<PAGE>
"Filed pursuant to Rule 424(b)(5)
Registration Nos: 333-47295 and 333-85497"
PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 24, 1999)
1,000,000 Common Units
Star Gas Partners, L.P.
Representing Limited Partner Interests
------------------
We are offering 1,000,000 common units representing limited partner
interests. Our common units are listed on the New York Stock Exchange under the
symbol "SGU." On August 18, 1999, the last reported sales price of our common
units on the NYSE was $16.125 per common unit.
------------------
Investing in our common units involves risks.
See "Risk Factors" beginning on page 11 of the accompanying prospectus.
------------------
PRICE $16.125 A COMMON UNIT
------------------
<TABLE>
<CAPTION>
Per Common Unit Total
--------------- -----------
<S> <C> <C>
Public offering price............................. $16.125 $16,125,000
Underwriting discount............................. $ 0.810 $ 810,000
Proceeds, before expenses, to Star Gas Partners,
L.P.............................................. $15.315 $15,315,000
</TABLE>
Star Gas Partners, L.P. has granted the underwriters the right to purchase
up to an additional 150,000 common units to cover over-allotments. The
underwriters expect to deliver the common units to purchasers on August 24,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
------------------
A.G. Edwards & Sons, Inc. PaineWebber Incorporated
Prospectus supplement dated August 18, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
<S> <C>
Star Gas Partners................ S-3
Recent Developments.............. S-4
The Offering..................... S-4
Risk Factors..................... S-5
Use of Proceeds.................. S-5
Price Range of Common Units and
Distributions................... S-6
Ratio of Taxable Income to Cash
Distributions................... S-6
Underwriting..................... S-7
Validity of Common Units......... S-8
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
<S> <C>
Guide To Reading This Prospectus... 1
Summary............................ 2
Risk Factors....................... 11
The Transaction.................... 21
Use of Proceeds.................... 23
Star Gas Partners Structure and
Management Following the
Transaction....................... 23
Price Range of Common Units and
Distributions..................... 25
Cash Distribution Policy........... 26
Business........................... 36
Management......................... 49
Beneficial Ownership of Principal
Unitholders and Management........ 54
Description of the Common Units.... 55
Federal Income Tax Considerations.. 57
Plan of Distribution............... 72
Validity of Common Units........... 72
Experts............................ 72
Where You Can Find More
Information....................... 73
Forward-Looking Statements......... 73
Incorporation of Certain Documents
by Reference...................... 74
Annex A -- Application for Transfer
of Common Units................... A-1
Annex B -- Glossary of Terms....... B-1
</TABLE>
S-2
<PAGE>
The information in this prospectus supplement is not complete. You should
review carefully all of the detailed information appearing in the accompanying
prospectus or incorporated in the prospectus by reference. Certain capitalized
terms used but not defined in this prospectus supplement have the meanings
assigned to them in the accompanying prospectus. Throughout this prospectus
supplement and the accompanying prospectus, we refer to ourselves, Star Gas
Partners, L.P., as "we" or "us" or "Star Gas Partners."
STAR GAS PARTNERS
We are the eighth largest retail distributor of propane and 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
180,000 propane customers from 56 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 335,000 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 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.
S-3
<PAGE>
RECENT DEVELOPMENTS
Recent Acquisitions
Since our acquisition of Petro in March 1999, we have purchased four propane
and heating oil distributors serving approximately 7,000 customers with annual
sales of 4.6 million gallons. The acquisitions were High Ridge Oil Co. in
Stamford, Connecticut; CT State Oil Co. in New Haven, Connecticut; Roby Propane
in Corning, New York; and McBride Propane in Flint, Michigan.
Pending Acquisitions
On August 10, 1999, we signed an agreement to purchase a privately owned
retail propane distributor located within our Midwest operating area. This
distributor sells more than seven million gallons of propane annually at retail
to over 6,500 customers. More than 70% of this distributor's volume is sold to
residential customers. The consummation of this transaction is subject to
finalization of due diligence, financing and other normal closing conditions.
We also signed an agreement on August 3, 1999 for the purchase of a home
heating oil distributor that sells more than 500,000 gallons of home heating
oil annually.
The aggregate purchase price of the four completed and two pending propane
and home heating oil acquisitions is approximately $14.0 million.
THE OFFERING
Common units offered............. 1,000,000 (excluding up to 150,000
additional common units that may be issued
upon exercise of an over-allotment option)
Common units outstanding after
the offering.....................
14,251,667
Distributions of available . We intend to distribute, to the extent
cash............................. there is sufficient available cash, at
(See page 26 of the accompanying least a minimum quarterly distribution
prospectus) 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.
S-4
<PAGE>
Timing of distributions.......... . We make distributions approximately 45
(See page 27 of the accompanying days after March 31, June 30, September
prospectus) 30 and December 31 to unitholders on the
applicable record date.
Subordination period............. . The subordination period will end once we
(See page 27 of the accompanying meet the financial tests in the
prospectus) 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 28 of the accompanying cash exceed target levels, the senior
prospectus) 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.
RISK FACTORS
You should read carefully the discussion of the material risks relating to
an investment in the common units offered by Star Gas Partners under the
caption "Risk Factors" beginning on page 11 of the accompanying prospectus.
USE OF PROCEEDS
We will receive net proceeds from the sale of the common units, assuming no
exercise of the over-allotment option, of approximately $15.0 million after
deducting estimated underwriting discounts and commissions and the estimated
expenses of this offering. We will use approximately $6.0 million of the net
proceeds to repay the remaining amounts outstanding under our propane
operations' revolving acquisition line of credit, which bears interest at a
floating rate currently equal to 8.25% per year. We will use the balance of the
net proceeds of approximately $9.0 million to fund acquisitions, including the
pending Midwest propane acquisition, and for growth capital expenditures.
Pending such uses, these funds will be used to reduce amounts outstanding under
our working capital facilities and for general corporate purposes.
Since April 1, 1999, we have completed four propane and heating oil
acquisitions and have signed agreements for two additional acquisitions with an
aggregate purchase price of approximately $14.0 million.
S-5
<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
Distri- Distri- Distri-
Fiscal Quarter Ended High Low bution High Low bution High Low bution
-------------------- ------ ------ ------- ------ ------ ------- ------ ------ -------
<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 13.75 0.55 24.75 21.38 0.55 24.63 20.75 0.55
June 30,................ 17.25 13.94 0.575 23.00 10.50 0.55 21.88 19.00 0.55
September 30,........... 17.94(a) 16.00(a) 0.575 22.38 20.13 0.55 23.50 21.00 0.55
</TABLE>
- ----------------
(a) Through August 18, 1999
The minimum quarterly distribution was increased from $0.550 to $0.575 per
unit, or from $2.20 to $2.30 per unit on a yearly basis effective March 26,
1999.
The last reported sales price of common units on the NYSE on August 18, 1999
was $16.125 per common unit. As of August 11, 1999, there were approximately
500 holders of record of Star Gas Partners' common units.
RATIO OF TAXABLE INCOME TO CASH DISTRIBUTIONS
We estimate that a holder who acquires common units in the offering and owns
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 taxable income that will
be allocated, as a percentage of distributions, could be higher or lower, and
any differences could be material and could materially affect the value of the
units. See "Federal Income Tax Considerations" beginning on page 57 in the
prospectus accompanying this prospectus supplement.
S-6
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions stated in the underwriting
agreement dated the date of this prospectus supplement, each underwriter named
below has severally agreed to purchase from us, and we have agreed to sell to
such underwriter, the number of common units set forth opposite the name of
such underwriter. PaineWebber Incorporated is serving as book-running manager
for this offering.
<TABLE>
<CAPTION>
Number of
Name Units
----------------------------------- ---------
<S> <C>
PaineWebber Incorporated........... 500,000
A.G. Edwards & Sons, Inc........... 500,000
---------
Total............................ 1,000,000
=========
</TABLE>
The underwriters propose to offer the common units to the public at the
public offering price set forth on the cover page of this prospectus supplement
and to certain dealers at such public offering price less a selling concession
not in excess of $0.48 per common unit. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per common unit to
certain other underwriters or to certain other brokers or dealers. After the
initial offering of the common units to the public, the offering price and
other selling terms may from time to time be changed by the underwriters.
The underwriting agreement provides that the obligations of the underwriters
to purchase the common units included in this offering are subject to approval
of certain legal matters by counsel and to certain other conditions. The
underwriters are obligated to take and pay for all the common units (other than
those covered by the over-allotment option described below) if any of such
units are taken.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make in respect of
any of those liabilities.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 150,000 additional
common units at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent this option
is exercised, each underwriter will be committed, subject to certain
conditions, to purchase a number of additional common units approximately
proportionate to the underwriter's initial purchase commitment.
Star Gas Partners, on behalf of itself and its affiliates, and certain
executives and other persons have agreed that, for a period of 120 days from
the date of this prospectus supplement, not to, without the prior written
consent of PaineWebber Incorporated, directly or indirectly, offer, sell,
pledge, contract to sell or otherwise dispose of or hedge any common units or
any securities substantially similar to, convertible into or exercisable or
exchangeable for common units or grant any options or warrants to purchase any
common units or any such securities or enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the economic
benefits or rights of ownership of the common units.
A.G. Edwards & Sons, Inc. and PaineWebber 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.
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. It received customary compensation for its services.
S-7
<PAGE>
In March 1999, PaineWebber Incorporated was hired by Petro as financial
adviser for its merger with Star Gas Partners. As compensation for these
financial advisory services, PaineWebber Incorporated received a fee of $1.5
million.
In March 1999, A.G. Edwards & Sons, Inc. was hired by a special committee of
the board of directors of Star Gas Corporation as financial advisor for the
merger. As compensation for these financial advisory services, Star Gas
Corporation paid A.G. Edwards & Sons, Inc. a fee of $575,000.
In March 1999, A.G. Edwards & Sons, Inc. and PaineWebber Incorporated served
as underwriters for Star Gas Partners' $126,978,309 offering of common units.
They received customary compensation for their services.
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 either of 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 either of the underwriters makes any representation that they will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional common units.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Common Unit.................................... $ 0.81 $ 0.81
Total.............................................. $ 810,000 $ 931,500
</TABLE>
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 Baker & Botts, L.L.P., Houston, Texas.
S-8
<PAGE>
PROSPECTUS
1,000,000 Common Units
[LOGO] Star Gas Partners, L.P.
Representing Limited Partner Interests
----------------
We may offer up to 1,000,000 common units from time to time in amounts, at
prices and on terms that we will determine in light of market conditions at the
time of sale. We will include these terms in a supplement to this prospectus.
We are the eighth largest retail distributor of propane and 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.
We may sell the common units covered by this prospectus to or through
underwriters or dealers, and we also may sell common units directly to other
purchasers or through agents. If any agents or underwriters are involved in the
sale of common units covered by this prospectus, we will include the names of
these agents or underwriters and any applicable commissions or discounts in a
prospectus supplement. We will also disclose in the prospectus supplement the
net proceeds to us from the sale of these 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 June 23,
1999 was $16.375 per common unit.
You should read "Risk Factors" beginning on page 11 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.
----------------
The date of this prospectus is June 24, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GUIDE TO READING THIS PROSPECTUS...... 1
SUMMARY............................... 2
The Business........................ 2
The Offering........................ 7
Summary of Tax Considerations....... 9
RISK FACTORS.......................... 11
Risks Inherent in Our Businesses.... 11
Risks Arising Out of the
Transaction........................ 15
Risks Inherent in an Investment in
Star Gas Partners.................. 16
Tax Risks to Common Unitholders..... 19
THE TRANSACTION....................... 21
Acquisition of Petro................ 21
Financings and Refinancings......... 21
New General Partner................. 22
Amendment of Partnership Agreement.. 22
USE OF PROCEEDS....................... 23
STAR GAS PARTNERS STRUCTURE AND
MANAGEMENT FOLLOWING THE
TRANSACTION.......................... 23
PRICE RANGE OF COMMON UNITS AND
DISTRIBUTIONS........................ 25
CASH DISTRIBUTION POLICY.............. 26
General Description of Cash
Distribution....................... 26
Quarterly Distributions of Available
Cash............................... 27
Distributions of Available Cash from
Operating Surplus During the
Subordination Period............... 27
Distributions of Available Cash from
Operating Surplus After the
Subordination Period............... 28
Incentive Distributions During the
Subordination Period............... 28
Incentive Distributions After the
Subordination Period............... 29
Distributions from Capital Surplus.. 30
Limitations and Prohibitions on
Distributions on Subordinated
Interests.......................... 30
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels................ 30
Issuance of Additional Senior
Subordinated Units................. 31
Distributions of Cash upon
Liquidation During the
Subordination Period............... 33
Distributions of Cash upon
Liquidation After the Subordination
Period............................. 34
BUSINESS.............................. 36
General............................. 36
Industry Characteristics............ 36
Competitive Strengths............... 37
Business Strategy................... 38
Propane............................. 38
Home Heating Oil.................... 43
Other............................... 46
MANAGEMENT............................ 49
Star Gas Partners Management........ 49
Reimbursement of Expenses of the
General Partner.................... 52
BENEFICIAL OWNERSHIP OF PRINCIPAL
UNITHOLDERS AND MANAGEMENT........... 54
DESCRIPTION OF THE COMMON UNITS....... 55
The Rights of Unitholders........... 55
Transfer Agent and Registrar........ 55
Obligations and Procedures for the
Transfer of Units.................. 55
FEDERAL INCOME TAX CONSIDERATIONS..... 57
Tax Consequences of Unit Ownership.... 57
Tax Treatment of Unitholders.......... 60
Tax-exempt Organizations and Other
Investors............................ 63
Tax Treatment of Operations........... 64
Administrative Matters................ 65
Disposition of Units.................. 68
State, Local and Other Tax
Considerations....................... 71
PLAN OF DISTRIBUTION.................. 72
VALIDITY OF COMMON UNITS.............. 72
EXPERTS............................... 72
WHERE YOU CAN FIND MORE INFORMATION... 73
FORWARD-LOOKING STATEMENTS............ 73
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................ 74
ANNEX A--APPLICATION FOR TRANSFER OF
COMMON UNITS......................... A-1
ANNEX B--GLOSSARY OF TERMS............ B-1
</TABLE>
i
<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" refers to our acquisition of Petro and certain
related transactions that closed on March 26, 1999;
(2) our operations prior to the completion of the transaction included
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 parent
of our former general partner. Following the transaction, the home heating
oil business and operations have been operated by Petro, which is 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 appointed 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 gives
effect to the partial exercise of the underwriters' over-allotment option
for the equity offering on April 26, 1999.
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 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 acquired Petro as part of a four-part transaction which
closed on March 26, 1999. The four principal parts of the transaction are
described below.
. Acquisition of Petro. Petro became 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 offered and sold to the public 8,720,013
common units, the net proceeds of which were approximately $116.1 million.
We subsequently sold an additional 230,000 common units upon the partial
exercise of the underwriters' over-allotment option, the net proceeds of
which were approximately $3.1 million. Separately, Petro offered and sold
$90 million of senior secured notes in a private transaction, the net
proceeds of which were approximately $87.7 million. Star Gas Partners,
along with Petro Holdings, have guaranteed the notes. Star Gas Partners
used 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
became a subsidiary of Star Gas Partners. We substituted a new general
partner, Star Gas LLC, for Star Gas Corporation. This substitution was
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 amended our partnership agreement in
effect prior to the transaction. The amendment, among other things,
facilitated the completion of the transaction and increased our minimum
quarterly distribution from $0.55 to $0.575 per common unit per quarter.
4
<PAGE>
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
are conducted through Petro Holdings, Petro and Petro's subsidiaries.
Upon completion of the transaction, Star Gas LLC became our general partner
and the general partner of Star Gas Propane.
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 after giving affect to the partial exercise of the
over-allotment option. 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. The table does
not give effect to the sale of any common units that we are offering under this
prospectus.
5
<PAGE>
[CHART DEPICTING STAR GAS PARTNERS ORGANIZATION
IMMEDIATELY FOLLOWING THE TRANSACTION]
6
<PAGE>
The Offering
Common units offered by Star
Gas Partners..................
1,000,000 common units.
Distributions of available . We intend to distribute, to the extent
cash.......................... there is sufficient available cash, at
(See page 26) 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 30) 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 27) days after March 31, June 30, September
30 and December 31 to unitholders on the
applicable record date.
7
<PAGE>
Subordination period.......... . The subordination period will end once we
(See page 27) 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 28) 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.
Use of Proceeds .............. Except as we may otherwise disclose in a
prospectus supplement relating to an
offering of common units, we will use
the net proceeds from the sale of the
common units for general partnership
purposes. If we decide to allocate the
net proceeds of an offering of common
units to a specific purpose we will make
this decision at the time of the
offering and we will describe this
allocation in the related prospectus
supplement. See "Use of Proceeds."
8
<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. All statements as to matters of law and
legal conclusions contained in this section, unless otherwise noted, reflect
the opinion of counsel as of June 23, 1999. 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.
Passive Loss Limitations Allow Deductibility of Losses Only 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 next 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.
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.
9
<PAGE>
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.
10
<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.
11
<PAGE>
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.
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 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
12
<PAGE>
specified circumstances, the terms of our debt instruments, including the
guarantee of the senior secured notes that we issued in the debt offering, will
limit our 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.
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
13
<PAGE>
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.
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
Our debt instruments 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.
14
<PAGE>
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.
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 have been 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 became a
member of the board of directors of Star Gas LLC following the transaction,
except that, at her request, Elizabeth Lanier withdrew as a director 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 officers of Star Gas Corporation have been 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;
15
<PAGE>
. 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.............................................. $30.5 million
Senior subordinated units................................. 5.7 million
Junior subordinated units................................. 0.8 million
General partner units..................................... 0.7 million
-------------
Total................................................... $37.7 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 $16.0 million. If infrequent restructuring, corporate identity and
transaction expenses were not taken into effect, pro forma cash available for
distribution would have been $21.5 million.
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's and its corporate affiliates'
tax liability and this will reduce our ability to distribute cash to
unitholders.
The transaction resulted 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;
. issuance of debt and equity securities;
. fluctuations in working capital;
. capital expenditures;
16
<PAGE>
. 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 after
giving effect to the partial exercise of the over-allotment option is
approximately $37.7 million. This figure represents $30.5 million for the
common units, $5.7 million for the senior subordinated units, $0.9 million for
the junior subordinated units and $0.7 million for the general partner units.
After giving pro forma effect to the transaction, the amount of available cash
generated in the twelve months ended December 31, 1998 would have been about
$16.0 million. If infrequent restructuring, corporate identity and transaction
expenses were not taken into effect, pro forma cash available for distribution
would have been $21.5 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 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.
17
<PAGE>
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.
. 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.
18
<PAGE>
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's and its corporate affiliates'
tax liability, also reducing our ability to distribute cash to our unitholders.
The transaction resulted 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 our 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, as of June 23, 1999, 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, as of
June 23, 1999, 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.
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
19
<PAGE>
to entity-level taxation for income tax purposes, then specified provisions of
the partnership agreement are subject to change, including a decrease in
distributions 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.
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.
20
<PAGE>
THE TRANSACTION
We acquired Petro through a four part transaction which closed on March 26,
1999. Each part of the transaction closed 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 on March 26, 1999, the subsidiary was 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, was
converted into 0.11758 senior subordinated units;
. each outstanding share of Petro junior convertible preferred stock was
converted into 0.13064 common units; and
. each outstanding share of Petro Series C exchangeable preferred stock
due 2009 was converted into the right to receive $10.69 in cash per
share plus accrued and unpaid dividends except for an aggregate of
505,000 shares of Series C preferred stock that were converted into an
aggregate of 400,531 common units.
There are 11,228 shares of Petro Class B common stock, par value $0.10 per
share, representing less than 0.01% of the issued and outstanding shares of
Petro common stock, which remained outstanding following the completion of the
transaction.
The "exchange" occurred immediately prior to the merger and was comprised of
the following elements.
(a) Holders of Petro common stock, consisting of Irik P. Sevin, Audrey L.
Sevin, Hanseatic Corp. and Hanseatic Americas Inc., who are referred to as
the "LLC Owners," formed Star Gas LLC, to which they contributed 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 contributed those
shares to Star Gas Partners in exchange for general partner units. In
addition, the LLC Owners contributed 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
contributed 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 was the refinancing of Petro's
outstanding debt and preferred stock to substantially reduce Petro's ongoing
borrowing costs. This refinancing was accomplished through several related
transactions, which closed at the same time as the closing of the transaction.
To accomplish this refinancing, we offered and sold to the public 8.7 million
common units in the equity offering, the net proceeds of which were
approximately $116.1 million. We subsequently sold an additional 230,000 common
units upon the partial exercise of the underwriters' over-allotment option, the
net proceeds of which were approximately $3.1 million. Petro offered and sold,
in a private placement, $90.0 million of senior secured notes, the net proceeds
of which were approximately $87.7 million. Star Gas Partners and Petro Holdings
guaranteed the notes.
21
<PAGE>
All of the net proceeds of the equity offering, together with the $87.7
million of estimated net proceeds from the debt offering and $5.4 million of
Petro's cash were 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;
. to repurchase Petro's 1989 preferred stock; and
. to pay for a portion of the expenses of the transaction.
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.
New General Partner
Since Star Gas Corporation is a wholly-owned subsidiary of Petro and was
acquired as our subsidiary in the transaction, it was no longer able to serve
as our general partner. Our new general partner is Star Gas LLC, which is owned
by the LLC Owners. Star Gas LLC's business activities are limited to those
related to being our general partner. Star Gas LLC does not have a significant
net worth except for its interest in Star Gas Partners.
Amendment of Partnership Agreement
In order to complete the transaction, we needed to amend our partnership
agreement and Star Gas Propane's partnership agreement in effect before the
transaction. The amendment, among other matters, increased the minimum
quarterly distribution from $0.55 to $0.575 per unit.
22
<PAGE>
USE OF PROCEEDS
Except as we may otherwise disclose in a prospectus supplement relating to an
offering of common units, we will use the net proceeds from the sale of the
common units for general partnership purposes. If we decide to allocate the net
proceeds of an offering of common units to a specific purpose we will make this
decision at the time of the offering and we will describe this allocation in
the related prospectus supplement.
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
are conducted through Petro Holdings, Petro and Petro's subsidiaries.
Upon completion of the transaction, Star Gas LLC became our general partner
and the general partner of Star Gas Propane.
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 after giving effect to the partial exercise of the
over-allotment option. 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. The table does
not give effect to the sale of any common units that we are offering under this
prospectus.
23
<PAGE>
[CHART OF STAR GAS PARTNERS ORGANIZATION
IMMEDIATELY FOLLOWING THE TRANSACTION]
24
<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 13.75 0.55 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>
As a result of the transaction, the minimum quarterly distribution was
increased from $0.550 to $0.575 per unit, or from $2.20 to $2.30 per unit on a
yearly basis.
The last reported sale price of common units on the NYSE on June 23, 1999 was
$16.375 per common unit. As of May 24, there were approximately 369 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."
25
<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.
26
<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. 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.
27
<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").
28
<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.
29
<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;
30
<PAGE>
(4) the number of additional common units issuable during the
subordination period without a unitholder vote;
(5) the number of Class B common units issuable upon conversion of the
senior subordinated units and 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.
31
<PAGE>
"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:
(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.
32
<PAGE>
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 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.
33
<PAGE>
. 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.
. 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.
34
<PAGE>
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.
35
<PAGE>
BUSINESS
General
We are the eighth largest retail distributor of propane and 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
36
<PAGE>
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,
37
<PAGE>
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.
38
<PAGE>
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:
NORTHEAST MIDWEST
- --------- -------
Connecticut Indiana Michigan
Stamford Akron Charlotte
Hartford Batesville Hillsdale
Bedford Somerset Center
Maine Bluffton
Fairfield Coal City Ohio
Fryeburg College Corner Bowling Green
Skowhegan Columbia City Cincinnati
Wells Decatur Defiance
Windham Ferdinand Deshler
Greencastle Ft. Recovery
Massachusetts Jeffersonville Hebron
Belchertown Linton Ironton
Rochdale Madison Kenton
Westfield New Salisbury Lancaster
Swansea N. Manchester Lewisburg
N. Vernon Lynchburg
New Hampshire N. Webster Macon
(from Fryeburg, ME) Portland Maumee
Remington McClure
New Jersey Richmond Milford
Maple Shade Salem Mt. Orab
Tuckahoe Seymour North Star
Sulphur Springs Ripley
New York Versailles Sabina
Addison Warren Waverly
Poughkeepsie Waterloo West Union
Washingtonville Winamac
West Virginia
Pennsylvania Kentucky (from Ironton, OH)
Hazelton Dry Ridge
Wind Gap Glencoe
Prospect
Rhode Island Shelbyville
Davisville
39
<PAGE>
From our branch locations, we also sell, install and service equipment
related to our propane distribution business, including heating and cooking
appliances and, at some locations, we rent water softeners. Typical branch
locations consist of an office, 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
40
<PAGE>
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
41
<PAGE>
reliability of service, responsiveness to customers and the ability to maintain
competitive prices. We believe that our superior service capabilities and
customer responsiveness differentiate us from many of our competitors. Branch
operations offer emergency service 24 hours a day, seven days a week, 52 weeks
a year.
Competition in the propane industry is highly fragmented and generally occurs
on a local basis with other large full-service multi-state propane marketers,
smaller local independent marketers and farm cooperatives. Based on industry
publications, we believe that the ten largest multi-state marketers, including
us, account for approximately 35% of the total retail sales of propane in the
United States, and that no single marketer has a greater than 10% share of the
total retail market in the United States. Most of our branches compete with
five or more marketers or distributors. The principal factors influencing
competition among propane marketers are price and service. Each retail
distribution outlet operates in its own competitive environment, 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.
42
<PAGE>
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 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
43
<PAGE>
responsibilities in order to eliminate redundant functions and regionalize
responsibilities where they can best serve customers and our home heating oil
business.
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>
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.
44
<PAGE>
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 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
45
<PAGE>
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 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
46
<PAGE>
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 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
47
<PAGE>
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.
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.
48
<PAGE>
MANAGEMENT
Star Gas Partners Management
General Partner
Upon completion of the transaction, Star Gas LLC became our general partner
and the general partner of Star Gas Propane. The membership interests in Star
Gas LLC are owned by Audrey L. Sevin, Irik P. Sevin, Hanseatic Corp. and
Hanseatic Americas Inc.
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
The Star Gas LLC board consists of the following persons, all of whom served
as directors of Star Gas Corporation, our former general partner: 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 withdrew 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.
49
<PAGE>
Directors are elected for one-year terms. The following table shows certain
information for the directors and executive officers of the general partner.
<TABLE>
<CAPTION>
Name Age Position with the General Partner
---- --- ---------------------------------
<S> <C> <C>
Irik P. Sevin(a)(b)................. 51 Chairman of the Board and Chief Executive
Officer
William G. Powers, Jr. ............. 45 Executive Vice President--Heating Oil and
Member of the Office of President and
Director
Joseph P. Cavanaugh................. 61 Executive Vice President--Propane and Member
of the Office of President
George Leibowitz.................... 62 Chief Financial Officer
Richard F. Ambury................... 42 Vice President and Treasurer
James Bottiglieri................... 43 Vice President
Audrey L. Sevin..................... 73 Secretary and Director
Thomas J. Edelman................... 48 Director
Paul Biddelman(b)................... 53 Director
Wolfgang Traber(a).................. 55 Director
William P. Nicoletti(c)............. 53 Director
</TABLE>
- --------
(a) Member of the Compensation Committee
(b) Member of the Distribution Committee
(c) Member of the Audit Committee
Irik P. Sevin has been the Chairman of the board of directors of Star Gas LLC
since March 1999 and 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 Executive Vice President--Heating Oil and
Member of the Office of President and a Director of Star Gas LLC since March
1999 and 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 Executive Vice President--Propane and Member of
the Office of President of Star Gas LLC since March 1999 and President and
Chief Executive Officer of Star Gas Propane since March 1999 and 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 Chief Financial Officer of Star Gas LLC since April
1, 1999 and Treasurer of Petro since April 1997. Mr. Leibowitz was Treasurer of
Star Gas LLC during March 1999. 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.
50
<PAGE>
From 1971 to 1984, Mr. Leibowitz was Vice President--Finance and Treasurer of
Meenan Oil Co., Inc. Mr. Leibowitz is a certified public accountant.
Richard F. Ambury has been Treasurer of Star Gas LLC since April 1, 1999 and
Vice President of Finance of Star Gas LLC and Star Gas Propane since March 1999
and 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 Vice President of Star Gas LLC since March 1999
and 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 LLC since March 1999 and a
director of Star Gas Corporation since December 1993. Mrs. Sevin has been the
Secretary of Star Gas LLC and Star Gas Propane since March 1999 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 LLC since March 1999 and 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 LLC since March 1999 and 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 LLC since March 1999 and 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 LLC since March 1999 and
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
51
<PAGE>
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.
Star Gas Propane
Upon completion of the transaction, the officers and employees of Star Gas
Corporation who managed our operations and business became officers and
employees of Star Gas Propane.
The following persons who comprised Star Gas Corporation's executive officers
prior to the transaction serve as executive officers of Star Gas Propane:
. Irik P. Sevin, Chairman of the Board;
. Joseph P. Cavanaugh, President and Chief Executive Officer;
. 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
continued to be employed by Petro.
The following persons who served as executive officers of Petro before the
transaction continue to 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
52
<PAGE>
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."
53
<PAGE>
BENEFICIAL OWNERSHIP OF
PRINCIPAL UNITHOLDERS AND MANAGEMENT
The following table shows the beneficial ownership as of May 1, 1999 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 and
officers 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 LLC 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........... -- -- -- -- 53,426 15.5 325,729(c) 100
Audrey L. Sevin......... -- -- -- -- 153,131 44.3 325,729(c) 100
Wolfgang Traber......... 535,400(a)(b) 4.0 1,062 * 138,807(b) 40.2 325,729(c) 100
Paul Biddelman.......... 500,000(b) 3.8 280 * 138,807(b) 40.2 325,729(c) 100
Thomas Edelman.......... -- -- 77,480(d) 3.1 -- -- -- --
Richard F. Ambury....... 2,125 * 39 * -- -- -- --
George Leibowitz........ -- -- -- * -- -- -- --
James J. Bottiglieri.... 1,500 -- -- -- -- -- -- --
C. Justin McCarthy...... 6,100 -- -- -- -- -- -- --
Angelo Catania.......... -- -- 294 * -- -- -- --
David Eastin............ -- -- -- -- -- -- -- --
Joseph P. Cavanaugh..... 1,000 -- 58 -- -- -- -- --
William G. Powers....... 1,000 -- -- -- -- -- -- --
All officers and
directors and Star Gas
LLC as a group (11
persons)............... 547,125(b) 4.1 79,213 3.2% 345,364(b) 100.0% 325,729 100.0%
</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 500,000 common units and 138,807 junior subordinated units held by
Hanseatic Americas Inc., a wholly-owned subsidiary of Hanseatic Americas
LDC, 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 senior subordinated units owned by Mr. Edelman's wife and trusts
for the benefit of his minor children.
54
<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."
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;
55
<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.
56
<PAGE>
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 provisions of the
Internal Revenue Code, its existing and proposed regulations and administrative
rulings and court decisions as of June 23, 1999, 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, as of June 23,
1999 and 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 as of June 23, 1999.
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");
(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");
57
<PAGE>
(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;
(b) Star Gas Partners has been and will be operated in accordance with
(1) all applicable partnership statutes,
58
<PAGE>
(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.
59
<PAGE>
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 distribution
of his proportionate share of the Section 751 Assets and having exchanged those
assets with us in
60
<PAGE>
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.
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.
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
61
<PAGE>
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.
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
62
<PAGE>
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."
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.
63
<PAGE>
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 applies, 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."
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."
64
<PAGE>
Uniformity of Units. Because we cannot match transferors and transferees of
units, uniformity of the economic and tax characteristics of the units to a
purchaser of 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 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 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."
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
65
<PAGE>
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.
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;
66
<PAGE>
(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.
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.
67
<PAGE>
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
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.
68
<PAGE>
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.
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
69
<PAGE>
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
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
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.
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.
70
<PAGE>
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 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.
71
<PAGE>
PLAN OF DISTRIBUTION
We may sell common units covered by this prospectus to or through
underwriters or dealers, and we also may sell common units directly to other
purchasers or through agents.
We will prepare a prospectus supplement for each offering that will disclose
the terms of the offering, including the name or names of any underwriters,
dealers or agents, the purchase price of the common units and the proceeds to
us from the sale, any underwriting discounts and other items constituting
compensation to underwriters, dealers or agents.
If we use underwriters or dealers in the sale, they will acquire the common
units for their own account and they may resell these units from time to time
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale. The
common units may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more of such firms. Unless otherwise disclosed in the prospectus supplement,
the obligations of the underwriters to purchase common units will be subject to
certain conditions precedent, and the underwriters will be obligated to
purchase all of the common units offered by the prospectus supplement if any
are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
We may sell the common units directly or through agents designated by us from
time to time. We will name any agent involved in the offering and sale of the
common units in for which this prospectus is delivered, and disclose any
commissions payable by us to the agent or the method by which the commissions
can be determined in the prospectus supplement. Unless otherwise indicated in
the prospectus supplement, any agent will be acting on a best efforts basis for
the period of its appointment.
We may agree to indemnify underwriters, dealers and agents who participate in
the distribution of common units against certain liabilities, including
liabilities under the Securities Act.
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.
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, 1997 and 1998 and for the fiscal years ended December 31, 1996, 1997 and
1998, 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.
72
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read our SEC filings over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy documents at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Full addresses: Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; 7 World Trade Center, New York, New York,
10038; Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms.
We have filed with the SEC 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.
73
<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' Quarterly Report on Form 10-Q, dated May 13, 1999.
.Star Gas Partners' Current Report on Form 8-K/A, dated November 24, 1997.
.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.
.Star Gas Partners' Current Report on Form 8-K, dated March 26, 1999.
.Star Gas Partners' Current Report on Form 8-K/A, dated May 26, 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 LLC, 2187 Atlantic Street,
Stamford, Connecticut 06902, Attention: Richard F. Ambury, Vice President and
Treasurer, telephone (203) 328-7313.
74
<PAGE>
ANNEX A--APPLICATION FOR TRANSFER OF COMMON UNITS
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form 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
amendment hereto, 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: _______________
- ------------------------------------- -------------------------------------
Social Security or other identifying Signature of Assignee
number of Assignee
- ------------------------------------- -------------------------------------
Purchase Price including Name and Address of Assignee
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
A-1
<PAGE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended, the
Partnership must withhold tax with respect to certain transfers of property if
a holder of an interest in the Partnership is a foreign person. To inform the
Partnership that no withholding is required with respect to the undersigned
interestholder's interest in it, the undersigned hereby certifies the following
(or, if applicable, certifies the following on behalf of the interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is _____.
3. My home address is _____________________________________________________.
B. Partnership, Corporation or Other Interestholder
1. ________________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ____________.
3. The interestholder's office address and place of incorporation (if
applicable) is __________________________________________________________
________________________________________________________________________.
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
---------------------
(Name of Interestholder)
---------------------
Signature and Date
---------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-2
<PAGE>
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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized anyone to provide information different from that
contained in this prospectus supplement and the accompanying prospectus. Nei-
ther the delivery of this prospectus supplement and the accompanying prospec-
tus nor sale of common units means that information contained in this prospec-
tus supplement and the accompanying prospectus is correct after the dates of
this prospectus supplement and the accompanying prospectus. This prospectus
supplement and the accompanying prospectus is not an offer to sell or a solic-
itation of an offer to buy these common units in any circumstances under which
the offer or solicitation is unlawful.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
<S> <C>
Star Gas Partners......................................................... S-3
Recent Developments....................................................... S-4
The Offering.............................................................. S-4
Risk Factors.............................................................. S-5
Use of Proceeds........................................................... S-5
Price Range of Common Units and Distributions............................. S-6
Ratio of Taxable Income to Cash Distributions............................. S-6
Underwriting.............................................................. S-7
Validity of Common Units.................................................. S-8
<CAPTION>
PROSPECTUS PAGE
<S> <C>
Guide To Reading This Prospectus.......................................... 1
Summary................................................................... 2
Risk Factors.............................................................. 11
The Transaction........................................................... 21
Use of Proceeds........................................................... 23
Star Gas Partners Structure and Management Following the Transaction...... 23
Price Range of Common Units and Distributions............................. 25
Cash Distribution Policy.................................................. 26
Business.................................................................. 36
Management................................................................ 49
Beneficial Ownership of Principal Unitholders and Management.............. 54
Description of the Common Units........................................... 55
Federal Income Tax Considerations......................................... 57
Plan of Distribution...................................................... 72
Validity of Common Units.................................................. 72
Experts................................................................... 72
Where You Can Find More Information....................................... 73
Forward-Looking Statements................................................ 73
Incorporation of Certain Documents by Reference........................... 74
Annex A -- Application for Transfer of Common Units....................... A-1
Annex B -- Glossary of Terms.............................................. B-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,000,000 Common Units
Star Gas Partners, L.P.
Representing
Limited Partner Interests
-------------------
PROSPECTUS SUPPLEMENT
-------------------
A.G. Edwards & Sons, Inc.
PaineWebber Incorporated
August 18, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
