<PAGE>
[STAR LOGO] [PETRO LOGO]
Supplement
to Joint Proxy Statement and Prospectus of
Star Gas Partners, L.P.
and
Petroleum Heat and Power Co., Inc.
This is a supplement to our joint The transaction cannot be
proxy statement and prospectus dated completed unless it is approved by a
February 10, 1999, that majority of all Star Gas Partners
was initially supplemented on common units and a majority of the
February 19, 1999, describing Star shares of Petro Class A common
Gas Partners, L.P.'s proposed stock. If you fail to vote by proxy
acquisition of Petroleum Heat and or in person, it will have the same
Power Co., Inc., and related effect as a vote against the
matters. transaction.
On March 3, 1999 Star Gas Partners The date, times and place of the
filed amendment number 3 to its meetings are as follows:
registration statement on Form S-3
for the equity offering. This Star Gas Partners Unitholders
amendment included updated pro forma Meeting:
financial information which is Tuesday, March 16, 1999
included in this supplement along 10:00 a.m. EST
with other important information. Chase Manhattan Bank
You should carefully consider the 270 Park Avenue, 11th Floor
information in this supplement New York, New York
together with the information in our
joint proxy statement and Petro Stockholders Meeting:
prospectus. Tuesday, March 16, 1999
11:00 a.m. EST
This supplement does not change Chase Manhattan Bank
the proposals previously submitted 270 Park Avenue, 11th Floor
for your approval. If you have New York, New York
already properly completed and
returned a proxy, your proxy will The record date for both meetings
continue to be valid, and you do not was January 29, 1999.
have to complete and return the
enclosed proxy unless you wish to do
so. For more information on voting,
please call our proxy solicitor,
Morrow & Co., at 1(800) 566-9061.
/s/ Joseph P. Cavanaugh /s/ Irik P. Sevin
- ----------------------- ----------------------------------
Joseph P. Cavanaugh Irik P. Sevin
President Chairman of the Board and
Star Gas Corporation Chief Executive Officer
Petroleum Heat and Power Co., Inc.
- --------------------------------------------------------------------------
Please vote by completing and mailing the enclosed proxy card. For your
vote to be counted you must return a signed proxy card whether your
shares or units are held directly or through a broker.
- --------------------------------------------------------------------------
The date of this supplement is March 4, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
CASH AVAILABLE FOR DISTRIBUTION BASED ON UPDATED PRO FORMA FINANCIAL
INFORMATION.............................................................. 1
UPDATE TO SELLING UNITHOLDER INFORMATION.................................. 2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION.......... 3
</TABLE>
i
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION BASED
ON UPDATED PRO FORMA FINANCIAL INFORMATION
The amount of cash needed to pay the minimum quarterly distribution for the
next four quarters on units outstanding before the transaction is
approximately:
<TABLE>
<S> <C>
Common units............................................... $ 8.5 million
Subordinated units......................................... 5.2 million
General partner interests.................................. 0.3 million
-------------
Total.................................................... $14.0 million
</TABLE>
After giving pro forma effect to propane acquisitions completed in the twelve
months ended December 31, 1998, and without giving pro forma effect to the
transaction, the amount of Available Cash constituting Operating Surplus
generated in the twelve months ended December 31, 1998 was approximately $8.0
million.
Assuming 9.0 million common units will be issued in the equity offering,
after giving pro forma effect to the transaction, the amount of Available Cash
constituting Operating Surplus needed to pay the minimum quarterly distribution
for next four quarters on the units to be outstanding immediately after the
transaction is approximately:
<TABLE>
<S> <C>
Common units............................................... $29.8 million
Senior subordinated units.................................. 5.7 million
Junior subordinated units.................................. 1.0 million
General partner units...................................... 0.8 million
-------------
Total.................................................... $37.3 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 $14.0 million. If
infrequent restructuring, corporate identity and transaction expenses were not
taken into effect, pro forma Available Cash constituting Operating Surplus
would have been approximately $19.6 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. Star Gas Partners believes 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.
1
<PAGE>
UPDATE TO SELLING UNITHOLDER INFORMATION
We are revising the Selling Unitholders' chart on page 104 of the joint proxy
statement and prospectus to correct the unit ownership figures for the
following selling unitholders: R. O'Connell--155,347 senior subordinated units;
Fernando Montero--28,281 senior subordinated units and Gabes S.A.--84,943
senior subordinated units.
2
<PAGE>
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 the equity offering, the debt offering and the
application of the net proceeds from these offerings as described in "Uses of
Funds From The Equity 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 the joint
proxy statement and 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.
3
<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 $ 87,578 (g) $ 13,631
--------- -------- --------
143,950 (h)
(237,532)(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 88,306 113,820 896 114,716
-------- --------- -------- --------- --------
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 76,201 270,948 (f) 397,563 2,422 (g) 399,985
-------- --------- -------- -------- --------- --------
Total assets......... $185,403 $ 199,531 $282,933 $667,867 $ (3,582) $664,285
======== ========= ======== ======== ========= ========
LIABILITIES AND
PARTNERS' CAPITAL
Current liabilities:
Current debt and
preferred stock...... $ 1,384 $ 12,188 $ 13,572 $ (9,797)(o) $ 3,775
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 (13,524) 118,020
-------- --------- -------- -------- --------- --------
Long-term debt........ 103,616 278,731 2,806 (b) 385,153 90,000 (g) 274,749
(200,404)(o)
Deferred income
taxes................ -- 46,000 (d) 46,000 46,000
Other long-term
liabilities.......... 53 10,764 (3,500)(d) 7,317 7,317
Redeemable and
exchangeable
preferred stock...... 28,578 (4,974)(b) 23,604 (23,604)(o) --
Partners' capital
Common unitholders.... 57,347 1,747 (c) 59,094 143,950 (h) 203,044
Subordinated
unitholders.......... (962) 46,149 (f) 13,855 13,855
(31,332)(f)
General partner....... 63 4,329 (f) 1,300 1,300
(3,092)(f)
Petro's stockholders'
deficiency........... (215,825) (648)(a)
2,168 (b)
(1,747)(c)
(47,100)(d)
(3,727)(e)
266,879 (f)
-------- --------- -------- -------- --------- --------
Total partners'
capital.............. 56,448 (215,825) 233,626 74,249 143,950 218,199
-------- --------- -------- -------- --------- --------
Total liabilities and
partners' capital.... $185,403 $ 199,531 $282,933 $667,867 $ (3,582) $664,285
======== ========= ======== ======== ========= ========
</TABLE>
4
<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) 36,510 36,510
(2,927)(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 (8,297) 13,951 13,951
Interest (income) expense,
net................... 7,927 427 8,354 30,803 39,157 $(14,463)(p) 24,694
Amortization of debt
issuance costs........ 176 -- 176 1,432 -- 1,608 (1,148)(n) 460
-------- ------ -------- -------- ------- -------- -------- --------
Income (loss) before
income taxes.......... (930) 349 (581) (17,936) (8,297) (26,814) 15,611 (11,203)
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) $(7,980) $(27,314) $ 15,611 $(11,703)
======== ====== ======== ======== ======= ======== ======== ========
General partner's
interest in net income
(loss)................ $ (19) $ (234)
======== ========
Limited partners'
interest in net income
(loss)................ $ (936) $(11,469)
======== ========
Basic and diluted net
income (loss) per
limited partner unit.. $ (0.16) $ (0.72)(q)
======== ========
Weighted average number
of limited partner
units outstanding..... 6,035 220 6,255 103 (c) 6,883 9,000 (h) 15,883 (q)
(2,396)(f)
430 (f)
2,491 (f)
</TABLE>
5
<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 $ (41)(l) 9,133 9,133
Net gain (loss) on
sales of assets...... (4) (15) (19) (19)
------- -------- ------- -------- ------- --------
Operating income 3,523 2,334 41 5,898 5,898
Interest expense, net... 2,178 7,820 9,998 $(3,617)(p) 6,381
Amortization of debt
issuance costs......... 45 335 380 (264)(n) 116
------- -------- ------- -------- ------- --------
Income (loss) before
income taxes........... 1,300 (5,821) 41 (4,480) 3,881 (599)
------- -------- ------- -------- ------- --------
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) $ (729) $ (4,561) $ 3,881 $ (680)
======= ======== ======= ======== ======= ========
General partner's
interest in net income
(loss)................. $ 26 $ (14)
======= ========
Limited partners'
interest in net income
(loss)................. $ 1,268 $ (666)
======= ========
Basic and diluted net
income (loss) per
limited partner unit... $ 0.20 $ (0.04)
======= ========
Weighted average number
of limited partner
units outstanding...... 6,255 103 (c) 6,883 9,000 (h) 15,883
(2,396)(f)
430 (f)
2,491 (f)
</TABLE>
6
<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) the equity 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 $5.0 million to redeem
Petro's 12 7/8% preferred stock and the negotiated premium of approximately
$2.8 million to refinance Petro's public debt.
(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 $17.00 per unit. The junior preferred
stock was issued to the holders of Petro's 9 3/8% subordinated debentures, 10
1/8% subordinated notes, and 12% 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 $46.0 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 $8.6 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 26.5 million shares of Petro's Class A common
stock and Class C common stock valued at $50.5 million for 2.5 million Star Gas
Partners senior subordinated units valued at $40.4 million, 0.4 million Star
Gas Partners junior subordinated units valued at $5.8 million and 0.3 million
general partner units valued at $4.3 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
7
<PAGE>
common stock is $45.5 million or $1.91 per share and the value assigned to
Petro's Class C common stock is $5.0 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.
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........... $ 50,478
Transaction expenses (1)....................................... 7,667
-------------
Total consideration........................................ 58,145
-------------
Fair market value of Petro's assets and liabilities as of
December 31, 1998:
Current assets............................................... (92,246)
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............................................... 281,537
Deferred income taxes........................................ 46,000
Other liabilities............................................ 7,264
Preferred stock.............................................. 23,604
Junior preferred stock....................................... 1,747
-------------
Subtotal................................................... 289,004
-------------
Total value assigned to intangibles and other assets........... 347,149
Carrying amount of intangibles and other assets................ (76,201)
-------------
Allocation of excess purchase price to intangibles............. $ 270,948
=============
Consisting of:
Customer lists............................................... $ 95,000
Goodwill..................................................... 251,184
Other assets................................................. 965
-------------
Total intangibles and other assets......................... $ 347,149
=============
</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
8
<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 The Equity Offering
(g) Reflects the estimated net proceeds to Petro of $87.6 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 $1.0
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 $144.0
million from the issuance and sale of 9.0 million common units in the equity
offering at an assumed offering price of $17.00 per common unit, net of
underwriting discounts and commissions estimated to be $7.7 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 $8.6 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.
9
<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 1,129 251,184 25 years 10,047 8,918
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 $347,149 $19,547 $ (850)
======= ------- ======== ------- -------
Totals.............. $27,427 $24,500 $(2,927)
======= ======= =======
</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 $8.9 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.
10
<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 248 251,184 25 years 2,512 2,264
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 $347,149 $4,887 $ 495
======= ------ ======== ------ -------
Totals.............. $6,166 $6,125 $ (41)
====== ====== =======
</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 $1.1 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 the equity offering and, the
debt offering to repay $83.0 million of Petro's 12 1/4% Senior Subordinated
Debentures due 2005 including $2.8 million of premiums, to repay $48.7 million
of Petro's 10 1/8% Senior Subordinated Notes due 2003, to repay $74.3 million
of Petro's 9 3/8% Senior Subordinated Debentures due 2006, to retire $23.6
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 $4.8 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.
(p) Reflects the net reduction to interest expense of $14.5 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 with the proceeds of the equity offering and the
debt offering. In addition interest income is reduced by $0.3 million, as $6.0
million of Petro's cash is used to finance the transaction.
11
<PAGE>
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
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
Lower letter of credit fees on acquisition notes... 191
-------
Total reductions to interest expense............. $21,912
=======
<CAPTION>
Interest Interest
Amount Rate Expense
------- -------- --------
<S> <C> <C> <C>
New Debt Issued and Cash Balance Reduction
Petro 7.92% notes.................................. $90,000 7.92% $(7,128)
Lower invested cash balances....................... 6,004 5.34% (321)
-------
Net reduction to interest expense.................. $14,463
=======
</TABLE>
- --------
(1) Excludes prepayment premium of $2.8 million.
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
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
Lower letter of credit fees on acquisition notes... 48
-------
Total reductions to interest expense............. $ 5,479
=======
<CAPTION>
Interest Interest
Amount Rate Expense
------- -------- --------
<S> <C> <C> <C>
New Debt Issued and Cash Balance Reduction
Petro 7.92% notes.................................. $90,000 7.92% $(1,782)
Lower invested cash balances....................... 6,004 5.34% (80)
-------
Net reduction to interest expense.................. $ 3,617
=======
</TABLE>
- --------
(1) Excludes prepayment premium of $2.8 million.
(q) 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. 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.
12
