<PAGE>
RULE NO. 424(b)(4)
REGISTRATION NO. 333-68329
PROSPECTUS
8,720,013 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. 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 before October 1, 2002, we
will make the minimum quarterly distribution to holders of common units before
any distributions will be made on the Star Gas Partners interests that rank
below the common units.
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 March 22,
1999 was $14.125 per common unit.
You should read "Risk Factors" beginning on page 20 of this prospectus for a
discussion of the material risks relating to an investment in the common units.
----------------
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.. $14.1875 $123,715,184
Underwriting Discounts
and Commissions....... $0.7100 $6,191,209
Proceeds, Before Ex-
penses, to Star Gas
Partners.............. $13.4775 $117,523,975
</TABLE>
The underwriters may also purchase up to an additional 1,090,000 common units
on the same terms described 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
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Donaldson, Lufkin & Jenrette
A.G. Edwards & Sons, Inc.
Lehman Brothers
Prudential Securities
Morgan Keegan & Company, Inc.
----------------
The date of this prospectus is March 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GUIDE TO READING THIS PROSPECTUS...... 1
SUMMARY............................... 2
The Business........................ 2
Summary Selected Historical
Financial and Operating Data--
Propane Operations................. 9
Summary Selected Historical
Financial and Operating Data--Home
Heating Oil Operations............. 11
Summary Selected Unaudited Pro Forma
Condensed Consolidated Financial
Information........................ 13
The Offering........................ 15
Cash Available for Distribution..... 17
Summary of Tax Considerations....... 18
RISK FACTORS.......................... 20
Risks Inherent in Our Businesses.... 20
Risks Arising Out of the
Transaction........................ 24
Risks Inherent in an Investment in
Star Gas Partners.................. 25
Tax Risks to Common Unitholders..... 28
THE TRANSACTION....................... 31
Acquisition of Petro................ 31
Financings and Refinancings......... 31
New General Partner................. 32
Amendment of the Partnership
Agreement.......................... 32
Outstanding Star Gas Partners
Units.............................. 32
USES OF FUNDS FROM THIS OFFERING AND
THE DEBT OFFERING.................... 33
CAPITALIZATION........................ 34
STAR GAS PARTNERS STRUCTURE AND
MANAGEMENT FOLLOWING THE
TRANSACTION.......................... 35
PRICE RANGE OF COMMON UNITS AND
DISTRIBUTIONS........................ 38
CASH DISTRIBUTION POLICY.............. 39
General Description of Cash
Distribution....................... 39
Quarterly Distributions of Available
Cash............................... 40
Distributions of Available Cash from
Operating Surplus During the
Subordination Period............... 40
Distributions of Available Cash from
Operating Surplus After the
Subordination Period............... 41
Incentive Distributions During the
Subordination Period............... 41
</TABLE>
<TABLE>
<S> <C>
Incentive Distributions After the
Subordination Period............... 42
Distributions from Capital Surplus.. 43
Limitations and Prohibitions on
Distributions on Subordinated
Interests.......................... 43
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels................ 43
Issuance of Additional Senior
Subordinated Units................. 44
Distributions of Cash upon
Liquidation During the
Subordination Period............... 45
Distributions of Cash upon
Liquidation After the Subordination
Period............................. 47
Cash Available for Distribution..... 47
BUSINESS.............................. 49
General............................. 49
Industry Characteristics............ 49
Competitive Strengths............... 50
Business Strategy................... 51
Propane............................. 51
Home Heating Oil.................... 55
Other............................... 59
MANAGEMENT............................ 62
Star Gas Partners Management........ 62
Reimbursement of Expenses of the
General Partner.................... 65
BENEFICIAL OWNERSHIP OF PRINCIPAL
UNITHOLDERS AND MANAGEMENT........... 66
DESCRIPTION OF THE COMMON UNITS....... 67
The Rights of Unitholders........... 67
Transfer Agent and Registrar........ 67
Obligations and Procedures for the
Transfer of Units.................. 67
THE PARTNERSHIP AGREEMENT............. 69
Organization and Duration........... 69
Purpose............................. 69
Power of Attorney................... 69
Restrictions on Authority of the
General Partner Regarding
Extraordinary Transactions......... 69
Lack of Dissenters' Rights.......... 70
Withdrawal or Removal of the General
Partner; Approval of Successor
General Partner.................... 70
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Restriction on Transfer of General Partner Interest....................... 71
Reimbursement for Services of the General Partner......................... 72
Rights and Status as Limited Partner or Assignee upon Transfer of
Interest................................................................. 72
Limitations on the Rights of Non-citizen Assignees and Redemption Rights
of Star Gas Partners..................................................... 72
Issuance of Additional Securities by Star Gas Partners.................... 72
Limited Call Right on Outstanding Limited Partner Interests............... 73
Amendment of the Partnership Agreement.................................... 74
Meetings of Limited Partners and Voting Rights............................ 75
Indemnification Obligations of Star Gas Partners.......................... 76
Potential Loss of Limited Liability by Unitholders........................ 76
Obligations of the General Partner to Provide Books and Reports to Limited
Partners................................................................. 77
Limited Partners' Right to Inspect Star Gas Partners Books and Records.... 77
Description of Termination and Dissolution of Star Gas Partners........... 77
Liquidation of Star Gas Partners and Distribution of Proceeds............. 78
Registration Rights of the General Partner or its Affiliates.............. 78
CONFLICTS OF INTEREST..................................................... 79
Conflicts of Interest May Arise as a Result of the Publicly-Traded Limited
Partnership Structure.................................................... 79
Fiduciary Duties Owed to Unitholders by the General Partner as Prescribed
by Law and the Partnership Agreement..................................... 80
DESCRIPTION OF INDEBTEDNESS............................................... 82
New Indebtedness.......................................................... 82
Existing Indebtedness..................................................... 83
UNITS ELIGIBLE FOR FUTURE SALE............................................ 85
</TABLE>
<TABLE>
<S> <C>
FEDERAL INCOME TAX CONSIDERATIONS......................................... 87
Tax Consequences of Unit Ownership........................................ 87
Tax Treatment of Unitholders.............................................. 90
Tax-exempt Organizations and Other Investors 94
Tax Treatment of Operations............................................... 94
Administrative Matters.................................................... 96
Disposition of Units...................................................... 98
State, Local and Other Tax Considerations................................. 101
INVESTMENT IN STAR GAS PARTNERS BY EMPLOYEE BENEFIT PLANS AND INDIVIDUAL
RETIREMENT ACCOUNTS...................................................... 103
UNDERWRITING.............................................................. 104
VALIDITY OF COMMON UNITS.................................................. 105
EXPERTS................................................................... 105
WHERE YOU CAN FIND MORE INFORMATION....................................... 106
FORWARD-LOOKING STATEMENTS................................................ 106
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 107
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION.......... 108
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)................ 109
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)...... 110
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)...... 111
Notes to Pro Forma Condensed Consolidated Financial Information........... 112
ANNEX A--APPLICATION FOR TRANSFER OF COMMON UNITS......................... A-1
ANNEX B--GLOSSARY OF TERMS................................................ B-1
ANNEX C--AMENDED AND RESTATED PARTNERSHIP AGREEMENT....................... C-1
ANNEX D--PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS.................. D-1
</TABLE>
ii
<PAGE>
GUIDE TO READING THIS PROSPECTUS
The following information should help you understand some of the conventions
used in this prospectus.
. Throughout this prospectus, we refer to ourselves, Star Gas Partners, L.P.,
as "we," or "us" or "Star Gas Partners." 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 ""Star Gas Partners" when
discussing our entity or its structure (such as "Star Gas Partners conducts
its operations through Star Gas Propane, L.P. . . .").
. When we refer to a fiscal year, we are referring to Star Gas Partners'
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 completion of the transaction include the
operations of Star Gas Propane, L.P., referred to in this prospectus as
"Star Gas Propane" and its subsidiary; and
(3) our operations from the time of completion 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 Star Gas Partners. Prior to
the transaction, the home heating oil business and operations referred to in
this prospectus were owned and operated by Petro, which is the current
parent of our general partner. Following the transaction, the home heating
oil business and operations will be operated by Petro, which will 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 some terms used in this prospectus is
included as Annex B to this prospectus. Capitalized terms not otherwise
defined in this prospectus 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.
1
<PAGE>
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 customers in the Midwest
and Northeast regions, and our home heating oil operations serve customers in
the Northeast and Mid-Atlantic regions.
Propane Operations
Our propane operations 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.
On a pro forma basis giving effect to acquisitions in fiscal 1998,
approximately 80% of our propane 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 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 requests. 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 our operating costs,
improve our customer service and establish a brand image among our heating oil
consumers.
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.
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 and-
2
<PAGE>
according to the Energy Information Administration, this accounts for
approximately 4% of household energy consumption in the United States.
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.
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 Star Gas Partners
and Petro have been active consolidators in their 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 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.
. 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 New York and our
Mid-Atlantic region, 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 using communication and
computer technology, generally not used by our competitors, that 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.
3
<PAGE>
. 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 in 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
Star Gas Partners will acquire Petro as part of a four-part transaction.
Each part of the transaction is meant to be completed 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 Star Gas Partners through:
(1) a merger of one of Star Gas Partners' 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 of Star Gas Partners.
. Financings and Refinancings. We are offering common units representing
limited partner interests. Separately, senior secured notes are being
privately offered by Petro. Star Gas Partners, along with Petro Holdings,
will guarantee the notes. Star Gas Partners will use the proceeds from
these offerings to redeem or restructure most of Petro's public and private
debt and its preferred stock.
. New General Partner. As a result of the transaction, Star Gas Corporation
will become a subsidiary of Star Gas Partners. 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 completion of the transaction and increase our
minimum quarterly distribution from $0.55 to $0.575 per common unit per
quarter.
4
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Estimated Uses of Funds from This Offering and Debt Offering
The following table shows the estimated funds that we will receive from this
offering of common units based on a public offering price of $14.1875 per unit.
This table also shows the funds that Petro will receive from the sale of notes
in the debt offering.
<TABLE>
<CAPTION>
Amount
(In thousands)
--------------
<S> <C>
Sources
This offering, net of underwriting discounts, commissions
and offering expenses..................................... $116,129
Debt offering, net of discounts, commissions and offering
expenses.................................................. 87,678
Cash balances.............................................. 5,369
--------
$209,176
========
Uses
Redeem Petro 12 1/4% Senior Subordinated Debentures due
2005...................................................... $ 79,472
Redeem Petro 10 1/8% Senior Subordinated Notes due 2003.... 46,128
Redeem Petro 9 3/8% Senior Subordinated Debentures due
2006...................................................... 68,252
Redeem Petro 12 7/8% preferred stock....................... 7,430
Repurchase Petro 1989 preferred stock...................... 4,167
Transaction fees and expenses.............................. 3,727
--------
$209,176
========
</TABLE>
Outstanding Star Gas Partners Units
The following table shows the approximate number of units outstanding before
and after the transaction based on a public offering price of $14.1875 per
unit. The 325,729 general partner interests/units represents 324,100 general
partner units in Star Gas Partners and the 0.01% general partner interest in
Star Gas Propane. This 0.01% interest is deemed to be in unit form solely for
purposes of this table.
<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 23.7%
Issued to Petro junior preferred
stockholders.................... -- -- 102,848 0.6
Issued in this offering and
related refinancings............ -- -- 9,120,547 56.0
--------- ----- ---------- -----
Subtotal....................... 3,858,999 60.5 13,082,394 80.3
Subordinated Units
Existing subordinated units...... 2,396,078 37.5 -- --
Senior subordinated units........ -- -- 2,481,742 15.3
Junior subordinated units........ -- -- 396,558 2.4
--------- ----- ---------- -----
Subtotal....................... 2,396,078 37.5 2,878,300 17.7
General Partner Interests/Units... 127,655 2.0 325,729 2.0
--------- ----- ---------- -----
Total.......................... 6,382,732 100.0% 16,286,423 100.0%
========= ===== ========== =====
</TABLE>
5
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Capitalization
The following table shows our historical capitalization as of December 31,
1998 on an actual basis and as adjusted to give pro forma effect to the
acquisition of Petro. It is further adjusted to give pro forma effect to this
offering and the debt offering and the application of the net proceeds of these
offerings. This table does not include $4.2 million of the current portion of
Petro's 1989 preferred stock that will be paid with the proceeds of this
offering and the debt offering.
The Petro public debt listed below consists of:
. $80.6 million of 12 1/4% Senior Subordinated Debentures due 2005,
including a prepayment discount of $0.7 million;
. $47.4 million of 10 1/8% Senior Subordinated Notes due 2003, including a
prepayment discount of $2.6 million; and
. $68.9 million of 9 3/8% Senior Subordinated Debentures due 2006,
including a prepayment discount of $6.1 million.
Upon completion of the transaction, Petro has the right to redeem up to an
aggregate of 98.5% of the principal amount of these securities.
The Petro private debt listed below consists of:
. approximately $62.7 million of 9% Senior Notes due 2002;
. $4.3 million of 10 1/4% Subordinated and Senior Notes due 2001; and
. $14.0 million of notes payable for the purchase of fuel oil dealers
maturing at various dates through 2004.
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>
December 31, 1998
----------------------------------
Pro Forma Adjusted
Actual Combined Pro Forma
-------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Cash........................ $ 5,831 $ 7,835 $ 14,266
======== ======== ========
Debt:
Star Gas Propane First
Mortgage Notes............ $ 96,000 $ 96,000 $ 96,000
Star Gas Propane acquisi-
tion facility............. 7,616 7,616 7,616
The notes issued in the
debt offering............. -- -- 90,000
Petro public debt.......... -- 196,875 3,022
Petro private debt......... -- 75,357 80,917
-------- -------- --------
Total Long-Term Debt.... 103,616 375,848 277,555
-------- -------- --------
Redeemable Preferred Stock:
Petro 12 7/8% preferred
stock..................... -- 12,828 --
Partners' Capital:
Common unitholders......... 57,347 58,806 180,333
Existing subordinated
unitholders............... (962) -- --
Senior and junior subordi-
nated unitholders......... -- 13,266 13,266
General partner............ 63 1,267 1,267
-------- -------- --------
Total Partners' Capi-
tal.................... 56,448 73,339 194,866
-------- -------- --------
Total Capitalization.... $160,064 $462,015 $472,421
======== ======== ========
</TABLE>
6
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Star Gas Partners Structure and Management Following the Transaction
Our propane operations are conducted through Star Gas Propane and its wholly-
owned corporate subsidiaries. In addition, substantially all of our propane
operations' consolidated assets and liabilities are accounted for by Star Gas
Propane in which Star Gas Partners 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 Star Gas Partners and Star Gas
Propane 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 Star Gas Propane. All of the membership
interests in Star Gas LLC will be owned by some of our current affiliates. Some
of the officers of Star Gas Corporation and Petro will become officers of Star
Gas LLC following the transaction.
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 following chart illustrates the organization and ownership of Star Gas
Partners, Star Gas Propane and its subsidiaries and Star Gas LLC immediately
following the transaction, based on an offering price of $14.1875 per common
unit. The percentages reflected in the following chart represent the
approximate ownership interests in each of Star Gas Partners and Star Gas
Propane, individually, and not on an aggregate basis.
7
<PAGE>
[Star Gas Partners Organization Chart Following the Transaction]
8
<PAGE>
Summary Selected Historical Financial and Operating Data-- Propane Operations
The following table shows, for the periods and dates indicated, summary
selected historical financial and operating data of Star Gas Partners, which is
derived from our consolidated financial statements. The financial data is only
a summary and should be read in conjunction with our historical financial
statements and related notes contained in the annual reports and other
information that we have filed with the SEC. See "Incorporation of Certain
Documents by Reference." The historical financial data for the three months
ended December 31, 1997 and 1998 is unaudited. The results of operations for
the three-month periods ended December 31, 1997 and 1998 contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial condition and results of operations for those periods. The
historical Other Data is unaudited but has been prepared on the same basis as
that of the audited consolidated financial statements. These historical results
of operations do not predict the future results of operations.
The 1996 column of the table shows the results of operations of the
predecessor of Star Gas Partners for the period from October 1, 1995 through
December 20, 1995 and the results of Star Gas Partners from December 20, 1995
through September 30, 1996. We combined these operating results to facilitate
an analysis of the fundamental operating data. However, on a per unit basis,
both the net income (loss) and the cash distributions paid in the 1996 column
of the table represent Star Gas Partners' actual results for the period from
December 20, 1995 through September 30, 1996.
"EBITDA" listed in the table below is defined as operating income plus
depreciation, amortization and other non-cash charges, less net gain (loss) on
sales 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.
Instead, EBITDA provides additional information for evaluating our ability to
make the minimum quarterly distribution. The definition of EBITDA used by Star
Gas Partners is different from the definition of EBITDA used by Petro and may
be different from that used by other corporations or partnerships.
<TABLE>
<CAPTION>
Three Months
Ended
September 30, December 31,
---------------------------- ----------------
1996 1997 1998 1997 1998
-------- -------- -------- ------- -------
(In thousands, except for per unit data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Sales....................... $119,634 $135,159 $111,685 $41,844 $30,237
Costs and expenses
Cost of sales............. 58,557 72,211 49,498 21,650 11,978
Delivery and branch ex-
penses................... 34,750 36,427 37,216 10,153 10,295
Depreciation and amortiza-
tion..................... 9,680 10,242 11,462 2,785 3,008
General and administrative
expenses................. 6,457 6,818 6,065 1,369 1,429
Net gain (loss) on sales
of assets................ (260) (295) (271) (48) (4)
-------- -------- -------- ------- -------
Operating income............ 9,930 9,166 7,173 5,839 3,523
Interest expense, net..... 7,124 6,966 7,927 2,086 2,178
Amortization of debt issu-
ance costs............... 128 163 176 40 45
-------- -------- -------- ------- -------
Income (loss) before income
taxes...................... 2,678 2,037 (930) 3,713 1,300
-------- -------- -------- ------- -------
Income tax expense........ 85 25 25 6 6
-------- -------- -------- ------- -------
Net income (loss)........... $ 2,593 $ 2,012 $ (955) $ 3,707 $ 1,294
======== ======== ======== ======= =======
General partner's interest
in net income (loss)....... -- 40 (19) 74 26
-------- -------- ------- -------
Limited partners' interest
in net income (loss)....... -- $ 1,972 $ (936) $ 3,633 $ 1,268
======== ======== ======= =======
Basic and diluted, net in-
come (loss) per limited
partner unit............... $ 0.11 $ 0.37 $ (0.16) $ 0.66 $ 0.20
======== ======== ======== ======= =======
Cash distribution declared
per unit................... $ 1.17 $ 2.20 $ 2.20 $ 0.55 $ 0.55(c)
======== ======== ======== ======= =======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, December 31,
---------------------------- -----------------------
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (end
of period)
Current assets........ $ 17,842 $ 14,165 $ 17,947 $ 21,989 $ 25,514
Total assets.......... 156,913 147,469 179,607 179,451 185,403
Long-term debt........ 85,000 85,000 104,308 96,000 103,616
Partners' capital..... 61,398 51,578 57,347 71,883 56,448
Summary Cash Flow Data
Net cash provided by
operating activi-
ties................. $ 9,982 $ 18,964 $ 9,264 $ 1,980 $ 2,244
Net cash provided by
(used in) investing
activities........... (6,954) (4,905) (13,276) (548) (1,285)
Net cash provided by
(used in) financing
activities........... (2,649) (14,276) 4,238 1,131 3,757
Other Data
Operating income be-
fore depreciation,
amortization and
other non-cash
charges less net gain
(loss) on sales of
equipment
("EBITDA")........... $ 19,870 $ 19,703 $ 18,906 $ 8,672 $ 6,535
Retail propane gallons
sold................. 96,294 94,893 98,870 38,550 29,400
Ratio of earnings to
fixed charges(a)..... 1.22x 1.27x -- 2.7x 1.6x
Total capital
expenditures(b)...... $ 5,332 $ 5,279 $ 5,015 $ 2,085 $ 1,312
</TABLE>
- -------
(a) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) from continuing operations before
income taxes, plus fixed charges. Fixed charges consist of interest expense
on all indebtedness, the amortization of deferred debt issuance costs and
the portion of operating rental expense that is representative of the
interest factor. For the year ended September 30, 1998, earnings were
inadequate to cover fixed charges by $1.0 million.
(b) Includes net maintenance capital expenditures for the fiscal years ended
September 30, 1996, 1997 and 1998 and the three months ended December 31,
1997 and 1998 of $2.3 million, $3.1 million, $2.6 million, $1.3 million and
$0.5 million.
(c) Star Gas Partners did not declare a distribution on the subordinated units
for the three months ended December 31, 1998.
10
<PAGE>
Summary Selected Historical Financial and Operating Data--
Home Heating Oil Operations
The following table shows summary selected historical financial and operating
data of Petro, which is derived from the consolidated financial statements of
Petro. The financial data is only a summary, and you should read it in
conjunction with Petro's historical financial statements, and related notes,
contained in the annual reports and other information that Petro has filed with
the SEC. See "Incorporation of Certain Documents by Reference." Since Star Gas
Partners' initial public offering in December 1995, Star Gas Partners has been
accounted for under the equity method of accounting in Petro's financial
statements. The Historical Other Data is unaudited but has been prepared on the
same basis as that of the Audited Consolidated Financial Statements. These
historical results of operations do not predict future results.
In analyzing the results of Petro, the following important factors should be
noted:
. The decline in operating income before depreciation, amortization and
provision for supplemental benefits (EBITDA) for the year ended
December 31, 1997, as compared to the year ended December 31, 1996,
was primarily due to warm weather experienced in 1997.
. For the twelve months ended December 31, 1998, home heating oil volume
declined by approximately 21% as compared to the twelve months ended
December 31, 1997 primarily due to the abnormally warm temperatures
associated with the weather phenomenon generally referred to as "El
Nino." While volume declined approximately 21%, EBITDA declined only
11.5% due to a reduction in operating costs largely attributable to
the effects of the restructuring and cost reduction programs.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
--------- -------- --------
(In thousands, except per
share data)
<S> <C> <C> <C>
Statement of Operations Data
Net sales....................................... $ 608,161 $548,141 $408,019
Costs and expenses
Cost of sales................................. 427,388 379,748 265,526
Operating expenses ........................... 138,703 132,383 111,881
Restructuring, corporate identity, pension
curtailment and Star Gas transaction
expenses..................................... 4,366 7,640 5,510
Depreciation, amortization and other non-cash
costs........................................ 28,946 28,847 26,895
--------- -------- --------
Operating income (loss)......................... 8,758 (477) (1,793)
Interest expense-net.......................... (32,412) (31,668) (30,732)
Amortization of debt issuance cost............ (1,872) (1,464) (1,404)
Income tax expense............................ (500) (500) (400)
Other income (expense)-net.................... 1,842 11,445 112
Share of income (loss) of Star Gas............ 2,283 (235) (1,120)
--------- -------- --------
Income (loss) before extraordinary item......... (21,901) (22,899) (35,337)
--------- -------- --------
Extraordinary Item.............................. (6,414) -- --
--------- -------- --------
Net income (loss)............................... $ (28,315) $(22,899) $(35,337)
========= ======== ========
Basic and Diluted earnings (losses) per common
share
Class A and Class C common stock.............. $ (1.20) $ (1.06) $ (1.52)
Cash dividends declared per common share
Class A and Class C common stock.............. $ 0.60 $ 0.30 --
Weighted average number of common shares
outstanding
Basic
Class A common stock.......................... 22,983 23,441 23,962
Class C common stock.......................... 2,598 2,598 2,598
Diluted
Class A common stock.......................... 22,983 23,441 23,962
Class C common stock.......................... 2,598 2,598 2,598
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
Balance Sheet Data (end of period)
Cash........................................ $ 3,257 $ 2,390 $ 2,004
Working capital............................. 18,093 12,436 (8,977)
Total assets................................ 275,025 247,846 199,531
Long-term debt.............................. 291,337 288,957 278,731
Redeemable preferred stock (long-term
portion)................................... 8,333 32,489 28,578
Stockholders' deficiency.................... (145,733) (177,033) (215,825)
Summary Cash Flow Data
Net cash provided by (used in) operating
activities................................. $ (3,852) $ 18,644 $ 19,284
Net cash provided by (used in) investing
activities................................. (26,193) (980) 1
Net cash provided by (used in) financing
activities................................. (44,983) (18,531) (19,671)
Other Data
Operating income before depreciation,
amortization and provision for supplemental
benefits (EBITDA).......................... $ 37,704 $ 28,370 $ 25,102
Heating oil gallons......................... 456,141 410,291 324,667
Ratio of earnings to fixed charges(a)....... -- -- --
</TABLE>
- -------
(a) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (losses) from continuing operations before
income taxes, plus fixed charges. Fixed charges consist of interest expense
on all indebtedness and the amortization of deferred debt issuance costs
and the portion of operating rental expense that is representative of the
interest factor. For the years ended December 31, 1996, 1997 and 1998,
earnings were inadequate to cover fixed charges by $28.3 million, $22.9
million, and $35.3 million.
12
<PAGE>
Summary Selected Unaudited Pro Forma Condensed Consolidated Financial
Information
The following summary selected unaudited pro forma condensed consolidated
Statement of Operations Data, and Other Data for the twelve month period ended
September 30, 1998 assume the transaction occurred on October 1, 1997. The pro
forma Statement of Operations Data, and other data for the three months ended
December 31, 1998 assume the transaction occurred on October 1, 1998. The
Balance Sheet data assume the transaction occurred on December 31, 1998. The
pro forma financial information below reflects the purchase method of
accounting and is intended to give you a better picture of what our businesses
might have looked like had they been combined. The companies may have performed
differently if they were combined. You should not rely on the pro forma
financial information as being indicative of the historical results that we
would have had or the future results that we will experience after the
transaction. See "Unaudited Pro Forma Condensed Consolidated Financial
Information."
The "Pro Forma Combined" column of the table represents the acquisition of
Petro by Star Gas Partners and the "As Adjusted Pro Forma" column of the table
represents the further effects of this offering and the debt offering.
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
September 30, 1998 December 31, 1998
---------------------- ----------------------
(In thousands, (In thousands,
except per unit data) except per unit data)
Pro Forma As Adjusted Pro Forma As Adjusted
Combined Pro Forma Combined Pro Forma
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data
Sales.............................. $566,155 $566,155 $146,777 $146,777
Costs and expenses:
Cost of sales.................... 349,472 349,472 85,996 85,996
Operating expenses............... 161,551 161,551 41,847 41,847
Restructuring charges............ 2,085 2,085 -- --
Transaction expenses............. 1,029 1,029 3,794 3,794
Corporate identity expenses...... 1,100 1,100 -- --
Provision for supplemental
benefits........................ 409 409 90 90
Depreciation and amortization.... 35,431 35,431 8,863 8,863
Net gain (loss) on sales of
assets.......................... (48) (48) (19) (19)
-------- -------- -------- --------
Operating income................... 15,030 15,030 6,168 6,168
Interest (income) expense, net... 39,157 22,878 9,998 6,094
Amortization of debt issuance
costs........................... 1,608 448 380 112
-------- -------- -------- --------
Income (loss) before income
taxes........................... (25,735) (8,296) (4,210) (38)
Income tax expense............... 500 500 81 81
-------- -------- -------- --------
Net income (loss).................. $(26,235) $ (8,796) $ (4,291) $ (119)
======== ======== ======== ========
Net income (loss) per limited
partner unit...................... -- $ (0.54) -- $ (0.01)
======== ========
Balance Sheet Data (as of December
31, 1998)
Current assets................... $113,820 $115,351
Total assets..................... 640,876 637,829
Long-term debt................... 375,848 277,555
Total partners' capital.......... 73,339 194,866
<CAPTION>
Summary Cash Flow Data
<S> <C> <C> <C> <C>
Net cash provided by operating
activities...................... $ 11,955 $ 28,234 $ (7,275) $ (3,371)
Net cash provided by (used in)
investing activities............ (4,826) (4,826) (2,295) (2,295)
Net cash provided by (used in)
financing activities............ (17,356) (23,231) 4,991 (1,215)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
September 30, 1998 December 31, 1998
--------------------- ---------------------
(In thousands) (In thousands)
Pro Forma As adjusted Pro Forma As adjusted
Combined Pro Forma Combined Pro Forma
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Other Data
Operating income before
depreciation, amortization less
net gain (loss) on sales of
equipment ("EBITDA")(a)......... $ 50,918 $ 50,918 $15,140 $ 15,140
Ratio of earnings to fixed
charges(b)...................... -- -- -- --
Heating oil and propane gallons.. 455,360 455,360 127,488 127,488
</TABLE>
- --------
(a) EBITDA has been reduced by approximately $3.8 million for the three months
ended December 31, 1998 and $4.2 million for the year ended September 30,
1998 for expenses associated with Petro's corporate identity, restructuring
and transaction expenses.
(b) For the twelve months ended September 30, 1998 pro forma combined and as
adjusted pro forma, the earnings were inadequate to cover fixed charges by
$26.2 million and $8.8 million. For the three months ended December 31,
1998, the pro forma combined and as adjusted pro forma, the earnings were
inadequate to cover fixed charges by $4.3 million and $0.1 million.
In analyzing the historical results of Star Gas Partners and the pro forma
information as provided in the table above, the following three important
factors should be considered.
. First, the results for the fiscal 1998 pro forma exclude cost savings
associated with Petro's restructuring program implemented during 1998.
This restructuring program includes reductions in both corporate and
field personnel, the consolidation of employee benefit plans and the
rationalization of branch facilities.
. Second, while depreciation and amortization expenses reduce net income as
a non-cash expense, these expenses do not impact distributable cash flow.
. Third, in fiscal 1998, temperatures were 12.8% warmer than normal for the
areas in which Star Gas Partners conducts its propane operations and
temperatures were 12.2% warmer than normal for the areas in which Petro
conducts its home heating oil operations. Temperatures in the propane
operating regions for the three months ended December 31, 1998 were 13.5%
warmer than normal and 15.5% warmer than the prior year's comparable
period. Temperatures in the home heating oil operating regions for the
three months ended December 31, 1998 were 13.4% warmer than normal and
13.6% warmer than the prior year's comparable period. Star Gas Partners
believes that overall levels of pro forma available cash from operating
surplus were adversely affected during these periods due to this
abnormally warm weather.
Recent Developments
Star Gas Partners
For the month ended January 31, 1999, retail propane volume sold increased
4.9 million gallons or 36.9% to 18.1 million gallons for the month ended
January 31, 1999, as compared to 13.2 million gallons for the month ended
January 31, 1998. These changes were largely attributable to the impact of
24.4% colder temperatures in the areas that Star Gas Partners conducts
operations.
Petro
For the month ended January 31, 1999, home heating oil volume sold increased
13.5 million gallons or 24.6% to 68.6 million gallons for the month ended
January 31, 1999, as compared to 55.1 million gallons for the month ended
January 31, 1998. These changes were attributable to the impact of 21.9% colder
temperatures in the areas that Petro conducts operations.
14
<PAGE>
The Offering
Common units offered.......... 8,720,013
Common units outstanding
after the offering............
13,082,394
Distributions of available . We intend to distribute, to the extent
cash.......................... there is sufficient available cash, at
(See page 39) least a minimum quarterly distribution
of $0.575 per unit, or $2.30 per unit on
a yearly basis.
. ""Available cash" for any quarter
consists generally of all cash on hand
at the end of that quarter, as adjusted
for reserves. The general partner has
broad discretion in establishing
reserves.
. In general, available cash will be
distributed per quarter based on the
following priorities:
. First, to the common units until each
has received $0.575, plus any arrearages
from prior quarters.
. Second, to the senior subordinated units
until each has received $0.575.
. Third, to the junior subordinated units
and general partner units until each has
received $0.575.
. Finally, after each unit has received
$0.575, available cash will be
distributed proportionately to all units
until target levels are met.
. If distributions of available cash
exceed target levels greater than
$0.604, the senior subordinated units,
junior subordinated units and general
partner units will receive incentive
distributions.
Limitations and prohibitions
on distributions.............. . Distributions will not be made on the
(See page 43) senior subordinated units, junior
subordinated units or general partner
units for any quarter in our fiscal year
1999, which ends on September 30, 1999.
. Distributions may be made on the senior
subordinated units, junior subordinated
units and general partner units
beginning with our fiscal year 2000,
which begins on October 1, 1999. Any
distributions made on these units
depends on the amount of available cash
we generate after October 1, 1999.
Timing of distributions....... .We make distributions approximately 45
(See page 40) days after March 31, June 30, September
30 and December 31 to unitholders on the
applicable record date.
15
<PAGE>
Subordination period.......... .The subordination period will end once we
(See page 40) meet the financial tests in the
partnership agreement, but it generally
cannot end before October 1, 2002.
However, if the general partner is
removed under some circumstances, the
subordination period will end.
.When the subordination period ends, 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 main difference between the Class A
common units and Class B common units is
that the Class B common units will
continue to have the right to receive
incentive distributions and additional
units.
Incentive distributions....... If quarterly distributions of available
(See page 41) cash exceed target levels, the senior
subordinated units, junior subordinated
units and general partner units will
receive an increased percentage of
distributions, resulting in their
receiving a greater amount on a per unit
basis than the common units.
NYSE trading symbol........... SGU.
16
<PAGE>
Cash Available for Distribution
We believe that we will generate sufficient available cash for the first full
four quarter period following the transaction to cover the minimum quarterly
distribution on all outstanding units. Our belief is based on a number of
assumptions, including the assumptions that:
.normal weather conditions will prevail in our operating areas;
.our operating margins will remain constant; and
.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 the norm. Therefore, some of our
assumptions may prove to be inaccurate. As a result, our cash available for
distribution could deviate materially from our current expectations. See "Risk
Factors."
The amount of cash needed to pay the minimum quarterly distribution for the
next four quarters on units outstanding immediately after the transaction is
approximately:
<TABLE>
<S> <C>
Common units............................................... $30.1 million
Senior subordinated units ................................. 5.7 million
Junior subordinated units.................................. 0.9 million
General partner units...................................... 0.8 million
-------------
Total.................................................... $37.5 million
</TABLE>
After giving pro forma effect to the transaction, the amount of available cash
generated in the twelve months ended December 31, 1998 would have been about
$15.9 million. If infrequent restructuring, corporate identity and transaction
expenses were not taken into effect, pro forma cash available for distribution
would have been $21.4 million.
In 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 and EBITDA were
adversely affected during 1998 due to this abnormally warm weather. In
addition, the pro forma results for this period also do not reflect certain
cost savings that Petro implemented in fiscal 1998. See "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 some of our indebtedness. There are
other provisions in these agreements that will, under some 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 Indebtedness" incorporated in this prospectus by
reference in our Quarterly Report on Form 10-Q, dated February 12, 1999. The
notes issued by Petro has provisions that will, under some circumstances,
similarly restrict our ability to make distributions to unitholders.
17
<PAGE>
Summary of Tax Considerations
The tax consequences of an investment in Star Gas Partners 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 tax consequences of
owning and disposing of common units. For a detailed discussion see "Federal
Income Tax Considerations."
We Will Be Classified as a Partnership For Tax Purposes
In the opinion of counsel, we have been and will continue to be classified
for federal income tax purposes as a partnership. Accordingly, we will pay no
federal income taxes, and each unitholder will be required to report in his
federal income tax return his share of our income, gains, losses and deductions
without regard to distributions.
Star Gas Partners Allocations and Distributions Are Based on Your Percentage
of Interest in Us
In general, our yearly income and loss will be allocated to the general
partner and the unitholders for each taxable year in accordance with their
percentage interests in us. 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 for that income, may exceed the cash distributed to
him.
Ratio of Taxable Income to Distributions Allocated to Purchasers of Common
Units Is Less Than 20 Percent
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.
No assurance can be given that these estimates will be correct.
Passive Loss Limitations on Deductibility of Partnership Losses Are Only
Available to Offset Our Future Income
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 Petro and its affiliates. 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 Raises Tax Issues
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.
18
<PAGE>
We Are Registered As a Tax Shelter
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 this
registration number does not indicate that an investment in us or the claimed
tax benefits have been reviewed, examined or approved by the IRS.
Disposition of Common Units Will Result in Recognition of a Gain or Loss
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 those
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.
We Have Made the 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 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.
19
<PAGE>
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which we are 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
Since Weather Conditions May Adversely Affect the Demand for Propane and Home
Heating Oil, Our Financial Condition Is Vulnerable to Warm Winters
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. As a result, weather conditions may adversely impact our
operating results and financial condition. 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 volume
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. Weather variations
also affect demand for propane from agricultural customers, because dry weather
during the harvest season reduces demand for propane used in crop drying.
Petro's Operating Results Will Be Adversely Affected If Its Significant
Customer Losses Are Not Offset or Reduced by Customer Gains
Petro's net attrition of home heating oil customers has been between
approximately 5% to 6% per year over the past five years. This rate represents
an annual gross customer loss rate of about 15% to 16%, offset by customer
gains of approximately 10% yearly. Customer losses are the result of various
factors, including:
. customer relocations;
. supplier changes based primarily on price and service;
. natural gas conversions; and
. credit problems.
Petro may not be able to maintain or reduce its customer attrition rate in the
future.
Sudden and Sharp Oil and Propane Price Increases That Cannot Be Passed on to
Customers May Adversely Affect Our Operating Results
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 sudden and sharp 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.
Our home heating oil business also competes for 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 Petro's customers from heating oil to other sources have
averaged approximately 1% per year of the homes it serves.
20
<PAGE>
Market Volatility and/or Inflation May Cause Us to Sell Inventory at Less Than
the Price That We Purchased It, Which Would Adversely Affect Operating Results
Because of the potential volatility of propane prices, the market price for
propane could fall below the price at which we purchased it, which could
adversely affect gross margin or render sales from inventory unprofitable.
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 is produced domestically
representing approximately 95% in fiscal 1998. 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. 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. To date, the level of these activities has not been
significant and we are not currently engaged in any of these transactions.
Inflation increases our operating and administrative costs. We attempt to
limit the effects of inflation on our operations through cost control efforts,
productivity improvement and increases in gross profit margins.
If We Do not Make Acquisitions on Economically Acceptable Terms, Our Future
Financial Performance Will Be Limited
Neither the propane nor the home heating oil industry is a growth industry
because of increased competition from alternative energy sources. A significant
portion of our growth in the past decade has been directly tied to the success
of our acquisition programs. Accordingly, our future financial performance will
depend on our ability to continue to make acquisitions at attractive prices. 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 has
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;
.the diversion of management's attention from other business concerns; and
.an excess of 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 Limit Our Ability to Make Distributions and Affect our
Operations
As a result of the transaction, we will have debt that is substantial
compared to our partners' capital. Principal and interest payable on this debt
will reduce cash available to make distributions on the common units. Under
specified circumstances, the terms of our debt instruments, including the
guarantee of the senior secured notes that will be issued in the debt offering,
will limit its ability to distribute cash to our common unitholders and to
borrow additional funds. The limitations and restrictions in new debt that we
and our subsidiaries issue may be more restrictive than those in current
indebtedness. In addition, some of our debt is secured by our assets. If we
defaulted on this secured debt, the lenders could institute foreclosure
proceedings to seize our assets. Any attempt to stay these foreclosure actions
by seeking to reorganize under the federal Bankruptcy Code would have a
material adverse effect on us and our common unitholders.
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Petro Has Significant Recent Net Losses That Are Likely to Continue
Petro has a history of operational and financial difficulties, including high
leverage and recent substantial net losses. Petro incurred net losses of
approximately $28.3 million, $22.9 million and $35.3 million for the years
ended December 31, 1996, 1997 and 1998. These net losses were primarily a
result of the amortization and interest expense associated with Petro's many
acquisitions since 1980. Other factors include:
.customer attrition;
.recent mild winters; and
.other operational factors.
Since Petro's strategy is to maximize cash flow, its accounting focus is not
on net income. Consequently, Petro is likely to incur non-cash expenses, such
as depreciation and amortization, that may result in net losses in the near
term.
Because of the Highly Competitive Nature of the Retail Propane and Home
Heating Oil Businesses, We May Not Be Able to Maintain Existing Customers or
Acquire New Customers, Which Would Have An Adverse Impact on Our Operating
Results and Financial Condition
In both our propane and home heating oil business, if we are unable to
compete effectively, we may lose existing customers or fail to acquire new
customers, which will have a material adverse effect on our results of
operations and financial condition.
Many of our propane competitors and potential competitors are larger or have
substantially greater financial resources than we do, which may provide them
with some advantages. 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. The principal factors influencing
competition with other retail marketers are:
.price;
.reliability and quality of service;
.responsiveness to customer needs;
.safety concerns;
.long-standing customer relationships;
.the inconvenience of switching tanks and suppliers; and
.the lack of growth in the industry.
We can make no assurances that we will be able to compete successfully on the
basis of these factors. If a competitor attempts to increase market share by
reducing prices, our operating results and financial condition could be
materially and adversely affected. Competition from alternative energy sources
has been increasing as a result of reduced regulation of many utilities,
including natural gas and electricity.
Our home heating oil business competes with heating oil distributors offering
a broad range of services and prices, from full service distributors, like
Petro, to those offering delivery only. Competition with other companies in the
home heating oil industry is based primarily on customer service and price.
Long-standing customer relationships are typical in the industry. It is
customary for companies to deliver home heating oil to their customers based
upon weather conditions and historical consumption patterns, without the
customer making an affirmative purchase decision. Most companies provide home
heating equipment repair service on a 24-hour per day basis. In some cases,
homeowners have formed buying cooperatives to purchase fuel oil from
distributors at a price lower than individual customers are otherwise able to
obtain. As a result of these factors, it may be difficult for Petro to acquire
new retail customers.
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We Are Subject to Operating and Litigation Risks That Could Adversely Affect
Our Operating Results to the Extent Not Covered by Insurance
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and 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 amounts and with coverages and deductibles as we believe are
reasonable. However, there can be no assurance that this insurance will be
adequate to protect us from all material expenses related to potential future
claims for personal and property damage or that these 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 Dependent on Principal Suppliers and Carriers, Increasing the Risk of
an Interruption in Supply That Might Result In a Loss of Revenues and/or
Customers
During fiscal year 1998, 28% of our propane purchases in the Midwest were
purchased on the spot market from various Mont Belvieu, Texas sources, 27% of
our propane purchases were from three refineries in Illinois, Kentucky and
Michigan owned by Marathon Ashland Petroleum, LLC and 23% were 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,
if we are unable to purchase propane from our usual sources, the failure to
obtain alternate sources at competitive prices and on a timely basis could have
a material adverse effect on our business.
Historically, a substantial portion of the propane we purchase has originated
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
business.
Provisions Concerning Change of Control, Default and Preclusion From Paying
Distributions in Our Debt Instruments May Affect Distributions
After completing the transaction, it is expected that our debt instruments
will contain provisions relating to a "change of control." A change of control
of Star Gas Partners would result in approximately $96 million of Star Gas
Propane debt and approximately $170 million of Petro debt becoming immediately
due and payable. A change of control at the Petro level would accelerate the
Petro debt but not the Star Gas Propane debt. In either case, this would
necessarily affect our ability to make distributions to unitholders. Neither
Star Gas Partners nor Petro is restricted from entering into a transaction that
would trigger the change of control provisions. If these change of control
provisions are triggered, some of the outstanding debt may become due. It is
possible that Star Gas Partners or Petro will not have sufficient funds at the
time of any change of control to make the required debt payments or that
restrictions in its other debt instruments will not permit those payments. In
some instances, lenders would have the right to foreclose on Star Gas Partners'
or Petro's assets if debt payments were not made upon a change of control.
Our Results of Operations and Financial Condition May Be Adversely Affected by
Governmental Regulation and Associated Environmental and Regulatory Costs
Our home heating oil business is subject to a wide range of federal and state
laws and regulations related to environmental and other regulated matters.
Petro has implemented environmental programs and policies designed to avoid
potential liability and costs under applicable environmental laws. It is
possible, however, that Petro will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance
with operating or other regulatory permits. New environmental regulations might
adversely impact Petro's 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 release or spill, are greater than those associated with our
propane operations. It is possible that material costs and liabilities will be
incurred, including those relating to claims for damages to property and
persons.
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Risks Arising Out of the Transaction
Conflicts of Interest Were Present in Negotiating and Structuring the
Transaction
All of the directors of Star Gas Corporation, other than the members of the
special committee, are also directors or officers of Petro. Thus, except for
the special committee, members of the Petro board of directors and the Star Gas
Corporation board of directors have interests that are different from, and in
conflict with, the interests of the Star Gas Partners common unitholders. The
Star Gas Corporation board of directors appointed the two members of the
special committee to negotiate the acquisition of Petro on behalf of the Star
Gas Partners common unitholders.
Prior to Petro's acquisition of Star Gas Corporation in 1992, Star Gas
Corporation engaged Nicoletti & Company Inc., an investment banking firm owned
by William P. Nicoletti, a member of the special committee, to perform specific
investment banking services for Star Gas Corporation. In this engagement, Star
Gas Corporation paid Nicoletti & Company Inc. fees of $40,000, $521,500 and
$81,600 for services rendered during 1992, 1993 and 1994. In 1995, Star Gas
Corporation paid Nicoletti & Company Inc. $20,000 in advisory fees for a
proposed acquisition. In 1997, Star Gas Corporation paid Mr. Nicoletti $20,000
for serving on the special committee that explored the possible sale or merger
of Star Gas Partners. In 1998, Star Gas Corporation paid Mr. Nicoletti $40,000
for serving on the Star Gas Partners special committee that explored the
business combination with Petro.
Elizabeth K. Lanier, a member of the special committee, was a partner in the
law firm of Frost & Jacobs in Cincinnati, Ohio until June 1996. Frost & Jacobs
has acted as counsel to Star Gas Corporation in specific litigation matters. In
1997, Star Gas Corporation paid Ms. Lanier $20,000 for serving on the special
committee that explored the possible sale or merger of Star Gas Partners. In
1998, Star Gas Corporation paid Ms. Lanier $40,000 for serving on the special
committee that explored the business combination with Petro.
The officers and directors of Star Gas Corporation will be indemnified, to
the extent permitted by law, for any and all actions taken in the transaction,
and they are also covered by customary directors' and officers' liability
insurance. Each member of the Star Gas Corporation board of directors will be a
member of the board of directors of Star Gas LLC following the transaction,
except that, at her request, Elizabeth Lanier will withdraw after 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. The current officers of Star Gas Corporation will be employed as
officers of Star Gas Propane following the transaction.
Continued and/or Increased Distributions per Common Unit Are Not Assured
The Star Gas Corporation board of directors structured the transaction with
the intent that it would increase the cash available to be distributed per
common unit. The intended increase in cash available for distributions is based
on several expectations that may not be realized, such as:
.successfully acquiring home heating oil businesses at attractive prices;
.completing Petro's restructuring program to reduce customer attrition; and
.increasing profit margins on a per gallon basis.
The amount of cash needed to pay the minimum quarterly distribution for four
quarters on units outstanding is approximately:
<TABLE>
<S> <C>
Common units.............................................. $30.1 million
Senior subordinated units................................. 5.7 million
Junior subordinated units................................. 0.9 million
General partner units..................................... 0.8 million
-------------
Total................................................... $37.5 million
</TABLE>
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After giving pro forma effect to the transaction, the amount of available
cash generated in the twelve months ended December 31, 1998 would have been
about $15.9 million. If infrequent restructuring, corporate identity and
transaction expenses were not taken into effect, pro forma cash available for
distribution would have been $21.4 million.
The Percentage of Common Units Will Increase, Which Will Make It More
Difficult to Pay the Full Minimum Quarterly Distribution
The existing common units represent a 60.5% limited partner interest in Star
Gas Partners. After the transaction, the common units will represent a 80.3%
limited partner interest. Accordingly, we will be required to make
distributions to a larger percentage of our equity at the common unit level,
which will increase the likelihood that we will not have sufficient funds to
pay the full minimum quarterly distribution to all common unitholders. In
addition during the subordination period, Star Gas Partners can issue 2,500,000
additional common units without obtaining any unitholder approval. These
additional common units could further dilute the interest of then-existing
unitholders in the net assets of, and distributions to be made by, Star Gas
Partners. In addition, holders of common units will not have preemptive rights
to acquire additional common units or other partnership interests that may be
issued.
The Increase in Taxes Payable By Petro In the Future Will Reduce Dividends to
Star Gas Partners, Which May Reduce Distributions to Unitholders
Although Petro and its corporate affiliates do not expect to pay significant
federal income tax for several years following the transaction, over time the
amount of federal income taxes paid by Petro and its corporate affiliates will
increase, and this will also reduce the amount of cash that we can distribute
to unitholders. A successful IRS challenge to the deduction of depreciation or
interest on specific debt will increase Petro and its corporate affiliates' tax
liability and this will reduce our ability to distribute cash to unitholders.
The transaction will result in income to Petro equal to the difference in the
value of the Star Gas Partners units distributed in the merger, including the
amount of any debt of which Petro is relieved, and the federal income tax basis
Petro has in those units. Petro expects that its net operating losses will
generally offset this income and Petro will incur only nominal tax. The IRS
could challenge the amount of Petro's net operating losses and the use of the
net operating losses to offset income realized in the transaction. A successful
challenge could reduce our cash available for distribution.
Petro and its corporate affiliates do not expect to pay significant federal
income tax for several years. Petro and its affiliates do expect to generate
earnings and profits during that time, which will make part of the
distributions from these entities to Star Gas Partners taxable dividend income
to the unitholders. This dividend income cannot be offset by past or future
losses generated by our propane activities.
Risks Inherent in an Investment in Star Gas Partners
Cash Distributions Are Not Guaranteed and May Fluctuate with Our Performance
and Reserve Requirements
Because distributions on the common units are dependent on the amount of cash
generated, distributions may fluctuate based on our performance. The actual
amount of cash that is available will depend upon numerous factors, including:
.profitability of operations;
.required principal and interest payments on debt;
.cost of acquisitions;
25
<PAGE>
.issuance of debt and equity securities;
.fluctuations in working capital;
.capital expenditures;
.adjustments in reserves;
.prevailing economic conditions; and
.financial, business and other factors.
Some of these factors are beyond the control of the general partner.
The partnership agreement gives the general partner discretion in
establishing reserves for the proper conduct of our business. These reserves
will also affect the amount of cash available for distribution. The general
partner may establish reserves for distributions on the senior subordinated
units only if those reserves will not prevent us from distributing the full
minimum quarterly distribution, plus any arrearages, on the common units for
the following four quarters.
The amount of cash needed to pay the minimum quarterly distribution for the
next four quarters on units outstanding immediately after the transaction is
approximately $37.5 million. This figure represents $30.1 million for the
common units, $5.7 million for the senior subordinated units, $0.9 million for
the junior subordinated units and $0.8 million for the general partner units.
After giving pro forma effect to the transaction, the amount of available cash
generated in the twelve months ended December 31, 1998 would have been about
$15.9 million. If infrequent restructuring, corporate identity and transaction
expenses were not taken into effect, pro forma cash available for distribution
would have been $21.4 million.
The Partnership Agreement Contains Provisions Intended to Discourage a Change
of Management That May Diminish Trading Value
The partnership agreement contains specific provisions that may discourage
attempts to remove an incumbent general partner or otherwise change the
management of Star Gas Partners. These provisions may diminish the trading
price of the senior subordinated units under some circumstances.
Unitholders Have Limited Voting Rights and Do Not Control the General Partner
Unitholders have no right to elect the general partner on an annual or other
continuing basis. The general partner manages and operates Star Gas Partners
and Star Gas Propane. Unlike the holders of common stock in a corporation,
unitholders have only limited voting rights on matters affecting our business.
The general partner generally may not be removed unless approved by the holders
of 66 2/3% of the outstanding units, voting together as a single class but not
including those held by the general partner and its affiliates. As a result,
unitholders have only limited influence on matters affecting our operation, and
it would be difficult for third parties to control or influence us. Although
the partnership agreement provides that the general partner may not, with
specified exceptions, transfer its general partner units to another person
before December 31, 2005 unless approved by a unit majority, the members of
Star Gas LLC may transfer their limited liability company interests in Star Gas
LLC to a third party at any time without the approval of the unitholders.
There Is a Limited Call Right That May Require Unitholders to Sell Their
Units at an Undesirable Time or Price
If at any time less than 20% of the outstanding units of any class are held
by persons other than the general partner and its affiliates, the general
partner has the right to acquire all, but not less than all, of those units
held by the unaffiliated persons. The price for these units will generally
equal the then-current market price of the units. As a consequence, a
unitholder may be required to sell his units at an undesirable time or price.
The general partner may assign this acquisition right to any of its affiliates
or Star Gas Partners. After the
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<PAGE>
subordination period ends, if we acquire more than 66 2/3% of the Class B
common units in a twelve-month period, then we will have a similar call right.
Our Ability to Make Distributions May Be Adversely Affected by Our Obligation
to First Reimburse the General Partner
Before we make any distributions on the units, we will reimburse the general
partner for all expenses it has incurred on our behalf. The reimbursement of
those expenses and the payment of reasonable fees charged by the general
partner for services could adversely affect our ability to make distributions.
Reimbursable expenses and fees are determined by the general partner in its
sole discretion.
Unitholders May Not Have Limited Liability in Some Circumstances
A number of states have not clearly established limitations on the liability
of limited partners for the obligations of a limited partnership. If it were
determined that we had been conducting business in any state and had failed to
comply with the applicable limited partnership statute, or that the rights or
exercise of the rights by the limited partners as a group under the partnership
agreement constituted participation in the "control" of Star Gas Partners, then
a unitholder might be held liable to the same extent as the general partner for
our obligations.
The General Partner Has Conflicts of Interest and Limited Fiduciary
Responsibilities, Which May Permit the General Partner to Favor Its Own
Interests to the Detriment of Unitholders
Conflicts of interest have arisen and could arise in the future as a result
of relationships between the general partner and its affiliates, on the one
hand, and Star Gas Partners or any of the limited partners, on the other hand.
As a result of these conflicts the general partner may favor its own interests
and those of its affiliates over the interests of the unitholders. The nature
of these conflicts is ongoing and includes the following considerations.
. The general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of
fiduciary duty. Unitholders are deemed to have consented to some actions
and conflicts of interest that might otherwise be deemed a breach of
fiduciary or other duties under applicable state law.
. The general partner is allowed to take into account the interests of
parties in addition to Star Gas Partners in resolving conflicts of
interest, thereby limiting its fiduciary duty to the unitholders.
. Except for Irik P. Sevin, who is subject to a non-competition agreement,
the general partner's affiliates are not prohibited from engaging in
other business or activities, including direct competition with us.
. The general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings and reserves, each of which
can impact the amount of cash that is distributed to unitholders.
. The general partner determines whether to issue additional units or other
equity securities of Star Gas Partners.
. The general partner determines which costs are reimbursable by us.
. The general partner controls the enforcement of obligations owed to us by
the general partner.
. The general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
. Some officers of the general partner, who will provide services to us,
will also devote significant time to the businesses of the general
partner's affiliates and will be compensated by these affiliates for the
services rendered to them.
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<PAGE>
. The general partner is not restricted from causing us to pay the general
partner or its affiliates for any services rendered on terms that are
fair and reasonable to us or entering into additional contractual
arrangements with any of these entities on our behalf.
. In some instances the general partner may borrow funds in order to permit
the payment of distributions.
Tax Risks to Common Unitholders
The Increase in Taxes Payable By Petro In the Future Will Reduce Dividends to
Star Gas Partners, Which May Reduce Distributions to Unitholders
Petro and its corporate affiliates do not expect to pay significant federal
income tax for several years following the transaction. However, over time the
amount of federal income taxes paid by Petro and its corporate affiliates will
increase. This will reduce the amount of cash that we can distribute to our
unitholders. A successful IRS challenge to the deduction of depreciation or
interest on specific debt will increase Petro and its corporate affiliates' tax
liability, also reducing our ability to distribute cash to our unitholders.
The transaction will result in income to Petro equal to the difference in the
value of the Star Gas Partners units distributed in the merger, including the
amount of any debt of which Petro is relieved and the federal income tax basis
Petro has in those units. Petro expects that its net operating losses
will generally offset this income and that it will incur only nominal tax. The
IRS could challenge the amount of Petro's net operating losses and the use of
the net operating losses to offset income realized in the transaction. A
successful challenge could reduce the cash we have available for distribution.
Petro and its corporate affiliates do not expect to pay significant federal
income tax for several years. Petro and its corporate affiliates do expect to
generate earnings and profits during that time, which will make part of the
distributions from these entities to Star Gas Partners taxable dividend income
to the unitholders. This dividend income cannot be offset by past or future
losses generated by Star Gas Partners' propane activities.
The IRS Could Classify Us as an Association Taxable as a Corporation, Which
Could Result in Us Paying Tax as an Entity Which Would Substantially Reduce
the Cash Available for Distribution to Unitholders
The federal income tax benefit of an investment in Star Gas Partners depends
largely on Star Gas Partners' classification as a partnership for federal
income tax purposes. Assuming the accuracy of factual matters represented as
true by the general partner and Star Gas Partners, counsel is of the opinion
that Star Gas Partners has been and will be classified as a partnership for
federal income tax purposes. No ruling from the IRS as to classification has
been or is expected to be requested. Instead, we intend to rely on the opinion
of counsel, which is not binding on the IRS. Based on the representations of
Star Gas Partners and the general partner and a review of applicable legal
authorities, counsel is also of the opinion that at least 90% of our gross
income is "qualifying income," within the meaning of Section 7704 of the
Internal Revenue Code. This means that our income is derived from the
exploration, development, mining or production, processing, refining,
transportation or marketing of any mineral or natural resource or other items.
Whether we will continue to be classified as a partnership depends, at least
partly, on our ability to continue to meet this qualifying income test in the
future.
If we were classified as an association taxable as a corporation for federal
income tax purposes, we would pay tax on our income at corporate rates, which
is currently a 35% federal rate. If this were to occur, distributions to the
unitholders would generally be taxed again as corporate distributions, and no
income, gains, losses or deductions would flow through to the unitholders.
Because a tax would be imposed upon Star Gas Partners as an entity, the cash
available for distribution to unitholders would be substantially reduced.
Treatment of Star Gas Partners as an association that is taxable as a
corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the market value of the units.
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<PAGE>
There can be no assurance that the law will not change so as to cause Star
Gas Partners to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The partnership agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects Star Gas
Partners to taxation as a corporation or otherwise subjects Star Gas Partners
to entity-level taxation for income tax purposes, then specified provisions of
the partnership agreement are subject to change, including a decrease in
distribution to reflect the impact of that law on us.
A Unitholder May Be Required to Pay Taxes on Income From Star Gas Partners
Even if He Receives No Cash Distributions
A unitholder will be required to pay federal income taxes and, in some cases,
state and local income taxes on his allocable share of our income, whether or
not he receives cash distributions from us. No assurance can be given that a
unitholder will receive cash distributions equal to his allocable share of our
taxable income or even equal to the actual tax liability that results from this
allocable share of income. Further, upon the sale of his units, a unitholder
may incur a tax liability in excess of the amount of cash he receives.
Investors, Other Than Individuals That Are U.S. Residents, May Have Adverse
Tax Consequences From Owning Units
Investment in units by specific tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to these persons. For
example, for any unitholder that is an organization exempt from federal income
tax, including IRAs and other retirement plans, virtually all of the
unitholder's allocable share of taxable income in the first few years will
constitute unrelated business taxable income and thus will be taxable to this
unitholder.
Because We Are a Registered Tax Shelter, A Unitholder or Star Gas Partners
Faces an Increased Risk of an IRS Audit Resulting In Taxes Payable on Star Gas
Partners' and Non-Star Gas Partners' Income
We are registered with the Secretary of the Treasury as a "tax shelter." The
IRS has issued the following tax shelter registration number to Star Gas
Partners: 96026000016. We cannot assure unitholders that we will not be audited
by the IRS or that adjustments to our income or losses will not be made. Any
unitholder owning less than a 1% profit interest in Star Gas Partners has very
limited rights to participate in the income tax audit process. Further, any
adjustments in our tax returns will lead to adjustments in the unitholders' tax
returns and may lead to audits of unitholders' tax returns and adjustments of
items unrelated to us. Each unitholder is responsible for any tax owed as the
result of an examination of his personal tax return.
Star Gas Partners Treats a Purchaser of Units As Having the Same Tax Benefits
As the Seller; the IRS May Challenge This Treatment Which Could Adversely
Affect the Value of the Units
Because we cannot match transferors and transferees of units and because of
other reasons, we have adopted depreciation and amortization conventions that
do not conform with all aspects of specified proposed and final Treasury
Regulations. A successful IRS challenge to those conventions 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.
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<PAGE>
There Are State, Local and Other Taxes To Which Unitholders Will Probably Be
Subject Solely Because of an Investment In the Units
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. The general partner anticipates 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 only
applies 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 ownership or sale of units.
30
<PAGE>
THE TRANSACTION
We 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, Star Gas Partners, Star Gas Propane and a wholly-
owned subsidiary of Star Gas Propane, executed a merger agreement. The parties
entered into an amended and restated merger agreement on February 3, 1999 to
reflect changes in the transaction. 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
Star Gas Propane. As a result of the merger:
. each outstanding share of Petro Class A common stock, par value $0.10
per share, and Petro Class C common stock, par value $0.10 per share,
other than shares that have been exchanged in the exchange or as to
which dissenters' rights have been perfected, will be converted into
0.11758 senior subordinated units;
. each outstanding share of Petro junior convertible preferred stock will
be converted into 0.11758 common units; and
. each outstanding share of Petro Series C exchangeable preferred stock
due 2009 will be converted into the right to receive $10.69 in cash per
share plus accrued and unpaid dividends.
There are 11,228 shares of Petro Class B common stock, par value $0.10 per
share, currently outstanding, representing less than 0.01% 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) Holders of Petro common stock, consisting of Irik P. Sevin, Audrey L.
Sevin, Hanseatic Corp. and Hanseatic Americas LDC, who are referred to as
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 Star Gas Partners in exchange for general
partner units. In addition, the LLC Owners will contribute their remaining
shares of Petro common stock to Star Gas Partners in exchange for junior
subordinated units.
(b) Other Petro common stockholders who are affiliates of Petro will
contribute shares of Petro common stock to Star Gas Partners in exchange
for Star Gas Partners 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
privately offering 7.92% senior secured notes. We are offering for sale to the
public 8.7 million common units in this offering, the net proceeds of which are
estimated to be $116.1 million. Petro will sell, in a private placement, $90.0
million of senior secured notes, the net proceeds of which are estimated to be
$87.7 million. Star Gas Partners and Petro Holdings will guarantee the notes.
All of the net proceeds of this offering, together with the $87.7 million of
estimated net proceeds from the debt offering and $5.4 million of Petro's cash
will be used:
. to redeem $79.5 million of Petro's 12 1/4% Senior Subordinated
Debentures due 2005, $46.1 million of Petro's 10 1/8% Senior
Subordinated Notes due 2003, $68.3 million of Petro's 9 3/8% Senior
Subordinated Debentures due 2006 and the $7.4 million of Petro's 12 7/8%
preferred stock;
31
<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."
In lieu of a portion of the cash purchase price that would otherwise be due
to the holders of the Petro 12 7/8% preferred stock, we may in the future issue
an additional 175,000 senior subordinated units. In addition, as part of the
transaction, we will issue 400,534 common units to two holders of the Petro 12
7/8% preferred stock instead of the cash purchase price.
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 Star Gas
Partners.
Amendment of Partnership Agreement
In order to complete the transaction, amendments must be made to our
partnership agreement and Star Gas Propane's partnership agreement in effect
before 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 Star Gas Partners Units
The following table sets forth the approximate number of units outstanding
before and after completion of the transaction. The 325,729 general partner
interests/units represent 324,100 general partner units in Star Gas Partners
and the 0.01% general partner interest in Star Gas Propane. This 0.01% is
deemed to be in unit form solely for purposes of this table.
<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 23.7%
Issued to Petro junior preferred
stockholders..................... -- -- 102,848 0.6
Issued in this offering and
related refinancings............. -- -- 9,120,547 56.0
--------- ----- ---------- -----
Subtotal........................ 3,858,999 60.5 13,082,394 80.3
Subordinated Units
Existing subordinated units....... 2,396,078 37.5 -- --
Senior subordinated units......... -- -- 2,481,742 15.3
Junior subordinated units......... -- -- 396,558 2.4
--------- ----- ---------- -----
Subtotal........................ 2,396,078 37.5 2,878,300 17.7
General Partner Interests/Units..... 127,655 2.0 325,729 2.0
--------- ----- ---------- -----
Total........................... 6,382,732 100.0% 16,286,423 100.0%
========= ===== ========== =====
</TABLE>
32
<PAGE>
USES OF FUNDS FROM THIS OFFERING AND THE DEBT OFFERING
The following table shows the estimated funds that we will receive from this
offering of common units based on a public offering price of $14.1875 per unit.
This table also shows the funds that Petro will receive from the sale of senior
secured notes in the debt offering.
<TABLE>
<CAPTION>
Amount
(In thousands)
--------------
<S> <C>
Sources
This offering, net of underwriting discounts, commissions and
offering expenses ........................................... $116,129
Debt offering, net of discounts, commissions and offering
expenses .................................................... 87,678
Cash balances................................................. 5,369
--------
$209,176
========
Uses
Redeem Petro 12 1/4% Senior Subordinated Debentures due 2005.. $ 79,472
Redeem Petro 10 1/8% Senior Subordinated Notes due 2003....... 46,128
Redeem Petro 9 3/8% Senior Subordinated Debentures due 2006... 68,252
Redeem Petro 12 7/8% preferred stock.......................... 7,430
Repurchase Petro 1989 preferred stock......................... 4,167
Transaction fees and expenses................................. 3,727
--------
$209,176
========
</TABLE>
33
<PAGE>
CAPITALIZATION
The following table shows our historical capitalization as of December 31,
1998 on an actual basis and as adjusted to give pro forma effect to the
acquisition of Petro. It is further adjusted to give pro forma effect to this
offering and the debt offering and the application of the net proceeds of these
offerings. This table does not include $4.2 million of the current portion of
Petro's 1989 preferred stock that will be paid with the proceeds of this
offering and the debt offering.
The Petro public debt listed below consists of:
. $80.6 million of 12 1/4% Senior Subordinated Debentures due 2005,
including a prepayment discount of $0.7 million;
. $47.4 million of 10 1/8% Senior Subordinated Notes due 2003, including a
prepayment discount of $2.6 million; and
. $68.9 million of 9 3/8% Senior Subordinated Debentures due 2006,
including a prepayment discount of $6.1 million.
Upon completion of the transaction, Petro has the right to redeem up to an
aggregate of 98.5% of the principal amount of these securities.
The Petro private debt listed below consists of:
. approximately $62.7 million of 9% Senior Notes due 2002;
. $4.3 million of 10 1/4% Subordinated and Senior Notes due 2001;and
. $14.0 million of notes payable for the purchase of fuel oil dealers
maturing at various dates through 2004.
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>
December 31, 1998
----------------------------------
Pro Forma Adjusted
Actual Combined Pro Forma
-------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Cash........................ $ 5,831 $ 7,835 $ 14,266
======== ======== ========
Debt:
Star Gas Propane First
Mortgage Notes............ $ 96,000 $ 96,000 $ 96,000
Star Gas Propane acquisi-
tion facility............. 7,616 7,616 7,616
The notes issued in the
debt offering............. -- -- 90,000
Petro public debt.......... -- 196,875 3,022
Petro private debt......... -- 75,357 80,917
-------- -------- --------
Total Long-Term Debt.... 103,616 375,848 277,555
-------- -------- --------
Redeemable Preferred Stock:
Petro 12 7/8% preferred
stock..................... -- 12,828 --
Partners' Capital:
Common unitholders......... 57,347 58,806 180,333
Existing subordinated
unitholders............... (962) -- --
Senior and junior subordi-
nated unitholders......... -- 13,266 13,266
General partner............ 63 1,267 1,267
-------- -------- --------
Total Partners' Capi-
tal.................... 56,448 73,339 194,866
-------- -------- --------
Total Capitalization.... $160,064 $462,015 $472,421
======== ======== ========
</TABLE>
34
<PAGE>
STAR GAS PARTNERS STRUCTURE AND MANAGEMENT
FOLLOWING THE TRANSACTION
Following the transaction, our propane operations will be conducted through
Star Gas Propane 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 Star Gas Propane. 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 Star Gas Propane. 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 Star Gas Partners to make distributions is restricted by
various debt instruments of Star Gas Partners and Petro. See "Description of
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 first chart below illustrates the current organization and ownership of
Star Gas Partners, Star Gas Propane and its subsidiaries and Star Gas
Corporation. The second chart illustrates the organization and ownership of
Star Gas Partners, Star Gas Propane 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 charts represent the approximate ownership interests in each
of Star Gas Partners and Star Gas Propane, individually, and not on an
aggregate basis.
35
<PAGE>
[CURRENT ORGANIZATIONAL CHART OF STAR GAS PARTNERS]
36
<PAGE>
[ORGANIZATIONAL CHART OF STAR GAS PARTNERS IMMEDIATELY FOLLOWING TRANSACTION]
37
<PAGE>
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
The common units are listed and traded on the New York Stock Exchange 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 $22.00 per common unit. The following table shows the closing
high and low sales prices for the common units on the Nasdaq National Market
System through May 28, 1998, and after that date, 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 $14.50 $0.55 $23.38 $20.50 $0.55 $23.88 $21.75 $0.55
March 31,............... 19.88(a) 14.13(a) -- 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,........... -- -- -- 22.38 20.13 0.55 23.50 21.00 0.55
</TABLE>
- --------
(a) Through March 22, 1999.
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 a
yearly basis. The first distribution on the common units offered in this
transaction is expected to be paid on approximately May 15, 1999 to holders of
record as of May 4, 1999 and will relate to the quarter ending March 31, 1999.
The last reported sale price of common units on the NYSE on March 22, 1999
was $14.13 per common unit. As of March 22, there were approximately 199
holders of record of Star Gas Partners' common units.
New York Stock Exchange Listing
On February 12, 1999, the New York Stock Exchange advised us that our
application to list the senior subordinated units on the NYSE had been approved
subject to official notice of issuance. At the same time, however, the NYSE
advised us that based on pro forma information in our registration statement
regarding the Petro acquisition, as filed with the SEC, we would fall below the
NYSE's continued listing criteria upon completion of the Petro acquisition.
When a company falls below any of the NYSE's criteria, the NYSE reviews the
appropriateness of the company's continued listing. The NYSE is currently
conducting a review of our continued listing as part of its standard
procedures.
In connection with the NYSE review process, during the week of February 22,
1999, we made a submission to the NYSE Listing and Compliance Committee. The
submission, which was based largely on our business strategy and the
projections set forth in our joint proxy statement and prospectus, demonstrated
a plan of action that will permit us to meet the NYSE criteria.
The NYSE will not take action to delist any of our securities at this time,
but will monitor our progress and performance on a quarterly basis. Under
current NYSE practice, we will need to meet the NYSE continued listing criteria
in 18 months and the NYSE original listing criteria in 36 months. Our ability
to make acceptable progress toward meeting the criteria, and ultimately to meet
the criteria and remain listed on the NYSE, will depend on our business
performance and other factors, including those described under the caption
"Risk Factors."
38
<PAGE>
CASH DISTRIBUTION POLICY
General Description of Cash Distribution
In general, we distribute to our partners on a quarterly basis, all of our
Available Cash in the manner described below. Available Cash is defined in the
glossary and generally means, for any of our fiscal quarters, all cash on hand
at the end of that 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 our business;
(2) comply with applicable law, any of our debt instruments or other
agreements; or
(3) provide funds for distributions to the common unitholders and the
senior subordinated unitholders during the next four quarters, in some
circumstances.
The general partner may not establish cash reserves for distributions to the
senior subordinated units unless the general partner has determined that the
establishment of reserves will not prevent us from distributing the minimum
quarterly distribution on all common units and any common unit arrearages for
the next four quarters. As discussed below, the restrictions on distributions
to 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 is defined in the glossary and generally means:
(1) the cash balance of Star Gas Partners on the date we began operations,
plus approximately $20.3 million, plus all of our cash receipts,
excluding cash receipts that constitute Capital Surplus; less
(2) all of our operating expenses, debt service payments, maintenance
capital expenditures and reserves established for future operations;
provided, however, that Operating Surplus is calculated without any
reduction for costs or expenses incurred in the transaction.
Capital Surplus is also defined in the glossary and is generally 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.
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
before that distribution. This method of cash distribution avoids the
difficulty of trying to determine whether Available Cash is distributed from
Operating Surplus or Capital Surplus. Any excess Available Cash, irrespective
of its source, will be deemed to be Capital Surplus and distributed
accordingly.
If Capital Surplus is distributed on each common unit issued in our initial
public offering in an aggregate amount per unit equal to $22.00 per common
unit, the distinction between Operating Surplus and Capital Surplus will cease.
All distributions after that date will be treated as from Operating Surplus.
The general partner does not expect that there will be significant
distributions from Capital Surplus.
The senior subordinated units and the junior subordinated units are each a
separate class of interests in Star Gas Partners, and the rights of holders of
those interests to participate in distributions differ from the rights of the
holders of common units. When issued, the Class B common units will also be a
separate class of interests in Star Gas Partners.
39
<PAGE>
Quarterly Distributions of Available Cash
Except for the limitations and prohibitions on distributions discussed below,
we will make distributions to our partners for each of our fiscal quarters
before liquidation in an amount equal to all of our Available Cash for that
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. We are prohibited from making any distributions on our senior
subordinated units, junior subordinated units and general partner units during
the remainder of our fiscal year 1999, which ends on September 30, 1999. If we
generate sufficient Available Cash to satisfy the limitation described below,
the first distribution permitted to be paid to the holders of the senior
subordinated units issued in the transaction will be paid for the first quarter
of our fiscal year 2000, which begins on October 1, 1999. The first
distribution on the common units, including those issued in this offering,
after the completion of the transaction will be paid for the quarter ending
March 31, 1999 on approximately May 15, 1999 to holders of record on
approximately May 4, 1999 regardless of how many days the common units have
been outstanding. For a discussion of the restrictions on distributions to the
holders of subordinated interests, see "--Limitations and Prohibitions on
Distributions on 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, and distributions on the general partner units will no
longer be subordinated to distributions on the common units. All references to
common units after the expiration of the subordination period are references to
Class A common units and Class B common units, collectively, unless otherwise
indicated. 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 on distributions for any quarter.
Distributions of Available Cash from Operating Surplus During the Subordination
Period
The subordination period is defined in the glossary and will generally extend
until the first day of any quarter beginning on or after October 1, 2002 that
each of the following three events occur:
(1) distributions of Available Cash from Operating Surplus on the common
units, senior subordinated units, junior subordinated units and general
partner units equal or exceed the sum of the minimum quarterly
distributions on all of the outstanding common units, senior
subordinated units, junior subordinated units and general partner units
for each of the three non-overlapping four-quarter periods immediately
preceding that 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 those periods on a
fully diluted basis for employee options or other employee incentive
compensation. This includes all outstanding 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 before the end
of the quarter immediately following the quarter for which the
determination is made. It also includes all units that have as of the
date of determination been earned by but not yet issued to our
management for incentive compensation; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
In specific circumstances, if the general partner is removed without cause,
the subordination period will end, any existing arrearages on the common units
will be extinguished, the senior subordinated units and 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."
40
<PAGE>
Distributions of Available Cash from Operating Surplus for 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 for each common unit an amount equal to the minimum quarterly
distribution for that quarter.
. Second, 100% to the common units, pro rata, until there has been
distributed for each common unit an amount equal to any cumulative common
unit arrearages on each common unit for any prior quarter.
. Third, 100% to the senior subordinated units, pro rata, until there has
been distributed for each senior subordinated unit an amount equal to the
minimum quarterly distribution for that quarter.
. Fourth, 100% to the junior subordinated units and general partner units,
pro rata, until there has been distributed for each junior subordinated
unit and general partner unit an amount equal to the minimum quarterly
distribution for that quarter.
. Thereafter, in the manner described in "--Incentive Distributions During
the Subordination Period" below.
Upon completion of the transaction, the general partner will have a 1.99%
general partner interest in Star Gas Partners in the form of general partner
units and a 0.01% general partner interest in Star Gas Propane. References in
this prospectus to distributions on the general partner units disregard the
general partner's 0.01% general partner interest in Star Gas Propane.
Distributions of Available Cash from Operating Surplus After the Subordination
Period
Distributions of Available Cash from Operating Surplus for any quarter after
the subordination period will be made in the following manner:
(1) First, 100% to all units, pro rata, until there has been distributed to
each unit an amount equal to the minimum quarterly distribution for
that quarter.
(2) Thereafter, in the manner described in "--Incentive Distributions After
the Subordination Period" below.
Incentive Distributions During the Subordination Period
For any quarter that both (1) and (2) below occur, holders of the senior
subordinated units, junior subordinated units and general partner units will
receive incentive distributions as described below.
(1) Available Cash from Operating Surplus is distributed to each of the
common units, senior subordinated units, junior subordinated units and
general partner units in an amount equal to the minimum quarterly
distribution.
(2) Available Cash has been distributed on outstanding common units in the
amount as may be necessary to eliminate any cumulative common unit
arrearages.
After the distributions described in (1) and (2) above are met, additional
Available Cash from Operating Surplus for that quarter will be distributed
among the units in the following manner:
. First, 100% to all units, 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 that quarter (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 each common unit has received, in addition to any
distributions to eliminate any cumulative common unit arrearages, a total
of $0.711 per unit for that quarter (the "Second Target Distribution").
41
<PAGE>
. 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 each common unit has received, in addition to any distributions to
eliminate any cumulative common unit arrearages, a total of $0.926 per
unit for that quarter (the "Third Target Distribution").
. 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 the issuance of
additional Star Gas Partners securities, in any manner that would increase the
aggregate amount of incentive distributions without the approval of a majority
of the outstanding units of the classes, each class voting separately, that
would be adversely affected.
The following table illustrates the amount of Available Cash from Operating
Surplus distributed pro rata as the base distribution to all unitholders pro
rata and the percentage of Available Cash distributed as incentive
distributions to the holders of senior subordinated units, junior subordinated
units and general partner units only at the target distribution levels. The
percentages in the table below are the percentage interests of the unitholders
in Available Cash from Operating Surplus distributed as base distributions to
all unitholders and distributed as incentive distributions based on the number
of units outstanding immediately after completion of the transaction.
<TABLE>
<CAPTION>
Percentage of Available Cash
Distributed as Incentive
Distributions to the Specified
Unit Class
---------------------------------
Percentage of Percentage of
Quarterly Available Cash Available Cash
Distribution Distributed as Distributed as Senior Junior General
Amount per Base Incentive Subordinated Subordinated Partner
Common Unit Distributions Distributions Units Units Units
------------ -------------- -------------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.575 100.0% -- -- -- --
First Target
Distribution........... 0.604 100.0 -- -- -- --
Second Target
Distribution........... 0.711 86.7 13.3% 10.3% 1.6% 1.4%
Third Target
Distribution........... 0.926 76.5 23.5 18.2 2.9 2.4
Thereafter.............. -- 51.0 49.0 37.9 6.1 5.0
</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
units.
Incentive Distributions After the Subordination Period
For any quarter for which Available Cash from Operating Surplus is
distributed to each of the Class A common units, the Class B common units and
general partner units in an amount equal to the minimum quarterly distribution,
then any additional Available Cash from Operating Surplus for that quarter will
be distributed among the unitholders in the following manner:
.First, 100% to all units, pro rata, until each unit has 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 each Class A common unit
has 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 each Class A common unit
has received the Third Target Distribution.
. Thereafter, 51% to all units, pro rata, and 49% to all Class B common
units and general partner units, pro rata.
42
<PAGE>
Distributions from Capital Surplus
Distributions of Available Cash from Capital Surplus will be made 100% on all
units, pro rata, until each common unit that was issued in our initial public
offering has received distributions equal to $22.00. This was the unit price
from the initial public offering. 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 unit price from the initial public offering. To reflect
repayment, the minimum quarterly distribution and the target distribution
levels will be adjusted downward by multiplying each amount by a fraction. This
fraction is determined as follows: the numerator is the unrecovered initial
unit price immediately after giving effect to the repayment and the denominator
is the unrecovered initial unit price immediately before the 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 common units issued in the initial public offering, then the amount of
the minimum quarterly distribution and the target distribution levels would
each be reduced to 50% of its initial level.
A "payback" of the unit price from the initial public offering occurs when
the unrecovered initial unit price is zero. At that time, the minimum quarterly
distribution and the target distribution levels each will have been reduced to
zero. All distributions of Available Cash from all sources after that time will
be treated as if they were from Operating Surplus. 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 then
be entitled to receive 49% of all distributions of Available Cash, after
distributions for 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 in which
they are distributed.
Limitations and Prohibitions on Distributions on Subordinated Interests
Distributions on the senior subordinated units, junior subordinated units and
general partner units are prohibited during the remainder of our fiscal year
1999, which ends on September 30, 1999. There is no prohibition on
distributions to common units during this time.
Beginning with the first quarter of our fiscal year 2000, which begins on
October 1, 1999, no distributions will be made on the senior subordinated
units, junior subordinated units or general partner units, unless the aggregate
amount of distributions on all units for all quarters, beginning with the first
quarter of our fiscal year 2000, is equal to or less than the total Operating
Surplus generated by us since October 1, 1999. Solely for purposes of this
limitation, Operating Surplus does not include our cash balance on the date we
began operations, plus approximately $20.3 million.
The holders of the senior subordinated units, junior subordinated units and
general partner units are not prohibited from receiving distributions from
Capital Surplus in a partial liquidation during the subordination period.
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjustments made upon a distribution of Available Cash from
Capital Surplus, the following will each be proportionately adjusted upward or
downward, as appropriate, if any combination or subdivision of units should
occur:
(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;
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(5) the number of Class B common units issuable upon conversion of the
senior subordinated units and the junior subordinated units; and
(6) other amounts calculated on a per unit basis.
However, no adjustment will be made by reason of the issuance of additional
units for cash or property. For example, if a two-for-one split of the common
units should occur, the minimum quarterly distribution, the target distribution
levels and the Unrecovered Initial Unit Price would each be reduced to 50% of
its initial level.
The minimum quarterly distribution and target distribution levels may also be
adjusted if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes. In this event, the minimum quarterly distribution and target
distribution levels for each quarter after that time would be reduced to
amounts equal to the product of:
(1) the minimum quarterly distribution or target distribution level;
multiplied by
(2) one minus the sum of:
(x) the highest marginal federal corporate income tax rate to which
we are then subject as an entity; plus
(y) any increase in the effective overall state and local income tax
rate 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 for the
payment of state and local income taxes, but only to the extent
of the increase in rates resulting from that legislation or
interpretation.
For example, assuming we are 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 before the adjustment.
Issuance of Additional Senior Subordinated Units
The partnership agreement provides for the issuance of up to 909,000
additional senior subordinated units if Petro meets specified financial tests.
Specifically, if the dollar amount of Petro Adjusted Operating Surplus per
Petro Unit equals or exceeds $2.90 for any four-quarter period that occurs
between the first and fifth anniversaries of the transaction, we will issue
303,000 senior subordinated units to the holders of the senior subordinated
units, junior subordinated units and general partner units of record for the
final quarter of that four-quarter period. After the end of the subordination
period, we would instead issue 303,000 Class B common units to the holders of
the Class B common units and the general partner units. In any case, we may not
issue more than 303,000 senior subordinated units or Class B common units in
any 365-day period. Furthermore, we may not issue more than 909,000 senior
subordinated units or Class B common units under this provision in the
aggregate. We will not issue any fractional units in the issuance of these
additional units but will pay to each holder who would otherwise be entitled to
a fractional unit an amount in cash in lieu of those fractional units. The
amount of cash to be paid will be determined by multiplying the fraction by the
current market price of a senior subordinated unit or a Class B common unit, as
the case may be. For this purpose, the current market price is set as of the
date three days prior to issuance of the additional units. On the first day
after the record date for distributions for the first quarter ending on or
after the fifth anniversary of 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, for any four-quarter period, the
Adjusted Operating Surplus generated by Petro, which includes all subsidiaries
of Star Gas Partners primarily engaged in the home heating oil business, during
that four quarter period. The determination of this amount is made in good
faith by a majority of the members of the board of directors of the general
partner acting with the concurrence of the audit committee. In calculating
Petro Adjusted Operating Surplus:
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(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 that 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", for any date, means the sum of:
(1) the excess of the number of units outstanding at completion of the
transaction over the number of units outstanding immediately before
the completion of the transaction, assuming the simultaneous
closing of this offering;
(2) the number of units issued by Star Gas Partners after the
transaction to the extent the net proceeds of which are contributed
to Petro, which for these purposes includes all subsidiaries of
Star Gas Partners primarily engaged in the home heating oil
business;
(3) the number of senior subordinated units or Class B common units
issued under 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 Star Gas Partners or any of its affiliates
after 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 that Star Gas Partners' 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.
For purposes of (4) above, the amount used to pay down the Petro debt discussed
below will be treated as if it were contributed to Petro by Star Gas Partners.
Specifically, Petro debt paid or debt allocated to Petro from internally
generated funds that exist at Petro only because Petro has not paid dividends
up to Star Gas Partners in an amount equal to the distributions that would have
been paid on the Petro Units had they been actual outstanding units of Star Gas
Partners will fall within (4) above. The distribution per senior subordinated
unit of Star Gas Partners shall be the amount that Star Gas Partners would have
been deemed to have distributed per Petro Unit had they been actual outstanding
units of Star Gas Partners. For purposes of the number of deemed outstanding
units in (4) above, those units shall be deemed to be issued on the date of the
capital contribution. For purposes of determining the number of outstanding
Petro Units for any period of time, the number of units issued under (2), (3)
and (4) above shall be determined on a weighted average basis based on the
amount of time they have been outstanding. For this purpose, common unit means
Class A common unit upon expiration of the subordination period. Petro Units
are not "units" as such term is used in this prospectus.
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 of those units 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 beginning of the 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 liquidation
will first be applied to the payment of our creditors in the order of priority
provided in the
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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 favor the holders of outstanding common units over the holders of
all other outstanding units, to the extent of the unrecovered initial unit
price plus any cumulative common unit arrearages. However, no assurance can be
given that there will be sufficient gain upon liquidation of Star Gas Partners
to enable the holders of common units to fully recover their Unrecovered
Initial Unit Price and arrearages, even though there may be cash available for
distribution to the holders of senior subordinated units and junior
subordinated units. The manner of the 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 in the following manner:
. First, to the partners that have negative balances in their capital
accounts, to the extent of and in proportion to, those 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 for that
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 on those 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 an amount per common unit equal to (a) the excess of the
First Target Distribution per unit over the then effective minimum
quarterly distribution per unit for each quarter of Star Gas Partners'
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 Star Gas Partners' 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 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
Star Gas Partners' 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 Star Gas Partners' 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 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 for each quarter of Star Gas Partners'
existence.
. Thereafter, 51.0% to all units, pro rata, and 49.0% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata.
Any loss or unrealized loss will be allocated to the unitholders in the
following manner:
. First, 100% to the junior subordinated units and general partner units,
pro rata, in proportion to the positive balances in their capital
accounts until the positive balances in their capital accounts have been
reduced to zero.
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. Second, 100% to the senior subordinated units in proportion to the
positive balances in their capital accounts until the positive balances
in their capital accounts have been reduced to zero.
. Third, 100% to the common units in proportion to the positive balances in
their capital accounts until the positive balances in their capital
accounts have been reduced to zero.
. 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 in the following manner:
. First, to the partners that have negative balances in their capital
accounts to the extent of and in proportion to those 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 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 our
existence, less (b) the amount per Class A common unit of any
distributions of Available Cash from Operating Surplus in excess of the
then effective minimum quarterly distribution per Class A common unit
that was distributed 100% to units, pro rata, for each quarter of our
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 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 our
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 our 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 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 our
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 our existence.
. 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 the Class B common units, pro rata, in proportion
to the positive balances in their capital accounts, until the positive balances
in those capital accounts have been reduced to zero.
Interim adjustments to capital accounts will be made at the time we issue
additional interests or make distributions of property. These adjustments will
be based on the fair market value of the interests issued or the property
distributed and any gain or loss resulting from the adjustments will be
allocated to the unitholders in the same manner as gain or loss is allocated
upon liquidation.
Cash Available for Distribution
We believe that we will generate sufficient Available Cash from Operating
Surplus for the first four-quarter period following the completion of the
transaction to cover the full minimum quarterly distribution for the four-
quarter period on all then outstanding units.
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Even if this amount is generated, we may, however, not distribute the cash.
We will not make distributions on the senior subordinated units, junior
subordinated units and general partner units for any quarter during our fiscal
year 1999. Beginning with the first quarter of our fiscal year 2000, we are
allowed to make distributions on the senior subordinated units, junior
subordinated units and general partner units, but may distribute less than the
minimum quarterly distribution on these units because of the subordination
provisions and other limitations on distributions in the partnership agreement.
Our belief about the amount of cash we may generate is based on a number of
assumptions, including the assumptions that:
. normal weather conditions will prevail in Star Gas Partners' and Petro's
operating areas;
. Star Gas Partners' and Petro's operating margins will remain constant;
and
. 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 series of
years, weather may deviate substantially from normal. Therefore, our
assumptions concerning the weather may prove to be inaccurate. As a result, our
Operating Surplus could deviate from that currently expected. See "Risk
Factors."
The amount of Available Cash constituting Operating Surplus needed to pay the
minimum quarterly distribution for four quarters on the common units, senior
subordinated units, junior subordinated units and general partner units to be
outstanding immediately after the transaction is approximately:
<TABLE>
<S> <C>
Common units................................................ $30.1 million
Senior subordinated units................................... 5.7 million
Junior subordinated units................................... 0.9 million
General partner units....................................... 0.8 million
-------------
Total..................................................... $37.5 million
</TABLE>
After giving pro forma effect to the transaction, the amount of pro forma
Available Cash constituting Operating Surplus generated during the twelve
months ended December 31, 1998, would have been approximately $15.9 million. If
infrequent restructuring, corporate identity and transaction expenses were not
taken into effect, pro forma Available Cash constituting Operating Surplus
would have been $21.4 million. In 1998, temperatures were significantly warmer
than normal for the areas in which Star Gas Partners conducts its propane
operations and Petro conducts its home heating oil operations. We believe that
overall levels of both pro forma Available Cash from Operating Surplus and
EBITDA were adversely affected during 1998 due to this abnormally warm weather.
See "Unaudited Pro Forma Condensed Consolidated Financial Information."
We are required to establish reserves for the future payment of principal and
interest on the First Mortgage Notes and the indebtedness under the bank credit
facilities. There are other provisions in these agreements that will, under
some circumstances, restrict our ability to make distributions to our partners.
See "Note 9 to Consolidated Financial Statements--Long-Term Debt and Working
Capital Borrowings" in our Annual Report on Form 10-K/A for the fiscal year
ended September 30, 1998 that is incorporated by reference in this prospectus.
The notes issued in the debt offering are expected to have provisions that
will, under some circumstances, similarly restrict our ability to make
distributions to our unitholders.
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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 that Star Gas Partners 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 and giving effect to the transaction
and the acquisitions made in fiscal 1998, we had $566.2 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 352.0 million
gallons. If certain infrequent restructuring, corporate identity and
transaction expenses were not subtracted from EBITDA, pro forma EBITDA for the
same period would have been $55.1 million.
Propane Operations
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. Based on volumes of gallons sold
approximately 80% of these sales 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 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 requests. 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 $450.1 million and EBITDA of $30.7 million. If
certain infrequent 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, our
total sales consisted of approximately:
.83% from sales of home heating oil;
.13% from the installation and repair of heating equipment; and
. 4% 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 that
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
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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.
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, thus 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 these 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 Star Gas Partners
and Petro have been active consolidators in each of their 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 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 with switching tanks.
. 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,
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marketing, information technology and other areas by spreading our costs
over a larger base of sales. In our home heating oil business, we are
using 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.
We cannot assure 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, while 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.
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Consequently, sales and operating profits are largely generated in the first
and second fiscal quarters of each year. 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:
MIDWEST Michigan
Charlotte
Hillsdale
Somerset Center
NORTHEAST Indiana Akron
Connecticut Batesville
Stamford Bedford
Hartford Bluffton Coal
City College
Corner Columbia
CityDecatur
Ferdinand
Greencastle
Jeffersonville
Linton Madison
New Salisbury
N. Manchester
N. Vernon N.
Webster
Portland
Remington
Richmond Salem
Seymour Sulphur
Springs
Versailles
Warren Waterloo
Winamac
Ohio Bowling
Green
Cincinnati
Defiance
Deshler Ft.
Recovery Hebron
Ironton Kenton
Lancaster
Lewisburg
Lynchburg Macon
Maumee McClure
Milford Mt.
Orab North Star
Ripley Sabina
Waverly West
Union
Maine Fairfield
Fryeburg
Skowhegan Wells
Windham
Massachusetts
Belchertown
Rochdale
Westfield
Swansea
New Hampshire
(from Fryeburg,
ME)
New Jersey West Virginia
Maple Shade (from Ironton,
Tuckahoe OH)
New YorkAddison Kentucky Dry
Poughkeepsie Ridge Glencoe
Washingtonville Prospect
Shelbyville
Pennsylvania
Hazelton Wind
Gap
Rhode Island
Davisville
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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, an appliance showroom and a warehouse and
service facilities, with one or more 12,000 to 30,000 gallon bulk storage
tanks. 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. These trucks 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 that 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. These sales were comprised of approximately:
. 56% to residential customers;
. 18% to industrial/commercial customers;
. 19% to agricultural customers; and
. 7% to motor fuel customers.
Approximately 20% of our propane sales during the fiscal year ended September
30, 1998, on a pro forma basis, 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 under 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 we cannot assure 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
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delivery. Some 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.
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, 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 our Midwest purchase volume was comprised of:
. 28% on the spot market from various Mont Belvieu, Texas sources;
. 27% from three refineries in Illinois, Kentucky and Michigan owned by
Marathon Ashland Petroleum, LLC;
. 23% from three refineries in Illinois and Indiana owned by Amoco Canada
Marketing Group; and
. the remaining propane from five other refineries.
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 and Carriers Increasing the Risk of an Interruption in Supply That
Might Result in a Loss of Revenues and Customers."
Propane is generally transported from refineries, pipeline terminals and
storage facilities, including our Seymour facility, and coastal terminals to
our branch location bulk plants. We accomplish this 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 under 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,
margins on our retail propane distribution business would 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 could be increased. The timing of those cost
pass-throughs can significantly affect margins.
Competition
The 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 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.
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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, while retail
marketers locate in close proximity to customers to lower the cost of providing
service. The typical retail distribution outlet has an effective marketing
radius of approximately 35 miles. See "Risk Factors--Risks Inherent in Our
Business--Because of the Highly Competitive Nature of the Retail Propane and
Home Heating Oil Businesses, We May Not Be Able to Maintain Existing Customers
or Acquire New Customers, Which Would Have An Adverse Impact on Our Operating
Results and Financial Condition."
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, we owned 60 of our 74 branch locations and 36 of
our 46 satellite storage facilities and leased the balance. In addition, Star
Gas Partners owns the Seymour facility, in which it stores propane for itself
and third parties. Our propane operations' corporate headquarters are leased in
Stamford, Connecticut, while our office and training facilities are leased 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, Star Gas Partners 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;
.206,000 stationary customer storage tanks with typical capacities of 24 to
1,000 gallons; and
.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. 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
55
<PAGE>
increase in the customer base due to housing starts. As a result, according to
the most recent available data, 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.
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.
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, our total sales
were comprised of approximately:
.83% from sales of home heating oil;
.13% from the installation and repair of heating equipment; and
. 4% 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 a request. We also
regularly provide various service incentives to obtain and retain customers.
Our home heating oil business is consolidating its operations under one brand
name, which we are building by employing an upgraded, professionally trained
and managed sales force, together with 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 operations 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 that interface with our approximately 110,000 Long
Island and New York City home heating oil customers, including sales, customer
service, credit and accounting. 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.
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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
Dutchess 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 five years through 1997. 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. In 1998 net
attrition approximated 3.4%, representing gains of approximately 11.4% and
gross losses of 14.8%. Gross 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. While our home heating oil business often loses customers
when they move from their homes, we are able to retain a majority of these
homes by obtaining the new home purchaser as a customer.
In addition, approximately 90% of our customers receive their home heating
oil under 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 under supply contracts or
on the spot market. Our home heating oil business has market price based
contracts for substantially all our petroleum requirements with 11 different
suppliers, the majority of which have significant
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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. Supply contracts
typically have terms of 12 months. All of the supply contracts provide for
maximum and in some cases minimum quantities. In most cases our supply
contracts do not establish the price at which we purchase fuel oil in advance.
This price, like the price to most of our home heating oil 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. We also
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 volatility
has not materially affected our performance, since over the years we have added
a gross margin onto our wholesale costs. This addition was 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 that
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 risks
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 that 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 us, 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. Like most companies in
the home heating oil business, we provide home heating equipment repair service
on a 24-hour a day basis. This tends to build customer loyalty. As a result of
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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 some 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
Star Gas Partners itself has historically had no employees except for some
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 Star Gas Propane of whom:
. 44 were employed by the corporate office in Stamford, Connecticut; and
. 580 were located in branch offices.
In addition, at this time Star Gas Corporation had employees of whom:
. 177 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;
. 244 were oil truck drivers and mechanics;
. 199 were management and staff; and
. 181 were employed in sales.
Approximately 50 of these 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,
the Clean Air Act, the Occupational Safety and Health Act, the Emergency
Planning and Community Right to Know Act, the Clean Water Act and comparable
state statutes. CERCLA, also known as the "Superfund" law, imposes joint and
several liability 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.
These laws and regulations could result in civil or
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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 above laws and regulations.
For 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 of that real estate prior to its purchase. This
due diligence includes questioning the seller, obtaining representations and
warranties concerning the seller's compliance with environmental laws and
performing site assessments. During this due diligence our employees, and, in
certain cases, independent environmental consulting firms review historical
records and data bases and conduct physical investigations of the property to
look for evidence of hazardous substances, compliance violations and the
existence of underground storage tanks.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of
the states in which we operate. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level.
Regarding 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 published its Final
Rule for Continued Operation of the Present Propane Trucks. This final rule is
intended to address perceived risks during the transfer of propane and required
certain immediate changes in industry operating procedures, including
retrofitting all propane delivery trucks. Star Gas Partners, as well as the
National Propane Gas Association and the propane industry in general, believe
that the Final Rule for Continued Operation of the Present Propane Trucks
cannot practicably be complied with in its current form. On October 15, 1997,
five of the principal multi-state propane marketers, all of whom were unrelated
to Star Gas Partners, filed an action against the U.S. Department of
Transportation in the United States District Court for the Western District of
Missouri seeking to enjoin enforcement of the Final Rule for Continued
Operation of the Present Propane Trucks. On February 13, 1998, the Court issued
a preliminary injunction prohibiting the enforcement of this final rule pending
further action by the Court. The National Propane Gas Association later 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 U.S. Department of Transportation from enforcing specific
provisions of the Final Rule for Continued Operation of the Present Propane
Trucks. At this time, Star Gas Partners 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 for Continued Operation of the Present
Propane Trucks will be to Star Gas Partners and the propane industry in
general.
The United States Environmental Protection Agency 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 specified large commercial
users of propane to develop a Risk Management Program and to file a Risk
Management Plan. The Risk Management Plan 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. It also mandates
training to protect against an event of this type. We are in substantial
compliance with National Fire Protection Code Pamphlet 58, which covers most of
the Risk Management Plan requirements and we do 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 Risk Management Plan 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.
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Future developments, such as stricter environmental, health or safety laws
and regulations, 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 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 amounts and with coverages and deductibles
as the general partner believes are reasonable and prudent. Star Gas LLC, the
general partner following the merger, has informed us that it intends to
maintain existing insurance policies. However, we cannot assure that this
insurance will be adequate to protect us from all material expenses related to
potential future claims for personal and property damage or that these 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.
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MANAGEMENT
Star Gas Partners Management
General Partner
Upon completion of the transaction, our general partner and the general
partner of Star Gas Propane 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--Risks
Inherent in an Investment in Star Gas Partners--The General Partner Has
Conflicts of Interest and Limited Fiduciary Responsibilities, Which May Permit
the General Partner to Favor its Own Interests to the Detriment of
Unitholders." 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
Star Gas Propane defaults under the First Mortgage Notes or the bank credit
facilities, the general partner will be liable for any deficiency remaining
after foreclosure on Star Gas Propane assets.
As is commonly the case with publicly-traded limited partnerships, Star Gas
Partners does not directly employ any of the persons responsible for our
management or operation. Instead, Star Gas Partners 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 completion 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 and an independent director to be selected by the Star
Gas LLC board, neither of whom are officers or employees of any affiliates of
the general partner, will serve on the audit committee of the Star Gas LLC
board. The audit committee has the authority to review specific matters that
the general partner believes present a conflict of interest. The audit
committee will determine if the resolution of the 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 our
unitholders.
In addition, the audit committee:
.reviews our external financial reports;
.recommends engagement of our independent accountants; and
.reviews our procedure for internal auditing and the adequacy of our
internal accounting controls.
In these additional matters, the audit committee may act on its own
initiative to question the general partner and, absent the delegation of
specific authority by the entire board of directors, its recommendations will
be advisory.
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Directors are elected for one-year terms. The following table shows certain
information for 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.................... 62 Treasurer
Richard F. Ambury................... 42 Vice President
James Bottiglieri................... 43 Vice President
Audrey L. Sevin..................... 73 Secretary
Thomas J. Edelman................... 48 Director
Paul Biddelman(c)................... 53 Director
Wolfgang Traber(a).................. 55 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 later integration into Star Gas Partners.
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.
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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.
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<PAGE>
Star Gas Propane
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 Star Gas Propane.
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
Star Gas Propane 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.
Specific information relating to executive compensation, various benefit
plans, including unit option plans, voting securities and the principal holders
of these securities, specific relationships and related transactions and other
related matters as to Star Gas Partners and Star Gas Corporation (as
predecessor general partner to Star Gas Corporation) is incorporated by
reference or described in our 1998 Annual Report on Form 10-K and is
incorporated by reference in this prospectus. In order to obtain copies of
these 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.
We expect that the following persons who serve as executive officers of Petro
before 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, Senior Vice President and Treasurer;
.James J. Bottiglieri, Vice President and 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
for its management of Star Gas Partners. The general partner is reimbursed at
cost for all expenses incurred on our behalf, including the costs of
compensation described in this prospectus properly allocable to Star Gas
Partners. The partnership agreement provides that the general partner shall
determine the expenses that are allocable to Star Gas Partners 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 on those units, as
described under "Cash Distribution Policy."
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<PAGE>
BENEFICIAL OWNERSHIP OF
PRINCIPAL UNITHOLDERS AND MANAGEMENT
The following table shows the beneficial ownership upon completion of the
transaction of common units, senior subordinated units, junior subordinated
units and general partner units by:
(1)Star Gas LLC and certain beneficial owners and all of the directors of
Star Gas LLC;
(2)each of the named executive officers of Star Gas Corporation and Petro;
and
(3)all directors and executive officers of Star Gas Corporation and Petro
as a group.
For purposes of this table, the number of general partner units is deemed to
include the 0.01% general partner interest in Star Gas Propane.
The address of each person is c/o Star Gas Partners, L.P. at 2187 Atlantic
Street, Stamford, Connecticut 06912-0011. The asterisk in the percentage column
refers to a percentage less than one percent.
<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............ -- -- % -- -- % -- -- % 325,729 100%
Irik P. Sevin........... -- -- -- -- 61,377 15.5 325,729(c) 100
Audrey L. Sevin......... -- -- -- -- 175,839 44.3 325,729(c) 100
Wolfgang Traber......... 10,400(a) * 1,062 * 159,342(b) 40.2 325,729(c) 100
Paul Biddelman.......... -- -- 280 * 159,342(b) 40.2 325,729(c) 100
Thomas Edelman.......... -- -- 82,425(d) 3.3 -- -- -- --
Richard F. Ambury....... 625 * 39 * -- -- -- --
George Leibowitz........ -- -- -- * -- -- -- --
C. Justin McCarthy...... 6,100 -- -- -- -- -- -- --
Angelo Catania.......... -- -- 294 * -- -- -- --
David Eastin............ -- -- -- -- -- -- -- --
Joseph P. Cavanaugh..... 1,000 -- 58 -- -- -- -- --
William G. Powers....... -- -- -- -- -- -- -- --
All officers and
directors and Star Gas
LLC as a group (14
persons)............... 18,125 * 177,138 7.1% 396,558(b) 100.0% 325,728 100.0%
</TABLE>
- --------
(a) Includes 10,000 common units owned by Mr. Traber's wife and 400 common
units owned by Mr. Traber's daughter as to which he may be deemed to share
beneficial ownership.
(b) Includes 159,342 junior subordinated units held by Hanseatic Americas LDC,
a Bahamian limited duration company. The sole managing member of Hanseatic
Americas is Hansabel Partners, LLC, a Delaware limited liability company.
The sole managing member of Hansabel Partners 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.
(c) Assumes each of Star Gas LLC and Messrs. Traber and Biddelman through their
positions with the Hanseatic companies may be deemed to beneficially own
all of Star Gas LLC's general partner units, however, they disclaim
beneficial ownership of these units.
(d) Includes 3,527 senior subordinated units owned by Mr. Edelman's wife and
trusts for the benefit of his minor children.
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<PAGE>
DESCRIPTION OF THE COMMON UNITS
The common units have been registered under the Exchange Act and we are
subject to the reporting and certain other requirements of the Exchange Act. We
are required to file periodic reports containing financial and other
information with the SEC.
Purchasers of common units in this offering and later transferees of common
units, or their brokers, agents or nominees on their behalf, will be required
to execute transfer applications. The form of transfer application is included
as Annex A to this prospectus and is also shown 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 of
that unit, and the beneficial owner's rights will be limited solely to those
that it has against the nominee holder.
The Rights of Unitholders
Generally, the common units represent limited partner interests, which
entitle the holders of those units 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 for the
common units. The transfer agent receives a fee from us for serving in these
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 unitholder. There will be no
charge to holders for disbursements of cash distributions. We will indemnify
the transfer agent, its agents and each of their shareholders, directors,
officers and employees against all claims and losses that may arise out of acts
performed or omitted for its activities as transfer agent, 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 resign, or be removed by us. If no successor is
appointed within 30 days, the general partner may act as the transfer agent and
registrar until a successor is appointed.
Obligations and Procedures for the Transfer of Units
Until a common unit has been transferred on our books, we and the transfer
agent, notwithstanding any notice to the contrary, may treat the record holder
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 that purchaser
for that purchase. Any later 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 does the following:
. Becomes the record holder of those units and shall be constituted as an
assignee until admitted into Star Gas Partners as a substituted limited
partner;
. Automatically requests admission as a substituted limited partner in Star
Gas Partners;
. Agrees to be bound by the terms and conditions of, and executes, the
partnership agreement;
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<PAGE>
. Represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
. Grants powers of attorney to the general partner and any liquidator of
Star Gas Partners as specified in the partnership agreement; and
. Makes the consents and waivers contained in the partnership agreement.
An assignee will become a substituted limited partner of Star Gas Partners
for the transferred common units upon satisfaction of the following two
conditions:
. The consent of the general partner, which may be withheld for any reason
in its sole discretion.
. The recording of the name of the assignee on the books and records of
Star Gas Partners.
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 Star Gas Partners for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only the following rights:
. The right to assign the common unit to a purchaser or other transferee.
. The right to transfer the right to seek admission as a substituted
limited partner in Star Gas Partners for 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 for those common
units. In addition, such purchaser or transferee may not receive some federal
income tax information or reports furnished to record holders of common units.
The transferor of common units will have a duty to provide the 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 the transferee neglects or fails to execute and
forward the transfer application to the transfer agent. See "The Partnership
Agreement--Rights and Status as Limited Partner or Assignee Upon Transfer of
Interest."
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<PAGE>
THE PARTNERSHIP AGREEMENT
The agreements of limited partnership of Star Gas Partners and Star Gas
Propane will be amended and restated at the completion of the transaction. The
form of the Star Gas Partners partnership agreement is included in this
prospectus as Annex C. The following discussion is a complete summary of the
material provisions of the partnership agreement.
The following provisions of the partnership agreement are summarized
elsewhere in this prospectus:
. With regard to various transactions and relationships of Star Gas
Partners with the general partner and its affiliates, see "Conflicts of
Interest."
. With regard to our management, 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
"Federal Income Tax Considerations."
Organization and Duration
Star Gas Partners and Star Gas Propane were organized in 1995 as Delaware
limited partnerships. Star Gas Partners will dissolve on December 31, 2085,
unless dissolved sooner under the terms of the partnership agreement.
Purpose
The purpose of Star Gas Partners is limited to serving as the limited partner
of Star Gas Propane and engaging in other activities approved by the general
partner. The general partner is authorized in general to perform all acts
deemed necessary to carry out those purposes and to conduct the business of
Star Gas Partners. The general partner has the ability to cause Star Gas
Partners and Star Gas Propane to engage in activities that may pose a greater
risk to investors than the propane and home heating oil marketing business.
Power of Attorney
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to the general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for the qualification, continuance or
dissolution of Star Gas Partners. The power of attorney also grants the
authority for the amendment of, and to make consents and waivers under, the
partnership agreement.
Restrictions on Authority of the General Partner Regarding Extraordinary
Transactions
The authority of the general partner is sometimes limited under the
partnership agreement. The general partner is prohibited, without the prior
approval of a unit majority, from:
. selling, exchanging or otherwise disposing of all or substantially all
of our assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other
combination; or
. approving on our behalf the sale, exchange or other disposition of all or
substantially all of the assets of Star Gas Propane.
However, we may mortgage, pledge, hypothecate or grant a security interest in
all or substantially all of our assets without any unitholder approval. We may
also sell all or substantially all of our assets in a foreclosure or other
realization upon these encumbrances without unitholder approval.
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Lack of Dissenters' Rights
The unitholders are not entitled to dissenters' rights of appraisal under the
partnership agreement or applicable Delaware law if a merger or consolidation
of Star Gas Partners or the sale, exchange or other disposition of
substantially all of our assets or any other event should occur.
Withdrawal or Removal of the General Partner; Approval of Successor General
Partner
Expect in the limited circumstances described below, the general partner has
agreed not to voluntarily withdraw as general partner of Star Gas Partners and
Star Gas Propane prior to December 31, 2005 without:
. obtaining the approval of a unit majority; and
. furnishing an opinion of counsel that the withdrawal and the selection of
a successor general partner will not result in the loss of the limited
liability of the limited partners of Star Gas Partners or cause us to be
treated as an association taxable as a corporation or otherwise taxed as
an entity for federal income tax purposes.
On or after December 31, 2005, the general partner may withdraw as general
partner by giving 90 days written notice without obtaining approval from the
unitholders. Withdrawal after this date will not constitute a violation of the
partnership agreement.
Notwithstanding the above, 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 limited instances to sell
all of its general partner units. See "--Restriction on 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 units, the holders of a majority of the outstanding units may
select a successor general partner. If the successor is not elected, or is
elected but an opinion of counsel regarding the tax matters discussed above
cannot be obtained, Star Gas Partners will be dissolved, wound up and
liquidated, unless within 180 days after that withdrawal, a unit majority
agrees in writing to continue the business of Star Gas Partners and to the
appointment of a successor general partner. See "--Description of Termination
and Dissolution of Star Gas Partners."
The general partner may not be removed unless:
. 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 those of the general partner and its affiliates;
and
. we receive an opinion of counsel that the removal will not result in a
loss of limited liability to the limited partners or cause us to be
treated as a corporation or otherwise taxed as an entity for federal
income tax purposes.
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 has not been made on the common units for more than one of those
quarters, excluding for this
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purpose the payment of any common unit arrearages, and the first quarter in
that six-quarter period that the minimum quarterly distribution on the common
units is not made occurs after March 31, 2001, then the subordination period
will not end. If the general partner is removed and the subordination period
does not end, the junior subordinated units shall convert into senior
subordinated units on a one-for-one basis and the distribution rights on the
general partner units with respect to the minimum quarterly distribution and
liquidation will rank equally with the senior subordinated units.
Removal or withdrawal of the general partner of Star Gas Partners also
constitutes removal or withdrawal, as the case may be, of the general partner
as general partner of Star Gas Propane.
In the event the withdrawal of the general partner 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 from the departing general partner the general partner units
in Star Gas Partners and the general partner interests in Star Gas Propane for
a cash payment equal to the fair market value. Under all other circumstances
where the general partner withdraws or is removed by the limited partners, the
departing general partner will have the right to require the successor general
partner to purchase from the departing general partner the general partner
units in Star Gas Partners and the general partner interest in Star Gas Propane
for that amount. In each case, the fair market value will be determined by
agreement between the departing general 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 general partner and
the successor general partner. If no expert can be agreed upon, the value will
be determined by an expert chosen by agreement of the experts selected by each
of them. In addition, Star Gas Partners will be required to reimburse the
departing general partner for all amounts due the departing general partner,
including, without limitation, all employee-related liabilities such as
severance liabilities, incurred in the termination of the employees employed by
the departing general partner.
If the above-described option is not exercised by either the departing
general partner or the successor general partner, as applicable, the departing
general partner's general partner units in Star Gas Partners and the general
partner interest in Star Gas Propane will be converted into common units equal
to the fair market value of the interest as determined by an investment banking
firm or other independent expert selected in the manner described in the
preceding paragraph. If any Class B common units are outstanding, the departing
general partner's general partner units in Star Gas Partners and the general
partner interest in Star Gas Propane will be converted into Class A common
units.
Restriction on Transfer of General Partner Interest
Except for the following two instances, the general partner may not transfer
any or all of the general partner units to another person or entity prior to
December 31, 2005, without the approval of holders of a unit majority.
. A transfer by the general partner of all, but not less than all, of its
general partner units to an affiliate.
. The merger or consolidation of the general partner with or into another
entity.
In each case the transferee of the general partner units must:
. assume the rights and duties of the general partner;
. agree to be bound by the provisions of the partnership agreement;
. furnish an opinion of counsel that the transfer will not result in a loss
of limited liability to the limited partners or cause Star Gas Partners
to be treated as an entity for federal income tax purposes; and
. agree to purchase the general partner's partnership interest in Star Gas
Propane.
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.
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Reimbursement for Services of the General Partner
The general partner is not entitled to receive any compensation for its
services as our general partner. 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 our
behalf; and
. all other necessary or appropriate expenses allocable to us or otherwise
reasonably incurred by the general partner for the operation of our
business, including expenses allocated to the general partner by its
affiliates.
The general partner, in its sole discretion, shall determine the expenses that
are allocable to us in any reasonable manner.
Rights and Status as Limited Partner or Assignee Upon Transfer of Interest
Except as described below under "--Potential Loss of Limited Liability by
Unitholders," the units will be fully paid, and unitholders will not be
required to make additional contributions to Star Gas Partners.
A person receiving a common unit after executing and delivering a transfer
application, but before admission as a substituted limited partner or
additional limited partner, has the right to share in allocations and
distributions. The general partner will vote and exercise other powers
attributable to common units or senior subordinated units owned by that person
before admission as a substitute limited partner or additional limited partner
at the written direction of that person. See "--Meetings of Limited Partners
and Voting Rights." Persons who do not execute and deliver a transfer
application will be treated neither as assignees nor as record holders of
common units or senior subordinated units and will not receive:
. cash distributions;
. federal income tax allocations; or
. reports furnished to unitholders.
See "Description of the Common Units--Obligations and Procedures for the
Transfer of Units."
Limitations on the Rights of Non-citizen Assignees and Redemption Rights of
Star Gas Partners
If, because of the nationality, citizenship or other related status of any
limited partner or assignee, we are or become 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 we have an interest, we may redeem the units held by that
limited partner or assignee at their Current Market Price. In order to avoid
any 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 his nationality, citizenship, residency or other related
status within 30 days after a request for the information, that person may be
treated as a non-citizen assignee. 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 Star Gas Partners.
Issuance of Additional Securities by Star Gas Partners
Except as discussed below, the general partner is authorized to cause us to
issue an unlimited number of additional limited partner interests and other
equity securities of Star Gas Partners for the consideration and on the terms
and conditions established in its sole discretion, without the approval of any
limited partners.
Except as described in (1) through (4) below, during the subordination
period, we may not issue an aggregate of more than 2,500,000 additional common
units or units on a parity with the common units without the prior approval of
at least a majority of the outstanding common units, other than those held by
the general partner and its affiliates.
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(1) Common units in the transaction, including those issued in this
offering.
(2) If the issuance occurs:
(a) for an acquisition or a capital improvement; or
(b) within 365 days of, and the net proceeds from the issuance are
used to repay debt incurred for, an acquisition or a capital
improvement;
in each case, where the acquisition or capital improvement involves
assets that would have, on a pro forma basis, resulted in an increase
in the amount of Adjusted Operating Surplus calculated on a per-unit
basis for all outstanding units for each of the four most recently
completed quarters.
(3) If the proceeds from the issuance are used exclusively to repay up to
$20 million of indebtedness of Star Gas Partners, Star Gas Propane or
any of its subsidiaries.
(4) The issuance of 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 us to issue
additional Star Gas Partners interests that may have special voting rights.
The general partner has the right to purchase units from us on the same terms
that we issue the units to other persons, whenever necessary for the general
partner and its affiliates to maintain the percentage of ownership interest
that existed immediately prior to each issuance. Persons other than the general
partner do not have preemptive rights to acquire additional common units or
other Star Gas Partners interests.
Additional issues of units, including senior subordinated units and junior
subordinated units or other equity securities of Star Gas Partners ranking
junior to the common units, may reduce the likelihood and/or amount of, any
distributions above the minimum quarterly distribution.
Limited Call Right on Outstanding Limited Partner Interests
If at any time:
(a) not more than 20% of the 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 us, to acquire all,
but not less than all, of the remaining limited partner interests of
that class; or
(b) after the expiration of the subordination period and the earlier to
occur of:
(1) the fifth anniversary of the completion of the transaction; or
(2) the issuance of 909,000 senior subordinated units and Class B
common units in the aggregate,
We acquire, in a twelve-month period, 66 2/3% or more of the total
Class B common units, we shall then have the right, to purchase all,
but not less than all, of the remaining Class B common units during
the following twelve-month period.
In the case of (a) or (b) above, the limited partners are entitled
to at least 10 but not more than 60 days' notice. The purchase price
if (a) or (b) above should occur shall be the greater of:
(x) the highest cash price paid by Star Gas Partners, the general
partner or any of its affiliates for any limited partner
interests of that class purchased within the 90 days preceding
the date the notice is first mailed to limited partners; and
(y) the Current Market Price as of the date three days prior to the
date the notice is mailed.
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As a consequence of this right to purchase outstanding limited partner
interests, a holder may have his limited partner interests purchased from
him at a time and/or price that may be undesirable. The tax consequences to
a unitholder of the exercise of this call right are the same as a sale by
that unitholder of his units in the market. See "Federal Income Tax
Considerations--Disposition of Units."
Amendment of the 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 the amendment or call a meeting of the
limited partners to consider and vote upon the proposed amendment, except as
described below.
Prohibited Amendments. 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 Star Gas Partners;
(4) provide that Star Gas Partners is not dissolved upon expiration of its
term; or
(5) give any person the right to dissolve Star Gas Partners other than the
general partner's right to dissolve Star Gas Partners with the
approval of holders of at least a unit majority.
No Unitholder Approval. The general partner may make amendments without the
approval of any limited partner or assignee to reflect:
(1) a change in the name of Star Gas Partners, the location of the
principal place of business of Star Gas Partners, the registered agent
or the registered office of Star Gas Partners;
(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
Star Gas Partners as a partnership in which the limited partners have
limited liability or that is necessary or advisable to ensure that
Star Gas Partners and Star Gas Propane 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 Star Gas
Partners, to prevent Star Gas Partners or the general partner or its
respective directors or officers from being subjected in any manner to
the provisions of the Investment Company Act, the Investment Advisors
Act, or the "plan asset" regulations adopted under ERISA, 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 for 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 under the terms of the partnership
agreement;
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(8) any amendment that, in the sole discretion of the general partner, is
necessary or advisable for the formation by Star Gas Partners of, or
its investment in, any corporation, partnership or other entity as
otherwise permitted by the partnership agreement;
(9) a change in the fiscal year and taxable year of Star Gas Partners; and
(10)any other amendments substantially similar to those listed above.
In addition, the general partner may make amendments without the approval of
any limited partner or assignee if the 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 our best interests and those of 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 that an amendment will not result in a
loss of limited liability to the limited partners or result in Star Gas
Partners being treated as an entity for federal income tax purposes if one of
the amendments described above under "--No Unitholder Approval" should occur.
No other amendments to the partnership agreement will become effective without
the approval of at least 90% of the units unless we obtain an opinion of
counsel that the amendment will not:
. affect the limited liability of any limited partner in Star Gas Partners
or the limited partner of Star Gas Propane; or
. cause Star Gas Partners to be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income tax
purposes.
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 of Limited Partners and Voting Rights
Record holders of units on the applicable record date will be entitled to
notice of, and to vote at, meetings of limited partners and to act on matters
as to which approvals may be solicited. The general partner shall vote units
owned by an assignee who is a record holder but who has not yet been admitted
as a limited partner at the written direction of the assignee. Absent this
direction, those units will not be voted. However, in the case of units held by
the general partner on behalf of non-citizen assignees, the general partner
shall distribute the votes of these units in the same ratios as the votes of
limited partners on other units are cast.
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 that number of limited partner interests necessary to authorize or take
action at a meeting. Meetings of the limited partners 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
shall constitute a quorum, unless the action requires approval by holders of a
greater percentage of those units, in which case the quorum shall be the
greater percentage.
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Units held in a nominee or street name account will be voted by the broker or
other nominee under the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Indemnification Obligations of Star Gas Partners
In most circumstances, we will indemnify the following persons, to the
fullest extent permitted by law, from and against all losses, claims, damages
or similar events:
(1) the general partner and its affiliates;
(2) any departing general partner and its affiliates;
(3) any person who is or was an officer, director, employee, partner, agent
or trustee of the general partner or any departing general partner or
any affiliate of the general partner or any departing general partner;
or
(4) any person who is or was serving at the request of the general partner
or any departing general partner or any affiliate of the general
partner or any departing general partner as an officer, director,
employee, partner, agent or trustee of another person.
Any indemnification will only be out of the assets of Star Gas Partners. The
general partner shall not have any obligation to contribute or loan funds to us
to enable us to effectuate indemnification. We are authorized to purchase
insurance against liabilities asserted against and expenses incurred by those
persons for our activities, regardless of whether we would have the power to
indemnify that person.
Potential Loss of Limited Liability by Unitholders
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Act and that he acts in conformity
with the provisions of the partnership agreement, his liability will be limited
to the amount of capital he is obligated to contribute to us, plus his share of
any undistributed profits and assets. If it were determined that an action by a
limited partner constituted "participation in the control" of our business for
the purposes of the Delaware Act, then a limited partner could be held
personally liable for our obligations, to the same extent as the general
partner, to persons who transact business with us. In order for a limited
partner to be liable for these obligations, the person who transacts business
with the limited partner must reasonably believe, based on the limited
partner's conduct, that the limited partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner if after 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. Under the Delaware Act, a limited partner who receives a
distribution and knew at the time that the distribution was in violation of the
Delaware Act shall be liable for the amount of the distribution for three
years. 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.
We conduct business in at least 13 states. Maintenance of limited liability
may require compliance with legal requirements in those jurisdictions in which
we conduct business, including qualifying us to do business in those
jurisdictions. Limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly established in many
jurisdictions. We will operate in the manner as the general partner deems
reasonable and necessary or appropriate to preserve the limited liability of
unitholders.
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Obligations of the General Partner to Provide Books and Reports to Limited
Partners
The general partner is required to keep appropriate books of our business at
our principal offices. The books will be maintained for both tax and financial
reporting purposes on an accrual basis. The fiscal year of Star Gas Partners 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 with an annual report containing audited financial statements 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 a report containing unaudited financial
statements and any 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 our
taxable year ends. This 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 summary information to
unitholders will depend on the cooperation of those unitholders in supplying
certain information to the general partner. Every unitholder will receive
information to assist him in determining his federal and state tax liability
and filing his federal and state income tax returns.
Limited Partners' Right to Inspect Star Gas Partners Books and Records
A limited partner can, for a purpose reasonably related to a person's
interest as a limited partner, upon reasonable demand and at his own expense,
be furnished with:
(1) a current list of the name and last known address of each partner;
(2) a copy of our 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, and powers of attorney;
(5) information regarding the status of our business and financial
condition; and
(6) any other information regarding our affairs as is just and
reasonable.
The general partner may, and intends to, keep the following confidential
from the limited partners:
(a) trade secrets;
(b) other information the disclosure of which the general partner
believes in good faith is not in our best interests; or
(c) information that is required by law or by agreements with third
parties to be kept confidential.
Description of Termination and Dissolution of Star Gas Partners
Star Gas Partners will continue until December 31, 2085, unless terminated
sooner upon:
(1) the election of the general partner to dissolve Star Gas Partners, if
approved by holders of a unit majority;
(2) the sale, exchange or other disposition of all or substantially all
of the assets and properties of Star Gas Partners and Star Gas
Propane;
(3) the entry of a decree of judicial dissolution of Star Gas Partners;
or
(4) the withdrawal or removal of the general partner or any other event
that results in its ceasing to be the general partner other than by
reason of a transfer of its general partner units or withdrawal or
removal following approval and admission of a successor.
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Upon a dissolution under clause (4), the holders of at least a majority of
the outstanding units may elect to reconstitute Star Gas Partners and continue
its business by forming a new limited partnership. The new general partner
would be a person or entity approved by the holders of at least a majority of
the outstanding units, subject to receipt by Star Gas Partners of an opinion of
counsel that this action will not affect its limited liabilities or result in
Star Gas Partners being treated as corporation or an entity for federal income
tax purposes.
Liquidation of Star Gas Partners and Distribution of Proceeds
Upon the dissolution of Star Gas Partners, unless Star Gas Partners is
reconstituted and continued as a new limited partnership, the person authorized
to wind up the affairs of Star Gas Partners will liquidate the assets and apply
the proceeds as provided in "Cash Distribution Policy--Distributions of Cash
upon Liquidation During the Subordination Period" and "--Distributions of Cash
upon Liquidation After the Subordination Period."
Registration Rights of the General Partner or its Affiliates
We have agreed:
(1) to register for resale under the Securities Act any units proposed to
be sold by the general partner or its affiliates upon their request
if an exemption from the registration requirements is not otherwise
available; and
(2) to register for resale under the Securities Act the common units and
senior subordinated units issued to affiliates of Petro in the
transaction upon their request if an exemption from the registration
requirements is not otherwise available.
We are obligated to pay all expenses incidental to the above registrations,
excluding underwriting discounts and commissions.
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CONFLICTS OF INTEREST
Conflicts of Interest May Arise as a Result of the Publicly-Traded Limited
Partnership Structure
Conflicts of interest have arisen and could arise in the future as a result
of relationships between the general partner and its affiliates, on the one
hand, and Star Gas Partners or any of the limited partners, on the other hand.
The directors and officers of the general partner have fiduciary duties to
manage the general partner in a manner beneficial to its members. In general,
the general partner has a fiduciary duty to manage Star Gas Partners in a
manner beneficial to Star Gas Partners and the unitholders. The partnership
agreement contains provisions that allow the general partner to take into
account the interests of parties in addition to Star Gas Partners in resolving
conflicts of interest. In effect, these provisions limit its fiduciary duty to
the unitholders. The partnership agreement also restricts the remedies
available to unitholders for actions taken that without those limitations,
constitute breaches of fiduciary duty. An audit committee of the Star Gas LLC
board has been created, consisting of two directors who are not officers of the
general partner. At the request of the general partner the audit committee will
review conflicts of interest that may arise between the general partner or its
affiliates, on the one hand, and Star Gas Partners, on the other. See
"Management" and "--Fiduciary Duties Owed to Unitholders by the General Partner
as Prescribed by Law and the Partnership Agreement."
Conflicts of interest could arise in the situations described below, among
others:
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. The amount of cash that is
available for distribution to unitholders is affected by decisions of the
general partner regarding matters such as:
. cash expenditures;
. participation in capital expansions and acquisitions;
. borrowings;
. issuance of additional units; and
. establishment of reserves.
In addition, borrowings by Star Gas Partners do not constitute a breach of
any duty owed by the general partner to the unitholders, including those
borrowings that have the purpose or effect of:
. causing incentive distributions to be made; or
. hastening the expiration of the subordination period.
The partnership agreement provides that we may borrow funds from the general
partner and its affiliates although the general partner and its affiliates may
not borrow funds from us.
Star Gas Partners' Borrowings May Enable the General Partner to Permit
Distributions on the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units. Typically the general partner must act as a fiduciary to
Star Gas Partners and the unitholders, and therefore must consider our best
interests. However, it is not a breach of the general partner's fiduciary duty
under the 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 General Partner Intends to Limit Its Liability with Respect to Star Gas
Partners' Obligations. The general partner intends to limit our liability under
contractual arrangements so that the other party has recourse only as to all or
particular assets of Star Gas Partners, and not against the general partner or
its assets. The partnership agreement provides that any action taken by the
general partner to limit its liability, or that of Star Gas Partners, is not a
breach of the general partner's fiduciary duties, even if we could have
obtained more favorable terms without the limitation on liability.
Unitholders Have No Right to Enforce Obligations of the General Partner and
Its Affiliates Under Agreements with Star Gas Partners. We will acquire
services from, or provide services to, the general partner
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and its affiliates on an ongoing basis. The agreements relating to these
arrangements will not grant to the unitholders, separate and apart from Star
Gas Partners, the right to enforce the obligations of the general partner and
its affiliates in favor of Star Gas Partners.
Contracts Between Star Gas Partners on the One Hand, and the General Partner
and Its Affiliates on the Other Will Not Be the Result of Arm's-Length
Negotiations. The partnership agreement allows the general partner to pay
itself or its affiliates for any services rendered, provided these services are
rendered on terms that are fair and reasonable to us. The general partner may
also enter into additional contractual arrangements with any of its affiliates
on our behalf. Neither the partnership agreement nor any of the other
agreements, contracts and arrangements between Star Gas Partners, 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 these transactions entered into
are required to be on terms that are fair and reasonable to us.
The General Partner's Affiliates May Compete with Star Gas Partners. Except
for Irik P. Sevin, affiliates of the general partner are not prohibited from
competing with us. Mr. Sevin's non-competition agreement with us provides that
following the completion of the transaction he will not engage in the retail
propane or retail home heating oil business in the United States so long as he:
. is a director, officer or employee of the general partner, Star Gas
Partners or a subsidiary of Star Gas Partners; or
. has access to information that would put Star Gas Partners at a
competitive disadvantage.
Further, Mr. Sevin is precluded from employing any person who was a managerial
employee of the general partner, Star Gas Partners or a subsidiary of Star Gas
Partners for the twelve-months after that employment so long as Mr. Sevin and
his mother, Ms. Audrey Sevin, own in the aggregate more than a 10% voting
interest in the general partner.
Fiduciary Duties Owed to Unitholders by the General Partner as Prescribed by
Law and the Partnership Agreement
The general partner is accountable to us and the Star Gas Partners
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 common stockholders of a corporation, the law concerning the
duties owed by general partners to other partners and to partnerships is
relatively undeveloped. Neither the Delaware Act nor case law defines with
particularity the fiduciary duties owed by general partners to limited partners
of a limited partnership. The Delaware Act does provide that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties 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 from taking any action or engaging
in any transaction where a conflict of interest is present. In order to induce
the general partner to manage the business of Star Gas Partners, the
partnership agreement contains various provisions limiting the fiduciary duties
that might otherwise be owed by the general partner. The partnership agreement
also contains provisions that waive or consent to conduct by the general
partner that might otherwise raise issues of compliance with fiduciary duties
or applicable law.
In order to become a limited partner of Star Gas Partners, a unitholder is
required to agree to be bound by its provisions, 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 enforceable even if not signed by a person being admitted as a
limited partner or becoming an assignee of a limited partner interest in
accordance with the terms of that agreement.
Whenever a conflict of interest arises between the general partner or its
affiliates, on the one hand, and Star Gas Partners or any other partner, on the
other, the general partner shall resolve this conflict. The general
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partner shall not be in breach of its obligations under the partnership
agreement or its duties to Star Gas Partners or the unitholders if the
resolution of this conflict is fair and reasonable to Star Gas Partners. Any
resolution is fair and reasonable to Star Gas Partners if the resolution is:
(1) approved by the audit committee, although no party is obligated to seek
approval and the general partner may adopt a resolution or course of
action that has not received 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.
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DESCRIPTION OF INDEBTEDNESS
New Indebtedness
Petro Notes
On the closing of the transaction, Petro will issue approximately $90.0
million of 7.92% senior secured notes in three separate series in a private
placement to institutional investors. It is currently expected that the senior
secured notes will be guaranteed by Star Gas Partners and Petro Holdings and
its subsidiaries. The notes have been assigned a preliminary private credit
rating of "BBB" by Fitch rating service. In addition, the senior secured notes
will be secured equally and ratably with Petro's existing senior debt and bank
credit facilities by the cash, accounts receivable, notes receivable, inventory
and customer lists of Petro Holdings and its subsidiaries, including Petro.
Each series of senior secured notes will be for $30.0 million and will mature
seven, eight or ten years from the issuance date. In addition, each series will
bear a fixed interest rate that will be determined at the time of pricing based
upon the yield of specified United States treasury notes that equal the
maturity of the series of notes plus a set percentage. Interest only on each
series is due semiannually. On the last interest payment date for each series,
the outstanding principal amount is due and payable in full.
The note agreement for the senior secured notes will contain various negative
and affirmative covenants, including restrictions on payment of dividends or
other distributions by Star Gas Partners on any partnership interest if the
ratio of consolidated pro forma operating cash flow to consolidated pro forma
interest expense, each as defined in the note agreement, is 1.75 to 1.0 or less
for the period of the four most recent fiscal quarters ending on or prior to
the date of the dividend or distribution or an event of default would exist.
Under the note agreement, Petro Holdings and its subsidiaries will be
permitted to make cash distributions to Star/Petro Inc. if:
(a) through March 31, 2000, the ratio of consolidated pro forma operating
cash flow to consolidated pro forma interest expense is greater than
1.75 to 1.0 for the period of the four most recent fiscal quarters
ending on or prior to the date of the distribution;
(b) after March 31, 2000, the ratio of consolidated operating cash flow to
consolidated interest expense is greater than 1.75 to 1.0 for the
period of the four most recent fiscal quarters ending on or prior to
the date of the distribution;
(c) the total cash distributions for all quarters beginning January 1, 1999
do not exceed specified amounts in the note agreement; or
(d) Star/Petro Inc. is the parent company of Petro Holdings Inc. and a
wholly-owned subsidiary of Star Gas Propane.
If Petro fails to make any principal or interest payment, any noteholder may
accelerate the maturity of the senior secured notes. If any event of default
exists under the note agreement, holders of a majority of the outstanding
principal amount of the senior secured notes may accelerate the maturity of the
notes. The maturity of the senior secured notes is automatically accelerated if
Petro, Star Gas Partners, Petro Holdings or any of their subsidiaries are
generally unable to pay their debts as they become due or become subject to any
bankruptcy or reorganization proceedings.
Petro Bank Facilities
On or before the closing of the transaction, Petro will enter into a bank
facilities agreement for approximately $100.0 million in senior secured
facilities with a group of commercial banks. The bank facilities will be
guaranteed by Star Gas Partners and Petro Holdings and its subsidiaries. In
addition, the bank facilities will be secured equally and ratably with Petro's
new senior secured notes and existing institutionally owned senior debt by the
cash, accounts receivable, notes receivable, inventory and customer lists of
Petro and its subsidiaries.
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The bank facilities will consist of three separate facilities--a $40 million
working capital facility, a $10 million letter of credit facility and a $50
million acquisition facility. The working capital facility and letter of credit
facility will expire on June 30, 2001. The acquisition facility will convert to
a term loan on June 30, 2001 which will be payable in eight equal quarterly
principal payments. Amounts borrowed under the working capital facility are
subject to a requirement to maintain a zero balance for 90 consecutive days
during the period from April 1 to September 30 of each year. In addition, each
facility will bear an interest rate that is based on either the London
Interbank Offer Rate or another base rate plus a set percentage.
The bank facilities agreement will contain covenants and default provisions
generally similar to those contained in the note agreement for the senior
secured notes.
Existing Indebtedness
Description of First Mortgage Notes
Star Gas Propane currently has outstanding approximately $96 million of first
mortgage notes. Star Gas Propane's obligations under the first mortgage note
agreements and the first mortgage notes are secured equally and ratably with
Star Gas Propane's obligations under its bank credit facilities by a mortgage
on most of the real property and liens on most of the operating facilities,
equipment and other assets. $85 million of the first mortgage notes have a
final maturity of September 15, 2009 and $11 million of the first mortgage
notes have a final maturity of September 15, 2010. The first mortgage notes
require semiannual prepayments, without premium, of the principal beginning
March 15, 2001. Under specified circumstances following the disposition of
assets, Star Gas Propane may be required to offer to prepay the first mortgage
notes, in whole or in part.
The first mortgage note agreements contain various negative and affirmative
covenants, including restrictions on payment of dividends or other
distributions to any partnership interest if the pro forma ratio of
consolidated cash flow to consolidated interest expense, each as defined in the
first mortgage note agreements, is less than 1.75 to 1.0. Upon completion of
the equity offering and after giving pro forma effect to the transaction, Star
Gas Propane would be in compliance with the negative and affirmative covenants
applicable under the first mortgage note agreements.
Under the first mortgage note agreements, so long as no default exists or
would result, Star Gas Propane is permitted to make cash distributions to Star
Gas Partners 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. will
become jointly and severally liable with Star Gas Propane under the first
mortgage notes and the first mortgage note agreements.
Description of Star Gas Propane Bank Credit Facilities
In December 1995, Star Gas Propane entered into credit facilities with a
group of commercial banks. The bank credit facilities consist of a $25.0
million acquisition facility and a $12.0 million working capital facility. At
September 30, 1998, $9.0 million was outstanding under the acquisition facility
and $4.8 million was outstanding under the 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 agreements.
The Star Gas Propane working capital facility will expire on June 30, 2000,
but may be extended annually with the consent of the banks. The Star Gas
Propane acquisition facility will revolve until June 30, 1999 after which time
any outstanding loans must be reduced by equal quarterly principal payments
over the period from September 30, 1999 through September 30, 2002.
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Amounts borrowed under both facilities are due at maturity. However, no
amount must be outstanding under the Star Gas Propane working capital facility
for at least 30 consecutive days during each calendar year. If Star Gas Propane
exercises its option to convert the Star Gas Propane acquisition facility into
a term loan, the outstanding principal balance under this facility will be
amortized in equal quarterly installments.
Other Petro Debt
Petro has entered into private debt agreements with the holders of:
. its outstanding 10.90% Senior Notes due 2002 in the aggregate principal
amount of $60 million; and
. its 14.1% Senior and Subordinated Notes due 2001 in the aggregate
principal amount of $4.1 million.
Under the private debt agreements at the completion of the transaction:
. the holders of the 10.90% notes will exchange them for $62.7 million
aggregate principal amount of 9.0% Senior Notes due 2002 of Petro; and
. the holders of the 14.10% notes will exchange those 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.
The new 9% notes and the new 10.25% notes will be guaranteed by Star Gas
Partners and Petro Holdings.
The agreements under which Petro will issue the new 9% and 10.25% notes will
be substantially identical to the agreement under which the $90.0 million of
senior secured notes will be issued, including negative and affirmative
covenants.
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, following the closing of the transaction, Petro will have
outstanding $1.3 million of 10 1/8% Subordinated Debentures due 2003, $0.7
million of 9 3/8% Subordinated Notes due 2006 and $1.1 million of 12 1/4%
Subordinated Notes due 2005. In October 1998, the indentures under which the 10
1/8%, 9 3/8% and 10 1/8% subordinated notes were issued were amended to
eliminate substantially all of the covenant protection provided by the
indentures.
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UNITS ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus after giving effect to the transaction, the
general partner and the owners of Star Gas LLC would have held 396,558 junior
subordinated units and 324,100 general partner units. The sale of units owned
by the general partner and the owners of Star Gas LLC 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 under an exemption from the Securities Act under Rule 144 of
the Securities Act 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 those securities outstanding; or
(2) the average weekly reported trading volume of the common units for the
four calendar weeks prior to that sale.
Sales under Rule 144 are also subject to specified manner of sale provisions,
notice requirements and the availability of current public information about
us. In addition, 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 those 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 for
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 here are excluded from those 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 this
circumstance, the general partner will have specified 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 Star Gas Partners 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 by Star Gas Partners."
Under the partnership agreement, the general partner and its affiliates have
the right to cause Star Gas Partners to register under the Securities Act the
offer and sale of any units held by that party. Subject to the terms and
conditions of the partnership agreement, these registration rights allow the
general partner and its affiliates, or their assignees, holding any units to
require registration of any of these units and to include any of these units in
a registration by us of other units, including units offered by us or by any
unitholder. These registration rights will continue in effect for two years
following any withdrawal or removal of Star Gas LLC as our general partner.
Also, we have 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 those registration requirements is not otherwise available for
the proposed transaction. We have also agreed to use our best efforts to keep
that registration statement effective for one year, subject to specified
exceptions and to the requesting party providing necessary information.
Regarding any of these registrations, we will indemnify each holder of units
participating in that 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
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of any registration of this type. In addition, the general partner and its
affiliates may sell their units in private transactions at any time, in
accordance with applicable law.
We, on behalf of ourselves and our affiliates, and specified 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 that 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.
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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 described below under
"--Legal Opinions and Advice," expresses the opinion of Andrews & Kurth L.L.P.,
special counsel to the General Partner and us, insofar as it relates to matters
of law and legal conclusions. This section is based upon current provisions of
the Internal Revenue Code, its existing and proposed regulations and current
administrative rulings and court decisions, all of which are subject to change
even with retroactive effect. Later 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 Star Gas Propane.
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.
Tax Consequences of Unit Ownership
Legal Opinions and Advice. Counsel is of the opinion that, based on the
representations and subject to the qualifications in the detailed discussion
that follows, for federal income tax purposes:
(1) Star Gas Partners and Star Gas Propane have been and will each be
treated as a partnership; and
(2) owners of units, with certain exceptions, as described in "--Tax
Treatment of Unitholders--Limited Partner Status" below, will be
treated as partners of Star Gas Partners, but not Star Gas Propane.
In addition, all statements as to matters of law and legal conclusions
contained in this section, unless otherwise noted, reflect the opinion of
counsel.
No ruling has been or is expected to be requested from the IRS regarding 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. An opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS or
the courts. Thus, no assurance can be provided that the opinions and statements
made here would be sustained by a court if contested by the IRS. Any contest of
this sort with the IRS may materially and adversely impact the market for the
units and the prices at which units trade. In addition, the costs of any
contest with the IRS will be borne directly or indirectly by the unitholders
and the general partner. Furthermore, no assurance can be given that the
treatment of Star Gas Partners or an investment in Star Gas Partners will not
be significantly modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion on the
following specific federal income tax issues:
(1) 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");
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(2) whether a unitholder acquiring units in separate transactions must
maintain a single aggregate adjusted tax basis in his units (see "--
Disposition of Units--Recognition of Gain or Loss");
(3) 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");
(4) whether our method for depreciating Section 743 adjustments is
sustainable (see "--Disposition of Units--Section 754 Election"); and
(5) whether the allocations of recapture income contained in the
partnership agreement will be respected (see "Tax Treatment of
Unitholders--Allocation of Star Gas Partners Income, Gain, Loss and
Deduction").
Partnership Status. A partnership is not a taxable entity and incurs no
federal income tax liability. Instead, each partner is required to take into
account his allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of cash distributed is in
excess of the partner's adjusted basis in his partnership interest.
No ruling has been or is expected to be sought from the IRS as to the status
of Star Gas Partners or Star Gas Propane as a partnership for federal income
tax purposes. Instead, we have relied on the opinion of counsel that, based
upon the Code, its regulations, published revenue rulings and court decisions
and representations described below, Star Gas Partners and Star Gas Propane
have been and will each be classified as a partnership for federal income tax
purposes.
In rendering its opinion, counsel has relied on factual representations made
by Star Gas Partners and the general partner. Such factual matters for taxable
years beginning before December 31, 1996 are as follows:
(a) For Star Gas Partners and Star Gas Propane, 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 Star Gas Partners and Star Gas
Propane and any notes or receivables due from such partnerships,
equal to at least $6.0 million;
(b) Star Gas Partners has been operated in accordance with
(1) all applicable partnership statutes,
(2) the partnership agreement and
(3) its description in this prospectus;
(c) Star Gas Propane has been operated in accordance with
(1) all applicable partnership statutes,
(2) the limited partnership agreement for Star Gas Propane and
(3) its description in this prospectus;
(d) The general partner has at all times acted independently of the
limited partners; and
(e) For each taxable year, less than 10% of the gross income of Star
Gas Partners has been derived from sources other than
(1) the exploration, development, production, processing, refining,
transportation or marketing of any mineral or natural resource,
including oil, gas or products thereof, or
(2) other items of qualifying income within the meaning of Section
7704(d) of the Code.
These factual matters for taxable years beginning after December 31, 1996 are
as follows:
(a) Neither Star Gas Partners nor Star Gas Propane has elected, or will
elect, to be treated as an association or corporation;
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(b) Star Gas Partners has been and will be operated in accordance with
(1) all applicable partnership statutes,
(2) the partnership agreement of Star Gas Partners as it may be
amended or restated, and
(3) its description in this prospectus;
(c) Star Gas Propane has been and will be operated in accordance with
(1) all applicable partnership statutes,
(2) the Star Gas Propane partnership agreement, and
(3) its description in this prospectus; and
(d) For each taxable year, more than 90% of the gross income of Star
Gas Partners has been and will be
(1) derived from the exploration, development, production,
processing, refining, transportation or marketing of any
mineral or natural resource, including oil, gas or its products
or
(2) other items of "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 gains from the transportation and
marketing of crude oil, natural gas, and products thereof, including the retail
and wholesale marketing of propane and the transportation of propane and
natural gas liquids. Based upon the representations of Star Gas Partners and
the general partner and a review of the applicable legal authorities, counsel
is of the opinion that at least 90% of our gross income 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 had 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 Star Gas Partners. This contribution and
liquidation should be tax-free to unitholders and Star Gas Partners, 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 Star Gas Partners or Star Gas Propane were treated as an association
taxable as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, its items of income,
gain, loss and deduction would be reflected only on its tax return rather than
being passed through to the unitholders, and its net income would be taxed to
Star Gas Partners or Star Gas Propane at corporate rates. In addition, any
distribution made to a unitholder would be treated as either taxable dividend
income, to the extent of Star Gas Partners' 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 Star Gas Partners or Star Gas Propane 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.
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Tax Treatment of Unitholders
Limited Partner Status. Unitholders who have become limited partners of Star
Gas Partners will be treated as partners of Star Gas Partners for federal
income tax purposes. Counsel is of the opinion that (a) assignees who have
executed and delivered transfer applications, and are awaiting admission as
limited partners and (b) Star Gas Partners unitholders whose units are held in
street name or by a nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of their units
will be treated as partners of Star Gas Partners for federal income tax
purposes. As there is no direct authority addressing assignees of units who are
entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute
and deliver transfer applications, Andrews & Kurth's opinion does not extend to
these persons. Furthermore, a purchaser or other transferee of units who does
not execute and deliver a transfer application may not receive some 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 for those units.
A beneficial owner of units whose units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such units for federal income tax purposes. See "--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 this unitholder would
therefore be fully taxable as ordinary income. These holders should consult
their own tax advisors with respect to their status as partners in Star Gas
Partners for federal income tax purposes.
Flow-through of Taxable Income. No federal income tax will be paid by Star
Gas Partners. Instead, each Star Gas Partners unitholder who is a partner for
federal income tax purposes will be required to report on his income tax return
his allocable share of the income, gains, losses and deductions of Star Gas
Partners without regard to whether corresponding cash distributions are
received by that unitholder. Consequently, a unitholder may be allocated income
from Star Gas Partners even if he has not received a cash distribution. Each
unitholder will be required to include in income his allocable share of Star
Gas Partners income, gain, loss and deduction for the taxable year of Star Gas
Partners ending with or within the taxable year of the unitholder.
Although it is not expected that Petro and its affiliates will pay
significant federal income tax for several years, Petro and its affiliates
expect to generate earnings and profits during that time making a portion of
the distributions from them to Star Gas Partners taxable dividend income to
Star Gas Partners and thus, to the unitholders. Such dividend income cannot be
offset by past or future losses generated by our propane activities.
Treatment of Partnership Distributions. Distributions by Star Gas Partners to
a unitholder generally will not be taxable to him for federal income tax
purposes to the extent of the tax basis he has in his units immediately before
the distribution. Our cash distributions in excess of a Star Gas Partners
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, known as "nonrecourse liabilities", will be treated as a
distribution of cash to that unitholder. To the extent 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 Star Gas Partners 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 the tax basis he has 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, and collectively, "Section 751
Assets". To that extent, he will be treated as having received a
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distribution of his proportionate share of the Section 751 Assets and having
exchanged those 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 a unitholder's 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
that distribution over (2) the Star Gas Partners unitholder's 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 holder who
acquires common units in the transaction and holds those units through December
31, 2001, will be allocated, on a cumulative basis, an amount of federal
taxable income for that period that will be less than 20% of the cash
distributed for that period. Star Gas Partners further estimates that for
taxable years after the taxable year ending 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 on all units and other
assumptions regarding 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, the estimates are based on current
tax law and 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 prove to 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
units.
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 distributive 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 from Star
Gas Partners and by the unitholder's share of Star Gas Partners' losses, by any
decreases in his share of our nonrecourse liabilities and by his share of our
expenditures that are not deductible in computing taxable income and are not
required to be capitalized. A limited partner will have no share of our debt
that 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 Star Gas Partners Losses. The deduction by a
Star Gas Partners 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 tax-exempt
organizations, to the amount for which the unitholder is considered to be "at
risk" regarding our activities, if that is less than his tax basis. A
unitholder must recapture losses deducted in previous years to the extent that
distributions made to him 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.
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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 he borrows to acquire
or hold his units, if the lender of such borrowed funds owns an interest in us,
is related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of his
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 some closely held corporations and personal service corporations can
deduct losses from passive activities, which are 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 for each publicly-traded partnership. Consequently, any
passive losses we generate will only be available to offset our passive income
generated in the future 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 Petro and
its affiliates, or salary or active business income. Passive losses that 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 with an unrelated party. The passive activity loss rules
are applied after other applicable limitations on deductions such as the at
risk rules and the basis limitation.
A unitholder's share of our net income may be offset by any suspended passive
losses, 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:
(1) interest on indebtedness properly allocable to property held for
investment;
(2) our interest expense attributed to portfolio income; and
(3) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under 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 Star Gas Partners Income, Gain, Loss and Deduction. In general,
if we have a net profit, our items of income, gain, loss and deduction will be
allocated among the general partner and the unitholders in accordance with
their 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 those distributions. If we have a net loss, our items of income,
gain, loss and deduction will generally be allocated first, to the general
partner and the unitholders in accordance with their percentage interests to
the extent of their positive capital accounts, as maintained under our
partnership, agreement, and, second, to the general partner.
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As required by Section 704(c) of the Code and as permitted by its
Regulations, some items of our income, deduction, gain and loss will be
allocated in a manner to account for the difference between the tax basis and
fair market value of property that is contributed or deemed contributed to us
by a partner ("Contributed Property"). The effect of these allocations to a
noncontributing unitholder will be essentially the same as if the tax basis of
the Contributed Property were equal to its fair market value at the time of
contribution or deemed contribution. In addition, specified items of recapture
income will be allocated to the extent possible to the partner who was
allocated the deduction giving rise to the treatment of that 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 Star Gas Partners income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Code to eliminate the difference between a partner's "book" capital
account, credited with the fair market value of Contributed Property, and "tax"
capital account, credited with the tax basis of Contributed Property, (the
"Book-Tax Disparity"), will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item will be determined
on the basis of the partner's interest in Star Gas Partners, which will be
determined by taking into account all the facts and circumstances, including
the partner's relative contributions to Star Gas Partners, 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 possible 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, Star Gas Partners is 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 Star Gas
Partners unitholders. We are authorized to amend the partnership agreement in
the manner necessary to maintain uniformity of intrinsic tax characteristics of
units and to adjust later distributions, so that after giving effect to these
distributions, the priority and characterization of distributions otherwise
applicable under the partnership agreement is maintained as nearly as is
practicable. Payments by Star Gas Partners as described above could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
Treatment of Short Sales. A Star Gas Partners unitholder whose units are
loaned to a "short seller" to cover a short sale of units may be considered as
having disposed of ownership of those units. If so, he would no longer be a
partner for 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 for those units would not be reportable by the
unitholder, any cash distributions received by the unitholder for those units
would be fully taxable and all of these 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."
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Tax-exempt Organizations and 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 that are exempt from federal income tax, including
individual retirement accounts and other retirement plans, are subject to
federal income tax on unrelated business taxable income. Virtually all of the
taxable income derived by such an organization from the ownership of a unit
will be unrelated business taxable income and thus will be taxable to that
unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends and 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 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
us to change these procedures. In addition, non-resident aliens and foreign
corporations, trusts or estates that own units will be considered to be engaged
in business in the United States on account of ownership of those units. As a
consequence, they will be required to file federal tax returns for 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 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 in
which the foreign corporate unitholder is a "qualified resident." In addition,
such a unitholder is subject to special information reporting requirements
under Section 6038C of the Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on
the disposition of that unit to the extent that this gain is effectively
connected with a 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 Star Gas Partners unitholder will be required to
include in income his allocable share of our income, gain, loss and deduction
for our taxable year ending within or with his taxable year. 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 allocable 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."
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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 Star Gas Partners 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 being taken in the
early years after assets are placed in service. We will not be entitled to any
amortization deductions for 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 partner who has taken cost recovery or depreciation deductions for
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 Star Gas Partners Income, Gain, Loss and Deduction" and "--
Disposition of Units--Recognition of Gain or Loss."
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 these 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 inconsistency with Treasury Regulation
Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
Section 1.197-2(g)(3), neither of which is expected to directly apply to a
material portion of the Partnership's assets. See "--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) adjustment, 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 this type of 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."
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Valuation of Star Gas Partners 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 regarding 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 later found to be incorrect, the character and amount of items of
income, gain, loss or deductions previously reported by Star Gas Partners
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 units, see "--State and Local
Tax Considerations" at the end of this section.
Administrative Matters
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes 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 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 Star Gas Partners 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 audit of this kind may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an audit of that
unitholder's own return. Any audit of a unitholder's return could result in
adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The amended and restated partnership agreement appoints the general partner as
the Tax Matters Partner of Star Gas Partners.
The Tax Matters Partner will make specified 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
for items in our returns. The Tax Matters Partner may bind a Star Gas Partners
unitholder with less than a 1% profits interest in us to a settlement with the
IRS unless that unitholder elects, by filing a statement with the IRS, not to
give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review, by which all the unitholders are bound, of a final
partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any unitholder having at
least a 1% interest in 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. If Star Gas Partners elects 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 it does not
currently intend to do, the unitholders would be required to treat all
partnership items in a manner consistent with our return.
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Each partner in an electing large partnership takes into account separately a
number of items determined at the partnership level. In addition, miscellaneous
itemized deductions of an electing large partnership are not passed through to
the partners and 30% of such deductions are used at the partnership level.
A number of changes have recently been made to the tax compliance and
administrative rules relating to electing large partnerships. Adjustments
relating to partnership items for a previous taxable year are generally taken
into account by those persons who were partners in the previous taxable year.
Each partner in an electing large partnership, however, must take into account
his share of any adjustments to partnership items in the year those adjustments
are made. Alternatively, an electing large partnership could elect, or in some
circumstances could be required to, directly pay the tax resulting from any
adjustments of this kind. In either case, therefore, unitholders could bear
significant costs 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 cost 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;
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any wholly-
owned agency or instrumentality of either of the foregoing, or
(3) a tax-exempt entity.
(c) the amount and description of units held, acquired or transferred for the
beneficial owner; and
(d) specific 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 specific
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 this 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 predecessor general partner, as our
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 Star Gas
Partners: 96026000016. Issuance of this Registration Number does not indicate
that investment in Star Gas Partners 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 later 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 failure. The unitholders must disclose the tax shelter
registration number of Star Gas Partners on Form 8271 to be attached to the tax
return on which any deduction, loss or other benefit generated by Star Gas
Partners is claimed or income of Star Gas Partners 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 are not deductible for federal income
tax purposes.
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Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Code. No penalty will be imposed, however, for
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 regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000, $10,000 for most
corporations. The amount of any understatement subject to penalty generally is
reduced if any portion of the understatement is attributable to a position
adopted on the return (1) for which there is, or was, "substantial authority"
or (2) as to which there is a reasonable basis and the pertinent facts of such
position are disclosed on the return. More stringent rules apply to "tax
shelters," a term that in this context does not appear to include Star Gas
Partners. If any Star Gas Partners item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in such an
"understatement" of income for which no "substantial authority" exists, 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 that 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 in the units that were sold. The amount realized by the unitholder
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 for a
unit that decreased a unitholder's tax basis in that unit will, in effect,
become taxable income if the 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.
Should the IRS successfully contest our convention to amortize only a portion
of the Section 743(b) adjustment, described under "--Disposition of Units--
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 if that convention had 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,
resulting in greater overall taxable income allocable to him than appropriate.
Counsel is unable to opine as to the validity of the convention but believes
such a contest by the IRS is 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 by an individual 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
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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.
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 this
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 this ruling.
Specific 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 enter(s) into:
(1)a short sale;
(2)an offsetting notional principal contract; or
(3)a futures or forward contract for 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 for a partnership
interest, the taxpayer will be treated as having sold that 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 in the open market may be allocated
income, gain, loss and deduction accrued after the date of transfer.
The use of this allocation method may not be permitted under existing
Treasury Regulations. Accordingly, counsel is unable to opine on the validity
of this method of allocating income and deductions between the transferors and
the transferees of units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, 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.
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<PAGE>
A unitholder who owns units any time during a quarter and who disposes of
these units prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to that 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") under 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.
Proposed Treasury regulations under Section 743 of the Code would require a
portion of the Section 743(b) adjustment attributable to recovery property to
be depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Nevertheless, the proposed regulations under Section 197
indicate that the Section 743(b) adjustment attributable to an amortizable
Section 197 intangible should be treated as a newly-acquired asset placed in
service in the month when the purchaser acquires the unit. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable
to property subject to depreciation under Section 167 of the Code rather than
cost recovery deductions under Section 168 is generally required to be
depreciated using either the straight-line method or the 150% declining balance
method. Although the proposed regulations under Section 743 will likely
eliminate many of the problems if finalized in their current form, the
depreciation and amortization methods and useful lives associated with the
Section 743(b) adjustment may differ from the methods and useful lives
generally used to depreciate the basis in these properties. Under our
partnership agreement, the general partner is authorized to adopt a convention
to preserve the uniformity of units even if that convention is not consistent
with specified Treasury Regulations. See "--Tax Treatment of Operations--
Uniformity of Units."
Although counsel is unable to opine as to the validity of an approach of this
type, 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 our assets. To the extent this 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 this 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 specified 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 those 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 his units is lower than those 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.
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The calculations involved in the Section 754 election are complex and we will
make them on the basis of assumptions as to the value of our assets and other
matters. We cannot assure 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 Star Gas Partners units may be allocated more income than he would
have been allocated had the election not been revoked.
Notification Requirements. A Star Gas Partners 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 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 describe 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. Star Gas Partners and Star Gas Propane will be
considered to have been terminated if there is a sale or exchange of 50% or
more of the total interests in Star Gas Partners capital and profits within a
12-month period. A termination of Star Gas Partners will cause a termination of
Star Gas Propane. A termination of Star Gas Partners will result in the closing
of Star Gas Partners' taxable year for all Star Gas Partners unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of the tax year of Star Gas Partners may result
in more than 12 months' taxable income or loss of Star Gas Partners being
includable in his taxable income for the year of termination. Tax elections
required to be made by Star Gas Partners, including a new election under
Section 754 of the Code, must be made after a termination and a termination
could result in a deferral of Star Gas Partners deductions for depreciation. A
termination could also result in penalties if Star Gas Partners were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject Star Gas Partners to, any tax
legislation enacted before the termination.
State, Local and Other Tax Considerations
In addition to federal income taxes, a unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he or she resides or in which we do business or own
property. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in Star Gas Partners. 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. Star
Gas Corporation anticipates 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 only applies to
interest and dividend income. Some of them 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. A unitholder will be required to file state
income tax returns and to pay state income taxes in some or all of these states
and may be subject to penalties for failure to comply with those requirements.
In some states, tax losses may not produce a tax benefit in the year incurred
and also may not be available to offset income in subsequent taxable years.
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
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<PAGE>
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.
It is the responsibility of each unitholder to investigate the legal and tax
consequences of his investment in us, under the laws of pertinent states and
localities. 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 U.S. federal,
state and local, tax returns that may be required. Counsel has not rendered an
opinion on the state or local tax consequences of an investment in us.
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<PAGE>
INVESTMENT IN STAR GAS PARTNERS BY EMPLOYEE
BENEFIT PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
An investment in Star Gas Partners by an employee benefit plan is subject to
specified additional considerations because the investments of those plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974 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 this investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA; and
(c)(1)the fact that this investment could result in recognition of
unrelated business taxable income by the 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 an investor plan of this kind of filing an
additional federal income tax return.
The person with investment discretion regarding the assets of an employee
benefit plan, often called a fiduciary, should determine whether an investment
in Star Gas Partners is authorized by the appropriate governing instrument and
is a proper investment for that 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 specified transactions involving "plan assets"
with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Code.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether that plan will, by investing in Star Gas Partners, be deemed to own an
undivided interest in our assets, with the result that the general partner also
would be a fiduciary of that plan and our operations 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 regarding whether the
assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets" under specific circumstances. Under 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 under 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.
Our 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).
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated March 23, 1999, the underwriters named below, for whom
PaineWebber Incorporated, CIBC Oppenheimer Corp., Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, A.G. Edwards & Sons, Inc., Lehman Brothers Inc., Prudential
Securities Incorporated and Morgan Keegan & Company, Inc., are acting as
representatives, have agreed to purchase from us and we have agreed to sell,
the following number of common units:
<TABLE>
<CAPTION>
Number of
Underwriter Common Units
----------- ------------
<S> <C>
PaineWebber Incorporated.......................................... 2,005,613
CIBC Oppenheimer Corp............................................. 872,000
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated... 872,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 1,133,600
A.G. Edwards & Sons, Inc. ........................................ 1,133,600
Lehman Brothers Inc. ............................................. 1,133,600
Prudential Securities Incorporated................................ 1,133,600
Morgan Keegan & Company, Inc...................................... 436,000
---------
Total........................................................... 8,720,013
=========
</TABLE>
The underwriters propose to offer the common units at the offering price
shown on the cover page of this prospectus, and in part to specified securities
dealers, who may include the underwriters, at a price less a concession not in
excess of $0.43 per common unit, and the underwriters and those dealers may
reallot to specified dealers a discount not in excess of $0.10 per common unit.
The common units are offered subject to receipt and acceptance by the
underwriters, and to other conditions, including the right to reject orders in
whole or in part.
We have granted the underwriters an option to purchase up to 1,090,000
additional common units exercisable for 30 days after the date of this
prospectus to cover over-allotments, if any, at the offering price less the
underwriting discount and commissions. The underwriters may purchase those
common units only to cover over-allotments made for this offering. If the
underwriters exercise this option, each underwriter will be committed, subject
to specified conditions, to purchase an additional number of common units
proportionate to that underwriter's initial commitment.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the federal securities laws, or to
contribute to payments that the underwriters may be required to make for those
liabilities.
Star Gas Partners, on behalf of itself and its affiliates, and certain
executives and other persons have agreed, for a period of 120 days from the
date of this prospectus, not to, 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 that 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 specified
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
Star Gas Partners 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.
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In January 1998, A.G. Edwards & Sons, Inc. served as placement agent for
$11,000,000 of Star Gas Propane'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 Star Gas Propane's special committee
as financial advisor for the potential transaction with Petro. As compensation
for these financial advisory services, Star Gas Propane 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 for the potential transaction with Star Gas
Partners. 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.
For 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 for 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 those 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 these
transactions or that these transactions, once begun, will not be discontinued
without notice.
VALIDITY OF COMMON UNITS
The validity of the common units will be passed upon for Star Gas Partners by
Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York. Certain tax
matters will be passed upon for Star Gas Partners by Andrews & Kurth L.L.P.,
New York, New York. Certain legal matters regarding 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, and
its subsidiary and the Star Gas Group (Predecessor) as of September 30, 1997
and 1998 and for the fiscal years ended September 30, 1996, 1997 and 1998,
incorporated by reference in this prospectus, have been incorporated by
reference in reliance upon the report of KPMG LLP, independent certified public
accountants, incorporated by reference and upon the authority of that firm as
experts in accounting and auditing.
The consolidated financial statements and schedule of Petro as of December
31, 1996 and 1997 and for the fiscal years ended December 31, 1995, 1996 and
1997, have been incorporated by reference in this prospectus in reliance upon
the report of KPMG LLP, independent certified public accountants, incorporated
by reference and upon the authority of that firm as experts in accounting and
auditing.
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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 a registration statement on Form S-3, regarding
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. Regarding
Star Gas Partners and the common units offered by this prospectus, we refer you
to that registration statement on Form S-3 and its related exhibits and
schedules for further information.
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.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Star Gas Partners with the SEC (File No. 33-
98490) are incorporated by reference in this prospectus:
.Star Gas Partners' 1998 Annual Report on Form 10-K/A.
.Star Gas Partners' Quarterly Report on Form 10-Q, dated February 12, 1999.
.Star Gas Partners' Current Report on Form 8-K, dated November 20, 1998.
.Star Gas Partners' Current Report on Form 8-K, dated February 18, 1999.
In addition, all other reports and documents, we have filed under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and before this offering shall be deemed incorporated by reference in this
prospectus from the date of filing of those reports and documents. If
information in incorporated documents conflicts with information in this
prospectus you should rely on the most recent information. If information in an
incorporated document conflicts with information in another incorporated
document, you should rely on the most recent incorporated document.
This prospectus incorporates documents by reference that are not included
with this prospectus. These documents, excluding exhibits to the documents, are
available without charge, upon oral or written request by any person to whom
this prospectus is delivered. Contact Star Gas Corporation, 2187 Atlantic
Street, Stamford, Connecticut 06902, Attention: Richard F. Ambury, Vice
President--Finance, telephone (203) 328-7313.
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UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information gives effect to the acquisition of Petro by Star Gas Partners, the
transaction, including this offering, the debt offering and the application of
the net proceeds from these offerings 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 related notes, 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 December 31, 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 unaudited pro forma condensed consolidated statement of operations
for the three months ended December 31, 1998 was prepared as if the transaction
had occurred on October 1, 1998.
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions described below, 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 information. 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 Star Gas
Partners 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 Star Gas Partners.
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<PAGE>
Star Gas Partners, L.P. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Star Gas
Star Gas Partners, L.P.
Partners Pro Forma Pro Forma The Adjusted
L.P. Petro Adjustments Combined Offerings Pro Forma
-------- --------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................. $ 5,831 $ 2,004 $ 7,835 $ 87,678 (g) $ 14,266
--------- -------- --------
116,129 (h)
(209,176)(o)
11,800 (o)
Restricted cash....... 4,900 4,900 (4,900)(o)
Accounts receivable... 9,153 56,845 65,998 65,998
Inventories........... 9,898 17,534 27,432 27,432
Prepaid expenses and
other current
assets............... 632 7,023 7,655 7,655
-------- --------- -------- --------- --------
Total current
assets.............. 25,514 88,306 113,820 1,531 115,351
-------- --------- -------- --------- --------
Cash collateral
account.............. 6,900 6,900 (6,900)(o)
Property and
equipment, net....... 109,475 28,124 $ 11,985 (f) 149,584 149,584
Intangible and other
assets, net.......... 50,414 76,201 243,957 (f) 370,572 2,322 (g) 372,894
-------- --------- -------- -------- --------- --------
Total assets......... $185,403 $ 199,531 $255,942 $640,876 $ (3,047) $637,829
======== ========= ======== ======== ========= ========
LIABILITIES AND
PARTNERS' CAPITAL
Current liabilities:
Current debt and
preferred stock...... $ 1,384 $ 12,188 $ 13,572 $ (9,726)(o) $ 3,846
Bank credit facility
borrowings........... 10,720 -- 10,720 10,720
Accounts payable...... 3,608 10,129 13,737 13,737
Unearned service
contract revenue..... 15,430 15,430 15,430
Accrued expenses and
income taxes......... 2,500 31,652 $ 4,600 (d) 42,479 (3,727)(o) 38,752
3,727 (e)
Accrued interest and
dividends............ 2,390 -- 648 (a) 3,038 3,038
Customer credit
balances............. 4,684 27,884 32,568 32,568
-------- --------- -------- -------- --------- --------
Total current
liabilities......... 25,286 97,283 8,975 131,544 (13,453) 118,091
-------- --------- -------- -------- --------- --------
Long-term debt........ 103,616 278,731 (6,499)(b) 375,848 90,000 (g) 277,555
(188,293)(o)
Deferred income
taxes................ -- 40,000 (d) 40,000 40,000
Other long-term
liabilities.......... 53 10,764 (3,500)(d) 7,317 7,317
Redeemable and
exchangeable
preferred stock...... 28,578 (15,750)(b) 12,828 (7,430)(o) --
Partners' capital (5,398)(p)
Common unitholders.... 57,347 1,459 (c) 58,806 116,129 (h) 180,333
5,398 (p)
Subordinated
unitholders.......... (962) 45,509 (f) 13,266 13,266
(31,281)(f)
General partner....... 63 4,347 (f) 1,267 1,267
(3,143)(f)
Petro's stockholders'
deficiency........... (215,825) (648)(a)
22,249 (b)
(1,459)(c)
(41,100)(d)
(3,727)(e)
240,510 (f)
-------- --------- -------- -------- --------- --------
Total partners'
capital.............. 56,448 (215,825) 232,716 73,339 121,527 194,866
-------- --------- -------- -------- --------- --------
Total liabilities and
partners' capital.... $185,403 $ 199,531 $255,942 $640,876 $ (3,047) $637,829
======== ========= ======== ======== ========= ========
</TABLE>
109
<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
Star Gas Combined Partners, L.P.
Partners, Propane Propane Pro Forma Pro Forma The Adjusted
L.P. Acquisitions(i) Operations Petro(j) Adjustments Combined Offerings Pro Forma
--------- --------------- ---------- -------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.................. $111,685 $4,386 $116,071 $452,765 $(2,681)(k) $566,155 $566,155
Costs and expenses:
Cost of sales........ 49,498 1,972 51,470 299,987 (1,985)(k) 349,472 349,472
Operating expenses... 43,281 1,090 44,371 117,849 (669)(k) 161,551 161,551
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........ 11,462 548 12,010 27,514 (87)(k) 35,431 35,431
(4,006)(l)
Net gain (loss) on
sales of assets..... (271) (271) 11,507 (11,284)(k) (48) -- (48)
-------- ------ -------- -------- ------- -------- -------- --------
Operating income....... 7,173 776 7,949 14,299 (7,218) 15,030 15,030
Interest (income) expense,
net................... 7,927 427 8,354 30,803 39,157 $(16,279)(q) 22,878
Amortization of debt
issuance costs........ 176 -- 176 1,432 -- 1,608 (1,160)(n) 448
-------- ------ -------- -------- ------- -------- -------- --------
Income (loss) before
income taxes.......... (930) 349 (581) (17,936) (7,218) (25,735) 17,439 (8,296)
Income tax expense..... 25 25 475 500 500
--------
Income before equity
interest in Star Gas
Corporation........... (18,411)
Share of income (loss)
of Star Gas
Corporation........... (317) 317 (m) --
-------- ------ -------- -------- ------- -------- -------- --------
Net income (loss)...... $ (955) $ 349 $ (606) $(18,728) $(6,901) $(26,235) $ 17,439 $ (8,796)
======== ====== ======== ======== ======= ======== ======== ========
General partner's
interest in net income
(loss)................ $ (19) $ (176)
======== ========
Limited partners'
interest in net income
(loss)................ $ (936) $ (8,620)
======== ========
Basic and diluted net
income (loss) per
limited partner unit.. $ (0.16) $ (0.54)(r)
======== ========
Weighted average number
of limited partner
units outstanding..... 6,035 220 6,255 103 (c) 6,840 8,720 (h) 15,961 (r)
(2,396)(f) 401 (p)
396 (f)
2,482 (f)
</TABLE>
110
<PAGE>
Star Gas Partners, L.P. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations
(unaudited)
Three Months Ended December 31, 1998
(In thousands, except per unit data)
<TABLE>
<CAPTION>
Star Gas
Star Gas Partners, L.P.
Partners, Pro Forma Pro Forma The Adjusted
L.P. Petro(j) Adjustments Combined Offerings Pro Forma
--------- -------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales................... $30,237 $116,540 $146,777 $146,777
Costs and expenses:
Cost of sales......... 11,978 74,018 85,996 85,996
Operating expenses.... 11,724 30,123 41,847 41,847
Transaction expenses.. -- 3,794 3,794 3,794
Provision for
supplemental
benefits............. 90 90 90
Depreciation and
amortization......... 3,008 6,166 $ (311)(l) 8,863 8,863
Net gain (loss) on
sales of assets...... (4) (15) (19) (19)
------- -------- ------- -------- ------- --------
Operating income 3,523 2,334 311 6,168 6,168
Interest expense, net... 2,178 7,820 9,998 $(3,904)(q) 6,094
Amortization of debt
issuance costs......... 45 335 380 (268)(n) 112
------- -------- ------- -------- ------- --------
Income (loss) before
income taxes........... 1,300 (5,821) 311 (4,210) 4,172 (38)
------- -------- ------- -------- ------- --------
Income tax expense...... 6 75 81 81
--------
Income before equity
interest in Star Gas
Corporation............ (5,896)
Share of income (loss)
of Star Gas
Corporation............ 770 (770)(m)
------- -------- ------- -------- ------- --------
Net income (loss)....... $ 1,294 $ (5,126) $ (459) $ (4,291) $ 4,172 $ (119)
======= ======== ======= ======== ======= ========
General partner's
interest in net income
(loss)................. $ 26 $ (2)
======= ========
Limited partners'
interest in net income
(loss)................. $ 1,268 $ (117)
======= ========
Basic and diluted net
income (loss) per
limited partner unit... $ 0.20 $ (0.01)
======= ========
Weighted average number
of limited partner
units outstanding...... 6,255 103 (c) 6,840 8,720 (h) 15,961
(2,396)(f) 401 (p)
396 (f)
2,482 (f)
</TABLE>
111
<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 Star Gas Partners 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 December
31, 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 for the twelve
months ended September 30, 1998, or as of October 1, 1998, in the
case of the pro forma condensed consolidated statement of
operations for the three months ended December 31, 1998.
The pro forma adjustments are based upon currently available information,
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 1989 preferred stock
and 12 7/8% preferred stock.
(b) Reflects the negotiated discount of approximately $15.8 million to redeem
Petro's 12 7/8% preferred stock, the negotiated discount of approximately $9.4
million to refinance Petro's public debt and the negotiated premium to
refinance Petro's private debt of approximately $2.9 million.
(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 $14.1875 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% subordinated debentures, and 12 7/8% preferred
stock as consideration for consenting to the early redemption of those
securities.
The Transaction (Merger and Exchange)
(d) Represents:
(1) the estimated amount of current federal and state taxes to be
incurred of $4.6 million;
(2) the estimated amount of deferred federal and state income taxes to
be recognized of $40.0 million; and
(3) the elimination of the tax liability associated with the Pearl Gas
conveyance of $3.5 million.
(e) Reflects the estimated additional amount of $3.7 million to be recorded
by Petro for legal, professional and advisory fees incurred by Petro and Star
Gas Partners in the transaction. Total estimated expenses are $8.5 million. As
of September 30, 1998 Petro has recorded $1.1 million in transaction expenses.
For the three months December 31, 1998, Petro has recorded $3.8 million in
transaction expenses.
(f) Represents the exchange of 26.2 million shares of Petro's Class A common
stock and Class C common stock valued at $49.9 million for 2.5 million Star Gas
Partners senior subordinated units valued at $40.2 million, 0.4 million Star
Gas Partners junior subordinated units valued at $5.3 million and 0.3 million
general partner units valued at $4.4 million. The 2.4 million Star Gas Partners
subordinated units outstanding prior to the transaction will be contributed to
Star Gas Partners by Petro. The value assigned to Petro's Class A
112
<PAGE>
common stock is $45.0 million or $1.91 per share and the value assigned to
Petro's Class C common stock is $4.9 million or $1.91 per share. The method
used to determine the fair market value of Petro's Class A and Class C common
stock was based on an implied unit analysis. The method used to determine the
fair market value of Star Gas Partners' senior subordinated units, junior
subordinated units and general partner units was based on an implied unit
analysis. See page 68 of the joint proxy statement and prospectus of Star Gas
Partners, L.P. and Petroleum Heat and Power Co., Inc. dated February 10, 1999
for a description of the implied unit analysis method.
The table below summarizes the preliminary allocation by Star Gas Partners of
the excess of purchase price over book value related to the acquisition of
Petro. The allocation of the purchase price is based on the results of a
preliminary appraisal of property, plant and equipment, customer lists and the
December 31, 1998 recorded values for tangible assets and liabilities. The
anticipated closing date of the transaction is March 31, 1999. This purchase
price allocation will be updated for changes in current assets and liabilities
based on Petro's operating results from January 1, 1999 to the anticipated
closing date. From January 1, 1999 to the closing date, it is expected that
Petro will generate net income and positive cash flows and that working capital
will increase. As a result, the amount of goodwill to be recorded on the
closing date will decrease. Subject to Petro's operating results which could be
impacted by weather, among other factors, it is estimated that the increase in
working capital for Petro from January 1, 1999 to the closing date will range
between $35 million to $40 million.
<TABLE>
<S> <C>
The preliminary allocation is as follows: (In thousands)
Consideration given for the exchange of Petro shares........... $ 49,856
Transaction expenses (1)....................................... 8,547
-------------
Total consideration........................................ 58,403
-------------
Fair market value of Petro's assets and liabilities as of
December 31, 1998:
Current assets............................................... (93,126)
Cash collateral account...................................... (6,900)
Property, plant and equipment (2)............................ (40,109)
Value of Petro's investment in Star Gas...................... (34,424)
Current liabilities.......................................... 97,283
Accrued income taxes......................................... 4,600
Accrued preferred dividends.................................. 648
Long-term debt............................................... 272,232
Deferred income taxes........................................ 40,000
Other liabilities............................................ 7,264
Preferred stock.............................................. 12,828
Junior preferred stock....................................... 1,459
-------------
Subtotal................................................... 261,755
-------------
Total value assigned to intangibles and other assets........... 320,158
Carrying amount of intangibles and other assets................ (76,201)
-------------
Allocation of excess purchase price to intangibles............. $ 243,957
=============
Consisting of:
Customer lists............................................... $ 95,000
Goodwill..................................................... 224,193
Other assets................................................. 965
-------------
Total intangibles and other assets......................... $ 320,158
=============
</TABLE>
- --------
(1) Transaction expenses include legal, accounting, investment advisory and
asset appraisal costs.
(2) Includes fair market value adjustment of $12.0 million.
The fair market value for property plant and equipment, excluding real estate,
was established using the cost approach method. The market approach was used in
valuing the real estate. The value assigned to customer
113
<PAGE>
lists was derived using a discounted cash flow analysis. The cash flows
attributable to the customer lists were discounted back at an equity risk
adjusted cost of capital to the net present value. Any excess was attributable
to goodwill.
The Debt Offering and This Offering
(g) Reflects the estimated net proceeds to Petro of $87.7 million from the
$90.0 million debt offering, net of underwriting discounts and commissions
estimated to be $1.4 million and offering expenses estimated to be $0.9
million. These costs are being amortized over the term of the related debt
which is 8.5 years.
(h) Reflects the estimated net proceeds to Star Gas Partners of $116.1
million from the issuance and sale of 8.7 million common units in this offering
at an assumed offering price of $14.1875 per common unit, net of underwriting
discounts and commissions estimated to be $6.2 million and offering expenses
estimated to be $1.4 million.
The Propane Acquisitions
(i) Represents the results of certain propane distributors acquired by Star
Gas Partners in fiscal 1998 from October 1, 1997 to their dates of acquisition.
Results of these distributors from the dates of acquisition to September 30,
1998 are included in Star Gas Partners' twelve months ended September 30, 1998
results adjusted for:
(1) cost savings of $0.3 million, primarily executive compensation and
legal expenses relating to selling shareholders;
(2) additional depreciation and amortization of $0.5 million; and
(3) additional interest expense of $0.4 million.
There were no propane acquisitions completed in the three months ended December
31, 1998.
The Transaction (Acquisition of Petro)
(j) Represents the results of operations of Petro for the twelve months ended
September 30, 1998 or the three months ended December 31, 1998. Estimated
expenses of $8.5 million to be incurred by Petro as a direct result of its
acquisition by Star Gas Partners will be included in Petro's actual statement
of operations. For the twelve months ended September 30, 1998, Petro has
recorded $1.1 million of these expenses. For the three months ended December
31, 1998, Petro has recorded $3.8 million of these expenses.
(k) Adjustment to reflect the disposition of Petro's Hartford, Connecticut
operations in November 1997. Petro received cash proceeds of $15.6 million and
recorded a gain of $11.3 million. The carrying value of these assets at the
time of sale was $4.3 million.
(l) Adjustment to depreciation and amortization expense attributable to the
acquisition of Petro.
114
<PAGE>
Star Gas Partners believes that the amortization periods assigned to the
assets below are appropriate. However, if the final amortization periods
assigned to the tangible and intangible assets were of shorter duration, the
amount of depreciation and amortization would increase and reduce net income.
For the twelve months ended September 30, 1998, the following table summarizes
the effect on depreciation and amortization of the acquisition of Petro.
<TABLE>
<CAPTION>
Net Book Value Amount per
Petro's Financials Amount per Appraisal Difference
--------------------------------------- --------------------------------------- ------------
Property and equipment, net Asset(1) Life Depreciation(2) Asset(1) Life Depreciation(2) Depreciation
- --------------------------- -------- -------------- --------------- -------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Land................ $ 2,092 $ -- $ 3,300 $ -- $ --
Buildings........... 4,788 20-45 years 419 4,300 30 years 143 (276)
Fleet............... 5,908 5 to 7 years 2,866 12,800 6 years 2,135 (731)
Leasehold........... 4,270 term of leases 562 5,900 term of leases 457 (105)
Computer, furniture
and fixtures....... 7,377 5 to 7 years 2,491 9,700 5 to 7 years 1,661 (830)
Service & other
equipment.......... 3,689 5 to 13 years 692 4,109 5 to 13 years 557 (135)
------- ------- -------- ------- -------
Total property and
equipment.......... $28,124 $ 7,030 $ 40,109 $ 4,953 $(2,077)
======= ======= ======== ======= =======
<CAPTION>
Intangible and other assets, net Asset(1) Life Amortization(2) Asset(1) Life Amortization(2) Amortization
- -------------------------------- -------- -------------- --------------- -------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Customer list....... $52,596 6.5 years $17,364 $ 95,000 10 years $ 9,500 $(7,864)
Goodwill............ 9,013 25 years 1,129 224,193 25 years 8,968 7,839
Covenants not to
compete............ 2,855 5 to 7 years 1,904 -- -- (1,904)
Other assets........ 965 -- 965 -- --
------- ------- -------- ------- -------
Total intangible and
other assets....... $65,429 $20,397 $320,158 $18,468 $(1,929)
======= ------- ======== ------- -------
Totals.............. $27,427 $23,421 $(4,006)
======= ======= =======
</TABLE>
- -------
(1) As of December 31, 1998.
(2) For the twelve months ended September 30, 1998.
Petro's property, plant and equipment is being depreciated using a historical
cost which is approximately $80 million. The fair market value of these assets
is $40.1 million. When depreciation expense is calculated based on the fair
market value, this expense is $2.1 million lower than historical depreciation.
Pro forma depreciation is less than historical depreciation due to decline in
the asset base being depreciated and an extension of the useful lives of those
assets. The remaining lives assigned to property, plant and equipment were
determined by an independent appraisal firm. All property, plant and equipment
is depreciated using the straight-line method.
Pro forma customer list amortization is less than historical amortization due
to a longer life and a lower amortization asset. The original cost used to
amortize historical customer list was approximately $120 million. The longer
life represents Petro's improved retention rate as well as the retention of
customers obtained through internal marketing, which have a higher retention
rate than for customers acquired through acquisition. Petro's previous
acquisitions represented the acquisition of customers. The acquisition of Petro
by Star Gas Partners is an acquisition of an on-going business. The appraisal
assigned a greater allocation to goodwill than what was previously allocated by
Petro in their purchase of a 188 relatively small fuel oil dealers. This
resulted in approximately $7.8 million of additional amortization, largely
offsetting the $7.9 million of less customer list amortization. Restrictive
covenants were not assigned a value under the pro forma intangibles due to the
minimal amount of the asset value expected at closing. Intangibles are
amortized on a straight-line basis.
115
<PAGE>
For the three months ended December 31, 1998, the following table summarizes
the effect on depreciation and amortization of the acquisition of Petro.
<TABLE>
<CAPTION>
Net Book Value Amount per
Petro's Financials Amount per Appraisal Difference
--------------------------------------- --------------------------------------- ------------
Property and equipment, net Asset(1) Life Depreciation(2) Asset(1) Life Depreciation(2) Depreciation
- --------------------------- -------- -------------- --------------- -------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Land................ $ 2,092 $ -- $ 3,300 $ -- $ --
Buildings........... 4,788 20-45 years 76 4,300 30 years 36 (40)
Fleet............... 5,908 5 to 7 years 676 12,800 6 years 534 (142)
Leasehold........... 4,270 term of leases 148 5,900 term of leases 114 (34)
Computer, furniture
and fixtures....... 7,377 5 to 7 years 655 9,700 5 to 7 years 415 (240)
Service & other
equipment.......... 3,689 5 to 13 years 219 4,109 5 to 13 years 139 (80)
------- ------ -------- ------ -------
Total property and
equipment.......... $28,124 $1,774 $ 40,109 $1,238 $ (536)
======= ====== ======== ====== =======
<CAPTION>
Intangible and other assets, net Asset(1) Life Amortization(2) Asset(1) Life Amortization(2) Amortization
- -------------------------------- -------- -------------- --------------- -------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Customer list....... $52,596 6.5 years $3,703 $ 95,000 10 years $2,375 $(1,328)
Goodwill............ 9,013 25 years 248 224,193 25 years 2,242 1,994
Covenants not to
compete............ 2,855 5 to 7 years 441 -- -- (441)
Other assets........ 965 -- 965 -- --
------- ------ -------- ------ -------
Total intangible and
other assets....... $65,429 $4,392 $320,158 $4,617 $ 225
======= ------ ======== ------ -------
Totals.............. $6,166 $5,855 $ (311)
====== ====== =======
</TABLE>
- -------
(1) As of December 31, 1998.
(2) For the three months ended December 31, 1998.
(m) Reflects the elimination of Petro's equity interest in Star Gas Partners.
The Offerings
(n) Reflects the net adjustment for the twelve months ended September 30,
1998 to amortization of debt issuance costs of $1.2 million attributable to the
debt offering and the acquisition of Petro. Amortization of debt issuance costs
is decreased by $1.4 million relating to the repayment of Petro debt and is
increased by $0.3 million relating to the 7.92% notes. For the three months
ended December 31, 1998, amortization of debt issuance costs is decreased by
$0.3 million relating to the repayment of Petro debt and is increased by $0.1
million relating to the 7.92% notes.
(o) Reflects the use of the net proceeds from this offering and, the debt
offering to repay $79.5 million of Petro's 12 1/4% Senior Subordinated
Debentures due 2005 to repay $46.1 million of Petro's 10 1/8% Senior
Subordinated Notes due 2003, to repay $68.3 million of Petro's 9 3/8% Senior
Subordinated Debentures due 2006, to retire $7.4 million of Petro's 12 7/8%
Exchangeable Preferred Stock, to retire $4.2 million of Petro's 14.33%
Exchangeable Preferred Stock and to pay $3.7 million of transaction expenses.
As of December 31, 1998 Petro had paid $4.9 million in transaction expenses. As
a result of the transaction, both Petro's current and long-term restricted cash
balances become available for general business purposes. 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).
Under the private debt agreements at the effective time of the transaction:
(i) the holders of the senior notes will exchange those notes for
$62.7 million aggregate principal amount of new 9% notes; and
116
<PAGE>
(ii) the holders of the 14.1% notes will exchange those notes for
$4.2 million aggregate principal amount of 10 1/4% notes.
The new private notes will be guaranteed by Star Gas
Partners and Petro Holdings.
(p) Reflects the exchange of $5.4 million of Petro's 12 7/8% exchangeable
preferred stock for 0.4 million common units in lieu of cash.
(q) Reflects the net reduction to interest expense of $16.3 million for
the twelve months ended September 30, 1998. This amount reflects $7.1 million
of additional interest expense annually on the $90.0 million in principal
amount of the notes at an interest rate of 7.92%. This amount also reflects an
annual reduction in interest expense of $21.9 million due to the repayment of
$203.2 million of Petro public debt, excluding negotiated discounts, with the
proceeds of this offering and the debt offering and a reduction in the interest
rate attributable to the private debt agreements described above. In addition
interest expense is reduced by $0.3 million, as $5.4 million of Petro's cash is
used to finance the transaction.
The following table summarizes the effect on interest expense of the
transaction for the twelve months ended September 30, 1998:
<TABLE>
<CAPTION>
Interest Interest
Amount Rate Expense
------- -------- --------
<S> <C> <C> <C>
Debt Repaid or Modified
Petro 12 1/4% senior subordinated debentures(1).... $80,155 12.25% $ 9,819
Petro 10 1/8% senior subordinated notes............ 48,739 10.125% 4,934
Petro 9 3/8% senior subordinated debentures........ 74,334 9.375% 6,968
Petro 11.96% notes(2).............................. 60,000 11.96% 7,176
Petro 14.10% notes(2).............................. 6,884 14.10% 971
Lower letter of credit fees on acquisition notes... 191
-------
Total reductions to interest expense............. $30,059
<CAPTION>
Interest
Amount Rate
------- --------
<S> <C> <C> <C>
New Debt Issued and Cash Balance Reduction
Petro 7.92% notes.................................. $90,000 7.92% $(7,128)
Petro 9.0% senior notes(2)......................... 62,697 9.0% (5,643)
Petro 10.25% senior and subordinated notes(2)...... 7,064 10.25% (724)
Lower invested cash balances....................... 5,369 5.31% (285)
-------
Net reduction to interest expense.................. $16,279
=======
</TABLE>
- --------
(1) Excludes prepayment premium of $2.8 million.
(2) Note to be exchanged under the private debt agreement.
117
<PAGE>
The following table summarizes the effect on interest expense of the
transaction for the three months ended December 31, 1998:
<TABLE>
<CAPTION>
Interest Interest
Amount Rate Expense
------- -------- --------
<S> <C> <C> <C>
Debt Repaid or Modified
Petro 12 1/4% senior subordinated debentures(1).... $80,155 12.25% $ 2,455
Petro 10 1/8% senior subordinated notes............ 48,739 10.125% 1,234
Petro 9 3/8% senior subordinated debentures........ 74,334 9.375% 1,742
Petro 10.90% notes(2).............................. 60,000 10.90% 1,635
Petro 14.10% notes(2).............................. 6,200 14.10% 219
Lower letter of credit fees on acquisition notes... 48
-------
Total reductions to interest expense............. $ 7,333
<CAPTION>
Interest
Amount Rate
------- --------
<S> <C> <C> <C>
New Debt Issued and Cash Balance Reduction
Petro 7.92% notes.................................. $90,000 7.92% $(1,783)
Petro 9.0% senior notes(2)......................... 62,697 9.0% (1,412)
Petro 10.25% senior and subordinated notes(2)...... 6,380 10.25% (163)
Lower invested cash balances....................... 5,369 5.31% (71)
-------
Net reduction to interest expense.................. $ 3,904
=======
</TABLE>
- --------
(1) Excludes prepayment premium of $2.8 million.
(2) Notes to be exchanged under the private debt agreement.
(r) The partnership agreement provides that for each non-overlapping four
quarter period that occurs after the first anniversary of the transaction, but
before the fifth anniversary of the transaction, in which the dollar amount of
Petro Adjusted Operating Surplus per Petro Unit equals or exceeds $2.90. Star
Gas Partners will issue 303,000 senior subordinated units, pro rata, or 303,000
Class B common units, pro rata, if such issuance occurs after the end of the
subordination period. These additional senior subordinated units will be issued
to the current holders of the senior subordinated units, junior subordinated
units and the general partner units. Star Gas Partners may not issue more than
an aggregate of 909,000 senior subordinated units or Class B common units under
this provision. In addition, Star Gas Partners has agreed to issue to the
holders of Petro's 12 7/8% exchangeable preferred stock 175,000 senior
subordinated units contingent upon Star Gas Partners earning $2.40 per unit in
distributable cash flow over four consecutive quarters during this period
commencing on January 1, 2000 and ending on December 31, 2002. The issuance of
these senior subordinated units will not generate any additional proceeds to
Star Gas Partners. When these units are issued, an additional amount of
goodwill will be recorded. Assuming 303,000 senior subordinated units are
issued, the amount of goodwill to be recorded will be $4.9 million. As a
result, annual amortization expense would increase by $0.2 million and would
decrease net income per limited partner unit by $0.01 per unit. If these senior
subordinated units are issued and they are converted into Class B common units,
the Class A common units would be diluted in terms of available cash to be used
for payment of the quarterly distributions.
118
<PAGE>
ANNEX A--APPLICATION FOR TRANSFER OF COMMON UNITS
No transfer of the Common Units evidenced here 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 shown 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
of its amendment, 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 here have the
meanings assigned to those 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
Partnership must withhold tax with respect to certain transfers of property if
a holder of an interest in the Partnership is a foreign person.
A-1
<PAGE>
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 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: For any period, Operating Surplus generated
during that period as adjusted to:
(a) decrease Operating Surplus by;
(1)any net increase in working capital borrowings during that
period, and
(2) any net reduction in cash reserves for Operating Expenditures
during that period not relating to an Operating Expenditure made
during that period; and
(b) increase Operating Surplus by;
(1) any net decrease in working capital borrowings during that
period; and
(2) any net increase in cash reserves for Operating Expenditures
during that 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)(1) of the definition of Operating Surplus.
Available Cash: For any quarter prior to liquidation:
(a)the sum of:
(1) all cash and cash equivalents of the Star Gas Partners and its
subsidiaries on hand at the end of that quarter; and
(2) all additional cash and cash equivalents of Star Gas Partners
and its subsidiaries on hand on the date of determination of
Available Cash for that quarter resulting from Working Capital
Borrowings after the end of that quarter;
(b) less the amount of cash reserves that is necessary or appropriate
in the reasonable discretion of the general partner to:
(1) provide for the proper conduct of the business of Star Gas
Partners and its subsidiaries (including reserves for future
capital expenditures) after that quarter;
(2) provide funds for minimum quarterly distributions and cumulative
common unit arrearages for any one or more of the next four
quarters; or
(3) comply with applicable law or any debt instrument or other
agreement or obligation to which any member of Star Gas Partners
and its subsidiaries 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 Star Gas Partners from distributing the
minimum quarterly distribution on all common units and any common unit
arrearages thereon for the next four quarters; and,
provided further, that disbursements made by Star Gas Partners and
its subsidiaries or cash reserves established, increased or reduced
after the end of that quarter but on or before the date of
determination of Available Cash for that quarter shall be deemed to
have been made, established, increased or reduced, for purposes of
determining Available Cash, within that quarter if the general partner
so determines.
Capital Account: The capital account maintained for a partner under the
amended and restated partnership agreement. The Capital Account for a common
unit, a subordinated unit, a junior subordinated unit, a general partner unit
or any other specified interest in Star Gas Partners shall be the amount which
that Capital Account would be if that common unit, subordinated unit, junior
subordinated unit, general partner unit or other interest in Star Gas Partners
were the only interest in Star Gas Partners held by a partner.
B-1
<PAGE>
Capital Surplus: All Available Cash distributed by Star Gas Partners from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of Star Gas Partners
equals the Operating Surplus as of the end of the quarter before that
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
Closing Price: The last sale price on a day, regular way, or in case no sale
takes place on that day, the average of the closing bid and asked prices on
that day, regular way. In either case, as reported in the principal
consolidated transaction reporting system for securities listed or admitted to
trading on the principal national securities exchange on which the units of
that class are listed or admitted to trading. If the units of that class are
not listed or admitted to trading on any national securities exchange, the last
quoted price on that day. If no quoted price exists, the average of the high
bid and low asked prices on that day in the over-the-counter market, as
reported by the Nasdaq Stock Market or any other system then in use. If on any
day the units of that class are not quoted by any organization of that type,
the average of the closing bid and asked prices on that day as furnished by a
professional market maker making a market in the units of the class selected by
the board of directors of the general partner. If on that day no market maker
is making a market in the units of that class, the fair value of such units on
that day as determined reasonably and in good faith by the board of directors
of the general partner.
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 for the 20 consecutive trading days immediately prior
to such date.
Interim Capital Transactions:
(a) borrowings, refinancings or refundings of indebtedness and sales of
debt securities (other than Working Capital Borrowings and other
than for items purchased on open account in the ordinary course of
business) by any member of Star Gas Partners and its subsidiaries;
(b) sales of equity interests (including common units sold to the
underwriters in the exercise of their over-allotment option) by any
member of Star Gas Partners and its subsidiaries; and
(c) sales or other voluntary or involuntary dispositions of any assets
of any member of Star Gas Partners and its subsidiaries (other than
sales or other dispositions of inventory in the ordinary course of
business, sales or other dispositions of other current assets,
including, without limitation, receivables and accounts, in the
ordinary course of business and sales or other dispositions of
assets as a part of normal retirements or replacements), in each
case before the dissolution and liquidation of Star Gas Partners.
Operating Expenditures: All expenditures of Star Gas Partners and its
subsidiaries 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;
(1) required for the sale or other disposition of assets or
(2) made for 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
Star Gas Partners and its subsidiaries within 180 days before or
after that payment to the extent of the principal amount of that
indebtedness.
B-2
<PAGE>
(b) Operating Expenditures shall not include;
(1) capital expenditures made for acquisitions or for capital
improvements (as opposed to capital expenditures made to
maintain assets);
(2) payment of transaction expenses relating to Interim Capital
Transactions;
(3) payment of transaction expenses related to the merger and the
transactions contemplated by the merger; or
(4) 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 Surplus: As to any period before liquidation:
(a)the sum of:
(1) $20,340,600 plus all cash of Star Gas Partners and its
subsidiaries on hand as of the close of business on the closing
date of the initial public offering;
(2) all the cash receipts of Star Gas Partners and its subsidiaries
for the period beginning on the closing date of the initial
public offering and ending with the last day of that period,
other than cash receipts from Interim Capital Transactions
(except to the extent specified in the amended and restated
partnership agreement; and
(3) all cash receipts of Star Gas Partners and its subsidiaries
after the end of that period but on or before the date of
determination of Operating Surplus for the period resulting from
borrowings for working capital purposes; less
(b)the sum of:
(1) Operating Expenditures for the period beginning on the date of
the closing of the initial public offering and ending with the
last day of that period; and
(2) 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 Star Gas Partners
or any of its subsidiaries or disbursements on behalf of Star
Gas Partners or any of its subsidiaries) or cash reserves
established, increased or reduced after the end of that period
but on or before the date of determination of Available Cash for
that period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating
Surplus, within that period if the general partner so
determines.
Notwithstanding the foregoing, "Operating Surplus" for the quarter in which the
liquidation date occurs and any later quarter shall equal zero.
subordination period: The subordination period will extend from the date of
the closing of the initial public offering until the first to occur of the
following:
(a)the first day of any quarter beginning on or after October 1, 2002
for which;
(1) distributions of Available Cash from Operating Surplus on each
of the outstanding common units, senior subordinated units,
junior subordinated units and general partner units equaled or
exceeded the sum of the minimum quarterly distribution on all of
the outstanding common units and junior subordinated units for
each of the three non-overlapping four-quarter periods
immediately preceding that 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 minimum quarterly
B-3
<PAGE>
distribution on all of the common units, senior subordinated
units, junior subordinated units and general partner units that
were outstanding during those periods on a fully diluted basis
for employee options or other employee incentive compensation
(i.e., taking into account for purposes of that 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
before the end of the quarter immediately following the quarter
for 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 Star Gas Partners for incentive compensation); and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
(b) the date on which the general partner is removed as general partner
of Star Gas Partners 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 for more than one of those quarters (excluding for this
purpose the payment of any common unit arrearages) and the first
quarter of that 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 described
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 equally with the
senior subordinated units.
Working Capital Borrowings: Borrowings under to a facility or other
arrangement requiring all of its borrowings 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-4
<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 22, 1998, as amended and
restated as of February 3, 1999 and as further amended from time to time (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 Petro Merger Agreement and the transactions contemplated thereby
(including, without limitation, the form of this Agreement and the amendments
effected hereby and the withdrawal of the Initial General Partner 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
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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:
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(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 Common Unit, Senior Subordinated
Unit, 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 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.
"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).
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"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. 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, with the same residence
as such Person.
"Audit Committee" means a committee of the Board of Directors of the General
Partner composed entirely of two or more directors who are neither members,
officers nor employees of the General Partner or members, stockholders (other
than holders of Common Units or Senior Subordinated Units), officers, directors
or employees of any Affiliate of the General Partner.
"Available Cash," as to any Quarter ending before the Liquidation Date, means
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such Quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such Quarter resulting from Working
Capital Borrowings subsequent to the end of such Quarter, less
(b) the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the proper
conduct of the business of the Partnership Group (including reserves for
future capital expenditures) subsequent to such Quarter, (ii) provide funds
for distributions under Sections 5.4(a)(i), (ii) and (iii) or 5.4(b)(i) in
respect of any one or more of the next four Quarters, or (iii) comply with
applicable law or any debt instrument or other agreement or obligation to
which any member of the Partnership Group is a party or its assets are
subject; provided, however, that the General Partner may not establish cash
reserves for distributions pursuant to Section 5.4(a)(iii) unless the
General Partner has determined that in its judgment the establishment of
reserves will not prevent the Partnership from distributing the Minimum
Quarterly Distribution on all Common Units and any Common Unit Arrearages
thereon with respect to the next four Quarters.
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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 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 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.
"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.
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"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, (a) substantially in the form of Exhibit A
hereto with respect to Common Units and Exhibit B hereto with respect to Senior
Subordinated Units, (b) issued in global form in accordance with the rules and
regulations of the Depositary, or (c) 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 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).
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"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, (a) that certain
Conveyance and Contribution Agreement, dated as of the Effective Time, among
the Partnership, the Operating Partnership, Petro and the General Partner and
(b) 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).
"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, including the Initial General Partner from
and after the Initial Closing.
"Debt Offering" means the private offering and sale by Petro of $90 million
Senior Secured Notes due .
"Depositary" means with respect to the Units issued in global form, The
Depositary Trust Company and its successors and permitted assigns.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
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"Effective Time" means the effective time of the Merger, which shall be the
later to occur of (a) the filing in the office of the Secretary of State of the
State of Delaware of a properly executed certificate of merger and (b) 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. 333-68329), 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)(E).
"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.
"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
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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 Working Capital
Borrowings 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 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) the
Organizational Limited Partner, each Initial Limited Partner, each Substituted
Limited Partner, each Additional Limited Partner and any Departing Partner upon
the change of its status from General Partner to Limited Partner pursuant to
Section 13.3; and (b) solely for purposes of Articles IV, V, VI and IX and
Sections 14.3 and 14.4, each Assignee.
"Limited Partner Interest" means the ownership interest of a Limited Partner
in the Partnership which is evidenced by Common Units, Senior Subordinated
Units and Junior Subordinated Units or other Partnership Securities and
includes any and all benefits to which a Limited Partner is entitled as
provided in this
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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.
"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, (a) for the period from the Initial
Closing Date through March 31, 1996, $0.6225 per Common Unit and Old
Subordinated Unit, (b) for the period April 1, 1996 through December 31, 1998,
$0.55 per Common Unit and Old Subordinated Unit per Quarter and (c) for each
Quarter thereafter, $0.575 per Unit, subject to adjustment in accordance with
Sections 5.6 and 5.8.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 4.9(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable year. The items included in the
calculation of Net Income shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or
Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
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"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)(1), 5.2(b)(ii)(1) and
5.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (including, without limitation, any 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
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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) $20,340,600 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.
"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).
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"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.
"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, (a) 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 (b) 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.
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"Petro Merger Agreement" has the meaning set forth in the Recitals to this
Agreement.
"Petro Units," with respect to any date, means the sum of (a) 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), (b) 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), (c) the number
of Senior Subordinated Units or Class B Common Units issued pursuant to Section
4.6, and (d) 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 (b) above or traceable to
debt proceeds), which number of deemed Units is obtained by dividing (i) the
amount of such contribution by (ii) the Current Market Price of a Common Unit.
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 (d)
above, such Units shall be deemed to be issued on the date of such Capital
Contribution. For purposes of determining the number of Outstanding Petro Units
for any period of time, the number of Units issued in (b), (c) and (d) above
shall be determined on a weighted average basis based on the amount of time
they have been Outstanding. For this purpose, Common Unit means Class A Common
Unit 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.
"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
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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)(F).
"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.
"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:
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(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 (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
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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, (a) 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 (b) after the Subordination Period, at least a
majority of the Outstanding Common Units.
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 4.9(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 4.9(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 4.9(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 4.9(d)).
"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).
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"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.
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.
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Section 4.3 Contributions at the Effective Time; General Partner Contributions.
(a) (i) At the Effective Time and pursuant to the Conveyance and
Contribution Agreements, Petro contributed to the Partnership all of its
general partner interest in the Operating Partnership (other than a portion
of such interest with a value of $1,000), all of its general partner
interest in the Partnership (other than a portion of such interest with a
value of $1,000) and all 2,396,078 Old Subordinated Units (all of which it
purchased from Star Gas in exchange for a note of equivalent value) in
exchange for 102,848 newly issued Common Units, 1,706,246 newly issued
Senior Subordinated Units and a promissory note in an amount equal to the
excess of the value of the Old Subordinated Units and general partner
interests assigned to the Partnership over the value of the Common Units
and Senior Subordinated Units issued in exchange therefor. The Old
Subordinated Units were cancelled.
(ii) At the Effective Time and pursuant to the Conveyance and
Contribution Agreements, the General Partner contributed 11,370 shares of
Petro Class A and Class C Common Stock to the Operating Partnership in
exchange for a .01% general partner interest in the Operating Partnership
and contributed 2,263,584 shares of Petro Class A and Class C Common Stock
to the Partnership in exchange for a 1.99% general partner interest in the
Partnership represented by 324,100 General Partner Units. At such time, the
general partner interests in the Partnership and the Operating Partnership
held by the Partnership were cancelled.
(iii) At the Effective Time and pursuant to the Exchange Agreement,
certain stockholders of Petro contributed (A) 2,769,653 shares of Petro
Class A and Class C Common Stock to the Partnership in exchange for 396,558
Junior Subordinated Units and (B) 6,595,477 shares of Petro Class A and
Class C Common Stock to the Partnership in exchange for 775,496 Senior
Subordinated Units.
(iv) At the Effective Time and pursuant to the Merger, the remaining
holders of Petro Class A and Class C Common Stock received 1,706,246 Senior
Subordinated Units from Petro in exchange for their shares of Petro Class A
and Class C Common Stock and the holders of Petro's 1998 Junior Convertible
Preferred Stock received 102,848 Common Units from Petro in exchange for
their shares of 1998 Junior Convertible Preferred Stock.
(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 4.3(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.
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(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). 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.
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(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
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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, the number of Senior Subordinated Units or Class B Common
Units issuable pursuant to Section 4.6 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,
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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.
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(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:
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(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 5.1(a)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to
Section 5.1(b)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the
aggregate Net Income allocated to such Partners pursuant to this
Section 5.1(a)(ii) for the current taxable year and all previous
taxable years is equal to the aggregate Net Losses allocated to such
Partners pursuant to Section 5.1(b)(ii) for all previous taxable years;
and
(iii) Third, the balance, if any, 100% to the General Partner and the
Limited Partners in accordance with their respective Percentage
Interests.
(b) Net Losses. After giving effect to the special allocations set forth
in Section 5.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses
for such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the
aggregate Net Losses allocated pursuant to this Section 5.1(b)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
5.1(a)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners in
accordance with their respective Percentage Interests; provided, that
Net Losses shall not be allocated pursuant to this Section 5.1(b)(ii)
to the extent that such allocation would cause any Limited Partner to
have a deficit balance in its Adjusted Capital Account at the end of
such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account); and
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 5.1(d), all items of income gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same
manner as such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this Section 5.1(c) shall be made after
Capital Account balances have been adjusted by all other allocations
provided under this Section 5.1 and after all distributions of Available
Cash provided under Section 5.4 have been made with respect to the taxable
period ending on the date of the Partnership's liquidation pursuant to
Section 14.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such
Net Termination Gain shall be allocated among the General Partner and
the Limited Partners in the following manner (and the Capital Accounts
of the Partners shall be increased by the amount so allocated in each
of the following subclauses, in the order listed, before an allocation
is made pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the
total deficit balances in the Capital Accounts of all Partners,
until each such Partner has been allocated Net Termination Gain
equal to any such deficit balance in its Capital Account;
(B) Second, 100% to all Partners holding Common Units, Pro Rata,
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;
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(C) 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, Pro
Rata, 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;
(D) 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, 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;
(E) Fifth, 100% to all Partners, Pro Rata, 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");
(F) Sixth, 86.7% to all Partners, Pro Rata, 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");
(G) Seventh, 76.5% to all Partners, Pro Rata, 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 expiration of the Subordination Period) is equal to
the sum of (1) the Second Liquidation Target Amount, plus (2)
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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
(H) Finally, any remaining amount 51% to all Partners, Pro Rata,
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:
(A) 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;
(B) 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, Pro Rata, until the Capital Account in respect
of each Senior Subordinated Unit then Outstanding has been reduced
to zero;
(C) 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, Pro Rata, until the Capital Accounts in respect of
each Common Unit then Outstanding are equal;
(D) Fourth, 100% to all Partners holding Common Units, Pro Rata,
until the Capital Account in respect of each Common Unit then
Outstanding has been reduced to zero; and
(E) 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 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,
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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 satisfies such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that
bears the Economic Risk of Loss with respect to the Partner Nonrecourse
Debt to which such Partner Nonrecourse Deductions are attributable in
accordance with Treasury Regulation Section 1.704-2(i). If more than
one Partner bears the Economic Risk of Loss with respect to a Partner
Nonrecourse Debt, such Partner Nonrecourse Deductions attributable
thereto shall be allocated between or among such Partners in accordance
with the ratios in which they share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities
of the Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-
in Gain shall be allocated among the Partners in accordance with their
respective Percentage Interests.
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(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 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
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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 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
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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), or any successor regulations
thereto. 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 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.
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Section 5.3 Requirement and Characterization of Distributions.
(a) Subject to (b) 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 Partnership shall not make
any distributions of Available Cash to the holders of Senior Subordinated
Units, Junior Subordinated Units and General Partner Units with respect to any
Quarter during the Partnership's fiscal year 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) 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, unless the aggregate amount of
distributions on all Units with respect to all Quarters, beginning with the
Quarter ending on December 31, 1999 shall be equal to or less than the total
Operating Surplus generated by the Partnership since October 1, 1999 (which
does not include that portion of Operating Surplus included in clause (a)(i) of
the definition of Operating Surplus).
(c) 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.
(d) 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;
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(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;
(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).
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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.
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, 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 converted 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
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increase in such rates resulting from such legislation or interpretation. Such
effective overall state and local income tax rate shall be determined for the
taxable year next preceding the first taxable year during which the Partnership
or the Operating Partnership is taxable for federal income tax purposes as an
association taxable as a corporation or is otherwise subject to entity-level
taxation by determining such rate as if the Partnership or the Operating
Partnership had been subject to such state and local taxes during such
preceding taxable year.
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
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 those of the
Operating Partnership (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
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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;
(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
(subject to Section 6.12 and Section 17.1); 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 Agreements, the agreements and other documents filed as exhibits
to the Proxy Statement and the Equity 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.
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Section 6.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific act
by all of the Outstanding Units or by other written instrument executed and
delivered by all of the Outstanding Units subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the Partnership;
(ii) possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XIV and XVI, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership, without the approval of holders of 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 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, the Operating
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
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cost to the General Partner or such Affiliate of Units or other Partnership
Securities purchased by the General Partner or such Affiliate from the
Partnership to fulfill options or awards under such plans, programs and
practices) shall be reimbursed in accordance with Section 6.4(b). Any and all
obligations of the General Partner under any employee benefit plans, employee
programs or employee practices adopted by the General Partner as permitted by
this Section 6.4(c) shall constitute obligations of the General Partner
hereunder and shall be assumed by any successor General Partner approved
pursuant to Section 13.1 or 13.2 or the transferee of or successor to all of
the General Partner's Partnership Interest (which is represented by the General
Partner Units) as a general partner in the Partnership pursuant to Section
11.2.
Section 6.5 Outside Activities.
(a) After the 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
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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.
(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 Agreements and any other transactions described in or
contemplated by the Proxy Statement, (ii) any transaction approved by Special
Approval, (iii) any transaction, the terms of which are no less favorable to
the Partnership than those generally being provided to or available from
unrelated third parties, or (iv) any transaction that, taking into account 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.
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(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 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.
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(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or any provision
hereof shall in any manner terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 6.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
Section 6.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Units, for losses sustained or liabilities incurred as a result of any act or
omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 6.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of 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
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General Partner (including the Audit Committee in connection with Special
Approval) shall be authorized in connection with its determination of what is
"fair and reasonable" to the Partnership and in connection with its resolution
of any conflict of interest to consider (A) the relative interests of any party
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person;
(C) any applicable generally accepted accounting practices or principles; and
(D) such additional factors as the General Partner (including the Audit
Committee) determines in its sole discretion to be relevant, reasonable or
appropriate under the circumstances. Nothing contained in this Agreement,
however, is intended to nor shall it be construed to require the General
Partner (including the Audit Committee) to consider the interests of any Person
other than the Partnership. In the absence of bad faith by the General Partner,
the resolution, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any
standard of care or duty imposed herein or therein or, to the extent permitted
by law, under the Delaware Act or any other law, rule or regulation.
(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.
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(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its powers
or obligations hereunder, to act through any of its duly authorized officers, a
duly appointed attorney or attorneys-in-fact or the duly authorized officers of
the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority prescribed
in this Agreement, so long as such action is reasonably believed by the General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
Section 6.11 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner 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 Effective Time, 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.
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Section 6.13 Registration Rights.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 6.13, any Person that is an Affiliate
of the General Partner at the date hereof notwithstanding that it may later
cease to be an Affiliate of the General Partner) 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 Partnership
Securities it desires to sell at the time it desires to do so without
registration under the Securities Act, then upon the request of the General
Partner or any of its Affiliates, the Partnership shall file with the
Commission as promptly as practicable after receiving such request, and use all
reasonable efforts to cause to become effective and remain effective for a
period of not less than six months following its effective date or such shorter
period as shall terminate when all Units or other Partnership Securities
covered by such registration statement have been sold, a registration statement
under the Securities Act registering the offering and sale of the number of
Units or other Partnership 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 Partnership
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 Partnership 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 Partnership 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 Partnership 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 Partnership 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),
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resulting to, imposed upon, or incurred by the Indemnified Persons, directly or
indirectly, under the Securities Act or otherwise (hereinafter referred to in
this Section 6.13(c) as a "claim" and in the plural as "claims") based upon,
arising out of or resulting from any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which any Units were registered under the Securities Act or any state
securities or Blue Sky laws, in any preliminary prospectus (if used prior to
the effective date of such registration statement), or in any summary or final
prospectus or in any amendment or supplement thereto (if used during the period
the Partnership is required to keep the registration statement current), or
arising out of, based upon or resulting from the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements made therein not misleading; provided, however, that the
Partnership shall not be liable to any Indemnified Person to the extent that
any such claim arises out of, is based upon or results from an untrue statement
or alleged untrue statement or omission or alleged omission made in such
registration statement, such preliminary, summary or final prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Partnership by or on behalf of such Indemnified
Person specifically for use in the preparation thereof. For purposes of this
Section 6.13(c), the term "Holder" shall also include Affiliates or former
Affiliates of Petro holding Common Units and Senior Subordinated Units.
(d) The provisions of Section 6.13(a) and (b) shall continue to be applicable
with respect to the General Partner (and any of the General Partner's
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
Partnership 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 Partnership 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 Partnership Securities 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 or former 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
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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 this
Agreement have been complied with or to inquire into the necessity or
expedience of any act or action of the General Partner or any such officer or
its representatives. Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or any such
officer or its representatives shall be conclusive evidence in favor of any and
every Person relying thereon or claiming thereunder that (a) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to
do so for and on behalf of the Partnership and (c) such certificate, document
or instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
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.
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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 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.
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Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed to each Record Holder of a Unit as of a date selected by the
General Partner in its sole discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with generally accepted accounting principles,
including a balance sheet and statements of operations, Partners' equity and
cash flows, such statements to be audited by a firm of independent public
accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed to each Record Holder of a Unit, as of a date
selected by the General Partner in its sole discretion, a report containing
unaudited financial statements of the Partnership and such other information as
may be required by applicable law, regulation or rule of any National
Securities Exchange on which the Units are listed for trading, or as the
General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information.
The General Partner shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be furnished to them
within 90 days of the close of the calendar year in which the Partnership's
taxable year ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the accrual method of
accounting for federal income tax purposes.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. For the purposes of computing the adjustments under Section 743(b) of
the Code, the General Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of Units will be deemed to be
the lowest quoted closing price of the Units on any National Securities
Exchange on which such Units are traded during the calendar month in which such
transfer is deemed to occur pursuant to Section 5.2(g) without regard to the
actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing the
Partnership ratably over a sixty-month period as provided in Section 709 of the
Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
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.
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Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner is
authorized to take any action that it determines in its sole discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income to any Partner
or Assignee (including, without limitation, by reason of Section 1446 of the
Code), the amount withheld shall be treated as a distribution of cash pursuant
to Section 5.3 in the amount of such withholding from such Partner.
ARTICLE X
CERTIFICATES
Section 10.1 Certificates.
Upon the Partnership's issuance of Common Units or Senior Subordinated Units
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 or Senior Subordinated Unit Certificate shall be valid
for any purpose until it has been countersigned by the Transfer Agent;
provided, however, that if the General Partner elects to issue Units in global
form, the Certificates shall be valid upon receipt of a certificate from the
Transfer Agent certifying that such Units have been duly registered in
accordance with the directions of the Partnership and the Underwriters. 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
Common Units and Senior Subordinated 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 (or, in the case of Units issued
in global form, register in accordance with the rules and regulations of the
Depositary), 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.
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(b) The General Partner on behalf of the Partnership shall execute, and upon
its request the Transfer Agent shall countersign and deliver (or, in the case
of Units issued in global form, register in accordance with the rules and
regulations of the Depositary), a new Certificate in place of any Certificate
previously issued if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the Partnership a
bond, in form and substance satisfactory to the General Partner, with
surety or sureties and with fixed or open penalty as the General Partner
may reasonably direct, in its sole discretion, to indemnify the
Partnership, the General Partner and the Transfer Agent against any claim
that may be made on account of the alleged loss, destruction or theft of
the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the General
Partner.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units representing Limited Partner Interests
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 (which is represented by
General Partner Units) 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,
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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 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 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
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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 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
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Assignee establishes to the satisfaction of the General Partner that such
Limited Partner or Assignee is an Eligible Citizen or has transferred his Units
to a Person who furnishes a Citizenship Certification to the General Partner
prior to the date fixed for redemption as provided below, redeem the
Partnership Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Units, the date fixed for redemption,
the place of payment, that payment of the redemption price will be made
upon surrender of the Certificate evidencing the Redeemable Units and that
on and after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Units will accrue or be made.
(ii) The aggregate redemption price for Redeemable Units shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Units of the class to be
so redeemed multiplied by the number of Units of each such class included
among the Redeemable Units. The redemption price shall be paid, in the sole
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest, commencing
one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Units, duly endorsed in blank or accompanied by
an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Units shall no longer
constitute issued and Outstanding Units.
(b) The provisions of this Section 11.6 shall also be applicable to Units
held by a Limited Partner or Assignee as nominee of a Person determined to be
other than an Eligible Citizen.
(c) Nothing in this Section 11.6 shall prevent the recipient of a notice of
redemption from transferring his Units before the redemption date if such
transfer is otherwise permitted under this Agreement. Upon receipt of notice of
such a transfer, the General Partner shall withdraw the notice of redemption,
provided the transferee of such Units certifies in the Transfer Application
that he is an Eligible Citizen. If the transferee fails to make such
certification, such redemption shall be effected from the transferee on the
original redemption date.
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
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representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request
admission as a Substituted Limited Partner to such purchaser or other
transferee in respect of the transferred Units. Each transferee of a Unit
representing a Limited Partner Interest (including any nominee holder or an
agent acquiring such Unit for the account of another Person) who executes and
delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Units so transferred to such Person. Such
Assignee shall become a Substituted Limited Partner (x) at such time as the
General Partner consents thereto, which consent may be given or withheld in the
General Partner's sole discretion, and (y) when any such admission is shown on
the books and records of the Partnership. If such consent is withheld, such
transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner with respect to allocations
and distributions, including liquidating distributions, of the Partnership.
With respect to voting rights attributable to Units that are held by Assignees,
the General Partner shall be deemed to be the Limited Partner with respect
thereto and shall, in exercising the voting rights in respect of such Units on
any matter, vote such Units at the written direction of the Assignee who is the
Record Holder of such Units. If no such written direction is received, such
Units will not be voted. An Assignee shall have no other rights of a Limited
Partner.
Section 12.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all 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.
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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 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 Initial Closing Date and ending at 12:00 midnight, Eastern
Standard Time, on December 31, 2005, the General Partner voluntarily withdraws
by giving at least 90 days' advance notice of its intention to withdraw to the
Limited 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
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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 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
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firm or other independent expert, the Departing Partner's successor shall
designate an independent investment banking firm or other independent expert,
and such firms or experts shall mutually select a third independent investment
banking firm or independent expert, which shall determine the fair market value
of the Combined Interest. In making its determination, such independent
investment banking firm or other independent expert shall consider the then
current trading price of Units on any National Securities Exchange on which
Units are then listed, the value of the Partnership's assets, the rights and
obligations of the General Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 13.3(a), the Departing Partner shall become a Limited Partner and the
Combined Interest shall be converted into Common Units pursuant to a valuation
made by an investment banking firm or other independent expert selected
pursuant to Section 13.3(a), without reduction in such Partnership Interest
(but subject to proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the Departing Partner
as to all debts and liabilities of the Partnership arising on or after the date
on which the Departing Partner becomes a Limited Partner. For purposes of this
Agreement, conversion of the General Partner's Combined Interest to Common
Units will be characterized as if the General Partner contributed its Combined
Interest to the Partnership in exchange for the newly issued Common Units. For
purposes of this Section 13.3(b), in the event that the Subordination Period
has expired, the Combined Interest shall be converted into Class A Common
Units.
(c) If a successor General Partner is elected in accordance with the terms of
Section 13.1 or 13.2 and the option described in Section 13.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in an amount equal to the fair market value of the Combined
Interest 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;
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(d) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 14.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 13.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 13.1 or 13.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or
(vi), then within 180 days thereafter, holders of at least a majority of the
Outstanding Units (excluding for purposes of such determination any Units held
by the General Partner or its Affiliates) may elect to reconstitute the
Partnership and continue its business on the same terms and conditions set
forth in this Agreement by forming a new limited partnership on terms identical
to those set forth in this Agreement and having as the successor general
partner a Person approved by holders of at least a majority of the Outstanding
Units (excluding for purposes of such determination any Units held by the
General Partner or its Affiliates). Unless such an election is made within the
applicable time period as set forth above, the Partnership shall conduct only
activities necessary to wind up its affairs. If such an election is so made,
then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 1.5 unless earlier dissolved in accordance with
this Article XIV;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be dealt with in the
manner provided in Section 13.3(b); and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and 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
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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, 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 than 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 Capital 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.
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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 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 neither the Partnership nor the Operating Partnership will 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;
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(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 16.3;
(j) an amendment that, in the sole discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Partnership, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
3.1; or
(k) any other amendments substantially similar to the foregoing.
Section 15.2 Amendment Procedures.
Except as provided in Sections 15.1 and 15.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner. A proposed amendment shall be effective upon its approval by
the holders of at least a Unit Majority, unless a greater or different
percentage is required under this Agreement or by Delaware law. Each proposed
amendment that requires the approval of the holders of a specified percentage
of Outstanding Units shall be set forth in a writing that contains the text of
the proposed amendment. If such an amendment is proposed, the General Partner
shall seek the written approval of the requisite percentage of Outstanding
Units or call a meeting of the Limited Partners to consider and vote on such
proposed amendment. The General Partner shall notify all Record Holders upon
final adoption of any such proposed amendments.
Section 15.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 15.1 and 15.2, no provision of
this Agreement that establishes a percentage of Outstanding Units required to
take any action shall be amended, altered, changed, repealed or rescinded in
any respect that would have either (i) the effect of reducing such voting
percentage or (ii) more than an immaterial effect on a Unitholder unless such
amendment is approved by the written consent or the affirmative vote of holders
of Outstanding Units whose aggregate Outstanding Units constitute not less than
the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment to
this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 15.3(c), (ii) enlarge the obligations
of, restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable to, the General
Partner without its consent, which may be given or withheld in its sole
discretion, (iii) change Section 14.1(a) or (c), or (iv) change the term of the
Partnership or, except as set forth in Section 14.1(c), give any Person the
right to dissolve the Partnership.
(c) 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.
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(e) This Section 15.3 shall only be amended with the approval of the holders
of at least 90% of the Outstanding Units.
Section 15.4 Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XV. Meetings of the Limited
Partners may be called by the General Partner or by Limited Partners owning 20%
or more of the Outstanding Units of the class or classes for which a meeting is
proposed. Limited Partners shall call a meeting by delivering to the General
Partner one or more requests in writing stating that the signing Limited
Partners wish to call a meeting and indicating the general or specific purposes
for which the meeting is to be called. Within 60 days after receipt of such a
call from Limited Partners or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes, rules, regulations,
listing agreements or similar requirements governing the holding of a meeting
or the solicitation of proxies for use at such a meeting, the General Partner
shall send a notice of the meeting to the Limited Partners either directly or
indirectly through the Transfer Agent. A meeting shall be held at a time and
place determined by the General Partner on a date not less than 10 days nor
more than 60 days after the mailing of notice of the meeting.
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
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of matters required to be included in the notice of the meeting, but not so
included, if the disapproval is expressly made at the meeting.
Section 15.9 Quorum.
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called represented in person or by proxy shall
constitute a quorum at a meeting of Limited Partners of such class or classes
unless any such action by the Limited Partners requires approval by holders of
a greater percentage of such Units, in which case the quorum shall be such
greater percentage (excluding, in either case, if such are to be excluded from
the vote, Outstanding Units owned by the General Partner and its Affiliates).
At any meeting of the Limited Partners duly called and held in accordance with
this Agreement at which a quorum is present, the act of Limited Partners
holding Outstanding Units that in the aggregate represent a majority of the
Outstanding Units entitled to vote and be present in person or by proxy at such
meeting shall be deemed to constitute the act of all Limited Partners, unless a
greater or different percentage is required with respect to such action under
the provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at least such greater
or different percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present 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
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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.
(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
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Entity, the cash, property or general or limited partner interests, rights,
securities or obligations of any limited partnership, corporation, trust or
other entity (other than the Surviving Business Entity) which the holders
of such general or limited partner interests, securities or rights are to
receive in exchange for, or upon conversion of their general or limited
partner interests, securities or rights, and (ii) in the case of securities
represented by certificates, upon the surrender of such certificates, which
cash, property or general or limited partner interests, rights, securities
or obligations of the Surviving Business Entity or any general or limited
partnership, corporation, trust or other entity (other than the Surviving
Business Entity), or evidences thereof, are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership, certificate of limited liability company
or other similar charter or governing document) of the Surviving Business
Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 16.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
Section 16.3 Approval by Limited Partners of Merger or Consolidation.
(a) The General Partner, upon its approval of the Merger Agreement, shall
direct that the Merger Agreement be submitted to a vote of Limited Partners,
whether at a meeting or by written consent, in either case in accordance with
the requirements of Article XV. A copy or a summary of the Merger Agreement
shall be included in or enclosed with the notice of a meeting or the written
consent.
(b) The Merger Agreement shall be approved upon receiving the affirmative
vote or consent of the holders of 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;
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(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another having occurred.
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
Section 17.1 Right to Acquire Units.
(a) Notwithstanding any other provision of this Agreement, if at any time not
more than 20% of the total Units of any class then Outstanding are held by
Persons other than the General Partner and its Affiliates, the General Partner
shall then have the right, which right it may assign and transfer to the
Partnership or any Affiliate of the General Partner, exercisable in its sole
discretion, to purchase all, but not less than all, of the Units of such class
then Outstanding held by Persons other than the General Partner and its
Affiliates, at the greater of (x) the Current Market Price as of the date three
days prior to the date that the notice described in Section 17.1(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 and the earlier to occur of
(i) the fifth anniversary of the Effective Time or (ii) the issuance of 909,000
Senior Subordinated Units and Class B Common Units in the aggregate pursuant to
Section 4.6, 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
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<PAGE>
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 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.
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<PAGE>
Section 18.2 References.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 18.3 Pronouns and Plurals.
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 18.4 Further Action.
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
Section 18.5 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 18.6 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 18.7 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 18.8 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 18.9 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
Section 18.10 Applicable Law.
This Agreement shall be construed in accordance with and governed by the laws
of the State of Delaware, without regard to the principles of conflicts of law.
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.
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<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:
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<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 Star Gas Partners unaudited pro forma condensed
consolidated financial information.
<TABLE>
<CAPTION>
Twelve Months
Ended
December 31, 1998
-----------------
(In thousands)
-----------------
<S> <C>
Pro forma net income (loss)................................... $(16,412)
Add (deduct):
Loss (gain) on sale of assets............................... 115
Depreciation and amortization............................... 35,431
Provision for supplemental benefits ........................ 358
Amortization of debt issuance costs......................... 424
Corporate identity expenses(a).............................. 152
Restructuring charges(a).................................... 535
Transaction expenses(b)..................................... 4,823
Maintenance capital expenditures............................ (4,059)
--------
$ 21,367
========
</TABLE>
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(a) Represents infrequent charges associated with Petro's branding, corporate
identity and restructuring programs.
(b) Represents expenses associated with the transaction.
D-1
<PAGE>
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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 that information is
given.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Guide To Reading This Prospectus......................................... 1
Summary.................................................................. 2
Risk Factors............................................................. 20
The Transaction.......................................................... 31
Use of Funds from This Offering and the Debt Offering.................... 33
Capitalization........................................................... 34
Star Gas Partners Structure and Management Following the Transaction..... 35
Price Range of Common Units and Distributions............................ 38
Cash Distribution Policy................................................. 39
Business................................................................. 49
Management............................................................... 62
Beneficial Ownership of Principal Unitholders and Management............. 66
Description of the Common Units.......................................... 67
The Partnership Agreement................................................ 69
Conflicts of Interest.................................................... 79
Description of Indebtedness.............................................. 82
Units Eligible for Future Sale........................................... 85
Federal Income Tax Considerations........................................ 87
Investment in Star Gas Partners by Employee Benefit Plans and Individual
Retirement Accounts..................................................... 103
Underwriting............................................................. 104
Validity of Common Units................................................. 105
Experts.................................................................. 105
Where You Can Find More Information...................................... 106
Forward-Looking Statements............................................... 106
Incorporation of Certain Documents by Reference.......................... 107
Unaudited Pro Forma Condensed Consolidated Financial Information......... 108
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>
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8,720,013 Common Units
Star Gas Partners, L.P.
Representing
Limited Partner Interests
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PROSPECTUS
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PaineWebber Incorporated
CIBC Oppenheimer
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Donaldson, Lufkin & Jenrette
A.G. Edwards & Sons, Inc.
Lehman Brothers
Prudential Securities
Morgan Keegan & Company, Inc.
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March 23, 1999
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