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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1999
REGISTRATION NO. 333-66005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STAR GAS PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
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DELAWARE 5984 06-1437793
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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2187 ATLANTIC STREET
P.O. BOX 120011
STAMFORD, CT 06912-0011
(203) 328-7300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOSEPH P. CAVANAUGH
PRESIDENT
STAR GAS CORPORATION
2187 ATLANTIC STREET
P.O. BOX 120011
STAMFORD, CT 06912-0011
(203) 328-7300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
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PHILLIPS NIZER BENJAMIN
ANDREWS & KURTH L.L.P. KRIM & BALLON LLP BAKER & BOTTS, L.L.P.
805 THIRD AVENUE 666 FIFTH AVENUE, 28TH FLOOR ONE SHELL PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10103-0084 910 LOUISIANA
(212) 850-2800 (212) 977-9700 HOUSTON, TEXAS 77002-4995
ATTN: MICHAEL ROSENWASSER,
ESQ. ATTN: ALAN SHAPIRO, ESQ. (713) 229-1330
ATTN: R. JOEL SWANSON, ESQ.
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----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and upon
holding of the meetings of securityholders of the Registrant and Petroleum Heat
and Power Co., Inc. described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this joint proxy statement/prospectus is not complete and +
+may be changed. We may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This joint proxy statement/prospectus is not an offer to sell these +
+securities and it is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated February 4, 1999
Star Gas Partners, L.P.
and
Petroleum Heat and Power Co., Inc.
This joint proxy The date, times and
statement and prospectus place of the meetings are
describes Star Gas as follows:
Partners, L.P.'s proposed
acquisition of Petroleum Star Gas Partners
Heat and Power Co., Inc., Unitholders Meeting:
and related matters. The Tuesday, March 16, 1999
transaction is structured 10:00 a.m. EST
with the intent to Chase Manhattan Bank
increase the cash flow of 270 Park Avenue, 11th
Star Gas Partners and to Floor
result in Petro common New York, New York
stockholders owning
equity in a financially Petro Stockholders
stronger company with Meeting:
growth opportunities. Tuesday, March 16, 1999
11:00 a.m. EST
If the transaction is Chase Manhattan Bank
completed, Petro will be 270 Park Avenue, 11th
a subsidiary of Star Gas Floor
Partners. The common New York, New York
unitholders of Star Gas
Partners will retain The record date for both
their units, although meetings is January 29,
their rights and 1999.
interests will be
modified by the This proxy statement
transaction. Petro common constitutes the notice of
stockholders will receive a special meeting
.11758 of a senior required under Minnesota
subordinated unit law. If the transaction
representing limited is completed, Petro
partner interests in Star common stock-holders who
Gas Partners for each do not vote in favor of
share of common stock the transaction and who
that they own. The senior strictly comply with the
subordinated units have applicable sections of
been approved for listing the Minnesota Business
on the New York Stock Corporation Act will be
Exchange under the symbol entitled to statutory
"SGH." dissenters' appraisal
rights. This proxy
statement is also the
prospectus of Star Gas
Partners for the resale,
by persons who may be
deemed affiliates of
Petro, of limited partner
interests received in the
transaction.
This proxy statement is You should carefully
furnished to the common consider each of the
unitholders of Star Gas factors described under
Partners and the common "Risk Factors," starting
stockholders of Petro for on page 22 of this proxy
the solicitation of statement.
proxies to vote on the
transaction. The
transaction cannot be
completed unless it is
approved by a majority of
all common units and a
majority of the shares of
Class A common stock of
Petro. If you fail to
vote by proxy or in
person, it will have the
same effect as a vote
against the transaction.
Please vote by completing
and mailing the enclosed
proxy card.
- --------------------- -------------------------------------------------------
Joseph P. Cavanaugh Irik P. Sevin Chairman of
President Star Gas the Board and Chief
Corporation Executive Officer
Petroleum Heat and Power
Co., Inc.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this joint proxy statement/prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
Joint proxy statement/prospectus dated , 1999, and first mailed to
unitholders and stockholders on , 1999.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS...................................................... iv
SUMMARY.................................................................... 1
Parties................................................................... 1
The Transaction........................................................... 2
Description of Star Gas Partners Units After Amendment of the Partnership
Agreement................................................................ 8
Special Factors........................................................... 10
Financial Information..................................................... 14
RISK FACTORS............................................................... 22
Risks to Star Gas Partners Common Unitholders............................. 22
Tax Risks to Star Gas Partners Common Unitholders......................... 26
Risks to Petro Common Stockholders........................................ 27
Tax Risks to Petro Common Stockholders.................................... 36
CAUTIONARY STATEMENT....................................................... 40
PARTIES.................................................................... 41
PROXY SOLICITATIONS........................................................ 44
The Star Gas Partners Unitholders
Meeting.................................................................. 44
The Petro Special Meeting................................................. 46
SPECIAL FACTORS............................................................ 50
Background of the Transaction............................................. 50
Reasons for the Transaction that the Special Committee Considered; Recom-
mendations of the Special Committee and Star Gas Corporation Board....... 63
Opinion of A.G. Edwards................................................... 66
Reasons for the Transaction that the Petro Board Considered; Recommenda-
tion of the Petro Board.................................................. 77
Opinion of Dain Rauscher Wessels.......................................... 80
Projections of Petro and Star Gas
Partners................................................................. 91
THE TRANSACTION............................................................ 98
Description of the Transaction............................................ 98
Description of the Merger and the Exchange................................ 98
Related Financing and Refinancing
Transactions............................................................. 99
Description of the Merger Agreement....................................... 101
Restrictions on Resales of Senior
Subordinated Units by Non-Affiliates and Affiliates...................... 104
Selling Unitholders....................................................... 105
Plan of Distribution for the Resale Units................................. 105
Accounting Treatment of the Transaction................................... 106
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Regulatory Matters Associated with the Transaction......................... 107
MANAGEMENT OF STAR GAS PARTNERS AFTER THE TRANSACTION....................... 108
General Partner............................................................ 108
Board of Directors of Star Gas LLC......................................... 108
Officers and Employees of Star Gas Propane and Petro....................... 109
Reimbursement of Expenses of the
General Partner........................................................... 110
BENEFICIAL OWNERSHIP OF PRINCIPAL UNITHOLDERS AND MANAGEMENT................ 111
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS.................................... 112
Introduction; Vote Required by
Unitholders in order to Amend the
Partnership Agreements.................................................... 112
Summary of Amendments to the
Partnership Agreement..................................................... 112
Summary of Amendments to the Star Gas Propane Partnership Agreement........ 116
Conforming Changes......................................................... 117
THE AMENDED AND RESTATED
PARTNERSHIP AGREEMENT...................................................... 118
Organization and Duration.................................................. 118
Purpose.................................................................... 118
Power of Attorney.......................................................... 118
Restrictions on Authority of the General Partner Regarding Extraordinary
Transactions ............................................................. 119
Lack of Dissenters' Rights................................................. 119
Withdrawal or Removal of the General
Partner; Approval of Successor General Partner............................ 119
Restriction on Transfer of General Partner Interest........................ 121
Reimbursement for Services of the
General Partner........................................................... 121
Rights and Status as Limited Partner or
Assignee Upon Transfer of Interest........................................ 122
Limitations on the Rights of Non-citizen
Assignees and Redemption Rights of Star Gas Partners...................... 122
Issuance of Additional Securities by Star Gas Partners..................... 122
Limited Call Right on Outstanding Limited Partner Interests................ 123
Amendment of the Amended and Restated Partnership Agreement................ 124
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Meetings of Limited Partners and Voting Rights............................ 126
Indemnification Obligations of Star Gas Partners.......................... 127
Potential Loss of Limited Liability by Unitholders........................ 127
Obligations of the General Partner to
Provide Books and Reports to Limited Partners............................ 128
Limited Partners' Right to Inspect
Star Gas Partners Books and
Records.................................................................. 128
Description of Termination and Dissolution of Star Gas Partners........... 129
Liquidation of Star Gas Partners and
Distribution of Proceeds................................................. 129
Registration Rights of the General Partner or its Affiliates.............. 129
CONFLICTS OF INTEREST OF STAR GAS PARTNERS................................. 130
Conflicts of Interest May Arise as a Result of the Publicly-Traded Limited
Partnership Structure..................................................... 130
Fiduciary Duties owed to Unitholders by the General Partner as Prescribed
by Law and the Amended and Restated Partnership Agreement................. 132
CASH DISTRIBUTION POLICY................................................... 133
General Description of Star Gas Partners' Cash Distribution............... 133
Quarterly Distributions of Available Cash................................. 134
Distributions of Available Cash from
Operating Surplus During the
Subordination Period..................................................... 135
Distributions of Available Cash from
Operating Surplus After the
Subordination Period..................................................... 136
Incentive Distributions During the
Subordination Period..................................................... 136
Incentive Distributions After the
Subordination Period..................................................... 138
Distributions from Capital Surplus........................................ 138
Limitation and Prohibitions on Distributions on Subordinated Interests.... 139
Adjustment of Minimum Quarterly Distribution and Target Distribution Lev-
els...................................................................... 139
Issuance of Additional Senior Subordinated Units.......................... 140
Distributions of Cash upon Liquidation
During the Subordination Period.......................................... 142
Distributions of Cash upon Liquidation
After the Subordination Period........................................... 144
CASH AVAILABLE FOR DISTRIBUTION............................................ 145
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DESCRIPTION OF THE STAR GAS
PARTNERS UNITS............................................................. 147
The Rights of Unitholders.................................................. 147
Transfer Agent and Registrar............................................... 147
Obligations and Procedures for the Transfer of Units....................... 148
COMPARISON OF SECURITIES.................................................... 150
Taxation................................................................... 150
Distributions and Dividends................................................ 150
Voting Rights.............................................................. 151
Rights to Call Meetings.................................................... 151
Removal of Directors or the
General Partner .......................................................... 151
Liquidation Rights......................................................... 152
Conversion Rights.......................................................... 152
Liability of Holders....................................................... 153
Transferability and Listing................................................ 153
Redemption................................................................. 153
Appraisal Rights........................................................... 154
Preemptive Rights.......................................................... 154
Inspection of Books, Records and List of Holders........................... 154
DESCRIPTION OF INDEBTEDNESS................................................. 155
Transaction Indebtedness.................................................... 155
Existing Indebtedness....................................................... 156
COMPARATIVE SECURITY PRICE AND DISTRIBUTION INFORMATION..................... 158
Star Gas Partners Securities............................................... 158
Petro Capital Stock........................................................ 159
Comparative Per Share/Per Unit
Information (Unaudited)................................................... 160
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS............................................................. 161
Tax Consequences of the Merger............................................. 161
Tax Consequences of Unit Ownership......................................... 162
Allocation of Star Gas Partners Income, Gain, Loss and Deduction........... 168
Tax Treatment of Operations................................................ 169
Disposition of Units....................................................... 172
Uniformity of Units........................................................ 174
Administrative Matters..................................................... 176
State, Local and Other Tax
Considerations............................................................ 179
DISSENTERS' RIGHTS.......................................................... 181
LEGAL MATTERS............................................................... 185
EXPERTS..................................................................... 185
WHERE YOU CAN FIND MORE
INFORMATION................................................................ 185
STATEMENT OF FORWARD-LOOKING DISCLOSURE..................................... 186
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE..................................................... 187
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ii
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION.............................................................. 188
Star Gas Partners, L.P. and Subsidiaries--Pro Forma Condensed Consolidated
Balance Sheet (unaudited)................................................ 189
Star Gas Partners, L.P. and Subsidiaries--Pro Forma Condensed Consolidated
Statement of Operations (unaudited)...................................... 190
Star Gas Partners, L.P. And Subsidiaries--Notes to Pro Forma Condensed
Consolidated Financial Information....................................... 191
GLOSSARY OF TERMS......................................................... 199
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Appendix A--Application for Transfer of Units........................... App-1
Annexes
A Merger Agreement
B Exchange Agreement
C Amended and Restated Partnership Agreement
D Opinion of A.G. Edwards & Sons Inc.
E Opinion of Dain Rauscher Wessels
F Copy of Sections 302A.471 and 302A.473 of Minnesota Business
Corporation Act
G Calculation of Pro Forma Available Cash from Operating Surplus
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iii
<PAGE>
QUESTIONS AND ANSWERS
Q: What is being proposed?
A: Both Star Gas Partners common
unitholders and Petro common
stockholders are voting on Star
Gas Partners' acquisition of
Petro. Petro currently is Star Gas
Partners' largest equity owner and
the parent of its current general
partner.
Q: What are Star Gas Partners' reasons for the transaction?
A: Petro is the largest home heating
oil distributor in the country and
has been a principal consolidator
of that highly fragmented industry.
Star Gas Partners believes Petro's
strong position in the home heating
oil industry will provide Star Gas
Partners with attractive
acquisition and expansion
opportunities. In addition, the
acquisition of Petro has been
structured with the intent of
providing an increase in Star Gas
Partners' cash flow. Based on this
expectation, the minimum quarterly
distribution will increase from
$0.55 to $0.575 per unit, or from
$2.20 to $2.30 on a yearly basis,
upon completion of the transaction.
Q: What are Petro's reasons for the transaction?
A: Petro does not have the financial flexibility to fully capitalize upon its
acquisition, operating and corporate-branding opportunities. This
transaction will recapitalize Petro and the resulting lower cost of capital
will allow Petro to grow.
Q: What are the proposals the Star Gas Partners common unitholders will vote
on?
A: Star Gas Partners common unitholders are voting on three proposals:
. The proposal to acquire Petro through a merger and an exchange of equity.
. The proposal to amend the partnership agreement to facilitate the
transaction.
. The proposal to elect a new general partner.
Q: Which parts of the transaction are the Petro common stockholders
considering?
A: Petro common stockholders are only voting on Star Gas Partners' acquisition
of Petro.
Q: When is the transaction expected to occur?
A: Star Gas Partners and Petro anticipate completing the transaction in March
1999.
Q: What do I need to do right now?
A: Return the signed proxy card in the enclosed return envelope as soon as
possible. For more information on voting please call our proxy solicitor,
Morrow & Co., at 1(800) 566-9061.
Q: What is the recommendation of the Star Gas Corporation board of directors?
A: Based on the recommendation of a special committee of the Star Gas
Corporation board of directors, the Star Gas Corporation board of directors
unanimously recommends that the Star Gas Partners common unitholders vote
FOR each of the proposals.
Q: What is the recommendation of the Petro board of directors?
A: The Petro board of directors unanimously recommends that Petro common
stockholders vote FOR the proposal to be acquired by Star Gas Partners.
Q: What do I do with my certificates?
A: Star Gas Partners common unitholders should hold their unit certificates.
Common units will continue to be listed and traded on the New York Stock
Exchange. After the transaction is approved, Petro common stockholders will
receive written instructions on how to deliver their Petro stock
certificates in exchange for senior subordinated units.
iv
<PAGE>
SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important to you. To fully understand
the transaction, and for a more complete description of legal terms, you should
read carefully this entire document and the documents to which we have referred
you. See "Where You Can Find More Information" (page 185). A glossary of terms
used in this proxy statement begins on page 198.
Parties
Star Gas Partners. Star Gas Partners is primarily a retail distributor of
propane and related supplies and equipment to residential, commercial,
industrial, agricultural and motor fuel customers. Propane is used primarily as
fuel for space and water heating and cooking by Star Gas Partners' residential
and commercial customers, who are the largest portion of its customer base.
Star Gas Partners is the eighth largest retail propane distributor in the
United States, serving approximately 166,000 customers from 74 branch locations
in 13 states in the Midwest and Northeast. In addition to its retail business,
Star Gas Partners serves approximately 30 wholesale customers from its
wholesale operation in southern Indiana.
The executive offices of Star Gas Partners are located at 2187 Atlantic
Street, Stamford, Connecticut 06902. The telephone number is (203) 328-7300.
Petro. Petro is primarily a retail distributor of home heating oil in the
Northeast and Mid-Atlantic states. Petro is the largest distributor of home
heating oil in the United States and serves approximately 340,000 customers
from 24 branch locations. To a limited extent, Petro also markets other
petroleum products, including diesel fuel and gasoline, to commercial
customers.
Petro's executive offices are located at 2187 Atlantic Street, Stamford,
Connecticut 06902. The telephone number is (203) 325-5400.
Relationship of the Parties. Petro and Star Gas Partners are already closely-
related. Star Gas Partners' current general partner, Star Gas Corporation, is a
wholly-owned subsidiary of Petro. Petro also owns all of Star Gas Partners'
outstanding subordinated units, which represent an aggregate 40.5% equity
interest in Star Gas Partners. Moreover all of the directors of Petro are also
directors of Star Gas Corporation. As a result, Petro controls Star Gas
Partners and has an interest in making the transaction more beneficial to
Petro.
In order to protect the interests of the Star Gas Partners common
unitholders, the Star Gas Corporation board appointed a special committee
consisting of the two directors who were not also directors of Petro to
negotiate the transaction on behalf of the Star Gas Partners common
unitholders. Independent legal counsel represented the special committee in the
negotiations. These two directors each received additional compensation of
$40,000.
You should also know that some of the directors of Petro have interests in
the transaction that are different from, and in conflict with, the interests of
Petro's public common stockholders. These directors are receiving consideration
in the transaction that is different from that of Petro's public common
stockholders. All of these conflicts of interest are discussed more fully
below.
<PAGE>
The Transaction
The transaction has four important parts:
. the merger of the two entities,
. raising the money to pay down Petro's debt and redeem Petro's preferred
stock,
. the election of a new general partner for Star Gas Partners and
. the amendment of the Star Gas Partners partnership agreement.
The Merger (See page 98)
The acquisition of Petro by Star Gas Partners will be accomplished through:
(1) a merger involving Petro and a wholly-owned subsidiary of Star Gas
Partners and
(2) an exchange by affiliates of Petro of their Petro common stock for
Star Gas Partners senior subordinated units, junior subordinated units
and general partner units.
Petro will become a wholly-owned indirect subsidiary of Star Gas Partners as a
result of these steps.
What a Petro Common StockholderWill Receive in the Merger
For each share of common stock, a Petro common stockholder will receive:
. .11758 of a senior subordinated unit of limited partner interests in Star
Gas Partners and
. a check in payment for any fractional units based on the market value of
senior subordinated units.
For example, if you own 100 shares of common stock, you will receive 11
senior subordinated units and a check for your fractional unit.
The merger will be a taxable transaction to a Petro common stockholder to the
extent of the difference between the value of the senior subordinated units
received and the federal income tax basis that he had in the shares of Petro
common stock that are exchanged.
What Affiliates Will Receive in the Exchange
. Irik P. Sevin, Audrey L. Sevin, Hanseatic Corp. and Hanseatic Americas
LDC are affiliates of Petro and Star Gas Partners. Irik P. Sevin and
Audrey L. Sevin are officers, directors and stockholders of Petro and
officers and directors of the general partner of Star Gas Partners. The
Hanseatic companies are stockholders of Petro and affiliates of Wolfgang
Traber and Paul Biddelman, who are directors of Petro and the general
partner of Star Gas Partners.
. Irik P. Sevin, Audrey L. Sevin and the Hanseatic companies will exchange
some of their Petro common stock for the ownership of Star Gas LLC, a new
company that will become the new general partner of Star Gas Partners.
Star Gas LLC will exchange these shares of Petro common stock for Star
Gas Partners general partner units.
. Irik P. Sevin, Audrey L. Sevin and the Hanseatic companies will exchange
their remaining shares of Petro common stock for Star Gas Partners junior
subordinated units. In each case, the exchange rate will be .14318 of a
general partner unit or junior subordinated unit for each share of Petro
common stock. This exchange rate is higher than the rate that Petro
public common stockholders will receive because
--the Star Gas Partners junior subordinated units and general partner
2
<PAGE>
units will not be entitled to distributions until the senior
subordinated units receive the full minimum quarterly distribution; and
--the Star Gas Partners junior subordinated units and general partner
units have not been registered and will not be publicly traded.
. Other affiliates of Petro will contribute shares of Petro common stock to
Star Gas Partners in exchange for Star Gas Partners senior subordinated
units at the same exchange rate as the Petro common stockholders.
. Petro retained Dain Rauscher Wessels to determine the fairness of the
transaction to its public common stockholders, from a financial point of
view. In performing its financial analysis of the transaction, Dain
Rauscher Wessels calculated implied merger values per Petro share.
According to these calculations, the implied merger value per Petro share
for the recipients of general partner units and junior subordinated units
is $1.69, and the implied merger value per Petro share for the recipients
of senior subordinated units is $1.91. Based upon such values, affiliates
who currently own approximately 44.7% of the shares of Petro common stock
will receive approximately 43.4% of the aggregate value of the Star Gas
Partners units being issued to the Petro common stockholders in the
transaction. The Petro public common stockholders who currently own
approximately 55.3% of the shares of Petro common stock will receive
approximately 56.6% of the aggregate value of the Star Gas Partners units
being issued to the Petro common stockholders in the transaction. The
implied merger values calculated by Dain Rauscher Wessels do not
constitute an opinion as to what the value of the senior subordinated
units, junior subordinated units and general partner units will be when
issued to Petro common stockholders or the price at which the senior
subordinated units will trade after the transaction.
. All of Petro's affiliates will exchange their Petro common stock without
realizing a taxable gain or loss. However, the transaction will be
taxable to the Petro public common stockholders. We chose this tax
structure to minimize the tax effects of the transaction on Petro. The
tax structure is also based on the assumption that Petro affiliates would
prefer to not realize a taxable gain, while most Petro public common
stockholders generally have a higher tax basis and would prefer to
realize a taxable loss.
Conditions to the Merger and the Exchange
In order for the merger and the exchange to occur, several conditions must be
met. The following are three key conditions:
. A majority of the Petro common stockholders and the Star Gas Partners
common unitholders must approve each of the proposals submitted for their
vote;
. An equity offering by Star Gas Partners and a debt offering by Petro must
be completed; and
. Petro must meet the financial tests in the merger agreement.
Dissenters' Rights
Petro common stockholders have the right to dissent and obtain payment for
the "fair value" of their shares if the merger occurs.
3
<PAGE>
Petro common stockholders who wish to exercise dissenters' rights must comply
fully with the requirements of the Minnesota Business Corporation Act.
Accordingly, Petro urges its common stockholders wishing to dissent to read
carefully "Proxy Solicitations--The Special Meeting--Dissenters' Rights" and
"Dissenters' Rights" in this proxy statement and Annex F and to consult their
own legal advisors.
Failure to follow the procedures in Annex F may result in a termination or
loss of dissenters' rights under the Minnesota Business Corporation Act.
Star Gas Partners' common unitholders do not have dissenters' rights.
Raising the Money to Pay Down Petro's Debt and Redeem Petro's Preferred Stock
(See page 99)
An integral element of the transaction is the refinancing of Petro's
outstanding debt and preferred stock, which will substantially reduce Petro's
ongoing borrowing costs.
. Star Gas Partners will offer for sale to the public approximately 8.9
million common units, the net proceeds of which are estimated to be $159.9
million.
. Petro will sell approximately $90.0 million of notes, the net proceeds of
which are estimated to be $87.9 million. We expect that Star Gas Partners
and some of its subsidiaries will guarantee the notes.
New General Partner (See page 109)
The new general partner of Star Gas Partners will be Star Gas LLC. The
directors of Star Gas LLC will be identical to the existing Star Gas
Corporation directors as of the date of this proxy statement, except that, at
her request, one of the current directors will withdraw as a director after the
transaction as a result of additional duties associated with a new job. That
director will be replaced by a director selected by the Star Gas LLC board of
directors. The new director will not be an officer or employee of Star Gas LLC
or any of its affiliates.
Amendments to the Star Gas Partners Partnership Agreement (See page 112)
In order to complete the steps of the transaction described in this proxy
statement, the current partnership agreement of Star Gas Partners must be
amended. The primary amendments that affect Star Gas Partners unitholders will:
. increase the minimum quarterly distribution from $0.55 to $0.575, or
$2.20 to $2.30 on a yearly basis, per unit;
. authorize the issuance of the senior subordinated units and junior
subordinated units, provide them with a combined class vote on specified
matters and establish financial tests that Star Gas Partners must satisfy
to make distributions to these unitholders;
. provide that the general partner units and junior subordinated units will
receive distributions only after the common units and senior subordinated
units have received the full minimum quarterly distribution;
. extend the earliest date upon which the subordination period can expire
from January 1, 2001 to October 1, 2002, during which time the common
units have priority over distributions to the other classes of units;
4
<PAGE>
. authorize the issuance of an additional 909,000 senior subordinated units
to holders of Star Gas Partners senior subordinated units, junior
subordinated units and general partner units if Petro meets specified
financial goals;
. authorize the issuance of Star Gas Partners common units in the equity
offering; and
. reallocate the incentive distribution rights, which are the rights to
receive a greater percentage of distributions once specified target
levels have been met, from the general partner to the holders of the Star
Gas Partners senior subordinated units, junior subordinated units and
general partner units.
5
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[Chart depicting Star Gas Current Organization]
6
<PAGE>
[Chart depicting Star Gas Partners Organization Immediately Following
Transaction]
7
<PAGE>
Description of Star Gas Partners Units After Amendment of the Partnership
Agreement
The following summarizes the provisions of the Star Gas Partners amended and
restated partnership agreement that govern the amount, timing and priority of
distributions on the common units, senior subordinated units, junior
subordinated units and general partner units.
Distributions of available
cash......................... . Star Gas Partners intends to distribute,
to the extent there is sufficient
(See page 133) available cash, at 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 as described below.
Limitations and Prohibitions
on distributions........ . Distributions will not be made on the
senior subordinated units, junior
(See page 139) subordinated units or general partner
units for any quarter in Star Gas
Partners' 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 Star Gas Partners' fiscal
year 2000, which begins on October 1,
1999. Any distributions made on these
units depends on the amount of available
cash generated by Star Gas Partners
after October 1, 1999.
Timing of distributions...... .Star Gas Partners makes distributions
approximately 45 days after March 31,
(See page 134) June 30, September 30 and
8
<PAGE>
December 31 to unitholders on the
applicable record date.
Subordination period..........
.The subordination period will end once
(See page 135) Star Gas Partners meets the financial
tests in the amended and restated
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 differences between the Class A
common units and Class B common units
are that the Class B common units will
continue to have the right to receive
incentive distributions and additional
units as described below.
Incentive distributions....... If quarterly distributions of available
cash exceed target levels, the senior
(See page 136) 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.
Additional senior
subordinated units........... Up to an additional 909,000 senior
subordinated units will be issued
(See page 140) proportionately to holders of senior
subordinated units, junior subordinated
units and general partner units, but
only if Petro achieves the financial
goals in the amended and restated
partnership agreement during the five-
year period following completion of the
transaction.
NYSE trading symbols: Common
units........................ "SGU"
Senior subordinated units.....
"SGH"
9
<PAGE>
Special Factors
Potential Advantages to Star Gas Partners Common Unitholders (See page 63)
The following are the potential advantages of the transaction to Star Gas
Partners common unitholders:
. The minimum quarterly distribution will increase from $0.55 to $0.575, or
$2.20 to $2.30 on a yearly basis, per unit.
. The transaction has been structured with the intent to increase the amount
of cash available for distribution to Star Gas Partners unitholders. If
this expectation is realized, it will provide Star Gas Partners
unitholders with greater assurance of receiving the minimum quarterly
distribution and an improved possibility of future distribution increases.
. The acquisition of Petro should improve Star Gas Partners' growth
prospects by providing attractive acquisition and expansion opportunities.
. Petro common stockholders will receive subordinated limited partner
interests that entitle them to receive distributions only after the Star
Gas Partners common unitholders receive their full minimum quarterly
distribution.
. The earliest date on which the distribution on the common units would stop
being senior to the distribution on the subordinated limited partner
interests will be extended 21 months to October 1, 2002.
. The transaction will increase Star Gas Partners' market capitalization and
should provide greater common unit market liquidity, investment community
awareness and ability to attract securities analyst research coverage.
Potential Disadvantages and Risks to Star Gas Partners Common Unitholders (See
pages 22 and 64)
The following are the potential disadvantages and risks of the transaction
to Star Gas Partners common unitholders:
. Petro has a history of operational and financial difficulties, including
high debt leverage and recent substantial net losses.
. The success of the transaction depends upon Star Gas Partners' ability to
continue to:
- -- successfully acquire home heating oil businesses at attractive prices;
- -- complete Petro's restructuring program to reduce Petro's customer
attrition rate; and
- -- increase Petro's profit margins on a per gallon basis.
. Star Gas Partners is making a large investment in a business that is more
sensitive to temperature levels than its propane operations. Home heating
oil is used almost exclusively for heating, while propane is often used
for purposes other than heating.
. The home heating oil industry is not a growth industry as a result of
increased competition from alternative energy sources.
. The proportion of common units to total limited partner interests will
increase from 60.5% to 79.9%. Therefore, the likelihood that Star Gas
Partners common units will receive the full minimum quarterly distribution
will be reduced.
10
<PAGE>
. The number of Star Gas Partners common units will increase from
approximately 3.9 million to 12.9 million, representing potential
significant dilution.
. Petro's income, unlike the income from Star Gas Partners' propane
operations, will be subject to corporate tax before any distributions.
. The ratio of taxable income to cash distributions to be made to the
existing Star Gas Partners common unitholders will increase over time at
a greater rate than if the transaction does not occur, and dividend and
interest income from Petro cannot be offset with past or future losses
generated by Star Gas Partners' propane operations.
Potential Advantages to Petro's Common Stockholders (See page 77)
The following are the potential advantages of the transaction to Petro
common stockholders:
. This transaction will provide Petro with the financial structure to
implement its growth-through-acquisition strategy and invest in its
operating and corporate- branding opportunities.
. Petro's market valuation should improve when it becomes part of a
publicly-traded limited partnership. Publicly-traded limited partnerships
are cash flow oriented and are valued primarily on a cash distribution
basis. We believe Petro's focus on cash flow is well suited for a limited
partnership structure. We also believe Star Gas Partners will have
greater investment community awareness than Petro. Currently, because it
is the only public home heating oil company, Petro has limited securities
analyst research coverage.
. You are more likely to receive cash distributions as a holder of a Star
Gas Partners senior subordinated unit than you are to receive dividends
as a holder of Petro common stock.
. You will receive senior subordinated units that must receive the minimum
quarterly distribution before any payments are made on the junior
subordinated units and the general partner units.
. The senior subordinated units will have the right to receive incentive
distributions. If Star Gas Partners generates cash above specified target
levels, the holders of Star Gas Partners senior subordinated units may
receive greater cash distributions than the Star Gas Partners common
unitholders.
. If Petro achieves its financial goals within the five-year period after
closing of the transaction, the holders of Star Gas Partners senior
subordinated units, junior subordinated units and general partner units
will receive up to an additional 909,000 senior subordinated units. This
incentive allows Petro common stockholders to continue to participate in
Petro's future performance.
Potential Disadvantages and Risks to Petro's Common Stockholders (See pages 27
and 78)
The following are the potential disadvantages and risks of the transaction
to Petro common stockholders:
11
<PAGE>
. Star Gas Partners unitholders have substantially different, and probably
fewer, legal rights than Petro common stockholders.
. There is no current trading market for the senior subordinated units.
Although the senior subordinated units have been approved for listing on
the New York Stock Exchange, there is no assurance that any active trading
market will develop. It is expected that the senior subordinated units
will trade at a lower price than the common units.
. The senior subordinated units are not eligible to receive distributions
for any quarter of Star Gas Partners fiscal year 1999.
. Distributions on the senior subordinated units, junior subordinated units
and general partner units are not guaranteed. Star Gas Partners will make
these distributions only after it has made the full minimum quarterly
distribution on the common units. Further, distributions on the senior
subordinated units, junior subordinated units and general partner units
are generally limited to available cash generated after the closing of the
transaction. Therefore, there is significant uncertainty as to the amount
and timing of these distributions.
. Star Gas LLC, the new general partner of Star Gas Partners, will have
conflicts of interest typical of a general partner in a publicly-traded
limited partnership. These conflicts are different than any conflicts of
interest that may exist for the Petro board of directors.
. Like Petro's home heating oil operations, Star Gas Partners' propane
operations are negatively affected by warm weather during the winter
months.
. Star Gas Partners may face difficulties in the future in making attractive
acquisitions in the propane industry because of the highly competitive
nature of the industry.
. Tax-exempt entities, regulated investment companies or foreign taxpayers
may determine that holding an interest in Star Gas Partners is
unattractive from a tax perspective. If some of these investors sell their
senior subordinated units following the transaction, the market price of
the senior subordinated units could fall substantially.
Recommendations of the Special Committee and Star Gas Corporation Board of
Directors and Opinion of A.G. Edwards & Sons, Inc. (See pages 22, 63 and 66)
A.G. Edwards & Sons, Inc. has served as independent financial advisor to the
special committee. They have rendered an opinion to the special committee that
the transaction is fair, from a financial point of view, to the Star Gas
Partners public common unitholders. The A.G. Edwards opinion is attached as
Annex D to this proxy statement. Star Gas Partners common unitholders and Petro
common stockholders are urged to read the opinion in its entirety for
descriptions of the procedures followed, matters considered and limitations on
the analysis undertaken.
After considering the advice of its independent legal counsel and financial
advisor, and based upon the A.G. Edwards opinion, the special committee
believes that the transaction is fair to, and in the best interests of, the
Star Gas Partners common unitholders who are not affiliated with Star Gas
Corporation. The
12
<PAGE>
special committee, therefore, has recommended the transaction to the Star Gas
Corporation board of directors. Based on this recommendation, the Star Gas
Corporation board of directors unanimously recommends that Star Gas Partners
common unitholders vote FOR each of the unitholders meeting proposals.
Recommendations of Petro Board of Directors and Opinion of Dain Rauscher
Wessels (See pages 27, 77 and 80)
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, has rendered
an opinion to the Petro board of directors that the consideration to be
received in the merger by the Petro common stockholders not affiliated with
Star Gas Corporation is fair, from a financial point of view, to unaffiliated
Petro common stockholders. The Dain Rauscher Wessels opinion is attached
as Annex E to this proxy statement. Star Gas Partners common unitholders and
Petro common stockholders are urged to read the opinion in its entirety for
descriptions of the procedures followed, matters considered and limitations on
the analysis undertaken.
The Petro board of directors has determined that the transaction is fair and
in the best interests of the Petro common stockholders and has approved the
merger agreement and the exchange agreement. The Petro board of directors,
therefore, unanimously recommends that Petro common stockholders vote FOR the
proposal to be acquired by Star Gas Partners.
PaineWebber Incorporated has also acted as a financial advisor to Petro.
13
<PAGE>
Financial Information
Estimated Sources and Uses of Funds of the Equity Offering and Debt Offering
The following table shows the estimated funds that Star Gas Partners will
receive from a public offering of an estimated 8.9 million common units at an
assumed public offering price of $19.00 per unit. The exact number of common
units that Star Gas Partners will issue will depend upon the market price of
the common units at the time of the offering. For example, if the market price
is less than $19.00 per unit then Star Gas Partners will issue a greater number
of units. This table also shows the estimated funds that Petro will receive
from the sale of notes in the debt offering. The estimated sources and uses may
change, depending on market conditions, results of operations and other
factors.
(In thousands)
<TABLE>
<S> <C>
Sources
Equity offering, net of underwriting discounts, commissions and
offering expenses............................................... $159,900
Debt offering, net of discounts and commissions.................. 87,915
--------
$247,815
========
Uses
Redeem Petro 12 1/4% Senior Subordinated Debentures due 2005..... $ 84,094
Redeem Petro 10 1/8% Senior Subordinated Notes due 2003.......... 50,000
Redeem Petro 9 3/8% Senior Subordinated Debentures due 2006...... 75,000
Redeem Petro 12 7/8% Preferred Stock............................. 27,600
Repurchase Petro 1989 Preferred Stock............................ 4,167
Transaction fees and expenses.................................... 6,954
--------
$247,815
========
</TABLE>
Outstanding Star Gas Partners Units
The following table shows the approximate number of units outstanding before
and after the transaction. The 323,082 general partner interests/units
represents 321,467 general partner units in Star Gas Partners and the 0.01%
general partner interest in Star Gas Propane. This 0.01% interest is deemed to
be in unit form solely for purposes of this table.
<TABLE>
<CAPTION>
Before Transaction After Transaction
-------------------- ---------------------
Number Percentage Number Percentage
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Units
Existing common units............ 3,858,999 60.5% 3,858,999 23.9%
Issued to Petro junior preferred
stockholders.................... -- -- 102,773 0.6
Issued in equity offering........ -- -- 8,947,368 55.4
--------- ----- ---------- -----
Subtotal......................... 3,858,999 60.5 12,909,140 79.9
Subordinated Units
Existing subordinated units...... 2,396,078 37.5 -- --
Senior subordinated units........ -- -- 2,491,500 15.4
Junior subordinated units........ -- -- 430,395 2.7
--------- ----- ---------- -----
Subtotal....................... 2,396,078 37.5 2,921,895 18.1
General Partner Interests/Units... 127,655 2.0 323,082 2.0
--------- ----- ---------- -----
Total.......................... 6,382,732 100.0% 16,154,117 100.0%
========= ===== ========== =====
</TABLE>
14
<PAGE>
Capitalization
The following table shows Star Gas Partners' historical capitalization as of
September 30, 1998 on an actual basis and as adjusted to give pro forma effect
to the acquisition of Petro. It is further adjusted to give pro forma effect to
the equity and debt offerings and the application of the net proceeds of these
offerings. This table does not include $4.2 million of the current portion of
Petro's 1989 preferred stock that will be paid with the proceeds of the equity
and debt offerings.
The Petro public debt listed below consists of:
. $84.1 million of 12 1/4% Senior Subordinated Debentures due 2005,
including a prepayment premium of $2.8 million,
. $50.0 million of 10 1/8% Senior Subordinated Notes due 2003 and
. $75.0 million of 9 3/8% Senior Subordinated Debentures due 2006.
Upon completion of the transaction, Petro has the right to redeem up to an
aggregate of 98.5% of the principal amount of these securities. Petro intends
to purchase the remaining securities on comparable terms.
The Petro private debt listed below consists of:
. approximately $63.1 million of 9% Senior Notes due 2002,
. $4.3 million of 10 1/4% Subordinated and Senior Notes due 2001 and
. $14.3 million of notes payable for the purchase of fuel oil dealers
maturing at various dates through 2004.
You should read this table together with the historical and pro forma
financial statements and notes included and incorporated by reference in this
proxy statement.
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------
Pro Forma Adjusted
Actual Combined Pro Forma
-------- -------------- ---------
(in thousands)
<S> <C> <C> <C>
Cash........................ $ 1,115 $ 14,882 $ 14,540
======== ======== ========
Debt:
Star Gas Propane First
Mortgage Notes............ $ 96,000 $ 96,000 $ 96,000
Star Gas Propane acquisi-
tion facility............. 8,308 8,308 8,308
The notes issued in the
debt offering............. -- -- 90,000
Petro public debt.......... -- 209,094 --
Petro private debt......... -- 72,614 78,244
-------- -------- --------
Total Long-Term debt.... 104,308 386,016 272,552
-------- -------- --------
Redeemable Preferred Stock:
Petro 12 7/8% Preferred
Stock..................... -- 27,600 --
Partners' Capital:
Common unitholders......... 58,686 60,639 220,539
Existing subordinated
unitholders............... (1,446) -- --
Senior and junior subordi-
nated unitholders......... -- 13,555 13,555
General partner............ 107 1,260 1,260
-------- -------- --------
Total partners' capi-
tal.................... 57,347 75,454 235,354
-------- -------- --------
Total capitalization.... $161,655 $489,070 $507,906
======== ======== ========
</TABLE>
15
<PAGE>
Summary Selected Historical Financial and Operating Data of Star Gas Partners
The following table describes for the periods and dates indicated, summary
selected historical financial and operating data of Star Gas Partners, which is
derived from the consolidated financial statements of Star Gas Partners. The
financial data is only a summary and should be read in conjunction with Star
Gas Partners' historical financial statements and related notes contained in
the annual reports and other information that Star Gas Partners has filed with
the SEC. See "Incorporation of Certain Documents by Reference." The historical
Other Data is unaudited but have been prepared on the same basis as that of the
audited consolidated financial statements. These historical results of
operations do not predict the future results of operations.
The 1996 column to the table shows the results of operations of the
predecessor of Star Gas Partners for the period October 1, 1995 through
December 20, 1995 and the results of Star Gas Partners from December 20, 1995
through September 30, 1996. We combined these operating results to facilitate
an analysis of the fundamental operating data. However, on a per unit basis,
both the net income (loss) and the cash distributions paid in the 1996 column
of the table represent Star Gas Partners' actual results for the period
December 20, 1995 through September 30, 1996.
"EBITDA" listed in the table below is defined as operating income plus
depreciation, amortization and other non-cash charges, less net gain (loss) on
sale of businesses and equipment. EBITDA should not be considered an
alternative to net income, as an indicator of operating performance, or as an
alternative to cash flow, as a measure of liquidity or ability to service debt
obligations. Instead, EBITDA provides additional information for evaluating
Star Gas Partners' ability to make the minimum quarterly distribution. The
definition of EBITDA used by Star Gas Partners is different from the definition
of EBITDA used by Petro and may be different from that used by other
corporations or partnerships.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------- ---
1996 1997 1998
------------- ------------- -------------
(In thousands, except for per unit data)
<S> <C> <C> <C> <C>
Statement of Operations
Data
Sales...................... $ 119,634 $ 135,159 $ 111,685
Costs and expenses
Cost of sales............ 58,557 72,211 49,498
Delivery and branch ex-
penses.................. 34,750 36,427 37,216
Depreciation and amorti-
zation.................. 9,680 10,242 11,462
General and administra-
tive expenses........... 6,457 6,818 6,065
Net gain (loss) on sales
of assets............... (260) (295) (271)
------------- ------------- -------------
Operating income........... 9,930 9,166 7,173
Interest expense, net.... 7,124 6,966 7,927
Amortization of debt is-
suance costs............ 128 163 176
------------- ------------- -------------
Income (loss) before income
taxes..................... 2,678 2,037 (930)
------------- ------------- -------------
Income tax expense....... 85 25 25
------------- ------------- -------------
Net income (loss).......... $ 2,593 $ 2,012 $ (955)
============= ============= =============
General partner's interest
in net income (loss)...... -- 40 (19)
------------- -------------
Limited partners' interest
in net income (loss)...... -- $ 1,972 $ (936)
============= =============
Basic and diluted, net in-
come (loss) per limited
partner unit.............. $ 0.11(a) $ 0.37 $ (0.16)
============= ============= =============
Cash distribution declared
per unit.................. $ 1.17(a) $ 2.20 $ 2.20
============= ============= =============
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------- ---
1996 1997 1998
------------- ------------- --------------
(In thousands, except for per unit data)
<S> <C> <C> <C> <C>
Balance Sheet Data (end of
period)
Current assets............. $ 17,842 $ 14,165 $ 17,947
Total assets............... 156,913 147,469 179,607
Long-term debt............. 85,000 85,000 104,308
Partners' capital.......... 61,398 51,578 57,347
Summary Cash Flow Data
Net cash provided by oper-
ating activities.......... $ 9,982 $ 18,964 $ 9,264
Net cash provided by (used
in) investing activities.. (6,954) (4,905) (13,276)
Net cash provided by (used
in) financing activities.. (2,649) (14,276) 4,238
Other Data
Operating income before de-
preciation and amortiza-
tion less net gain (loss)
on sales of equipment
("EBITDA")................ $ 19,870 $ 19,703 $ 18,906
Retail propane gallons
sold...................... 96,294 94,893 98,870
Ratio of earnings to fixed
charges(a)................ 1.22x 1.27x --
Total capital
expenditures(b)........... $ 5,332 $ 5,279 $ 5,015
</TABLE>
- -------
(a) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) from continuing operations before
income taxes, plus fixed charges. Fixed charges consist of interest expense
on all indebtedness, the amortization of deferred debt issuance costs and
the portion of operating rental expense that is representative of the
interest factor. For the year ended September 30, 1998, earnings were
inadequate to cover fixed charges by $1.0 million.
(b) Includes net maintenance capital expenditures for the fiscal years ended
September 30, 1996, 1997 and 1998 of $2.3 million, $3.1 million and $2.6
million.
17
<PAGE>
Summary Selected Historical Financial and Operating Data of Petro
The following table describes summary selected historical financial and
operating data of Petro, which is derived from the consolidated financial
statements of Petro. The financial data is only a summary, and you should read
it in conjunction with Petro's historical financial statements, and related
notes, contained in the annual reports and other information that Petro has
filed with the SEC. See "Incorporation of Certain Documents by Reference."
Since Star Gas Partners' initial public offering in December 1995, Star Gas
Partners has been accounted for under the equity method of accounting in
Petro's financial statements.
The historical financial data for the nine months ended September 30, 1997
and 1998 and the historical other data is unaudited. The results of operations
for the nine-month periods ended September 30, 1997 and 1998 contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial condition and results of operations for those periods.
These historical results of operations do not predict future results.
In analyzing the results of Petro, the following important factors should be
noted:
. The decline in operating income before depreciation, amortization and
provision for supplemental benefits (EBITDA) for the year ended
December 31, 1997, as compared to the year ended December 31, 1996 was
primarily due to warm weather experienced in 1997.
. For the nine months ended September 30, 1998, home heating oil volume
declined by 19.9% as compared to the nine months ended September 30,
1997 primarily due to the abnormally warm temperatures associated with
the weather phenomenon generally referred to as "El Nino." While
volume declined 19.9%, EBITDA declined only 16.6% due to a reduction
in operating costs largely attributable to the effects of the
restructuring and cost reduction programs.
18
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- ----------------------
1996 1997 1997 1998
----------- ----------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data
Net sales............... $ 608,161 $ 548,141 $ 386,855 $ 291,479
Costs and expenses
Cost of sales......... 427,388 379,748 271,269 191,508
Operating expenses ... 138,703 132,383 96,292 81,758
Restructuring,
corporate identity
and pension
curtailment.......... 4,366 7,640 5,142 1,716
Depreciation, amorti-
zation and other non-
cash costs........... 28,946 28,847 21,567 20,639
----------- ----------- --------- ---------
Operating income
(loss)................. 8,758 (477) (7,415) (4,142)
Interest expense-net.. 32,412 31,668 23,777 22,912
Amortization of debt
issuance cost........ 1,872 1,464 1,097 1,069
Income tax expense.... 500 500 350 325
Other income (ex-
pense)-net........... 1,842 11,445 65 127
Share of income (loss)
of Star Gas.......... 2,283 (235) (1,808) (1,890)
Income (loss) before ex-
traordinary item....... (21,901) (22,899) (34,382) (30,211)
----------- ----------- --------- ---------
Net income (loss)....... $ (28,315) $ (22,899) $ (34,382) $ (30,211)
=========== =========== ========= =========
Basic and Diluted earn-
ings (losses) per com-
mon share(b)
Weighted average
number of common
shares outstanding
Class A and Class C
common stock......... $ (1.20) $ (1.06) $ (1.47) $ (1.29)
Cash dividends declared
per common share(b)
Class A and Class C
common stock......... $ 0.60 $ 0.30 $ 0.23 --
Weighted average number
of common shares
outstanding
Basic(b)
Class A common stock.. 22,983 23,441 23,339 23,960
Class C common stock.. 2,598 2,598 2,598 2,598
Diluted(b)
Class A common stock.. 23,339 23,960
Class C common stock.. 2,598 2,598
Balance Sheet Data (end
of period)
Cash.................. $ 3,257 $ 2,390 $ 13,806 $ 13,767
Working capital....... 18,093 12,436 5,414 (7,479)
Total assets.......... 275,025 247,846 223,918 198,678
Long-term debt........ 291,337 288,957 288,774 278,864
Redeemable preferred
stock (long-term
portion)............. 8,333 32,489 34,167 28,555
Stockholders'
deficiency........... (145,733) (177,033) (189,361) (209,618)
Summary Cash Flow Data:
Net cash provided by
(used in) operating
activities........... $ (3,852) $ 18,644 $ 34,342 $ 28,803
Net cash provided by
(used in) investing
activities........... (26,193) (980) (14,059) 1,011
Net cash provided by
(used in) financing
activities........... (44,983) (18,531) (9,734) (18,437)
Other Data
Operating income
before depreciation,
amortization and
provision for
supplemental benefits
(EBITDA)............. $ 37,704 (d) $ 28,370(d)(e) $ 14,152(d) $ 16,497(d)(f)
Heating oil gallons... 456,141 410,291 282,806 226,579(f)
Ratio of earnings to
fixed charges(a)..... -- -- -- --
</TABLE>
- --------
(a) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) from continuing operations before
income taxes, plus fixed charges. Fixed charges consist of interest expense
on all indebtedness and the amortization of deferred debt issuance costs
and the portion of operating rental expense that is representative of the
interest factor. For the years ended December 31, 1996 and 1997 and for the
nine months ended September 30, 1997 and 1998, earnings were inadequate to
cover fixed charges by $28.3 million, $22.9 million, $34.3 million and
$30.2 million.
19
<PAGE>
Summary Selected Unaudited Pro Forma Condensed Consolidated Financial
Information
The following summary selected unaudited pro forma condensed consolidated
Statement of Operations Data, Other Data and Balance Sheet Data for the twelve
month period ended September 30, 1998 assume the transaction occurred on
October 1, 1997. The pro forma financial information below reflects the
purchase method of accounting and is intended to give you a better picture of
what our businesses might have looked like had they been combined since October
1, 1997. The companies may have performed differently if they were combined.
You should not rely on the pro forma financial information as being indicative
of the historical results that we would have had or the future results that we
will experience after the transaction. See "Unaudited Pro Forma Condensed
Consolidated Financial Information."
The "Pro Forma Combined" column of the table represents the acquisition of
Petro by Star Gas Partners and the "As Adjusted Pro Forma" column of the table
represents the further effects of the equity and debt offerings.
<TABLE>
<CAPTION>
Twelve Months Ended
September 30, 1998
----------------------------
(dollars in thousands,
except per unit amounts)
Pro Forma As adjusted
Combined Pro Forma
------------ -----------
<S> <C> <C>
Statement of Operations Data
Sales............................................. $ 566,155 $ 566,155
Costs and expenses:
Cost of sales................................... 349,472 349,472
Operating expenses.............................. 161,551 161,551
Restructuring charges........................... 2,085 2,085
Transaction expenses............................ 1,029 1,029
Corporate identity expenses..................... 1,100 1,100
Provision for supplemental benefits............. 409 409
Depreciation and amortization................... 36,765 36,765
Net gain (loss) on sales of assets.............. (48) (48)
------------ ------------
Operating income.................................. 13,696 13,696
Interest (income) expense, net.................. 39,157 23,669
Amortization of debt issuance costs............. 1,608 383
------------ ------------
Income (loss) before income taxes............... (27,069) (10,356)
Income tax expense.............................. 500 500
------------ ------------
Net income (loss)................................. $ (27,569) $ (10,856)
============ ============
Net income (loss) per limited partner unit........ N.R. $ (0.67)
============
Balance Sheet Data (end of period)
Current assets.................................. $ 100,659 $ 100,317
Total assets.................................... 662,878 664,621
Long-term debt.................................. 386,016 272,552
Total partners' capital......................... 75,454 235,354
<CAPTION>
Summary Cash Flow Data
<S> <C> <C>
Net cash provided by operating activities....... $ 11,955 $ 27,443
Net cash provided by (used in) investing
activities..................................... (4,826) (4,826)
Net cash provided by (used in) financing
activities..................................... (17,356) (22,926)
Other Data
Operating income plus depreciation, amortization
less net gain (loss) on sales of equipment
("EBITDA")(a).................................. $ 50,918 $ 50,918
Ratio of earnings to fixed charges(b)........... -- --
Heating oil and propane gallons................. 455,360 455,360
</TABLE>
(footnotes on next page)
20
<PAGE>
- --------
(a) EBITDA has been reduced by approximately $4.2 million in expenses
associated with Petro's corporate identity, restructuring and transaction
expenses.
(b) For the pro forma combined and as adjusted pro forma, the earnings were
inadequate to cover fixed charges by $27.6 million and $10.9 million.
In analyzing the historical results of Star Gas Partners and the pro forma
information as provided in the table above, the following three important
factors should be considered.
. First, the results for the fiscal 1997 pro forma exclude cost savings
associated with Petro's restructuring program implemented during 1998.
This restructuring program includes reductions in both corporate and
field personnel, the consolidation of employee benefit plans and the
rationalization of branch facilities.
. Second, while depreciation and amortization expenses reduce net income as
a non-cash expense, these expenses do not impact distributable cash flow.
. Third, in fiscal 1998, temperatures were significantly warmer than normal
for the areas in which Star Gas Partners conducts its propane operations
and Petro conducts its home heating oil operations. Overall levels of pro
forma available cash from operating surplus were adversely affected
during fiscal 1998 due to this abnormally warm weather.
21
<PAGE>
RISK FACTORS
Limited partner interests are inherently different from the capital stock of
a corporation, although the business risks faced by Star Gas Partners are
similar to those of a corporation engaged in a similar business. Star Gas
Partners common unitholders and Petro common stockholders should consider the
following factors in evaluating the transaction.
Risks to Star Gas Partners Common Unitholders
The Star Gas Corporation board of directors urges Star Gas Partners common
unitholders to carefully consider each of the factors described below.
Conflicts of Interest Were Present in Negotiating and Structuring the
Transaction
All of the directors of Star Gas Corporation, other than the members of the
special committee, are also directors or officers of Petro. Thus, except for
the special committee, members of the Petro board of directors and the Star Gas
Corporation board of directors have interests that are different from, and in
conflict with, the interests of the Star Gas Partners common unitholders. The
Star Gas Corporation board of directors appointed the two members of the
special committee to negotiate the acquisition of Petro on behalf of the Star
Gas Partners common unitholders.
Prior to Petro's acquisition of Star Gas Corporation in 1992, Star Gas
Corporation engaged Nicoletti & Company Inc., an investment banking firm owned
by William P. Nicoletti, a member of the special committee, to perform specific
investment banking services for Star Gas Corporation. In this engagement, Star
Gas Corporation paid Nicoletti & Company Inc. fees of $40,000, $521,500 and
$81,600 for services rendered during 1992, 1993 and 1994. In 1995, Star Gas
Corporation paid Nicoletti & Company Inc. $20,000 in advisory fees for a
proposed acquisition. In 1997, Star Gas Corporation paid Mr. Nicoletti $20,000
for serving on the special committee that explored the possible sale or merger
of Star Gas Partners. In 1998, Star Gas Corporation paid Mr. Nicoletti $40,000
for serving on the Star Gas Partners special committee that explored the
business combination with Petro.
Elizabeth K. Lanier, a member of the special committee, was a partner in the
law firm of Frost & Jacobs in Cincinnati, Ohio until June 1996. Frost & Jacobs
has acted as counsel to Star Gas Corporation in specific litigation matters. In
1997, Star Gas Corporation paid Ms. Lanier $20,000 for serving on the special
committee that explored the possible sale or merger of Star Gas Partners. In
1998, Star Gas Corporation paid Ms. Lanier $40,000 for serving on the special
committee that explored the business combination with Petro.
The officers and directors of Star Gas Corporation will be indemnified, to
the extent permitted by law, for any and all actions taken in the transaction,
and they are also covered by customary directors' and officers' liability
insurance. Each member of the Star Gas Corporation board of directors will be a
member of the board of directors of Star Gas LLC following the transaction,
except that, at her request, Elizabeth Lanier will withdraw after the
transaction as a result of additional duties associated with a new job. She
will be replaced by a director selected by the Star Gas LLC board, and the new
director will not be an officer or employee of Star Gas LLC or any of its
affiliates. The current officers of Star Gas Corporation will be employed as
officers of Star Gas Propane following the transaction.
22
<PAGE>
Petro Has Significant Recent Net Losses That Are Likely To Continue
Petro incurred net losses of approximately $23.5 million, $28.3 million and
$22.9 million for the years ended December 31, 1995, 1996 and 1997. 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.
Continued and/or Increased Distributions per Common Unit Are Not Assured
The Star Gas Corporation board of directors structured the transaction with
the intent that it would increase the cash available to be distributed per
common unit. The intended increase in cash available for distributions is based
on several expectations that may not be realized, such as:
. successfully acquiring home heating oil businesses at attractive prices,
. completing Petro's restructuring program to reduce customer attrition
and
. increasing profit margins on a per gallon basis.
The amount of cash needed to pay the minimum quarterly distribution for the
four quarters on units outstanding before the transaction is approximately:
<TABLE>
<S> <C>
Common Units............................................... $ 8.5 million
Subordinated Units......................................... 5.2 million
General Partner Interests.................................. 0.3 million
-------------
Total.................................................... $14.0 million
</TABLE>
After giving pro forma effect to the propane acquisitions completed in the
twelve months ended September 30, 1998, and without giving pro forma effect to
the transaction, the amount of available cash for distribution generated in the
twelve months ended September 30, 1998 was approximately $9.2 million.
The amount of cash needed to pay the minimum quarterly distribution for four
quarters on units outstanding immediately after the transaction is
approximately:
<TABLE>
<S> <C>
Common Units............................................... $26.7 million
Senior Subordinated Units ................................. 5.7 million
Junior Subordinated Units.................................. 1.0 million
General Partner Units...................................... 0.7 million
-------------
Total.................................................... $37.1 million
</TABLE>
After giving pro forma effect to the transaction, the amount of available cash
generated in the twelve months ended September 30, 1998 would have been about
$21.9 million. If infrequent restructuring,
23
<PAGE>
corporate identity and transaction expenses were not taken into effect, pro
forma cash available for distribution would have been $26.1 million.
The Percentage of Common Units Will Increase, Which Will Make It More
Difficult to Pay the Full Minimum Quarterly Distribution
The existing common units represent a 60.5% limited partner interest in Star
Gas Partners. After the transaction, the common units will represent a 79.9%
limited partner interest. Accordingly, Star Gas Partners will be required to
make distributions to a larger percentage of its equity at the common unit
level, which will increase the likelihood that Star Gas Partners will not have
sufficient funds to pay the full minimum quarterly distribution to all Star Gas
Partners common unitholders. In addition during the subordination period, Star
Gas Partners can issue 2,500,000 additional common units without obtaining any
Star Gas Partners unitholder approval. These additional common units could
further dilute the interest of then-existing Star Gas Partners unitholders in
the net assets of, and distributions to be made by, Star Gas Partners. In
addition, holders of Star Gas Partners common units will not have preemptive
rights to acquire additional common units or other partnership interests that
may be issued by Star Gas Partners.
Common Unitholders Will Have Reduced Voting Power
After the transaction, Star Gas Partners common unitholders will have reduced
voting power. In some instances, matters that previously required only the
consent of a majority of the outstanding common units will also require a
separate class vote of the senior subordinated units and junior subordinated
units, voting together as a single class. Thus, there may be matters in the
future that the common units approve but that are not adopted because a
majority of the senior subordinated and junior subordinated units did not
approve those matters.
Star Gas Partners' Indebtedness, Including the Guarantee of the Notes, May
Limit Its Ability to Make Distributions on the Common Units and Affect Its
Operations
As a result of the transaction, Star Gas Partners will have debt that is
substantial compared to its partners' capital. Principal and interest payable
on this debt will reduce cash available to make distributions on the common
units. Under specified circumstances, the terms of Star Gas Partners' debt
instruments, including the guarantee of the notes issued in the debt offering,
will limit its ability to distribute cash to Star Gas Partners common
unitholders and to borrow additional funds. The limitations and restrictions in
new debt that Star Gas Partners and its subsidiaries issue may be more
restrictive than those in current indebtedness. In addition, some of Star Gas
Partners' debt is secured by its assets. If Star Gas Partners defaulted on this
secured debt, the lenders could institute foreclosure proceedings to seize its
assets. Any attempt to stay these foreclosure actions by seeking to reorganize
under the federal Bankruptcy Code would have a material adverse effect on Star
Gas Partners and the Star Gas Partners common unitholders.
Because the Demand for Heating Oil Is More Affected by Weather Conditions than
the Demand for Propane, Star Gas Partners' Financial Condition May be More
Vulnerable to Warm Winters After the Transaction
24
<PAGE>
Petro's operations are more sensitive to temperature levels than are Star Gas
Partners' because home heating oil is used almost exclusively for heating
purposes, while propane has uses other than heating. Since sales of home
heating oil during the peak heating season from October through March represent
75% to 80% of Petro's annual home heating oil volume, abnormally warm
temperatures during this period can negatively affect Petro's financial
results.
Petro Has Experienced Significant Customer Losses That May Continue
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.
Because of the Highly Competitive Nature of the Heating Oil Business, Petro
May Not Be Able to Acquire New Customers
Petro competes with heating oil distributors offering a broad range of
services and prices, from full service distributors, like Petro, to those
offering delivery only. If Petro is unable to effectively compete, it may lose
existing customers or fail to acquire new customers, which may have a material
adverse effect on its results of operations and financial condition.
Competition with other companies in the home heating oil industry is based
primarily on customer service and price. Long-standing customer relationships
are typical in the industry. It is customary for companies to deliver home
heating oil to their customers based upon weather conditions and historical
consumption patterns, without the customer making an affirmative purchase
decision. Most companies provide home heating equipment repair service on a 24-
hour per day basis. In some cases, homeowners have formed buying cooperatives
to purchase fuel oil from distributors at a price lower than individual
customers are otherwise able to obtain. As a result of these factors, it may be
difficult for Petro to acquire new retail customers.
If Petro Does Not Make Acquisitions on Economically Acceptable Terms, Its
Future Financial Performance Will Be Limited
The home heating oil industry is not a growth industry because of increased
competition from alternative energy sources. Petro's growth in the past decade
has been directly tied to the success of its acquisition program. Its future
financial performance will depend on its ability to continue to make
acquisitions at attractive prices. There is no assurance that Petro will be
able to continue to make acquisitions or to do so on economically acceptable
terms. If Petro is able to make acquisitions, there is no assurance that they
will be profitable, or that any additional debt incurred to make these
acquisitions will not offset the cash generated. Factors that may adversely
affect Petro's operating and financial results may also limit Petro's access to
capital and its acquisition activities.
25
<PAGE>
Oil Price Increases May Negatively Affect Petro's Results of Operations and
Financial Condition
During periods of sudden and sharp increases in the supply cost of home
heating oil, Petro may be unwilling or unable to pass the entire increase in
costs on to its customers. As a result, gross profit margins will be reduced.
On the other hand, price increases that continue over a long period of time may
be passed on to customers. These increases could reduce demand by encouraging
conservation or conversion to alternative energy sources. If demand were
reduced and Petro was unable to increase its gross profit margin or reduce its
operating expenses, the decrease in volume would adversely affect Petro's
operating results.
Petro also competes for customers with suppliers of alternative energy
products, principally natural gas. Petro 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.
Petro Is Subject to Operating and Litigation Risks That, If Not Insured, Could
Adversely Affect Its Results of Operations and Financial Condition
Petro's operations, like those of Star Gas Partners, are subject to all
operating hazards and risks incidental to providing customers with combustible
liquids such as home heating oil. As a result, in the ordinary course of
business, Petro may be sued. Petro maintains insurance policies in the amounts
and with coverages and deductibles as it believes are reasonable. However,
there can be no assurance that this insurance will be adequate to protect Petro
from all expenses related to potential future claims.
Petro's Results of Operations and Financial Condition May Be Adversely
Affected by Governmental Regulation and Associated Environmental and
Regulatory Costs
Petro's 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 cost 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
Petro's home heating oil operations, such as the risks of accidental release or
spill, are greater than those associated with Star Gas Partners' propane
operations. It is possible that material costs and liabilities will be
incurred, including those relating to claims for damages to property and
persons.
Tax Risks to Star Gas Partners Common Unitholders
The Increase in Taxes Payable By Petro Will, In the Future, 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 Star Gas Partners
can distribute to Star Gas Partners unitholders. A successful IRS challenge to
the deduction
26
<PAGE>
of depreciation or interest on specific debt will increase Petro and its
affiliates' tax liability and this will reduce Star Gas Partners' ability to
distribute cash to Star Gas Partners unitholders.
The transaction will result in income to Petro equal to the difference in the
value of the Star Gas Partners units distributed in the merger (including the
amount of any debt Petro is relieved of) 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 the cash available for distribution by Star Gas
Partners.
Although Petro believes that Petro and its affiliates will not pay
significant federal income tax for several years, Petro expects the related
entities to generate earnings and profits during that time making a portion of
the distributions from the entities to Star Gas Partners taxable dividend
income to the Star Gas Partners unitholders. This dividend income cannot be
offset by past or future losses generated by Star Gas Partners' propane
activities.
The Portion of Distributions That Constitute Taxable Income Will Increase
The portion of the cash distributions that constitute taxable income to Star
Gas Partners unitholders will increase at a greater rate if the transaction
occurs. For example, the general partner estimates that a holder of a common
unit issued in the initial public offering would be allocated, in the
aggregate, no net passive income and less than $0.05 per unit per year of
portfolio income through December 31, 2004 if the transaction is not completed.
In contrast, if the transaction is completed the general partner estimates that
the same holder would instead be allocated, in the aggregate, no net passive
income and approximately $.20 per unit on average per year of portfolio income
through December 31, 2002. In either case, the taxable income allocated to a
Star Gas Partners common unitholder after either date will constitute an
increasingly higher percentage of cash distributed to him. Furthermore,
distributions that are in excess of the minimum quarterly distribution will
increase the portion of each cash distribution that constitutes taxable income
to an existing Star Gas Partners common unitholder. However, the transaction
will have different tax effects on different Star Gas Partners common
unitholders, depending on when they purchased their units.
Risks to Petro Common Stockholders
The Petro board of directors urges Petro common stockholders to carefully
consider each of the factors described below.
Conflicts Were Present in Structuring and Negotiating the Transaction
Some directors of Petro have interests in the transaction that are different
from, and in conflict with, the interests of the Petro common stockholders who
are not directors, officers or affiliates of Petro. Irik P. Sevin is both the
Chairman of the Board and Chief Executive Officer of Petro and the Chairman of
the Board of Star Gas Corporation; Audrey L. Sevin is the Secretary and a
director of both Petro and Star Gas Corporation; and Messrs. Paul Biddelman,
Thomas J. Edelman and Wolfgang Traber are directors of both Petro and Star Gas
Corporation. Messrs. Sevin, Biddelman, Edelman and Traber and Mrs. Sevin are
beneficial owners of Petro Class A common stock and Petro
27
<PAGE>
Class C common stock. As a result, the members of the Petro board who are also
members of the Star Gas Corporation board have conflicting fiduciary duties to
the Petro public common stockholders and the common unitholders who are not
directors, officers or affiliates of Star Gas Partners.
Some of the directors and their affiliates are receiving consideration that
is different from that received by Petro public common stockholders. These
directors and their affiliates will be exchanging their common stock for Star
Gas Partners junior subordinated units and general partner units, while the
Petro public common stockholders and other directors and affiliates will be
receiving Star Gas Partners senior subordinated units.
The Star Gas Partners junior subordinated units and general partner units
will not be entitled to distributions until the senior subordinated units
receive the minimum quarterly distribution. The Star Gas Partners senior
subordinated units will be publicly traded and have been approved for listing
on the New York Stock Exchange. The Star Gas Partners junior subordinated units
and general partner units have not been registered and will not be publicly
traded.
The affiliates exchanging their Petro common stock for Star Gas Partners
junior subordinated units and general partner units will receive .14318 of a
junior subordinated unit or general partner unit for each share of Petro common
stock. The remaining common stockholders will exchange their shares for Star
Gas Partners senior subordinated units at a ratio of .11758 of a senior
subordinated unit for each share of Petro common stock.
The transaction has been structured so that the Petro public common
stockholders will realize a taxable gain or loss on the transaction, while
substantially all affiliates of Petro will exchange their Petro common stock
without realizing a taxable gain or loss. This structure was designed to
minimize the tax effect of the transaction on Petro. It was also based on the
assumption that specified Petro affiliates have a low tax basis and would
prefer not realizing a taxable gain on the transaction, while Petro public
common stockholders generally have a higher tax basis and would prefer
realizing a tax loss.
The officers and directors of Petro will be indemnified, to the extent
permitted by law, for any and all actions taken in the transaction. The current
officers of Petro will continue to be employed as officers following the
transaction.
Senior Subordinated Unitholders Are Not Assured of Receiving Cash
Distributions
Petro public common stockholders will receive senior subordinated units in
exchange for their shares of common stock. Petro common stockholders should
consider the following factors regarding distribution rights of senior
subordinated units:
. During the subordination period, which generally cannot end before
October 1, 2002, no distributions of cash for any quarter may be made
on the Star Gas Partners senior subordinated units until the Star Gas
Partners common units have received the minimum quarterly
distribution, plus any arrearages on those common units.
. The amount that may be paid for the quarters ending June 30, 1999 and
September 30, 1999 depends on whether the combined results of Star
Gas Partners and Petro exceed specified financial benchmarks. As of
the date of this proxy statement, Star Gas Partners does not expect
to meet these financial benchmarks and therefore it does not expect
to
28
<PAGE>
make distributions on its senior subordinated units, junior
subordinated units and general partner units during 1999.
. Beginning with the quarter ending on December 31, 1999, the amount of
distributions depends upon the amount of available cash generated by
Star Gas Partners after October 1, 1999.
. Star Gas Partners Senior subordinated units do not accrue
distribution arrearages.
Petro common stockholders should also keep in mind that there is no
assurance that:
. Star Gas Partners will ever meet the tests that must be satisfied to
end the subordination period;
. the senior subordinated units will ever convert to Class B common
units; and
. Petro will ever meet the financial tests necessary for any additional
senior subordinated units to be issued to them.
Cash Distributions Are Not Guaranteed and May Fluctuate with Star Gas
Partners' Performance and Reserve Requirements
Because distributions on the Star Gas Partners senior subordinated units are
dependent on the amount of cash generated, distributions may fluctuate based
on the performance of Star Gas Partners. The actual amount of cash that is
available will depend upon numerous factors, including:
. profitability of operations,
. required principal and interest payments on debt,
. the cost of acquisitions,
. issuance of debt and equity securities,
. fluctuations in working capital,
. capital expenditures,
. adjustments in reserves,
. prevailing economic conditions and
. financial, business and other factors.
Some of these factors are beyond the control of the general partner.
The amended and restated partnership agreement gives the general partner
discretion in establishing reserves for the proper conduct of Star Gas
Partners' 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 Star Gas Partners 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 four
quarters on units outstanding immediately after the transaction is
approximately $37.1 million. This figure represents
29
<PAGE>
$29.7 million for the common units, $5.7 million for the senior subordinated
units, $1.0 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 September 30,
1998 would have been about $21.9 million. If infrequent restructuring,
corporate identity and transaction expenses were not taken into effect, pro
forma cash available for distribution would have been $26.1 million.
The Liquidity and Value of Senior Subordinated Units Are Uncertain Because
There Is No Active Trading Market and Anticipated Volatility In Market Price
At present there is no trading market for the Star Gas Partners senior
subordinated units. Although an application has been approved to list the
senior subordinated units on the NYSE there can be no assurance that an active
trading market will develop after the transaction. The Petro board of directors
believes that senior subordinated units will likely trade at a discount to the
price per common unit. The actual trading price of the senior subordinated
units will depend on a variety of factors, including market conditions for
securities of publicly-traded limited partnerships, the trading price of the
common units, weather conditions and the cash generated by Star Gas Partners.
There can be no assurance that holders of Star Gas Partners senior subordinated
units will be able to sell their units at favorable prices. After the
transaction, if a number of former Petro common stockholders sell their senior
subordinated units, the trading price of the senior subordinated units could
decline significantly.
Star Gas Partners Has Substantial Indebtedness That May Restrict its Ability
to Make Distributions on Senior Subordinated Units
Although it has less debt than Petro, after the transaction, Star Gas
Partners will have debt that is substantial compared to its partners' capital.
Principal and interest payable on this debt will reduce cash available to make
distributions on the senior subordinated units. Under some circumstances, the
terms of Star Gas Partners' debt instruments, including the notes issued in the
debt offering, will limit its ability to distribute cash to senior subordinated
unitholders and to borrow additional funds. The limitations and restrictions in
the new debt that Star Gas Partners issues may be more restrictive than those
in current debt instruments. In addition, some of Star Gas Partners' debt is
secured by its assets. If Star Gas Partners defaulted on this secured debt, the
lenders could institute foreclosure proceedings to seize its assets. Any
attempt to stay these foreclosure actions by seeking to reorganize under the
federal Bankruptcy Code would have a material adverse effect on Star Gas
Partners and the Star Gas Partners senior subordinated unitholders.
Provisions Concerning Change of Control, Default and Preclusion From Paying in
Star Gas Partners' Debt Instruments May Affect Distributions on the Senior
Subordinated Units
After completing the transaction, it is expected that the debt instruments of
Star Gas Partners and Petro will contain provisions relating to a "change of
control." Therefore, a change of control of either entity may result in some
debt being immediately due and payable, which would necessarily affect Star Gas
Partners' ability to make distributions to Star Gas Partners senior
subordinated unitholders. Neither party 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
30
<PAGE>
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.
Star Gas Partners Unitholders Have Limited Voting Rights and Do Not Control
the General Partner
Star Gas Partners 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, Star Gas Partners unitholders have only limited voting rights on
matters affecting Star Gas Partners' business. The general partner generally
may not be removed unless approved by the holders of 66 2/3% of the outstanding
units, except those held by the general partner and its affiliates, voting
together as a single class. As a result, Star Gas Partners unitholders have
only limited influence on matters affecting the operation of Star Gas Partners,
and it would be difficult for third parties to control or influence Star Gas
Partners. Although the amended and restated partnership agreement provides that
the general partner may not, with specified exceptions, transfer its general
partner units 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 Star Gas Partners unitholders.
Unlike the holders of Star Gas Partners common units, the holders of Star Gas
Partners senior subordinated units do not have the right to approve the
issuance of additional partnership interests under any circumstances.
Furthermore, the matters on which the senior subordinated units may vote
require the approval of a unit majority. During the subordination period, a
unit majority means at least a majority of the common units, except those of
the general partner and its affiliates, and at least a majority of the senior
subordinated units and junior subordinated units voting as a single class.
Thus, there may be matters that are approved by a majority of the senior
subordinated units but that are nevertheless not adopted because either too few
junior subordinated units approved or a majority of the common units did not
approve.
The Issuance of Additional Units by Star Gas Partners May Dilute Existing Star
Gas Partners Unitholders' Interests in Assets, Income and Available Cash
After the transaction, Star Gas Partners will have the authority to issue up
to 2,500,000 common units. In some circumstances, it may also issue an
unlimited number of additional common, senior subordinated, and junior
subordinated units or other equity securities for consideration and on terms
determined in the general partner's sole discretion without approval of the
Star Gas Partners unitholders. The issuance of these additional units may
dilute the interests of the existing Star Gas Partners unitholders in assets,
income and available cash, since they will own a smaller percentage of Star Gas
Partners.
The Amended and Restated Partnership Agreement Contains Provisions Intended to
Discourage a Change of Management
The amended and restated partnership agreement contains certain provisions
that may discourage attempts to remove an incumbent general partner or
otherwise change the management of
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Star Gas Partners. These provisions may diminish the trading price of the
senior subordinated units under some circumstances.
Star Gas Partners' Ability to Make Distributions May Be Adversely Affected by
Its Obligation to First Reimburse the General Partner
Before any distributions on the units, Star Gas Partners will reimburse the
general partner for all expenses it has incurred on behalf of Star Gas
Partners. The reimbursement of those expenses and the payment of reasonable
fees charged by the general partner for services could adversely affect the
ability of Star Gas Partners to make distributions. Reimbursable expenses and
fees are determined by the general partner in its sole discretion.
There Is a Limited Call Right That May Require Star Gas Partners 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 Star Gas
Partners unitholder may be required to sell these 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 Star
Gas Partners acquires more than 66 2/3% of the Class B common units in a
twelve-month period, then Star Gas Partners will have a similar call right.
Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners unitholder might be held liable to the
same extent as the general partner for Star Gas Partners' obligations.
Petro Common Stockholders Will Have Fewer Rights as Star Gas Partners
Unitholders
After the transaction, the Petro common stockholders will lose their rights
as stockholders in a Minnesota corporation, but will gain the rights of limited
partners in a Delaware limited partnership. Overall, the transaction probably
will result in a reduction in Petro common stockholders' legal rights. For
example, while Petro common stockholders currently have the right to elect
directors, Star Gas Partners unitholders do not have the right to elect the
directors of the general partner. A comparison of these changes in rights is
described in "Comparison of Securities."
Since Weather Conditions May Adversely Affect the Demand for Propane, Star Gas
Partners' Financial Condition Is Vulnerable to Warm Winters
Weather conditions may adversely impact Star Gas Partners' operating results
and financial condition. Propane is used for both heating and agricultural
purposes. Accordingly, retail propane
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sales are directly affected by the severity of the winter weather. The highest
sales occur during the six-month peak heating season from October through
March, which period accounts for about 70% to 75% of total retail propane
volume. For the fiscal year ended September 30, 1998, temperatures were
significantly warmer than normal for the areas where Star Gas Partners sells
propane. Weather variations also affect demand for propane from agricultural
customers because dry weather during the harvest season reduces demand for
propane in crop drying.
Propane Price Increases May Negatively Affect Star Gas Partners' Operating
Results and Financial Condition
The retail propane business is a margin-based business in which gross profits
depend on sales prices over propane supply costs. Consequently, Star Gas
Partners' profitability is sensitive to changes in wholesale and market prices
of propane. Star Gas Partners has no control over these market conditions.
Thus, when there are large or sudden increases in the supply costs of propane,
Star Gas Partners may not be able to pass on these increases to its customers
through higher sales prices, which could reduce its gross margin.
Star Gas Partners Could Be Unable to Sell Inventory Profitably Due to Market
Volatility and/or Inflation
Because of the potential volatility of propane prices, the market price for
propane could fall below the price at which Star Gas Partners purchased it,
which would 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.
Star Gas Partners purchases propane from a variety of suppliers under supply
contracts and on the spot market. The major portion of propane purchased by
Star Gas Partners (approximately 95% in fiscal 1998) is produced domestically.
To the extent that Star Gas Partners purchases propane from Canadian sources,
which was approximately 5% in fiscal 1998, its propane business will be subject
to risks of disruption in foreign supply. Star Gas Partners attempts to
minimize inventory risks by purchasing propane on a short-term basis. During
periods of low demand for propane, which generally occur during the summer
months, Star Gas Partners has on occasion purchased large volumes of propane at
lower-than-market costs for storage in Star Gas Partners' 21 million gallon
Indiana underground storage facility for future resale. Star Gas Partners 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 Star Gas Partners is not currently engaged in any of these
transactions.
Inflation increases Star Gas Partners' operating and administrative costs.
Star Gas Partners attempts to limit the effects of inflation on its operations
through cost control efforts, productivity improvement and increases in gross
profit margins.
Star Gas Partners Is Dependent on Principal Suppliers and Carriers Which
Increases the Risk of an Interruption in Supply
During fiscal year 1997, 43% of Star Gas Partners' propane purchases in the
Midwest was purchased on the spot market from various Mont Belvieu, Texas
sources, and 21% was purchased
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from three refineries owned by Amoco Canada Marketing Group. Approximately 47%
of the purchases from Amoco Canada were made under long-term market-based
supply contracts, and the balance was made under short-term supply contracts.
Although Star Gas Partners believes that alternative sources of propane are
readily available, if Star Gas Partners was unable to purchase propane from its
usual sources, the failure to obtain alternate sources at competitive prices
and on a timely basis could have a material adverse effect on the business of
Star Gas Partners.
Historically, a substantial portion of the propane purchased by Star Gas
Partners has originated in Mont Belvieu, Texas and has been shipped to Star Gas
Partners through a major common carrier pipeline. Any significant interruption
in the service at Mont Belvieu or on the common carrier pipeline could have a
material adverse effect on the business of Star Gas Partners.
Because of the Highly Competitive Nature of the Retail Propane Business, Star
Gas Partners May Not Be Able to Maintain Existing Customers or Acquire New
Customers
If Star Gas Partners is unable to compete effectively, it may lose existing
customers or fail to acquire new customers, which will have a material adverse
effect on its results of operations and financial condition. Many of Star Gas
Partners' competitors and potential competitors are larger or have
substantially greater financial resources than Star Gas Partners, 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
Star Gas Partners' 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.
Star Gas Partners can make no assurances that it will be able to compete
successfully on the basis of these factors. If a competitor attempts to
increase market share by reducing prices, Star Gas Partners' 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.
Star Gas Partners Cannot Grow Unless It Makes Acquisitions on Economically
Acceptable Terms
The propane business is mature and total demand is expected to remain
relatively flat or to decline slightly. Star Gas Partners' future financial
performance will depend on its ability to make
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acquisitions at attractive prices. Star Gas Partners cannot assure that it will
be able to identify attractive acquisition candidates in the future or to
acquire them on economically acceptable terms. In particular, competition for
acquisitions in the propane business has intensified and become more costly in
recent years. Factors that may adversely affect operating and financial
results, such as warm weather patterns, may limit Star Gas Partners' access to
capital and adversely affect its ability to make acquisitions.
In addition, acquisitions may be dilutive to earnings and any additional debt
incurred to finance acquisitions may affect Star Gas Partners' ability to make
distributions to unitholders.
Star Gas Partners Is Subject to Operating and Litigation Risks That May Not Be
Insured
Star Gas Partners' operations are subject to all operating hazards and risks
incidental to providing consumers with combustible liquids such as propane.
Thus, in the ordinary course of business, Star Gas Partners may be a defendant
in litigation. Star Gas Partners maintains insurance policies in the amounts
and with the coverages and deductibles as the general partner believes are
reasonable. However, there can be no assurance that this insurance will be
adequate to protect Star Gas Partners from all material expenses related to
potential future claims.
The General Partner Has Conflicts of Interest and Limited Fiduciary
Responsibilities
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 Star Gas Partners
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 Star Gas
Partners unitholders for actions that might, without the limitations,
constitute breaches of fiduciary duty. Star Gas Partners 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 Star Gas Partners
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 Star Gas
Partners.
. 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 Star Gas Partners
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 Star Gas
Partners.
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. The general partner controls the enforcement of obligations owed to Star
Gas Partners by the general partner.
. The general partner decides whether to retain separate counsel,
accountants or others to perform services for Star Gas Partners.
. Some officers of the general partner, who will provide services to Star
Gas Partners, 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 Star Gas Partners to
pay the general partner or its affiliates for any services rendered on
terms that are fair and reasonable to Star Gas Partners or entering into
additional contractual arrangements with any of these entities on behalf
of Star Gas Partners.
. In some instances the general partner may borrow funds in order to
permit the payment of distributions.
Tax Risks to Petro Common Stockholders
The Merger Is Taxable to the Petro Common Stockholders
The transaction will be taxable to a Petro common stockholder, generally
resulting in gain or loss in an amount equal to the difference between the
value of the senior subordinated units of Star Gas Partners he receives and the
federal income tax basis he has in the shares of Petro common stock he
exchanges. Any gain or loss will be capital gain or loss if the stock has been
held as a capital asset, and will be long-term capital gain or loss if held for
more than one year. Long-term capital gains are generally taxed at a maximum
rate of 20% for individuals. Capital losses can be deducted against capital
gains and thereafter against ordinary income to the extent of $3,000 per year
for individuals. Any unused capital loss can be carried forward indefinitely.
The transaction will also result in income to Petro equal to the difference
in the value of the Star Gas Partners units it contributes in the transaction
and the federal income tax basis Petro has in the units. The value of units
contributed by Petro includes the amount of any Petro debt extinguished. Petro
expects that its net operating losses will generally offset this income;
however, the IRS could challenge the amount or use of the net operating losses
and a successful challenge could reduce the cash available for distribution by
Star Gas Partners.
Tax Treatment of an Investment in Star Gas Partners Is Dependent on
Partnership Status Which May Be Subject to Challenge
The federal income tax benefits of an investment in Star Gas Partners depend
largely on Star Gas Partners' classification as a partnership for federal
income tax purposes. Assuming the accuracy of factual matters represented as
true by the general partner and Star Gas Partners, counsel is of the opinion
that Star Gas Partners has been and will be classified as a partnership for
federal income tax purposes. No ruling from the IRS as to classification has
been or is expected to be requested. Instead, Star Gas Partners intends to rely
on the opinion of counsel, which is not binding on the IRS. Based on the
representations of Star Gas Partners and the general partner and a review of
applicable legal authorities, counsel is also of the opinion that at least 90%
of Star Gas Partners' gross income is
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"qualifying income," within the meaning of Section 7704 of the Internal Revenue
Code of 1986, as amended. This means that Star Gas Partners' 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 Star Gas Partners will continue to be classified as a partnership
depends, at least partly, on Star Gas Partners' ability to continue to meet
this qualifying income test in the future.
If Star Gas Partners were classified as an association taxable as a
corporation for federal income tax purposes, Star Gas Partners would pay tax on
its income at corporate rates, which is currently a 35% federal rate. If this
were to occur, distributions to the Star Gas Partners unitholders would
generally be taxed again as corporate distributions, and no income, gains,
losses and deductions would flow through to the Star Gas Partners unitholders.
Because a tax would be imposed upon Star Gas Partners as an entity, the cash
available for distribution to Star Gas Partners 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
Star Gas Partners 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
to entity-level taxation for income tax purposes, then specified provisions of
the partnership agreement are subject to change, including a decrease in
distribution to reflect the impact of that law on Star Gas Partners.
Since There Has Been No IRS Ruling Regarding Tax Consequences There Is
Uncertainty As to Partnership Status
No ruling has been requested from the IRS with respect to classification of
Star Gas Partners as a partnership for federal income tax purposes, whether
Star Gas Partner's propane activities generate "qualifying income" under
Section 7704 of the Internal Revenue Code or any other matter affecting Star
Gas Partners. Accordingly, the IRS may adopt positions different from counsel's
conclusions expressed below. It may be necessary to resort to administrative or
court proceedings to sustain some or all of counsel's conclusions, and these
conclusions may ultimately not be sustained. Any contest of this sort with the
IRS might materially and adversely impact the market value of the units. In
addition, the costs of any contest with the IRS will be borne directly or
indirectly by some or all of the Star Gas Partners unitholders and the general
partner.
There Is a Risk of Tax Liability Exceeding Cash Distributions
A Star Gas Partners unitholder will be required to pay federal income taxes
and, in some cases, state and local income taxes on his allocable share of Star
Gas Partners' income, whether or not he receives cash distributions from Star
Gas Partners. No assurance can be given that a Star Gas Partners unitholder
will receive cash distributions equal to his allocable share of taxable income
of Star Gas Partners or even equal to the actual tax liability that results
from this allocable share of
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income. Further, upon the sale of his units, a Star Gas Partners unitholder may
incur a tax liability in excess of the amount of cash he receives.
Ownership of Units Raises Issues for Tax-Exempt Organizations and Other
Investors
Investment in units by specfic 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. A significant portion of the Petro common stockholders may,
therefore, find it necessary or advisable to sell the senior subordinated units
they acquire in the transaction, possibly driving down the market price of
those units.
There Are Limits on Deductibility of Losses
Taxpayers who are subject to the passive loss rules are generally individuals
and closely held corporations. For these taxpayers, losses generated by Star
Gas Partners will only be available to offset future passive income generated
by Star Gas Partners and cannot be used to offset income from other activities,
including passive activities or investments or interest and dividend income
generated by Star Gas Partners. Passive losses that are not deductible because
they exceed the Star Gas Partners unitholder's share of income of Star Gas
Partners may be deducted in full when the Star Gas Partners unitholder disposes
of his entire investment in Star Gas Partners in a fully taxable transaction
with an unrelated party. Net passive income from Star Gas Partners may be
offset by unused Star Gas Partners losses carried over from prior years, but
not by losses from other passive activities, including losses from other
publicly traded companies.
Tax Shelter Registration Could Increase Risk of Potential IRS Audit
Star Gas Partners is 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. Star Gas Partners cannot assure Star Gas
Partners unitholders that it will not be audited by the IRS or that adjustments
to its income or losses will not be made. Any Star Gas Partners 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 Star Gas Partners' tax returns will lead to adjustments in the Star Gas
Partners unitholders' tax returns and may lead to audits of Star Gas Partners
unitholders' tax returns and adjustments of items unrelated to Star Gas
Partners. Each Star Gas Partners unitholder is responsible for any tax owed as
the result of an examination of his personal tax return.
There is a Possibility of Loss of Tax Benefits Relating to Non-Uniformity of
Units and Non-Conforming Depreciation Covenants
Because Star Gas Partners cannot match transferors and transferees of units
and because of other reasons, Star Gas Partners has adopted depreciation and
amortization conventions that do not conform with all aspects of specified
proposed and final Treasury Regulations. A successful IRS challenge to those
conventions could adversely affect the amount of tax benefits available to a
purchaser of units and could have a negative impact on the value of the units.
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Tax Gain or Loss on Disposition of Units Could Be Different Than Expected
A Star Gas Partners unitholder who sells units will recognize gain or loss
equal to the difference between the amount realized, including his share of
Star Gas Partners nonrecourse liabilities, and his adjusted tax basis in these
units. Thus, prior Star Gas Partners distributions in excess of cumulative net
taxable income attributable to a unit, and that therefore decreased a Star Gas
Partners unitholder's tax basis in that unit, will effectively become taxable
income if the unit is sold at a price greater than the Star Gas Partners
unitholder's tax basis, even if the price is less than his original cost. A
portion of the amount realized, whether or not representing gain, may be
ordinary income. Furthermore, should the IRS successfully contest specific
conventions used by Star Gas Partners, a Star Gas Partners unitholder could
realize more gain on the sale of units than would be the case if the
conventions were used, without the benefit of decreased income in prior years.
Reporting of Star Gas Partners Tax Information Is Complicated and Subject to
Audits
Star Gas Partners will furnish each Star Gas Partners unitholder with a
Schedule K-1 that shows his allocable share of income, gains, losses and
deductions for each year. In preparing these schedules, Star Gas Partners will
use various accounting and reporting conventions and adopt various depreciation
and amortization methods. There is no assurance that these schedules will yield
a result that conforms to statutory or regulatory requirements or to
administrative pronouncements of the IRS. Further, Star Gas Partners' tax
return may be audited, and any audit of this type could result in an audit of a
partner's individual tax return as well as increased liabilities for taxes
because of adjustments resulting from the audit.
There Are State, Local and Other Taxes To Which Star Gas Partners Unitholders
Will Likely Be Subject
In addition to federal income taxes, Star Gas Partners 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 Star Gas Partners does business or owns
property. A Star Gas Partners 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 Star Gas Partners does business or
owns property and may be subject to penalties for failure to comply with those
requirements. The general partner anticipates that substantially all of Star
Gas Partners' 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; however, New
Hampshire's tax only applies to interest and dividend income. Each of these
states currently imposes a personal income tax. It is the responsibility of
each Star Gas Partners 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.
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CAUTIONARY STATEMENT
Star Gas Corporation provided all information in this proxy statement about
Star Gas Partners, Star Gas Propane and its subsidiaries involved in propane
operations, and Petro/Mergeco, Inc.
Petro provided all information in this proxy statement about Petro and its
subsidiaries in the home heating oil business.
. You should rely only on the information contained in this document or to
which we refer you. We have not authorized anyone to provide you with
information that is different.
. We are not offering to sell or seeking your offer to buy these
securities in any state where it is illegal to do so.
. We are not seeking your proxy in any state where it is illegal to do so.
. This information may change after , 1999.
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PARTIES
Star Gas Partners and Star Gas Propane
Star Gas Partners is a publicly-traded Delaware limited partnership formed in
1995 to acquire and operate the propane business of Star Gas Corporation and
Petro. Star Gas Partners' activities are conducted through Star Gas Propane,
L.P., a Delaware limited partnership, and a corporate subsidiary of Star Gas
Propane, L.P. Except as the context otherwise requires, references to or
descriptions of operations of Star Gas Partners include the operations of Star
Gas Propane and any other subsidiary operating partnership or corporation.
Star Gas Partners is primarily engaged in the retail distribution of propane
and related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers. Star Gas Partners believes that it is
the eighth largest retail propane distributor in the United States, serving
approximately 166,000 customers from 74 branch locations in the Midwest and
Northeast. For the fiscal year ended September 30, 1998, it had total sales on
a pro forma basis of approximately $116.1 million. Propane is used primarily as
fuel for space and water heating and cooking by Star Gas Partners' residential
and commercial customers, who are the largest portion of Star Gas Partners'
customer base. In the Midwest, Star Gas Partners services customers in Indiana,
Kentucky, Michigan, Ohio and West Virginia. In the Northeast, Star Gas Partners
services customers in Connecticut, Maine, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania and Rhode Island. In addition to its retail
business, Star Gas Partners serves approximately 50 wholesale customers from
its wholesale operation in southern Indiana.
For the fiscal year ended September 30, 1998, approximately 80% of Star Gas
Partners' sales were to retail customers and approximately 20% were to
wholesale customers. The retail customers are predominately residential (56%)
with the remainder representing those that are agricultural (19%),
industrial/commercial (18%) and motor fuel users (7%). Residential sales have a
greater profit margin, more stable customer base and less sensitivity to price
changes than the other markets served by Star Gas Partners. Sales to
residential customers for fiscal 1998 accounted for 66% of Star Gas Partners'
gross profit on propane sales, reflecting the higher-margin nature of this
segment of the retail market.
Star Gas Partners' business strategy is to maximize its cash flow and
profitability, primarily through:
. internal growth,
. controlling operating costs and
.acquisitions that have the potential for generating attractive returns on
investment.
The retail propane industry is mature, experiences only limited growth in total
demand for the product and is large and highly fragmented. Currently there are
approximately 6,000 independently owned and operated propane distributors.
Given these characteristics, Star Gas Partners' acquisition strategy is focused
on acquiring smaller to medium-sized local and regional independent propane
distributors, particularly those with a relatively large percentage of
residential customers, which
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generate higher margins than other types of customers, and those located in the
Midwest and Northeast, where Star Gas Partners believes it can attain higher
margins than in other areas of the United States.
To facilitate Star Gas Partners' acquisition strategy, Star Gas Propane has
bank credit facilities, which consist of a $25 million acquisition facility and
a $12 million working capital facility. As of September 30, 1998, $9.0 million
was outstanding under the acquisition facility and $4.8 million under the
working capital facility. In addition to borrowings under the bank credit
facilities, Star Gas Partners may fund future acquisitions from internal cash
flow or from the issuance of additional Star Gas Partners interests or debt
securities.
While Star Gas Partners regularly considers and evaluates acquisitions as
part of its ongoing acquisition program, Star Gas Partners does not have any
present agreements or commitments regarding any material acquisition other than
the acquisition of Petro. The general partner has broad discretion in making
acquisitions, and it is expected that it will not generally seek approval of
acquisitions by Star Gas Partners' limited partners.
For information concerning weather conditions, and other factors that could
adversely affect Star Gas Partners' operations, see "Risk Factors--Risks to
Petro Common Stockholders--Since Weather Conditions May Adversely Affect the
Demand for Propane, Star Gas Partners' Financial Condition Is Vulnerable to
Warm Winters."
Additional information about Star Gas Partners is included in Star Gas
Partners' Annual Report on Form 10-K for its fiscal year ended September 30,
1998 and the other documents relating to Star Gas Partners that are
incorporated herein by reference. See "Incorporation of Certain Documents By
Reference."
Petro
Petro is a Minnesota corporation engaged primarily in the retail distribution
of home heating oil in the Northeast and Mid-Atlantic states. Petro serves
approximately 340,000 customers from 24 branch locations including metropolitan
Boston, New York City, Baltimore, Providence, and Washington, D.C., with total
sales on a pro forma basis of approximately $450.1 million for the twelve
months ended September 30, 1998. Petro believes that it is the largest retail
distributor of home heating oil in the United States. As an adjunct to its
heating oil business, Petro installs and repairs heating equipment. Petro
considers these services, which are typically not designed to generate profits,
to be an integral part of its basic fuel oil business and generally does not
provide service to any person who is not a home heating oil customer. To a
limited extent, Petro also markets other petroleum products, including diesel
fuel and gasoline, to commercial customers.
The home heating oil industry is large, highly fragmented and undergoing
consolidation, with approximately 3,700 independently owned and operated home
heating oil distributors in the Northeast. Petro has been the principal
consolidator in this industry and, since 1979, when Petro's current management
assumed control, has acquired over 180 retail heating oil distributors. Petro
acquires distributors in both new and existing markets and integrates them into
the existing operations. Economies of scale are realized from these purchases
through its centralization of accounting, data processing, fuel oil purchasing,
credit and marketing functions. Petro is well known in the heating oil industry
and is regularly contacted by potential sellers. As a result of its growth
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strategy, heating oil sales volume increased from 59.4 million gallons in 1980
to 410.3 million gallons for the year ended December 31, 1997, a compound
annual growth rate of 12%. Despite its size, Petro estimates that its customer
base represents only approximately 5% of the residential home heating oil
customers in the Northeast.
Petro has been implementing an operational restructuring program, including a
"brand name" identity program to, among other things, reduce customer attrition
and improve operating margins.
Following the completion of the transaction, Petro will operate as a wholly-
owned indirect subsidiary of Star Gas Propane.
Additional information about Petro is included in Petro's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and other documents
relating to Petro that accompany this proxy statement. See "Incorporation of
Certain Documents By Reference."
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PROXY SOLICITATIONS
The Star Gas Partners Unitholders Meeting
Date, Time and Place. The Star Gas Partners unitholders meeting will be held
on March 16, 1999, at 10:00 a.m., EST, at Chase Manhattan Bank, 270 Park
Avenue, 11th Floor, Conference Room C, New York, New York.
Purpose. The purpose of the unitholders meeting is to consider and vote upon
the proposal to acquire Petro, the proposal to amend the partnership agreement
and the proposal to change the general partner.
Star Gas Partners Record Date. The close of business on January 29, 1999 has
been fixed by the Star Gas Corporation board as the record date for the
determination of Star Gas Partners common unitholders entitled to notice of,
and to vote at, the unitholders meeting and any adjournment or postponement of
the meeting. On the Star Gas Partners record date, there were 3,858,999 common
units issued and outstanding, held by approximately holders of
record.
Recommendations of the Special Committee and the Star Gas Corporation
Board. The special committee believes that the transaction is in the best
interests of the Star Gas Partners public common unitholders and has
recommended the transaction to the Star Gas Corporation board. Based on this
recommendation, the Star Gas Corporation board unanimously recommends that Star
Gas Partners common unitholders vote FOR the unitholders meeting proposals. See
"Special Factors--Reasons for the Transaction that the Special Committee
Considered; Recommendations of the Special Committee and Star Gas Corporation
Board."
Description of Proxies and Procedures for Voting and Revoking Proxies. A
proxy card for voting at the unitholders meeting is enclosed with this proxy
statement, which is being mailed to all holders of Star Gas Partners common
units as of the Star Gas Partners record date. When a proxy card is returned,
properly completed, signed and dated, the common units it represents will be
voted in accordance with the instructions contained on the proxy card. If a
Star Gas Partners common unitholder does not attend the unitholders meeting and
does not return the signed proxy card, that holder's shares will not be voted,
and this will have the effect of a vote AGAINST the unitholders meeting
proposals. Star Gas Partners common unitholders are urged to mark the box on
the proxy card to indicate how common units represented by the proxy card are
to be voted. An executed proxy card that does not indicate how common units are
to be voted will be voted FOR all unitholders meeting proposals.
Star Gas Corporation does not intend to bring any matters before the
unitholders meeting other than approval of the unitholders meeting proposals
and does not know of any other matters sought to be brought before the
unitholders meeting by others. If any business other than the unitholder
meeting proposals is brought before the unitholders meeting, the common units
represented by a proxy card will be voted by those persons appointed by Star
Gas Corporation to vote the common units represented by the proxy card
according to their best judgment. The proxy card also confers discretionary
authority on the persons appointed by Star Gas Corporation named on the proxy
card to vote the common units represented thereby on any other procedural
matter that is properly presented for action at the unitholders meeting.
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The execution of a proxy card will not affect a Star Gas Partners
unitholder's right to attend the unitholders meeting and vote in person. A Star
Gas Partners unitholder who has given a proxy may revoke it at any time before
it is exercised at the unitholders meeting by:
(a) delivering a written notice of revocation to the Vice President--
Finance of Star Gas Corporation,
(b) executing and submitting a proxy card bearing a later date or
(c) attending the unitholders meeting and voting in person.
However, the mere presence at the unitholders meeting by a person who has given
a proxy will not revoke that proxy.
Unless the arrangement between the beneficial owner and a broker or other
nominee holder provides otherwise, brokers and other nominee holders of common
units will not have discretionary authorization to vote common units on any of
the matters to be voted on in the absence of instructions from the beneficial
owners of those common units. Beneficial owners are therefore urged to provide
instructions to those brokers or other nominees concerning how they wish their
common units to be voted. Abstentions and broker non-votes are each included in
the determination of the number of common units present for quorum purposes.
Abstentions and broker non-votes will in effect be votes against the
unitholders meeting proposals because approval of these proposals requires the
affirmative vote of the holders of a majority of Star Gas Partners all common
units.
Cost of Solicitation of Proxies. Petro, which has agreed to reimburse Star
Gas Partners for the expenses incurred by Star Gas Partners in the transaction,
will bear all costs relating to the solicitation of proxies from the Star Gas
Partners common unitholders and will reimburse banks, brokerage houses,
custodians, nominees, fiduciaries, and other persons holding common units in
their names or in the names of their nominees for their reasonable expenses in
forwarding proxy material to beneficial owners of common units. Star Gas
Partners has engaged Morrow & Co., Inc., a professional proxy solicitation
firm, to solicit proxies on its behalf. Star Gas Partners will pay this firm a
fee of $7,500, plus expenses, for this service. In addition, some of the
officers, directors and regular employees of Star Gas Corporation may, without
additional compensation, solicit proxies by personal interview, telephone,
telex, telegram, facsimile or similar means of communication.
Voting Rights; Vote Required. Except for specified limitations discussed
below, each person deemed to be a "record holder" of Star Gas Partners common
units on the Star Gas Partners record date will have a vote according to their
percentage interest in Star Gas Partners on that date. Under the partnership
agreement as currently in effect, a "record holder" of common units means the
person in whose name those common units are registered on the books of the
transfer agent for the common units at the opening of business on the Star Gas
Partners record date, which includes both persons who have been admitted to
Star Gas Partners as limited partners or substitute limited partners and
transferees of common units who have executed and delivered to that transfer
agent a transfer application as required by the partnership agreement, but who
have not yet been admitted to Star Gas Partners as substitute limited partners.
The partnership agreement also provides that common units held in nominee or
street name account will be voted by the broker, or other nominee, consistent
with the instructions of the beneficial owner, unless the arrangement between
the beneficial owner and his nominee provides otherwise. Star Gas Partners is
entitled to assume that the nominee is acting at the direction of the
beneficial owner without further inquiry.
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The partnership agreement requires the affirmative vote of at least a unit
majority, in order to approve and adopt each of the unitholders meeting
proposals to be considered at the unitholders meeting. "Unit majority" is
defined in the partnership agreement to mean those persons holding at least a
majority of the outstanding common units, other than common units owned by Star
Gas Corporation or any of its affiliates.
The transaction cannot be effected unless the Star Gas Partners common
unitholders approve each of the proposals presented at the unitholders meeting.
Holders of Star Gas Partners common units should not send any unit
certificates with their proxy cards.
Quorum; Adjournment. The partnership agreement provides that the presence at
the unitholders meeting, either in person or by proxy, of a majority of the
outstanding common units is necessary to constitute a quorum at the unitholders
meeting. The partnership agreement also provides that, in the absence of a
quorum, the unitholders meeting may be adjourned from time to time by the
affirmative vote of the holders of a majority of the common units represented
at the unitholders meeting either in person or by proxy.
The partnership agreement provides that when a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting and a
new record date need not be fixed if the time and place of the adjourned
meeting is announced at the meeting at which the adjournment is taken, unless
that adjournment is for more than 45 days. At an adjourned meeting, Star Gas
Partners may transact any business that might have been transacted at the
original meeting.
No Dissenters' Rights. Star Gas Partners common unitholders do not have
dissenters' rights for matters to be voted on at the unitholders meeting.
The Petro Special Meeting
Date, Time and Place. A special meeting of Petro common stockholders will be
held on March 16, 1999, at 11:00 a.m., EST, at Chase Manhattan Bank, 270 Park
Avenue, 11th Floor, Conference Room C, New York, New York.
Purpose. The purpose of the special meeting is to consider and vote upon the
acquisition proposal.
Petro Record Date. The Petro board has fixed the close of business on January
29, 1999, as the record date for the determination of stockholders entitled to
notice of, and to vote at, the special meeting. Accordingly, only holders of
record of shares of common stock at the close of business on the Petro record
date will be entitled to vote at the special meeting and any adjournment or
postponement of the special meeting. As of the close of business on the Petro
record date, there were issued and outstanding 23,854,751 shares of Class A
common stock, held by record holders, and 2,597,519 shares of Class C
common stock, held by 24 record holders.
Petro Board Recommendation. The Petro board has determined that the
transaction is fair and in the best interests of the Petro public common
stockholders. Therefore, it has approved a merger agreement, under which Petro
will be merged with a subsidiary of Star Gas Partners and Petro common
stockholders will receive senior subordinated units of Star Gas Partners, and
an exchange
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agreement, under which Petro common stockholders who are affiliates of Petro
will exchange their common stock for junior subordinated units and general
partner units of Star Gas Partners, and unanimously recommends that the Petro
common stockholders vote FOR the acquisition proposal. See "Special Factors--
Reasons for the Transaction that the Petro Board Considered; Recommendation of
the Petro Board."
Description of Proxies and Procedure for Voting and Revoking of Proxies. A
proxy card for voting at the Petro special meeting is enclosed with this proxy
statement, which is being mailed to all Petro common stockholders as of the
Petro record date. When a proxy card is returned, properly completed, signed
and dated, the shares of Petro common stock represented by it will be voted in
accordance with the instructions on the proxy card. If a Petro common
stockholder does not attend the special meeting and does not return the signed
proxy card, that holder's shares will not be voted, and this will have the
effect of a vote AGAINST the matters to be voted on at the special meeting.
Petro common stockholders are urged to mark the box on the proxy card to
indicate how the shares represented by the proxy card are to be voted. An
executed proxy card that does not indicate how the shares of common stock are
to be voted will be voted "FOR" approval of the acquisition proposal.
The Petro board does not intend to bring any matters before the special
meeting other than approval of the acquisition proposal and does not know of
any other matters sought to be brought before the special meeting by others. If
any business other than the acquisition proposal is brought before the special
meeting, the shares of common stock represented by a proxy card will be voted
by those persons appointed by the Petro board to vote the shares of common
stock represented by the proxy card according to their best judgment. The proxy
card also confers discretionary authority on the persons appointed by the Petro
board named on the proxy card to vote the shares represented by it on any other
procedural matter that is properly presented for action at the special meeting.
The execution of a proxy card will not affect a Petro common stockholder's
right to attend the special meeting and vote in person. A Petro common
stockholder who has given a proxy may revoke it at any time before it is
exercised at the special meeting by
(a)delivering a written notice of revocation to the Secretary of Petro,
(b)executing and submitting a proxy card bearing a later date or
(c)attending the special meeting and voting in person.
However, the mere presence at the special meeting by a person who has given a
proxy will not revoke that proxy.
Unless the arrangement between the beneficial owner and a broker or other
nominee holder provides otherwise, brokers and other nominee holders of Petro
common stock will not have discretionary authorization to vote shares of Petro
common stock on any of the matters to be voted upon in the absence of
instructions from the beneficial owners of that common stock. Beneficial owners
are therefore urged to provide instructions to those brokers or other nominees
concerning how they wish their common stock to be voted. Abstentions and broker
non-votes are each included in the determination of the number of shares of
common stock present for quorum purposes. Abstentions and broker non-votes will
in effect be votes against the acquisition proposal because approval of the
acquisition proposal requires the affirmative vote of the holders of a majority
of all outstanding shares of Petro common stock.
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Petro common stockholders should not send any stock certificates with their
proxy cards. If the transaction is effected, Petro common stockholders will be
provided with transmittal materials for the surrender of Petro stock
certificates in exchange for certificates representing senior subordinated
units of Star Gas Partners or cash payments, as applicable.
Cost of Solicitation of Proxies. Petro will bear all costs relating to the
solicitation of proxies from Petro common stockholders and will reimburse
banks, brokerage houses, custodians, nominees, fiduciaries, and other persons
holding Petro common stock in their names or in the names of their nominees for
their reasonable expenses in forwarding proxy material to beneficial owners of
common stock. Petro has engaged Morrow & Co., Inc. to solicit proxies on behalf
of Petro. Petro will pay that firm a fee of $7,500, plus expenses, for this
service. In addition, some of the officers, directors and regular employees of
Petro may, without additional compensation, solicit proxies by personal
interview, telephone, telex, telegram, facsimile or similar means of
communication.
Voting Rights; Vote Required. All Petro common stockholders of record at the
close of business on the Petro record date are entitled to vote at the special
meeting. Holders of each class of Petro common stock, voting as a separate
class, other than the Class B common stock, will have one vote for each share
for the acquisition proposal. The affirmative vote of the holders of a majority
of the Petro Class A common stock outstanding as of the Petro record date,
voting as a class, and the affirmative vote of the holders of the Petro Class C
common stock outstanding as of the Petro record date, voting as a class, other
than shares held by the directors and officers of Petro and their affiliates,
is required to approve the acquisition proposal.
The directors and executive officers of Petro and affiliates beneficially
owned, as of the Petro record date, 11,843,221 shares of common stock,
excluding all options to purchase shares of Class A common stock and Class C
common stock. The holders of % of the shares of Class A common stock and %
of the shares of Class C common stock have agreed to vote for the acquisition
proposal at the special meeting.
Directors and executive officers of Star Gas Corporation and their
affiliates, other than those persons who were also directors or executive
officers of Petro, did not beneficially own, as of the Petro record date, any
shares of Petro common stock, and no shares of Petro common stock were owned by
Star Gas Partners or Star Gas Corporation.
The transaction cannot be effected without approval of the acquisition
proposal by the Petro common stockholders.
Voting Rights of Holders of Petro Preferred Stock. The acquisition proposal
also requires the approval of the holders of a majority of all shares of
Petro's junior preferred stock, public preferred stock and private preferred
stock, outstanding as of the Petro record date, each voting separately as a
class. The holders of a majority of the Petro preferred stock outstanding as of
the Petro record date have granted irrevocable proxies to Petro or have agreed
to vote their shares for the acquisition proposal.
As of the Petro record date, no shares of Petro preferred stock were
beneficially owned by any of the directors and executive officers of Petro or
Star Gas Corporation or any of their affiliates or by Star Gas Partners or Star
Gas Corporation.
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Class B Shares Will Remain Outstanding. There are 11,228 shares of Class B
common stock currently outstanding, representing less than .1% of the issued
and outstanding shares of common stock of Petro. The Class B common stock will
remain outstanding following the completion of the merger.
Quorum; Adjournment. Petro's restated bylaws provide that the presence at the
special meeting, either in person or by proxy, of a majority of the Petro
common stockholders is necessary to constitute a quorum at the special meeting.
Petro's restated bylaws also provide that in the absence of a quorum, the
special meeting may be adjourned from time to time by the affirmative vote of
the holders of a majority of shares of the common stock represented at the
special meeting either in person or by proxy.
Petro's restated bylaws provide that, when a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting and a new
record date need not be fixed if the time and place of the adjourned meeting is
announced at the meeting at which the adjournment is taken. At an adjourned
meeting at which a quorum is present, Petro may transact any business that
might have been transacted at the original meeting.
Dissenters' Rights. Under Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act, included in full as Annex F to this proxy statement,
Petro common stockholders, other than those who have agreed to vote for the
acquisition proposal or who have granted irrevocable proxies to Petro to vote
for the acquisition proposal at the special meeting, have the right to dissent,
and obtain payment for the "fair value" of their shares, if corporate actions
such as the merger should occur.
Petro common stockholders who wish to exercise dissenters' rights must comply
fully with the requirements of Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act. Accordingly, Petro common stockholders wishing to
dissent are urged to read carefully "Dissenters' Rights" in this proxy
statement and its attached Annex F, and to consult their own legal advisors.
Among other things, Section 302A.473 requires that a Petro common stockholder
wishing to exercise dissenters' rights must:
(1) file with Petro, before the vote on the transaction at the special
meeting, a written notice of intent to demand payment of fair value for
that holder's common stock, and
(2) not vote in favor of the proposal to acquire Petro.
If the acquisition proposal is approved at the Petro special meeting, Petro
common stockholders wishing to dissent from the merger must comply fully
thereafter with a series of additional requirements under Section 302A.473 of
the Minnesota Business Corporation Act.
Failure to follow the procedures in Annex F may result in a termination or
loss of dissenters' rights under Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act.
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SPECIAL FACTORS
Background of the Transaction
The Genesis of the Transaction and Related Events
In May 1997, Mr. Kevin McCarthy, then of Smith Barney Inc., contacted Irik
Sevin, Chairman of the Board and Chief Executive Officer of Petro, to determine
Petro's interest in a proposed transaction consisting of a strategic business
combination with Star Gas Partners. Mr. McCarthy, who had previously been
associated with PaineWebber Incorporated, had provided investment banking
services to, and was very familiar with, both Petro and Star Gas Partners. The
initial contact was made at Mr. McCarthy's initiative based on his perception
that the two entities could benefit from a business combination.
On May 2 and May 7, 1997, Mr. McCarthy and other Smith Barney bankers
presented the following concept to Mr. Sevin. In their view, Petro's common
stock was not fully valued in the public market place due, in large measure, to
a lack of research analyst coverage and investor interest. Mr. McCarthy noted
that despite Petro's preeminent position in the home heating oil industry, the
public market had always had a difficult time valuing its common stock due to:
. there being no other comparable publicly-traded companies;
. its being a cash flow oriented company with no earnings per share, which
is a standard measure used to value publicly-traded common stocks; and
. its small equity market capitalization.
Mr. McCarthy went on to note that while Petro was the principal consolidator of
the home heating oil industry, its capital structure was limiting its full
growth potential. He suggested that converting Petro into a publicly-traded
limited partnership format would address these various issues. He noted that
Petro would benefit from the relatively broad research coverage provided the
relatively large number of publicly-traded limited partnerships. In addition,
these entities were valued on a cash flow basis, similar to Petro's financial
orientation, and that the combined Petro/Star Gas Partners publicly-traded
limited partnership would have a significantly increased market capitalization.
Also of significance was that the publicly-traded limited partnership format
would give Petro access to lower cost capital and increase its financial
flexibility to fund its growth-through-acquisition strategy.
Mr. McCarthy went on to note that he believed that combining Star Gas
Partners and Petro could also significantly benefit Star Gas Partners. While
Star Gas Partners had been performing relatively well operationally, there had
been a significant increase in competition for propane acquisitions, the major
source of Star Gas Partners' growth. This not only was impacting the number of
acquisitions Star Gas Partners could make but was also increasing the purchase
price multiples paid for propane companies. Both of these factors combined to
limit the potential growth in Star Gas Partners' annual cash flow from its
acquisition program. The combination with Petro could provide an additional
source of acquisition opportunities at lower purchase price multiples resulting
from Petro's preeminent position in the home heating oil industry and the
significantly lower level of competition in that industry for acquisitions.
Combining Petro's acquisition opportunities with
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Star Gas Partners' access to lower cost capital suggested the combination of
the two companies made strategic sense.
During May and June 1997, Mr. Sevin had several meetings and telephone calls
with representatives of Smith Barney and other financial and legal advisors
concerning various business, tax and regulatory aspects of the proposed
transaction.
On June 5, 1997, at a Petro board meeting, Mr. Sevin described the proposed
transaction and its benefits. In addition to the original benefits outlined by
Mr. McCarthy, the proposed transaction was now structured to refinance Petro's
relatively high-cost long-term debt and preferred stock with lower cost
partnership equity and a new issue of debt further increasing the combined
entity's distributable cash flow.
Mr. Sevin informed the Petro board that not all aspects of the proposed
transaction had been fully developed and that he had not made any presentation
concerning the combination to the Star Gas Corporation board. After discussing
the matter, a consensus was reached that the proposed transaction seemed
interesting and that Mr. McCarthy should be invited to make a formal
presentation to the Petro board.
Mr. McCarthy Presents the Proposed Transaction to the Petro Board of Directors
On July 24, 1997, the Petro board met to hear Mr. McCarthy make a formal
presentation regarding the proposed transaction. Initially, Mr. McCarthy
explained that he had terminated his relationship with Smith Barney and had
reassociated with PaineWebber as a managing director in its investment banking
division. Mr. McCarthy then reviewed the overall strategic rationale for the
proposed transaction.
Mr. McCarthy went on to describe the proposed transaction's structure
indicating that it would have two fundamental components. The first was Petro's
becoming a wholly-owned subsidiary of Star Gas Partners, by virtue of the Petro
public common stockholders and a limited number of Petro affiliated common
stockholders exchanging their shares for publicly-traded Star Gas Partners
senior subordinated units and a specified number of Petro shares being
exchanged for Star Gas Partners junior subordinated units that would not be
publicly traded. He indicated that in order to provide the Petro public common
stockholders with a publicly-traded partnership unit with sufficient earnings
coverage, there needed to be a specified number of units junior to those
securities. The second component of the proposed transaction was the
refinancing of Petro's outstanding, relatively high-cost debt and preferred
stock through the sale of lower-cost, new partnership equity and debt.
Mr. McCarthy then enumerated the benefits of the proposed transaction to Star
Gas Partners common unitholders as well as to Star Gas Partners. Mr. McCarthy
briefly outlined the following benefits to the Star Gas Partners common
unitholders:
.a significant increase in distributable cash flow,
.an increase in the annualized minimum quarterly distribution from $2.20 to
$2.30,
.improved distribution coverage,
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.larger equity market capitalization and resulting liquidity to Star Gas
Partners unitholders and
.improved growth potential in an otherwise relatively stagnant market.
Mr. McCarthy went on to note that the most important considerations in valuing
public limited partnerships are their growth, ability to make distributions,
and size. The combination of Star Gas Partners and Petro would improve Star Gas
Partners' measures in each of these areas.
After review and discussion by the Petro board of this concept, it authorized
Mr. Sevin to consult further with PaineWebber concerning the proposed
transaction, and to present it to the Star Gas Corporation board. In this
regard, it was determined that it would be most appropriate to approach the two
members of the Star Gas Corporation board who were not officers, directors or
employees of Petro to ascertain their views about the proposed transaction,
since the remaining members of that board were also directors or officers of
Petro. The Petro board recognized that in light of the potential conflict of
interest, the proposed transaction should be analyzed and approved by the non-
Petro members of the Star Gas Corporation board.
The Petro board also instructed Petro's management to closely monitor the
impact of Petro's recently instituted regionalization and product branding
programs as it believed that Petro's ability to operate more efficiently and
with more customer sensitivity would be an important element to the success of
any business combination.
PaineWebber Informally Discusses the Proposed Transaction with the Non-Petro
Directors of Star Gas Corporation
On September 2, 1997, at the request of Mr. Sevin, Mr. McCarthy met with the
non-Petro directors of the Star Gas Corporation board, Mr. William Nicoletti
and Ms. Elizabeth Lanier, concerning the combination of Petro and Star Gas
Partners. Mr. Nicoletti and Ms. Lanier indicated that they had a number of
questions concerning the proposed transaction, but that they believed that Star
Gas Partners would be willing to consider a combination.
Petro Considers Alternative Transactions
In December 1997 and January 1998, Petro also began to explore other
transactions. Mr. Sevin met with representatives of CNG Energy Services
Corporation, a subsidiary of Consolidated Natural Gas Company, a large natural
gas utility, to explore the possibility of forming a joint venture acquisition
corporation. These discussions did not progress beyond the preliminary stages.
In addition, Mr. Sevin met with an investment banking firm which had a
relationship with Enron Capital and Trade Corp., a subsidiary of Enron Corp.,
that was seeking investment opportunities. Mr. Sevin believed that Petro's
large customer base would provide this company with cross-marketing potential
adding to the attractiveness of forming a joint venture acquisition corporation
with Petro. After discussions held in January 1998, this company indicated that
it was not interested in forming this joint venture with Petro.
PaineWebber Formally Presents the Proposed Transaction to the Star Gas
Corporation Board
On January 26, 1998, Mr. McCarthy made a formal presentation concerning the
proposed transaction to the Star Gas Corporation board. He first described the
underlying rationale of the proposed transaction.
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Mr. McCarthy then detailed the proposed transaction's structure:
. Petro would combine with Star Gas Partners, becoming a wholly-owned
subsidiary of Star Gas Propane.
. The Petro public common stockholders, as well as specified affiliated
Petro common stockholders, would receive publicly-traded senior
subordinated units of Star Gas Partners.
. Specified affiliated Petro common stockholders would be required to
exchange their shares for Star Gas Partners junior subordinated units
that would be junior to the senior subordinated units offered the Petro
public common stockholders and would not be publicly traded. Mr. McCarthy
indicated that this condition was required to provide sufficient earnings
coverage of the Star Gas Partners senior subordinated units to make them
sufficiently attractive in the marketplace.
. In determining the exchange ratio for Petro's common stock and how many
Star Gas Partners units would be given to the Petro common stockholders,
the following values were used:
--Petro's common stock was being valued at $3.15 per share.
--The Star Gas Partners senior subordinated units to be given to the
Petro public common stockholders were valued on the basis of their
having an 11.5% yield representing an approximately 10% discount from
the Star Gas Partners common unit value.
--The Star Gas Partners junior subordinated units and general partner
units were valued at an assumed 14% yield representing a 250 basis
point premium over the Star Gas Partners senior subordinated units
based on their additional level of subordination and illiquidity.
. As a result of the anticipated immediate accretion in distributable cash
flow resulting from the transaction, Star Gas Partners would increase its
minimum quarterly distributions per unit from $0.55 to $0.575, or from
$2.20 to $2.30 per unit annually.
. The right to receive incentive payments, which has historically been
provided to the general partner upon meeting specified performance tests,
would be reallocated to all Petro common stockholders by distributing
those rights among the Star Gas Partners senior subordinated units,
junior subordinated units and general partner units, pro rata.
. The general partner of Star Gas Partners would be a newly-organized
limited liability company that would be owned by affiliates of Petro.
. The Star Gas Partners senior subordinated units and junior subordinated
units would be subordinated to the distribution and liquidation rights of
the Star Gas Partners common units until Star Gas Partners earned $2.30
per unit in distributable cash flow for three years, at which time the
subordination period would end.
Mr. McCarthy then described, as he had done with the Petro board, the
benefits of the proposed transaction to the Star Gas Partners public common
unitholders and the Petro public common stockholders.
In response to a question from the directors, Mr. McCarthy indicated that,
based on a preliminary review, he did not believe that a combined
propane/heating oil publicly-traded limited partnership would have a negative
perception in the public market. He considered growth and ability to make
distributions the key considerations for valuing a publicly-traded limited
partnership, and
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Petro's growth potential would more than offset any impact of its having non-
propane activities. In addition, he pointed out that several diversified
publicly-traded limited partnerships exist and perform favorably compared to
their peers.
In response to a question concerning Petro's operating performance, Mr.
McCarthy indicated that while the benefits of Petro's regionalization and
branding programs had begun to be realized, the implied value has yet to be
factored into Petro's stock price. However, these improvements should
ultimately benefit the combined entity and its future value.
The Star Gas Corporation Board Appoints the Special Committee to Consider
the Proposed Transaction
Based on this presentation and the ensuing discussion, the Star Gas
Corporation board believed that there was a consensus to proceed with further
consideration of the proposed transaction. Because all of the directors of Star
Gas Corporation were also directors or officers of Petro, other than Mr.
Nicoletti and Ms. Lanier, the Star Gas Corporation board assigned the task of
exploring the proposal to them. It was decided that these two should act as a
special committee to ensure that the interests of the Star Gas Partners public
common unitholders were independently represented in the proposed transaction.
Ms. Lanier then proposed that the special committee retain independent
financial advisors and legal counsel to assist in a review of the proposed
transaction. The Star Gas Corporation board authorized the special committee to
retain an independent financial advisor and legal counsel as they deemed
appropriate.
In January and February 1998, the special committee invited A.G. Edwards
along with one other investment banking firm to present its qualifications to
serve as financial advisor to the special committee. Following several meetings
and discussions with A.G. Edwards and the other candidate, on March 23, 1998
the special committee engaged A.G. Edwards as its financial advisor. The
special committee had previously retained Baker & Botts, L.L.P. as its legal
counsel.
On February 4, 1998, Petro's management met with investment bankers at
Donaldson Lufkin & Jenrette to discuss the proposed terms for the refinancing
or restructuring of Petro's public and private debt and preferred stock in the
proposed transaction.
Mr. Sevin Reviews the Status of the Proposed Transaction with the Petro Board
in February 1998
At a February 23, 1998 Petro board meeting, Mr. Sevin updated the Petro board
on the discussions with the special committee regarding the proposed
transaction, as well as developments with other energy companies.
The Petro board agreed that Mr. Sevin should continue to pursue the proposed
transaction, as well as other investment alternatives. The Petro board then
asked one of its members to assist Mr. Sevin in structuring these alternatives.
In March 1998, Mr. Sevin met with each of Petro's three commercial banks
separately to determine if the mergers and acquisitions or utility departments
of those institutions could identify any public utility that was seeking to
invest in deregulated energy activities or any other party that might be
interested in investing in or forming a joint venture with Petro.
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Petro Commences Discussions with the Special Committee
On March 10, 1998, Petro's representatives met with the special committee to
discuss certain initial questions that had arisen from its discussions with
potential financial advisors. Petro's representatives wanted to review several
matters with the special committee, including: Petro's capitalization
structure, the improvement in Petro's customer attrition rate, its ability
continue increasing its gross profit margins and to acquire new businesses at
historic rates.
Petro Continues to Pursue Other Investment Alternatives
In March and April 1998, Petro continued to pursue other investment
alternatives. In April 1998, Petro's management met with representatives of two
public utilities, AllEnergy Marketing Company L.L.C. and Connective Power
Delivery, to discuss with each a possible joint venture. While Connective
indicated that it was not interested in pursuing the matter, AllEnergy, which
had previously expressed an interest in purchasing Petro's heating oil
operations, indicated that it could possibly be interested in a joint venture.
However, its conditions to pursuing further discussions of such a venture were
determined to be unacceptable and discussions were ended.
During May and June 1998, Petro had several discussions and meetings with
representatives of Providence Energy Corporation concerning a proposed
investment in Petro, either pursuant to a joint venture or the purchase of
specified Petro operations. However, this utility determined it was not
interested in an investment in Petro and Petro indicated it was not interested
in divesting any of its operations.
Petro Retains Dain Rauscher Wessels to Provide a Fairness Opinion to Petro's
Public Common Stockholders
In April 1998, Petro began a search for an independent investment banking
firm with expertise in the area of publicly-traded partnerships that could
render an opinion as to the fairness, from a financial point of view, of the
consideration to be received by the Petro public common stockholders in the
proposed transaction. On April 22, 1998, Mr. Sevin met with representatives of
Dain Rauscher Wessels. On May 14, 1998, Dain Rauscher Wessels was formally
engaged, and, on May 28 and May 29, 1998, Dain Rauscher Wessels met separately
with the management of Star Gas Partners and Petro in order to begin its due
diligence with respect to Star Gas Partners and Petro.
A.G. Edwards Prepares Preliminary Status Report
On April 28, 1998, A.G. Edwards met with the special committee and members of
Star Gas Partners' management to discuss and present the status of A.G.
Edwards' due diligence efforts and preliminary conclusions. A.G. Edwards
recommended that the special committee proceed in its analysis and review of a
potential business combination with Petro and recommended that A.G. Edwards
begin preparation of a preliminary status report that could be shared with
Petro and PaineWebber. The preliminary status report would include the special
committee's preliminary views on the structure of a potential transaction as
well as its preliminary thoughts on a merger agreement and required changes to
the partnership agreement. The special committee agreed.
On May 4, 1998, A.G. Edwards delivered the preliminary status report and an
updated and revised preliminary financial analysis to the special committee.
The special committee authorized A.G. Edwards to discuss the preliminary status
report with both Petro and PaineWebber.
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On May 5, 1998, at a meeting of the Star Gas Corporation board, the special
committee advised the board as to the status of the preliminary status report
and indicated A.G. Edwards' preliminary views as to the valuation of Petro.
The Special Committee and Petro Meet to Review the Preliminary Status Report
and to Negotiate the Proposed Transaction
On May 7, 1998, the special committee and A.G. Edwards met with Petro and
PaineWebber to discuss the preliminary status report and to begin negotiation
of a potential combination.
The special committee took three firm negotiating positions at the May 7
meeting, which were reflected in the preliminary status report.
First, the special committee required that the minimum quarterly
distribution to be paid to Star Gas Partners common unitholders be raised
from $2.20 annually to $2.30 annually.
Second, the special committee took the position that no distributions
would be paid to the holders of Star Gas Partners senior subordinated
units, junior subordinated units and general partner units following a
transaction that were not earned by the actual performance of the combined
business following the transaction.
Third, the special committee took the position that a $3.15 valuation per
Petro share was too high, and that the special committee would only look at
a combination if the price was in the $2.00 per share range. In support of
this third position, A.G. Edwards discussed with Petro and PaineWebber the
basis for its valuation of Petro's common stock at $2.00 per share.
Mr. Sevin responded that he could agree to the revised minimum quarterly
distribution of $2.30 and to the proposal that during the subordination period
holders of Star Gas Partners senior subordinated units, junior subordinated
units and general partner units would only receive distributions out of
distributable cash generated following the closing of the transaction. However,
he indicated he could not agree to valuing Petro's common stock at $2.00 per
share, indicating his belief that this valuation was unfairly low. He pointed
out that while there are many criteria that could be used in determining the
appropriate valuation for Petro's common stock, he believed the most important
was the accretion to Star Gas Partners resulting from the acquisition of Petro.
While Mr. Sevin questioned some of the assumptions upon which A.G. Edwards
views were based, he noted that even using the most conservative assumption, a
$2.00 value would, based on the projections available at the time, result in
projected accretion of approximately $.62 per unit, which could grow to over
$1.00 per unit. Mr. Sevin indicated that this level of accretion was excessive
and unwarranted and that the approximate $.40 per unit projected accretion
resulting from a $3.15 per share price was certainly more appropriate and would
still make this combination significantly attractive to the Star Gas Partners
common unitholders. This was especially true given the greater growth potential
provided by Petro which would, over time, increase the accretion to over $1.00
per unit even at a $3.15 valuation.
PaineWebber also indicated to A.G. Edwards that the $3.15 per unit valuation
did not represent an excessive premium to market value when Petro's average
stock performance for the last twelve months was considered. PaineWebber noted
that the suspension of Petro's common stock dividends following the unusually
warm weather of the first quarter of 1998 had lowered the short-term trading
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prices of Petro's common stock despite the significant improvements in Petro's
operating results. In addition, PaineWebber asked A.G. Edwards to consider
market statistics prepared by PaineWebber that indicated that the merger
premiums for stocks priced at less than $5.00 per share were generally greater
than the merger premiums for higher priced shares.
In an attempt to bridge the valuation gap, the parties discussed having Star
Gas Partners issue additional units to the Petro common stockholders after the
transaction if Petro met specified financial goals.
At the conclusion of this meeting, the parties agreed to review their
respective positions.
On May 19, 1998, representatives of A.G. Edwards met with representatives of
PaineWebber and Petro in an attempt to reach an agreement on the appropriate
price per share to be used to value the consideration paid to the Petro common
stockholders. PaineWebber provided A.G. Edwards with information concerning
comparable acquisition multiples to demonstrate that a $3.15 per share price
was appropriate. In addition, PaineWebber indicated that Petro's first quarter
operating performance was better than the budgeted figures originally provided
A.G. Edwards, which further suggested that the $3.15 valuation was appropriate.
In order to bridge the gap in valuation, the parties began discussing a $2.50
per share value with Petro's ability to obtain additional value through the
issuance of additional senior subordinated units after the closing if it met
specified earnings criteria. The concept was that Petro would be able to
receive an additional total 909,000 units, at a rate of 303,000 per year in
each of three years that Petro provided Star Gas Partners with $.50 per unit of
accretion in distributable cash flow over the level Star Gas Partners would
earn had it not combined with Petro. It was indicated that these additional
units, if earned, would be issued pro rata to the holders of Star Gas Partners
senior subordinated units, junior subordinated units and general partner units.
A.G. Edwards Prepares a Preliminary Draft Proposal for the Transaction
On May 20, 1998, the special committee met by conference telephone call with
A.G. Edwards and Baker & Botts to discuss its preliminary analysis, updated by
A.G. Edwards, and the status of negotiations. The group also discussed a
preliminary draft proposal prepared by A.G. Edwards for submission to Petro.
The special committee instructed A.G. Edwards to revise the preliminary draft
proposal. On May 21, the special committee met again by conference telephone
call with Baker & Botts to review the proposal. A.G. Edwards submitted a
revised preliminary draft proposal to the special committee on May 26, 1998 and
the special committee instructed A.G. Edwards to submit the proposal to Petro.
The proposal dated May 26, 1998 included the following principal terms:
. In exchange for all of Petro's issued and outstanding shares of common
stock, Star Gas Partners would issue an aggregate of 2,718,000 senior
subordinated units, 524,000 junior subordinated units and 289,000 general
partner units, reflecting a valuation for the Petro common stock of $2.50
per share. In conjunction with the issuance of these new units, Star Gas
Partners would in effect cancel the existing 2,396,078 subordinated units
and the 2% combined general partner interest, both owned by Petro.
. Star Gas Partners would issue up to 303,000 additional senior
subordinated units per year, up to a maximum of 909,000 additional senior
subordinated units, pro rata to the holders of its
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senior subordinated units, junior subordinated units and general partner
units in each year that Petro achieves specified levels of accretion in
the future.
. The amount of new equity required to be raised by Star Gas Partners and
new debt required to be raised by a subsidiary of Star Gas Partners in
order to refinance Petro's existing debt and preferred stock could not
exceed certain maximum amounts and were subject to specified price and
expense limitations.
. The partnership agreement would be amended to prohibit the payment of
distributions to the holders of Star Gas Partners senior subordinated
units, junior subordinated units and general partner units from any
source other than distributable cash generated during the last twelve
months.
. The cost of refinancing Petro's outstanding debt and redeeming Petro's
preferred stock could not exceed specified limits.
The management of Petro believed that, with some further modifications, the
preliminary draft proposal could form the basis of an agreement. With that in
mind, Petro began focusing its efforts on reaching an agreement with
institutional holders of its long-term debt and preferred stock on a basis
that would comply with the terms of the preliminary draft proposal.
Petro Negotiates the Refinancing of its Public and Private Debt and Preferred
Stock
During June and July 1998, representatives of Petro undertook negotiations
with institutional holders of its public and private debt and preferred stock
to obtain the right to refinance these securities.
In August 1998, Petro reached an agreement with institutional holders of
$149 million or 63.1% of Petro's 10 1/8% Subordinated Notes due 2003, 12 1/4%
Subordinated Debentures due 2005 and 9 3/8% Subordinated Debentures due 2006
and 12 7/8% Series B Exchangeable Preferred Stock, to permit the redemption of
those securities at the closing of the proposed transaction. The accepting
holders included the holders of 100% of 12 7/8% preferred stock. This
agreement allows Petro to redeem its 9 3/8% debentures, 10 1/8% notes and 12
1/4% debentures at 100%, 100% and 103.5% of principal amount, and to redeem
its 12 7/8% preferred stock at $23 per share. In consideration for this early
redemption right, Petro agreed to issue to those holders 3.3732 shares of
newly issued junior convertible preferred stock for each $1,000 in principal
amount or liquidation preference of such securities.
Petro subsequently offered to the remaining holders of these securities the
same right of early redemption under the same terms and conditions as agreed
to by the consenting holders. This proposal was made through an exchange offer
that terminated on September 24, 1998 with an aggregate acceptance rate of
more than 95%.
Other Activities Undertaken in Connection With the Proposed Transaction
Formal Financial Advisory Agreement with PaineWebber. On June 3, 1998,
following consultation with a number of Petro board members, the management of
Petro entered into a formal financial advisory agreement with PaineWebber.
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Meeting with Hanseatic on Terms of the Exchange
Also, on June 3, 1998, Mr. Sevin met with the representatives of Hanseatic
Americas LDC, a Bahamian limited duration company indirectly controlled by
Hanseatic Corporation, a majority of the shares of capital stock of which were
owned by Wolfgang Traber, a Petro board member, and in which another Petro
board member, Paul A. Biddelman, acts as President. Hanseatic Americas and
Hanseatic Corporation in the aggregate owned more than 1.9 million shares of
Petro common stock. The purpose of the meeting was to determine the Hanseatic
companies' willingness to exchange their Petro common stock for Star Gas
Partners junior subordinated units and general partner units, rather than
the Star Gas Partners senior subordinated units being exchanged with the Petro
public common stockholders. Specified other affiliates had previously indicated
an unwillingness to accept junior and illiquid securities at the value
suggested by PaineWebber. The Hanseatic companies' assent was necessary, so
that when combined with the shares of Petro common stock that Irik Sevin and
Audrey Sevin were prepared to convert into Star Gas Partners junior
subordinated units and general partner units, a total of the approximately 5.3
million shares of Petro common stock required by Star Gas Partners' proposal
could be accumulated. While Mr. Traber indicated a willingness to undertake an
exchange in order to accommodate completion of the transaction, he further
wanted the independent assent of the major investors in these companies. An
agreement was reached that these representatives would support the exchange.
Meeting with Star Gas Board of Directors on the Status of the Transaction
On July 27, 1998, at a meeting of the Star Gas Corporation board, Mr. Sevin,
on behalf of Petro, and the special committee informed the board of the
progress of the discussions and negotiations between PaineWebber on behalf of
Petro and A.G. Edwards on behalf of the special committee. Mr. Sevin also
informed the Star Gas Corporation board of the results of Petro's negotiations
with the institutional holders of its public and private debt and preferred
stock.
Mr. Sevin advised the Star Gas Corporation board that it was his
understanding that A.G. Edwards would produce a revised proposal in the form of
a draft term sheet to reflect the discussions and negotiations.
Mr. Sevin also informed the board that he had received a telephone call from
a director of Heritage Propane Partners, L.P., another publicly-traded propane
limited partnership, to inquire as to whether Star Gas Partners would be
interested in being acquired by Heritage. The purchase price indicated did not
reflect any premium over the current market price of the Star Gas Partners
common units and the valuation of Petro's subordinated units and general
partner interests was not acceptable to Petro. After discussion, it was decided
that Mr. Sevin should respond that Star Gas Partners was not interested in the
proposal.
A.G. Edwards Prepares and Forwards the Revised Proposal to Petro
On July 28, 1998, following additional telephonic discussions with
PaineWebber to further refine the terms of the revised proposal, A.G. Edwards,
on behalf of the special committee, forwarded the revised proposal to the Star
Gas Corporation board, the Petro board and PaineWebber for each of their review
and consideration. The revised proposal clarified that the Star Gas Partners
general partner units would be subordinated to both its common units and senior
subordinated units, but was otherwise similar to the preliminary draft
proposal.
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On July 29, 1998, Dain Rauscher Wessels met with representatives of Petro to
review the revised proposal and for Dain Rauscher Wessels to undertake further
due diligence.
The Petro Board Reviews the Revised Proposal
On August 3, 1998, at a meeting of the Petro board, which was attended
telephonically by Dain Rauscher Wessels as well as PaineWebber and legal
counsel, Mr. Sevin stated that it was important at this time to apprise the
directors of all of the details of the revised proposal and to answer any
questions that they may have, since the matter might be brought to a formal
vote within the next week to ten days.
The Petro board then discussed various aspects of the proposed transaction as
well as the fiduciary obligations of the Petro board and those of the Petro
directors who also serve as directors of Star Gas Corporation. In response to
questions regarding these responsibilities, Mr. Michael Rosenwasser, of Andrews
& Kurth L.L.P., co-counsel to Petro, indicated that the special committee would
have the overall responsibility for negotiating, reviewing and deciding whether
to recommend the proposed transaction to the Star Gas Corporation board and to
the public common unitholders. Mr. Rosenwasser further indicated that the law
firms of Phillips Nizer Benjamin Krim & Ballon LLP and Andrews & Kurth would be
representing Petro and its board and that the law firm of Baker & Botts would
be representing the special committee.
A question was raised as to whether it would be advisable to appoint an
independent committee of the Petro board to represent the Petro public common
stockholders. After discussion, it was determined that there was doubt as to
whether an unquestionably independent committee could be constituted. Instead,
the Petro board determined that Petro would not proceed with the proposed
transaction without the approval of the holders of a majority of the shares of
Petro's Class A common stock owned by non-affiliates and unless Petro received
a favorable fairness opinion from Dain Rauscher Wessels as to the consideration
to be received by the Petro public common stockholders.
On August 10, 1998, Petro entered into an agreement with specified affiliated
Petro Class C common stockholders to approve the transaction. Such approval was
required under a Petro stockholders' agreement among the holders of Petro's
Class C common stock.
The Special Committee Approves the Revised Proposal
On August 11, 1998, the Star Gas Corporation board by written consent
authorized the special committee to assume responsibility for all matters
relating to the proposed transaction, including the power and authority to
negotiate the terms of the transaction subject to those additional actions by
the Star Gas Corporation board as may be necessary or advisable under
applicable law. Following the grant of that authority, the special committee
approved the revised proposal and transmitted the revised proposal to the Petro
board.
The Petro Board Approves the Revised Proposal
The Petro board met on August 13, 1998 to consider and vote upon the revised
proposal. Mr. Sevin reviewed with the Petro board some minor changes which had
been made to that document after to the August 3, 1998 meeting, and indicated
that it had been approved by the special committee earlier in the week. After
discussion, the Petro board unanimously approved the revised proposal.
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On August 14, 1998, Petro and Star Gas Partners issued a joint press release
announcing that they had reached an agreement-in-principle concerning the
proposed transaction.
During August, September and October 1998, the special committee, in
conjunction with its legal counsel and financial advisors, negotiated the terms
of a merger agreement and exchange agreement with Petro and its legal counsel
and financial advisors. During the course of these negotiations, the special
committee required, and Petro ultimately agreed, as a condition of
the transaction, that
(1) no distributions could be made on any Star Gas Partners subordinated
units until August 15, 1999;
(2) specified earnings tests had to be achieved for any distributions to be
made on that date or on the next anticipated distribution date of
November 15, 1999; and
(3) as of the closing of the transaction, Petro had to have specified
minimum working capital levels substantially higher than was required in
the preliminary draft proposal.
The Special Committee Recommends and the Star Gas Corporation Board Approves
the Transaction
On October 16, 1998 the special committee met with its financial advisors and
legal counsel to consider the transaction. At this meeting, A.G. Edwards
delivered its oral and written opinion that the transaction was fair, from a
financial point of view, to the Star Gas Partners public common unitholders.
The special committee then entered into a full discussion of the financial and
legal aspects of the transaction with its financial and legal advisors. On
October 19, 1998, the special committee met again with its financial and legal
advisors and, after discussion and based on the advice of its advisors and the
fairness opinion of A.G. Edwards, unanimously voted to recommend the
transaction to the Star Gas Corporation board for its approval subject to its
legal advisors negotiating the last remaining details of the merger agreement,
none of which were deemed material. On October 19, 1998, based on that
recommendation, the Star Gas Corporation board approved the merger agreement
and exchange agreement and authorized the officers of Star Gas Corporation to
execute and deliver the merger agreement and exchange agreement.
The Petro Board Approves the Transaction
On October 6, 1998, Dain Rauscher Wessels presented to the Petro board its
opinion that the consideration to be provided to the Petro public common
stockholders in the transaction was fair from a financial point of view.
PaineWebber and Petro's legal counsel attended that meeting.
On October 19, 1998, the Petro board held a meeting to consider the
transaction. Based on a variety of factors, including the Dain Rauscher Wessels
opinion, the Petro board unanimously approved the merger agreement and exchange
agreement and authorized and directed the officers of Petro to execute and
deliver the merger agreement and exchange agreement.
Petro and Star Gas Partners Negotiate to Amend the Transaction
As a result of the volatility and uncertainty in the high yield debt markets
in October and November 1998, Petro began to explore alternatives to the
initially contemplated high yield offering of $120 million of senior
subordinated debt. In November and December 1998, Petro had several telephone
conversations and meetings with Bank of America regarding a proposed private
placement of investment grade senior secured debt as an alternative to the high
yield offering. Representatives
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of the bank advised Petro that they believed that there was a market for an
offering of approximately $90 million of Petro senior secured debt if that debt
were to receive an investment grade rating. In their opinion this rating could
be obtained by changing the proportion of capital to be raised from $140
million of equity and $120 million of debt to $170 million of equity and $90
million of debt and by ranking the debt senior secured. In order to structure
this type of offering, Petro needed to obtain the consent of its existing
senior private debtholders to permit the new debt to be given that ranking.
In December 1998, Petro had several conversations with the holders of its
existing senior debt as well as conversations with the Fitch rating service to
determine whether a $90 million senior secured debt offering could receive an
investment grade rating. In December 1998, Petro received favorable indications
from the holders of its existing senior debt that they would be willing to
permit the new senior debt to be pari passu with the existing senior debt. In
January 1999, Petro received preliminary advice from the Fitch rating service
indicating that a $90 million senior secured debt offering by Petro could
receive an investment grade rating.
In January 1999, Mr. Sevin sought approval from the special committee to
amend the merger agreement between Star Gas Partners and Petro to allow an
increase in the amount of Star Gas Partners common units to be issued from $140
million to $170 million and to provide greater flexibility in that agreement's
limitation on the annual cost of new capital.
After consultation with A.G. Edwards, the special committee advised Mr. Sevin
that they were concerned that an increase in the size of the equity offering
would reduce the common unit coverage ratio, as compared to the level that was
contemplated under the originally agreed upon capital structure. This would
make the revised structure less attractive, in their opinion, to the Star Gas
Partners common unitholders. The special committee indicated they could approve
the common unit offering increase, however, in return for a 10% reduction in
the conversion ratio on the Star Gas Partners senior subordinated units, junior
subordinated units and general partner units to be issued in exchange for Petro
common stock. The special committee also agreed to allow some limited
flexibility on the cost of capital requirement in the merger agreement to the
extent that Petro obtained savings on the redemption prices of its debt and
preferred stock and used those savings to retire debt and preferred stock.
After reviewing this proposal with PaineWebber, on January 13, 1999, Mr.
Sevin advised the special committee the he would recommend that the Petro board
approve this proposal.
The Special Committee Recommends and the Star Gas Corporation Board Approves
the Amended Transaction
On February , 1999 the special committee met with its financial advisors
and legal counsel to consider the proposed changes to the transaction. At this
meeting, A.G. Edwards delivered its oral and written opinion that the amended
transaction was fair, from a financial point of view, to the Star Gas Partners
public common unitholders. After discussion and based on the advice of its
advisors and the fairness opinion of A.G. Edwards dated February , 1999, the
special committee unanimously voted to recommend the amended transaction to the
Star Gas Corporation board for its approval. This approval was subject,
however, to its legal advisors negotiating the last remaining details of the
amendment to the merger agreement, none of which were deemed material. On
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February , 1999, based on that recommendation, the Star Gas Corporation board
approved the amended merger agreement and amended exchange agreement and
authorized the officers of Star Gas Corporation to execute and deliver the
amended merger agreement and the amended exchange agreement.
The Petro Board Approves the Amended Transaction
On , 1999, Dain Rauscher Wessels presented to the Petro board its
opinion dated February , 1999 that the consideration to be provided to the
Petro public common stockholders in the amended transaction was fair, from a
financial point of view. PaineWebber and Petro's legal counsel attended that
meeting.
Based on a variety of factors, including the Dain Rauscher Wessels opinion
dated February , 1999, the Petro board unanimously approved the amended
merger agreement and amended exchange agreement and authorized and directed the
officers of Petro to execute and deliver those agreements.
Reasons for the Transaction that the Special Committee Considered;
Recommendations of the Special Committee and Star Gas Corporation Board
At a meeting of the special committee held on February , 1999, the special
committee received presentations concerning, and reviewed the terms of, the
amended transaction with members of management and its legal counsel and
financial advisors. At the meeting, the special committee unanimously
determined that the amended transaction is fair to, and in the best interests
of, the Star Gas Partners public common unitholders. The special committee
expressly adopted the conclusions and analysis of A.G. Edwards regarding the
fairness of the transaction to the Star Gas Partners public common unitholders.
Accordingly, the special committee unanimously recommends that the Star Gas
Partners unitholders vote FOR the unitholder meeting proposals at the
unitholders meeting. Based on the recommendation of the special committee, the
board of directors of Star Gas Corporation has determined that the transaction
is fair to, and in the best interests of, the Star Gas Partners public common
unitholders and unanimously recommends that the Star Gas Partners common
unitholders vote FOR each of the proposals at the unitholders meeting. The Star
Gas Corporation board, other than the members of the special committee, has
also determined on behalf of Star Gas Partners that the transaction is fair to,
and in the best interests of, Petro's public common stockholders. In reaching
this conclusion, the Star Gas Corporation board has adopted the analyses
employed by the Petro board to reach the same conclusion.
During the course of its deliberations, the special committee, with the
assistance of management and its legal and financial advisors, considered a
number of factors, including the following potential advantages of the
transaction:
. The special committee believes the acquisition of Petro will increase
Star Gas Partners' ability to grow through further acquisitions in the
home heating oil business. Petro is the largest retail distributor of
home heating oil in the country. In addition, Petro has been the
principal consolidator of that highly fragmented industry, having
purchased over 180 retail home heating oil companies since 1979. The
primary source of growth in the propane industry is acquisitions.
Competition for acquisitions in the propane industry has intensified,
decreasing the opportunities available, and increasing the prices paid,
for propane companies. The special
committee believes Petro's strong position in the home heating oil
industry will provide Star Gas Partners with an additional source of
attractive acquisition and expansion opportunities.
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. The special committee believes the transaction will be accretive to Star
Gas Partners' distributable cash flow per unit based on the following
three factors:
(1)Star Gas Corporation's management projections for 15- and 30-year
weather;
(2) Petro's management projections for 15- and 30-year weather, as well
as the adjusted 15-year weather projections for Petro and the
adjusted 30-year weather projections for Petro utilized by A.G.
Edwards in its analyses; and
(3) the expected pro forma capital structure of Star Gas Partners,
including its pro forma debt and common, senior subordinated,
junior subordinated and general partnership units outstanding.
The expected increase in distributable cash flow per unit resulting from
the transaction will enable Star Gas Partners to raise the minimum
quarterly distribution from $0.55 to $0.575 or from $2.20 to $2.30 on an
annual basis. If the expected increase in distributable cash flow is
realized, it will provide greater protection of the minimum quarterly
distribution and improve the possibility of future distribution increases.
. The transaction will increase Star Gas Partners' market capitalization
and should provide greater common unit liquidity, investment community
awareness and the ability to attract securities analyst research
coverage.
. Petro common stockholders will receive Star Gas Partners senior
subordinated units that are subordinated to the distributions on Star Gas
Partners common units for a minimum of three years. The senior
subordinated units will remain subordinated to the common units until
Star Gas Partners has earned and paid the minimum quarterly distribution
of $2.30 on all units for three consecutive four-quarter periods. In
addition, the subordination period has been extended at least 21 months
from January 1, 2001 to October 1, 2002.
. During the subordination period, distributions on the Star Gas Partners
senior subordinated units, junior subordinated units and general partner
units will be generally limited to the amount of distributable cash
generated after the transaction is completed.
. Overall, the special committee believes that the transaction represents
an opportunity to acquire a company that is expected to significantly
increase Star Gas Partners' size and scope of operations, growth
prospects and ability to increase its distributions to unitholders.
During the course of its deliberations, the special committee also considered
the following potential disadvantages of the transaction:
. Star Gas Partners is acquiring an entity which, based on 1997 revenues,
is several times its size. Therefore, the nature of Star Gas Partners'
business will change significantly.
. Petro has a history of operational and financial difficulties, including
high leverage and recent substantial net losses.
. The success of the acquisition depends upon Star Gas Partners' ability to
continue to
(1)make heating oil acquisitions at attractive prices;
(2)reduce Petro's customer attrition rate; and
(3) improve Petro's profit margins on a per gallon basis.
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There can be no assurance that any of the three will occur.
. Star Gas Partners is making a large investment in a business which, like
Star Gas Partners' propane operations, is negatively affected by warm
weather during the winter months.
. The income of Petro, unlike the income of Star Gas Partners, will be
subject to corporate tax prior to distributions. Dividend income from
Petro cannot be offset with past or future losses generated by Star Gas
Partners' propane operations.
. The ratio of taxable income to cash distributions to be made to the
existing Star Gas Partners common unitholders will increase over time at
a greater rate than if the transaction does not occur.
. The home heating oil business is not a growth business as a result of
competition from alternative energy sources.
. The proportion of Star Gas Partners common units to total limited partner
interests will increase from 60.5% to 79.9%. Therefore the likelihood
that common units will receive the full minimum quarterly distribution
will be reduced.
. The number of Star Gas Partners common units will increase from
approximately 3.9 million to 12.9 million representing a potential
significant dilution.
The special committee also considered the following factors:
. The special committee placed significant weight on A.G. Edwards' opinion
that the transaction is fair, from a financial point of view, to the Star
Gas Partners public common unitholders. The special committee considered
valuation methods used by A.G. Edwards in rendering their opinion to be
appropriate and has adopted the A.G. Edwards opinion in reaching their
determination as to the fairness of the transaction to the Star Gas
Partners public common unitholders. The special committee did not perform
its own financial analysis (see page 66).
. The projections prepared by Star Gas Partners and Petro (see page 91).
. The terms of the exchange agreement, the merger agreement and the
amendments to the partnership agreement (see pages 98, 101 and 112).
. The conditions to the completion of the transaction (see page 103).
. The background of the structure of the transaction (see page 50).
. The conflicts of interest in structuring the transaction (see pages 22
and 27).
. Recent trading prices of the common units and the common stock (see pages
158 and 159).
The discussion above of information and factors considered and given weight
by the special committee is not intended to be exhaustive. Except for A.G.
Edwards' opinion, on which it placed significant weight, in view of the wide
variety of factors considered in its evaluation of the transaction, the special
committee did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the special
committee may have given different weights to different factors.
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The special committee unanimously recommends that the Star Gas Partners
public common unitholders vote FOR the unitholder meeting proposals.
Opinion of A.G. Edwards
On March 23, 1998, the special committee engaged A.G. Edwards to serve as its
financial advisor and to render an opinion as to the fairness, from a financial
point of view, of the transaction to the Star Gas Partners public common
unitholders.
A.G. Edwards, as part of its investment banking business, is regularly
engaged in, among other things, the valuation of businesses and their
securities in mergers and acquisitions, initial public offerings, secondary
distribution of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. A.G. Edwards is familiar
with Star Gas Partners through acting as exclusive financial advisor and
placement agent in Star Gas Partners' private placement of 7.17% First Mortgage
Notes due 2010 and through its securities research coverage of Star Gas
Partners. A.G. Edwards is not aware of any relationship between A.G. Edwards
and Star Gas Partners, Star Gas Corporation or Petro, which in its opinion,
would affect its ability to render a fair and independent opinion in this
matter.
Petro and Star Gas Partners have informed A.G. Edwards of some anticipated
revisions to the merger agreement, the amended and restated partnership
agreement and the proxy statement of Petro and Star Gas Partners filed as part
of the registration statement on Form S-4 of Star Gas Partners. In addition,
Petro and Star Gas Partners have informed A.G Edwards that certain internal
analyses and forecasts and other internal information concerning the businesses
and operations of Petro and Star Gas Partners and certain publicly available
information have changed since A.G. Edwards delivered its opinion to the
special committee on October 16, 1998. The summary below is based upon a draft
of the A.G. Edwards opinion that incorporates these anticipated revisions and
the changes to internal and publicly available information. The A.G. Edwards
opinion is to be delivered to the special committee in February on or prior to
the date of this proxy statement. Petro and Star Gas Partners have not
finalized these revisions, and these revisions are beyond the control of A.G.
Edwards. Any information contained in the draft of the A.G. Edwards opinion is
subject to change, and any changes may result in a material change to the
opinion.
On October 16, 1998 [and February , 1999], A.G. Edwards rendered its
written opinions to the special committee that, as of the date of each opinion,
the transaction was fair, from a financial point of view, to the Star Gas
Partners public common unitholders.
After delivering the October 16, 1998 opinion, Star Gas Partners invited A.G.
Edwards to serve as one of seven co-managers of the equity offering.
The full text of the A.G. Edwards opinion [dated February , 1999] is
attached as Annex D to this proxy statement. It describes A.G. Edwards'
principal assumptions made, procedures followed, matters considered and
limitations of the scope of the review undertaken by A.G. Edwards in rendering
its opinion. The Star Gas Partners public common unitholders are urged to, and
should, read the A.G. Edwards opinion carefully and in its entirety. The A.G.
Edwards opinion was directed to the special committee and addresses only the
fairness, from a financial point of view, of the transaction to the Star Gas
Partners public common unitholders and does not constitute tax advice or a
recommendation to any Star Gas Partners public common
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<PAGE>
unitholder as to how to vote on the transaction. The summary of the A.G.
Edwards opinion in this proxy statement is qualified in its entirety by
reference to the full text of the A.G. Edwards opinion.
For purposes of the A.G. Edwards opinion [dated February , 1999] A.G.
Edwards assumed that Star Gas Partners will be able to complete the private
debt offering of approximately $90.0 million of senior secured notes, the
public equity offering of approximately $170.0 million of common units, and the
redemption of some debt and preferred stock of Petro. A.G. Edwards understood
that the transaction will not be completed if Star Gas Partners is unable to
complete the offerings and redemptions in accordance with the terms of the
amended merger agreement. A.G. Edwards also assumed that the withdrawal of Star
Gas Corporation as general partner of Star Gas Partners and the related
admission of a successor general partner will have no financial impact on the
Star Gas Partners public common unitholders.
In rendering its opinion [dated February , 1999], A.G. Edwards reviewed:
. the most recently available drafts of Star Gas Partners' registration
statement on Form S-4 and its exhibits including the amended merger
agreement, the exchange agreement, the amended and restated partnership
agreement and the conveyance and contribution agreements;
. some publicly available historical audited financial statements and some
unaudited interim financial statements of Star Gas Partners and Petro;
. some financial analyses and forecasts of Star Gas Partners prepared by,
and reviewed with, management of Star Gas Corporation and the views of
management of Star Gas Corporation regarding Star Gas Partners' past and
current business operations, results thereof, financial condition and
future prospects, including the impact of the transaction, as well as
information relating to the retail propane distribution industry and the
potential strategic, financial and operational benefits and challenges
anticipated from the transaction;
. some financial analyses and forecasts of Petro prepared by, and reviewed
with, management of Petro and the views of management of Petro regarding
Petro's past and current business operations, results thereof, financial
condition and future prospects, including the impact of the transaction,
as well as information relating to the home heating oil distribution
industry and the potential strategic, financial and operational benefits
and challenges anticipated from the transaction;
. the pro forma impact of the transaction on Star Gas Partners and Petro;
. the publicly reported historical price and trading activity for the
common units and the Class A common stock, including a comparison of some
financial and stock market information for Star Gas Partners with similar
publicly available information for some other companies, the securities
of which are publicly traded;
. the current market environment generally and the retail propane
distribution environment and the home heating oil distribution
environment in particular;
. information relating to the financial terms of some transactions,
including selected merger and acquisition transactions; and
. any other information, financial studies, analyses and investigations,
and financial, economic and market criteria that A.G. Edwards considered
relevant.
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<PAGE>
A.G. Edwards did not perform an analysis related to the net book value or the
liquidation value of Petro as it considered these analyses inappropriate under
the circumstances of the transaction. A.G. Edwards believes that net book value
represents only historical financial performance and does not accurately
reflect market value or potential future financial performance. Additionally,
A.G. Edwards believes that a liquidation value analysis is inappropriate for
valuing Petro as an ongoing concern. In rendering the A.G. Edwards opinion
[dated February , 1999], A.G. Edwards assumed that the transaction will be
completed on the terms contained in the merger agreement, without any waiver of
any material terms or conditions by Star Gas Partners or Petro.
The financial or other information upon which A.G. Edwards based its opinion,
[dated February , 1999] was either publicly available, furnished to or
otherwise discussed with A.G. Edwards for the purpose of its opinion. A.G.
Edwards relied upon and assumed the accuracy and completeness of this
information without any independent verification. A.G. Edwards assumed and was
advised by the management of Star Gas Corporation and Petro that the financial
projections and other information provided to A.G. Edwards were reasonably
prepared on a basis that reflects the best currently available estimates and
judgments of the management of Star Gas Corporation and Petro. A.G. Edwards
requested that the management of Star Gas Corporation adjust the 1999 Star Gas
Partners projections for the actual results through January 21, 1999. These
adjusted for actual projections were lower than the Star Gas Partners 1999
EBITDA projections by 12.4% for the 30-year weather projections and 10.0% for
the 15-year weather projections.
A.G. Edwards reviewed numerous sets of Petro's projections and analyzed what
it believed were some of the major assumptions embedded within Petro's
projections, which are detailed in "--Certain Projections of Petro and Star Gas
Partners."A.G. Edwards requested that Petro:
(1) make changes to two of its assumptions;
(2) adjust its 1999 projections for the actual results through January 21,
1999; and
(3) furnish A.G. Edwards with the resulting adjusted projections based on
both 15-year weather and 30-year weather, collectively referred to as
the "adjusted projections for Petro."
The two assumptions that A.G. Edwards requested that Petro change were as
follows:
. A.G. Edwards assumed retail margin growth of $0.01 per gallon in 1999 and
$0.005 per gallon thereafter; and
. A.G. Edwards assumed that Petro would complete $15.0 million in 1999 and
$30.0 million, annually, in 2000 to 2002 of home heating oil company
acquisitions at a purchase price of 4.75x the first year earnings before
interest expense, income taxes, depreciation and amortization and any
infrequent revenues and expenses ("EBITDA").
The adjusted 30-year weather projections for Petro resulted in heating oil
EBITDA projections that were lower than the heating oil EBITDA projections from
Petro's 30-year weather projections by the following percentages for 1999,
2000, 2001 and 2002: [5.9]%, [4.3]%, [7.7]% and [10.6]%. The adjusted 15-year
weather projections for Petro resulted in heating oil EBITDA projections that
were lower than the heating oil EBITDA projections from Petro's 15-year weather
projections by the following percentages for 1999, 2000, 2001 and 2002: [3.4%],
[3.3]%, [5.0]% and [6.6]%.
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The special committee did not engage A.G. Edwards to, and therefore A.G.
Edwards did not, verify the accuracy or completeness of any of the information
above. A.G. Edwards has relied upon the assurances of the management of Star
Gas Corporation and Petro that the managements are not aware of any facts that
would make the information inaccurate or misleading. A.G. Edwards did not
conduct a physical inspection of the properties or facilities of Star Gas
Partners or Petro nor did it make or obtain any independent evaluation or
appraisals of those properties or facilities or assets and liabilities. A.G.
Edwards assumed that the transaction will be accounted for as a purchase
transaction under generally accepted accounting principles. A.G. Edwards also
assumed that the final form of Star Gas Partners' registration statement on
Form S-4, the merger agreement, the exchange agreement, the amended and
restated partnership agreement and the conveyance and contribution agreements
would be substantially similar to the last drafts reviewed by A.G. Edwards,
except for changes requested by the special committee. The A.G. Edwards opinion
is necessarily based on economic, market and other conditions as in effect on,
and the information made available to A.G. Edwards as of [February , 1999].
The consideration being paid to the Petro common stockholders in the
transaction will consist of Star Gas Partners senior subordinated units, junior
subordinated units and general partner units. As of the date of the A.G.
Edwards opinion, a market price did not exist for these units. After
the transaction, a market price will exist only for the Star Gas Partners
senior subordinated units. In A.G. Edwards' judgment, an analysis of the value
per unit of each of the Star Gas Partners senior subordinated units, junior
subordinated units and general partner units was necessary to evaluate the
fairness of the transaction. In analyzing the value of the Star Gas Partners
senior subordinated units, A.G. Edwards reviewed estimated ranges of discount
rates, trading yields and relative valuations compared to the price of
the publicly-traded Star Gas Partners common units. In determining these
estimated ranges, A.G. Edwards considered, among other factors:
. during the subordination period, Star Gas Partners common unitholders
will have priority in payment of the full minimum quarterly distribution
plus arrearages before any distributions are made to the Star Gas
Partners senior subordinated unitholders;
. the earliest date on which the subordination period could expire is
October 1, 2002;
. the subordination period would only expire if the adjusted operating
surplus generated during each of the three immediately preceding non-
overlapping four-quarter periods equaled or exceeded the sum of the
increased minimum quarterly distribution of $2.30 on a yearly basis on
all outstanding units during that period;
. during the subordination period, distributions on the Star Gas Partners
senior subordinated units will be limited to the amount of distributable
cash generated;
. the Star Gas Partners senior subordinated units will receive a
distribution of additional Star Gas Partners senior subordinated units,
but only if Petro achieves specified financial goals during the five-
year period following the closing of the transaction; and
. the Star Gas Partners senior subordinated units will receive a pro rata
distribution of the rights to receive incentive distributions previously
held by the general partner.
A.G. Edwards' analysis resulted in an implied valuation range for a Star Gas
Partners senior subordinated unit of [$15.40] to [$17.33] per unit, of which
A.G. Edwards used the midpoint value of [$16.36].
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<PAGE>
In analyzing the value of the Star Gas Partners junior subordinated units and
general partner units, A.G. Edwards considered, among other factors, some of
the differences between the Star Gas Partners senior subordinated units, on the
one hand, and the junior subordinated units and general partner units, on the
other hand, including:
. the lack of marketability of the Star Gas Partners junior subordinated
units and general partner units;
. the authority given the general partner under the amended and restated
partnership agreement, and reflected in the general partner units, to
control the affairs of Star Gas Partners; and
. during the subordination period, both the common units and senior
subordinated units will have priority in payment of the full minimum
quarterly distribution before any distributions are made on the Star Gas
Partners junior subordinated units and general partner units.
A.G. Edwards' analysis resulted in an implied valuation range for the junior
subordinated units and general partner units of [$12.51] to [$14.44] per unit,
of which A.G. Edwards used the midpoint value of [$13.48]. Based on an implied
value of [$16.36] for each senior subordinated unit and [$13.48] for each
junior subordinated unit and general partner unit, A.G. Edwards calculated that
the implied consideration paid for each Petro share averaged [$1.92].
A.G. Edwards did not express an opinion as to what the value of the senior
subordinated units, junior subordinated units or general partner units will be
when issued to the Petro common stockholders in the transaction or the price at
which the common units or senior subordinated units will trade after the
transaction.
The preparation of a fairness opinion is a complex process and is not readily
susceptible to partial analysis or summary description. In rendering the A.G.
Edwards opinion [dated February , 1999], A.G. Edwards applied its judgment to
a variety of complex analyses and assumptions, considered the results of all of
its analyses as a whole and did not attribute any particular weight to any
analysis or factor considered by it. Furthermore, selecting any portion of its
analyses, without considering all analyses, would create an incomplete view of
the process underlying the A.G. Edwards opinion. In addition, A.G. Edwards may
have given various analyses and factors more or less weight than other
analyses and factors, and may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be A.G.
Edwards' view of the actual value of Star Gas Partners or Petro. In performing
its analyses, A.G. Edwards made numerous assumptions regarding industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of Star Gas Partners or Petro.
The assumptions made and judgments applied by A.G. Edwards in rendering the
A.G. Edwards opinion [dated February , 1999] are not readily susceptible to
description beyond that in the written text of the A.G. Edwards opinion itself.
Any estimates are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than those suggested
by the estimates. A.G. Edwards does not assume responsibility if future results
are different from those projected. The analyses performed were prepared solely
as part of A.G. Edwards' analysis of the fairness, from a financial point of
view, to Star Gas Partners public common unitholders of the
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transaction and were conducted for the delivery of the A.G. Edwards opinion to
the special committee. The A.G. Edwards opinion was one of the many factors
taken into consideration by the special committee in making its determination
to recommend the transaction. The decision to enter into the transaction was
solely that of the special committee and the Star Gas Corporation board.
The following is a summary of the material analyses performed by A.G. Edwards
in arriving at the A.G. Edwards opinion [dated February , 1999]:
Pro Forma Acquisition Analysis
A.G. Edwards analyzed the impact of the transaction on Star Gas Partners,
. distributable cash flow, which is EBITDA less interest expense,
maintenance, capital expenditures and taxes and related accretion,
. distributable cash flow per unit, which is distributable cash flow
divided by the total number of common, senior subordinated, junior
subordinated and general partner units, and the related accretion,
. common unit coverage, which is distributable cash flow per common unit
divided by the yearly minimum quarterly distribution of $2.20, or $2.30
on a pro forma basis and
. total unit coverage, which is distributable cash flow per total unit
divided by the yearly minimum quarterly distribution of $2.20, or $2.30
on a pro forma basis.
Based on the adjusted 15-year weather projections for Petro and the Star Gas
Corporation's management projections for 15-year weather and adjusted 30-year
weather projections for Petro and Star Gas Corporation's management projections
for 30-year weather, as well as other assumptions including assumptions
regarding the refinancing transactions, A.G. Edwards calculated pro forma for
the transaction, projected distributable cash flow per unit, common unit
coverage and total unit coverage and compared these calculations to the same
calculations for Star Gas Partners on a stand-alone basis under three
scenarios:
. actual 1998, which was based on historical results for Star Gas Partners
and Petro for the four quarters ended September 30, 1998,
. adjusted for actual 1999 and
. projected 2000, which assumed normal weather.
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<PAGE>
The results are as follows:
<TABLE>
<CAPTION>
15-Year Weather 30-Year Weather
--------------------- ---------------------
Star Gas Star Gas
Partners Partners
Stand-alone Pro Forma Stand-alone Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Accretion
1998 Actual...................... [$0.14] [$0.14]
1999 Adjusted for Actual......... [0.57] [0.57]
2000 Projected................... [0.39] [0.39]
Common unit coverage
1998 Actual...................... [0.98x] [0.79x] [0.98x] [0.79x]
1999 Adjusted for Actual......... [1.04] [1.07] [1.13] [1.13]
2000 Projected................... [1.27] [1.15] [1.49] [1.29]
Total unit coverage
1998 Actual...................... [0.59x] [0.63x] [0.59x] [0.63x]
1999 Adjusted for Actual......... [0.64] [0.86] [0.68] [0.90]
2000 Projected................... [0.80] [0.94] [0.92] [1.04]
</TABLE>
A.G. Edwards believes that the accretion and increase in total unit coverage
support the A.G. Edwards opinion, and that the decrease in common unit coverage
in 1998 actual and 2000 projected does not support the A.G. Edwards opinion.
Analysis of Acquisition Premiums to Market Value
A.G. Edwards analyzed the premium to be received by Petro common stockholders
using the implied consideration of [$1.92] for each Petro share and the market
value of the Petro Class A common stock one day, one week, four weeks, three
months and one year prior to August 14, 1998, the day the agreement in
principle relating to the transaction was announced. A.G. Edwards reviewed
three groups of selected merger and acquisition transactions of majority or
remaining interests involving domestic public companies, excluding banks,
thrifts and trusts, and compared these transactions with the transaction. The
first group included [551] mergers and corporate transactions announced and
completed since January 1, 1996 through in which the selling company's
share price was equal to or greater than $10 per share one week prior to the
announcement. The second group included [125] mergers and corporate
transactions announced and completed since January 1, 1996 through in
which the selling company's share price was less than $10 per share but greater
than $5 per share one week prior to the announcement. The third group included
[91] mergers and corporate transactions completed since January 1, 1996 through
in which the selling company's share price was equal to or less than $5
per share one week prior to announcement. A.G. Edwards compared the mean values
for the $10 and greater transactions, the greater than $5 and less than $10
transactions, and the $5 and less transactions, to the transaction premiums.
The results are as follows:
<TABLE>
<CAPTION>
Premium to stock
price prior to Petro at Mean of Mean of Mean of
announcement of the [$1.92] per Unit Transactions Transactions Transactions
transaction on August Implied Offer Equal to or Greater Than $5 Equal to or
14th: Price Less Than $5 and Less Than $10 Greater Than $10
- --------------------- ---------------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C>
One day prior: [2.4%] [39.7%] [34.3%] [28.1%]
One week prior: [9.7%] [48.8%] [42.3%] [32.7%]
Four weeks prior: [(6.9%)] [55.4%] [48.5%] [39.6%]
Three months prior: [20.5%] [67.1%] [58.0%] [77.9%]
One year prior: [36.0%] [53.8%] [45.8%] [53.2%]
</TABLE>
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<PAGE>
A.G. Edwards believes that the analysis of acquisition premiums to market
value supports the A.G. Edwards opinion because the premium to the implied
consideration to be received by the Petro common stockholders is less than the
mean premium received in each of the three groups of selected merger and
acquisition transactions reviewed by A.G. Edwards.
A.G. Edwards observed that Petro's Class A common stock price has declined
since the announcement of the agreement in principle of the transaction and
that the implied premium to be received by Petro common stockholders, based on
Petro's Class A common stock price as of January 26, 1999, was [92.0%].
Contribution Analysis
A.G. Edwards analyzed the relative pro forma contribution of each of Star Gas
Partners and Petro to the ownership of capital in Star Gas Partners pro forma
for the transaction based on Star Gas Partners' and Petro's historical results
of operations and Star Gas Corporation's management projections and the
adjusted projections for Petro. For comparative purposes, A.G. Edwards
converted Petro's historical December 31 fiscal year-end to a September 30
year-end using Petro's quarterly statements to conform to Star Gas Partners'
September 30 year-end. The results are as follows:
Relative Contribution Analysis
<TABLE>
<CAPTION>
Gross Profit EBITDA
---------------------------------- -------------------------------------
15-Year Weather 30-Year Weather 15-Year Weather 30-Year Weather
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Star Gas Star Gas Star Gas Star Gas
Partners Petro Partners Petro Partners Petro Partners Petro
-------- ------ -------- ------ -------- ------ -------- ------
1996.......... 24.3% 75.7% 24.3% 75.7% 1996.......... 31.3% 68.7% 31.3% 68.7%
1997.......... 29.4% 70.6% 29.4% 70.6% 1997.......... 39.8% 60.2% 39.8% 60.2%
1998.......... 28.9% 71.1% 28.9% 71.1% 1998.......... 35.1% 64.9% 35.1% 64.9%
1999 Adjusted 1999 Adjusted
for Actual... [29.1%] [70.9%] [28.9%] [71.1%] for Actual... [32.0%] [68.0%] [32.2%] [67.8%]
2000
Projected..... [ %] [ %] [ %] [ %] 2000.......... [34.1%] [65.9%] [34.4%] [65.6%]
</TABLE>
A.G. Edwards compared these figures to the percentage of the implied pro forma
firm value attributable to Star Gas Partners of [36.4%]. This figure was
calculated by subtracting the implied aggregate purchase price of Petro's
heating oil assets, as described in the comparable transactions analysis, from
the pro forma market capitalization of Star Gas Partners divided by the pro
forma market capitalization of Star Gas Partners. The pro forma market
capitalization of Star Gas Partners equals:
. the pro forma common units multiplied by the market price of the common
units plus
. the pro forma senior subordinated, junior subordinated and general
partner units multiplied by their implied values plus
. the pro forma book value of debt less pro forma cash.
A.G. Edwards believes that the contribution analysis supports the A.G. Edwards
opinion because the percentage of the implied pro forma firm value attributable
to Star Gas Partners is greater than Star Gas Partners' contribution to the
gross profit and EBITDA of Star Gas Partners pro forma for the transaction for
each of the years analyzed with the exception of Star Gas Partners' 1997 EBITDA
contribution.
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Discounted Cash Flow Analyses
A.G. Edwards performed a discounted cash flow analysis of Petro. In
performing the Petro cash flow analysis A.G. Edwards used the adjusted
projections for Petro, excluding the financial impact of projected
acquisitions. In performing the Petro cash flow analysis, A.G. Edwards
discounted back to September 30, 1998, using a discount rate range of [13.5%]
to [14.1%] based upon Petro's weighted average cost of capital, the sum of:
. the projected tax-adjusted operating cash flows for 1999 to 2002; and
. the terminal value for 2002.
The Petro terminal value was determined based on projected 2002 operating cash
flow and a terminal operating cash flow multiple range of [8.0x] to [10.0x].
Operating cash flow means EBITDA less taxes, maintenance capital expenditures
and working capital increases.
The Petro cash flow analysis indicated a present value of the equity of Petro
in the range of [($44.3)] million to [($3.9)] million for 15-year weather and
[($29.8)] million to [$13.2] million for 30-year weather. A.G. Edwards believes
that the Petro cash flow analysis is not meaningful to the A.G. Edwards opinion
because the indicated percent values resulting from this analysis represent the
implied equity value of Petro's heating oil business to Petro's common
stockholders if the transaction is not consummated, and does not relate to the
value of Petro's heating oil business to the Star Gas Partners common
unitholders if the transaction is consummated.
A.G. Edwards also performed discounted cash flow analyses of Star Gas
Partners based on Star Gas Corporation's management projections and Star Gas
Partners pro forma for the transaction based on Star Gas Corporation's
management projections and the adjusted projections for Petro. In performing
the Star Gas Partners cash flow analyses, A.G. Edwards discounted back to
September 30, 1998, using a discount rate range of [9.4%] to [10.3%] for Star
Gas Partners and [9.5%] to [10.3%] for Star Gas Partners pro forma for the
transaction based upon the cost of equity for each, the sum of
. the projected distributable cash flows for 1999 to 2002; and
. the terminal values for 2002.
Star Gas Partners terminal values were determined based on 2002 projected
distributable cash flows and a terminal distributable cash flow multiple range
of [9.0x] to [11.0x] for 15-year weather and [8.0x] to [10.0x] for 30-year
weather. Based on the Star Gas Partners' cash flow analyses and the ratio of
the common units outstanding as of the date of the A.G. Edwards opinion to
total units, including the general partner interest, outstanding as of that
date, A.G. Edwards calculated the present value attributable to the original
Star Gas Partners common units and compared it to the present value
attributable to the original Star Gas Partners common units pro forma for the
transaction. The range of values were [$78.5] million to [$92.8] million for
15-year weather and [$77.7] million to [$92.8] million for 30-year weather for
Star Gas Partners and [$94.7] million to [$111.7] million for 15-year weather
and [$93.1] million to [$111.0] million for 30-year weather for Star Gas
Partners pro forma for the transaction. A.G. Edwards believes that the Star Gas
Partners discounted cash flow analysis supports the A.G. Edwards opinion
because the range of present values attributable to the original Star Gas
Partners common units is higher on a pro forma basis.
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Comparable Transactions Analysis
A.G. Edwards noted that, because Petro is the only publicly-traded home
heating oil distribution company, public disclosure regarding transactions in
the home heating oil distribution industry was extremely limited. A.G. Edwards
analyzed the financial terms related to divestitures by Petro of three of its
heating oil branches and compared them to the implied multiples of the implied
aggregate purchase price of Petro's heating oil assets. The analyzed
divestitures were
. Punderson, a division of Petro located in Springfield, Massachusetts,
. A division of Petro located in southern New Hampshire and
. TLC, a division of Petro's subsidiary Ocennet located in Hartford,
Connecticut.
Petro sold these three branches for a range of 8.0x to 9.8x purchase price to
EBITDA multiples.
In analyzing the implied EBITDA multiple paid for Petro's heating oil assets,
A.G. Edwards considered the following:
. the implied consideration paid for the Petro common stock;
. the implied valuation of the subordinated units and general partner
interest of Star Gas Partners currently owned by Petro;
. the redemption value of certain of Petro's indebtedness and preferred
stock;
. the value of some of Petro's indebtedness that will remain outstanding
subsequent to the transaction;
. consent fees paid to certain of Petro's debt holders;
. an estimate of all of the transaction costs associated with the
transaction that will not be funded by Petro; and
. Petro's actual 1998 EBITDA, adjusted for actual 1999 EBITDA and projected
2000 EBITDA based on the Adjusted Projections for Petro.
Based on this information, actual 1998 EBITDA, adjusted for actual 1999
EBITDA and projected 2000 EBITDA implied multiples paid for Petro's heating
oil assets were [10.3x], [8.2x] and [7.8x] for 15-year weather, respectively,
and [10.3x], [8.1x] and [7.4x] for 30-year weather, respectively. A.G. Edwards
believes that the adjusted for actual 1999 and projected 2000 implied EBITDA
multiples support the A.G. Edwards opinion because these multiples were within,
or lower than, the range of EBITDA multiples that Petro received in the sale of
three of its heating oil branches. A.G. Edwards believes that the actual 1998
implied EBITDA multiple does not support the A.G. Edwards opinion as this
multiple was higher than the range of EBITDA multiples that Petro received in
the sale of three of its heating oil branches.
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Analysis of Selected Publicly Traded Partnerships
A.G. Edwards used publicly-available information to compare selected
financial and market trading information for Star Gas Partners to Star Gas
Partners pro forma for the transaction and to a group of selected retail
propane distributors, all of which are also publicly-traded limited
partnerships. A.G. Edwards selected the retail propane distributors in this
group based on the similarity of their businesses to that of Star Gas Partners.
This group was comprised of:
. AmeriGas Partners, L.P.
. Cornerstone Propane Partners, L.P.
. Ferrellgas Partners, L.P.
. Heritage Propane Partners, L.P.
. National Propane Partners, L.P.
. Suburban Propane Partners, L.P.
No partnership used in the analysis is identical to Star Gas Partners.
A.G. Edwards' analysis involves complex considerations and judgments
concerning differences in the potential financial and operating characteristics
of the selected comparable group of retail propane distributors and other
factors regarding the trading values of this group. The financial information
reviewed included, among other things:
(1) market capitalization, which for purposes of this calculation was
defined as equity market capitalization, plus the book value of debt
plus the book value of minority interest less cash, to latest twelve
months EBITDA and 1999 estimated EBITDA based on currently available
research estimates;
(2) equity market capitalization, which for the purposes of this
calculation was defined as common units plus subordinated units and
implied general partner units multiplied by the market price of the
common units to latest twelve months distributable cash flow and 1999
estimated distributable cash flow based on currently available research
estimates; and
(3) distribution yield.
A.G. Edwards based the analysis for Star Gas Partners and Star Gas Partners pro
forma for the transaction on Star Gas Corporation's management projections and
the adjusted projections for Petro, the closing price of Star Gas Partners'
common units on [January 26, 1999] of [$19.25] and a $2.20 yearly minimum
quarterly distribution for Star Gas Partners stand-alone and a $2.30 annualized
minimum quarterly distribution for Star Gas Partners pro forma. The results are
as follows:
<TABLE>
<CAPTION>
Star Gas Star Gas
Partners Stand- Partners Pro
alone Forma
---------------- ---------------- Public Partnership Public Partnership
15-Year 30-Year 15-Year 30-Year
Weather Weather Weather Weather Medians Ranges
------- ------- ------- ------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Distribution Yield [11.4%] [11.4%] [11.9%] [11.9%] [10.1%] [8.7%] to [16.8%]
Market
Capitalization/LTM
EBITDA [12.3x] [12.3x] [10.4x] [10.4x] [11.9x] [9.4x] to [13.4x]
Market
Capitalization/1999E
EBITDA [11.4x] [11.0x] [8.8x] [8.5x] [9.7x] [7.6x] to [11.5x]
Equity Market Cap/LTM
DCF [14.8x] [14.8x] [12.8x] [12.8x] [13.5x] [10.0x] to [16.0x]
Equity Market Cap/1999E
DCF [13.3x] [12.7x] [9.0x] [8.7x] [10.6x] [3.3x] to ]12.5x]
</TABLE>
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<PAGE>
A.G. Edwards believes that the analysis of selected publicly traded
partnerships supports the A.G. Edwards opinion as: the distribution yield on a
pro forma basis increased compared to Star Gas Partners stand-alone and was
higher than the median of the comparable public partnerships, and the Market
Capitalization/EBITDA and Equity Market Capitalization/DCF multiples decreased
on a pro forma basis compared to Star Gas Partners stand-alone and were lower
than the median of the comparable public partnerships.
Terms of A.G. Edwards' Engagement
The terms of the engagement of A.G. Edwards by the special committee are
described in a letter agreement between A.G. Edwards and the special committee.
Under the terms of the engagement letter, as compensation for rendering its
financial advisory services and the A.G. Edwards opinions to the special
committee, Star Gas Partners agreed to pay A.G. Edwards a fee of $575,000, of
which $325,000 has been paid and $250,000 will be due upon the closing of the
transaction. Star Gas Partners agreed to reimburse A.G. Edwards for all travel
and out-of-pocket expenses incurred in its engagement. Star Gas Partners also
agreed to indemnify A.G. Edwards against some liabilities in the engagement of
A.G. Edwards.
Reasons for the Transaction that the Petro Board Considered; Recommendation of
the Petro Board
At a special meeting of the Petro board held on October 6, 1998, the Petro
board received presentations concerning, and reviewed the terms of, the
transaction with members of Petro's management and its legal counsel and
financial advisors. At a special meeting held on October 19, 1998, the Petro
board unanimously determined that the transaction is fair to, and in the best
interests of, the Petro public common stockholders. The Petro board expressly
adopted the conclusions and analysis of Dain Rauscher Wessels concerning the
fairness of the consideration to be received by the Petro public common
stockholders. Accordingly, the Petro board has unanimously approved the merger
agreement and exchange agreement and unanimously recommends that the Petro
common stockholders vote FOR the approval of the acquisition proposal at the
special meeting. See "--Background of the Transaction."
During the course of its deliberations, the Petro board with the assistance
of management and its legal and financial advisors, considered the following
potential advantages of the transaction:
. Petro is the largest home heating oil distributor in the U.S. and
the principal consolidator of that highly fragmented industry. However,
Petro does not have the financial flexibility to fully capitalize upon
the acquisition, operating and corporate branding opportunities resulting
from this position. This transaction will recapitalize Petro providing it
with access to lower cost capital to better realize these growth
opportunities.
. As part of a publicly-traded limited partnership, Petro's home heating
oil operations should receive an improved market valuation. Due to high
financing costs and amortization of customer lists, Petro does not
currently generate net income for financial reporting purposes. Since
publicly-traded limited partnerships are cash flow oriented and are
valued primarily on a cash distribution basis, the publicly-traded
limited partnership structure corresponds more closely with Petro's focus
on cash flow. The Petro board also believes Star Gas Partners will have
greater investment community awareness as compared to Petro. As the only
public home heating oil company, Petro has had limited securities analyst
research coverage.
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<PAGE>
. Based on information provided by its financial advisors, the Petro board
expects the Petro common stockholders to receive Star Gas Partners' units
that are expected to trade at an attractive price compared to the recent
trading price of the Petro common stock. The actual trading price of the
Star Gas Partners senior subordinated units will depend on a variety of
factors, including overall market conditions for publicly-traded limited
partnerships, the trading level of the Star Gas Partners common units,
the weather in Star Gas Partners' areas of operations and the actual and
expected levels of available cash generated by Star Gas Partners'
activities.
. The Petro board believes that the transaction has been structured so the
Petro common stockholders will continue to participate in the expected
benefits from Petro's operating and corporate branding opportunities. If
Petro achieves specified financial goals within the five-year period
after closing, the holders of Star Gas Partners senior subordinated
units, junior subordinated units and general partner units will receive
up to an additional 909,000 senior subordinated units. This enables Petro
common stockholders to continue to participate in Petro's future
performance. While there is no assurance these goals will be achieved,
the Petro board believes that they are realistic and, if achieved, could
provide significant additional value to Petro common stockholders.
. Although Petro has historically paid cash dividends to its common
stockholders, these dividends have been suspended. Star Gas Partners
generally distributes to its partners the cash it generates from its
operations. While there can be no assurance, this should give Petro
common stockholders an increased probability of a resumption of annual
distributions.
. The Star Gas Partners senior subordinated units will be allocated certain
incentive distribution rights previously held by the general partner. To
the extent that Star Gas Partners generates cash above certain target
distribution levels, the holders of Star Gas Partners senior subordinated
units may receive increased cash distributions.
. The Petro public common stockholders will receive Star Gas Partners
senior subordinated units that must receive their full minimum quarterly
distribution prior to any payments being made on the Star Gas Partners
junior subordinated units and the general partner units.
During the course of its deliberations, the Petro board also considered the
following potential disadvantages of the proposed transaction.
. Unitholders in Star Gas Partners have substantially different, and
probably fewer, legal rights than Petro common stockholders.
. There is no current trading market for the Star Gas Partners senior
subordinated units and even though they will be listed on the New York
Stock Exchange, there are no assurances that any active trading market
will exist after the closing of the transaction. It is expected that the
Star Gas Partners senior subordinated units will trade at a lower price
than the common units.
. Distributions on the Star Gas Partners senior subordinated units, junior
subordinated units and general partner units are not guaranteed and are
subordinated to distributions on the common units. Further, distributions
on the senior subordinated units, junior subordinated units and
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<PAGE>
general partner units are in general limited to the amount of
distributable cash generated after the transaction. Therefore, there is
significant uncertainty as to the amount and timing of those
distributions.
. Star Gas LLC, the new general partner in Star Gas Partners, may have a
greater number of conflicts of interest than the directors of Petro.
. Star Gas Partners' propane operations, like Petro's home heating oil
business, are negatively affected by warm weather during the winter
months.
. Star Gas Partners may face difficulties in the future in making
attractive acquisitions in the propane industry because of the highly
competitive nature of the industry.
. Petro common stockholders that are tax-exempt entities, regulated
investment companies or foreign taxpayers may determine that holding
an interest in Star Gas Partners may be unattractive from a tax
perspective. If some of these investors sell their Star Gas Partners'
senior subordinated units following the transaction, the market price of
the senior subordinated units could fall substantially.
The Petro board also considered the following factors.
. The Petro board placed significant weight on the Dain Rauscher Wessels
opinion that the consideration to be received by the Petro public common
stockholders is fair, from a financial point of view, to the public
common stockholders. The Petro board considered the valuation methods
used by Dain Rauscher Wessels in rendering the Dain Rauscher Wessels
opinion to be appropriate and has adopted the Dain Rauscher Wessels
opinion in reaching their determination as to the fairness of the
transaction to the Petro public common stockholders. The Petro board did
not perform its own financial analysis (see page 80).
. The projections prepared by Star Gas Partners and Petro (see page 91).
. The terms of the exchange agreement, merger agreement and amendments to
the partnership agreement (see pages 98, 101 and 112).
. The conditions to the completion of the transaction (see page 103).
. The background of the structure of the transaction (see page 50).
. The conflicts of interest in structuring the transaction (see pages 22
and 27).
. Recent trading prices for the Star Gas Partners common units and the
Petro common stock (see pages 158 and 159).
The discussion above of information and factors considered and given weight
by the Petro board is not intended to be exhaustive. Except for the Dain
Rauscher Wessels opinion on which it placed significant weight, in view of the
wide variety of factors considered in its evaluation of the transaction, the
Petro board did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Petro
board may have given different weights to different factors.
The Petro board unanimously recommends that the Petro common stockholders
vote FOR the acquisition proposal at the special meeting.
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Opinion of Dain Rauscher Wessels
On May 14, 1998, the Petro board retained Dain Rauscher Wessels to render an
opinion to the Petro board concerning the fairness, from a financial point of
view, of the consideration to be received by the Petro public common
stockholders in the merger. Dain Rauscher Wessels rendered opinions to the
Petro board on October 6, 1998, February , 1999 and on the date of this proxy
statement. Each opinion stated that, as of the date of the opinion, and based
upon and subject to the factors and assumptions described in that opinion, the
consideration to be received by the Petro public common stockholders in the
merger was fair, from a financial point of view, to the Petro public common
stockholders.
Petro and Star Gas Partners have informed Dain Rauscher Wessels of
anticipated revisions to the merger agreement, the amended and restated
partnership agreement and the proxy statement of Petro and Star Gas Partners
filed as part of the registration statement on Form S-4 of Star Gas Partners.
In addition, Petro and Star Gas Partners have informed Dain Rauscher Wessels
that the internal analyses and forecasts and other internal information
concerning the businesses and operations of Petro and Star Gas Partners and
some publicly available information have changed since Dain Rauscher Wessels
delivered its opinion to the Petro board on October 6, 1998. The summary below
is based upon a draft of the Dain Rauscher Wessels opinion that incorporates
the anticipated revisions and changes to internal and publicly available
information. The Dain Rauscher Wessels opinion is to be delivered to the Petro
board in February, 1999, on or prior to the date of this proxy statement. Petro
and Star Gas Partners have not finalized the anticipated revisions and the
revisions are beyond the control of Dain Rauscher Wessels. Any information
contained in the draft of the Dain Rauscher Wessels opinion is subject to
change, and any changes may result in a material change to the Dain Rauscher
Wessels opinion dated February , 1999.
The full text of the Dain Rauscher Wessels opinion, which describes the
principal assumptions made, matters considered and qualifications and
limitations on the review undertaken by Dain Rauscher Wessels in rendering its
opinion dated February , 1999, is attached as Annex E to the proxy statement
and is incorporated by reference. The summary of the Dain Rauscher Wessels
opinion dated February , 1999 in this proxy statement is qualified in its
entirety by reference to the full text of the opinion dated February , 1999.
Petro common stockholders are urged to read the opinion carefully and in its
entirety. The Dain Rauscher Wessels opinion was provided to the Petro board for
its information and is directed only to the fairness, from a financial point of
view, of the consideration to be received by the Petro public common
stockholders in the merger. The Dain Rauscher Wessels opinion dated February
, 1999 does not address the merits of the underlying decision by Petro to
engage in the merger and does not constitute a recommendation to any Petro
common stockholder as to how that holder should vote on the approval and
adoption of the merger agreement or any matter related to it.
The summary below does not completely describe the analyses underlying the
Dain Rauscher Wessels opinion dated February , 1999 or the presentation made
by Dain Rauscher Wessels to the Petro board. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore, this
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion dated February ,
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<PAGE>
1999, Dain Rauscher Wessels did not attribute any particular weight to any
analysis or factor considered by it, but rather made assumptions and
qualitative judgements as to the significance and relevance of each analysis
and factor. Accordingly, Dain Rauscher Wessels believes that its analyses must
be considered as a whole and that selecting portions of its analyses, without
considering all of its analyses, would create an incomplete view of the process
underlying the Dain Rauscher Wessels opinion.
In performing its analyses, numerous assumptions were made regarding industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Dain Rauscher Wessels,
Petro or Star Gas Partners. Any estimates contained in the analyses performed
by Dain Rauscher Wessels are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than
suggested by the analyses. Additionally, estimates of the value of businesses
or securities do not purport to be appraisals or to reflect the prices at which
those businesses or securities might actually be sold. Accordingly, the
analyses and estimates are inherently subject to substantial uncertainty. The
Dain Rauscher Wessels opinion dated February , 1999 and Dain Rauscher
Wessels' presentation to the Petro board were among several factors taken into
consideration by the Petro board in making its determination to approve the
merger agreement. Consequently, the Dain Rauscher Wessels' analyses described
below should not be viewed as determinative of the decision of the Petro board
or Petro's senior management to engage in the merger.
In arriving at its opinion dated February , 1999, Dain Rauscher Wessels met
with the senior managements of Petro and Star Gas Partners to discuss the
businesses, operations and prospects of Petro and Star Gas Partners. Dain
Rauscher Wessels also considered long-term benefits of the merger, both
operational and financial, that were described to Dain Rauscher Wessels by the
senior managements of Petro and Star Gas Partners. In addition, Dain Rauscher
Wessels reviewed:
. the most recently available drafts of the merger agreement;
. the amended and restated partnership agreement;
. this proxy statement;
. publicly available financial information concerning Petro and Star Gas
Partners;
. internal analyses, forecasts and other internal information concerning
the businesses and operations of Petro and Star Gas Partners prepared by
the senior managements of Petro and Star Gas Partners;
. current and historical market prices and trading volumes for Petro
common stock and Star Gas Partners common units;
. Petro's and Star Gas Partners' cash flow, net income and book value per
share or unit;
. the capitalization and financial condition of Petro and Star Gas
Partners;
. the pro forma financial effects which could result from the merger;
. the potential relative ownership of various classes of units of Star Gas
Partners after the merger by the current holders of common stock of
Petro and the current unitholders of Star Gas Partners;
. to the extent publicly available, the terms of selected recent merger
and acquisition transactions involving comparable public companies;
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<PAGE>
. merger premiums paid in selected recent stock-for-stock acquisitions of
public companies generally, and energy industry companies in particular;
. financial, stock market and other publicly available information
relating to the businesses of other companies and limited partnerships
whose operations Dain Rauscher Wessels considered comparable to the
operations of Petro and Star Gas Partners; and
. other information, financial studies, analyses and investigations and
financial, economic and market criteria that Dain Rauscher Wessels
deemed relevant in arriving at its opinion dated February , 1999.
In preparing its opinion, Dain Rauscher Wessels did not verify any of the
above information, and relied upon the information being complete and accurate
in all material respects. Dain Rauscher Wessels assumed, with Petro's consent,
that the financial forecasts provided to and discussed with Dain Rauscher
Wessels were reasonably prepared. Dain Rauscher Wessels also assumed that those
financial forecasts were prepared to reflect the best currently available
estimates and judgments of the senior management of Petro and Star Gas Partners
as to the expected future performance of Petro and Star Gas Partners, and of
the combined companies following the proposed merger. In addition, Dain
Rauscher Wessels did not conduct a physical inspection or make an independent
evaluation or appraisal of the assets of Petro or Star Gas Partners, nor was
Dain Rauscher Wessels furnished with any evaluation or appraisal. Dain Rauscher
Wessels assumed that the merger will be accounted for as a purchase transaction
under generally accepted accounting principles, and will be a taxable event to
the Petro public common stockholders.
In rendering its opinion Dain Rauscher Wessels assumed that in the course of
obtaining the necessary regulatory and governmental approvals for the proposed
merger, no restriction will be imposed that will have a material adverse effect
on the contemplated benefits of the proposed merger. Dain Rauscher Wessels also
assumed that the final form of the merger agreement would be substantially
similar to the last draft reviewed by Dain Rauscher Wessels. Dain Rauscher
Wessels also assumed that the representations, warranties and covenants were
correct and would be performed, and that the conditions would be satisfied
without waiver. The Dain Rauscher Wessels opinion dated February , 1999 is
based on circumstances as they existed on the date of its opinion dated
February , 1999.
The following is a brief summary of the material analyses performed by Dain
Rauscher Wessels in its preparation of its opinion dated February , 1999.
Unit Reference Value Analysis
Dain Rauscher Wessels performed a unit reference value analysis to determine
ranges of reference values for the common units, senior subordinated units and
junior subordinated/general partner units. In its judgment, this analysis was
required because the senior subordinated units and junior subordinated/general
partner units are newly-created classes of units for which no prior public
market trading data exists. A range of reference values was calculated for the
common units so that they could be evaluated on a basis consistent with the
other classes of units. Moreover, the determination of reference values for the
senior subordinated units and junior subordinated/general partner units was
required for Dain Rauscher Wessels to analyze the absolute and relative values
of each class of units, as well as to evaluate the aggregate value of the
consideration to be received by the Petro common stockholders in the merger.
To determine a range of reference values for each class of unit, Dain
Rauscher Wessels employed a discounted distribution model based upon Petro
senior management's forecasts for the
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pro forma combined entity from the year ended September 30, 1999 through the
year ended September 30, 2002, assuming 15-year weather and 30-year weather.
Dain Rauscher Wessels also examined a downside case in which distributions per
unit remained constant at $2.30 per year over the forecast period, and a Dain
Rauscher Wessels case in which distributions increased at a slower rate than in
the 15-year weather case and the 30-year weather case. Factors examined
included the indicated distributions, the additional senior subordinated units
to be issued based upon the performance of Petro, and the incentive
distributions that are to be shared pro rata by the senior subordinated units
and junior subordinated/general partner units if distributions of available
cash exceed target distribution levels. Dain Rauscher Wessels discounted
projected distributions for each class of units to a net present value
employing discount rates which, in its judgment, reflected:
(1) prevailing market yields for the Star Gas Partners common units and
publicly-traded units of other propane distribution limited
partnerships;
(2) the structural subordination of the various classes of units; and
(3) the relative risks associated with the indicated distributions, the
additional senior subordinated units to be issued based upon the
performance of Petro and the incentive distributions.
For each class of unit, net present terminal values were calculated employing
a perpetuity valuation based upon the discount rate employed for a given class
of distribution and the amount of the projected distributions in the year
ending September 30, 2002. To reflect the lack of marketability of the junior
subordinated/general partner units, Dain Rauscher Wessels considered a range of
discounts and applied a discount of 22% to the net present values calculated
for those units. For the common units, discount rates of 10.0%-12.4% were
applied to the projected indicated distributions.
For the senior subordinated units, discount rates of 11.3%-14.9% were applied
to the projected indicated distributions, discount rates of 14.0%-15.8% were
applied to the projected additional senior subordinated units to be issued
based upon the performance of Petro and discount rates of 14.5%-16.3% were
applied to the projected incentive distributions.
For the junior subordinated/general partner units, discount rates of 12.0%-
15.9% were applied to the projected indicated distributions, discount rates of
14.0%-15.8% were applied to the projected additional senior subordinated units
to be issued based on the performance of Petro and discount rates of 14.5%-
16.3% were applied to the projected incentive distributions. The results of the
unit reference value analysis and other key assumptions made are detailed in
the table below.
<TABLE>
<CAPTION>
Dain
15 Year 30 Year Rauscher
Downside Weather Weather Wessels
Case Case Case Case
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Common Unit Reference Value................ $ 19.00 $ 23.15 $ 26.86 $ 20.59
Senior Subordinated Unit
Unit Reference Value..................... $ 14.82 $ 18.43 $ 28.11 $ 16.26
Unit Exchange Ratio...................... 0.11758 0.11758 0.11758 0.11758
Implied Merger Value per Petro Share..... $ 1.74 $ 2.17 $ 3.31 $ 1.91
Junior Subordinated/General Partner Unit
Unit Reference Value..................... $ 10.82 $ 13.29 $ 20.78 $ 11.81
Unit Exchange Ratio...................... 0.14318 0.14318 0.14318 0.14318
Implied Merger Value per Petro Share..... $ 1.55 $ 1.90 $ 2.98 $ 1.69
</TABLE>
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<PAGE>
For purposes of performing its other analyses, Dain Rauscher Wessels employed
the unit reference values implied by the Dain Rauscher Wessels case as
reference values for the subject units.
Discounted Cash Flow Analysis
Dain Rauscher Wessels performed a discounted cash flow analysis to calculate
the implied price per share of Petro common stock based upon senior
management's projections assuming 15-year weather and 30-year weather from
January 1, 1999 through December 31, 2002, and no acquisitions. Using this
information, Dain Rauscher Wessels calculated the net present value of Petro's
unlevered free cash flows from January 1, 1999 through December 31, 2002 using
discount rates ranging from 12.0% to 16.0%. Dain Rauscher Wessels also
calculated the net present terminal value of Petro at December 31, 2002 based
upon multiples of 6.0x to 8.0x EBITDA, which is earnings before interest,
taxes, depreciation and amortization, in the year ending December 31, 2002, and
discount rates ranging from 12.0% to 16.0%.
Dain Rauscher Wessels employed the capital asset pricing model to determine a
weighted average cost of capital for Petro, and also employed its professional
judgment in determining a range of discount rates for use in the analysis. In
order to determine an implied net present value per share of Petro common
stock, Dain Rauscher Wessels added the net present values of the free cash
flows and terminal values, less outstanding debt and preferred stock, net of
excess cash. This calculation yielded an implied net present value per share of
Petro common stock ranging from $(1.55) to $1.56 in the 15-year weather case
and $(0.62) to $2.81 in the 30-year weather case. Dain Rauscher Wessels noted
that the implied merger values calculated in the unit reference value analysis
for the senior subordinated units exceeded the implied net present values per
Petro share in each case.
Inherent in any discounted cash flow analysis are the use of a number of
assumptions, including the accuracy of management's projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations
in any of these assumptions or judgments and variables beyond management's
control, such as general and regional economies, worldwide oil and gas prices,
adverse weather conditions and the availability of personnel and equipment,
could significantly alter the results of a discounted cash flow analysis.
Relative Contribution Analysis
Dain Rauscher Wessels performed a relative contribution analysis to examine
the relationship between the percentage ownership of Star Gas Partners that the
Petro common stockholders would receive in the merger and the relative
contribution of Petro to the distributable cash flow of Star Gas Partners on a
pro forma combined basis. In considering the percentage ownership of Star Gas
Partners that the Petro common stockholders would receive in the merger, Dain
Rauscher Wessels performed calculations on both a gross units basis and an
adjusted units basis. In calculating the gross units basis, all classes of
units were treated as being of equal value. In determining the adjusted units
basis, the number of units to be received by the Petro common stockholders was
adjusted to reflect the different values of various classes of units implied by
Dain Rauscher Wessels' unit reference value analysis. In calculating the
relative contributions of Petro and Star Gas Partners to
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the distributable cash flow of Star Gas Partners on a pro forma combined basis,
Dain Rauscher Wessels considered that Petro, as the owner of Star Gas
Corporation and all of Star Gas Partners' outstanding subordinated units prior
to the merger, was the contributor of the distributable cash flow accruing to
that ownership position.
Based upon senior management's normalized estimates for fiscal 1998 for Petro
and Star Gas Partners, and the 15-year weather case assumptions for Star Gas
Partners on a pro forma combined basis for fiscal 1999, both estimated and
normalized, Dain Rauscher Wessels calculated that Petro would provide 49.1%,
45.5% and 53.3% of the distributable cash flow of Star Gas Partners on a pro
forma combined basis in fiscal 1998, estimated 1999 and normalized 1999. Dain
Rauscher Wessels determined that, in the merger, the Petro common stockholders
would receive 45.7% of the ownership of the pro forma combined entity on a
gross units basis, and 38.3% on an adjusted units basis. Based on the exchange
ratio of 0.11758 and assuming that the minimum quarterly distribution is $0.575
following the merger and the minimum quarterly distribution is paid to holders
of senior subordinated units, the Petro public common stockholders who receive
senior subordinated units would receive an annual distribution of $0.27 for
each share of common stock exchanged in the merger. Dain Rauscher Wessels noted
that Petro common stock does not presently pay a dividend.
Net Asset Value Analysis
Dain Rauscher Wessels performed a net asset value analysis to examine values
that might be realized by the Petro common stockholders if Petro pursued
orderly liquidations of its home heating oil business and investment in Star
Gas Partners, and satisfied its obligations to creditors and preferred
stockholders. For purposes of this analysis, Dain Rauscher Wessels selected six
criteria for valuing Petro's home heating oil business:
(1) the mean EBITDA multiple paid by Petro in its ten largest acquisitions
of home heating oil businesses in 1996-1997, adjusted for a 10% size
premium;
(2) the mean price per gallon of target annual volume paid by Petro in
those acquisitions, adjusted for a 10% size premium;
(3) the mean price per target customer paid by Petro in those acquisitions,
adjusted for a 10% size premium;
(4) the mean EBITDA multiple paid by Star Gas Partners in its acquisitions
of eleven propane retailers in 1994-1998, adjusted for a 10% size
premium;
(5) the mean EBITDA multiple paid in the selected transactions examined in
Dain Rauscher Wessels' comparable transactions analysis; and
(6) a growth rate adjusted EBITDA multiple implied by an analysis of the
public market multiples of companies engaged in consolidating
fragmented industries.
In each scenario, Dain Rauscher Wessels valued Petro's current investment in
Star Gas Partners by multiplying the number of subordinated units and implied
general partner units by the most recent common unit price, less a 48% discount
to reflect structural subordination and the fact that the subordinated units
did not receive a
85
<PAGE>
distribution for the quarter ended September 30, 1998 and will not receive a
distribution for the quarter ended December 31, 1998. Outstanding debt and
preferred stock were assumed to be liquidated at par or liquidation value, plus
applicable prepayment penalties, and the analysis further assumed $5.0 million
of transaction costs. The results of the net asset value analysis are detailed
in the table below.
<TABLE>
<CAPTION>
Criteria
-----------------------------------
1 2 3 4 5 6 Mean Median
----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Implied Value per Share of
Petro Common Stock $0.00 $1.52 $4.73 $0.00 $0.83 $0.00 $1.18 $0.41
</TABLE>
Dain Rauscher Wessels noted that excluding criterion (3) above, the values
per share of Petro common stock implied by these analyses ranged from $0.00 to
$1.52, with a mean of $0.47 and a median of $0.00. Dain Rauscher Wessels
believes that criterion (3) is less reliable as a means of valuing Petro's home
heating oil business due to a lack of consistency in the price per target
customer paid by Petro in those acquisitions. Dain Rauscher Wessels applied its
subjective professional judgment in comparing these values to the implied
merger value of $1.91 to be received in the merger by the Petro public common
stockholders, and noted that the implied merger value exceeded each of the
values implied by the criteria above, except criterion (3).
Comparable Company Trading Analysis
Using publicly available information, Dain Rauscher Wessels compared, based
upon market trading values as of January 22, 1999, multiples of specified
financial criteria, including:
. revenues;
. EDITDA;
. EBIT (earnings before interest and taxes);
. net income;
. Cash Flow from Operations (net income plus depreciation and amortization,
deferred taxes and other non-cash items, but not including changes in
working capital accounts); and
. tangible book value of equity.
These multiples for Petro were compared to other companies which, in Dain
Rauscher Wessels' judgment, were comparable to Petro for purposes of this
analysis. Dain Rauscher Wessels noted that Petro is the only publicly-traded
company engaged primarily in the distribution of home heating oil. Accordingly,
Dain Rauscher Wessels selected for comparison companies engaged to varying
degrees in the wholesale and retail marketing and distribution of energy and
fuel. Other factors considered by Dain Rauscher Wessels in selecting companies
for comparison included size, financial condition and geographic scope of
operations. The group of companies used in the comparison included:
.Getty Petroleum Marketing Inc.
.Meteor Industries, Inc.,
.Midcoast Energy Resources, Inc.,
.Streicher Mobile Fueling, Inc.,
.TransMontaigne Inc. and
.World Fuel Services Corporation.
86
<PAGE>
<TABLE>
<CAPTION>
Comparable Companies
-----------------------
Net Market Capitalization (1) to Latest
Twelve Months Mean Median High Low Petro (2)
- --------------------------------------- ----- ------ ----- ---- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................... 0.3x 0.2x 0.9x 0.1x 0.7x
EBITDA...................................... 10.5x 8.5x 23.9x 3.8x 8.1x
EBIT........................................ 11.3x 11.8x 15.9x 5.7x NM
<CAPTION>
Equity Market Value to Latest Twelve Months
- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income.................................. 15.7x 12.5x 29.3x 8.7x NM
Cash Flow from Operations................... 7.7x 6.4x 12.1x 3.8x 14.7x
Tangible Book Value of Equity............... 1.6x 1.8x 2.1x 0.7x NM
</TABLE>
- --------
NM = Not meaningful
(1) Defined as equity market value plus book value of debt and liquidation/book
value of preferred stock, less excess cash and equivalents.
(2) Petro latest twelve months EBITDA and cash flow from operations include
Star Gas Partners distributions.
In addition, Dain Rauscher Wessels used publicly available information, based
upon market trading values as of January 22, 1999, to compare specified
financial criteria for a group of publicly-traded propane distribution limited
partnerships that it considered to be comparable to Star Gas Partners,
including:
. multiples of latest twelve months EBITDA and cash flow from
operations,
. distribution yields and
. debt to book capitalization ratios.
For purposes of analysis, this group was composed of:
. Amerigas Partners, L.P.,
. Cornerstone Propane Partners, L.P.,
. Ferrellgas Partners, L.P.,
. Heritage Propane Partners, L.P. and
. Suburban Propane Partners, L.P.
Dain Rauscher Wessels calculated an adjusted equity market value for
each publicly-traded propane distribution limited partnership by valuing the
common units of each limited partnership at market value, the subordinated
units at 65% of the common unit market value, and the implied general partner
units at 85% of the common unit market value. For purposes of this analysis
Dain Rauscher Wessels valued the subordinated units of Star Gas Partners at 50%
of the common unit market value. Dain Rauscher Wessels also calculated an
adjusted market capitalization for each limited partnership as the sum of
adjusted equity market value plus the book value of debt, less excess cash and
equivalents.
87
<PAGE>
<TABLE>
<CAPTION>
Comparable Companies
------------------------- Star Gas
Mean Median High Low Partners
----- ------ ------ ----- --------
<S> <C> <C> <C> <C> <C>
Adjusted Market Capitalization
to Latest Twelve Months EBITDA.............. 10.3x 10.6x 11.0x 9.0x 11.0x
Adjusted Equity Market Value to Latest
Twelve Months Cash Flow from Operations..... 8.7x 8.9x 10.7x 7.2x 8.8x
Common Unit Distribution Yields.............. 10.0% 10.1% 11.8% 8.9% 11.6%
Total Debt to Book Capitalization............ 81.1% 86.8% 109.2% 49.9% 65.7%
</TABLE>
The comparable company trading analysis is a valuation methodology used by
Dain Rauscher Wessels to determine whether Petro and Star Gas Partners were
reasonably valued by the public trading market, at existing market prices, in
relation to the public trading markets' valuation of similar companies and
limited partnerships. Dain Rauscher Wessels did not establish any specific
valuation for Petro or Star Gas Partners in this analysis.
No public company utilized as a comparison is identical to Petro, Star Gas
Partners or the business segment for which a comparison is being made. An
analysis of the results of such a comparison is not mathematical; rather, it
involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and
other factors that could affect the public trading value of the comparable
companies to which Petro and Star Gas Partners were being compared.
Comparable Transactions Analysis
Dain Rauscher Wessels conducted a comparable transactions analysis whereby it
examined the terms of recent publicly disclosed acquisitions of businesses and
assets related to the energy marketing and distribution industry. For the
significant majority of these transactions, public disclosure regarding
purchase price and target financial results was insufficient to permit Dain
Rauscher Wessels to draw conclusions regarding value. Sufficient data did exist
with respect to 12 selected transactions that Dain Rauscher Wessels considered
reasonably comparable to the merger. The selected transactions are listed below
by acquiror/target:
. Valero Energy Corporation/Valero Natural Gas Partners, L.P.,
. Associated Natural Gas Corporation/Grand Valley Gas Company,
. K N Energy, Inc./American Oil & Gas Company,
. Panhandle Eastern Corp./Associated Natural Gas Corporation,
. Natural Gas Clearinghouse/Trident NGL Holding, Inc.,
. LG&E Energy Corporation/ Hadson Corporation,
. El Paso Natural Gas Company/Eastex Energy Inc.,
. PacifiCorp Holdings, Inc./TPC Corporation,
. Enron Corp./Enron Global Power & Pipelines, L.L.C.,
88
<PAGE>
. Kinder Morgan Energy Partners, L.P./Santa Fe Pacific Pipeline Partners,
L.P.,
. CMS Energy Corporation/Continental Natural Gas, Inc. and
. (Pending) ONEOK, Inc./Southwest Gas Corporation.
<TABLE>
<CAPTION>
Selected Transactions
-----------------------
Transaction Enterprise Value (1) to: Mean Median High Low Petro (2)
- ------------------------------------ ---- ------ ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Latest Twelve Months EBITDA.................. 11.0x 10.9x 14.6x 7.3x 8.6x
Latest Twelve Months EBIT.................... 16.5x 15.2x 23.3x 10.9x NM
Transaction Equity Value to:
- ----------------------------
Latest Twelve Months Net Income.............. 34.4x 26.5x 55.3x 15.4x NM
Tangible Book Value.......................... 2.6x 2.5x 4.3x 1.4x NM
</TABLE>
- --------
NM = Not meaningful
(1) Defined as transaction equity value plus book value of debt and
liquidation/book value of preferred stock, less excess cash and
equivalents.
(2) Calculated using the implied merger value. Petro latest twelve months
EBITDA includes Star Gas Partners distributions.
Dain Rauscher Wessels also examined multiples paid by Petro in the
acquisitions of retail distributors of home heating oil during 1996-1997. Dain
Rauscher Wessels noted that Petro generally paid higher multiples and values in
its larger acquisitions and that Petro's home heating oil business is
significantly larger than any similar business acquired by Petro.
<TABLE>
<CAPTION>
All Acquisitions Petro Home
(Excluding Ten Largest) Ten Largest Acquisitions Heating
------------------------------ -------------------------------- Oil
Transaction Value Business
to/per: Mean Median High Low Mean Median High Low (1)
- ----------------- ------ ------ ------ ------ ------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Latest Twelve Months
EBITDA................. 4.1x 3.9x 4.9x 3.4x 4.2x 4.2x 4.6x 3.4x 9.3x
Target Gallon of Annual
Volume................. $ 0.55 $ 0.55 $ 0.87 $ 0.37 $ 0.84 $ 0.89 $ 1.02 $ 0.58 $ 0.85
Target Customer......... $ 630 $ 533 $1,037 $ 334 $ 1,194 $ 1,055 $2,010 $ 658 $ 971
</TABLE>
- --------
(1) Calculated using the implied merger value and assumptions regarding the
value of Petro's current investment in Star Gas Partners.
89
<PAGE>
Merger Premiums Analysis
Dain Rauscher Wessels examined percentage premiums paid in all publicly-
disclosed stock-for-stock transactions with transaction values of $100-$500
million since January 1, 1998. Dain Rauscher Wessels also examined percentage
premiums paid in all publicly-disclosed stock-for-stock energy industry
transactions with transaction values of $100-$500 million since January 1,
1994. Dain Rauscher Wessels used the implied merger value of $1.91 to calculate
the implied premium to be received pursuant to the merger by the Petro public
common stockholders.
<TABLE>
<CAPTION>
Stock-for-Stock Energy
Stock-for-Stock Industry
Transactions, Transactions, $100-$500
$100-$500 million, million,
since January 1, 1998 since January 1, 1994 Petro (1)
--------------------------- ----------------------------- --------------------
Implied Premium/ Prior to Current
Discount to: Mean Median High Low Mean Median High Low Announcement (2)
- ---------------- ------ ------ ------ ------ ------- ------- ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Day prior to
Announcement 26.5% 23.2% 87.5% -21.4% 24.7% 14.4% 91.0% -0.1% 1.9% 91.1%
1 Week prior to
Announcement 33.2% 32.2% 93.6% -22.3% 30.8% 25.1% 99.4% 2.4% 22.3% 91.1%
4 Weeks prior to
Announcement 41.7% 39.2% 208.0% -11.6% 34.3% 26.9% 95.7% 5.2% 5.5% 91.1%
</TABLE>
- -------
(1) Based on implied merger value of $1.91.
(2) Based on the closing price of $1.00 on January 22, 1999.
Dain Rauscher Wessels' Engagement Agreement
Dain Rauscher Wessels was retained to render its opinion dated February ,
1999 on the basis of its experience with mergers and acquisitions in the energy
industry, and on the basis of its experience with publicly-traded energy
industry limited partnerships. Dain Rauscher Wessels is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in mergers and acquisitions, corporate restructurings,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In the ordinary course of its business, Dain Rauscher Wessels and its
affiliates may actively trade the debt and equity securities of Petro and Star
Gas Partners for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Under an engagement agreement between Petro and Dain Rauscher Wessels, Petro
paid Dain Rauscher Wessels an engagement fee of $50,000 upon the execution of
the engagement agreement and $375,000 upon the initial delivery of the written
Dain Rauscher Wessels opinion to the Petro board. Petro has agreed to reimburse
Dain Rauscher Wessels for its out-of-pocket expenses not to exceed $50,000, and
to indemnify Dain Rauscher Wessels and its controlling persons against
specified liabilities and expenses relating to or arising out of the
transaction, including certain liabilities under U.S. federal securities laws.
No portion of Dain Rauscher Wessels' fee was contingent upon the closing of the
transaction or whether Dain Rauscher Wessels rendered a favorable opinion
regarding the proposed merger. The terms of Dain Rauscher Wessels' engagement
agreement with Petro, which are customary for transactions of this nature, were
negotiated at arm's length between Petro and Dain Rauscher Wessels, and the
Petro board was aware of the terms at the time of its approval of the merger
agreement.
After delivering its opinion dated October 6, 1998, Dain Rauscher Wessels was
invited to serve as one of seven co-managers of the equity offering.
90
<PAGE>
Projections of Petro and Star Gas Partners
Petro and Star Gas Partners provided A.G. Edwards and Dain Rauscher Wessels
with projected financial data for the years 1999 through 2003. The projections
were not prepared with a view to public disclosure or compliance with published
guidelines of the Securities and Exchange Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
projections. The projections are included in this proxy statement only because
they were made available to A.G. Edwards and Dain Rauscher Wessels. These
projections were prepared as of September 30, 1998. Neither A.G. Edwards, Dain
Rauscher Wessels nor KPMG Peat Marwick, LLP, Star Gas Partners' independent
certified public accountants, examined, compiled or applied any procedures for
the projections or expressed any opinion or provided any kind of assurance on
those projections.
While presented with numerical specificity, the projections are based on a
variety of assumptions relating to the business of Petro and Star Gas Partners
that, although considered appropriate by Petro and Star Gas Partners at the
time, may not be realized. Moreover, the projections and the assumptions upon
which they are based are subject to significant uncertainties and
contingencies, many of which are beyond the control of Petro and Star Gas
Partners. Consequently, the projections and the underlying assumptions are
necessarily speculative in nature and inherently imprecise, and there can be no
assurance that projected financial results will be realized. It is expected
that there will be differences between actual and projected results, and
projected results and actual results are likely to vary materially from those
shown, and that variance will likely increase over time. None of the financial
advisors, Petro, Star Gas Partners, the special committee nor any of their
affiliates or advisors intends to update or otherwise revise the projections.
The inclusion of the projections in this proxy statement should not be
regarded as an indication that the financial advisors, Petro, Star Gas
Partners, the special committee or any of their affiliates or advisors
considers the projections likely to be an accurate prediction of future
results. Star Gas Partners common unitholders and Petro common stockholders are
cautioned not to place undue reliance on the projections, which should be read
in conjunction with the information relating to the business, assets and
financial condition of Star Gas Partners included herein.
The projections contain forward-looking information and are subject to a
number of risks discussed elsewhere in this proxy statement. See "Risk
Factors." These risks are likely to cause actual results in the future to
differ significantly from results expressed or implied in the projections.
The projections described are the most recent versions of numerous
projections provided to the financial advisors. Petro and Star Gas Partners
believe that discussion of earlier versions would not add materially to the
information provided here. Earlier versions have, however, been filed as an
exhibit to the registration statement.
Shown below is a summary of the projections prepared by Petro and Star Gas
Partners as of September 30, 1998 and provided to the financial advisors.
91
<PAGE>
Petro Projections on a Stand Alone Basis
In order to develop projections for the fiscal years ending December 31,
1999-2003, Petro first began with formulating a revised 1998 normalized budget.
The normalized 1998 budget made assumptions relating to revenues and delivery
expenses based on volumes which would be associated with a "normal" winter. In
addition, Petro gave full year impact in the normalized 1998 budget to $11
million in cost reduction initiatives implemented during 1998. These estimated
annual cost reductions include $3.5 million for the elimination of corporate
and branch overhead, $3.5 million for the rationalization of branch operating
expenses and $4 million in reduced benefit plan, personnel and other operating
expenses. For these purposes, Petro ran two cases assuming that "normal"
weather was based on either
(a) the historical average temperature of the relevant measurement
statistics over the 15-year period from 1983 through 1997 derived
from information published by the U.S. Department of Commerce-
National Oceanic and Atmospheric Administration ("NOAA") or
(b)the historical average temperature of the relevant measurement
statistics as published by the NOAA over the 30-year period from 1961
through 1990.
The projections for the fiscal years ending December 31, 1999-2003 were based
on the normalized 1998 budget adjusted for the following:
(a)base customer attrition of 4.0% annually,
(b) an increase in retail gross margins of $0.01 per gallon annually,
(c) an increase in service revenues and expenses (net of the impact of
attrition) of 2.0% annually,
(d) an increase in net operating costs of 2.0% annually, and
(e) no additional acquisitions due to capital constraints.
92
<PAGE>
Petro Projections on a Stand Alone Basis--30-Year Case
(In thousands)
<TABLE>
<CAPTION>
For the Years Ending December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Information
Heating Oil EBITDA...... $ 46,900 $ 45,548 $ 43,867 $ 42,283 $ 40,766 $ 39,288
Distributions(1)........ 4,367 4,205 4,586 5,159 5,575 5,581
-------- -------- -------- -------- -------- --------
Total EBITDA............ 51,267 49,753 48,453 47,442 46,341 44,869
Depreciation and
Amortization(2)........ 28,710 23,500 19,500 15,500 11,500 8,000
-------- -------- -------- -------- -------- --------
EBIT.................... 22,557 26,253 28,953 31,942 34,841 36,869
Interest Expense........ (31,444) (30,971) (30,675) (28,749) (28,083) (28,035)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... (8,887) (4,718) (1,722) 3,193 6,758 8,834
Income Taxes............ (500) (500) (500) (500) (500) (500)
Equity in Star Gas
Partner Earnings....... 997 1,250 1,175 1,202 1,295 1,389
Distributions........... (4,367) (4,205) (4,586) (5,159) (5,575) (5,581)
-------- -------- -------- -------- -------- --------
Net Income(3)........... $(12,757) $ (8,173) $ (5,633) $ (1,264) $ 1,978 $ 4,142
======== ======== ======== ======== ======== ========
Other Information
Maintenance
Capital Expenditures... $ 2,776 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Net Debt and Preferred
Stock (4).............. 287,934 292,348 281,906 270,549 259,627 250,129
</TABLE>
Petro Projections on a Stand Alone Basis--15-Year Case
(In thousands)
<TABLE>
<CAPTION>
For the Years Ending December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Information
Heating Oil EBITDA...... $ 44,749 $ 43,392 $ 41,769 $ 40,237 $ 38,770 $ 37,342
Distributions(1)........ 4,367 2,719 2,772 3,013 3,300 3,614
-------- -------- -------- -------- -------- --------
Total EBITDA............ 49,116 46,111 44,541 43,250 42,070 40,956
Depreciation and
Amortization(2)........ 28,710 23,500 19,500 15,500 11,500 8,000
-------- -------- -------- -------- -------- --------
EBIT.................... 20,406 22,611 25,041 27,750 30,570 32,956
Interest Expense........ (31,444) (30,971) (30,675) (28,869) (29,283) (29,235)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... (11,038) (8,360) (5,634) (1,119) 1,287 3,721
Income Taxes............ (500) (500) (500) (500) (500) (500)
Equity in Star Gas
Partner Earnings....... 442 739 780 920 1,063 1,198
Distributions........... (4,367) (2,719) (2,772) (3,013) (3,300) (3,614)
-------- -------- -------- -------- -------- --------
Net Income(3)........... $(15,463) $(10,840) $ (8,126) $ (3,712) $ (1,451) $ 805
======== ======== ======== ======== ======== ========
Other Information
Maintenance Capital
Expenditures........... $ 2,776 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Net Debt and Preferred
Stock(4)............... 290,085 289,957 283,427 276,382 270,932 266,547
</TABLE>
- --------
(1) Distributions in 1998 represent actual distributions received on the units
and general partner interest owned by Petro; distributions in 1999-2003
represent expected distributions based on Star Gas Partners' available
cash, which may be less than the full minimum quarterly distribution.
(2) Depreciation and Amortization declines from period to period since the
existing assets being depreciated or amortized are not replaced on a stand-
alone basis.
(3) Net income includes equity in Star Gas Partners' earnings but excludes
distributions.
(4) Reflects total debt less net working capital plus preferred stock.
93
<PAGE>
Star Gas Partners Projections on a Stand Alone Basis
In order to develop projections for the fiscal years ending September 30,
1999-2003, Star Gas Partners first began with formulating a revised normalized
1998 budget. The normalized 1998 budget made certain adjustments to revenues
and expenses based on the expected increase in volumes which would be
associated with a "normal" winter as well as acquisitions completed during
fiscal 1998. For these purposes, Star Gas Partners ran two cases assuming that
"normal" weather was based on either
(a) the historical average temperature of the relevant measurement
statistics over the 15-year period from 1983 through 1997 derived
from information published by the NOAA, or
(b) the historical average temperature of the relevant measurement
statistics as published by the NOAA over the 30-year period from 1961
through 1990.
The Projections for the fiscal year ending September 30, 1999 through 2003
include the following additional assumptions:
(a) $5 million of acquisitions are made in 1999 and $10.0 million of
acquisitions are made annually in the years that follow,
(b)the acquisitions are made at a purchase price of 6.5x the first year
EBITDA of the acquired assets,
(c) additional debt is incurred at an annual interest rate of 7.25%,
(d)acquisitions are financed with debt and equity such that a pro forma
debt to EBITDA ratio of 4.5x is maintained,
(e) common units are issued at $22.00 per unit and
(f) maintenance capital expenditures on the acquired assets are assumed
to be approximately 2.2 cents per retail gallon sold.
Star Gas Partners Projections on a Stand Alone Basis--30-Year Case
(In thousands)
<TABLE>
<CAPTION>
For the Years Ending December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Information
EBITDA.................. $ 23,722 $ 24,106 $ 25,260 $ 26,797 $ 28,335 $ 29,873
Depreciation and
Amortization........... 12,079 12,218 13,066 13,944 14,652 15,363
-------- -------- -------- -------- -------- --------
EBIT.................... 11,643 11,888 12,194 12,853 13,683 14,510
Interest Expenses....... (8,497) (8,686) (9,126) (9,627) (10,129) (10,631)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 3,146 3,202 3,068 3,226 3,554 3,879
Income Taxes............ (25) (25) (25) (25) (25) (25)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 3,121 $ 3,177 $ 3,043 $ 3,201 $ 3,529 $ 3,854
======== ======== ======== ======== ======== ========
Other Information
Maintenance Capital
Expenditures........... $ 2,610 $ 2,632 $ 2,679 $ 2,728 $ 2,777 $ 2,827
Total Long Term Debt.... $105,000 $110,209 $117,128 $124,047 $130,966 $137,885
Average Units Outstand-
ing
Common Units............ 3,859 3,889 4,020 4,208 4,370 4,502
Subordinated Units...... 2,396 2,396 2,396 2,396 2,396 2,396
Implied General Partner
Units.................. 128 128 131 135 138 141
-------- -------- -------- -------- -------- --------
Total Units............. 6,383 6,414 6,547 6,739 6,904 7,039
======== ======== ======== ======== ======== ========
</TABLE>
94
<PAGE>
Star Gas Partners Projections on a Stand Alone Basis--15-Year Case
(In thousands)
<TABLE>
<CAPTION>
For the Years Ending December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Information
EBITDA.................. $ 22,316 $ 22,674 $ 23,749 $ 25,182 $ 26,615 $ 28,048
Depreciation and
Amortization........... 12,079 12,218 12,886 13,411 13,852 14,296
-------- -------- -------- -------- -------- --------
EBIT.................... 10,237 10,456 10,863 11,771 12,763 13,752
Interest Expenses....... (8,497) (8,515) (8,708) (9,117) (9,585) (10,052)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 1,740 1,941 2,154 2,654 3,178 3,700
Income Taxes............ (25) (25) (25) (25) (25) (25)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 1,715 $ 1,916 $ 2,129 $ 2,629 $ 3,153 $ 3,675
======== ======== ======== ======== ======== ========
Other Information
Maintenance Capital
Expenditures........... $ 2,610 $ 2,553 $ 2,599 $ 2,646 $ 2,694 $ 2,742
Total Long Term Debt.... $105,000 $105,493 $110,329 $116,771 $123,224 $129,672
Average Units Outstand-
ing
Common Units............ 3,859 4,028 4,384 4,718 5,005 5,279
Subordinated Units...... 2,396 2,396 2,396 2,396 2,396 2,396
Implied General Partner
Units.................. 128 131 138 145 151 157
-------- -------- -------- -------- -------- --------
Total Units............. 6,383 6,555 6,918 7,259 7,552 7,832
======== ======== ======== ======== ======== ========
</TABLE>
Star Gas Partners Projections Pro Forma for the Transaction
Star Gas Partners ran two cases of projections pro forma for the transaction.
The first case assumes that volumes reflect weather normalization based on
the historical average temperature of the relevant measurement statistics over
the 15-year period from 1983 through 1997 derived from information published by
the NOAA.
The second case reflects weather normalization based on the historical
average temperature of the relevant measurement statistics as published by the
NOAA over the 30-year period from 1961 through 1997.
The pro forma projections for the fiscal years ended September 30, 1998
through 2003 include the following additional assumptions:
(a) the specific terms of the merger as described in "The Transaction,"
(b) $90.0 million of new debt issued at 7.50%,
(c) the redemption of $206.3 million in senior and subordinated notes, the
redemption of $34.2 million in preferred stock, and the restructuring
of $66.2 million of senior and subordinated notes,
(d) issuance of approximately $170.0 million of new common units at $19.00
per common unit,
(e) acquisitions are financed with debt and equity such that a debt to
EBITDA ratio of up to 4.0x is maintained at all times,
(f) common units are issued at annualized yields of 9.5% in 1999 and at
9.0% in 2000 and thereafter,
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<PAGE>
(g) base and projected EBITDA, maintenance capital expenditures,
acquisition and operating assumptions for Star Gas Partners are the
same as previously defined in "Star Gas Partners Projections on a
Stand-Alone Basis,"
(h) base and projected EBITDA, maintenance capital expenditures and
operating assumptions for Petro reflect those as previously defined in
"Petro Projections on a Stand-Alone Basis" plus incremental EBITDA and
maintenance capital expenditures associated with the Petro acquisitions,
(i) annual operating synergies associated with the transaction of $500,000
and
(j) transaction expenses net of underwriting discounts and commissions of
approximately $10.9 million.
The pro forma projections include the following assumptions regarding Petro's
ability to make acquisitions:
(a) Under the 30-year case, $15.0 million of acquisitions are made in 1999
and $30.0 million of acquisitions are made annually thereafter; and
under the 15-year case, $15.0 million of acquisitions are made in 1999
and $25.0 million of acquisitions are made annually thereafter,
(b) acquisitions are made at a purchase price of 4.6x the first year EBITDA
of the acquired assets, and
(c) customer attrition associated with acquisitions is 16.2% in year 1,
12.6% in year 2, 6.8% in year 3, and 6.1% in year 4 and thereafter.
Star Gas Partners Projections
Pro Forma for Transaction--30-Year Case
(In thousands)
<TABLE>
<CAPTION>
For the Years Ending September 30,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Income
Propane EBITDA.......... $ 23,722 $ 24,106 $ 25,260 $ 26,797 $ 28,335 $ 29,873
Heating Oil EBITDA...... 46,900 47,215 50,369 54,883 59,097 63,108
Synergistic Savings..... 500 500 500 500 500 500
-------- -------- -------- -------- -------- --------
Pro Forma Combined
EBITDA................. 71,122 71,821 76,129 82,180 87,932 93,481
Depreciation and Amorti-
zation................. 36,097 37,186 40,066 43,576 46,921 50,274
-------- -------- -------- -------- -------- --------
EBIT.................... 35,025 34,634 36,063 38,604 41,011 43,206
Interest Expense (1).... (24,036) (24,672) (26,122) (27,845) (29,557) (31,195)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 10,989 9,962 9,941 10,758 11,455 12,012
Income Taxes............ (525) (525) (625) (675) (725) (775)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 10,464 $ 9,437 $ 9,316 $ 10,083 $ 10,730 $ 11,237
======== ======== ======== ======== ======== ========
Other Information
Maintenance Capital
Expenditures........... $ 6,110 $ 6,273 $ 6,393 $ 6,516 $ 6,641 $ 6,768
Total Long Term Debt.... $279,081 $293,949 $317,850 $342,052 $365,061 $387,256
Average Units
Outstanding
Common Units............ 12,909 12,951 13,270 13,816 14,366 14,921
Senior Subordinated
Units.................. 2,491 2,491 2,794 3,097 3,400 3,400
Junior Subordinated
Units.................. 430 430 430 430 430 430
General Partner Units... 323 323 323 323 323 323
-------- -------- -------- -------- -------- --------
Total Units............. 16,154 16,196 16,818 17,667 18,520 19,074
======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE>
Star Gas Partners Projections
Pro Forma for Transaction--15-Year Case
(In thousands)
<TABLE>
<CAPTION>
For the Years Ending September 30,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Income
Propane EBITDA.......... $ 22,316 $ 22,674 $ 23,749 $ 25,182 $ 26,615 $ 28,048
Heating Oil EBITDA...... 44,749 45,013 47,551 50,924 54,081 57,080
Synergistic Savings..... 500 500 500 500 500 500
-------- -------- -------- -------- -------- --------
Pro Forma Combined
EBITDA................. 67,565 68,187 71,800 76,606 81,196 85,628
Depreciation and Amorti-
zation................. 36,097 37,186 39,688 42,447 45,128 47,818
-------- -------- -------- -------- -------- --------
EBIT.................... 31,468 31,001 32,113 34,158 36,068 37,810
Interest Expense (1).... 24,036 (24,139) (24,869) (26,226) (27,588) (28,896)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 7,432 6,862 7,243 7,932 8,479 8,914
Income Taxes............ (525) (525) (525) (525) (525) (525)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 6,907 $ 6,337 $ 6,718 $ 7,407 $ 7,954 $ 8,389
======== ======== ======== ======== ======== ========
Other Information
Maintenance Capital Ex-
penditures............. $ 6,110 $ 6,194 $ 6,313 $ 6,434 $ 6,558 $ 6,683
Total Long Term Debt.... $279,081 $279,232 $298,005 $317,226 $335,588 $353,314
Average Units
Outstanding
Common Units............ 12,909 13,319 14,044 14,646 15,202 15,741
Senior Subordinated
Units.................. 2,491 2,491 2,491 2,491 2,491 2,491
Junior Subordinated
Units.................. 430 430 430 430 430 430
General Partner Units... 323 323 323 323 323 323
-------- -------- -------- -------- -------- --------
Total Units............. 16,154 16,564 17,289 17,890 18,447 18,986
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1)Interest Expense reflects the net cash interest expense only.
97
<PAGE>
THE TRANSACTION
The following discussion includes complete summaries of the material terms of
the merger agreement and the exchange agreement. The merger agreement and the
exchange agreement are attached as Annexes A and B of this proxy statement and
are incorporated by reference. Star Gas Partners common unitholders and Petro
common stockholders are urged to read the merger agreement, the exchange
agreement and other annexes in their entirety.
Description of the Transaction
The transaction has four principal parts:
(1) Star Gas Partners' acquisition of Petro, which will be accomplished
through
. the exchange by certain affiliates of Petro of 11,834,183 shares of
Petro common stock for approximately 772,705 Star Gas Partners senior
subordinated units, 430,395 junior subordinated units and 321,467
general partner units and a .01% general partner interest in Star Gas
Propane;
. the exchange by the Petro public common stockholders of 14,618,087
shares of Petro common stock for approximately 1,718,795 Star Gas
Partners senior subordinated units; and
. the merger of Petro/Mergeco, Inc., a wholly-owned subsidiary of Star
Gas Partners, with and into Petro, with Petro surviving the merger;
(2) The equity offering and the debt offering;
(3) The withdrawal of Star Gas Corporation as the general partner of Star
Gas Partners and Star Gas Propane and the election of Star Gas LLC as
the successor general partner; and
(4) The adoption of certain amendments to the partnership agreements of
Star Gas Partners and Star Gas Propane.
Description of the Merger and the Exchange
The Merger
Subject to the terms and conditions of the merger agreement, Petro/Mergeco,
Inc. will merge with and into Petro at the completion of the transaction. The
separate corporate existence of Petro/Mergeco, Inc. will end. Petro will
survive the merger and continue its corporate existence as a Minnesota
corporation and as a wholly-owned indirect subsidiary of Star Gas Propane.
The merger agreement provides that, at the effective time and without any
action on the part of the Petro stockholders, the issued and outstanding shares
of Petro capital stock shall be treated as follows:
. Each share of common stock held by Petro as treasury stock or issued
to Petro/Mergeco, Inc. as a result of the merger will be canceled and
retired;
. Each outstanding share of Petro common stock, other than treasury
shares, shares held by Petro/Mergeco, Inc. or shares as to which
dissenters rights are perfected under the Minnesota Business
Corporation Act, will be converted into .11758 of a Star Gas Partners
senior subordinated unit;
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<PAGE>
. Each outstanding share of Petro junior convertible preferred stock
will be converted into .13064 of a Star Gas Partners common unit;
. Each outstanding share of 12 7/8% preferred stock will be converted
into the right to receive cash in the amount of $23.00 plus accrued
and unpaid dividends or a lesser amount to which a holder may agree
in writing;
. Each outstanding share of Petro Class B common stock will remain
unchanged;
. Each share of Petro common stock held by a dissenting common
stockholder who has perfected his dissenters' rights under the
Minnesota Business Corporation Act, will represent only the right to
receive "fair value" for those shares, as determined under that act;
and
. Each outstanding vested option to purchase shares of Petro common
stock granted to employees and directors of Petro and its
subsidiaries will be converted into an option to purchase .11758 of a
Star Gas Partners senior subordinated unit at an exercise price equal
to the quotient of dividing the original exercise price by .11758.
No fractional Star Gas Partners senior subordinated units or common units
will be issued in the merger. In place of any fractional senior subordinated
units, each Petro common stockholder who would otherwise be entitled to receive
a fraction of a senior subordinated unit will receive an amount in cash. This
cash amount will be equal to the product obtained by multiplying the fraction
by the closing price of the Star Gas Partners senior subordinated units on
their first day of trading on the New York Stock Exchange, as reported in an
authoritative source. The cash amount received by Petro common stockholders
will be calculated without interest and to the nearest cent.
The Exchange
Subject to the terms and conditions of the exchange agreement, immediately
prior to the merger:
. Irik P. Sevin, Audrey L. Sevin, Hanseatic Corp. and Hanseatic Americas LDC
will contribute
--a total of 2,256,471 shares of Petro common stock to Star Gas LLC for
all of the ownership interests of Star Gas LLC; and
--a total of 3,005,972 shares of Petro common stock to Star Gas Partners
for 430,395 junior subordinated units.
. Star Gas LLC will contribute its 2,256,471 shares of Petro common stock
for 321,407 Star Gas Partners general partner units and a .01% general
partner interest in Star Gas Propane.
. Certain other affiliated Petro common stockholders of Petro will
contribute 6,580,778 shares of Petro common stock for 773,768 Star Gas
Partners senior subordinated units.
Related Financing and Refinancing Transactions
The refinancing of Petro's outstanding debt and preferred stock is an
integral element of the transaction. The purpose of the refinancing is to
substantially reduce Petro's ongoing borrowing costs, which is expected to
increase the cash flow of the combined entity. This refinancing will be
accomplished through several related transactions that are described below.
These related transactions will close substantially simultaneously with the
closing of the transaction.
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<PAGE>
Equity Offering and Debt Offering
Key elements in the related financing are the equity offering and the debt
offering. Star Gas Partners will offer for sale to the public approximately 8.9
million common units The net proceeds of this offering are estimated to be
$159.9 million assuming an initial offering price of $19.00 per common unit.
Petro will sell in a private placement to institutional investors approximately
$90.0 million of notes. The net proceeds of this offering are estimated to be
$87.9 million. It is expected that Star Gas Partners and Petro Holdings, Inc.
will guarantee the notes issued in the debt offering. See "Description of
Certain Indebtedness."
The net proceeds of the equity offering and the debt offering will be used to
redeem Petro's public debt and preferred stock and to pay for the expenses of
the transaction.
Description of Exchange of Petro Private Debt and Redemption of Preferred
Stock
Petro has entered into agreements with the holders of
(1) its outstanding 10.90% Senior Notes due 2002 in the aggregate
principal amount of $60 million; and
(2) its 14.1% Senior and Subordinated Notes due 2001 in the aggregate
principal amount of $4.1 million.
Under these agreements at the completion of the transaction:
(a) the holders of the 10.90% senior notes will exchange those notes
for $63.1 million aggregate principal amount of 9.0% Senior Notes
due 2002 of Petro; and
(b) the holders of the 14.1% senior and subordinated notes will
exchange those notes for $2.2 million aggregate principal amount
of 10.25% Senior Notes due 2001 of Petro and $2.2 million
principal amount of 10.25% Subordinated Notes due 2001 of Petro.
The new 9.0% senior notes and the new 10.25% senior notes and
subordinated notes will be guaranteed by Star Gas Partners and
Petro Holdings and its subsidiaries.
Petro has also entered into an agreement with the holder of $4.1 million in
face value of its 1989 preferred stock to redeem the 1989 preferred stock at
100% of face value plus accrued but unpaid dividends immediately prior to the
completion of the transaction.
Description of Petro Public Debt and Public Preferred Stock Exchange Offers
In October 1998, Petro completed an exchange offer with the holders of its 10
1/8% notes, 9 3/8% debentures and 12 1/4% debentures and entered into
individually negotiated agreements with the holders of its 12 7/8% preferred
stock.
In the debt exchange offer and the preferred stock agreements, the holders of
approximately 98.5% in aggregate principal amount and liquidation preference of
Petro's public debt and preferred stock exchanged those securities for a like
principal amount and liquidation preference of new securities. The terms of
those securities are in all material respects the same as the terms of the old
securities, except that
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<PAGE>
(1) the new debt securities are senior to the old debt securities, and
(2) the terms of the new debt securities and the new preferred stock
(a) give Petro the right to redeem these securities at the closing of
the transaction at the following redemption prices:
. 103.5% of face value for the new 12 1/4% debentures;
. 100% of face value for the new 10 1/8% notes and the new 9 3/8%
debentures; and
. $23.00 per share for the new 12 7/8% preferred stock; and
(b) eliminate substantially all covenants from the indentures under
which the old debt securities were issued.
The tendering holders of the old 12 7/8% preferred stock have also granted
Petro an irrevocable proxy to vote their shares of preferred stock in favor of
the acquisition proposal at the special meeting.
In the debt exchange offer, Petro issued an aggregate of 786,690 shares of
junior convertible preferred stock to the tendering holders. At the completion
of the transaction, those shares will be converted into an aggregate of 102,773
Star Gas Partners common units in the merger. Holders of substantially all of
these shares have also granted Petro an irrevocable proxy or have agreed to
vote these shares in favor of the acquisition proposal.
Description of the Merger Agreement
Completion of the Transaction; Closing
The merger agreement provides that the merger will be effective at the
completion of the transaction. The completion of the transaction will follow
the filing of a certificate of merger with the Delaware Secretary of State and
articles of merger with the Minnesota Department of State. The closing of the
merger will occur after the day on which the last of the conditions to the
merger have been satisfied or waived.
Exchange of Certificates in the Merger
For holders of Petro common stock and junior preferred stock: Promptly after
completion of the transaction, the exchange agent, American Stock Transfer &
Trust Company, will mail transmittal materials to each recordholder of Petro
common stock and junior preferred stock for use in effecting the surrender of
their certificates. However, the exchange agent will not mail transmittal
materials to dissenting common stockholders. The transmittal materials are for
use by each recordholder in surrendering his certificates in exchange for
certificates representing senior subordinated units or common units, as
appropriate, and cash for any fractional senior subordinated units or common
units.
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<PAGE>
Note: Petro common stockholders should not send in their certificates
until they receive transmittal materials from the exchange agent.
For holders of Petro 12 7/8% preferred stock: Promptly after the completion
of the transaction, the exchange agent will mail transmittal materials to each
recordholder of Petro 12 7/8% preferred stock for use in effecting the
surrender of his certificates. The transmittal materials are for use by each
recordholder in surrendering his certificates in exchange for cash in the
aggregate amount payable for the surrendered Petro 12 7/8% preferred stock.
The exchange agent may impose reasonable and customary terms and conditions
upon the acceptance of certificates in order to effect an orderly exchange.
Neither the exchange agent nor Star Gas Partners, Petro/Mergeco, Inc. or
Petro shall be liable to any former Petro common stockholder for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
Recordholders of Petro common stock and junior preferred stock immediately
before the effective time who comply with the certificate exchange procedures
will be entitled to receive distributions from Star Gas Partners in respect of
the number of senior subordinated units or common units, as the case may be,
into which their shares of Petro common stock or Petro junior preferred stock
have been converted.
Covenants of Star Gas Partners and Petro in the Merger Agreement
The merger agreement generally provides that before the completion of the
transaction, Petro and Star Gas Partners will conduct their business in the
ordinary course consistent with past practice. They have agreed to use
reasonable best efforts to preserve their business organizations intact,
maintain their rights, franchises, goodwill and assets, keep available the
services of their employees, and preserve their relationships with customers,
suppliers and others.
Representations and Warranties
The merger agreement includes standard representations and warranties by
Petro and Star Gas Partners as to themselves and their subsidiaries concerning:
. organization, standing and authority;
. capitalization;
. the power and authority to execute the merger agreement, including
necessary corporate or partnership approval, subject to equityholder
approval;
. absence of defaults caused by execution of the merger agreement;
. the accuracy of financial statements and reports filed with the SEC;
. pending or threatened litigation;
. compliance with applicable laws;
. the absence of undisclosed contracts and defaults;
. brokers and finders fees;
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<PAGE>
. employee compensation and benefit plans and related matters;
. labor matters;
. the absence of violations or liabilities under environmental laws;
. certain tax matters;
. the absence of any necessary regulatory approvals of the merger, except
under the Hart-Scott-Rodino Act;
. the conduct of business in the ordinary and usual course and the absence
of certain materially adverse changes;
. certain insurance matters;
. the condition and sufficiency of certain tangible assets; and
. the ownership and rights to use certain intellectual property.
Conditions to Completion of the Merger
The merger agreement generally provides that the obligations of each of Petro
and Star Gas Partners to complete the merger are subject to a number of
conditions, including the following:
. approval of the transaction by the Petro common stockholders and the Star
Gas Partners common unitholders;
. expiration of any waiting period under the Hart-Scott-Rodino Act, making
all material filings and obtaining all material approvals;
. absence of any order, decree or injunction to prevent the transactions
contemplated by the merger agreement, or any pending governmental action,
proceeding or investigation to enjoin, delay or restrict the transaction;
. effectiveness of the registration statement relating to the merger;
. receipt of legal opinions as to certain corporate, partnership and tax
matters;
. approvals of the Star Gas Partners senior subordinated units and common
units for listing on the New York Stock Exchange, subject to official
notice of issuance;
. as to Star Gas Partners, no withdrawal of the fairness opinion of A.G.
Edwards; as to Petro, no withdrawal of the fairness opinion of Dain
Rauscher Wessels;
. completion of the equity offering and the debt offering;
. meeting certain conditions as to refinancing of debt, cash balances and
working capital;
. no more than 10% of shares of Petro common stock held by dissenting Petro
common stockholders; and
. Petro's entering into a working capital credit facility of not less than
$30 million satisfactory to the special committee.
Amendment and Waiver
The merger agreement provides that prior to the closing, any provision of the
merger agreement may be
(1) waived by the party benefitted by that provision or
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<PAGE>
(2) modified or amended at any time by a written agreement of Petro and
Star Gas Partners if approved by the Petro board and the special
committee.
The merger agreement also provides that before the submission of the merger
agreement for approval at the special meeting, Star Gas Partners may change the
method of effecting the combination with Petro, Petro has agreed that the Petro
board will approve any amendments to the merger agreement resulting from that
action by Star Gas Partners provided that it does not
(a) alter or change the amount or kind of consideration to be issued to
Petro common stockholders in the merger,
(b) alter the tax treatment of Petro common stockholders as a result of the
merger or
(c) materially impede or delay the merger.
Termination
The merger agreement may be terminated, and the merger abandoned, at any time
prior to the completion of the transaction, whether before or after approval of
the merger by the Star Gas Partners common unitholders or the Petro common
stockholders:
(a) by the mutual consent of Petro and Star Gas Partners;
(b) by either Petro or Star Gas Partners
(i) if the other party materially breaches any of its
representations, warranties and covenants and the breach is
not cured or curable within the prescribed time;
(ii) if approval under the Hart-Scott-Rodino Act is not received
or a governmental authority enjoins the merger, provided that
the terminating party is not in breach of the merger
agreement; or
(iii) if approval of either the Petro common stockholders or
Star Gas Partners common unitholders is not obtained; and
(c) by Star Gas Partners, if the Petro Board, or by Petro, if the Star
Gas Corporation board withdraws or modifies its approval or
recommendation of the merger agreement and its related transactions.
Furthermore, the merger agreement shall be terminated if the merger is not
completed on or before April 1, 1999 unless the special committee and Petro
elect to extend the termination date.
If the merger agreement is terminated and the merger is abandoned, neither
Petro nor Star Gas Partners will have any liability or further obligation to
any other party under the merger agreement, except that a party who caused the
termination through its wilful breach will still be liable.
Expenses
Petro will bear all expenses incurred for the merger agreement and its
contemplated transactions.
Restrictions on Resales of Senior Subordinated Units by Non-Affiliates and
Affiliates
The common units and senior subordinated units issuable to Petro stockholders
upon completion of the transaction have been registered under the Securities
Act and may be traded freely without restriction by those Petro common
stockholders who are not deemed to be "affiliates" of Star Gas Partners or
Petro. The term "affiliates" is defined in the rules promulgated under the
Securities Act.
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<PAGE>
Star Gas Partners common units and senior subordinated units received by
those Petro stockholders who are deemed to be affiliates of Star Gas Partners
or Petro at the time of the securityholder meetings may be resold without
registration under the Securities Act only as permitted by Rule 145 or as
otherwise permitted under the Securities Act. Star Gas Partners senior
subordinated units received by persons who are deemed to be "affiliates" of
Star Gas Partners may be sold only in transactions permitted under the
provisions of Rule 144 under the Securities Act, or as otherwise permitted
under the Securities Act.
Selling Unitholders
The registration statement of which this proxy statement forms a part also
covers the reoffering and resale from time to time by the following selling
unitholders who may be deemed to be "affiliates" of Petro within the meaning of
Rule 145 of the following Star Gas Partners senior subordinated units to be
received by the selling unitholders in the transaction. Star Gas Partners will
not receive any proceeds from the sale of these units by the selling
unitholders. The amounts under the column titled "Number of Senior Subordinated
Units" represents the total number of senior subordinated units owned by each
selling unitholder and the maximum number of senior subordinated units that
could be sold by each selling unitholder.
<TABLE>
<CAPTION>
Number of Senior
Selling Unitholder Subordinated Units
------------------ ------------------
<S> <C>
Phillip Cohen................................................ 93,204
Thomas Edelman............................................... 91,986(a)
Richard O'Connell............................................ 168,281
Brentwood Corp. ............................................. 94,400
Gabes S.A. .................................................. 84,885
Minneford Corp. ............................................. 10,069
Fernando Montero............................................. 4,149
M.M. Warburg & Co. .......................................... 3,740
Barcel Corp. ................................................ 88,935
Hubertus Langen.............................................. 87,069
Tortosa GmbH................................................. 35,123
Paul Biddelman............................................... 281
United Capital Corp. ........................................ 10,582
</TABLE>
- --------
(a) Includes 8,936 senior subordinated units owned by Mr. Edelman's wife and
trusts for the benefit of his minor children.
Plan of Distribution for the Resale Units
The selling unitholders may from time to time sell all or a portion of their
Star Gas Partners senior subordinated units in transactions on the New York
Stock Exchange, in the over-the-counter market, in negotiated transactions,
under Rule 144 or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Star Gas Partners senior
subordinated units may be sold directly or through brokers or dealers or in a
distribution by one or more underwriters on a firm commitment or best efforts
basis. The methods by which the senior subordinated units may be sold include:
(1) a block trade in which the broker dealer or dealer engaged will attempt
to sell the senior subordinated units as agent but may position and
resell a portion of the block as principal to facilitate the
transaction,
(2) purchases by a broker or dealer as principal and resales by that broker
dealer for its account pursuant to this proxy statement,
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<PAGE>
(3) ordinary brokerage transactions and transactions in which the broker
solicits purchasers or to or through marketmakers,
(4) transactions in put or call options or other rights, whether exchange-
listed or otherwise, established after the effectiveness of the
registration statement of which this proxy statement is a part and
(5) privately negotiated transactions.
In addition, any of the Star Gas Partners senior subordinated units that
qualify for sale under Rule 145 under the Securities Act may be sold in
transactions complying with that rule, rather than under this proxy statement.
In the case of the sale of Star Gas Partners senior subordinated units
effected to or through broker-dealers, the broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling unitholders or the purchasers of senior subordinated units sold by or
through the broker-dealers, or both. Star Gas Partners is not aware as of the
date of this proxy statement of any agreements between any of the selling
unitholders and any broker-dealers with respect to the sale of senior
subordinated units. The selling unitholders and any broker-dealers or agents
participating in the distribution of the Star Gas Partners senior subordinated
units may be deemed to be "underwriters" within the meaning of the Securities
Act. In addition, any commissions received by the broker-dealers or agents and
profits on any resale of senior subordinated units may be deemed to be
underwriting commissions under the Securities Act. The commissions received by
a broker-dealer or agent may be in excess of customary compensation. Star Gas
Partners will receive no part of the proceeds from the sale of any of the
shares of the senior subordinated units by the selling unitholders.
Star Gas Partners will pay all costs and expenses incurred for the
registration under the Securities Act of senior subordinated units offered by
the selling unitholders, including without limitation all
.registration and filing fees,
.listing fees,
.printing expenses and
.fees and disbursements of counsel and accountants for Star Gas Partners.
Each selling unitholder will pay all brokerage fees and commissions, if any,
incurred in the sale of senior subordinated units owned by him. In addition,
Star Gas Partners has agreed to indemnify the selling unitholders against
certain liabilities, including liabilities under the Securities Act.
Accounting Treatment of the Transaction
The parties anticipate that the transaction will be accounted for as a
purchase for accounting purposes. See "Unaudited Pro Forma Condensed
Consolidated Financial Information."
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Regulatory Matters Associated with the Transaction
No filing with, or approval of any federal or state governmental entity is
required for the transaction, except for:
(a) the filing of notice of the proposed transaction with the United States
Department of Justice and the Federal Trade Commission under the Hart-
Scott-Rodino Act, and the lapse of the relevant waiting period
prescribed under them;
(b) registration under the Securities Act of the Star Gas Partners senior
subordinated units and the common units to be issued in the transaction
and the Star Gas Partners common units to be offered in the equity
offering;
(c) notifications required to be given by Petro to state and county
authorities under provisions of certain licenses and permits; and
(d) tax filings.
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MANAGEMENT OF STAR GAS PARTNERS AFTER THE TRANSACTION
General Partner
Since Star Gas Corporation is a wholly-owned subsidiary of Petro and will
become an indirect subsidiary of Star Gas Partners in the transaction, it will
no longer be able to serve as the general partner. At the completion of the
transaction, the general partner of Star Gas Partners and Star Gas Propane
will be Star Gas LLC. The membership interests in Star Gas LLC are owned by
Irik P. Sevin, Audrey L. Sevin, Hanseatic Corp. and Hanseatic Americas LDC. The
officers of Star Gas LLC will be:
. Irik P. Sevin, Chairman of the Board and Chief Executive;
. Joseph Cavanaugh, Executive Vice President--Propane and Member of the
Office of President;
. William G. Powers, Jr., Executive Vice President--Heating Oil and Member
of the Office of President;
. George Leibowitz, Treasurer;
. Richard F. Ambury, Vice President;
. James Bottiglieri, Vice President; and
. Audrey L. Sevin, Secretary.
The general partner manages and operates the activities of Star Gas Partners.
Star Gas Partners unitholders do not directly or indirectly participate in the
management or operation of Star Gas Partners. The general partner owes a
fiduciary duty to the Star Gas Partners unitholders. Despite any limitation on
obligations or duties, the general partner is liable, as the general partner of
Star Gas Partners, for all debts of Star Gas Partners, to the extent not
paid by Star Gas Partners, except to the extent that indebtedness or other
obligations incurred by Star Gas Partners 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's
assets.
Board of Directors of Star Gas LLC
At the completion of the transaction, it is expected that the Star Gas LLC
board will consist of the following persons, all of whom currently serve as
directors of Star Gas Corporation: Irik P. Sevin, who is Chairman of the Board,
Audrey L. Sevin, William G. Powers, Jr., Thomas J. Edelman, Paul Biddelman,
Wolfgang Traber, and William P. Nicoletti. At her request, one of the current
directors of Star Gas Corporation will withdraw as a director upon completion
of the transaction as a result of additional duties associated with a new job.
That director will be replaced by a director selected by the Star Gas LLC
board, and the new director will not be an officer or employee of Star Gas LLC
or any of its affiliates.
William P. Nicoletti and an independent director to be selected by the Star
Gas LLC board, 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
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determine if the resolution of the conflict proposed by the general partner is
fair and reasonable to Star Gas Partners. Any matters approved by the audit
committee will be:
.conclusively deemed to be fair and reasonable to Star Gas Partners,
.approved by all partners of Star Gas Partners and
. not a breach by the general partner of any duties it may owe Star Gas
Partners or the Star Gas Partners unitholders.
In addition, the audit committee:
.reviews external financial reporting of the Star Gas Partners,
.recommends engagement of Star Gas Partners' independent accountants and
. reviews the Star Gas Partners' procedure for internal auditing and the
adequacy of Star Gas Partners' 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.
Officers and Employees of the Star Gas Propane and Petro
Star Gas Propane. At the completion of the transaction, the officers and
employees of Star Gas Corporation who currently manage the operations and
business of Star Gas Partners will become officers and employees of Star Gas
Propane.
We expect that the following persons who currently serve as Star Gas
Corporation's executive officers will serve as executive officers of Star Gas
Propane following the completion of the transaction:
. Irik P. Sevin, Chairman of the Board;
. Joseph P. Cavanaugh, President and Chief Executive Officer;
. David R. Eastin, Vice President-Operations;
. Richard F. Ambury, Vice President-Finance; and
. Audrey L. Sevin, Secretary.
Information relating to executive compensation, various benefit plans,
including unit option plans, voting securities and their principal holders,
certain relationships and related transactions and other related matters as to
Star Gas Partners and Star Gas Corporation is described in Star Gas Partners'
Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and is
incorporated by reference in this proxy statement. Securityholders of Star Gas
Partners or Petro desiring copies of these documents may contact Star Gas
Partners at its address or telephone number indicated under "Where You Can Find
More Information."
Petro. At the completion of the transaction the officers and employees of
Petro will continue to be employed by Petro.
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We expect that the following persons who currently serve as Petro's executive
officers will continue to serve as executive officers of Petro following the
completion of 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;
. George Leibowitz, Treasurer;
. James J. Bottiglieri, Controller;
. Matthew J. Ryan, Vice President-Supply;
. Angelo Catania, Vice President and General Manager-Mid Atlantic Region;
. John Ryan, Vice-President-General Manager-New York Metro Region;
. Peter B. Terenzio, Jr., Vice President-Human Resources; and
. Audrey L. Sevin, Secretary.
Information relating to executive compensation, various benefit plans;
(including stock option plans, voting securities and their principal holders,
certain relationships and related transactions and other related matters as to
Petro is described in Petro's Annual Report on Form 10-K for the year ended
December 31, 1997, and is incorporated by reference in this proxy statement.
Securityholders of Star Gas Partners or Petro desiring copies of these
documents may contact Petro at its address or telephone number indicated under
"Where You Can Find More Information."
Reimbursement of Expenses of the General Partner
The general partner does not receive any management fee or other compensation
for its management of Star Gas Partners. The general partner is reimbursed at
cost for all expenses incurred on behalf of Star Gas Partners, including the
costs of compensation described below that are properly allocable to Star Gas
Partners. The amended and restated partnership agreement provides that the
general partner shall determine the expenses that are allocable to Star Gas
Partners in any reasonable manner determined by the general partner in its sole
discretion.
The general partner will be entitled to distributions on its general partner
units and will be entitled to incentive distributions on those units, as
described under "Cash Distribution Policy."
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BENEFICIAL OWNERSHIP OF PRINCIPAL UNITHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership as of the record date
of Star Gas Partners common units, senior subordinated units, junior
subordinated units and general partner units after giving effect to the
transaction by:
(1) Star Gas LLC and certain beneficial owners and all of the directors of
Star Gas LLC,
(2) each of the named executive officers of Star Gas Corporation and
Petro, and
(3) all directors and executive officers of Star Gas Corporation and Petro
as a group.
The address of each of these persons is c/o Star Gas Partners, L.P. at 2187
Atlantic Street, Stamford, CT 06912-0011.
<TABLE>
<CAPTION>
Senior Junior General Partner
Common Units Subordinated Units Subordinated Units Interests/Units
-------------------- --------------------- --------------------- ---------------------
Name Number Percentage Number Percentage Number Percentage Number Percentage
---- ------ ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Star Gas LLC............ -- --% -- --% -- --% 323,082 100%
Irik P. Sevin........... -- -- -- -- 51,071 15.8 323,082(c) 100
Audrey L. Sevin......... -- -- -- -- 144,556 44.7 323,082(c) 100
Wolfgang Traber......... 10,400(a) * 1,063 * 127,454(b) 39.5 323,082(c) 100
Paul Biddelman.......... -- -- 281 * 127,454(b) 39.5 323,082(c) 100
Thomas Edelman.......... -- -- 91,986(d) 3.7 -- -- -- --
Richard F. Ambury....... 625 * 39 * -- -- -- --
George Leibowitz........ -- -- -- * -- -- -- --
C. Justin McCarthy...... -- -- -- -- -- -- -- --
Angelo Catania.......... -- -- 294 * -- -- -- --
David Eastin............ -- -- -- -- -- -- -- --
Joseph G. Cavanaugh..... -- -- 59 * -- -- -- --
William G. Powers....... -- -- -- -- -- -- -- --
All officers and
directors and Star Gas
LLC as a group
(13 persons)........... 11,025 * 185,863 7.5 -- 100.0 323,082 100.0
</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 127,454 junior subordinated units held by Hanseatic Americas LDC,
a Bahamian limited duration company. The sole managing member of Hanseatic
Americas is Hansabel Partners, LLC, a Delaware limited liability company.
The sole managing member of Hansabel Partners is Hanseatic Corporation, a
New York corporation. Messrs. Traber and Biddelman are executive officers
of Hanseatic Corporation, and Mr. Traber holds in excess of a majority of
the shares of capital stock of Hanseatic Corporation.
(c) Assumes each member 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 8,936 senior subordinated units owned by Mr. Edelman's wife and
trusts for the benefit of his minor children.
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AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
The following is a complete summary of the material amendments to the current
Star Gas Partners partnership agreement and Star Gas Propane partnership
agreement to be voted upon by the Star Gas Partners common unitholders. The
full text of the proposed Star Gas Partners amended and restated partnership
agreement is attached as Annex C. Annex C shows the portions of the existing
Star Gas Partners partnership agreement that will be deleted or changed if the
transaction is completed. In the following section discussing the amendment
proposal, references to unitholders are to Star Gas Partners unitholders and
references to units are to Star Gas Partners units.
Introduction; Vote Required by Unitholders in order to Amend the Partnership
Agreements
Star Gas Corporation, the current general partner, proposes the adoption of
the amendments described below to the Star Gas Partners partnership agreement
and the Star Gas Propane partnership agreement. This amendment proposal must
receive the approval of the holders of a unit majority. Under the current
partnership agreement a unit majority means, during the subordination period,
at least a majority of the common units outstanding on the record date, other
than common units owned by Star Gas Corporation or any affiliate. The enclosed
proxy affords unitholders an opportunity to separately vote for or against the
amendment proposal by marking the appropriate box on their proxy card. However,
the transaction will not be effected unless the amendment proposal is adopted.
Summary of Amendments to the Partnership Agreement
Increase of Minimum Quarterly Distribution. The amendment proposal will
increase the minimum quarterly distribution from $0.55 to $0.575 per quarter,
which is equal to an annual increase from $2.20 to $2.30. No changes will be
made to the target distribution levels.
Extension of the Subordination Period. The amendment proposal will extend the
earliest date on which the subordination period can expire from January 1, 2001
to October 1, 2002. Under the current partnership agreement, the subordination
period will end upon the removal of the general partner by the requisite vote
by limited partners under circumstances where cause does not exist. The
amendment proposal contains a similar provision but also provides that if the
general partner is removed during the subordination period
. within 12 months after a six-quarter period in which the minimum
quarterly distribution was not made on the common units for more than one
of those quarters, excluding, for this purpose, the payment of any common
unit arrearages, and
. the first quarter in that six-quarter period that the minimum quarterly
distribution on the common units is not made occurs after March 31, 2001,
then the subordination period will not end. If the general partner is removed
and the subordination period does not end,
. the junior subordinated units shall convert into senior subordinated
units on a one-for-one basis and
. the distribution rights on the general partner units with respect to the
minimum quarterly distribution and to an extent for liquidating
distributions will rank pari passu with the senior subordinated units.
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Issuance of Senior Subordinated Units. The amendment proposal will authorize
the issuance of senior subordinated units. The senior subordinated units will
have distribution rights that are subordinated to all present and future common
units for the minimum quarterly distribution and arrearages, and, to an extent,
for liquidating distributions. The senior subordinated units will be senior to
all present and future junior subordinated units and general partner units for
the minimum quarterly distribution and to an extent for liquidating
distributions. Upon expiration of the subordination period, all outstanding
senior subordinated units will convert into Class B common units on a one-for-
one basis. Each outstanding common unit will be redesignated as a Class A
common unit upon expiration of the subordination period. The only difference
between the Class A common units and the Class B common units is that the Class
B common units will have the right to receive incentive distributions and the
right to receive additional senior subordinated units if Petro achieves
specified financial goals. See "Cash Distribution Policy--Distributions of
Available Cash from Operating Surplus During the Subordination Period."
Issuance of Junior Subordinated Units. The amendment proposal will authorize
the issuance of junior subordinated units. The junior subordinated units will
have distribution rights that are subordinate to all present and future common
units and senior subordinated units. In addition, the junior subordinated units
will rank pari passu with all present and future general partner units for the
minimum quarterly distribution and, to an extent, for liquidating
distributions. Upon expiration of the subordination period, all outstanding
junior subordinated units will convert into Class B common units on a one-for-
one basis. The existing subordinated units held by Star Gas Corporation will be
cancelled upon completion of the transaction. See "Cash Distribution Policy--
Distributions of Available Cash from Operating Surplus During the Subordination
Period."
Subordination of General Partner Interests. The amendment proposal will
redesignate the general partner interests in Star Gas Partners as general
partner units. These general partner units will rank pari passu with the junior
subordinated units for the minimum quarterly distribution and, to an extent,
for liquidating distributions. Currently, the general partner is entitled to 2%
of all payments of the minimum quarterly distribution made on the common units
and the existing subordinated units. The general partner units shall not
convert into any class of common units upon expiration of the subordination
period. However, at that time, they shall no longer be subordinated and shall
rank pari passu with the Class A and Class B common units. See "Cash
Distribution Policy--Distributions of Available Cash from Operating Surplus
During the Subordination Period" and "--Distributions of Available Cash from
Operating Surplus After the Subordination Period."
Limitations and Prohibitions on Distributions on Subordinated Interests. The
amendment proposal will limit and, in some cases, prohibit distributions during
the subordination period on the senior subordinated units, junior subordinated
units and general partner units in the following manner:
. No distributions will be paid on the senior subordinated units, junior
subordinated units and general partner units for any quarter during the
remainder of Star Gas Partners' distributions to fiscal year 1999, which
ends on September 30, 1999. There is no prohibition or limitation on
common units during this time period.
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. Beginning with the first quarter of Star Gas Partners' 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 Star Gas Partners fiscal
year 2000, shall be equal to or less than the total Operating Surplus
generated by Star Gas Partners since October 1, 1999. Solely for purposes
of this limitation, Operating Surplus does not include approximately $20
million and Star Gas Partners cash balance on the date it commenced
operations, which are included in the definition.
The amendment proposal does not prohibit the holders of senior subordinated
units, junior subordinated units or general partner units from receiving
distributions from Capital Surplus in a partial liquidation during the
subordination period.
Issuance of Additional Senior Subordinated Units. The amendment proposal
authorizes Star Gas Partners to issue and distribute up to an aggregate of
909,000 additional senior subordinated units. For each non-overlapping four-
quarter period that occurs after the first anniversary of the transaction, but
before the fifth anniversary of the transaction, if the dollar amount of Petro
Adjusted Operating Surplus per Petro Unit equals or exceeds $2.90, Star Gas
Partners will issue 303,000 senior subordinated units. These additional senior
subordinated units will be issued to the current holders of the senior
subordinated units, junior subordinated units and the general partner units for
the distribution of the final quarter of that four-quarter period. If, however,
the subordination period has expired, Star Gas Partners will issue Class B
common units as opposed to senior subordinated units to the holders of Class B
common units and general partner units. Under this provision, Star Gas Partners
may not issue more than 909,000 senior subordinated units or Class B common
units in the aggregate or more than 303,000 senior subordinated units or Class
B common units in any 365-day period. See "Cash Distribution Policy--Issuance
of Additional Senior Subordinated Units."
Reallocation of Incentive Distribution Rights. The amendment proposal will
reallocate the right to receive incentive distributions currently held by the
general partner among the senior subordinated units, junior subordinated units
and general partner units. As a result, in some quarters the holders of senior
subordinated units, junior subordinated units and general partner units may
receive greater distributions than the holders of common units. See "Cash
Distribution Policy--Incentive Distributions During the Subordination Period"
and "--Incentive Distributions After the Subordination Period."
Deletion of the Provision Regarding the Net Worth of the General Partner. The
amendment proposal will delete the prohibition against the general partner from
taking any action that would cause its net worth, independent of its interest
in Star Gas Partners and Star Gas Propane, to be less than $6.0 million. The
primary purpose of the net worth requirement was to ensure that Star Gas
Partners would be treated as a partnership and not as an association taxable as
a corporation for federal income tax purposes. Counsel has advised Star Gas
Partners that the failure of the general partner to maintain a specific net
worth will not result in Star Gas Partners being treated as an association
taxable as a corporation for federal income tax purposes under current
regulations under the Code.
Issuance of Additional Common Units. The partnership agreement currently
authorizes Star Gas Partners to issue 1,300,000 common units or units ranking
on a parity with common units
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without the approval of the common unitholders. This number does not include
common units issued for
(1)capital improvements or acquisitions that are accretive on a per
unit basis,
(2)the repayment of indebtedness incurred for (1) above or
(3) the conversion of the existing subordinated units.
The amendment proposal will increase the number of common units or units
ranking on a parity with common units that Star Gas Partners may issue without
further unitholder approval to 2,500,000. This number does not include:
(a) common units issued for the purposes described in (1) and (2)
above,
(b) Class B common units issued in the conversion of senior
subordinated units and junior subordinated units and
(c) the common units issued in the transaction, including the equity
offering.
Approval of this amendment satisfies the requirement under the current
partnership agreement that the holders of a unit majority approve the issuance
of common units in the equity offering.
Definition of Unit Majority. Under the current partnership agreement, some
transactions require the approval of a unit majority, which is defined to mean
the approval of a majority of the common units, other than common units held by
the general partner or any of its affiliates. The amendment proposal will
provide that the senior subordinated units and junior subordinated units have a
vote on some matters by restating the definition of "unit majority" as follows:
"Unit Majority" means, during the subordination period, at least (1) a
majority of the outstanding common units voting as a class and (2) a
majority of the outstanding senior subordinated units and junior
subordinated units voting as a single class, in each case excluding units
owned by the general partner or any affiliate, and, after the subordination
period, at least a majority of the outstanding common units.
Proportionate Increase in Operating Surplus Basket. The amendment proposal
will increase the basket of $6 million described in the definition of
"Operating Surplus" in proportion to the additional number of common units to
be issued in the equity offering. In lieu of $6 million, the amount shall be a
number equal to the product of:
(1)$6 million and
(2)a fraction,
(x) the numerator of which is the number of outstanding common units at
the completion of the transaction, assuming the simultaneous
closing of the equity offering, and
(y) the denominator of which is the number of outstanding common units
immediately prior to the completion of the transaction.
Assuming the issuance of approximately 8.9 million common units in the equity
offering, the basket will be increased to approximately $20 million. This
amendment will keep the dollar amount of the basket per common unit the same as
it was immediately before the transaction.
Deletion of Provisions Relating to Early Conversion of Subordinated
Units. The amendment proposal will delete those provisions of the partnership
agreement that provide that a portion of the
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subordinated units will convert into common units prior to the expiration of
the subordination period if certain levels of minimum quarterly distribution
are both earned and distributed. Based upon Star Gas Partners' inability to
satisfy tests based on distributions and earnings, the early conversion of
subordinated units is no longer feasible.
General Partner Capital Contribution Requirement. The amendment proposal
relieves the general partner of its obligation to maintain a fixed percentage
general partner interest in Star Gas Partners. The general partner will,
however, retain its preemptive right to maintain its existing ownership
interest. If the general partner does not make a contribution of capital upon
the issuance of additional units, its claim on distributions will be
proportionately reduced.
Additional Capital Contribution Obligation of the General Partner. The
amendment proposal will delete the additional capital contribution obligation
of the general partner in order for Star Gas Partners to pay the minimum
quarterly distribution on the common units. Based upon the satisfaction of
tests in the current partnership agreement determined by distributions, this
obligation of the general partner has expired.
Partnership's Right to Acquire Units. The amendment proposal will provide
that if at any time after the expiration of the subordination period and the
earlier to occur of:
(1) the fifth anniversary of the completion of the transaction or
(2) the issuance of 909,000 senior subordinated units and Class B common
units in the aggregate,
Star Gas Partners acquires, in a twelve-month period through purchase or
exchange, 66 2/3% or more of the total Class B common units, Star Gas Partners
may purchase all, but not less than all, of the remaining Class B common units
then outstanding during the following twelve-month period.
Registration Rights of Certain Affiliates of Petro. The amendment proposal
will provide that Star Gas Partners must register for resale under the
Securities Act the common units and senior subordinated units issued to
affiliates of Petro in the transaction.
Summary of Amendments to the Star Gas Propane Partnership Agreement
Under the current partnership agreement, the general partner cannot consent
to any amendment to the Star Gas Propane partnership agreement that would have
a material adverse effect on Star Gas Partners as a partner of Star Gas
Propane. Additionally the general partner cannot cause Star Gas Partners to
elect a successor general partner of Star Gas Propane without the approval of
the holders of a unit majority of the unitholders in Star Gas Partners.
Star Gas Corporation consents to and proposes that the limited partners
approve:
(1) the election of Star Gas LLC as successor general partner,
(2) the deletion of the allocation of depreciation to the general
partner,
(3) the deletion of the prohibition against the general partner from
taking any action that would cause its net worth to be less than $6
million and
(4) any other amendments to the Star Gas Propane partnership agreement
that the general partner deems necessary to complete the
transaction.
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Conforming Changes
Additional changes will be required to conform the current Star Gas Partners
partnership agreement and the current Star Gas Propane partnership agreement to
the amendments and to facilitate the transaction. It is the good faith opinion
of Star Gas Corporation that the conforming changes do not adversely affect the
unitholders in any material respect. Thus, under the current partnership
agreement, Star Gas Corporation may make any or all conforming changes without
the consent of the unitholders.
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THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT
If the transaction is completed, all holders of Star Gas Partners' units will
be bound by the provisions of the Star Gas Partners amended and restated
partnership agreement. The following is a complete summary of the material
provisions of the amended and restated partnership agreement. For a more
complete understanding, see the proposed amended and restated partnership
agreement attached as Annex C of this proxy statement. In the following
discussion of the provisions of the amended and restated partnership agreement,
references to unitholders are to Star Gas Partners unitholders and references
to common, senior subordinated, junior subordinated, and general partner units
are to Star Gas Partners units.
The following provisions of the amended and restated partnership agreement
are summarized elsewhere in this proxy statement:
. With regard to various transactions and relationships of Star Gas
Partners with the general partner and its affiliates, see "Conflicts of
Interest of Star Gas Partners."
. With regard to the management of Star Gas Partners, see "Management of
Star Gas Partners After the Transaction." With regard to the transfer of
units, see "Description of the Units."
. With regard to distributions of Available Cash, see "Cash Distribution
Policy."
. With regard to allocations of taxable income and taxable loss, see
"Federal Income Tax Considerations."
Organization and Duration
Star Gas Partners and Star Gas Propane were organized in 1995 as Delaware
limited partnerships. Star Gas Partners will dissolve on December 31, 2085,
unless dissolved sooner under the terms of the amended and restated partnership
agreement.
Purpose
The purpose of Star Gas Partners is limited to serving as the limited partner
of Star Gas Propane and engaging in other activities approved by the general
partner. The general partner is authorized in general to perform all acts
deemed necessary to carry out those purposes and to conduct the business of
Star Gas Partners. The general partner has the ability to cause Star Gas
Partners and Star Gas Propane to engage in activities that may pose a greater
risk to investors than the propane and home heating oil marketing business.
Power of Attorney
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to the general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for the qualification, continuance or
dissolution of Star Gas Partners. The power of attorney also grants the
authority for the amendment of, and to make consents and waivers under, the
amended and restated partnership agreement.
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Restrictions on Authority of the General Partner Regarding Extraordinary
Transactions
The authority of the general partner is sometimes limited under the amended
and restated partnership agreement. The general partner is prohibited, without
the prior approval of a unit majority, from:
. selling, exchanging or otherwise disposing of all or substantially all
of Star Gas Partners' assets in a single transaction or a series of
related transactions, including by way of merger, consolidation or other
combination or
. approving on behalf of Star Gas Partners the sale, exchange or other
disposition of all or substantially all of the assets of Star Gas
Propane.
However, Star Gas Partners may mortgage, pledge, hypothecate or grant a
security interest in all or substantially all of Star Gas Partners' assets
without any unitholder approval. Star Gas Partners may also sell all or
substantially all of its assets in a foreclosure or other realization upon
these encumbrances without Star Gas Partners unitholder approval.
Lack of Dissenters' Rights
The unitholders are not entitled to dissenters' rights of appraisal under the
current partnership agreement, the amended and restated partnership agreement
or applicable Delaware law if a merger or consolidation of Star Gas Partners or
the sale, exchange or other disposition of substantially all of Star Gas
Partners' assets or any other event should occur.
Withdrawal or Removal of the General Partner; Approval of Successor General
Partner
Expect in the limited circumstances described below, the general partner has
agreed not to voluntarily withdraw as general partner of Star Gas Partners and
Star Gas Propane prior to December 31, 2005 without
. obtaining the approval of a unit majority and
. furnishing an opinion of counsel that the withdrawal and the selection of
a successor general partner will not result in the loss of the limited
liability of the limited partners of Star Gas Partners or cause Star Gas
Partners to be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes.
On or after December 31, 2005, the general partner may withdraw as general
partner by giving 90 days written notice without obtaining approval from the
unitholders. Withdrawal after this date will not constitute a violation of the
amended and restated partnership agreement.
Notwithstanding the foregoing, the general partner may withdraw without
unitholder approval upon 90 days notice to the limited partners if more than
50% of the outstanding units are held or controlled by one person and its
affiliates, other than the general partner and its affiliates. In addition, the
amended and restated partnership agreement permits the general partner in
limited instances to sell all of its general partner units. See "--Restriction
on Transfer of General Partner Interest."
Upon the withdrawal of the general partner under any circumstances, other
than as a result of a transfer by the general partner of all or a part of its
general partner units, the holders of a majority of
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the outstanding units may select a successor general partner. If the successor
is not elected, or is elected but an opinion of counsel regarding the tax
matters discussed above cannot be obtained, Star Gas Partners will be
dissolved, wound up and liquidated, unless within 180 days after that
withdrawal, a unit majority agrees in writing to continue the business of Star
Gas Partners and to the appointment of a successor general partner. See "--
Description of Termination and Dissolution of Star Gas Partners."
The general partner may not be removed unless:
. removal is approved by the vote of the holders of not less than 66 2/3%
of the outstanding units owned by limited partners voting together as a
single class, other than those of the general partner and its affiliates
and
. Star Gas Partners receives an opinion of counsel that the removal will
not result in a loss of limited liability to the limited partners or
cause Star Gas Partners to be treated as a corporation or otherwise taxed
as an entity for federal income tax purposes.
Removal is also subject to the approval of a successor general partner by the
vote of the holders of a unit majority.
If the general partner is removed as general partner other than for cause,
the subordination period will end, any then-existing arrearages on the common
units will be terminated, any senior subordinated units and junior
subordinated units held by the general partner will immediately convert into
Class B common units and the general partner units will no longer be
subordinated; provided, however, that if the general partner is removed during
the subordination period within 12 months after a six-quarter period in which
the minimum quarterly distribution has not been made on the common units for
more than one of those quarters, excluding for this purpose the payment of any
common unit arrearages, and the first quarter in that six-quarter period that
the minimum quarterly distribution on the common units is not made occurs
after March 31, 2001, then the subordination period will not end. If the
general partner is removed and the subordination period does not end, the
junior subordinated units shall convert into senior subordinated units on a
one-for-one basis and the distribution rights on the general partner units
with respect to the minimum quarterly distribution and liquidation will rank
equally with the senior subordinated units.
Removal or withdrawal of the general partner of Star Gas Partners also
constitutes removal or withdrawal, as the case may be, of the general partner
as general partner of Star Gas Propane.
In the event the withdrawal of the general partner violates the amended and
restated partnership agreement or removal of the general partner by the
limited partners under circumstances where cause exists, a successor general
partner will have the option to purchase from the departing general partner
the general partner units in Star Gas Partners and the general partner
interests in Star Gas Propane for a cash payment equal to the fair market
value . Under all other circumstances where the general partner withdraws or
is removed by the limited partners, the departing general partner will have
the right to require the successor general partner to purchase from the
departing general partner the general partner units in Star Gas Partners and
the general partner interest in Star Gas Propane for that amount. In each
case, the fair market value will be determined by agreement between the
departing general partner and the successor general partner, or if no
agreement is reached, by an independent investment banking firm or other
independent experts selected by the departing general partner and
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the successor general partner. If no expert can be agreed upon, by the expert
chosen by agreement of the experts selected by each of them. In addition, Star
Gas Partners will be required to reimburse the departing general partner for
all amounts due the departing general partner, including, without limitation,
all employee-related liabilities such as severance liabilities, incurred in the
termination of the employees employed for the benefit of Star Gas Partners by
the departing general partner.
If the above-described option is not exercised by either the departing
general partner or the successor general partner, as applicable, the departing
general partner's general partner units will be converted into common units
equal to the fair market value of the interest as determined by an investment
banking firm or other independent expert selected in the manner described in
the preceding paragraph. If any Class B common units are outstanding, the
departing general partner's general partner units will be converted into Class
A common units.
Restriction on Transfer of General Partner Interest
Except for the following two instances, the general partner may not transfer
any or all of the general partner units to another person or entity prior to
December 31, 2005, without the approval of holders of a unit majority.
. A transfer by the general partner of all, but not less than all, of its
general partner units to an affiliate.
. The merger or consolidation of the general partner with or into another
entity.
In each case the transferee of the general partner units must:
. assume the rights and duties of the general partner,
. agree to be bound by the provisions of the amended and restated
partnership agreement,
. furnish an opinion of counsel that the transfer will not result in a loss
of limited liability to the limited partners or cause Star Gas Partners
to be treated as an entity for federal income tax purposes and
. agree to purchase the general partner's partnership interest in Star Gas
Propane.
At any time, the members of Star Gas LLC may sell or otherwise transfer their
membership interests in Star Gas LLC to a third party without the approval of
the unitholders.
Reimbursement for Services of the General Partner
The general partner is not entitled to receive any compensation for its
services as general partner of Star Gas Partners. The general partner is,
however, entitled to be reimbursed on a monthly basis, or such other basis as
the general partner may reasonably determine for:
. all direct and indirect expenses it incurs or payments it makes on behalf
of Star Gas Partners, and
. all other necessary or appropriate expenses allocable to Star Gas
Partners or otherwise reasonably incurred by the general partner for the
operation of Star Gas Partners' business, including expenses allocated to
the general partner by its affiliates.
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The general partner, in its sole discretion, shall determine the expenses that
are allocable to Star Gas Partners in any reasonable manner.
Rights and Status as Limited Partner or Assignee Upon Transfer of Interest
Except as described below under "--Potential Loss of Limited Liability by
Unitholders," the units will be fully paid, and unitholders will not be
required to make additional contributions to Star Gas Partners.
A person receiving a common unit or senior subordinated unit subsequent to
executing and delivering a transfer application, but before admission as a
substituted limited partner or additional limited partner has the right to
share in allocations and distributions. The general partner will vote and
exercise other powers attributable to common units or senior subordinated unit
owned by that person before admission as a substitute limited partner or
additional limited partner at the written direction of that person. See "--
Meetings of Limited Partners and Voting Rights." Persons who do not execute and
deliver a transfer application will be treated neither as assignees nor as
record holders of common units or senior subordinated units and will not
receive:
. cash distributions,
. federal income tax allocations or
. reports furnished to unitholders.
See "Description of the Units--Obligations and Procedures for the Transfer of
Units."
Limitations on the Rights of Non-citizen Assignees and Redemption Rights of
Star Gas Partners
If, because of the nationality, citizenship or other related status of any
limited partner or assignee, Star Gas Partners is or becomes subject to
federal, state or local laws or regulations that, in the reasonable
determination of the general partner, create a substantial risk of cancellation
or forfeiture of any property in which Star Gas Partners has an interest, Star
Gas Partners may redeem the units held by that limited partner or assignee at
their Current Market Price. In order to avoid any
cancellation or forfeiture, the general partner may require each limited
partner or assignee to furnish information about his nationality, citizenship,
residency or related status. If a limited partner or assignee fails to furnish
information about his nationality, citizenship, residency or other related
status within 30 days after a request for the information, that person may be
treated as a non-citizen assignee. A non-citizen assignee does not have the
right to direct the voting of his units and may not receive distributions in
kind upon liquidation of Star Gas Partners.
Issuance of Additional Securities by Star Gas Partners
Except as discussed below, the general partner is authorized to cause Star
Gas Partners to issue an unlimited number of additional limited partner
interests and other equity securities of Star Gas Partners for the
consideration and on the terms and conditions established in its sole
discretion, without the approval of any limited partners.
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Except as described in (1) through (4) below, during the subordination
period, Star Gas Partners may not issue an aggregate of more than 2,500,000
additional common units or units on a parity with the common units without the
prior approval of at least a majority of the outstanding common units, other
than those held by the general partner and its affiliates.
(1)Common units in the transaction, including those issued in the equity
offering.
(2) If the issuance occurs
(a) for an acquisition or a capital improvement or
(b) within 365 days of, and the net proceeds from the issuance are
used to repay debt incurred for, an acquisition or a capital
improvement.
In each case, where the acquisition or capital improvement involves
assets that would have, on a pro forma basis, resulted in an increase
in the amount of Adjusted Operating Surplus calculated on a per-unit
basis for all outstanding units for each of the four most recently
completed quarters;
(3) If the proceeds from the issuance are used exclusively to repay up to
$20 million of indebtedness of Star Gas Partners, Star Gas Propane or
any of its subsidiaries.
(4) The issuance of Class B common units upon the conversion of the senior
subordinated units and junior subordinated units at the end of the
subordination period.
In accordance with Delaware law and the provisions of the amended and
restated partnership agreement, the general partner in its sole discretion, may
cause Star Gas Partners to issue additional partnership interests that may have
special voting rights.
The general partner has the right to purchase units from Star Gas Partners on
the same terms that Star Gas Partners issues the units to other persons,
whenever necessary for the general partner and its affiliates to maintain the
percentage of ownership interest that existed immediately prior to each
issuance. Persons other than the general partner do not have preemptive rights
to acquire additional common units or other partnership interests.
Additional issues of units, including senior subordinated units and junior
subordinated units or other equity securities of Star Gas Partners ranking
junior to the common units, may reduce the likelihood and/or amount of, any
distributions above the minimum quarterly distribution.
Limited Call Right on Outstanding Limited Partner Interests
If at any time:
(a) not more than 20% of the limited partner interests of any class are
held by persons other than the general partner and its affiliates, the
general partner will have the right, which it may assign and transfer
in whole or in part to any of its affiliates or to Star Gas Partners,
to acquire all, but not less than all, of the remaining limited
partner interests of that class or
(b) after the expiration of the subordination period and the earlier to
occur of
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(1) the fifth anniversary of the completion of the transaction or
(2) the issuance of 909,000 senior subordinated units and Class B
common units in the aggregate,
Star Gas Partners acquires, in a twelve-month period, 66 2/3% or more
of the total Class B common units, Star Gas Partners shall then have
the right, to purchase all, but not less than all, of the remaining
Class B common units during the following twelve-month period.
In the case of (a) or (b) above, the limited partners are entitled to
at least 10 but not more than 60 days' notice. The purchase price if
(a) or (b) above should occur shall be the greater of
(x) the highest cash price paid by Star Gas Partners, the general partner
or any of its affiliates for any limited partner interests of that
class purchased within the 90 days preceding the date the notice is
first mailed to limited partners and
(y) the Current Market Price as of the date three days prior to the date
the notice is mailed.
As a consequence of this right to purchase outstanding limited partner
interests, a holder may have his limited partner interests purchased from
him at a time and/or price that may be undesirable. The tax consequences to
a unitholder of the exercise of this call right are the same as a sale by
that unitholder of his units in the market. See "Federal Income Tax
Considerations--Disposition of Units."
Amendment of the Amended and Restated Partnership Agreement
Amendments to the amended and restated partnership agreement may be proposed
only by or with the consent of the general partner. In order to adopt a
proposed amendment, the general partner is required to seek written approval of
the holders of the number of units required to approve the amendment or call a
meeting of the limited partners to consider and vote upon the proposed
amendment, except as described below.
Prohibited Amendments. No amendment may be made that would:
(1) enlarge the obligations of any limited partner, without its consent,
(2) enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable to, the general partner, without its
consent, which may be given or withheld in its sole discretion,
(3) change the term of Star Gas Partners,
(4) provide that Star Gas Partners is not dissolved upon expiration of its
term or
(5) give any person the right to dissolve Star Gas Partners other than the
general partner's right to dissolve Star Gas Partners with the
approval of holders of at least a unit majority.
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No Unitholder Approval. The general partner may make amendments without the
approval of any limited partner or assignee to reflect:
(1) a change in the name of Star Gas Partners, the location of the
principal place of business of Star Gas Partners, the registered agent
or the registered office of Star Gas Partners,
(2) admission, substitution, withdrawal or removal of partners in
accordance with the amended and restated partnership agreement,
(3) a change that, in the sole discretion of the general partner, is
necessary or advisable to qualify or continue the qualification of
Star Gas Partners as a partnership in which the limited partners have
limited liability or that is necessary or advisable to ensure that
Star Gas Partners and Star Gas Propane will not be treated as an
association taxable as a corporation or otherwise taxed as an entity
for federal income tax purposes,
(4) an amendment that is necessary, in the opinion of counsel to Star Gas
Partners, to prevent Star Gas Partners or the general partner or its
respective directors or officers from being subjected in any manner
to the provisions of the Investment Company Act, the Investment
Advisors Act, or the "plan asset" regulations adopted under ERISA,
whether or not substantially similar to plan asset regulations
currently applied or proposed,
(5) subject to the limitations on the issuance of additional Class A
common units, Class B common units or other limited or general
partner interests described above, an amendment that in the sole
discretion of the general partner is necessary or advisable for the
authorization of additional limited or general partner interests,
(6) any amendment expressly permitted in the amended and restated
partnership agreement to be made by the general partner acting alone,
(7) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved pursuant to the terms of the amended
and restated partnership agreement,
(8) any amendment that, in the sole discretion of the general partner, is
necessary or advisable for the formation by Star Gas Partners of, or
its investment in, any corporation, partnership or other entity as
otherwise permitted by the amended and restated partnership
agreement,
(9) a change in the fiscal year and taxable year of Star Gas Partners and
(10) any other amendments substantially similar to the foregoing.
In addition, the general partner may make amendments without the approval of
any limited partner or assignee if the amendments:
(1) do not adversely affect the limited partners in any material respect,
(2) are necessary or advisable, in the sole discretion of the general
partner to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, ruling or regulation of any
federal or state agency or judicial authority or contained in any
federal or state statute,
(3) are necessary or advisable to facilitate the trading of the units or
to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the units are or
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will be listed for trading, compliance with any of which the general
partner deems to be in the best interests of Star Gas Partners and the
unitholders or
(4) are required or contemplated by the amended and restated partnership
agreement.
Opinion of Counsel and Unitholder Approval. The general partner will not be
required to obtain an opinion of counsel that an amendment will not result in
a loss of limited liability to the limited partners or result in Star Gas
Partners being treated as an entity for federal income tax purposes if one of
the amendments described above under "--No Unitholder Approval" should occur.
No other amendments to the amended and restated partnership agreement will
become effective without the approval of at least 90% of the units unless Star
Gas Partners obtains an opinion of counsel that the amendment will not:
. affect the limited liability of any limited partner in Star Gas Partners
or the limited partner of Star Gas Propane or
. cause Star Gas Partners to be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income tax
purposes.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of holders of at least a majority
of the outstanding units so affected, excluding, during the subordination
period, any units held by the general partner and its affiliates.
Meetings of Limited Partners and Voting Rights
Record holders of units on the applicable record date will be entitled to
notice of, and to vote at, meetings of limited partners and to act on matters
as to which approvals may be solicited. The general partner shall vote units
owned by an assignee who is a record holder but who has not yet been admitted
as a limited partner at the written direction of the assignee. Absent this
direction, those units will not be voted. However, in the case of units held
by the general partner on behalf of non-citizen assignees, the general partner
shall distribute the votes of these units in the same ratios as the votes of
limited partners on other units are cast.
Any action that is required or permitted to be taken by the limited partners
may be taken either at a meeting of the limited partners or without a meeting
if consents in writing setting forth the action so taken are signed by holders
of that number of limited partner interests necessary to authorize or take
action at a meeting. Meetings of the limited partners may be called by the
general partner or by limited partners owning at least 20% of the outstanding
units of the class for which a meeting is proposed. Limited partners may vote
either in person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting has been called
shall constitute a quorum, unless the action requires approval by holders of a
greater percentage of those units, in which case the quorum shall be the
greater percentage.
Units held in a nominee or street name account will be voted by the broker
or other nominee under the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
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Indemnification Obligations of Star Gas Partners
In most circumstances, Star Gas Partners will indemnify the following
persons, to the fullest extent permitted by law, from and against all losses,
claims, damages or similar events:
(1) the general partner and its affiliates,
(2) any departing general partner and its affiliates,
(3) any person who is or was an officer, director, employee, partner, agent
or trustee of the general partner or any departing general partner or
any affiliate of the general partner or any departing general partner
or
(4) any person who is or was serving at the request of the general partner
or any departing general partner or any affiliate of the general
partner or any departing general partner as an officer, director,
employee, partner, agent or trustee of another person.
Any indemnification will only be out of the assets of Star Gas Partners. The
general partner shall not have any obligation to contribute or loan funds to
Star Gas Partners to enable it to effectuate indemnification. Star Gas Partners
is authorized to purchase insurance against liabilities asserted against and
expenses incurred by those persons for Star Gas Partners' activities,
regardless of whether Star Gas Partners would have the power to indemnify that
person.
Potential Loss of Limited Liability by Unitholders
Assuming that a limited partner does not participate in the control of the
business of Star Gas Partners within the meaning of the Delaware Act and that
he acts in conformity with the provisions of the amended and restated
partnership agreement, his liability will be limited to the amount of capital
he is obligated to contribute to Star Gas Partners, plus his share of any
undistributed profits and assets. If it were determined that an action by a
limited partner constituted "participation in the control" of Star Gas
Partners' business for the purposes of the Delaware Act, then a limited partner
could be held personally liable for Star Gas Partners' obligations, to the same
extent as the general partner, to persons who transact business with Star Gas
Partners. In order for a limited partner to be liable for these obligations,
the person who transacts business with the limited partner must reasonably
believe, based on the limited partner's conduct, that the limited partner is a
general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner if after the distribution, all liabilities of the partnership, other
than liabilities to partners on account of their partnership interests and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. Under the Delaware Act, a limited partner who receives a
distribution and knew at the time that the distribution was in violation of the
Delaware Act shall be liable for the amount of the distribution for three
years. Under the Delaware Act, an assignee who becomes a substituted limited
partner of a limited partnership is liable for the obligations of his assignor
to make contributions to the partnership, except the assignee is not obligated
for liabilities unknown to him at the time he became a limited partner and that
could not be ascertained from the amended and restated partnership agreement.
Star Gas Propane conducts business in at least 13 states. Maintenance of
limited liability may require compliance with legal requirements in those
jurisdictions in which Star Gas Propane conducts
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business, including qualifying Star Gas Propane to do business therein.
Limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established in many jurisdictions.
Star Gas Partners will operate in the manner as the general partner deems
reasonable and necessary or appropriate to preserve the limited liability of
unitholders.
Obligations of the General Partner to Provide Books and Reports to Limited
Partners
The general partner is required to keep appropriate books of the business of
Star Gas Partners at the principal offices of Star Gas Partners. The books will
be maintained for both tax and financial reporting purposes on an accrual
basis. The fiscal year of Star Gas Partners is October 1 to September 30.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the general partner will furnish each record holder of
units with an annual report containing audited financial statements prepared in
accordance with generally accepted accounting principles. As soon as
practicable, but in no event later than 90 days after the close of each
quarter, except the last quarter of each fiscal year, the general partner will
furnish each record holder of units a report containing unaudited financial
statements and any other information as may be required by law.
The general partner will use all reasonable efforts to furnish each record
holder of a unit with information reasonably required for tax reporting
purposes within 90 days after the close of each calendar year in which Star Gas
Partners' taxable year ends. This information is expected to be furnished in
summary form so that certain complex calculations normally required of partners
can be avoided. The general partner's ability to furnish summary information to
unitholders will depend on the cooperation of such unitholders in supplying
certain information to the general partner. Every unitholder will receive
information to assist him in determining his federal and state tax liability
and filing his federal and state income tax returns.
Limited Partners' Right to Inspect Star Gas Partners Books and Records
A limited partner can, for a purpose reasonably related to a person's
interest as a limited partner, upon reasonable demand and at his own expense,
be furnished with:
(1) a current list of the name and last known address of each partner,
(2) a copy of Star Gas Partners' tax returns,
(3) information as to the amount of cash and a description and statement
of the net agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner,
(4) copies of the amended and restated partnership agreement, the
certificate of limited partnership, and powers of attorney
(5) information regarding the status of Star Gas Partners' business and
financial condition and
(6) such other information regarding the affairs of Star Gas Partners as
is just and reasonable,
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The general partner may, and intends to, keep the following confidential
from the limited partners: (1) trade secrets, (2) other information the
disclosure of which the general partner believes in good faith is not in
the best interests of Star Gas Partners or (3) information that is required
by law or by agreements with third parties to be kept confidential.
Description of Termination and Dissolution of Star Gas Partners
Star Gas Partners will continue until December 31, 2085, unless:
(1) the election of the general partner to dissolve Star Gas Partners, if
approved by holders of a unit majority,
(2) the sale, exchange or other disposition of all or substantially all
of the assets and properties of Star Gas Partners and Star Gas
Propane,
(3) the entry of a decree of judicial dissolution of Star Gas Partners or
(4) withdrawal or removal of the general partner or any other event that
results in its ceasing to be the general partner other than by
reason of a transfer of its general partner units or withdrawal or
removal following approval and admission of a successor.
Upon a dissolution pursuant to clause (4), the holders of at least a majority
of the outstanding units may elect to reconstitute Star Gas Partners and
continue its business by forming a new limited partnership. The new general
partner would be a person or entity approved by at least the holders of a
majority of the outstanding units, subject to receipt by Star Gas Partners of
an opinion of counsel that this action will not affect its limited liabilities
or result in Star Gas Partners being treated as corporation or an entity for
federal income tax purposes.
Liquidation of Star Gas Partners and Distribution of Proceeds
Upon dissolution of Star Gas Partners, unless Star Gas Partners is
reconstituted and continued as a new limited partnership, the person authorized
to wind up the affairs of Star Gas Partners will liquidate the assets and apply
the proceeds as provided in "Cash Distribution Policy--Distributions of Cash
upon Liquidation During the Subordination Period" and "--Distributions of Cash
upon Liquidation After the Subordination Period."
Registration Rights of the General Partner or its Affiliates
Star Gas Partners has agreed:
(1) to register for resale under the Securities Act any units proposed to
be sold by the general partner or its affiliates upon their request
if an exemption from the registration requirements is not otherwise
available and
(2) to register for resale under the Securities Act the common units and
senior subordinated units issued to affiliates of Petro in the
transaction upon their request if an exemption from the registration
requirements is not otherwise available.
Star Gas Partners is obligated to pay all expenses incidental to the above
registrations, excluding underwriting discounts and commissions.
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CONFLICTS OF INTEREST OF STAR GAS PARTNERS
The following discussion of conflicts of interests of Star Gas Partners
refers to Star Gas Partners unitholders as unitholders and refers to Star Gas
Partners units as units.
Conflicts of Interest May Arise as a Result of the Publicly-Traded Limited
Partnership Structure
Conflicts of interest have arisen and could arise in the future as a result
of relationships between the general partner and its affiliates, on the one
hand, and Star Gas Partners or any of the limited partners, on the other hand.
The directors and officers of the general partner have fiduciary duties to
manage the general partner in a manner beneficial to its members. In general,
the general partner has a fiduciary duty to manage Star Gas Partners in a
manner beneficial to Star Gas Partners and the unitholders. The amended and
restated partnership agreement contains provisions that allow the general
partner to take into account the interests of parties in addition to Star Gas
Partners in resolving conflicts of interest. In effect, these provisions limit
its fiduciary duty to the unitholders. The amended and restated partnership
agreement also restricts the remedies available to unitholders for actions
taken that without those limitations, constitute breaches of fiduciary duty. An
audit committee of the Star Gas LLC board has been created, consisting of two
directors who are not officers of the general partner. At the request of the
general partner the audit committee will review conflicts of interest that may
arise between the general partner or its affiliates, on the one hand, and Star
Gas Partners, on the other. See "Management of Star Gas Partners After the
Transaction" and "--Fiduciary Duties Owed to Unitholders by the General Partner
as Prescribed by Law and the Amended and Restated Partnership Agreement."
Conflicts of interest could arise in the situations described below, among
others:
Actions Taken by the General Partner May Affect the Amount of Cash Available
for Distribution to Unitholders or Accelerate the Right to Convert Senior
Subordinated Units and Junior Subordinated Units. The amount of cash that is
available for distribution to unitholders is affected by decisions of the
general partner regarding matters such as:
. cash expenditures,
. participation in capital expansions and acquisitions,
. borrowings,
. issuance of additional units and
. establishment of reserves.
In addition, borrowings by Star Gas Partners do not constitute a breach of
any duty owed by the general partner to the unitholders, including those
borrowings that have the purpose or effect of:
. causing incentive distributions to be made,
. hastening the expiration of the subordination period or
. converting the senior subordinated and junior subordinated units into
Class B common units.
The amended and restated partnership agreement provides that Star Gas Partners
may borrow funds from the general partner and its affiliates although the
general partner and its affiliates may not borrow funds from Star Gas Partners.
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Star Gas Partners' Borrowings May Enable the General Partner to Permit
Distributions on the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units. Typically the general partner must act as a fiduciary to
Star Gas Partners and the unitholders, and therefore must consider Star Gas
Partners' best interests. It is not a breach of the general partner's fiduciary
duty under the amended and restated partnership agreement if Star Gas Partners'
borrowings are effected in a manner that, directly or indirectly, enables the
general partner to permit the payment of distributions on the senior
subordinated units, junior subordinated units and general partner units.
The General Partner Intends to Limit Its Liability with Respect to Star Gas
Partners' Obligations. The general partner intends to limit Star Gas Partners'
liability under contractual arrangements so that the other party has recourse
only as to all or particular assets of Star Gas Partners, and not against the
general partner or its assets. The amended and restated partnership agreement
provides that any action taken by the general partner to limit its liability,
or that of Star Gas Partners, is not a breach of the general partner's
fiduciary duties, even if Star Gas Partners could have obtained more favorable
terms without the limitation on liability.
Unitholders Have No Right to Enforce Obligations of the General Partner and
Its Affiliates Under Agreements with Star Gas Partners. Star Gas Partners will
acquire services from, or provide services to, the general partner and its
affiliates on an ongoing basis. The agreements relating to these arrangements
will not grant to the unitholders, separate and apart from Star Gas Partners,
the right to enforce the obligations of the general partner and its affiliates
in favor of Star Gas Partners.
Contracts Between Star Gas Partners on the One Hand, and the General Partner
and Its Affiliates on the Other Will Not Be the Result of Arm's-Length
Negotiations. The amended and restated partnership agreement allows the general
partner to pay itself or its affiliates for any services rendered, provided
these services are rendered on terms that are fair and reasonable to Star Gas
Partners. The general partner may also enter into additional contractual
arrangements with any of its affiliates on behalf of Star Gas Partners. Neither
the amended and restated partnership agreement nor any of the other agreements,
contracts and arrangements between Star Gas Partners, on the one hand, and the
general partner and its affiliates, on the other, are or will be the result of
arm's-length negotiations. All of these transactions entered into are required
to be on terms that are fair and reasonable to Star Gas Partners.
The General Partner's Affiliates May Compete with Star Gas Partners. Except
for Irik P. Sevin, affiliates of the general partner are not prohibited from
competing with Star Gas Partners. Mr. Sevin's non-competition agreement with
Star Gas Partners provides that following the completion of the transaction he
will not engage in the retail propane or retail home heating oil business in
the United States so long as he
. is a director, officer or employee of the general partner, Star Gas
Partners or a subsidiary of Star Gas Partners or
. has access to information that would put Star Gas Partners at a
competitive disadvantage.
Further, Mr. Sevin is precluded from employing a person who was a managerial
employee of the general partner, Star Gas Partners or a subsidiary of Star Gas
Partners for the twelve-months after that employment so long as Mr. Sevin and
his mother, Ms. Audrey Sevin, own in the aggregate more than a 10% voting
interest in the general partner.
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Fiduciary Duties Owed to Unitholders by the General Partner as Prescribed by
Law and the Amended and Restated Partnership Agreement
The general partner is accountable to Star Gas Partners and the unitholders
as a fiduciary. Consequently, the general partner must exercise good faith and
integrity in handling the assets and affairs of Star Gas Partners. In contrast
to the relatively well-developed law concerning fiduciary duties owed by
officers and directors to the common stockholders of a corporation, the law
concerning the duties owed by general partners to other partners and to
partnerships is relatively undeveloped. Neither the Delaware Act nor case law
defines with particularity the fiduciary duties owed by general partners to
limited partners of a limited partnership. The Delaware Act does provide that
Delaware limited partnerships may, in their partnership agreements, restrict or
expand the fiduciary duties owed by general partners to limited partners and
the partnership. Fiduciary duties are generally considered to include an
obligation to act with the highest good faith, fairness and loyalty. Such duty
of loyalty, in the absence of a provision in a partnership agreement providing
otherwise, would generally prohibit a general partner from taking any action or
engaging in any transaction where a conflict of interest is present. In order
to induce the general partner to manage the business of Star Gas Partners, the
amended and restated partnership agreement contains various provisions limiting
the fiduciary duties that might otherwise be owed by the general partner. The
amended and restated partnership agreement also contains provisions that waive
or consent to conduct by the general partner that might otherwise raise issues
of compliance with fiduciary duties or applicable law.
In order to become a limited partner of Star Gas Partners, a unitholder is
required to agree to be bound by its provisions, including the provisions
discussed above. This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the enforceability of
partnership agreements. The Delaware Act also provides that a partnership
agreement is enforceable even if not signed by a person being admitted as a
limited partner or becoming an assignee of a limited partner interest in
accordance with the terms of that agreement.
Whenever a conflict of interest arises between the general partner or its
affiliates, on the one hand, and Star Gas Partners or any other partner, on the
other, the general partner shall resolve this conflict. The general partner
shall not be in breach of its obligations under the amended and restated
partnership agreement or its duties to Star Gas Partners or the unitholders if
the resolution of this conflict is fair and reasonable to Star Gas Partners.
Any resolution is fair and reasonable to Star Gas Partners if the resolution is
(1) approved by the audit committee, although no party is obligated to seek
approval and the general partner may adopt a resolution or course of
action that has not received approval,
(2) on terms no less favorable to Star Gas Partners than those generally
being provided to or available from unrelated third parties or
(3) fair to Star Gas Partners, taking into account the totality of the
relationships between the parties involved, including other
transactions that may be particularly favorable or advantageous to Star
Gas Partners.
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CASH DISTRIBUTION POLICY
The following discussion gives effect to the adoption of the amendment
proposal and is furnished by Star Gas Partners. Thus, references to "we," "us"
and "our" are to Star Gas Partners. Also, the following section discussing Star
Gas Partners cash distribution policy, refers to Star Gas Partners unitholders
as unitholders and refers to Star Gas Partners units as units. A glossary of
certain terms used in this proxy statement begins on page 198.
General Description of Star Gas Partners' 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, with respect to 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 Star Gas Partners' 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
certain 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 commenced
operations, plus approximately $20 million, plus all of our cash
receipts, excluding cash receipts from 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.
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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.
Quarterly Distributions of Available Cash
Except for the limitations and prohibitions on distributions discussed below,
we will make distributions to our partners with respect to each of our fiscal
quarters prior to liquidation in an amount equal to all of our Available Cash
for that quarter. Distributions will be made approximately 45 days after each
March 31, June 30, September 30 and December 31, to holders of record on the
applicable record date. We are prohibited from making any distributions on our
senior subordinated units, junior subordinated units and general partner units
during the remainder of our fiscal year 1999, which ends on September 30, 1999.
If we generate sufficient Available Cash to satisfy the limitation described
below, the first distribution permitted to be paid to the holders of the senior
subordinated units issued in the transaction will be paid for the first quarter
of our fiscal year 2000, which begins on October 1, 1999. The first
distribution on the common units, including those issued in the equity
offering, after the completion of the transaction will be paid for the quarter
ending March 31, 1999 on approximately May 15, 1999 to holders of record on
approximately May 4, 1999 regardless of how many days the common units have
been outstanding. For a discussion of the restrictions on distributions to the
holders of subordinated interests, see "--Limitation 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.
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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 equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units, senior
subordinated units, junior subordinated units and general partner units
with respect to each of the three non-overlapping four-quarter periods
immediately preceding 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 with respect to 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
prior to 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
management of Star Gas Partners in respect of incentive compensation.
(3) There are no arrearages in payment of the minimum quarterly
distribution on the common units.
In certain circumstances, if the general partner is removed without cause,
the subordination period will end, any existing arrearages on the common units
will be extinguished, the senior subordinated units and junior subordinated
units will immediately convert into Class B common units and distributions on
the general partner units will no longer be subordinated. See "The Amended and
Restated Partnership Agreement--Withdrawal or Removal of the General Partner;
Approval of Successor General Partner."
Distributions of Available Cash from Operating Surplus with respect to any
quarter during the subordination period will be made in the following manner.
. First, 100% to the common units, pro rata, until there has been
distributed 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.
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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 proxy statement 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) occur, holders of the senior
subordinated units, junior subordinated units and general partner units will
receive incentive distributions as discussed 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,
Additional Available Cash from Operating Surplus in respect of 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 for each
unit (the "First Target Distribution").
. Second, 86.7% to all units, pro rata, and 13.3% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata, until the common units have received, in addition to any
distributions to common unitholders to eliminate any cumulative common
unit arrearages, a total of $0.711 per unit for that quarter for each
common unit (the "Second Target Distribution").
. Third, 76.5% to all units, pro rata, and 23.5% to all senior subordinated
units, junior subordinated units and general partner units, pro rata,
until the common units have received, in addition to any distributions to
common unitholders to eliminate any cumulative common unit arrearages, a
total of $0.926 per unit for that quarter for each common unit (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.
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The amended and restated partnership agreement may not be amended, including
the issuance of additional partnership securities, in any manner which would
increase the aggregate amount of incentive distributions without the approval
of a majority of the outstanding units of the classes, 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% 10.2% 1.8% 1.3%
Third Target
Distribution........... 0.926 76.5 23.5 18.0 3.1 2.3
Thereafter.............. -- 51.0 49.0 37.6 6.5 4.9
</TABLE>
The percentage allocation of incentive distributions among senior
subordinated units, junior subordinated units and general partner units, will
change in the future if there are additional non- proportional issuances of
units.
The following table illustrates the distribution of Available Cash per unit
among the common units, senior subordinated units, junior subordinated units
and general partner units at the target distribution levels. The calculations
are based on the assumption that the quarterly distribution amounts shown do
not include any cumulative common unit arrearages. The amounts in the table
below are based on the units outstanding immediately after completion of the
transaction.
<TABLE>
<CAPTION>
Quarterly Distribution Amount
----------------------------------------
Senior Junior General
Common Subordinated Subordinated Partner
Unit Unit Unit Unit
------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution........ $0.575 $0.575 $0.575 $0.575
First Target Distribution............. 0.604 0.604 0.604 0.604
Second Target Distribution............ 0.711 0.793 0.793 0.793
Third Target Distribution............. 0.926 1.337 1.337 1.337
</TABLE>
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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 the units have received the
First Target Distribution.
.Second, 86.7% to all units, pro rata, and 13.3% to all Class B common
units and general partner units, pro rata, until the Class A common units
have received the Second Target Distribution.
. Third, 76.5% to all units, pro rata, and 23.5% to all Class B common
units and general partner units, pro rata, until the Class A common units
have received the Third Target Distribution.
. Thereafter, 51% to all units, pro rata, and 49% to all Class B common
units and general partner units, pro rata.
The following table illustrates the distribution of Available Cash per unit
among the Class A common units, Class B common units and general partner units
at the target distribution levels. The calculations are based on the assumption
that the quarterly distribution amounts shown do not include any cumulative
common unit arrearages. The amounts set forth below are based on the number of
units outstanding immediately after completion of the transaction.
<TABLE>
<CAPTION>
Quarterly
Distribution
---------------------
Class Class
A B General
Common Common Partner
Unit Unit Unit
------ ------ -------
<S> <C> <C> <C>
Minimum Quarterly Distribution............................ $0.575 $0.575 $0.575
First Target Distribution................................. 0.604 0.604 0.604
Second Target Distribution................................ 0.711 0.793 0.793
Third Target Distribution................................. 0.926 1.337 1.337
</TABLE>
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 prior to 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.
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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. Thereafter, all distributions of Available Cash from all sources 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.
Limitation 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 the approximately $20 million
and our cash balance on the date we commenced operations, which are included in
the definition of Operating Surplus.
The holders of the senior subordinated units, junior subordinated units and
general partner units are not prohibited from receiving distributions from
Capital Surplus in a partial liquidation during the subordination period.
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjustments made upon a distribution of Available Cash from
Capital Surplus, the following will each be proportionately adjusted upward or
downward, as appropriate, if any combination or subdivision of units should
occur:
(1) the minimum quarterly distribution,
(2) the target distribution levels,
(3) the Unrecovered Initial Unit Price,
(4) the number of additional common units issuable during the
subordination period without a unitholder vote,
(5) the number of Class B common units issuable upon conversion of the
senior subordinated units
(6) junior subordinated units and
(7) other amounts calculated on a per unit basis,
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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
differently interpreted in a manner that causes Star Gas Partners 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
thereafter 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 with
respect to 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 prior to the adjustment.
Issuance of Additional Senior Subordinated Units
The amended and restated partnership agreement provides that for each non-
overlapping four-quarter period that occurs after the first anniversary of the
transaction, but prior to the fifth anniversary of the transaction, that the
dollar amount of Petro Adjusted Operating Surplus per Petro Unit equals or
exceeds $2.90, we will issue 303,000 senior subordinated units. If the
subordination period ends during this five year period, we will issue 303,000
Class B common units as opposed to senior subordinated units. Prior to the
expiration of the subordination period, these additional senior subordinated
units will be issued to the current holders of the senior subordinated units,
junior subordinated units and the general partner units on the record date for
the distribution of the final quarter of the four-quarter period, pro rata.
After the expiration of the subordination period, these additional Class B
common units will be issued, pro rata, to the current holders of the Class B
common units and general partner units. However, under this provision we may
not issue more than 909,000 senior subordinated units or Class B common units
in the aggregate. In addition, we Star Gas Partners may not issue more than
303,000 senior subordinated units or Class B common units under this provision
in any 365-day period. We will not issue any fractional units in the issuance
of
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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 with respect to the first
quarter ending on or after the fifth anniversary of completion of the
transaction, the right to receive the additional units shall lapse and all
conversion rights shall cease to exist.
"Petro Adjusted Operating Surplus" means, for any four-quarter period, the
Adjusted Operating Surplus generated by Petro ,which includes all subsidiaries
of Star Gas Partners primarily engaged in the home heating oil business, during
that four quarter period. The determination of this amount is made in good
faith by a majority of the members of the board of directors of the general
partner acting with the concurrence of the audit committee. In calculating
Petro Adjusted Operating Surplus,
(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 the equity 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 amended and restated 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
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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) 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 proxy
statement.
The terms upon which any of the said additional units may be issued may not
be amended in a manner that would materially adversely affect the rights of the
holders thereof without the affirmative vote of the holders of a majority of
the outstanding senior subordinated units, junior subordinated units and
general partner units, voting together as a single class.
Distributions of Cash upon Liquidation During the Subordination Period
Following the commencement of the dissolution and liquidation, 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 amended and restated partnership agreement and by law
and, thereafter, be distributed on the units in accordance with respective
capital account balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with capital
account balances. Although operating losses are allocated on all units pro
rata, the allocations of gains and losses attributable to liquidation are
intended to 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 amended and
restated 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.
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. Fourth, 100% to the junior subordinated units and general partner units,
pro rata, until the capital account for each junior subordinated unit is
equal to the unrecovered initial unit price plus the amount of the
minimum quarterly distribution for the fiscal quarter during which the
dissolution occurs.
. Fifth, 100% to all units, pro rata, until there has been allocated under
this clause an amount per common unit equal to (a) the excess of the
First Target Distribution per unit over the then effective minimum
quarterly distribution per unit for each quarter of Star Gas Partners'
existence, less (b) the amount per common unit of any distributions of
Available Cash from Operating Surplus in excess of the then effective
minimum quarterly distribution per unit that was distributed 100% to all
units, pro rata, for each quarter of Star Gas Partners' existence.
. Sixth, 86.7% to all units, pro rata, 13.3% to senior subordinated units,
junior subordinated units and general partner units, pro rata, until
there has been allocated under this clause an amount per common unit
equal to (a) the excess of the Second Target Distribution per common unit
over the First Target Distribution per common unit for each quarter of
Star Gas Partners' existence, less (b) the amount per common unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per common unit but not in excess of the Second
Target Distribution for each quarter of Star Gas Partners' existence.
. Seventh, 76.5% to all units, pro rata, and 23.5% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata, until there has been allocated under this clause an amount per
common unit equal to (a) the excess of the Third Target Distribution per
common unit over the Second Target Distribution but not in excess of the
Third Target Distribution for each quarter of Star Gas Partners'
existence.
. Thereafter, 51.0% to all units, pro rata, and 49.0% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata.
Any loss or unrealized loss will be allocated to the unitholders in the
following manner.
. First, 100% to the junior subordinated units and general partner units,
pro rata, in proportion to the positive balances in their respective
capital accounts until the positive balances in their respective capital
accounts have been reduced to zero.
. Second, 100% to the senior subordinated units in proportion to the
positive balances in their respective capital accounts until the positive
balances in their respective capital accounts have been reduced to zero.
. Third, 100% to the common units in proportion to the positive balances in
their respective capital accounts until the positive balances in the
respective capital accounts have been reduced to zero.
. Thereafter, to the general partner units.
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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 third an amount per Class A common unit equal to (a) the
excess of the First Target Distribution per Class A common unit over the
then effective minimum quarterly distribution for each quarter of 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 fourth an amount per Class A common unit equal to (a) the
excess of the Second Target Distribution per Class A common unit over the
First Target Distribution per Class A common unit for each quarter of 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 fifth an amount per Class A common unit equal to (a) the
excess of the Third Target Distribution per Class A common unit over the
Second Target Distribution per Class A common unit for each quarter of
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 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, Class B common units, pro rata, in proportion to the
positive balances in their capital accounts, until the positive balances in the
respective capital accounts have been reduced to zero.
Interim adjustments to capital accounts will be made at the time Star Gas
Partners issues additional interests or makes 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 therefrom will be
allocated to the unitholders in the same manner as gain or loss is allocated
upon liquidation.
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CASH AVAILABLE FOR DISTRIBUTION
Star Gas Partners believes that it will generate sufficient Available Cash
from Operating Surplus for the first four-quarter period following the
completion of the transaction to cover the full minimum quarterly distribution
for the four-quarter period on all then outstanding units.
Even if this amount is generated, Star Gas Partners may, however, not
distribute the cash. Star Gas Partners will not make distributions on the
senior subordinated units, junior subordinated units and junior subordinated
units for any quarter during its fiscal year 1999. Beginning with the first
quarter of its fiscal year 2000, Star Gas Partners is allowed to make
distributions on the senior subordinated units, junior subordinated units and
general partner units, but may distribute less than the minimum quarterly
distribution on these units because of the subordination provisions and other
limitations on distributions in the amended and restated partnership agreement.
Star Gas Partners' belief about the amount of cash it may generate is based
on a number of assumptions, including the assumptions that:
. normal weather conditions will prevail in Star Gas Partners' and Petro's
operating areas,
. Star Gas Partners' and Petro's operating margins will remain constant and
. market and overall economic conditions will not change substantially.
Although Star Gas Partners believes its assumptions are within a range of
reasonableness, most of the assumptions are not within the control of Star Gas
Partners and cannot be predicted with any degree of certainty. For example, in
any particular year or series of years, weather may deviate substantially from
normal. Therefore, Star Gas Partners' assumptions concerning the weather may
prove to be inaccurate. As a result, the Operating Surplus of Star Gas Partners
could deviate from that currently expected. See "Risk Factors."
The amount of Available Cash constituting Operating Surplus needed to pay the
minimum quarterly distribution for four quarters on the common units, senior
subordinated units, junior subordinated units and general partner units to be
outstanding immediately after the transaction is approximately:
<TABLE>
<S> <C>
Common Units.................................................. $26,690,000
Senior Subordinated Units..................................... 5,730,000
Junior Subordinated Units..................................... 990,000
General Partner Units......................................... 740,000
-----------
Total....................................................... $37,150,000
</TABLE>
These amounts assume that 8.9 million common units will be issued in the
equity offering. If more common units are issued in the equity offering, the
amount of Available Cash constituting Operating Surplus needed to pay the
minimum quarterly distribution will increase.
After giving pro forma effect to the transaction, the amount of pro forma
Available Cash constituting Operating Surplus generated during the twelve
months ended September 30, 1998, would have been approximately $21.9 million.
If infrequent restructuring, corporate identity and transaction expenses were
not taken into effect, pro forma Available Cash constituting Operating Surplus
would have been $26.1 million. In fiscal 1998, temperatures were significantly
warmer than normal for the areas in which Star Gas Partners conducts its
propane operations and Petro conducts its home heating
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oil operations. Star Gas Partners believes that overall levels of both pro
forma Available Cash from Operating Surplus and EBITDA were adversely affected
during fiscal 1998 due to this abnormally warm weather. See "Unaudited Pro
Forma Condensed Consolidated Financial Information."
Star Gas Partners is required to establish reserves for the future payment of
principal and interest on the First Mortgage Notes and the indebtedness under
the bank credit facilities. There are other provisions in such agreements that
will, under some circumstances, restrict Star Gas Partners' ability to make
distributions to its partners. See "Note 9 to Consolidated Financial
Statements--Long-Term Debt and Working Capital Borrowings" in Star Gas
Partners' Annual Report on Form 10-K for the fiscal year ended September 30,
1998 that is incorporated by reference in this proxy statement. The notes
issued in the debt offering are expected to have provisions that will, under
some circumstances, similarly restrict Star Gas Partners' ability to make
distributions to its unitholders.
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DESCRIPTION OF THE STAR GAS PARTNERS UNITS
This discussion assumes the adoption of the amendment proposal.
The common units and senior subordinated units to be issued in the
transaction have been registered under the Exchange Act, and Star Gas Partners
is subject to the reporting requirements of the Exchange Act. Star Gas Partners
is required to file periodic reports containing financial and other information
with the SEC.
Common stockholders who receive common units or senior subordinated units in
the transaction and subsequent transferees of common units and senior
subordinated units will be required to execute a transfer application, which
will be printed on the reverse side of the unit certificates. The form of
transfer application is included as Appendix A. Common units and senior
subordinated units may be held in nominee accounts, provided that the broker
(or other nominee) executes and delivers a transfer application and becomes a
limited partner. Star Gas Partners is entitled to treat the nominee holder of a
common unit or a senior subordinated unit as the absolute owner thereof, and
the beneficial owner's rights will be limited solely to those that it has
against the nominee holder.
The Rights of Unitholders
Generally, the common units, senior subordinated units and junior
subordinated units represent limited partner interests in Star Gas Partners,
which entitle the holders thereof to participate in Star Gas Partners
distributions and to exercise the rights or privileges available to limited
partners under the amended and restated partnership agreement. For a
description of the relative rights and preferences of holders of these three
classes of units to distributions, together with a description of the
circumstances under which senior subordinated units and junior subordinated
units may convert into Class B common units, see "Cash Distribution Policy."
For a description of the rights of limited partners under the amended and
restated partnership agreement, see "The Amended and Restated Partnership
Agreement."
Transfer Agent and Registrar
Star Gas Partners has retained BankBoston N.A. as registrar and transfer
agent for the common units and the senior subordinated units. All fees charged
by the transfer agent for transfers of common units and senior subordinated
units will be borne by Star Gas Partners and not by its holders of common units
or senior subordinated units, except that fees similar to those customarily
paid by stockholders for surety bond premiums to replace lost or stolen
certificates, taxes and other governmental charges, special charges for
services requested by a Star Gas Partners unitholder and other similar fees or
charges will be borne by the unitholder. There will be no charge to unitholders
for disbursements of Star Gas Partners' cash distributions. Star Gas Partners
will indemnify the transfer agent against all claims and losses that may arise
out of acts performed or omitted in respect of its activities as such.
The transfer agent may resign or be removed by Star Gas Partners. If no
successor is appointed within 30 days, the general partner may act as the
transfer agent and registrar until a successor is appointed.
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Obligations and Procedures for the Transfer of Units
Until a common unit, a senior subordinated unit or a junior subordinated unit
has been transferred on the books of Star Gas Partners, Star Gas Partners and
the transfer agent, notwithstanding any notice to the contrary, may treat the
record holder thereof as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations. Any transfers of a
common unit or a senior subordinated unit will not be recorded by the transfer
agent or recognized by Star Gas Partners unless the transferee executes and
delivers a transfer application. By executing and delivering a transfer
application, the transferee of common units, senior subordinated units or
junior subordinated units does the following.
. Becomes the record holder of such 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
amended and restated partnership agreement.
. Represents that such transferee has the capacity, power and authority to
enter into the amended and restated partnership agreement.
. Grants powers of attorney to the general partner and any liquidator of
Star Gas Partners as specified in the amended and restated partnership
agreement.
. Makes the consents and waivers contained in the amended and restated
partnership agreement.
An assignee will become a substituted limited partner of Star Gas Partners
for the transferred common units or senior subordinated units upon satisfaction
of the following two conditions.
. The consent of the general partner, which may be withheld for any reason
in its sole discretion.
. The recording of the name of the assignee on the books and records of
Star Gas Partners.
Common units and senior subordinated units are securities and are
transferable according to the laws governing transfer of securities. In
addition to other rights acquired upon transfer, the transferor gives the
transferee the right to request admission as a substituted limited partner in
Star Gas Partners in respect of the transferred common units or senior
subordinated units. A purchaser or transferee of common units or senior
subordinated units who does not execute and deliver a transfer application
obtains only the following rights.
. The right to assign the common unit or senior subordinated units 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 or
senior subordinated units.
Thus, a purchaser or transferee of common units who does not execute and
deliver a transfer application will not receive cash distributions unless the
common units or senior subordinated units are held in a nominee or "street
name" account and the nominee or broker has executed and delivered a transfer
application with respect to such common units or senior subordinated units, and
may not receive some federal income tax information or reports furnished to
record holders of common units or senior subordinated units. The transferor of
common units or senior subordinated
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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 or
senior subordinated units, but a transferee agrees, by acceptance of the
certificate representing common units or senior subordinated units, that the
transferor will not have a duty to insure the execution of the transfer
application by the transferee and will have no liability or responsibility if
the transferee neglects or fails to execute and forward the transfer
application to the transfer agent. See "The Amended and Restated Partnership
Agreement--Rights and Status as Limited Partner or Assignee Upon Transfer of
Interest."
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COMPARISON OF SECURITIES
The following is a complete summary of the material differences between the
attributes of Petro Class A common stock and the Star Gas Partners senior
subordinated units that Petro common stockholders will receive.
Taxation
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
The holders of Class A common stock The holders of the senior
realize taxable income when Petro subordinated units will be required
makes actual distributions from to report their share of Star Gas
current or accumulated earnings or, Partners' income, gains, losses and
in other cases, if distributions deductions on their federal income
exceed a holder's basis in its tax return whether or not
stock. distributions are made to them. In
general, cash distributions on the
senior subordinated units will be
taxable only if, and to the extent
that, they exceed a holder's tax
basis in its senior subordinated
units.
Distributions and Dividends
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
Shares of Class A common stock are The senior subordinated units
entitled to a pro rata share of any generally are entitled to receive
dividends declared by the Petro quarterly distributions from
board to be made from funds legally available cash during the
available for the payment of subordination period after the
dividends. However, no dividends may common units receive the minimum
be paid on the shares of Class A quarterly distribution plus any
common stock until all dividends arrearages. The senior subordinated
have been paid, or declared and set units have the right to receive the
apart, and all mandatory redemption minimum quarterly distribution
requirements have been satisfied for before any distribution is made on
the 1989 preferred stock and the 12 the junior subordinated units and
7/8% preferred stock. the general partner units. In
addition, the senior subordinated
units have the right to receive
distributions in addition to the
minimum quarterly distribution if
quarterly distributions of available
cash exceed the target distribution
levels. However, no distribution can
be paid on senior subordinated units
unless Star Gas Partners meets
certain cash generation
requirements.
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Voting Rights
Petro Common Stock Star Gas Partners Senior
Subordinated Units
Class A common stockholders are
entitled to one vote per share and All units have limited voting rights
Class C common stockholders are on matters affecting Star Gas
entitled to ten votes per share upon Partners. The matters that
all matters submitted for a vote to do require unitholder approval
the common stockholders. Except when generally require the approval of
required by Minnesota law and in the holders of a unit majority,
specified special circumstances which prior to the expiration of the
described in the restated articles subordination period, includes the
of incorporation, Class B common approval of a majority of the senior
stockholders are not entitled to subordinated units and junior
vote. Generally, the action of the subordinated units voting together
majority of the votes evidenced by as a single class as well as the
the shares of all classes voting as approval of a majority of the common
a single class represented at a units. Unitholders in Star Gas
meeting of the common stockholders Partners do not elect the directors
and entitled to vote is sufficient of the general partner.
for actions that require a vote of
the common stockholders.
Rights to Call Meetings
Petro Common Stock Star Gas Partners Senior
Subordinated Units
Petro is required to hold an annual
stockholders meeting each year. Star Gas Partners does not have
Special meetings of the stockholders annual meetings. A meeting of
may be called, and business proposed unitholders may be called only by:
at those meetings, by:
. the general partner or
.the Chairman of the Petro board
or . the holders of 20% or more of the
outstanding units of the class for
which the meeting is proposed.
. the Secretary upon the written
request of a majority of the
total number of directors that
Petro would have if there were
no vacancies.
Removal of Directors or the General Partner
Petro Common Stock Star Gas Partners Senior
Subordinated Units
The business and affairs of Petro
are managed by or under the
direction of the Petro board, whose The business and affairs of Star Gas
members are elected by a plurality Partners are managed by or under the
of the votes cast by stockholders. direction of the general partner.
Stockholders may remove a director Subject to specified conditions, the
or the entire Petro board with or general partner may be removed upon
without cause. The removal of either the approval of the holders of at
a director or the Petro board least 66 2/3% of the outstanding
requires the affirmative vote of a units, excluding units owned by the
majority of the outstanding voting general partner and its affiliates.
stock.
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Liquidation Rights
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
In the event of any complete In the event of any liquidation of
liquidation, dissolution or winding Star Gas Partners during the
up of the business of Petro, subordination period, the senior
distributions are made to each class subordinated units will be entitled
of equity security in the following to receive a distribution out of the
order: net assets of Star Gas Partners
after liquidating distributions are
made on the common units. The senior
subordinated units will be entitled
to receive a distribution out of the
net assets of Star Gas Partners
before liquidating distributions are
made on the junior subordinated
units and general partner units.
. first, each Class B share
would be entitled to a
distribution equal to $5.70
per share, as adjusted, before
any distribution is made on
any other class of Petro
stock;
. second, each share of 1989
preferred stock and each share
of 12 7/8% preferred stock
would be entitled to
distributions equal to $100
per share and $23 per share,
plus accrued and unpaid
dividends;
. third, each share of junior
convertible preferred stock
would be entitled to a
distribution of $0.10 per
share; and
. fourth, each share of Class A
common stock, Class B common
stock, Class C common stock
and junior convertible
preferred stock would
participate equally in all
liquidating distributions.
Conversion Rights
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
The Class A common stock is not
convertible into any other security. The senior subordinated units will
convert into Class B common units
upon the expiration of the
subordination period. The
subordination period will extend
until the first day of any quarter
beginning October 1, 2002 if
specified amounts of available cash
were distributed and earned in
previous quarters.
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Liability of Holders
Petro Common Stock Star Gas Partners Senior
Subordinated Units
The liability of a holder of Class A
common stock for the debts and
obligations of Class A common stock As long as a holder of a senior
is limited to that holder's subordinated unit does not
investment in the stock. All Class A participate in the control of the
common stock is fully paid and non- business of Star Gas Partners and
assessable. acts in accordance with the amended
and restated partnership agreement,
liability is limited to the holder's
investment in the senior
subordinated units. Except under
limited exceptions, all senior
subordinated units are fully paid
and non-assessable.
Transferability and Listing
Petro Common Stock Star Gas Partners Senior
Subordinated Units
Shares of Class A common stock are
freely transferrable and are quoted The senior subordinated units are
on the Nasdaq National Market. freely transferable and listed on
the New York Stock Exchange.
Redemption
Petro Common Stock Star Gas Partners Senior
Subordinated Units
There are no redemption rights for
shares of Class A common stock. If at any time 20% or fewer of the
then issued and outstanding limited
partner interests of any class are
held by persons other than the
general partner and its affiliates,
the general partner will have the
right to acquire all, but not less
than all, of the remaining limited
partner interests of that class. The
general partner may assign this
right to an affiliate or Star Gas
Partners.
After the subordination period
expires and the earlier of the fifth
anniversary of the transaction or
the issuance of 909,000 additional
senior subordinated units and Class
B common units in the aggregate, if
Star Gas Partners acquires, in a
twelve-month period, 66 2/3% or more
of the total Class B common units,
then Star Gas Partners will have the
right to purchase all, but not less
than all, of the remaining Class B
common units during the following
twelve-month period. Star Gas
Partners may not assign this right.
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Appraisal Rights
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
Under Sections 302A.471 and 302A.473 The holders of the senior
of the Minnesota Business subordinated units, as well as the
Corporation Act, described in Annex holders of all other units, are not
F to this proxy statement, common entitled to dissenters' rights under
stockholders, other than those who the amended and restated partnership
have agreed to vote for the agreement or applicable Delaware law
acquisition proposal or who have if a merger or consolidation of Star
granted irrevocable powers to Petro Gas Partners, or a sale, exchange or
to vote for the transaction at the other disposition of substantially
special meeting, have the right to all of Star Gas Partners' assets
dissent, and obtain payment for the should occur.
"fair value" of their shares, if
corporate actions such as the
transaction should occur.
Preemptive Rights
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
Class A common stockholders do not
have: Senior subordinated unitholders do
not have preemptive rights regarding
the issuance of any securities of
Star Gas Partners.
. preemptive rights,
. rights to maintain their
respective percentage
ownership interests or
. other rights to subscribe for
additional Petro stock.
Inspection of Books, Records and List of Holders
Petro Common Stock
Star Gas Partners Senior
Subordinated Units
Under Section 302A.461 of the
Minnesota Business Corporation Act, As long as there exists a purpose
any stockholder, in person or by reasonably related to a limited
attorney or other agent, has the partner's interest, the senior
right, upon written demand under subordinated unitholders may, upon
oath stating the purpose thereof, reasonable demand and at their own
during the usual hours of business expense, have furnished to them
to inspect for any proper purpose:
. a current list of the
name and last known address
of each partner,
. the corporation's stock
ledger,
. a list of its stockholders, . a copy of Star Gas Partners'
and its other books and tax returns,
records, and
. certain information on the
. to make copies or extracts value of contributions to
therefrom. Star Gas Partners,
A proper purpose means a purpose
reasonably related to such person's . copies of the amended and
interest as a stockholder. restated partnership
agreement, certificate of
limited partnership and
powers of attorney,
. information regarding the
status of the Star Gas
Partners' business and
financial condition and
. other information regarding
the affairs of Star Gas
Partners that is just and
reasonable.
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DESCRIPTION OF INDEBTEDNESS
New Indebtedness
Petro Notes
On the closing of the transaction, Petro will issue approximately $90.0
million of senior secured notes in three separate series in a private placement
to institutional investors. It is currently expected that the senior secured
notes will be guaranteed by Star Gas Partners and Petro Holdings and its
subsidiaries. The notes have been assigned a preliminary private credit rating
of "BBB" by Fitch rating service. In addition, the senior secured notes will be
secured equally and ratably with Petro's existing senior debt and bank credit
facilities by the cash, accounts receivable, notes receivable, inventory and
customer lists of Petro Holdings and its subsidiaries, including Petro.
Each series of senior secured notes will be for $30.0 million and will mature
seven, eight or ten years from the issuance date. In addition, each series will
bear a fixed interest rate that will be determined at the time of pricing based
upon the yield of specified United States treasury notes that equal the
maturity of the series of notes plus a set percentage. Interest only on each
series is due semiannually. On the last interest payment date for each series,
the outstanding principal amount is due and payable in full.
The note agreement for the senior secured notes will contain various negative
and affirmative covenants, including restrictions on payment of dividends or
other distributions by Star Gas Partners on any partnership interest if the
ratio of consolidated pro forma cash flow to consolidated pro forma interest
expense, each as defined in the note agreement, is less than 1.75 to 1.0 or an
event of default would exist.
Under the note agreement, Petro Holdings and its subsidiaries will be
permitted to make cash distributions to Star/Petro Inc. if the financial
requirements described above are met and no default exists or would result
Star/Petro Inc. is the parent company of Petro Holdings Inc. and a wholly owned
subsidiary of Star Gas Propane. If an event of default exists under the note
agreement, the noteholders may accelerate the maturity of the senior secured
notes.
Petro Bank Facilities
On or before the closing of the transaction, Petro will enter into a bank
facilities agreement for approximately $100.0 million in senior secured
facilities with a group of commercial banks. The bank facilities will be
guaranteed by Star Gas Partners and Petro Holdings and its subsidiaries. In
addition, the bank facilities will be secured equally and ratably with Petro's
new senior secured notes and existing institutionally owned senior debt by the
cash, accounts receivable, notes receivable, inventory and customer lists of
Petro and its subsidiaries.
The bank facilities will consist of three separate facilities--a $40 million
working capital facility, a $10 million letter of credit facility and a $50
million acquisition facility. The working capital facility and letter of credit
facility will expire on June 30, 2001. The acquisition facility will convert to
a term loan on June 30, 2001 which will be payable in eight equal quarterly
principal payments. Amounts borrowed under the working capital facility are
subject to a requirement to maintain a zero balance for 90 consecutive days
during the period from April 1 to September 30 of each year. In addition, each
facility will bear an interest rate that is based on either the London
Interbank Offer Rate or another base rate plus a set percentage.
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The bank facilities agreement will contain covenants and default provisions
generally similar to those contained in the note agreement for the senior
secured notes.
Existing Indebtedness
Description of First Mortgage Notes
Star Gas Propane currently has outstanding approximately $96 million of first
mortgage notes. Star Gas Propane's obligations under the first mortgage note
agreements and the first mortgage notes are secured equally and ratably with
Star Gas Propane's obligations under its bank credit facilities by a mortgage
on most of the real property and liens on most of the operating facilities,
equipment and other assets. Eighty-five million of the first mortgage notes
have a final maturity of September 15, 2009 and $11 million of the first
mortgage notes have a final maturity of September 15, 2010. The first mortgage
notes require semiannual prepayments, without premium, of the principal
beginning March 15, 2001. Under specified circumstances following the
disposition of assets, Star Gas Propane may be required to offer to prepay the
first mortgage notes, in whole or in part.
The first mortgage note agreements contain various negative and affirmative
covenants, including restrictions on payment of dividends or other
distributions to any partnership interest if the pro forma ratio of
consolidated cash flow to consolidated interest expense, each as defined in the
first mortgage note agreements, is less than 1.75 to 1.0. Upon completion of
the equity offering and after giving pro forma effect to the transaction, Star
Gas Propane would be in compliance with the negative and affirmative covenants
applicable under the first mortgage note agreements.
Under the first mortgage note agreements, so long as no default exists or
would result, Star Gas Propane is permitted to make cash distributions to Star
Gas Partners not more frequently than quarterly in an amount not to exceed
available cash, as defined in the first mortgage note agreement, for the
immediately preceding calendar quarter. If an event of default exists on the
first mortgage notes, the noteholders may accelerate the maturity of the first
mortgage notes and exercise other rights and remedies, including foreclosures
upon the mortgaged property.
In connection with the closing of the transaction, Star/Petro, Inc. will
become jointly and severally liable with Star Gas Propane under the first
mortgage notes and the first mortgage note agreements.
Description of Star Gas Propane Bank Credit Facilities
In December 1995, Star Gas Propane entered into credit facilities with a
group of commercial banks. The bank credit facilities consist of a $25.0
million acquisition facility and a $12.0 million working capital facility. At
September 30, 1998, $9.0 million was outstanding under the acquisition facility
and $4.8 million was outstanding under the working capital facility.
The agreement governing the bank credit facilities contains covenants and
default provisions generally similar to those contained in the first mortgage
note agreements.
The Star Gas Propane working capital facility will expire on June 30, 2000,
but may be extended annually with the consent of the banks. The Star Gas
Propane acquisition facility
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will revolve until June 30, 1999 after which time any outstanding loans must be
reduced by equal quarterly principal payments over the period from September
30, 1999 through September 30, 2002.
Amounts borrowed under both facilities are due at maturity. However, no
amount must be outstanding under the Star Gas Propane working capital facility
for at least 30 consecutive days during each calendar year. If Star Gas Propane
exercises its option to convert the Star Gas Propane acquisition facility into
a term loan, the outstanding principal balance under this facility will be
amortized in equal quarterly installments.
Other Petro Debt
Petro has entered into private debt agreements with the holders of:
. its outstanding 10.90% Senior Notes due 2002 in the aggregate principal
amount of $60 million; and
. its 14.1% Senior and Subordinated Notes due 2001 in the aggregate
principal amount of $4.1 million.
Under the private debt agreements at the completion of the transaction:
. the holders of the 10.90% notes will exchange them for $63.1 million
aggregate principal amount of 9.0% Senior Notes due 2002 of Petro; and
. the holders of the 14.10% notes will exchange those notes for $2.2
million aggregate principal amount of 10.25% Senior Notes due 2001 of
Petro and $2.2 million principal amount of 10.25% Subordinated Notes due
2001 of Petro.
The new 9% notes and the new 10.25% notes will be guaranteed by Star Gas
Partners and Petro Holdings.
The agreements under which Petro will issue the new 9% and 10.25% notes will
be substantially identical to the agreement under which the $90.0 million of
senior secured notes will be issued, including negative and affirmative
covenants.
Petro also had outstanding as of September 30, 1998 an aggregate of $14.3
million of notes, primarily in connection with the purchase of fuel oil
dealers, which notes are due variously in monthly, quarterly and annual
installments with interest at various rates ranging from 8% to 15%, maturing at
various dates through 2004.
In addition, following the closing of the transaction, Petro will have
outstanding $1.3 million of 10 1/8% Subordinated Debentures due 2003, $0.7
million of 9 3/8% Subordinated Notes due 2006 and $1.1 million of 12 1/4%
Subordinated Notes due 2005. In October 1998, the indentures under which the 10
1/8%, 9 3/8% and 10 1/8% subordinated notes were issued were amended to
eliminate substantially all of the covenant protection provided by the
indentures.
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COMPARATIVE SECURITY PRICE AND DISTRIBUTION INFORMATION
Star Gas Partners Securities
Common Units. Since May 29, 1998, the common units have been listed and
traded on the New York Stock Exchange under the symbol "SGU." From December 20,
1995 through May 28, 1998, the common units were listed on the Nasdaq National
Market. The following table sets forth the closing high and low sales prices
per common unit on the Nasdaq National Market through May 28, 1998 and after
that date on the New York Stock Exchange. The table also shows:
. the cash distributions declared and paid per common unit for the fiscal
quarters ended from December 31, 1996 through September 30, 1998; and
. the cash distribution declared but not paid per common unit for the
fiscal quarter ended December 31, 1998.
<TABLE>
<CAPTION>
Fiscal
Fiscal 1999 Fiscal 1998 1997
-------------------------------- -------------------------- --------------------------
Fiscal Cash Cash Cash
Quarter Ended High Low Distribution High Low Distribution High Low Distribution
------------- ------ ------ ------------ ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,............ $21.75 $14.50 $0.55 $23.38 $20.50 $0.55 $23.88 $21.75 $0.55
March 31,............... $19.88(a) $17.00(a) -- 24.75 21.38 0.55 24.63 20.75 0.55
June 30,................ -- -- -- 23.00 20.50 0.55 21.88 19.00 0.55
September 30,........... -- -- -- 22.38 20.13 0.55 23.50 21.00 0.55
</TABLE>
- --------
(a) As of February 1, 1999.
On August 13, 1998, the last full trading day prior to the public
announcement of the proposed transaction, the closing sales price of the common
units was $21.06 on the New York Stock Exchange. On February 1, 1999, the
closing sales price of the common units was $18.75.
Subordinated Units. There is no trading market for Star Gas Partners'
2,396,078 subordinated units, all of which are held by Star Gas Corporation.
Senior Subordinated Units. There are no senior subordinated units outstanding
as of the date of this proxy statement.
Junior Subordinated Units. There are no junior subordinated units outstanding
as of the date of this proxy statement.
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Petro Capital Stock
Class A Common Stock. Shares of Class A common stock are listed and traded on
the Nasdaq National Market under the symbol "HEAT." The following table shows
the last reported high and low sale prices per share of Class A common stock
and dividends declared on shares of Class A common stock for the periods
indicated. For the fiscal quarter ended March 31, 1998, Petro declared a
dividend of $.075 per share of Class A common stock which was paid on January
2, 1998 to holders of record on December 15, 1997. On February 24, 1998, Petro
announced that it would suspend its regularly scheduled quarterly common stock
dividend and that it did not expect to pay common stock dividends for the
remainder of the year. In arriving at this decision, the Petro board considered
the impact of unusually warm winter weather on its earnings and cash flow, as
well as a variety of other facts.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- -----------------------
Fiscal Quarter Ended High Low Dividends High Low Dividends High Low Dividends
- -------------------- ------- ------- --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31,............. $ 3 $1 7/16 $0.075 $6 3/4 $3 3/8 $0.075 $8 1/4 $6 1/2 $0.15
June 30,.............. 2 1/16 1 1/2 -- 3 7/8 2 1/2 0.075 7 3/4 6 1/2 0.15
September 30,......... 2 1/16 1 5/16 -- 3 1/2 2 5/8 0.075 7 3/4 6 1/4 0.15
December 31,.......... 1 29/32 14/16 -- 3 1/2 2 1/8 0.075 7 3/4 5 5/8 0.15
</TABLE>
On August 13, 1998, the last full trading day prior to the public
announcement of the proposed transaction, the closing sales price of the Class
A common stock was $1.875 on the Nasdaq National Market. The last sale price of
the Class A common stock on February 1, 1999 was $0.9375 per share. As of
January 29, 1999, Petro had holders of record of Class A common stock.
Class C Common Stock. There is no established trading market for Class C
common stock. As of January 29, 1999, Petro had holders of record of Class
C common stock.
Public Preferred Stock. There is no established trading market for the 12
7/8% preferred stock. As of January 29, 1999, Petro had holders of record
of 12 7/8% preferred stock.
Private Preferred Stock. There is no established trading market for the 1989
preferred stock. As of January 29, 1999, Petro had holders of record of the
1989 preferred stock.
Junior Convertible Preferred Stock. There is no established trading market
for the junior convertible preferred stock. As of January 29, 1999, Petro had
holders of record of junior convertible preferred stock.
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Comparative Per Share/Per Unit Information (Unaudited)
The following table describes, for units of limited partner interests of Star
Gas Partners and shares of Petro Class A common stock, historical, pro forma
and pro forma equivalent per unit financial information for the latest fiscal
years of Star Gas Partners and Petro. The pro forma data do not purport to be
indicative of the results of future operations or the results that would have
occurred had the transaction been completed on October 1, 1997. This
information should be read in conjunction with and is qualified in its entirety
by the financial statements and accompanying notes of Star Gas Partners and
Petro included in the documents described under "Incorporation of Certain
Documents By Reference" and the pro forma combined financial statements and
accompanying discussion and notes set forth under "Unaudited Pro Forma
Condensed Consolidated Financial Information."
<TABLE>
<CAPTION>
Historical Pro Forma
Star Gas Star Gas Pro Forma
Partners per Partners per Equivalent
unit of unit of Historical per unit of
limited limited Petro per limited
partner partner share of partner
interests interests common stock interests
for fiscal for fiscal for fiscal for fiscal
year ended year ended year ended year ended
September 30, September 30, December 31, September 30,
1998 1998 1997 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Income............. $(0.16) $(0.67) $(1.06) $(0.08)
Cash Distributions..... $ 2.20 $ 2.30 $ 0.30 $ 0.28
Book Value............. $ 9.50 (a) $14.57 (a) $(6.76)(b) $ 1.79 (b)
</TABLE>
- --------
(a) As of September 30, 1998.
(b) As of December 31, 1997.
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FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be relevant
to prospective Star Gas Partners 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 Star Gas Partners, insofar
as it relates to matters of law and legal conclusions. This section is based
upon current provisions of the IRS Code, current and proposed regulations and
current administrative rulings and court decisions, all of which are subject to
change with and without 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 Star Gas Partners are references to both Star Gas Partners and Star
Gas Propane. In addition, unless otherwise noted, the following discussion is
from Star Gas Partners' perspective and all references to "we," "us" and "our"
are to Star Gas Partners.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting Star Gas Partners or the Star Gas Partners
unitholders. Moreover, the discussion focuses on Star Gas Partners 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 Star Gas Partners unitholder should
consult, and should depend on, his own tax advisor in analyzing the federal,
state, local and foreign tax consequences peculiar to him of the ownership or
disposition of units.
Tax Consequences of the Merger
The merger will be a taxable transaction to the Petro common stockholders
generally resulting in gain or loss to each holder in an amount equal to the
difference between the value of the senior subordinated units received by him
and the federal income tax basis he has in the shares exchanged for senior
subordinated units. The gain or loss will be capital gain or loss if the stock
is held by the Petro common stockholder as a capital asset and will be long-
term gain or loss if such stock has been held for more than one year. Long-term
capital gain will generally be taxed at a maximum rate of 20% for individuals.
Capital losses can be deducted against capital gains and thereafter against
ordinary income to the extent of $3,000 per year for individuals with any
unused capital loss being carried forward indefinitely. Net capital gain of
foreign holders of Petro common stock should generally not be subject to United
States federal income tax. Petro common stockholders participating in the
merger will have a basis in their senior subordinated units equal to the fair
market value of those units at the time of the merger and their holding period
will begin on the day after the merger. Counsel has not rendered any opinion on
these matters.
The merger will also result in gain to Petro equal to the excess of the value
of the Star Gas Partners senior subordinated units distributed to the Petro
common stockholders in the merger and any debt relief over the federal income
tax basis of those units to Petro. Although it is expected by Petro that this
gain will generally be offset by Petro's net operating losses, the net
operating losses are subject to challenge by the IRS. Petro and its affiliates
do not anticipate that Petro or its affiliates will pay significant federal
income tax at the outset; however, over time more federal income tax will be
paid by Petro and its affiliates. Petro and its affiliates' ability to reduce
income for federal income tax
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purposes is dependent on depreciation deductions and interest deductions on
certain debt, all of which is subject to scrutiny by the IRS. Counsel has not
rendered any opinion on these matters.
Tax Consequences of Unit Ownership
Legal Opinions and Advice. Counsel is of the opinion that, based on the
representations and subject to the qualifications in the detailed discussion
that follows, for federal income tax purposes
(1) Star Gas Partners and Star Gas Propane have been and will each be
treated as a partnership and
(2) owners of units, with certain exceptions, as described in "Limited
Partner Status" below, will be treated as partners of Star Gas
Partners, but not Star Gas Propane.
In addition, all statements as to matters of law and legal conclusions
contained in this section, unless otherwise noted, reflect the opinion of
counsel.
No ruling has been or will be requested from the IRS regarding the
classification of Star Gas Partners as a partnership for federal income tax
purposes, whether Star Gas Partners' operations generate "qualifying income"
under Section 7704 of the Code or any other matter affecting Star Gas Partners
or prospective Star Gas Partners 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 Star Gas
Partners 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 Star Gas Partners unitholder whose units are
loaned to a short seller to cover a short sale of units (see "--Tax
Treatment of Operations--Treatment of Short Sales"),
(2) whether a Star Gas Partners 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 Star Gas Partners' monthly convention for allocating
taxable income and losses is permitted by existing Treasury
Regulations (see "--Disposition of Units--Allocations Between
Transferors and Transferees"),
(4) whether Star Gas Partners' method for depreciating Section 743
adjustments is sustainable (see "--Tax Treatment of Operations--
Section 754 Election") and
(5) whether the allocations of recapture income contained in the
amended and restated partnership agreement will be respected (see
"--Allocation of Star Gas Partners' Income, Gain, Loss and
Deduction").
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Tax Rate. The top marginal income tax rate for individuals for 1998 is 39.6%.
Net capital gains of an individual are generally subject to a maximum 20% tax
rate if the asset was held for more than 12 months at the time of disposition.
Star Gas Partners Status as a Partnership. 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 will 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, Star Gas Partners has 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 certain 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 amended and restated
partnership agreement and (3) its description in this proxy
statement;
(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
proxy statement;
(d) The general partner has at all times acted independently of the
limited partners; and
(e) For each taxable year, less than 10% of the gross income of 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.
Such 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, (2) the partnership
agreement of Star Gas Partners as it may be amended or restated,
and (3) its description in this proxy statement;
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(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 proxy
statement; 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
products thereof 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 least 90% of Star Gas Partners' gross income will
constitute qualifying income. Star Gas Partners estimates that less than %
of its gross income for each taxable year will not constitute qualifying
income.
If Star Gas Partners fails to meet the Qualifying Income Exception, other
than a failure that is determined by the IRS to be inadvertent and is cured
within a reasonable time after discovery, Star Gas Partners will be treated as
if it had transferred all of its assets (subject to liabilities) to a newly
formed corporation, on the first day of the year in which it fails to meet the
Qualifying Income Exception, in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in
Star Gas Partners. This contribution and liquidation should be tax-free to Star
Gas Partners unitholders and Star Gas Partners, so long as Star Gas Partners,
at that time, does not have liabilities in excess of the tax basis of its
assets. Thereafter, Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners unitholder's cash flow
and after-tax return and thus would likely result in a substantial reduction of
the value of the units.
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The discussion below is based on the assumption that Star Gas Partners will
be classified as a partnership for federal income tax purposes.
Limited Partner Status. Star Gas Partners 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 such units.
A beneficial owner of units whose units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such units for federal income tax purposes. See "--Tax
Treatment of Operations--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
Star Gas Partners unitholder who is not a partner for federal income tax
purposes, and any cash distributions received by such a Star Gas Partners
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 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 Star Gas Partners unitholder may be allocated income from Star Gas Partners
even if he has not received a cash distribution. Each Star Gas Partners
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 Star Gas Partners
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 Star Gas Partners unitholders. Such dividend
income cannot be offset by past or future losses generated by Star Gas
Partners' propane activities.
Treatment of Partnership Distributions. Distributions by Star Gas Partners to
a Star Gas Partners 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
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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 Star Gas Partners 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 Star Gas Partners distributions cause
a Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners 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 return for the non-pro rata
portion of the actual distribution made to him. This latter deemed exchange
will generally result in a Star Gas Partners unitholder's realization of
ordinary income under Section 751(b) of the Code. That income will equal the
excess of (1) the non-pro rata portion of that distribution over (2) the Star
Gas Partners unitholder's tax basis for the share of such Section 751 Assets
deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a holder who
acquires units in the transaction and holds those units through December 31,
2001, will be allocated, on a cumulative basis, an amount of federal taxable
income for that period that will be less than 15% 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
Star Gas Partners unitholder will constitute a significantly higher percentage
of cash distributed to him. These estimates are based upon the assumption that
gross income from operations will approximate the amount required to make the
minimum quarterly distribution on all units and other assumptions regarding
capital expenditures, cash flow and anticipated cash distributions. These
estimates and assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political uncertainties beyond
our control. Further, the estimates are based on current tax law and tax
reporting positions that we have adopted or intend to adopt and with which the
IRS could disagree. Accordingly, no assurance can be given that these estimates
will prove to be correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower, and any differences could
be material and could materially affect the value of the units.
Basis of Units. A Star Gas Partners unitholder will generally have an initial
tax basis for his units equal to the fair market value of the units received.
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 Star Gas
Partners 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
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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 Star Gas Partners
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 Star Gas Partners unitholder
is considered to be "at risk" regarding our activities, if that is less than
his tax basis. A Star Gas Partners unitholder must recapture losses deducted in
previous years to the extent that Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners unitholder or can look
only to the units for repayment. A Star Gas Partners unitholder's at risk
amount will increase or decrease as the tax basis of his units increases or
decreases, other than tax basis increases or decreases attributable to
increases or decreases in his share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely held corporations and personal service corporations can
deduct losses from passive activities, which are generally, activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately for each publicly-traded partnership. Consequently, any
passive losses we generate will only be available to offset our passive income
generated in the future and will not be available to offset income from other
passive activities or investments, including other publicly-traded companies,
interest and dividend income generated by us, such as dividends from Petro and
its affiliates, or salary or active business income. Passive losses that are
not deductible because they exceed a Star Gas Partners 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 Star Gas Partners 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.
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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 Star Gas Partners
unitholder's share of our net passive income will be treated as investment
income for this purpose. In addition, the Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners
unitholders in accordance with their percentage interests in us. At any time
that distributions are made to the Star Gas Partners common units and not to
the Star Gas Partners senior subordinated units or junior subordinated units,
or that incentive distributions are made to holders of Star Gas Partners senior
subordinated units, junior subordinated units or general partner units or to
holders of Star Gas Partners 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 Star Gas Partners unitholders in accordance with
their percentage interests to the extent of their positive capital accounts (as
maintained under our amended and restated 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 each of the partners ("Contributed Property"). The effect of these
allocations to a Star Gas Partners 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 Star Gas Partners 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.
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Regulations provide that an allocation of items of Star Gas Partners income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Code to eliminate the difference between a partner's "book" capital
account, credited with the fair market value of Contributed Property, and "tax"
capital account, credited with the tax basis of Contributed Property, (the
"Book-Tax Disparity"), will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item will be determined
on the basis of the partner's interest in Star Gas Partners, which will be
determined by taking into account all the facts and circumstances, including
the partner's relative contributions to Star Gas Partners, the interests of the
partners in economic profits and losses, the interest of the partners in cash
flow and other nonliquidating distributions and rights of the partners to
distributions of capital upon liquidation.
Counsel is of the opinion that allocations under our amended and restated
partnership agreement, with the exception of the allocation of recapture income
discussed above, will be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction.
Tax Treatment of Operations
Accounting Method and Taxable Year. 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
Star Gas Partners 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 "--Allocation
of Our Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions 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
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may be required to recapture such deductions as ordinary income upon a sale of
his interest in us. See "--Allocation of Star Gas Partners' Income, Gain, Loss
and Deduction" and "--Disposition of Units--Recognition of Gain or Loss."
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 Star Gas Partners unitholders. For
purposes of this discussion, a Star Gas Partners 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. This analysis assumes the Proposed Treasury Regulations under
Section 743 of the Code are adopted requiring the remedial allocation method.
Nevertheless, the proposed regulations under Section 197 indicate that the
Section 743(b) adjustment attributable to an amortizable Section 197 intangible
should be treated as a newly-acquired asset placed in service in the month when
the purchaser acquires the unit. Under Treasury Regulation Section 1.167(c)-
1(a)(6), a Section 743(b) adjustment attributable to property subject to
depreciation under Section 167 of the Code rather than cost recovery deductions
under Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Although the
proposed regulations under Section 743 will likely eliminate many of the
problems if finalized in their current form, the depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment may
differ from the methods and useful lives generally used to depreciate the basis
in these properties. Under our amended and restated 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 "--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 Star Gas Partners' assets. To the extent this Section 743(b)
adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules described in the
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation or amortization convention
under which all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to Basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in our assets. Such an aggregate approach
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may result in lower annual depreciation or amortization deductions than would
otherwise be allowable to specified Star Gas Partners unitholders. See "--
Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by 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 Star Gas
Partners' assets. Conversely, a Section 754 election is disadvantageous if the
transferee's tax basis in these units is lower than that unit's share of the
aggregate tax basis of Star Gas Partners' 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.
Alternative Minimum Tax. Each Star Gas Partners 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 Star Gas Partners
unitholders should consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative minimum tax.
Valuation of 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 Star Gas Partners unitholders might be required
to adjust their tax liability for prior years.
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
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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 Star Gas Parnters 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. Star Gas Partners
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."
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 Star Gas
Partners unitholder's tax basis in the units that were sold. The amount
realized by the Star Gas Partners 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 Star Gas Partners 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 "--Tax Treatment of
Operations--Section 754 Election", attributable to an amortizable Section 197
intangible after a sale by the general partner of units, a Star Gas Partners
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
Star Gas Partners unitholders.
Gain or loss recognized by a Star Gas Partners unitholder, other than a
"dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
on the sale of units held more than 12 months will generally be taxed a maximum
rate of 20%. A portion of this gain or loss, which could be substantial,
however, will be separately computed and taxed as ordinary income or loss under
Section 751 of the Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to "inventory
items" owned by us. The term "unrealized receivables" includes potential
recapture items, including depreciation recapture. Ordinary income attributable
to unrealized receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of the unit and may be
recognized even if there is a net taxable loss realized on the sale of the
unit. Thus, a Star Gas Partners 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.
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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 Star Gas Partners units, a Star Gas
Partners 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 Star Gas Partners unitholders. A
Star Gas Partners 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.
Specified provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a
taxpayer as having sold an "appreciated" partnership interest, one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value, if the taxpayer or related persons enter(s) into
(1)a short sale,
(2)an offsetting notional principal contract, or
(3)a futures or forward contract for the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an offsetting
notional principal contract or a futures or forward contract for a partnership
interest, the taxpayer will be treated as having sold that position if the
taxpayer or a related party then acquires the partnership interest or
substantially identical property. The Secretary of Treasury is also authorized
to issue regulations that treat a taxpayer who or that enters into transactions
or positions that have substantially the same effect as the preceding
transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the principal
national securities exchange on which the units are then traded on the first
business day of the month (the "Allocation Date"). However, gain or loss
realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a unitholder transferring units in the open market may be allocated
income, gain, loss and deduction accrued after the date of transfer.
The use of this allocation method may not be permitted under existing
Treasury Regulations. Accordingly, counsel is unable to opine on the validity
of this method of allocating income and deductions between the transferors and
the transferees of units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests
otherwise vary during a taxable period, to conform to a method permitted under
future Treasury Regulations.
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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.
Notification Requirements. A Star Gas Partners unitholder who sells or
exchanges units is required to notify Star Gas Partners 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. Star Gas Partners is required to notify the IRS of that
transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply 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
described the amount of the consideration received for the unit that is
allocated to our goodwill or going concern value. Failure to satisfy these
reporting obligations may lead to the imposition of substantial penalties.
Constructive Termination. Star Gas Partners and Star Gas Propane will be
considered to have been terminated if there is a sale or exchange of 50% or
more of the total interests in Star Gas Partners capital and profits within a
12-month period. A termination of Star Gas Partners will cause a termination of
Star Gas Propane. A termination of Star Gas Partners will result in the closing
of Star Gas Partners' taxable year for all Star Gas Partners unitholders. In
the case of a Star Gas Partners 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.
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. Star Gas Partners is authorized to amend the amended and
restated 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 amended and
restated 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.
Uniformity of Units
Because Star Gas Partners 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
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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 "--Tax Treatment of Operations--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 "--Tax Treatment of
Operations--Section 754 Election." To the extent such Section 743(b) adjustment
is attributable to appreciation in value in excess of the unamortized Book-Tax
Disparity, we will apply the rules described in the Regulations and legislative
history. If we determine that such a position cannot reasonably be taken, we
may adopt a depreciation and amortization convention under which all purchasers
acquiring units in the same month would receive depreciation and amortization
deductions, whether attributable to basis or Section 743(b) basis, based upon
the same applicable rate as if they had purchased a direct interest in our
property. If such an aggregate approach is adopted, it may result in lower
annual depreciation and amortization deductions than would otherwise be
allowable to certain unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that such deductions are
otherwise allowable. This convention will not be adopted if we determine that
the loss of depreciation and amortization deductions will have a material
adverse effect on the unitholders. If Star Gas Partners chooses not to utilize
this aggregate method, we may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any units that would not have a material adverse effect on
the unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of additional deductions.
See "--Disposition of Units--Recognition of Gain or Loss."
Tax-exempt Organizations and Certain Other Investors. Ownership of units by
employee benefit plans, other tax-exempt organizations, nonresident aliens,
foreign corporations, other foreign persons and regulated investment companies
raises issues unique to such persons and, as described below, may have
substantially adverse tax consequences. Employee benefit plans and most other
organizations that are exempt from federal income tax, including individual
retirement accounts ("IRAs") and other retirement plans, are subject to federal
income tax on unrelated business taxable income. Virtually all of the taxable
income derived by such an organization from the ownership of a unit will be
unrelated business taxable income and thus will be taxable to 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.
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Under current rules applicable to publicly-traded partnerships, we are
required to withhold as taxes 39.6% of any cash distributions made to foreign
Star Gas Partners unitholders. A foreign Star Gas Partners unitholder may claim
a credit for those taxes. If that tax exceeds the taxes due from the foreign
unitholder, he may claim a refund. Each foreign Star Gas Partners 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 Star Gas Partners to
change these procedures. In addition, non-resident aliens and foreign
corporations, trusts or estates that own units will be considered to be engaged
in business in the United States on account of ownership of those units. As a
consequence, they will be required to file federal tax returns for their share
of our income, gain, loss or deduction and pay federal income tax at regular
rates on any net income or gain.
Because a foreign corporation that owns units will be treated as engaged in a
United States trade or business, such a corporation may be subject to United
States branch profits tax a rate of 30%, in addition to regular federal income
tax, on its share of our income and gain, as adjusted for changes in the
foreign corporation's "U.S. net equity", which are effectively connected with
the conduct of a United States trade or business. That tax may be reduced or
eliminated by an income tax treaty between the United States and the country in
which the foreign corporate unitholder is a "qualified resident." In addition,
such a unitholder is subject to special information reporting requirements
under Section 6038C of the Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on
the disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business. Except to the extent the
ruling applied (as to which counsel has not opined), a foreign unitholder will
not be taxed or subject to withholding upon the disposition of a unit if he has
owned less than 5% in value of the units during the five-year period ending on
the date of the disposition and if the units are regularly traded on an
established securities market at the time of the disposition.
Administrative Matters
Information Returns and Audit Procedures. We intend to furnish to each Star
Gas Partners unitholder, within 90 days after the close of each calendar year,
specific tax information, including a Schedule K-1, which describes each Star
Gas Partners 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 Star
Gas Partners unitholder's share of income, gain, loss and deduction. There is
no assurance that any of those conventions will yield a result that conforms to
the requirements of the Code, regulations or administrative interpretations of
the IRS. Neither we nor counsel can assure prospective Star Gas Partners
unitholders that the IRS will not successfully contend in court that such
accounting and reporting conventions are impermissible. Any such challenge by
the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any audit of this kind may require each Star Gas Partners
unitholder to adjust a prior year's tax liability,
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and possibly may result in an audit of that unitholder's own return. Any audit
of a Star Gas Partners 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 Star Gas Partners unitholders. In addition, the Tax Matters Partner
can extend the statute of limitations for assessment of tax deficiencies
against Star Gas Partners 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
Star Gas Partners 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 Star Gas Partners 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 Star Gas Partners elects 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
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units. Although we are authorized under our amended and restated partnership
agreement to do so, we do not expect to elect to have the large partnership
provisions apply to us because of the cost of their application.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us
(a) the name, address and taxpayer identification number of the beneficial
owner and the nominee;
(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any wholly-
owned agency or instrumentality of either of the foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred for the
beneficial owner; and
(d) specific information including the dates of acquisitions and transfers,
means of acquisitions and transfers, and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Code for failure to report this information to Star Gas
Partners. 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 the 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 Star Gas Partners unitholders,
and a Star Gas Partners unitholder who sells or otherwise transfers a Star Gas
Partners 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 Star
Gas Partners 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 Star Gas Partners unitholder who
fails to disclose the tax shelter registration number on his return, without
reasonable cause for that failure, will be subject to a $250 penalty for each
failure. Any penalties discussed are not deductible for federal income tax
purposes.
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Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Code. No penalty will be imposed, however, for
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000, $10,000 for most
corporations. The amount of any understatement subject to penalty generally is
reduced if any portion of the understatement is attributable to a position
adopted on the return (1) with respect to 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, Star
Gas Partners must disclose the pertinent facts on its return. In addition, Star
Gas Partners will make a reasonable effort to furnish sufficient information
for Star Gas Partners unitholders to make adequate disclosure on their returns
to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property, or
the adjusted basis of any property, claimed on a tax return is 200% or more of
the amount determined to be the correct amount of that valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000, $10,000
for most corporations. If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
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 Star Gas Partners does
business or owns property. Although an analysis of those various taxes is not
presented here, each prospective Star Gas Partners unitholder should consider
their potential impact on his investment in Star Gas Partners. A Star Gas
Partners 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 Star Gas Partners' 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 incomes. Some of them may require Star Gas Partners, or
Star Gas Partners may elect, to withhold a percentage of income from amounts to
be distributed to a Star Gas Partners 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
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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 "--Disposition of Units--Entity-Level Collections." Based on current
law and our estimate of our future operations, we do not anticipate that any
amounts required to be withheld will be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences of his investment in us, under the laws of pertinent states and
localities. Accordingly, each prospective unitholder should consult, and must
depend upon, his own tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all U.S. federal,
state and local, tax returns that may be required. Counsel has not rendered an
opinion on the state or local tax consequences of an investment in us.
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DISSENTERS' RIGHTS
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act (the
"Minnesota Act") provide to each Petro common stockholder the right to dissent
from the acquisition proposal and to obtain payment from Petro for the "fair
value" of his shares following the transaction. The term "fair value" means the
value of a dissenting Petro common stockholder's shares of Petro common stock
immediately before the completion of the transaction. Under the merger
agreement, Star Gas Partners has agreed to make payment of the fair value of
the shares of dissenting Petro common stockholders. Star Gas Partners common
unitholders do not have dissenters' rights under the Delaware Act or the
partnership agreement.
The following summary of the applicable material provisions of Sections
302A.471 and 302A.473 of the Minnesota Act the full texts of which are attached
as Appendix E to this proxy statement. These sections should be reviewed
carefully by any Petro common stockholder who wishes to exercise dissenters'
rights or who wishes to preserve the right to do so, since failure to comply
with the procedures in the Minnesota Act will result in the loss of dissenters'
rights.
All references in Sections 302A.471 and 302A.473 of the Minnesota Act to a
"shareholder" are to a record holder of shares of Petro common stock who
asserts dissenters' rights. A person having beneficial ownership of shares of
Petro common stock that are held of record in the name of another person, such
as a broker, nominee, trustee or custodian, must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner in order to perfect whatever dissenters' rights a beneficial owner may
have.
Petro common stockholders who wish to exercise their dissenters' rights under
the Minnesota Act must satisfy all of the following conditions.
(1) The common stockholder must deliver a written notice of intent to
demand fair value for his shares of Petro common stock to Petro at the
address specified below before the vote on the acquisition proposal.
The notice of dissent is in addition to and separate from any proxy or
vote against the acquisition proposal. Voting against, abstaining from
voting or failing to vote on the acquisition proposal does not
constitute a notice of dissent or demand for appraisal under the
Minnesota Act. Only Petro common stockholders of record as of the
record date, and beneficial owners of Petro common stock as of the
record date who hold through Petro common stockholders, are entitled
to exercise dissenters' rights.
(2) The common stockholder must not vote for the acquisition proposal. A
Petro common stockholder's failure to vote against the acquisition
proposal will not constitute a waiver of his dissenters' rights.
However, if a Petro common stockholder returns a signed proxy but does
not specify a vote against the acquisition proposal or a direction to
abstain, the proxy will be voted for the acquisition proposal, which
will have the effect of waiving that Petro common stockholder's
dissenters' rights.
(3) A Petro common stockholder may not assert dissenters' rights as to less
than all of the shares of Petro common stock registered in his name
and/or beneficially owned by him, except where shares are beneficially
owned by another person but registered in the Petro common
stockholder's name. If a Petro common stockholder, such as a broker,
nominee,
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trustee or custodian, wishes to dissent with respect to shares of Petro
common stock beneficially owned by another person, the Petro common
stockholder must dissent with respect to all of these shares and must
disclose the name and address of the beneficial owner on whose behalf
the dissent is made. A beneficial owner of shares of Petro common stock
who is not the record owner of his shares may assert dissenters' rights
as to shares held on his behalf, provided that the beneficial owner
submits a written consent of the record owner to Petro at or before the
time dissenters' rights are asserted.
(4) A Petro common stockholder who opts to exercise dissenters' rights must
send a notice of dissent to Petro at the following address before the
vote on the acquisition proposal: Petroleum Heat and Power Co., Inc.,
P.O. Box 1457, Stamford, CT 06902, Attention: Treasurer. The notice of
dissent should specify the Petro common stockholder's name and mailing
address, the number of shares of each class of Petro common stock owned
by him and that he intends to demand the fair value of the shares.
If the acquisition proposal is approved by the Petro common stockholders at
the Petro special meeting, Petro will send a written notice to each Petro
common stockholder who filed a notice of dissent concerning the procedures that
should be followed. The procedure notice will contain the address to which the
Petro common stockholder should send a demand for the payment of the fair value
of his shares of common stock and the certificates representing the shares in
order to obtain payment and the date by which they must be received by Petro, a
form to be used to make the demand for fair value and other related
information.
In order to receive fair value for his shares of Petro common stock, a
dissenting Petro common stockholder must, within 30 days after the date the
procedure notice was provided, send his stock certificates, a demand for fair
value and all other information specified in the procedure notice from Petro,
to the address specified in the procedure notice. A dissenting Petro common
stockholder will retain all rights as a common stockholder until the completion
of the transaction. After the later of (1) the date Petro receives a valid
demand for fair value and the related stock certificates and other information
specified in the procedure notice and (2) the completion of the transaction,
Star Gas Partners, on behalf of Petro, will remit to each dissenting Petro
common stockholder who has complied with the statutory requirements the amount
that Petro estimates to be the fair value of his shares of Petro common stock,
with interest commencing five days after the completion of the transaction at a
rate prescribed by law. Remittance will be accompanied by Petro's balance sheet
and statement of operations for a fiscal year ending not more than 16 months
before the completion of the transaction, together with the latest available
interim financial data, an estimate of the fair value of the dissenting Petro
common stockholder's shares of Petro common stock and a brief description of
the method used to reach the estimate and of the procedure to be followed if
the dissenting Petro common stockholder wishes to demand supplemental payment
as described below and copies of Sections 302A.471 and 302A.473 of the
Minnesota Act.
If the dissenting Petro common stockholder believes that the amount remitted
by Star Gas Partners, on behalf of Petro, for his shares of Petro common stock
is less than the fair value of his shares, plus interest, the dissenting Petro
common stockholder may give written notice to Petro of his own estimate of the
fair value of the shares, plus interest, within 30 days after the mailing date
of the
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remittance and demand payment of the difference. A demand for this supplemental
payment must be given to Petro at the address specified in the procedure
notice. A Petro common stockholder who fails to give written notice within this
time period is entitled only to the amount remitted by Star Gas Partners.
Within 60 days after receipt of a demand for supplemental payment, Petro must
either (1) pay the Petro common stockholder the amount demanded or agreed to by
the Petro common stockholder after discussion with Petro or (2) petition a
state court in Hennepin County, Minnesota for the determination of the fair
value of the shares, plus interest. The petition must name as parties all Petro
common stockholders who have demanded supplemental payment and have not reached
an agreement with Petro. The court, after determining that the dissenting Petro
common stockholder or stockholders in question have complied with all statutory
requirements, may use any valuation method or combination of methods it deems
appropriate, whether or not used by Petro or the dissenting Petro common
stockholder, and may appoint appraisers to recommend the amount of the fair
value of the class of Petro common stock to be valued. The court's
determination will be binding on all Petro common stockholders who properly
exercised dissenters' rights and made demands for supplemental payment as
described above. Dissenting Petro common stockholders are entitled to judgment
for the amount by which the court-determined fair value per share, plus
interest, exceeds the amount per share, plus interest, remitted to the Petro
common stockholders by Star Gas Partners. Petro common stockholders will not be
liable to Petro or Star Gas Partners for any amounts paid by Petro or Star Gas
Partners that exceed the fair value of the shares as determined by the court,
plus interest. The costs and expenses of a proceeding to determine the fair
value of the shares, including the expenses and compensation of any appraisers,
will be determined by the court and assessed against Petro, except that the
court may, in its discretion, assess part or all of those costs and expenses
against any Petro common stockholder whose action in demanding supplemental
payment is found to be arbitrary, vexatious or not in good faith. The court may
award fees and expenses to an attorney for the dissenting Petro common
stockholders out of the amount, if any, awarded to the Petro common
stockholders. Fees and expenses of experts or attorneys may also be assessed
against any person who acted arbitrarily, vexatiously or not in good faith in
bringing the proceeding.
Star Gas Partners may withhold the remittance of the estimated fair value,
plus interest, for any shares of Petro common stock owned by any person who was
not a Petro common stockholder, or who is dissenting on behalf of a person who
was not a beneficial owner, on August 14, 1998. That date is the date on which
the proposed transaction was first announced to the public. Petro will forward
to post-announcement dissenting Petro common stockholder who has complied with
all requirements in exercising dissenters' rights
. the procedure notice,
. all other materials sent after approval by the Petro common
stockholders of the acquisition proposal to all Petro common
stockholders who have properly exercised dissenters' rights,
. together with a statement of the reason for withholding the
remittance and
. an offer to pay the dissenting Petro common stockholder the amount
listed in the materials, if the common stockholder agrees to accept
that amount in full satisfaction.
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A post-announcement dissenting Petro common stockholder may decline the offer
and demand payment by following the same procedure as that described for a
demand for supplemental payment by Petro common stockholders who owned their
shares on August 14, 1998. Any Petro common stockholder who did not own shares
on August 14, 1998 and who fails properly to demand payment will be entitled
only to the amount offered by Petro. Upon proper demand by any post-
announcement Petro common stockholder, the same rules and procedures applicable
to the making of a demand for supplemental payment by a dissenting Petro common
stockholder who owned shares on August 14, 1998 will also apply to any post-
announcement Petro common stockholder properly giving a demand for payment. Any
post-announcement Petro common stockholder is not entitled to receive any
remittance from Petro or Star Gas Partners until the fair value of the shares,
plus interest, has been determined under those rules and procedures.
Petro common stockholders considering exercising dissenters' rights should
bear in mind that the fair value of their shares determined under Sections
302A.471 and 302A.473 of the Minnesota Act could be more than, the same as or,
in some circumstances, less than the consideration they would receive in the
merger if they do not seek appraisal of their shares. Petro common stockholders
should also recognize that the opinion of any investment banking firm as to
fairness, from a financial point of view, is not an opinion as to fair value
under Sections 302A.471 and 302A.473.
Cash received due to the exercise of dissenters' rights may be subject to
federal or state income tax. See "Federal Income Tax Considerations."
A Petro common stockholder who fails to comply fully with the statutory
procedure summarized above will forfeit his rights of dissent and will receive
the transaction consideration for his Petro common stock. See Appendix F.
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LEGAL MATTERS
The validity of the Star Gas Partners common units and senior subordinated
units to be issued in the transaction 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 schedules 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 proxy statement, 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 schedules of Petro as of December
31, 1996 and 1997 and for the fiscal years ended December 31, 1995, 1996 and
1997, have been incorporated by reference in this proxy statement 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.
WHERE YOU CAN FIND MORE INFORMATION
Star Gas Partners and Petro file annual, quarterly and special reports, proxy
statements (Petro only) and other information with the Commission. You may read
and copy any reports, statement or other information that Star Gas Partners and
Petro file with the Commission at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. These Commission filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the Commission at "http://www.sec.gov." Reports and other
information concerning Star Gas Partners should also be available for
inspection at the offices of the NYSE.
Star Gas Partners filed a registration statement on Form S-4 to register with
the Commission the common units and senior subordinated units to be issued
in the transaction. This proxy statement is a part of that registration
statement and constitutes a prospectus of Star Gas Partners. As allowed by
Commission rules, this proxy statement does not contain all the information you
can find in Star Gas Partners' registration statement or the exhibits to the
registration statement.
The Commission allows Star Gas Partners and Petro to "incorporate by
reference" information into this proxy statement, which means that they can
disclose important information to you by referring you to another document
filed separately with the Commission. The information incorporated by reference
is considered part of this proxy statement, except for any information
superseded by information contained directly in this proxy statement or in
later filed documents incorporated by reference in this proxy statement.
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This proxy statement includes information required by the Commission to be
disclosed under Rule 13e-3 of the Exchange Act which governs so-called "going
private" transactions by certain issuers or their affiliates. In accordance
with that rule, Petro filed with the Commission under the Exchange Act, a
Schedule 13E-3 with respect to the transaction. This proxy statement does
not contain all of the information in the Schedule 13E-3, parts of which are
omitted in accordance with the regulations of the Commission. The Schedule 13E-
3, and its amendments, including exhibits filed with it, will be available for
inspection and copying at the offices of the Commission as set forth above.
This proxy statement incorporates by reference the documents set forth below
that Star Gas Partners and Petro have previously filed with the Commission.
These documents contain important information about Star Gas Partners and Petro
and their finances.
<TABLE>
<S> <C>
The Partnership Commission Filings
(File No. 33-78490) Period/As of Date
---------------------------------- -----------------
Annual Report on Form 10-K Year ended September 30, 1998
Petro Commission Filings (File No. 1-9358) Period/As of Date
------------------------------------------ -----------------
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly Report on Form 10-Q Quarter ended September 30, 1998
Proxy Statement April 30, 1998
</TABLE>
You should rely only on the information contained or incorporated by
reference in this proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement. This proxy statement is dated . You should not assume
that the information contained in this joint proxy statement-prospectus is
accurate as of any date other than the date of the proxy statement. Neither the
mailing of this proxy statement to securityholders nor the issuance of units in
the transaction creates any implication to the contrary.
STATEMENT OF FORWARD-LOOKING DISCLOSURE
Some of the information in this proxy statement may contain forward-looking
statements. You can identify these statements by our use of "will," "believe,"
"expect," "anticipate," "estimate," "continue," "think" or other similar words.
These statements discuss future expectations, contain projections of results of
operations or of financial condition, or state other "forward-looking"
information. When considering these forward-looking statements, you should keep
in mind the risk factors and other cautionary statements in this proxy
statement. The risk factors noted under "Risk Factors" and other factors noted
throughout this proxy statement, including risks and uncertainties, could cause
our actual results to differ materially from those contained in any forward-
looking statement.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed by Star Gas Partners with the Commission (File
No. 33-98490) is incorporated by reference in this proxy statement:
(1) Star Gas Partners Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
In addition, all other reports and documents filed by Star Gas Partners under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the unitholders meeting and the special meeting shall be
deemed incorporated by reference into this proxy statement from the date of
filing of such reports and documents. Any statement contained herein or in a
document, all or a portion of which is incorporated or deemed to be
incorporated by reference in this proxy statement, shall be deemed to be
modified or superseded for purposes of this proxy statement to the extent that
a statement contained here (and, in case of any statement in an incorporated
document prior to the date of this proxy statement), or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement.
The following documents filed by Petro with the Commission are also
incorporated by reference in this proxy statement:
(1) Petro's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, which accompanies this proxy statement;
(2) Petro's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998, which
accompanies this proxy statement; and
(3) Petro's proxy statement dated April 30, 1998.
This proxy statement incorporates documents by reference that are not
included with this proxy statement. These documents (excluding exhibits to such
documents) are available without charge, upon oral or written request by any
person, including any beneficial owner, to whom this proxy statement is
delivered. For documents relating to Star Gas Partners, contact Star Gas
Corporation, 2187 Atlantic Street, Stamford, Connecticut 06902, Attention:
Richard F. Ambury, Vice President-Finance, telephone (203) 328-7313. For
documents relating to Petro, contact Petroleum Heat and Power Co., Inc., 2187
Atlantic Avenue, Stamford, Connecticut 06902, Attention: George Leibowitz,
Treasurer, telephone (203) 325-5470. To ensure timely delivery of the
documents, any request should be made by , 1999.
187
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information gives effect to the acquisition of Petro by Star Gas Partners, the
transaction, including the equity offering, the debt offering and the
application of the net proceeds from these offerings as described in "Summary--
Financial Information--Estimated Sources and Uses of Funds of the Equity
Offering and Debt Offering." The information presented is derived from, should
be read in conjunction with, and is qualified in its entirety by, reference to
the historical financial statements and related notes, appearing elsewhere and
incorporated by reference in this proxy statement.
The unaudited pro forma condensed consolidated balance sheet was prepared as
if the transaction had occurred on September 30, 1998. The unaudited pro forma
condensed consolidated statement of operations for the twelve months ended
September 30, 1998 was prepared as if the transaction had occurred on October
1, 1997.
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions described below, and therefore, the actual
adjustments may differ from the unaudited pro forma adjustments. However,
management believes that the assumptions provide a reasonable basis for
representing the significant effects of the transaction as contemplated and
that the unaudited pro forma adjustments give appropriate effect to those
assumptions and are properly applied in the unaudited pro forma condensed
consolidated financial information. The unaudited pro forma condensed
consolidated balance sheet and statement of operations are not necessarily
indicative of the financial position or results of operations of Star Gas
Partners if the transaction had actually occurred on the dates indicated above.
Likewise, the unaudited pro forma condensed consolidated financial information
is not necessarily indicative of future financial combined position or future
results of combined operations of Star Gas Partners.
188
<PAGE>
Star Gas Partners, L.P. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Star Gas
Star Gas Partners, L.P.
Partners Pro Forma Pro Forma The Adjusted
L.P. Petro Adjustments Combined Offerings Pro Forma
-------- -------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................. $ 1,115 $ 13,767 $ 14,882 $ 87,915 (g) $ 14,540
-------- -------- --------
159,900 (h)
(248,157)(o)
Restricted cash....... 4,900 4,900 4,900
-------- -------- --------
Accounts receivable... 5,279 38,163 43,442 43,442
Inventories........... 10,608 13,997 24,605 24,605
Prepaid expenses and
other current
assets............... 945 11,885 12,830 12,830
-------- -------- -------- -------- --------
Total current
assets.............. 17,947 82,712 100,659 (342) 100,317
-------- -------- -------- -------- --------
Cash collateral
account.............. 6,900 6,900 6,900
Property and
equipment, net....... 110,262 28,799 $ 11,310 (f) 150,371 150,371
Intangible and other
assets, net.......... 51,398 80,267 273,283 (f) 404,948 2,085 (g) 407,033
-------- -------- -------- -------- -------- --------
Total assets......... $179,607 $198,678 $284,593 $662,878 $ 1,743 $664,621
======== ======== ======== ======== ======== ========
LIABILITIES AND
PARTNERS' CAPITAL
Current liabilities:
Current debt and
preferred stock...... $ 692 $ 12,188 $ 12,880 $ (9,797)(o) $ 3,083
Bank credit facility
borrowings........... 4,770 -- 4,770 4,770
Accounts payable...... 3,097 6,320 9,417 9,417
Unearned service
contract revenue..... 13,599 13,599 13,599
Accrued expenses and
income taxes......... 2,830 29,281 $ 4,600 (d) 44,007 (7,296)(o) 36,711
7,296 (e)
Accrued interest and
dividends............ 485 -- 583 (a) 1,068 1,068
Customer credit
balances............. 6,038 28,803 34,841 34,841
-------- -------- -------- -------- -------- --------
Total current
liabilities......... 17,912 90,191 12,479 120,582 (17,093) 103,489
-------- -------- -------- -------- -------- --------
Long-term debt.......... 104,308 278,864 2,844 (b) 386,016 90,000 (g) 272,552
(203,464)(o)
Deferred income
taxes................ 46,000 (d) 46,000 46,000
Other long-term
liabilities.......... 40 10,686 (3,500)(d) 7,226 7,226
Redeemable and
exchangeable
preferred stock...... 28,555 (955)(b) 27,600 (27,600)(o)
Partners' capital
Common unitholders.... 58,686 1,953 (c) 60,639 159,900 (h) 220,539
Subordinated
unitholders.......... (1,446) 46,581 (f) 13,555 13,555
(31,580)(f)
General partner....... 107 4,329 (f) 1,260 1,260
(3,176)(f)
Petro's stockholders'
deficiency........... (209,618) (583)(a)
(1,889)(b)
(1,953)(c)
(47,100)(d)
(7,296)(e)
268,439 (f)
-------- -------- -------- -------- -------- --------
Total partners'
capital.............. 57,347 (209,618) 227,725 75,454 159,900 235,354
-------- -------- -------- -------- -------- --------
Total liabilities and
partners' capital.... $179,607 $198,678 $284,593 $662,878 $ 1,743 $664,621
======== ======== ======== ======== ======== ========
</TABLE>
189
<PAGE>
Star Gas Partners, L.P. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations
(unaudited)
Twelve Months Ended September 30, 1998
(in thousands, except per Unit data)
<TABLE>
<CAPTION>
Star Gas Combined
Partners, Propane Propane Pro Forma Pro Forma The
L.P. Acquisitions(i) Operations Petro(j) Adjustments Combined Offerings
--------- --------------- ---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $111,685 $4,386 $116,071 $452,765 $(2,681)(k) $566,155
Costs and expenses:
Cost of sales......... 49,498 1,972 51,470 299,987 (1,985)(k) 349,472
Operating expenses.... 43,281 1,090 44,371 117,849 (669)(k) 161,551
Restructuring
charges.............. 2,085 2,085
Transaction expenses.. 1,029 1,029
Corporate identity
expenses............. 1,100 1,100
Provision for
supplemental benefits 409 409
Depreciation and
amortization......... 11,462 548 12,010 27,514 (87)(k) 36,765
(2,672)(l)
Net gain (loss) on
sales of assets...... (271) (271) 11,507 (11,284)(k) (48) --
-------- ------ -------- -------- ------- -------- -------
Operating income 7,173 776 7,949 14,299 (8,552) 13,696
Interest (income) expense, net.. 7,927 427 8,354 30,803 39,157 $15,488 (p)
Amortization of debt
issuance costs......... 176 -- 176 1,432 -- 1,608 (1,225)(n)
-------- ------ -------- -------- ------- -------- -------
Income (loss) before
income taxes........... (930) 349 (581) (17,936) (8,552) (27,069) 16,713
-------- ------ -------- -------- ------- -------- -------
Income tax expense...... 25 25 475 500
--------
Income before equity
interest in Star Gas
Corporation............ (18,411)
Share of income (loss)
of Star Gas
Corporation............ (317) 317 (m)
-------- ------ -------- -------- ------- -------- -------
Net income (loss)....... $ (955) $ 349 $ (606) $(18,728) $(8,235) $(27,569) $16,713
======== ====== ======== ======== ======= ======== =======
General partner's
interest in net income
(loss)................. $ (19)
========
Limited partners'
interest in net income
(loss)................. $ (936)
========
Basic and diluted net
income (loss) per
limited partner unit... $ (0.16)
========
Weighted average number
of limited partner
units outstanding...... 6,035 220 6,255 103 (c) 6,884 8,947 (h)
(2,396)(f)
430 (f)
2,492 (f)
<CAPTION>
Star Gas
Partners, L.P.
Adjusted
Pro Forma
---------------
<S> <C>
Sales................... $566,155
Costs and expenses:
Cost of sales......... 349,472
Operating expenses.... 161,551
Restructuring
charges.............. 2,085
Transaction expenses.. 1,029
Corporate identity
expenses............. 1,100
Provision for
supplemental benefits 409
Depreciation and
amortization......... 36,765
Net gain (loss) on
sales of assets...... (48)
---------------
Operating income 13,696
Interest (income) expense, net.. 23,669
Amortization of debt
issuance costs......... 383
---------------
Income (loss) before
income taxes........... (10,356)
---------------
Income tax expense...... 500
Income before equity
interest in Star Gas
Corporation............
Share of income (loss)
of Star Gas
Corporation............ --
---------------
Net income (loss)....... $(10,856)
===============
General partner's
interest in net income
(loss)................. $ (217)
===============
Limited partners'
interest in net income
(loss)................. $(10,639)
===============
Basic and diluted net
income (loss) per
limited partner unit... $ (0.67)(q)
===============
Weighted average number
of limited partner
units outstanding...... 15,831 (q)
</TABLE>
190
<PAGE>
Star Gas Partners, L.P. and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial Information
The following pro forma adjustments give effect to
(1)the offering of 809,000 common units by Star Gas Partners on
December 16, 1997,
(2)the acquisition of Petro,
(3)the debt offering and
(4)the equity offering,
as if each transaction had taken place on September 30, 1998, in the case of
the pro forma condensed consolidated balance sheet, or as of October 1, 1997,
in the case of the pro forma condensed consolidated statement of operations.
The pro forma adjustments are based upon currently available information,
certain estimates and assumptions described below and a preliminary
determination and allocation of the total purchase price for Petro and
therefore, the actual results may differ from the pro forma results. However,
management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as contemplated, and
that the pro forma adjustments give appropriate effect to those assumptions and
are properly applied in the pro forma financial information.
Transaction Related Adjustments
(a) Reflects the accrued dividends payable on Petro's 1989 preferred stock
and 12 7/8% preferred stock.
(b) Reflects the negotiated discount of approximately $1.0 million to redeem
Petro's 12 7/8% preferred stock and the negotiated premium of approximately
$2.8 million to refinance Petro's public debt.
(c) Reflects the issuance of 0.8 million shares of junior preferred stock of
Petro, which will be converted into 0.1 million Star Gas Partners common units
upon completion of the transaction at an assumed value of $19.00 per unit. The
junior preferred stock was issued to the holders of Petro's 9 3/8% subordinated
debentures, 10 1/8% subordinated notes, and 12% subordinated debentures, and 12
7/8% preferred stock as consideration for consenting to the early redemption of
those securities.
The Transaction (Merger and Exchange)
(d) Represents:
(1)the estimated amount of current federal and state taxes to be
incurred of $4.6 million,
(2) the estimated amount of deferred federal and state income taxes to
be recognized of $46.0 million, and
(3) the elimination of the tax liability associated with the Pearl Gas
conveyance of $3.5 million.
191
<PAGE>
(e) Reflects the estimated additional amount of $7.3 million to be recorded
by Petro for legal, professional and advisory fees incurred by Petro and Star
Gas Partners in the transaction.
(f) Represents the exchange of 26.5 million shares of Petro's Class A common
stock and Class C common stock valued at $50.9 million for 2.5 million Star Gas
Partners senior subordinated units valued at $40.8 million, 0.4 million Star
Gas Partners junior subordinated units valued at $5.8 million and 0.3 million
Star Gas Partners general partner units valued at $4.3 million. The 2.4 million
Star Gas Partners subordinated units outstanding prior to the transaction will
be contributed to Star Gas Partners by Petro. The value assigned to Petro's
Class A common stock is $45.8 million or $1.92 per share and the value assigned
to Petro's Class C common stock is $5.0 million or $1.92 per share. The method
used to determine the fair market value of Petro's Class A and Class C common
stock was based on an implied unit analysis. The method used to determine the
fair market value of Star Gas Partners' senior subordinated units, junior
subordinated units and general partner units was based on an implied unit
analysis. See page 69 for a description of the implied unit analysis method.
192
<PAGE>
The table below summarizes the preliminary allocation by Star Gas Partners of
the excess of purchase price over book value related to the acquisition of
Petro. The allocation of the purchase price is based on the results of a
preliminary appraisal of property, plant and equipment, customer lists and the
September 30, 1998 recorded values for tangible assets and liabilities. The
anticipated closing date of the transaction is March 31, 1999. This purchase
price allocation will be updated for changes in current assets and liabilities
based on Petro's operating results from October 1, 1998 to the anticipated
closing date. From October 1, 1998 to the closing date, it is expected that
Petro will generate net income and positive cash flows and that working capital
will increase. As a result, the amount of goodwill to be recorded on the
closing date will decrease. Subject to Petro's operating results which could be
impacted by weather, among other factors, it is estimated that the increase in
working capital for Petro from October 1, 1998 to the closing date will range
between $30 million to $40 million.
The preliminary allocation is as follows (in thousands):
<TABLE>
<S> <C>
Consideration given for the exchange of Petro shares................ $ 50,910
Transaction expenses (1)............................................ 6,954
--------
Total consideration............................................. 57,864
--------
Fair market value of Petro's asset and liabilities as of September
30, 1998:
Current assets.................................................... (82,712)
Cash collateral account........................................... (6,900)
Property, plant and equipment (2)................................. (40,109)
Value of Petro's investment in Star Gas Partners.................. (34,756)
Current liabilities............................................... 90,533
Accrued income taxes.............................................. 4,600
Accrued preferred dividends....................................... 583
Long-term debt.................................................... 281,708
Deferred income taxes............................................. 46,000
Other liabilities................................................. 7,186
Preferred stock................................................... 27,600
Junior preferred stock............................................ 1,953
--------
Subtotal........................................................ 295,686
--------
Total value assigned to intangibles and other assets................ 353,550
Carrying amount of intangibles and other assets..................... (80,267)
--------
Allocation of excess purchase price to intangibles.................. $273,283
========
Consisting of:
Customer lists.................................................... $ 95,000
Goodwill.......................................................... 257,554
Other assets...................................................... 996
--------
Total intangibles and other assets.............................. $353,550
========
</TABLE>
- --------
(1)Transaction expenses include legal, accounting, investment advisory and
asset appraisal costs.
(2)Includes fair market value adjustment of $11.3 million.
The fair market value for property plant and equipment, excluding real estate,
was established using the cost approach method. The market approach was used in
valuing the real estate. The value assigned to customer lists was derived using
a discounted cash flow analysis. The cash flows attributable to the customer
lists were discounted back at an equity risk-adjusted cost of capital to the
net present value, and any excess was attributable to goodwill.
193
<PAGE>
The Debt Offering and the Equity Offering
(g) Reflects the estimated net proceeds to Petro of $87.9 million from the
$90.0 million debt offering, net of discounts and commissions (estimated to be
$1.1 million) and offering expenses (estimated to be $1.0 million). These costs
are being amortized over the term of the related debt which is assumed to be 10
years.
(h) Reflects the estimated net proceeds to Star Gas Partners of $159.9
million from the issuance and sale of 8.9 million common units in the equity
offering at an assumed offering price of $19.00 per common unit, net of
underwriting discounts and commissions (estimated to be $8.5 million) and
offering expenses (estimated to be $1.6 million).
The Propane Acquisitions
(i) Represents the results of propane distributors acquired by Star Gas
Partners in fiscal 1998 from October 1, 1997 to their dates of acquisition.
Results of these distributors from the dates of acquisition to September 30,
1998 are included in Star Gas Partners' twelve months ended September 30, 1998
results adjusted for:
(1) cost savings of $0.3 million, primarily executive compensation and
legal expenses relating to selling shareholders;
(2) additional depreciation and amortization of $0.5 million; and
(3) additional interest expense of $0.4 million.
The Transaction (Acquisition of Petro)
(j) Represents the results of operations of Petro for the twelve months ended
September 30, 1998. Estimated expenses of $8.3 million to be incurred by Petro
as a direct result of its acquisition by Star Gas Partners will be included in
Petro's actual statement of operations. For the twelve months ended September
30, 1998, Petro has recorded $1.0 million of these expenses.
(k) Adjustment to reflect the disposition of Petro's Hartford, Connecticut
operations in November 1997. Petro received cash proceeds of $15.6 million and
recorded a gain of $11.3 million. The carrying value of these assets at the
time of sale was $4.3 million.
(l) Adjustment to depreciation and amortization expense attributable to the
acquisition of Petro.
194
<PAGE>
Star Gas Partners believes that the amortization periods assigned to the
assets below are appropriate. However, if the final amortization periods
assigned to the tangible and intangible assets were of shorter duration, the
amount of depreciation and amortization would increase and reduce net income.
The following table summarizes the effect on depreciation and amortization of
the acquisition of Petro.
<TABLE>
<CAPTION>
Net Book Value Amount per
Petro's Financials Amount per Appraisal Difference
----------------------------------- ------------------------------------ ------------
Property and equipment,
net Asset Life Depreciation Asset Life Depreciation Depreciation
- ----------------------- ------- -------------- ------------ -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Land.................... $ 2,092 $ -- $ 3,300 $ -- $ --
Buildings............... 4,920 20-45 years 419 4,300 30 years 143 (276)
Fleet................... 6,342 5 to 7 years 2,866 12,800 6 years 2,135 (731)
Leasehold............... 4,353 term of leases 562 5,900 term of leases 457 (105)
Computer, furniture and
fixtures............... 7,593 5 to 7 years 2,491 9,700 5 to 7 years 1,661 (830)
Service & other
equipment.............. 3,499 5 to 13 years 692 4,109 5 to 13 years 557 (135)
------- ------- -------- ------- -------
Total property and
equipment.............. $28,799 $ 7,030 $ 40,109 $ 4,953 $(2,077)
======= ======= ======== ======= =======
<CAPTION>
Intangible and other
assets, net Asset Life Amortization Asset Life Amortization Amortization
- -------------------- ------- -------------- ------------ -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Customer list........... $56,298 6.5 years $17,364 $ 95,000 10 years $ 9,500 $(7,864)
Goodwill................ 10,292 25 years 1,129 257,554 25 years 10,302 9,173
Covenants not to
compete................ 4,041 5 to 7 years 1,904 -- -- (1,904)
Other assets............ 996 -- 996 -- --
------- ------- -------- ------- -------
Total intangible and
other assets........... $71,627 $20,397 $353,550 $19,802 $ (595)
======= ======= ======== ------- -------
Totals.................. $27,427 $24,755 $(2,672)
======= ======= =======
</TABLE>
Petro's property, plant and equipment is being depreciated using a historical
cost which is approximately $80 million. The fair market value of these assets
is $40.1 million. When depreciation expense is calculated based on the fair
market value, this expense is $2.1 million lower than historical depreciation.
Pro forma depreciation is less than historical depreciation due to decline in
the asset base being depreciated and an extension of the useful lives of those
assets. The remaining lives assigned to property, plant and equipment were
determined by an independent appraisal firm. All property, plant and equipment
is depreciated using the straight-line method.
Pro forma customer list amortization is less than historical amortization due
to a longer life and a lower amortization asset. The original cost used to
amortize historical customer list was approximately $120 million. The longer
life represents Petro's improved retention rate as well as the retention of
customers obtained through internal marketing, which have a higher retention
rate than for customers acquired through acquisition. Petro's previous
acquisitions represented the acquisition of customers. The acquisition of Petro
by Star Gas Partners is an acquisition of an on-going business. The appraisal
assigned a greater allocation to goodwill than what was previously allocated by
Petro in their purchase of 188 relatively small fuel oil dealers. This resulted
in approximately $9.2 million of additional amortization, largely offsetting
the $7.9 million of less customer list amortization.
195
<PAGE>
Restrictive covenants were not assigned a value under the pro forma intangibles
due to the minimal amount of the asset value expected at closing. Intangibles
are amortized on a straight-line basis.
(m) Reflects the elimination of Petro's equity interest in Star Gas Partners.
The Offerings
(n) Net adjustment to amortization of debt issuance costs of $1.2 million
attributable to the debt offering and the acquisition of Petro. Amortization of
debt issuance costs is decreased by $1.4 million relating to the repayment of
Petro debt and is increased by $0.2 million relating to the 7.5% notes.
(o) Reflects the use of the net proceeds from the equity offering, the debt
offering and $0.3 million of Petro's cash to repay $84.1 million of Petro's 12
1/4% Senior Subordinated Debentures due 2005 including $2.8 million of
premiums, to repay $50.0 million of Petro's 10 1/8% Senior Subordinated Notes
due 2003, to repay $75.0 million of Petro's 9 3/8% Senior Subordinated
Debentures due 2006, to retire $27.6 million of Petro's 12 7/8% Exchangeable
Preferred Stock, to retire $4.1 million of Petro's 14.33% Exchangeable
Preferred Stock and to pay $7.3 million of transaction expenses.
(p) Reflects the net reduction to interest expense of $15.5 million for the
twelve months ended September 30, 1998. This amount reflects $6.8 million of
additional interest expense annually on the $90.0 million in principal amount
of the senior secured notes at an assumed interest rate of 7.5%. This amount
also reflects an annual reduction in interest expense of $22.0 million due to
the repayment of $206.3 million of Petro public debt with the proceeds of the
equity offering and the debt offering.
The following table summarizes the effect on interest expense of the
transaction:
<TABLE>
<CAPTION>
Interest Interest
Amount Rate Expense
------- -------- --------
<S> <C> <C> <C>
Debt Repaid
Petro 12 1/4% Senior Subordinated Debentures(1).... $81,250 12.25% $ 9,953
Petro 10 1/8% Senior Subordinated Notes............ 50,000 10.125% 5,063
Petro 9 3/8% Senior Subordinated Debentures........ 75,000 9.375% 7,031
Lower letter of credit fees on Acquisition Notes... 191
-------
Total Reductions to Interest Expense............. $22,238
=======
<CAPTION>
Interest Interest
Amount Rate Expense
------- -------- --------
<S> <C> <C> <C>
New Debt Issued
Petro 7.5% Notes................................... $90,000 7.5% $(6,750)
-------
Net Reduction to Interest Expense.................. $15,488
=======
</TABLE>
- --------
(1) Excludes prepayment premium of $2.8 million.
196
<PAGE>
(q) The amended and restated partnership agreement provides that for each
non-overlapping four quarter period that occurs after the first anniversary of
the transaction, but before the fifth anniversary of the transaction, in which
the dollar amount of Petro Adjusted Operating Surplus per Petro Unit equals or
exceeds $2.90, Star Gas Partners will issue 303,000 senior subordinated units,
pro rata, or 303,000 Class B common units, pro rata, if such issuance occurs
after the end of the subordination period. These additional senior subordinated
units will be issued to the current holders of the senior subordinated units,
junior subordinated units and the general partner units. Star Gas Partners may
not issue more than an aggregate of 909,000 senior subordinated units or Class
B common units under this provision. The issuance of these senior subordinated
units will not generate any additional proceeds to Star Gas Partners. When
these units are issued, an additional amount of goodwill will be recorded.
Assuming 303,000 senior subordinated units are issued, the amount of goodwill
to be recorded will be $4.9 million. As a result, annual amortization expense
would increase by $0.2 million and would decrease net income per limited
partner unit by $0.01 per unit. If these senior subordinated units are issued
and they are converted into Class B common units, the Class A common units
would be diluted in terms of available cash to be used for payment of the
quarterly distributions.
197
<PAGE>
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,
198
<PAGE>
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.
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
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(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) 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) $20,071,225 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
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(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
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
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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.
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APPENDIX A
No transfer of the Units evidenced hereby will be registered on the books of
the Partnership unless the Certificate evidencing the Units to be transferred
is surrendered for registration or transfer and an Application for Transfer of
Units has been executed by a transferee either (a) on the form set forth below
or (b) on a separate application that the Partnership will furnish on request
without charge. A transferor of the Units shall have no duty to the transferee
with respect to execution of the transfer application in order for such
transferee to obtain registration of the transfer of the Units.
APPLICATION FOR TRANSFER OF UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner
(evidenced by a credit to the account of the undersigned at The Depository
Trust Company in the name of its nominee, Cede & Co.) and agrees to comply with
and be bound by, and hereby executes, the Agreement of Limited Partnership of
Star Gas Partners, L.P. (the "Partnership"), as amended, supplemented or
restated to the date hereof (the "Partnership Agreement"), (b) represents and
warrants that the Assignee has all right, power and authority and, if an
individual, the capacity necessary to enter into the Partnership Agreement, (c)
appoints the General Partner and, if a Liquidator shall be appointed, the
Liquidator of the Partnership as the Assignee's attorney-in fact to execute,
swear to, acknowledge and file any document, including, without limitation, the
Partnership Agreement and any amendment thereto and the Certificate of Limited
Partnership of the Partnership and any amendment thereto, necessary or
appropriate for the Assignee's admission as a Substituted Limited Partner and
as a party to the Partnership Agreement, (d) gives the powers of attorney
provided for in the Partnership Agreement and (e) makes the waivers and gives
the consents and approvals contained in the Partnership Agreement. Capitalized
terms not defined herein have the meanings assigned to such terms in the
Partnership Agreement.
Date: ______________________________________
- --------------------------------------------
Signature of Assignee
- --------------------------------------------
Social Security or other identifying number of Assignee
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
App-1
<PAGE>
Name and Address of Assignee
- -------------------------------------
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual
[_] Trust
[_] Partnership
[_] Other (specify) _______________________________________________
[_] Corporation
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Foreign Corporation
[_] Non-resident Alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income
taxation.
2. My U.S. taxpayer identification number (Social Security Number)
is _____________________________________________________________________
3. My home address is ________________________________________________
B. Partnership, Corporation or Other Interestholder
1. (Name of Interestholder) is not a foreign corporation,
foreign partnership, foreign trust or foreign estate (as those terms
are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is _______
3. The interestholder's office address and place of incorporation (if
applicable) is _________________________________________________________
------------------------------------------------------------------------
App-2
<PAGE>
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
(Name of Interestholder)
-------------------------
Signature and Date -------------------------
Title (if applicable)-------------------------
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Units shall
be made to the best of the Assignee's knowledge.
App-3
<PAGE>
Annex A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM OF AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PETROLEUM HEAT AND POWER CO., INC.
STAR GAS PARTNERS L.P.
PETRO/MERGECO, INC.
AND
STAR GAS PROPANE, L.P.
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<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I.
CERTAIN DEFINITIONS
<TABLE>
<C> <S> <C>
1.1. Certain Definitions................................................. 1
ARTICLE II.
THE MERGER; EFFECTS OF THE MERGER
2.1. The Merger.......................................................... 11
2.2. Effective Date And Closing.......................................... 12
ARTICLE III.
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.1. Merger Consideration................................................ 12
3.2. Rights As Stockholders; Stock Transfers............................. 13
3.3. Fractional Shares................................................... 13
3.4. Exchange Procedures................................................. 14
3.5. Anti-Dilution Provisions............................................ 16
3.6. Shares of Dissenting Common Holders................................. 16
3.7. Options............................................................. 16
ARTICLE IV.
ACTIONS PENDING MERGER
4.1. Ordinary Course..................................................... 17
4.2. Capital Stock....................................................... 17
4.3. Dividends, Distributions............................................ 17
4.4. Compensation; Employment Agreements................................. 18
4.5. Benefit Plans....................................................... 18
4.6. Acquisitions And Dispositions....................................... 18
4.7. Amendments.......................................................... 19
4.8. Accounting Methods.................................................. 19
4.9. Insurance........................................................... 19
4.10. Notification........................................................ 19
4.11. Taxes............................................................... 19
4.12. Debt, Capital Expenditures and the Like............................. 19
4.13. No Dissolution...................................................... 19
4.14. Adverse Actions..................................................... 20
4.15. Agreements.......................................................... 20
ARTICLE V.
REPRESENTATIONS AND WARRANT
5.1. Disclosure Schedule................................................. 20
5.2. Standard............................................................ 20
5.3. Representations And Warranties...................................... 20
ARTICLE VI.
COVENANTS
6.1. Best Efforts........................................................ 31
6.2. Equityholder Approvals.............................................. 31
6.3. Registration Statements............................................. 32
6.4. Modification of Petro Indentures and Preferred Stock................ 33
</TABLE>
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<TABLE>
<C> <S> <C>
6.5. Press Releases..................................................... 34
6.6. Access; Information................................................ 34
6.7. Acquisition Proposals.............................................. 35
6.8. Affiliate Arrangements............................................. 35
6.9. Takeover Laws...................................................... 36
6.10. No Rights Triggered................................................ 36
6.11. Senior Subordinated Units Listed................................... 36
6.12. Third Party Approvals.............................................. 36
6.13. Indemnification; Directors' and Officers' Insurance................ 37
6.14. Benefit Plans...................................................... 39
6.15. Notification Of Certain Matters.................................... 40
6.16. New Director for Star Gas LLC...................................... 40
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1. Shareholder Vote................................................... 40
7.2. Governmental Approvals............................................. 40
7.3. No Injunction...................................................... 40
7.4. Representations, Warranties And Covenants Of Star Partners......... 41
7.5. Representations, Warranties And Covenants Of Petro................. 41
7.6. Effective Merger Registration Statement............................ 41
7.7. Opinion............................................................ 42
7.8. Opinion of Petro's Counsel......................................... 42
7.9. NYSE Listing....................................................... 43
7.10. Affiliate Arrangements............................................. 43
7.11. Fairness Opinion................................................... 43
7.12. Public Offerings................................................... 43
7.13. Refinancing Conditions............................................. 43
7.14. Dissenters' Rights................................................. 45
7.15. Covenant Not to Compete............................................ 45
7.16. Working Capital Loan............................................... 45
7.17. Debt Offering...................................................... 45
7.18. Restructuring Transactions......................................... 45
7.19. Special Committee.................................................. 45
7.20. Custody Agreement.................................................. 45
ARTICLE VIII.
TERMINATION
8.1. Termination........................................................ 45
8.2... Effect Of Termination And Abandonment.............................. 46
ARTICLE IX
MISCELLANEOUS
9.1. Survival........................................................... 47
9.2. Waiver; Amendment.................................................. 47
9.3. Counterparts....................................................... 47
9.4. Governing Law...................................................... 47
9.5. Expenses........................................................... 47
9.6. Confidentiality.................................................... 47
9.7. Notices............................................................ 47
9.8. Entire Understanding; No Third Party Beneficiaries................. 48
9.9. Headings........................................................... 49
</TABLE>
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EXHIBITS
<TABLE>
<C> <S>
Exhibit A Amended and Restated Partnership Agreement
Exhibit B Amended and Restated Operating Partnership Agreement
Exhibit C Petro Conveyance Agreement
Exhibit D Star LLC Conveyance Agreement
Exhibit E Covenant Not To Compete of Irik P. Sevin
</TABLE>
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DISCLOSURE SCHEDULES
<TABLE>
<C> <C> <S>
(S) 4.2 (Petro only) Capital stock; issuance of additional shares
(S) 4.4 (Petro only) Compensation; Employment Agreements
(S) 4.6 (Petro only) Acquisition and Dispositions
(S) 4.12 (Petro only) 1998 Capital Budget
Shares; Shares/Units reserved for issuance;
(S) 5.3 (b) stock options
(S) 5.3 (c) Subsidiaries
(S) 5.3 (f) No defaults
(S) 5.3 (h) Litigation
Compliance with laws (exception for no
(S) 5.3 (i) Material Adverse Effect)
(S) 5.3 (l) (i) Compensation and Benefit Plans
Disclosures concerning pension plans, multi-
(S) 5.3 (l) (iv) employer plans
Excess of benefit liabilities over current
(S) 5.3 (l) (vi) value of assets
(S) 5.3 (l) (viii) Golden parachutes, etc.
(S) 5.3 (m) Collective bargaining agreement
(S) 5.3 (p) Regulatory approval
(S) 5.3 (t) Intellectual property
</TABLE>
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of February 3,
1999 (this "Agreement"), by and among PETROLEUM HEAT AND POWER CO., INC., a
Minnesota corporation ("Petro"), STAR GAS PARTNERS, L.P., a Delaware limited
partnership ("Star Partners"), STAR GAS PROPANE, L.P., a Delaware limited
partnership ("Star Propane"), and PETRO/MERGECO, INC., a Minnesota corporation
("Mergeco") and an indirect, wholly owned subsidiary of Star Partners.
WITNESSETH:
WHEREAS, the Board of Directors of Petro and the Board of Directors of Star
Gas Corporation, the general partner of Star Partners and Star Propane, upon
the recommendation of the Special Committee of the Board of Directors of the
General Partner, have determined that it is in the best interests of their
respective companies and their equity holders to consummate the business
combination provided for herein pursuant to which Mergeco will, subject to the
terms and conditions set forth herein, merge (the "Merger") with and into
Petro, with Petro surviving as an indirect, wholly owned subsidiary of Star
Partners;
WHEREAS, on or prior to the date hereof, the Tax Free Group (as defined
herein) and Star Partners have executed the Exchange Agreement (as defined
herein);
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
WHEREAS, in connection therewith, the parties hereto have entered into that
certain Merger Agreement (the "Original Merger Agreement") dated as of October
22, 1998;
WHEREAS, the parties hereto wish to amend and restate the Original Merger
Agreement in its entirety as set forth as follows;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the Original Merger Agreement is hereby amended and, as so amended, is
restated in its entirety as follows:
ARTICLE I.
CERTAIN DEFINITIONS
1.1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
"Affiliate" shall have the meaning set forth in Section 6.8(a).
"Agreement" shall have the meaning set forth in the introductory paragraph to
this Agreement.
"Amended and Restated Operating Partnership Agreement" shall mean the Amended
and Restated Operating Partnership Agreement substantially in the form attached
hereto as Exhibit B.
"Amended and Restated Partnership Agreement" shall mean the Amended and
Restated Partnership Agreement substantially in the form attached hereto as
Exhibit A.
"Articles of Merger" shall have the meaning set forth in Section 2.1(b).
"Certificate of Merger" shall have the meaning set forth in Section 2.1(b).
"Certificates" shall have the meaning set forth in Section 3.4(b).
A-1
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"Closing" shall have the meaning set forth in Section 2.2.
"Closing Date" shall have the meaning set forth in Section 2.2.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Units" shall mean the common units representing limited partner
interests of Star Partners having the rights and obligations specified with
respect to Common Units in the Amended and Restated Partnership Agreement.
"Compensation and Benefit Plans" shall have the meaning set forth in Section
5.3(1).
"Cost of Capital" shall mean the sum of (a) the number of Common Units and
Senior Subordinated Units issued in the Equity Offering (excluding any Common
Units or Senior Subordinated Units issued pursuant to the exercise of an over-
allotment option except any over-allotment securities sold on the closing date
of the Equity Offering the proceeds of which are applied to redeem any
securities described in Section 6.4 or to pay those costs described in Section
7.13(d)) multiplied by $2.30 and (b) the principal amount of debt issued in the
Debt Offering multiplied by the interest rate on such debt.
Notwithstanding the foregoing, if it appears that the Cost of Capital on
the securities necessary to be issued in the Debt Offering and Equity
Offering to redeem the 12 7/8% Series C Exchangeable Preferred Stock, the
1989 Preferred Stock and the Public Debt ("Relevant Securities") and to pay
the costs described in Section 7.13(d) not to exceed $19,139,000 would
exceed $27.5 million on an annual basis ("Excess Cost"), then the following
will apply:
(i) If the holders of the Relevant Securities agree to accept $2 million
less than the maximum redemption and repurchase amounts indicated in
Sections 6.4(b), (c) and (d) and if a reduction in the size of the Equity
Offering to reflect the lower proceeds required would not be sufficient to
eliminate any Excess Cost, then for purposes of determining Cost of
Capital, the number of Common Units deemed issued in the Equity Offering
shall be reduced by an amount necessary to reduce the Cost of Capital to
$27.5 million on an annual basis, subject to a maximum reduction pursuant
to this clause of 105,263 Common Units.
(ii) If, after giving effect to subparagraph (i), the Cost of Capital on
the securities necessary to be issued in the Debt Offering and Equity
Offering to effect the redemption and repurchase of securities described in
Section 6.4 and to pay the costs described in Section 7.13(d) not to exceed
$19,139,000 continues to exceed $27.5 million on an annual basis and if the
holders of the Relevant Securities agree to accept $3 million less than the
maximum redemption and repurchase amount indicated in Sections 6.4(b), (c)
and (d), and if a reduction in the size of the Equity Offering to reflect
the lower proceeds required does not eliminate any remaining Excess Cost,
then for purposes of determining Cost of Capital, the number of Common
Units deemed issued in the Equity Offering shall be further reduced by an
amount necessary to reduce the Cost of Capital to $27.5 million on an
annual basis, subject to a maximum reduction pursuant to this clause of an
additional 52,631 Common Units.
(iii) If, after giving effect to subparagraphs (i) and (ii), the Cost of
Capital on the securities necessary to be issued in the Debt Offering and
Equity Offering to effect the redemption and repurchase of securities
described in Section 6.4 and to pay the costs described in Section
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7.13(d) not to exceed $19,139,000 continues to exceed $27.5 million on an
annual basis, and if the holders of the Relevant Securities agree to accept
$4 million less than the maximum redemption and repurchase amount indicated
in Sections 6.4(b), (c) and (d), and if a reduction in the size of the
Equity Offering to reflect the lower proceeds required does not eliminate
any remaining Excess Cost, then for purposes of determining Cost of
Capital, the number of Common Units deemed issued in the Equity Offering
shall be further reduced by an amount necessary to reduce the Cost of
Capital to $27.5 million on an annual basis, subject to a maximum reduction
pursuant to this clause of an additional 52,631 Common Units.
(iv) If, after giving effect to subparagraphs (i), (ii) and (iii), the Cost
of Capital on the securities necessary to be issued in the Debt Offering
and Equity Offering to effect redemption and repurchase of securities
described in Section 6.4 and to pay the costs described in Section 7.13(d)
not to exceed $19,139,000 continues to exceed $27.5 million on an annual
basis, and if the holders of the Relevant Securities agree to accept at
least $5 million less than the maximum redemption and repurchase amount
indicated in Sections 6.4(b), (c) and (d), and if a reduction in the size
of the Equity Offering to reflect the lower proceeds required does not
eliminate any remaining Excess Cost, then for purposes of determining Cost
of Capital, the number of Common Units deemed issued in the Equity Offering
shall be further reduced by an amount necessary to reduce the Cost of
Capital to $27.5 million on an annual basis, subject to a maximum reduction
pursuant to this clause of an additional 52,631 Common Units.
"Custody Agreement" shall mean the Custody Agreement among the Petro
Insider's and American Stock Transfer and Trust substantially in the form
annexed to the Exchange Agreement.
"Dain Rauscher Wessels" shall mean Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated.
"Debt Offering" shall mean a public or private offering by a wholly owned
subsidiary of Star Propane of nonconvertible debt securities with gross
proceeds of not more than $90 million with total underwriting discounts and
commissions or placement agent fees not to exceed 3% of the aggregate principal
amount offered to the public, the proceeds of which shall be used to refinance
a portion of the Public Debt.
"Debt Offering Memorandum" shall have the meaning set forth in Section
6.3(a).
"Debt Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Designated Percentage" shall mean a percentage of between 0% and 100%
recommended by the Chief Financial Officer of Petro and approved by the Special
Committee, not more than 10 business days and not less than two business days
before the Closing Date.
"DGCL" shall mean the Delaware General Corporation Law.
"Disclosure Schedule" shall have the meaning set forth in Section 5.1.
"Dissenting Common Holders" shall mean Petro shareholders who comply with all
provisions of the MBCA concerning their right to object to and dissent from the
Merger and demand "fair value" for their shares.
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<PAGE>
"Effective Time" shall have the meaning set forth in Section 2.1(b).
"Environmental Laws" shall mean all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the Clean Water Act,
the Federal Clean Air Act, and the Occupational Safety and Health Act, each as
amended, regulations promulgated thereunder, and state counterparts.
"Equity Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Equity Offering" shall mean a public offering by Star Partners of Common
Units or Senior Subordinated Units with gross proceeds of not more than $170
million, as determined by Petro (excluding any proceeds received from the
exercise of the underwriters' over-allotment option, which will not exceed 15%
of the number of Common Units or Senior Subordinated Units initially issued in
the public offering), with total underwriting discounts and commissions not to
exceed 5% of the aggregate price to the public.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall have the meaning set forth in Section 5.3(1)(iv).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" shall mean American Stock Transfer & Trust Company or such
other entity as may be selected by Star Partners subject to the reasonable
approval of Petro.
"Exchange Agreement" shall mean the Exchange Agreement among the Petro
Insiders and Star Partners dated as of October 17, 1998, as the same may be
amended from time to time by the written consent of all parties thereto.
"Exchange Fund" shall have the meaning set forth in Section 3.4(a).
"General Partner" shall mean Star Gas Corporation, a Delaware corporation,
and its successors and permitted assigns as general partner of Star Partners
and Star Propane.
"General Partner Units" shall mean the general partner units representing a
general partner interest in Star Partners having the rights and obligations
specified with respect to General Partner Units in the Amended and Restated
Partnership Agreement.
"HSRA" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder.
"Indemnified Party" shall have the meaning set forth in Section 6.13(a).
"Joint Proxy Statement" shall have the meaning set forth in Section 6.3(a).
"Junior Preferred Stock" shall mean Petro's 1998 Junior Convertible Preferred
Stock.
"Junior Subordinated Units" shall mean the junior subordinated units
representing limited partner interests of Star Partners having the rights and
obligations specified with respect to Junior Subordinated Units in the Amended
and Restated Partnership Agreement.
"Lien" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
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"MBCA" shall mean the Minnesota Business Corporation Act.
"Material Adverse Effect" shall mean, with respect to either Petro or Star
Partners, any effect that (i) is material and adverse to the financial
position, results of operations, business or prospects of Petro and its
Subsidiaries taken as a whole, or Star Partners and its Subsidiaries taken as a
whole, respectively, or (ii) would materially impair the ability of Petro or
Star Partners, respectively, to perform its obligations under this Agreement or
otherwise materially threaten or materially impede the consummation of the
Merger and the other transactions contemplated by this Agreement; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of (a) actions or omissions of Petro or Star Partners taken with the prior
written consent of Petro or the Special Committee, as applicable, in connection
with the transactions contemplated hereby (as long as the material facts known
to the requesting party concerning such actions or omissions were disclosed to
the consenting party at the time it gave its consent), (b) circumstances
affecting home heating oil companies or propane companies generally, and (c)
the effects of the Merger and compliance by either party with the provisions of
this Agreement on the business, financial condition or results of operations of
such party and its Subsidiaries, or the other party and its Subsidiaries, as
the case may be.
"Meeting" shall have the meaning set forth in Section 6.2.
"Merger" shall have the meaning set forth in the recitals to this Agreement
and in Section 2.1(a).
"Merger Consideration" shall have the meaning set forth in Sections 2.1(a)
and 3(1).
"Merger Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Multiemployer Plans" shall have the meaning set forth in Section
5.3(1)(iii).
"New Certificates" shall have the meaning set forth in Section 3.4(a).
"Newco" shall mean Petro Holdings Inc., a Minnesota corporation and a wholly
owned subsidiary of Parentco.
"Non-Compliance Event" shall have the meaning set forth in Section
5(3)(i)(i).
"Non-Compliance Notification" shall have the meaning set forth in Section
5(3)(i)(iii).
"NYSE" shall mean the New York Stock Exchange.
"Old Subordinated Units" shall mean the subordinated units representing
limited partner interests of Star Partners having the rights and obligations
specified with respect to Subordinated Units in the Partnership Agreement.
"Operating Partnership Agreement" shall mean the Agreement of Limited
Partnership of Star Propane, as in effect immediately prior to the Effective
Time.
"Operating Partnership Agreement Amendments" shall mean the amendments to the
Operating Partnership Agreement effected in the Amended and Restated Operating
Partnership Agreement.
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"Parentco" shall mean Star/Petro, Inc., a Minnesota corporation and a wholly
owned subsidiary of the Star Propane.
"Partnership Agreement" shall mean the Agreement of Limited Partnership of
Star Partners, as in effect immediately prior to the Effective Time.
"Partnership Agreement Amendments" shall mean the amendments to the
Partnership Agreement effected in the Amended and Restated Partnership
Agreement.
"Pension Plan" shall have the meaning set forth in Section 5.3(1)(iii).
"Permitting Violation" shall have the meaning set forth in Section
5(3)(i)(ii).
"Person" or "person" shall mean any individual, bank, corporation,
partnership, limited liability company, association, joint-stock company,
business trust or unincorporated organization.
"Petro Class A Common Stock" means the Class A Common Stock, par value $.10
per share of Petro.
"Petro Class B Common Stock" means the Class B common Stock, par value $.10
per share of Petro.
"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
per share of Petro.
"Petro Common Stock" shall mean shares of Petro Class A Common Stock and
Class C Common Stock without distinction as to class.
"Petro Conveyance Agreement" shall mean the Conveyance and Contribution
Agreement among Petro, Star Partners and Star Propane to be entered into as of
the Closing Date substantially in the form of Exhibit C.
"Petro Directors" shall mean the members of the Board of Directors of Petro.
"Petro's Disclosure Schedule" shall mean the Disclosure Schedule delivered by
Petro pursuant to Section 5.1.
"Petro Insiders" shall mean Irik P. Sevin, Audrey L. Sevin, Phillip Ean
Cohen, Thomas J. Edelman, Richard O'Connell, Brentwood Corp., Gabes S.A.,
Minneford Corp., Fernando Montero, M.M. Warburg & Co., Hanseatic Corp.,
Hanseatic Americas LDC, Barcel Corp., Hubertus Langen, Tortosa GmbH, Paul
Biddelman and United Capital Corp.
"Petro Meeting" shall have the meaning set forth in Section 6.2.
"Petro Preferred Stock" shall mean collectively the Junior Preferred Stock,
the Private Preferred Stock and the Public Preferred Stock.
"Petro Stock Option" shall have the meaning set forth in Section 3.7.
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"Petro Stock Option Plans" shall have the meaning set forth in Section 3.7.
"Plans" shall have the meaning set forth in Section 5(3)(l)(iii).
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule.
"Private Debt" means Petro's 11.85% Senior Notes due October 1, 2002, Petro's
12.17% Senior Notes due October 1, 2002 and Petro's 12.18% Senior Notes due
October 1, 2002.
"Private Preferred Stock" shall mean Petro's 1989 Preferred Stock due 1999.
"Public Debt" means Petro's 10 1/8% Subordinated Notes due 2003, Petro's 9
3/8% Subordinated Debentures due 2006 and Petro's 12 1/4% Subordinated
Debentures due 2005.
"Public Preferred Stock" means Petro's 12 7/8% Series B and Series C
Exchangeable Preferred Stock due 2009.
"Registration Statements" shall have the meaning set forth in Section 6.3.
"Regulatory Authorities" shall have the meaning set forth in Section
5.3(h)(ii).
"Restructuring Transactions" shall mean the following, collectively:
1. the sale of the Designated Percentage of certain assets (the
"Transferred Assets") by Petro or Subsidiaries of Petro to Star Propane in
exchange for a note (the "Bridge Note"), as contemplated by the Petro
Conveyance Agreement;
2. the sale by the General Partner (i) to Petro of its general partner
interests in Star Partners and Star Propane and 1,962,700 of its
subordinated limited partner interests and common limited partner interests
in Star Partners to Petro for a note in the principal amount of the fair
market value of such partnership interests and (ii) to Star Partners of
433,378 of its subordinated limited partner interests for a note in the
principal amount equal to the fair market value of such subordinated
interests;
3. the contribution by Petro of (i) all of its general partner interest
in Star Propane (other than a portion of such interest with a value of
approximately $1,000) to Star Partners in exchange for 75,085 newly issued
Senior Subordinated Units and (ii) all of its general partner interest in
Star Partners (other than a portion of such interest with a value of
approximately $1,000) to Star Partners in exchange for 75,085 newly issued
Senior Subordinated Units) as contemplated by the Petro Conveyance
Agreement;
4. the conversion (or exchange) of all of Petro's Old Subordinated Units
for 1,568,625 newly issued Senior Subordinated Units and 42,046 newly
issued Common Units;
5. the contribution by certain Petro Insiders of 2,256,471 shares of
Class A Common Stock and Class C Common Stock (the "Insider Stock") to a
newly formed Delaware limited liability company ("Star Gas LLC") in
exchange for all the member interests in Star Gas LLC as contemplated in
the Exchange Agreement, the formation certificate and operating agreement
to be subject in form and substance to the approval of the Special
Committee;
6. the contribution by Star Gas LLC of 1,615 of its Class A Common Stock
to Star Propane in exchange for a .01% general partner interest in Star
Propane as contemplated by the Star LLC Conveyance Agreement;
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7. the contribution by Star Gas LLC of 2,254,856 of its Class A and Class
C Common Stock to Star Partners to be represented by 323,851 General
Partner Units (as defined in the Amended and Restated Partnership
Agreement), subject to an adjustment as set forth below, in exchange for a
1.99% general partner interest in Star Partners as contemplated by the Star
LLC Conveyance Agreement;
8. the contribution by certain of the Petro Insiders of 9,577,712 shares
of their Class A and Class C Common Stock to Star Partners in exchange for
430,395 Junior Subordinated Units and 772,705 Senior Subordinated Units, as
contemplated in the Exchange Agreement;
9. the contribution by Star Partners of the Petro Common Stock owned by
it to Star Propane;
10. the contribution by Star Propane to Parentco of the Transferred
Assets, the stock of Petro and the stock of Stellar Propane Corp. in
exchange for all the capital stock of Parentco and the assumption by
Parentco of $85 million of Star Propane's 8.04% First Mortgage Notes and
$11 million of Star Propane's 7.17% First Mortgage Notes.
11. the contribution by Parentco of the Petro Common Stock and the
Transferred Assets owned by it to Newco free of any liability with respect
to the outstanding First Mortgage Notes of Star Partners; and
12. the contribution by Newco of the Petro Common Stock owned by it to
Mergeco.
The number of General Partner Units and the number of Junior Subordinated
Units and the number of shares of Petro Common Stock to be transferred for each
shall be changed, if necessary, so that the number of General Partners Units to
be outstanding following the Merger and the Equity Offering will be equal to 2%
of the total partnership units outstanding and the total number of General
Partner Units and Junior Subordinated Units will equal 753,477.
"Rights" shall mean, with respect to any person, securities or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or acquire, or any options, calls or commitments relating to,
equity securities of such person.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 5.3(g).
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Senior Subordinated Units" shall mean the senior subordinated units
representing limited partner interests of Star Partners having the rights and
obligations specified with respect to Senior Subordinated Units in the Amended
and Restated Partnership Agreement.
"Significant Subsidiaries" shall have the meaning ascribed to such term in
Section 1-01(w) of Regulation S-X under the Securities Act.
"Special Committee" means the special committee of the Board of Directors of
the General Partner consisting of William Nicoletti and Elizabeth Lanier.
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"Star Gas LLC" shall mean Star Gas LLC, a newly-created Delaware limited
liability company that will succeed Star Gas Corporation as the general partner
of the partnership.
"Star LLC Conveyance Agreement" shall mean the Conveyance and Contribution
Agreement among Star Gas LLC, Star Propane and Star Partners to be entered into
as of the Closing Date substantially in the form of Exhibit D.
"Star Partners" shall have the meaning set forth in the introductory
paragraph to this Agreement.
"Star Partners' Disclosure Schedule" shall mean the Disclosure Schedule
delivered by Star Partners pursuant to Section 5.1.
"Star Partners Meeting" shall have the meaning set forth in Section 6.2.
"Star Propane" shall have the meaning set forth in the introductory paragraph
to this Agreement.
"Star Propane Debt Conditions" shall mean the Holders of Star Propane's 8.04%
First Mortgage Notes due 2009, Star Propane's 7.17% First Mortgage Notes due
2010 and Star Propane's outstanding bank credit facilities shall have consented
to the execution, delivery and performance of this Agreement by Star Propane or
shall have entered into amendments permitting the execution, delivery and
performance of this Agreement by Star Propane without violation of the terms of
such indebtedness and without a requirement that such indebtedness be
repurchased (or an offer be made to purchase such indebtedness).
"Subsidiary" shall have the meaning ascribed to such term in Rule 1-02 of
Regulation S-X under the Securities Act.
"Surviving Corporation" shall have the meaning set forth in Section 2.1(a).
"Takeover Law" means any "fair price", "moratorium", "control share
acquisition" or any other anti-takeover statute or similar statute enacted
under state or federal law.
"Takeover Proposal" shall mean, with respect to Petro, any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving Petro or any of its Subsidiaries or any proposal or offer to acquire
in any manner a substantial equity interest in, or a substantial portion of the
assets of, Petro or any of its Subsidiaries other than the transactions
contemplated or permitted by this Agreement.
"Tax Returns" shall have the meaning set forth in Section 5.3(o).
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
including, without limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, goods and services, capital, transfer, franchise,
profits, license, withholding, payroll, employment, employer health, excise,
estimated, severance, stamp, occupation, property or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
"Treasury Shares" shall mean shares of Petro Common Stock owned by Petro at
the Effective Time.
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"Working Capital" when applied to Petro, shall mean Petro's current assets
minus current liabilities determined in accordance with generally accepted
accounting principles applied on a consistent basis provided that (i)
restricted cash shall be excluded from current assets to the extent such
restricted cash remains restricted immediately following the Effective Time and
relates to indebtedness due in more than one year, (ii) draws under Petro's
bank working capital facility shall be included in current liabilities, (iii)
the current maturities of all other Petro long-term indebtedness and preferred
stock shall be excluded from current liabilities, and (iv) expenses of the type
described in Section 7.13(d) shall be included as a current liability to the
extent not financed in the Debt Offering or the Equity Offering.
ARTICLE II.
THE MERGER; EFFECTS OF THE MERGER
2.1. The Merger.
(a) The Surviving Corporation. Subject to the terms and conditions of this
Agreement, at the Effective Time, Mergeco shall merge with and into Petro (the
"Merger"), the separate corporate existence of Mergeco shall cease and Petro
shall survive and continue to exist as a Minnesota corporation (Petro, as the
surviving corporation in the Merger, sometimes being referred to herein as the
"Surviving Corporation"). Star Partners, with the consent of the Special
Committee, may at any time change the method of effecting the Merger
(including, without limitation, the provisions of this Article II) if and to
the extent it deems such change to be desirable; provided, however, that no
such change shall (A) alter or change the amount or kind of consideration to be
issued to holders of Petro Common Stock or Petro Preferred Stock as provided
for in this Agreement (the "Merger Consideration"), (B) adversely affect the
tax treatment of Petro's stockholders as a result of receiving the Merger
Consideration or (C) materially impede or delay consummation of the
transactions contemplated by this Agreement.
(b) Effectiveness And Effects Of The Merger. Subject to the satisfaction or
waiver of the conditions set forth in Article VII in accordance with this
Agreement, the Merger shall become effective upon the later to occur of (i) the
filing in the office of the Secretary of State of Delaware of a properly
executed certificate of merger (the "Certificate of Merger") and (ii) the
filing with the Department of State of Minnesota of properly executed articles
of merger (the "Articles of Merger"), or such later date and time as may be set
forth in the Certificate of Merger and the Articles of Merger (the "Effective
Time"), in accordance with the DGCL and the MBCA. The Merger shall have the
effects prescribed in DGCL and the MBCA.
(c) Certificate Of Incorporation And By-Laws. The certificate of
incorporation and by-laws of Petro in effect immediately prior to the Effective
Time shall be the certificate of incorporation and bylaws of the Surviving
Corporation, until duly amended in accordance with applicable law.
(d) Directors of the Surviving Corporation. The directors of Petro who are
also employees of Petro immediately prior to the Effective time shall be the
directors of the Surviving Corporation as of the Effective Time.
(e) Officers of the Surviving Corporation. The officers of Petro immediately
prior to the Effective Time shall be the officers of the Surviving Corporation
as of the Effective Time.
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2.2. Effective Date And Closing. Subject to the satisfaction or waiver of the
conditions as set forth in Article VII in accordance with this Agreement, the
closing of the Merger and the other transactions contemplated hereby (the
"Closing") shall occur on (a) the third business day to occur after the day on
which the last of the conditions set forth in Article VII shall have been
satisfied or waived in accordance with the terms of this Agreement provided
that such date shall not be earlier than February 15, 1999 or (b) such other
date to which the parties may agree in writing. The date on which the Closing
occurs is referred to as the "Closing Date." The Closing of the transactions
contemplated by this Agreement shall take place at the offices of Phillips
Nizer Benjamin Krim & Ballon LLP, 666 Fifth Avenue, New York, New York 10103 at
10:00 a.m. New York City time on the Closing Date.
ARTICLE III.
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.1. Merger Consideration. Subject to the provisions of this Agreement, at
the Effective Time, by virtue of the Merger and without any action on the part
of any holder of capital stock of any party:
(a) Each share of the common stock, par value $.01 per share, of Mergeco
outstanding immediately prior to the Effective Time shall be converted into
and become one fully paid and nonassessable share of Common Stock, par
value $.10, of the Surviving Corporation.
(b) Each Treasury Share and each share of Petro Common Stock owned by
Mergeco shall cease to be outstanding and shall be canceled and retired
without payment of any consideration therefor, and no partnership interest
of Star Partners or other consideration shall be delivered in exchange
therefor.
(c) Each share of Petro Common Stock issued and outstanding immediately
prior to the Effective Time (other than Treasury Shares, shares held by
Mergeco, and shares of Dissenting Common Holders) shall be converted into
the right to receive .13064 fully paid and nonassessable Senior
Subordinated Units.
(d) Each share of Junior Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive .13064 fully paid and nonassessable Common Units.
(e) Each share of Public Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive $23 in cash plus accrued and unpaid dividends as of the
Effective Time, or such lesser amount as a holder may agree to in writing.
(f) Each share of Petro's Class B Common Stock, $.10 par value,
outstanding immediately prior to the Effective Time, shall be unchanged and
shall remain outstanding with the same relative rights, preferences and
privileges which it had immediately prior to the Effective Time.
3.2. Rights As Stockholders; Stock Transfers. At the Effective Time, holders
of Petro Common Stock, Junior Preferred Stock and Public Preferred Stock shall
cease to be, and shall have
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no rights, as stockholders of Petro, other than to receive (a) any dividend or
other distribution with respect to such Petro Common Stock, Junior Preferred
Stock or Public Preferred Stock with a record date occurring prior to the
Effective Time that may have been declared or made by Petro on such shares of
Petro Common Stock, Junior Preferred Stock or Public Preferred Stock in
accordance with the terms of this Agreement or prior to the date hereof and
which remain unpaid at the Effective Time and (b) the consideration provided
under this Article III. After the Effective Time, there shall be no transfers
on the stock transfer books of the shares of Petro Common Stock or Petro
Preferred Stock.
3.3. Fractional Shares. No certificates or scrip representing fractional
Common Units or Senior Subordinated Units shall be issued upon the surrender
for exchange of Certificates pursuant to this Article III, and, except as
provided in Section 3.2 and this Section 3.3, no dividend or other
distribution, stock split or interest shall relate to any such fractional
security, and such fractional interests shall not entitle the owner thereof to
vote or to any rights of a security holder of Star Partners. In lieu thereof,
each holder of shares of Petro Common Stock who would otherwise have been
entitled to a fraction of a Senior Subordinated Unit upon surrender of
Certificates for exchange pursuant to this Article III will be paid an amount
in cash (without interest) equal to the closing price of the Senior
Subordinated Units on the first day of trading thereof on the NYSE (as reported
in The Wall Street Journal or, if not reported therein, in another
authoritative source) multiplied by the fractional interest the holder would
otherwise be entitled to receive, and each holder of shares of Junior Preferred
Stock who would otherwise have been entitled to a fraction of a Common Unit
upon surrender of Certificates for exchange pursuant to this Article III will
be paid an amount in cash (without interest) equal to such fraction multiplied
by the average of the last sales prices of the Common Units on the New York
Stock Exchange Composite Transactions tape (as reported in The Wall Street
Journal or, if not reported therein, in another authoritative source) for the
five consecutive trading days ending immediately prior to the second trading
day prior to the Closing Date.
3.4. Exchange Procedures. (a) At or prior to the Effective Time, Star
Partners shall deposit, or shall cause to be deposited, with the Exchange
Agent, for the benefit of the holders of the Petro Common Stock and the Junior
Preferred Stock for exchange in accordance with this Article III (i)
certificates representing the Senior Subordinated Units and Common Units ("New
Certificates") issuable pursuant to Section 3.1 in exchange for outstanding
shares of Petro Common Stock and Junior Preferred Stock, (ii) the amount of
cash necessary to be distributed to the holders of Public Preferred Stock in
accordance with the foregoing sections of this Article III and (iii) an amount
of cash to be paid in lieu of fractional Senior Subordinated Units and Common
Units as provided herein (such cash and New Certificates, together with any
dividends or distributions with respect thereto (but without any interest
thereon), being hereinafter referred to as the "Exchange Fund").
(b) Promptly after the Effective Time, the Exchange Agent shall mail to each
holder of record of a certificate or certificates which, immediately prior to
the Effective Time, represented outstanding shares of Petro Common Stock and
Junior Preferred Stock (the "Certificates"), which holder's shares of Petro
Common Stock or Junior Preferred Stock were converted into the right to receive
Senior Subordinated Units or Common Units pursuant to Section 3.1 (i) a letter
of transmittal, which shall specify that delivery shall be effected and risk of
loss and title to the Certificates shall pass only
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upon delivery of the Certificates to the Exchange Agent, and shall be in such
form and have such other provisions as Star Partners may reasonably specify and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing Senior Subordinated Units and Common
Units. Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and any other required
documents, the holder of such Certificate shall be entitled to receive in
exchange therefor a New Certificate representing the number of whole Senior
Subordinated Units or Common Units that such holder has the right to receive
pursuant to this Article III, and cash in lieu of any fractional Senior
Subordinated Units or Common Units, as contemplated by Section 3.3, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Petro Common Stock or Junior Preferred Stock that is
not registered in the transfer records of Petro, a certificate representing the
proper number of Senior Subordinated Units or Common Units may be issued to a
transferee only on the condition that the Certificate formerly representing
such shares of Petro Common Stock or Junior Preferred Stock is presented to the
Exchange Agent, properly endorsed, and accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid or that no such taxes are applicable. The
Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to Senior Subordinated Units or Common Units held by it
from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect thereto for
the account of persons entitled thereto.
(c) If any Certificate shall have been lost, stolen, mislaid or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen, mislaid or destroyed, and if required by Star
Partners, the posting by such Person of a bond in such reasonable amount as
Star Partners may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen, mislaid or destroyed Certificate the
consideration deliverable in respect thereof as determined in accordance with
this Article III.
(d) Notwithstanding the foregoing, neither the Exchange Agent nor any party
hereto shall be liable to any former holder of Petro Common Stock or Junior
Preferred Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(e) No distributions with respect to the Common Units or Senior Subordinated
Units declared or made after the Effective Time with a record date occurring
after the Effective Time shall be paid to the holder of any unsurrendered old
Certificate, and no cash payment in lieu of fractional Senior Subordinated
Units or Common Units shall be paid to any such holder pursuant to Section 3.3
until the holder thereof shall surrender such Certificates in accordance with
this Article III. After the surrender of certificates in accordance with this
Article III, and subject to the effect of applicable laws, there shall be paid
to the holder of Senior Subordinated Units or Common Units issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
distributions with a record date after the Effective Time theretofore payable
with respect to such Senior Subordinated Units or Common Units and not paid,
less the amount of any withholding taxes which may be required thereon, and
(ii) at the appropriate payment date, the amount of distributions with a record
date after the Effective Time but prior to surrender and a payment date
subsequent to surrender
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payable with respect to such Senior Subordinated Units or Common Units, less
the amount of any withholding taxes which may be required thereon.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of Petro for twelve months after the Closing shall be paid to Star
Partners. Any stockholders of Petro who have not theretofore complied with this
Article III shall thereafter look only to Star Partners for payment of the
Common Units or Senior Subordinated Units, cash in lieu of any fractional
Common Units or Senior Subordinated Units and unpaid distributions on the
Common Units and the Senior Subordinated Units deliverable in respect of each
share of Petro Common Stock and Junior Preferred Stock such stockholder holds
as determined pursuant to this Agreement, in each case, without any interest
thereon.
3.5. Anti-Dilution Provisions. In the event of any subdivisions,
reclassifications, recapitalizations, splits, combinations or dividends in the
form of equity interests with respect to the Common Units, and the Petro Common
Stock (in each case, as permitted pursuant to Section 4.3) the number of Senior
Subordinated Units and Common Units to be issued in the Merger and the average
closing sales prices of the Common Units determined in accordance with Section
3.3 will be correspondingly adjusted.
3.6. Shares of Dissenting Common Holders. Any issued and outstanding shares
of Petro Common Stock held by Dissenting Common Holders shall not be converted
as described in Section 3.1(c) but shall from and after the Effective Time
represent only the right to receive such consideration as may be determined to
be due to such Dissenting Common Holder pursuant to the MBCA; provided,
however, that shares of Petro Common Stock outstanding immediately prior to the
Effective Time and held by a Dissenting Common Holder who shall, after the
Effective Time, withdraw his demand for fair value or lose his dissenters'
rights pursuant to the MBCA, shall be deemed to be converted, as of the
Effective Time, into the right to receive Senior Subordinated Units as
specified in Section 3.1(c), without interest.
3.7. Options. (a) At the Closing, all employee and director stock options to
purchase shares of Petro Common Stock (each, a "Petro Stock Option"), which are
then outstanding and unexercised, shall cease to represent a right to acquire
shares of Petro Stock. To the extent any such stock option is not vested at the
Effective Time and does not become vested by reason of the Merger, such stock
option shall be cancelled. To the extent that any stock option is vested as of
the Effective Time or becomes vested by reason of the Merger, such stock option
to the extent so vested shall be converted automatically into options to
purchase .11758 Senior Subordinated Units at a price equal to the original
exercise price divided by .13064 and Star Partners shall assume each such Petro
Stock Option subject to the terms of any of the stock option plans listed under
"Stock Option Plans" in Section 5.3 of Petro's Disclosure Schedule
(collectively, the "Petro Stock Option Plans"), and the agreements evidencing
grants thereunder, including but not limited to the accelerated vesting of such
options which shall occur in connection with and by virtue of the Merger as and
to the extent required by such plans and agreements.
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ARTICLE IV.
ACTIONS PENDING MERGER
From the date hereof until the Effective Time, except as expressly contemplated
by this Agreement, (a) without the prior written consent of the Special
Committee (which consent shall not be unreasonably withheld or delayed) Petro
will not, and will cause each of its Subsidiaries not to, and (b) without the
prior written consent of Petro (which consent shall not be unreasonably
withheld or delayed) Star Partners will not, and will cause each of its
Subsidiaries not to:
4.1. Ordinary Course. Conduct the business of it and its Subsidiaries other
than in the ordinary and usual course or, to the extent consistent therewith,
fail to use reasonable best efforts to preserve intact its business
organizations, goodwill and assets and maintain its rights, franchises and
existing relations with customers, suppliers, employees and business
associates, or take any action that would (a) adversely affect the ability of
any party to obtain any approvals required under the HSRA for the transactions
contemplated hereby or (b) adversely affect its ability to perform any of its
material obligations under this Agreement.
4.2. Capital Stock. In the case of Petro and its Subsidiaries, other than (a)
pursuant to stock options Previously Disclosed in its Disclosure Schedule, (b)
pursuant to the Petro dividend reinvestment program or (c) as otherwise set
forth on Section 4.2 of Petro's Disclosure Schedule, (i) issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of capital stock, any stock appreciation rights or any
Rights, (ii) enter into any agreement with respect to the foregoing or (iii)
permit any additional shares of capital stock to become subject to new grants
of employee stock options, stock appreciation rights or similar stock-based
employee rights.
4.3. Dividends, Distributions. (a) Make, declare or pay any dividend (other
than (i) in the case of Star Propane, distributions of Available Cash (as
defined in the Operating Partnership Agreement) to its partners, (ii) in the
case of Star Partners, regular quarterly cash distributions of Available Cash
on the Common Units, Subordinated Units and general partner interest of Star
Partners and (iii) in the case of Petro, regular quarterly dividends on the
Petro Preferred Stock), in each case in the ordinary course consistent with
past practice), on or in respect of, or declare or make any distribution on any
shares of its equity securities other than as Previously Disclosed, (b) split,
combine or reclassify any of its capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (c) repurchase, redeem or
otherwise acquire, or permit any of its Subsidiaries to purchase, redeem or
otherwise acquire any shares of its capital stock, except as required by the
terms of its securities outstanding on the date hereof or as contemplated by
any existing Compensation and Benefit Plan.
4.4. Compensation; Employment Agreements. In the case of Petro and its
Subsidiaries, except as set forth on Section 4.4 of Petro's Disclosure
Schedule, enter into or amend any written employment, severance or similar
agreements or arrangements with any of its directors, officers or employees, or
grant any salary or wage increase or increase any employee benefit (including
incentive or bonus payments), except for (a) normal individual increases in
compensation to employees (other than officers and directors) in the ordinary
course of business consistent with past practice or (b) other changes as are
provided for herein or as may be required by law or to
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satisfy contractual obligations existing as of the date hereof or (c)
additional grants of awards to newly hired employees consistent with past
practice.
4.5. Benefit Plans. In the case of Petro and its Subsidiaries, except as set
forth on Section 4.5 of the Petro Disclosure Schedule, enter into or amend
(except as may be required by applicable law, to satisfy contractual
obligations existing as of the date hereof or amendments which, either
individually or in the aggregate, would not reasonably be expected to result in
a material liability to Petro or its Subsidiaries) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors, officers or other employees, including,
without limitation, taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
4.6. Acquisitions And Dispositions. In the case of Petro and its
Subsidiaries, and except for the sale of the Transferred Assets to Star
Propane, sell, lease, dispose of or discontinue any portion of its assets,
business or properties, which is material to it and its Subsidiaries taken as a
whole, or acquire, by merger or otherwise, or lease (other than by way of
foreclosures or acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case in the
ordinary and usual course of business consistent with past practice) any assets
or all or any portion of, the business or property of any other entity which,
in either case, is material to it and its Subsidiaries taken as a whole, or
would be likely to have a Material Adverse Effect on the ability of the parties
to consummate the transactions contemplated by this Agreement or to delay
materially the Effective Time. In the case of Star Partners, Star Partners will
not, and will cause its Subsidiaries not to, make any acquisition or take any
other action which would have a Material Adverse Effect on its ability to
consummate the transactions contemplated by this Agreement.
4.7. Amendments. In the case of Petro, amend its Articles of Incorporation or
By-laws.
4.8. Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by law or
generally accepted accounting principles.
4.9. Insurance. Fail to use reasonable best efforts to maintain with
financially responsible insurance companies, insurance in such amounts and
against such risks and losses as has been customarily maintained by it in the
past.
4.10. Notification. Fail to promptly notify the other of any material change
in its condition (financial or otherwise) or business or any material
litigation or material governmental complaints, investigations or hearings or
the breach in any material respect of any of its representations or warranties
contained herein.
4.11. Taxes. (a) Make or rescind any material express or deemed election
relating to Taxes unless it is reasonably expected that such action will not
materially and adversely affect it, including elections for any and all joint
ventures, partnerships, limited liability companies, working interests or other
investments where it has the capacity to make such binding election, (b) settle
or compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, except
where such settlement or compromise will not materially and adversely
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affect it or (c) change in any material respect any of its methods of reporting
income, or deductions for federal income tax purposes from those employed in
the preparation of its federal income tax return for the most recent taxable
year for which a return has been filed, except as may be required by applicable
law or except for such changes that are reasonably expected not to materially
adversely affect it.
4.12. Debt, Capital Expenditures and the Like. In the case of Petro, except
as provided in Section 6.4, (a) incur any indebtedness for borrowed money
(except for working capital under existing credit facilities) or guarantee any
such indebtedness of others, (b) enter into any material lease (whether
operating or capital), (c) create any material mortgages, liens, security
interests or other encumbrances on the property of Petro or its Subsidiaries in
connection with any pre-existing indebtedness, new indebtedness or lease or (d)
make or commit to make aggregate capital expenditures in excess of $2.0 million
over Petro's fiscal 1998 capital expenditure budget identified in Section 4.12
of the Petro Disclosure Schedule and Previously Disclosed to Star Gas.
4.13. No Dissolution. Authorize, recommend, propose or announce an intention
to adopt a plan of complete or partial dissolution or liquidation.
4.14. Adverse Actions. Knowingly take any action that is intended or is
reasonably likely to result in (a) any of its representations and warranties
set forth in this Agreement being or becoming untrue in any material respect at
any time prior to the Closing, (b) any of the conditions to the Merger set
forth in Article VII not being satisfied or (c) a material violation of any
provision of this Agreement except, in each case, as may be required by
applicable law.
4.15. Agreements. Agree or commit to do anything prohibited by Sections 4.1
through 4.14.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
5.1. Disclosure Schedule. On or prior to the date hereof, Star Partners has
delivered to Petro and Petro has delivered to Star Partners a schedule
(respectively, its "Disclosure Schedule") setting forth, among other things,
items the disclosure of which is necessary or appropriate in relation to any or
all of its representations and warranties; provided, however, that (a) no such
item is required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence is not reasonably likely to result in
the related representation or warranty being deemed untrue or incorrect under
the standard established by Section 5.2, and (b) the mere inclusion of an item
in a Disclosure Schedule shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect.
5.2. Standard. No representation or warranty of Star Partners or Petro
contained in Section 5.3 (except Sections 5.3(b), 5.3(c)(i), 5.3(c)(ii), 5.3(d)
and 5.3(e)) shall be deemed untrue or incorrect, and no party hereto shall be
deemed to have breached a representation or warranty, as a consequence of the
existence of any fact, circumstance or event unless such fact, circumstance or
event, individually or taken together with all other facts, circumstances or
events inconsistent with any paragraph of Section 5.3, has had or is reasonably
expected to have a Material Adverse Effect.
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5.3. Representations and Warranties. Subject to Sections 5.1 and 5.2 and
except as Previously Disclosed, Petro hereby represents and warrants to Star
Partners, and Star Partners hereby represents and warrants to Petro, to the
extent applicable, in each case with respect to itself and its Subsidiaries, as
follows:
(a) Organization, Standing and Authority. Such party is a corporation, or in
the case of Star Partners and Star Propane, a limited partnership, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Such party (i) is duly qualified to do
business and is in good standing in the states of the United States where its
ownership or leasing of property or the conduct of its business requires it to
be so qualified and (ii) has in effect all federal, state, local, and foreign
governmental authorizations and permits necessary for it to own or lease its
properties and assets and to carry on its business as it is now conducted.
Such party (i) is duly qualified to do business and is in good standing in the
states of the United States where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and (ii) has in effect
all federal, state, local, and foreign governmental authorizations and permits
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted.
(b) Shares. (i) In the case of Petro, as of the date hereof, the authorized
capital stock of Petro consists solely of 81,909,722 shares of stock, $.10 par
value, of which, as of the date hereof, 23,964,962 shares of Class A Common
Stock, 11,228 shares of Class B Common Stock, 2,597,519 shares of Class C
Common Stock, 41,668 shares of Private Preferred Stock, no more than 797,000
shares of Junior Preferred Stock and 1,200,000 shares of Public Preferred Stock
are issued and outstanding. Such outstanding shares were duly authorized and
are validly issued and fully paid and non-assessable and are not subject to any
preemptive or similar rights (and were not issued in violation of any
preemptive or similar rights). The holder of the Petro Private Preferred Stock
has consented to the redemption thereof on or prior to the Closing Date at a
price equal to $4.167 million plus accrued and unpaid dividends.
(ii) In the case of Star Partners, as of the date hereof, there are
3,858,999 Common Units and 2,396,078 Old Subordinated Units issued and
outstanding, and all of such Common Units and Old Subordinated Units and
the limited partner interests represented thereby were duly authorized and
validly issued in accordance with the Partnership Agreement and are fully
paid (to the extent required under the Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Merger Registration Statement under the caption
"Description of the Partnership Agreement--Limited Liability"). As of the
date hereof, the General Partner owns a 1% general partner interest in Star
Partners, and such general partner interest was duly authorized and validly
issued in accordance with the Partnership Agreement. As of the date hereof,
Star Partners owns a 98.9899% limited partner interest in Star Propane, and
such limited partner interest was duly authorized and validly issued in
accordance with the Operating Partnership Agreement and is fully paid (to
the extent required under the Operating Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Merger Registration Statement under the caption
"Description of the Partnership Agreement--Limited Liability"). As of the
date hereof, the General Partner owns a 1.0101% general partner interest in
Star Propane, and such general
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partner interest was duly authorized and validly issued in accordance with
the Operating Partnership Agreement.
(iii) As of the date hereof, except as Previously Disclosed in Section
5.3(b) of a party's Disclosure Schedule, there are no shares of capital
stock (in the case of Petro) or interests (in the case of Star Partners),
of such party's equity securities authorized and reserved for issuance,
such party does not have any Rights issued or outstanding with respect to
its equity securities, and such party does not have any commitment to
authorize, issue or sell any such equity securities or Rights, except
pursuant to this Agreement. Since December 31, 1997, Petro has not issued
any shares of its capital stock or rights in respect thereof or reserved
any shares for such purposes except pursuant to plans or commitments
Previously Disclosed in Section 5.3(b) of its Disclosure Schedule.
(iv) The number of shares of Petro Common Stock which are issuable and
reserved for issuance upon exercise of Petro Stock Options as of the date
hereof are Previously Disclosed in Section 5.3(b) of Petro's Disclosure
Schedule, and the number of Common Units and Subordinated Units that are
issuable upon exercise of any employee or director options to purchase
Common Units or Subordinated Units as of the date hereof are Previously
Disclosed in Section 5.3 of Star Partners' Disclosure Schedule.
(c) Subsidiaries. (i) (A) Such party has Previously Disclosed in Section
5.3(c) of its Disclosure Schedule a list of all of its Subsidiaries together
with the jurisdiction of organization of each such Subsidiary, (B) it owns,
directly or indirectly, all of the equity interests of each of its
Subsidiaries, (C) no equity interests of any of its Subsidiaries are or may
become required to be issued by reason of any Rights, (D) there are no
contracts, commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
interests of any such Subsidiaries, (E) there are no contracts, commitments,
understandings, or arrangements relating to its rights to vote or to dispose of
such equity interests, and (F) all of the equity interests of each such
Subsidiary held by it or its Subsidiaries are fully paid and nonassessable and
are owned by it or its Subsidiaries free and clear of any Liens.
(ii) In the case of the representations and warranties of Petro, other
than ownership of its Subsidiaries, Petro does not own beneficially,
directly or indirectly, any equity securities or similar interests of any
person, or any interest in a partnership or joint venture of any kind.
(iii) Each of such party's Subsidiaries has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization and (a) is duly qualified to do business and in good standing
in the jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and (b) has in
effect all federal, state, local, and foreign governmental authorizations
and permits necessary for it to own or lease its properties and assets and
to carry on its business as it is now conducted.
(d) Corporate or Partnership Power. Such party and each of its Subsidiaries
has the corporate power and authority, or in the case of Star Partners and Star
Propane the partnership power and authority to carry on its business as it is
now being conducted and to own all its properties and assets; and it has the
corporate power and authority or, in the case of Star Partners and Star
Propane, the partnership power and authority, to execute, deliver and perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby.
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(e) Equityholder Authority. Subject in the case of this Agreement to approval
by the holders of a majority of the shares of Petro Class A and Class C Common
Stock and Petro Preferred Stock entitled to vote thereon, voting separately by
classes the approval of the holders of a majority of the Petro Class A Common
Stock which is not owned by Petro Insiders or Affiliates, and by the holders of
a majority of the Common Units of Star Partners, excluding Common Units held by
Petro and its Affiliates, this Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action (partnership
action in the case of Star Partners and Star Propane), and this Agreement has
been duly executed and delivered and is a legal, valid and binding agreement of
it, enforceable in accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles). In the case of
Petro, the holders of 100% of the Public Preferred Stock, 100% of the Private
Preferred Stock and 100% of the Junior Preferred Stock have granted Petro an
irrevocable proxy to vote their shares in favor of the Merger.
(f) No Defaults. Except as Previously Disclosed, subject to receipt of the
HSRA approval, the approval of the holders of the Private Debt and 1998
Preferred Stock, the approval of Petro's bank group, the required filings under
federal and state securities laws and the approvals contemplated by Article
VII, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby does not and will not (i)
constitute a breach or violation of, or result in a default (or an event that,
with notice or lapse of time or both, would become a default) under, or result
in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, any note, bond, mortgage, indenture,
deed of trust, license, franchise, lease, contract, agreement, joint venture or
other instrument or obligation to which it or any of its Subsidiaries is a
party or by which it or any of its Subsidiaries or properties is subject or
bound, (ii) constitute a breach or violation of, or a default under, in the
case of Petro its articles of incorporation or by-laws and in the case of Star
Partners and Star Propane its Agreement of Limited Partnership, (iii)
contravene or conflict with or constitute a violation of any provision of any
law, rule, regulation, judgment, order or decree binding upon or applicable to
it or any of its Subsidiaries, (iv) result in the creation of any Lien on any
of its assets or its Subsidiaries' assets or (v) cause the transactions
contemplated by this Agreement to be subject to Takeover Laws.
(g) Financial Reports and SEC Documents. Its Annual Report on Form 10-K, for
the fiscal year ended December 31, 1997 in the case of Petro and for the fiscal
year ended September 30, 1997 in the case of Star Partners, and all other
reports, registration statements, definitive proxy statements or information
statements filed or to be filed by it or any of its Subsidiaries subsequent to
December 31, 1995 under the Securities Act, or under Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act, in the form filed, or to be filed (collectively,
its "SEC Documents"), with the SEC (i) complied or will comply in all material
respects as to form with the applicable requirements under the Securities Act
or the Exchange Act, as the case may be, and (ii) did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading; and
each of the balance sheets contained in or incorporated by reference into any
such SEC Document (including the related notes and schedules thereto) fairly
presents the financial position of the entity or entities to which it relates
as of its date, and each of the statements of
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income and changes in stockholders' equity and cash flows or equivalent
statements in the case of Star Partners in such SEC Documents (including any
related notes and schedules thereto) fairly presents the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may be,
of the entity or entities to which it relates for the periods to which it
relates, in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except in each
case as may be noted therein, subject to normal year-end audit adjustments in
the case of unaudited statements. Except as and to the extent set forth on its
balance sheet as of September 30, 1997 (in the case of Star Partners) and
December 31, 1997 (in the case of Petro), as of such date, neither it nor any
of its Subsidiaries had any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or reserved against in, a balance sheet or in the notes thereto
prepared in accordance with generally accepted accounting principles
consistently applied.
(h) Litigation; Regulatory Action. (i) No litigation, claim or other
proceeding before any court or governmental agency is pending against it or any
of its Subsidiaries and, to the best of its knowledge, no such litigation,
claim or other proceeding has been threatened, other than normal and routine
litigation which is either covered by insurance in amounts sufficient to
discharge any likely exposure. There are no outstanding judgments, decrees,
injunctions, awards or orders against it or any of its Subsidiaries. Section
5.3(h) of its Disclosure Schedule contains, as of the date of this Agreement,
an accurate and complete list of all actions, suits and proceedings pending or,
to the best of its knowledge, threatened against it, except as to routine law
suits arising in the ordinary course of business involving customer complaints
or vehicular accidents which are fully covered by insurance (except for
deductible amounts under such insurance policies which if required to be paid
would not individually or in the aggregate have a Material Adverse Effect).
(ii) Except as Previously Disclosed, neither it nor any of its
Subsidiaries or properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with,
or a commitment letter or similar submission to, any federal or state
governmental agency or court or authority or body or the supervision or
regulation of it or any of its Subsidiaries (collectively, the "Regulatory
Authorities").
(iii) Neither it nor any of its Subsidiaries has been advised by any
Regulatory Authority that such Regulatory Authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of understanding,
commitment letter or similar submission.
(i) Compliance With Laws. Except as set forth in Section 5.3(i) of its
Disclosure Schedule, it and each of its Subsidiaries:
(i) in the conduct of its business, is in compliance with all applicable
federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, (any instance of failure to so comply is
referred to herein as a "Non-Compliance Event").
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to conduct
its businesses substantially as presently conducted; all such permits,
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licenses, certificates of authority, orders and approvals are in full force
and effect and, to the best of its knowledge, no suspension or cancellation
of any of them is threatened (any instance or failure to obtain any of the
foregoing and to maintain them in full force and effect is referred to
herein as a ("Permitting Violation"); and
(iii) has not received, since December 31, 1994, any notification or
communication from any Regulatory Authority asserting that it or any of its
Subsidiaries is not in compliance with any of the statutes, regulations, or
ordinances which such Regulatory Authority enforces or threatening to
revoke any license, franchise, permit, or governmental authorization (nor,
to its knowledge, do any grounds for any of the foregoing exist), any
instance of the foregoing referred to herein as a "Non-Compliance
Notification";
(j) Defaults. Neither it nor any of its Subsidiaries is in default under any
contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which it is a party, by which its respective assets, business, or
operations may be bound or affected, or under which it or its respective
assets, business, or operations receives benefits, and there has not occurred
any event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
(k) No Brokers. No action has been taken by it that would give rise to any
valid claim against any party hereto for a brokerage commission, finder's fee
or other like payment with respect to the transactions contemplated by this
Agreement, excluding, in the case of Petro, fees to be paid to PaineWebber
Incorporated and Dain Rauscher Wessels, and, in the case of Star Partners, fees
to be paid to A.G. Edwards & Sons, Inc., in each case pursuant to letter
agreements which have been heretofore disclosed to the other party.
(l) Compensation and Benefit Plans. (i) Section 5.3(l)(i) of a party's
Disclosure Schedule contains a complete list of all material bonus, vacation,
deferred compensation, pension, retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock and
stock option plans, all employment or severance contracts, all medical, dental,
disability, health and life insurance plans, all other employee benefit and
fringe benefit plans, contracts or arrangements and any applicable "change of
control" or similar provisions in any plan, contract or arrangement maintained
or contributed to by it or any of its Subsidiaries for the benefit of officers,
former officers, employees, former employees, directors, former directors, or
the beneficiaries of any of the foregoing, including all "employee benefit
plans" as defined in ERISA (collectively, "Compensation and Benefit Plans").
(ii) True and complete copies of its Compensation and Benefit Plans,
including, but not limited to, any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto and,
if applicable, the most recent Form 5500 and annual reports for such plans
have been made available to the other party.
(iii) Each of its Compensation and Benefit Plans has been administered in
all material respects in accordance with the terms thereof. All "employee
benefit plans" within the meaning of Section 3(3) of ERISA, other than
"multiemployer plans" within the meaning of Section 3(37) of ERISA
("Multiemployer Plans"), covering employees or former employees of it and
its Subsidiaries (its "Plans"), to the extent subject to ERISA, are in
material compliance with ERISA, the Code, the Age Discrimination in
Employment Act and other applicable laws and no
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prohibited transaction has occurred with respect to any such employee
benefit plan that would result in any such excise tax or other liability
under ERISA or the Code. Each Compensation and Benefit Plan of it or its
Subsidiaries which is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA ("Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service, and it is not aware
of any circumstances reasonably likely to result in the revocation or
denial of any such favorable determination letter. There is no pending or,
to its knowledge, threatened litigation or governmental audit, examination
or investigation relating to the Plans.
(iv) Except as Previously Disclosed in Section 5.3(l)(iv) of a Party's
Disclosure Schedule, no material liability under Title IV of ERISA has been
or is expected to be incurred by it or any of its Subsidiaries with respect
to any ongoing, frozen or terminated "single-employer plan", within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which is
considered one employer with it under Section 4001(a)(15) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Except as Previously
Disclosed in Section 5.3(l)(iv) of a party's Disclosure Schedule, neither
it nor any of its Subsidiaries presently contributes to a Multiemployer
Plan, nor have they contributed to such a plan within the past five
calendar years. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan of it or
any of its Subsidiaries or by any ERISA Affiliate within the past 12
months.
(v) All contributions, premiums and payments required to be made under
the terms of any Compensation and Benefit Plan of it or any of its
Subsidiaries have been made. Neither any Pension Plan of it or any of its
Subsidiaries nor any single-employer plan of an ERISA Affiliate of it or
any of its Subsidiaries has an "accumulated funding deficiency" (whether or
not waived) within the meaning of Section 412 of the Code or Section 302 of
ERISA. Neither it nor any of its Subsidiaries has provided or is required
to provide, security to any Pension Plan or to any single-employer plan of
an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(vi) Except as Previously Disclosed in Section 5.3(l)(vi) of a party's
Disclosure Schedule, under each Pension Plan of it or any of its
Subsidiaries which is a single-employer plan, as of the last day of the
most recent plan year ended prior to the date hereof, the actuarially
determined present value of all "benefit liabilities", within the meaning
of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Plan's most recent actuarial
valuation) did not exceed the then current value of the assets of such
Plan, and there has been no adverse change in the financial condition of
such Plan (with respect to either assets or benefits) since the last day of
the most recent Plan year.
(vii) Neither it nor any of its Subsidiaries has any obligations under
any Compensation and Benefit Plans to provide benefits, including death or
medical benefits, with respect to employees of it or its Subsidiaries
beyond their retirement or other termination of service other than (i)
coverage mandated by Part 6 of Title I of ERISA or Section 4980B of the
Code, (ii) retirement or death benefits under any employee pension benefit
plan (as defined under Section 3(2) of ERISA), (iii) disability benefits
under any employee welfare plan that have been fully provided for by
insurance or otherwise, or (iv) benefits in the nature of severance pay.
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(viii) Except as Previously Disclosed under Section 5.1(l)(viii) of a
party's Disclosure Schedule, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
(i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due to
any director or any employee of it or any of its Subsidiaries under any
Compensation and Benefit Plan or otherwise from it or any of its
Subsidiaries, (ii) increase any benefits otherwise payable under any
Compensation and Benefit Plan or (iii) result in any acceleration of the
time of payment or vesting of any such benefit.
(m) Labor Matters. Except as set forth in Section 5.3(m) of a party's
Disclosure Schedule, neither it nor any of its Subsidiaries is a party to, or
is bound by, any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is it or any of
its Subsidiaries the subject of a proceeding asserting that it or any such
Subsidiaries has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel it or such Subsidiaries to
bargain with any labor organization as to wages and conditions of employment.
(n) Environmental Matters. Neither (a) the past or present conduct nor
operation of such party or its Subsidiaries nor any condition of any property
or asset presently or previously owned, leased or operated by any of them,
including but not limited to on-site or off-site disposal or release of any
chemical substance, product or waste, violates or violated Environmental Laws,
and no condition has existed or event has occurred with respect to any of them
or any such property that, with notice or the passage of time, or both, is
reasonably likely to result in liability or obligations for any clean-up,
remediation, disposal or corrective action under Environmental Laws or claims
for personal injury, property damage or damage to natural resources and (b)
such party nor any of its Subsidiaries has received any notice from any person
or entity that it or its Subsidiaries or the operation or condition of any
property or asset ever owned, leased, operated, held as collateral or held as a
fiduciary by any of them is or was in violation of or otherwise are alleged to
have liability under any Environmental Law or has entered into any consent
decree or order or is subject to any order of any court or governmental
authority or tribunal under any Environmental Law or relating to the clean-up
of any hazardous materials contamination, including, but not limited to,
responsibility (or potential responsibility) for the cleanup or other
remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on, beneath, or originating from any such property.
(o) Tax Matters. (i) All material returns, declarations, reports, estimates,
information returns and statements required to be filed under federal, state,
local or any foreign tax laws ("Tax Returns") with respect to it or any of its
Subsidiaries, have been timely filed, or requests for extensions have been
timely filed and have not expired; (ii) all Tax Returns filed by it are
complete and accurate in all material respects; (iii) all Taxes shown to be due
on such Tax Returns and all other Taxes, if any, required to be paid by it or
its Subsidiaries for all periods ending through the date hereof have been paid
or adequate reserves have in accordance with generally accepted accounting
principles been established for the payment of such Taxes; and (iv) no material
(A) audit or examination or (B) refund litigation with respect to any Tax
Return is pending. As of the date hereof, neither it nor any of its
Subsidiaries (x) has granted any requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
taxes with
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respect to any tax returns, (y) is a party to any tax sharing or tax indemnity
agreement or (z) is a party to an agreement that provides for the payment of
any amount that would constitute a "parachute payment" within the meaning of
Section 280G of the Code.
(p) Regulatory Approvals. Except as set forth in Section 5.3(p) of a party's
Disclosure Schedule, the only approval of any governmental agency necessary to
consummate the transactions contemplated by this Agreement (other than filings
under the Securities Act) is pursuant to the HSRA. As of the date hereof,
neither Petro nor the Star Partners is aware of any reason why the approvals
under the HSRA will not be received.
(q) No Material Adverse Change. Since September 30, 1997, in the case of Star
Partners, and since December 31, 1997, in the case of Petro, except as
disclosed in its SEC Documents filed with the SEC on or before the date hereof,
(i) it and its Subsidiaries have conducted their respective businesses in the
ordinary and usual course (excluding the incurrence of expenses related to this
Agreement and the transactions contemplated hereby), (ii) it has not made any
material change in its accounting methods, principles or practices or its tax
methods, practices or elections and (iii) no event has occurred or circumstance
arisen that, individually or taken together with all other facts, circumstances
and events is reasonably likely to result in a Material Adverse Effect.
(r) Insurance. It has previously delivered to the other party a schedule
listing the officers' and directors' liability insurance policies, primary and
excess casualty and liability insurance policies providing coverage for bodily
injury and property damage maintained by it and its Subsidiaries. It and its
Subsidiaries maintain insurance coverage reasonably adequate for the operation
of their respective businesses taking into account the cost and availability of
such insurance.
(s) Condition and Sufficiency of Assets. The vehicles, equipment and other
assets used in the business of it and its Subsidiaries are in operating
condition and repair consistent with normal industry standards and are adequate
for the uses to which they are being put and none of such vehicles, equipment
and assets are in need of replacement, maintenance or repairs except for
ordinary and routine maintenance and repairs that are not material in nature or
cost, except for vehicles and equipment which are not in service and the use of
which are not required to conduct the business of it and its Subsidiaries in
the ordinary course consistent with past practices. The vehicles, equipment and
assets in service are sufficient for the continued conduct of its business
after the Closing.
(t) Intellectual Property. Except as may be disclosed in Section 5.3(t) of
its Disclosure Schedule, it and its Subsidiaries own or possess adequate
licenses and other valid rights to use all patents, patent rights, trademarks,
trademark rights and proprietary information used or held for use in connection
with their respective businesses as currently being conducted, and there are no
assertions or claims challenging the validity of any of the foregoing which are
likely to have, individually or in the aggregate, a Material Adverse Effect.
The computer software operated or licensed by it that is material to its
business or its internal operations is capable of providing or is being adapted
to provide uninterrupted millennium functionality to record, store, process and
present calendar dates falling on or after January 1, 2000 in substantially the
same manner and with substantially the same functionality as such software
records, stores, processes and presents such calendar dates falling on or
before December 31, 1999. The costs of the adaptations referred to in the prior
sentence will not have a Material Adverse Effect.
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ARTICLE VI.
COVENANTS
Petro hereby covenants to and agrees with Star Partners, and Star Partners
hereby covenants to and agrees with Petro, that:
6.1. Best Efforts. (a) Subject to the terms and conditions of this Agreement,
it shall use its commercially reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, desirable or advisable under applicable laws, so as to
permit consummation of the Merger promptly and otherwise to enable consummation
of the transactions contemplated hereby, including, without limitation,
obtaining (and cooperating with the other party hereto to obtain) HSRA approval
and any other third party approval that is required to be obtained by Petro or
Star Partners or any of their respective Subsidiaries in connection with the
Merger and the other transactions contemplated by this Agreement, and using
reasonable efforts to lift or rescind any injunction or restraining order or
other order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and using reasonable efforts to defend any
litigation seeking to enjoin, prevent or delay the consummation of the
transactions contemplated hereby or seeking material damages, and each shall
cooperate fully with the other parties hereto to that end, and shall furnish to
the other party copies of all correspondence, filings and communications
between it and its affiliates and any governmental or regulatory authority with
respect to the transactions contemplated hereby. In complying with the
foregoing, neither it nor its Subsidiaries shall be required to take measures
that would have a Material Adverse Effect on it and its Subsidiaries taken as a
whole.
6.2. Equityholder Approvals. Each of them shall take, in accordance with
applicable law, applicable stock exchange rules and its restated articles or
certificate of incorporation and by-laws, in the case of Petro, and Agreement
of Limited Partnership, in the case of Star Partners, all action necessary to
convene, respectively, an appropriate meeting of the holders of the Common
Units of Star Partners to consider and vote upon the approval of the Merger
Agreement, the Amended and Restated Partnership Agreement, the Amended and
Restated Operating Partnership Agreement, and any other matters required to be
approved by them for consummation of the Merger (including any adjournment or
postponement, the "Star Partners Meeting"), and an appropriate meeting of
stockholders of Petro to consider and vote upon the approval of the Merger and
any other matters required to be approved by Petro's stockholders for
consummation of the Merger (including any adjournment or postponement, the
"Petro Meeting"; and each of the Star Partners Meeting and Petro Meeting, a
"Meeting"), respectively, promptly after the date hereof. The Board of
Directors of Petro and the Special Committee shall (subject in the case of
Petro to compliance with its fiduciary duties as advised by counsel) recommend
such approval, and each of Star Partners and Petro shall take all reasonable
lawful action to solicit such approval by its respective equityholders.
6.3. Registration Statements. (a) Each of Star Partners and Petro agrees to
cooperate in the preparation of (i) a registration statement on Form S-4 (the
"Merger Registration Statement") to be filed by Star Partners with the SEC in
connection with the issuance of Senior Subordinated Units and Common Units in
the Merger and the Junior Subordinated and Senior Subordinated Units to be
issued by Star Partners to certain Affiliates of Petro as described under
subparagraph 9 of the definition of "Restructuring Transactions" (including the
joint proxy statement and prospectus and
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other proxy solicitation materials of Star Partners and Petro constituting a
part thereof (the "Joint Proxy Statement") and all related documents), (ii) a
registration statement on Form S-3 to be filed by Star Partners with the SEC in
connection with the Equity Offering (the "Equity Registration Statement") and
(iii) either a registration statement to be filed by Star Partners or a
subsidiary of Star Partners with the SEC in connection with the Debt Offering
(the "Debt Registration Statement" and together with the Merger Registration
Statement and the Equity Registration Statement, the "Registration Statements")
or an offering memorandum related to the Debt Offering ("Debt Offering
Memorandum"). Provided Petro has cooperated as required above, Star Partners
agrees to file the Registration Statements with the SEC as promptly as
practicable. Each of Petro and Star Partners agrees to use all reasonable
efforts to cause the Registration Statements to be declared effective under the
Securities Act as promptly as practicable after filing thereof. Star Partners
also agrees to use commercially reasonable efforts to obtain all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement. Petro agrees to furnish to
Star Partners all information concerning Petro, its Subsidiaries, officers,
directors and stockholders and to take such other action as may be reasonably
requested in connection with the foregoing.
(b) Each of Petro and Star Partners agrees, as to itself and its
Subsidiaries, that (i) none of the information supplied or to be supplied by it
for inclusion or incorporation by reference in the Registration Statements
will, at the time the Registration Statements or Debt Offering Memorandum and
each amendment or supplement thereto, if any, becomes effective under the
Securities Act or at the date of the Debt Offering Memorandum, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (ii) the
Joint Proxy Statement and any amendment or supplement thereto will, at the date
of mailing to stockholders and at the times of the Star Partners Meeting and
Petro Meeting, not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Each of Petro and Star Partners further agrees that if it shall
become aware prior to the Closing Date of any information that would cause any
of the statements in the Registration Statements or Debt Offering Memorandum to
be false or misleading with respect to any material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not false or misleading, it will
promptly inform the other party thereof and take the necessary steps to correct
the Joint Proxy Statement.
(c) Star Partners will advise Petro, promptly after Star Partners receives
notice thereof, of the time when each of the Registration Statements has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of the Common Units or Senior
Subordinated Units for offering or sale in any jurisdiction, of the initiation
or threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of a Registration Statement or for additional
information.
(d) Each of Star Partners and Petro will use its best efforts to cause the
Joint Proxy Statement to be mailed to its unitholders and stockholders,
respectively, as soon as practicable after the effective date thereof.
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6.4. Modification of Petro Indentures and Preferred Stock. Immediately upon
execution of this Agreement, Petro agrees to use its reasonable best efforts in
good faith to accomplish the following prior to the Effective Date:
(a) As to the Private Debt. The Private Debt consists of (i) $60.0
million of Notes due 2002 at 11.96% interest per annum which shall be
restructured to $63.12 million of Notes due 2002 at 9.0% per annum and (ii)
$4.1 million of Notes due 2001 at 14.1% interest per annum to be
restructured to $2.2 million of Senior Notes due 2001 at 10.25% interest
per annum and $2.2 million of Subordinated Notes due 2001 at 10.25%
interest per annum (the "Private Debt Conditions").
(b) As to the Public Debt. At least 90% of (a) Petro's 9 3/8%
Subordinated Notes due 2003 and 10 1/8% Subordinated Notes due 2003 will be
repurchased at no more than 100% of par plus accrued interest and (b)
Petro's 12 1/4% Subordinated Notes due 2005 will be repurchased at no more
than 103.5% of par plus accrued interest (the "Public Debt Conditions").
(c) As to the 1989 Preferred Stock. The 1989 Preferred Stock will be
repurchased for an aggregate of $4.167 million plus accrued and unpaid
dividends (the "1989 Preferred Stock Conditions").
(d) As to the outstanding Star Propane Debt. The Holders of Star
Propane's 8.04% First Mortgage Notes due 2009, Star Propane's 7.17% First
Mortgage Notes due 2010 and Star Propane's outstanding Bank credit
facilities shall have consented to the execution, delivery and performance
of this Agreement by Star Propane or shall have entered into amendments
permitting the execution, delivery and performance of this Agreement by
Star Propane without violation of the terms of such indebtedness and
without a requirement that such indebtedness be repurchased (or an offer be
made to purchase such indebtedness) (the "Star Propane Debt Conditions").
6.5. Press Releases. It will not, without the prior approval of the other
party hereto, issue any press release or written statement for general
circulation relating to the transactions contemplated hereby, except as
otherwise required by applicable law or regulation or the rules of the NYSE, in
which case it will consult with the other party before issuing any such press
release or written statement.
6.6. Access; Information. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, it shall, and shall
cause its Subsidiaries to, afford the other parties and their officers,
employees, counsel, accountants and other authorized representatives, access,
during normal business hours throughout the period prior to the Effective Date,
to all of its properties, books, contracts, commitments and records, and to its
officers, employees, accountants, counsel or other representatives, and, during
such period, it shall, and shall cause its Subsidiaries to, furnish promptly to
such other parties and representatives (i) a copy of each material report,
schedule and other document filed by it pursuant to the requirements of federal
or state securities law (other than reports or documents that Star Partners or
Petro, or their respective Subsidiaries, as the case may be, are not permitted
to disclose under applicable law) and (ii) all other information concerning the
business, properties and personnel of it as the other may reasonably request.
Neither Star Partners nor Petro nor any of its respective Subsidiaries shall be
required to provide access to or to disclose
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information where such access or disclosure would violate or prejudice the
rights of its customers, jeopardize the attorney-client privilege of the
institution in possession or control of such information or contravene any law,
rule, regulation, order, judgment, decree, fiduciary duty or binding agreement
entered into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under the circumstances in which
the restrictions of the preceding sentence apply.
(b) It will not use any information obtained pursuant to this Section 6.6 for
any purpose unrelated to the consummation of the transactions contemplated by
this Agreement and, if this Agreement is terminated, will hold all information
and documents obtained pursuant to this paragraph in confidence. No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant
or agreement in this Agreement, or the conditions to either party's obligation
to consummate the transactions contemplated by this Agreement.
6.7. Acquisition Proposals. Without the prior written consent of Star
Partners, Petro shall not, and shall cause its Subsidiaries and its and its
Subsidiaries' officers, directors, agents, advisors and affiliates not to,
solicit or encourage inquiries or proposals with respect to, or engage in any
negotiations concerning, or provide any confidential information to, or have
any discussions with, any such person relating to, any tender offer or exchange
offer for, or any proposal for the acquisition of a substantial equity interest
in, or a substantial portion of the assets of, or any merger or consolidation
with, Petro or any of its Significant Subsidiaries; provided, however, that
Petro may, and may authorize and permit its officers, directors, employees or
agents to, furnish or cause to be furnished confidential information and may
participate in such discussions and negotiations with a person or entity who
has made an unsolicited bona fide acquisition proposal for Petro or such assets
or Significant Subsidiaries that is superior to the Merger and is reasonably
capable of being financed if Petro's Board of Directors, after having consulted
with and considered the advice of outside counsel, has determined that the
failure to provide such information or participate in such negotiations and
discussions could cause the members of such Board of Directors to breach their
fiduciary duties under applicable laws. Petro shall promptly (within 24 hours)
advise Star Partners of its receipt of any such proposal or inquiry, of the
substance thereof, and of the identity of the person making such proposal or
inquiry. Nothing in this Section 6.7 shall permit Petro to enter into any
agreement with respect to an acquisition proposal during the term of this
Agreement other than a confidentiality and standstill agreement in reasonably
customary form.
6.8. Affiliate Arrangements. (a) Not later than the 15th day after the
mailing of the Joint Proxy Statement, Petro shall deliver to Star Partners a
schedule of each person that, to the best of its knowledge, is or is reasonably
likely to be, as of the date of the relevant Meeting, deemed to be an
"affiliate" of it (an "Affiliate") as that term is used in Rule 145 under the
Securities Act.
(b) Petro shall use its reasonable best efforts to cause its Affiliates not
to sell any securities received under the Merger or Exchange Agreement in
violation of the registration requirements Securities Act, including Rule 145
thereunder.
6.9. Takeover Laws. Neither party shall take any action that would cause the
transactions contemplated by this Agreement to be subject to requirements
imposed by any Takeover Laws, and
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each of them shall take all necessary steps within its control to exempt (or
ensure the continued exemption of) the transactions contemplated by this
Agreement from, or if necessary challenge the validity or applicability of, any
shareholder rights plan adopted by such party or any applicable Takeover Law,
as now or hereafter in effect, including, without limitation, Takeover Laws of
any state that purport to apply to this Agreement. the transactions
contemplated hereby.
6.10. No Rights Triggered. Each of Petro and Star Partners shall take all
steps necessary to ensure that the entering into of this Agreement and the
consummation of the transactions contemplated hereby and any other action or
combination of actions, or any other transactions contemplated hereby, do not
and will not result in the grant of any Rights to any person (i) in the case of
Petro under its articles or certificate of incorporation or by-laws and in the
case of Star Partners under its Agreement of Limited Partnership or (ii) under
any material agreement to which it or any of its Subsidiaries is a party.
6.11. Senior Subordinated Units Listed. In the case of Star Partners, Star
Partners shall use its reasonable best efforts to list, prior to the Closing,
on the NYSE, upon official notice of issuance, the Senior Subordinated Units to
be issued to the holders of Petro Common Stock in the Merger and to certain
Petro Affiliates pursuant to the Exchange Agreement.
6.12. Third Party Approvals. (a) Star Partners and Petro and their respective
Subsidiaries shall cooperate and use their respective commercially reasonable
best efforts to prepare all documentation, to effect all filings, to obtain all
permits, consents, approvals and authorizations of all third parties and HSRA
approval necessary to consummate the transactions contemplated by this
Agreement and to comply with the terms and conditions of such permits,
consents, approvals and authorizations and to cause the Merger to be
consummated as expeditiously as practicable. Each of Star Partners and Petro
shall have the right to review in advance, and to the extent practicable each
will consult with the other, in each case subject to applicable laws relating
to the exchange of information, with respect to, all material written
information submitted to any third party or any Regulatory Authorities in
connection with the transactions contemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto agrees to act reasonably and
promptly. Each party hereto agrees that it will consult with the other parties
hereto with respect to the obtaining of all material permits, consents,
approvals and authorizations of all third parties and Regulatory Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each party will keep the other parties apprised of the status of
material matters relating to completion of the transactions contemplated
hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Registration Statement, the Joint Proxy Statement or any
filing, notice or application made by or on behalf of such other party or any
of its Subsidiaries to any Regulatory Authority in connection with the
transactions contemplated hereby.
6.13. Indemnification; Directors' and Officers' Insurance. (a) In the event
of any threatened or actual claim, action, suit, proceeding or investigation,
whether civil, criminal or administrative, including, without limitation, any
such claim, action, suit, proceeding or investigation in which any person who
is now, or has been at any time prior to the date of this Agreement, or who
becomes
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prior to the Closing, a director, officer or employee of Petro or any of its
Subsidiaries, including, without limitation, the directors of Star Gas (the
"Indemnified Parties" or, individually, an "Indemnified Party") is, or is
threatened to be, made a party based in whole or in part on, or arising in
whole or in part out of, or pertaining to (i) the fact that he is or was a
director, officer or employee of Petro, any of Petro's Subsidiaries or any of
their respective predecessors or was prior to the Closing serving at the
request of any such party as a director, officer, employee, fiduciary or agent
of another corporation, partnership, trust or other enterprise or (ii) this
Agreement or any of the transactions contemplated hereby and thereby and all
actions taken by an Indemnified Party in connection herewith or therewith,
whether in any case asserted or arising before or after the Closing, the
parties hereto agree to cooperate and use their best efforts to defend against
and respond thereto. It is understood and agreed that after the Closing, Star
Partners shall indemnify and hold harmless, as and to the fullest extent
permitted by law, each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of an undertaking from such Indemnified Party to repay such
advanced expenses if it is finally and unappealably determined that such
Indemnified Party was not entitled to indemnification hereunder), judgments,
fines and amounts paid in settlement in connection with any such threatened or
actual claim, action, suit, proceeding or investigation, and in the event of
any such threatened or actual claim, action, suit, proceeding or investigation
(whether asserted or arising before or after the Closing), the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with Star Partners; provided, however, that (1) Star Partners shall have the
right to assume the defense thereof and upon such assumption Star Partners
shall not be liable to any Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by any Indemnified Party in
connection with the defense thereof, except that if Star Partners elects not to
assume such defense, or counsel for the Indemnified Parties reasonably advises
the Indemnified Parties that there are or may be (whether or not any have yet
actually arisen) issues which raise conflicts of interest between Star Partners
and the Indemnified Parties, the Indemnified Parties may retain counsel
reasonably satisfactory to them, and Star Partners shall pay the reasonable
fees and expenses of such counsel for the Indemnified Parties, (2) Star
Partners shall be obligated pursuant to this paragraph to pay for only one firm
of counsel for all Indemnified Parties, (3) Star Partners shall not be liable
for any settlement effected without its prior written consent (which consent
shall not be unreasonably withheld) and (4) Star Partners shall have no
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim indemnification under this Section 6.13,
upon learning of any such claim, action, suit, proceeding or investigation,
shall notify Star Partners thereof provided that the failure to so notify shall
not affect the obligations of Star Partners under this Section 6.13 except (and
only) to the extent such failure to notify materially prejudices Star Partners.
Star Partners's obligations under this Section 6.10 shall continue in full
force and effect for a period of six (6) years from the Closing; provided,
however, that all rights to indemnification in respect of any claim (a "Claim")
asserted or made within such period shall continue until the final disposition
of such Claim.
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(b) Without limiting any of the obligations under paragraph (a) of this
Section 6.13, Star Partners agrees that all rights to indemnification and all
limitations of liability existing in favor of the Indemnified Parties as
provided in Petro's Amended and Restated Articles of Incorporation or Bylaws or
in the governing documents of any of Petro's Subsidiaries as in effect as of
the date of this Agreement with respect to matters occurring on or prior to the
Closing shall survive the Merger and shall continue in full force and effect,
without any amendment thereto, for a period of six (6) years from the Closing;
provided, however, that all rights to indemnification in respect of any Claim
asserted or made within such period shall continue until the final disposition
of such Claim; provided further, however, that nothing contained in this
Section 6.13(b) shall be deemed to preclude the liquidation, consolidation or
merger of Petro or any Company Subsidiary, in which case all of such rights to
indemnification and limitations on liability shall be deemed to so survive and
continue notwithstanding any such liquidation, consolidation or merger and
shall constitute rights which may be asserted against Star Partners. Nothing
contained in this Section 6.13(b) shall be deemed to preclude any rights to
indemnification or limitations on liability provided in Petro's Amended and
Restated Articles of Incorporation or Bylaws or the governing documents of any
of Petro's Subsidiaries with respect to matters occurring subsequent to the
Closing to the extent that the provisions establishing such rights or
limitations are not otherwise amended to the contrary.
(c) Star Partners shall use its reasonable best efforts to cause the persons
serving as officers and directors of Petro and Star Gas immediately prior to
the Closing to be covered for a period of six (6) years from the Closing by the
directors' and officers' liability insurance policy maintained by Petro
(provided that Star Partners may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions which are not less
advantageous to such directors and officers of Petro than the terms and
conditions of such existing policy) with respect to acts or omissions occurring
prior to the Closing which were committed by such officers and directors in
their capacity as such provided that Star Partners shall not be required to pay
annual premiums in excess of the last annual premium paid by Petro prior to the
date hereof but in such case shall purchase as much coverage as reasonably
practicable for such amount.
(d) In the event Star Partners or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Star
Partners shall assume the obligations set forth in this Section 6.13.
(e) The provisions of this Section 6.13 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs
and representatives.
6.14. Benefit Plans. The parties agree to take such actions with respect to
compensation and employee benefit plans, programs, arrangements and other
perquisites as are set forth on Section 6.14 of Petro's Disclosure Schedule.
6.15. Notification Of Certain Matters. Each of Petro and Star Partners shall
give prompt notice to the other of any fact, event or circumstance known to it
that (i) is reasonably likely,
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<PAGE>
individually or taken together with all other facts, events and circumstances
known to it, to result in any Material Adverse Effect with respect to it or
(ii) would cause or constitute a material breach of any of its representations,
warranties, covenants or agreements contained herein.
6.16. New Director for Star Gas LLC. As soon as reasonably practicable
following the Effective Time, Star Gas LLC will appoint a new independent
director to serve on the Audit Committee of Star Gas LLC provided that Star Gas
LLC shall not appoint any such director to which William P. Nicoletti shall
have reasonably objected.
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of each of the parties to consummate the Merger is
conditioned upon the satisfaction at or prior to the Closing of each of the
following:
7.1. Shareholder Vote. The Merger, the Partnership Agreement Amendments and
the other transactions contemplated hereby shall have been approved and adopted
by the affirmative vote of a Unit Majority (as defined in the Partnership
Agreement), and the Merger and the other transactions contemplated hereby shall
have been approved and adopted by the affirmative vote of the holders of a
majority of each class of Petro Common Stock and Petro Preferred Stock and a
majority of the Petro Class A Common Stock held by Persons other than Petro and
Affiliates of Petro. Holders of at least 100% of the Private Preferred Stock
and 90% of the Junior Preferred Stock shall have voted in favor of the Merger.
7.2. Governmental Approvals. Any waiting period (including any extended
waiting period arising as a result of a request for additional information by
the Federal Trade Commission or the U. S. Department of Justice) under the HSRA
shall have expired or been terminated. All other filings required to be made
prior to the Effective Time with, and all other consents, approvals, permits
and authorizations required to be obtained prior to the Effective Time from,
any Regulatory Authority in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby by the
parties hereto or their affiliates shall have been made or obtained, except
where the failure to obtain such consents, approvals, permits and
authorizations would not be reasonably likely to result in a Material Adverse
Effect on Star Partners or Petro or on the ability of Star Partners or Petro to
consummate the transactions contemplated by this Agreement.
7.3. No Injunction. No order, decree or injunction of any court or agency of
competent jurisdiction shall be in effect, and no law, statute or regulation
shall have been enacted or adopted, that enjoins, prohibits or makes illegal
consummation of any of the transactions contemplated hereby, and no action,
proceeding or investigation by any Regulatory Authority with respect to the
Merger or the other transactions contemplated hereby shall be pending that
seeks to restrain, enjoin, prohibit or delay consummation of the Merger or such
other transaction or to impose any material restrictions or requirements
thereon or on Star Partners or Petro with respect thereto; provided, however,
that prior to invoking this condition, each party shall have complied fully
with its obligations under Section 6.1.
7.4. Representations, Warranties And Covenants Of Star Partners. In the case
of Petro's obligation to consummate the Merger (i) each of the representations
and warranties contained herein of Star Partners shall be true and correct as
of the date of this Agreement and upon the Closing Date
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<PAGE>
with the same effect as though all such representations and warranties had been
made on the Closing Date, except for any such representations and warranties
made as of a specified date, which shall be true and correct as of such date,
in any case subject to the standard set forth in Section 5.2, (ii) each and all
of the agreements and covenants of Star Partners to be performed and complied
with pursuant to this Agreement on or prior to the Closing Date shall have been
duly performed and complied with in all material respects, and (iii) Petro
shall have received a certificate signed by the Chief Financial Officer of the
General Partner, dated the Closing Date, to the effect set forth in clauses (i)
and (ii) of this Section 7.4.
7.5. Representations, Warranties And Covenants Of Petro. In the case of Star
Partners's obligation to consummate the Merger (i) each of the representations
and warranties contained herein of Petro shall be true and correct as of the
date of this Agreement and upon the Closing Date with the same effect as though
all such representations and warranties had been made on the Closing Date,
except for any such representations and warranties made as of a specified date,
which shall be true and correct as of such date, in any case subject to the
standard set forth in Section 5.2, (ii) each and all of the agreements and
covenants of Petro to be performed and complied with pursuant to this Agreement
on or prior to the Closing Date shall have been duly performed and complied
with in all material respects, and (iii) Star Partners shall have received a
certificate signed by the Chief Financial Officer of Petro, dated the Closing
Date, to the effect set forth in clauses (i) and (ii) of this Section 7.5.
7.6. Effective Merger Registration Statement. The Merger Registration
Statement shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the Merger Registration Statement shall
have been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC or any other Regulatory Authority.
7.7. Opinion of Andrews & Kurth LLP. Star Partners and Petro shall have
received an opinion from Andrews & Kurth LLP to the effect that:
(a) the Merger and the transactions contemplated by this Agreement will
not result in the loss of limited liability of any limited partner of Star
Partners or Star Propane,
(b) the Merger and the transactions contemplated by this Agreement will
not cause Star Partners or Star Propane to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes,
(c) the Merger Registration Statement accurately sets forth the material
federal income tax consequences to the holders of Common Units of the
transactions contemplated hereby.
7.8. Opinion of Petro's Counsel. In the case of Star Partner's obligation to
consummate the Merger, Star Partners shall have received an opinion from
Phillips Nizer Benjamin Krim & Ballon LLP, counsel to Petro, to the effect
that:
(a) Petro is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Minnesota with all requisite
corporate power and authority to own its properties and assets and to carry
on its business as presently conducted;
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(b) Petro has all requisite corporate power and authority to effect the
Merger as contemplated by this Agreement; the Board of Directors and
shareholders of Petro have taken all action required by the MBCA and
Petro's Articles of Incorporation and Bylaws to authorize the Merger in
accordance with the terms of this Agreement; the execution and delivery of
this Agreement did not, and the consummation of the Merger will not,
violate any provision of Petro's Articles of Incorporation or Bylaws; and
upon the filing by the Surviving Corporation of the Articles of Merger with
the Secretary of State of the State of Minnesota, the Merger shall become
effective under the MBCA.
In rendering such opinions, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Star Partners, Petro and others and opinions of Minnesota counsel,
reasonably satisfactory in form and substance to such counsel.
7.9. NYSE Listing. The Senior Subordinated Units and Common Units issuable
pursuant to this Agreement and the Exchange Agreement shall have been approved
for listing on the NYSE, subject to official notice of issuance.
7.10. Affiliate Arrangements. Petro shall have taken reasonable action to
cause its Affiliates not to sell any securities received under the Merger
Agreement in violation of the registration requirements of the Securities Act,
including Rule 145 thereunder.
7.11. Fairness Opinion. In the case of Star Partner's obligation to
consummate the Merger, the Special Committee shall have received an opinion of
A.G. Edwards & Sons, Inc. to the effect that, as of the date of the Joint Proxy
Statement, the Merger and the transactions contemplated hereby are fair, from a
financial point of view, to the holders of Common Units (other than Petro and
its affiliates), and the opinion shall not have been withdrawn by A.G. Edwards
& Sons, Inc. In the case of Petro's obligation to consummate the Merger, Petro
shall have received an opinion of Dain Rauscher Wessels to the effect that, as
of the date of the Joint Proxy Statement, the Merger and the transactions
contemplated thereby are fair, from a financial point of view, to the non-
affiliated, public holders of Petro Common Stock, and the opinion shall not
have been withdrawn by Dain Rauscher Wessels.
7.12. Public Offerings. Star Partners shall have consummated the Equity
Offering and the Debt Offering, with the Cost of Capital not to exceed $27.5
million on an annual basis, and with the net proceeds therefrom applied to
reduce indebtedness and preferred stock of Petro outstanding prior to the
Effective Time.
7.13. Refinancing Conditions. Immediately prior to the Restructuring
Transactions:
(a) The sum of (i) all indebtedness for borrowed money of Petro and its
Subsidiaries to be outstanding at the Effective Time except indebtedness
outstanding under Petro's working capital bank credit facility and (ii) the
repurchase or redemption price (including the value of the Junior Preferred
Stock, which shall be deemed to be $2.24 million) of all indebtedness for
borrowed money and Petro Preferred Stock to be repurchased or redeemed as
provided in the Refinancing Conditions less the amount, if any, by which
the Working Capital of Petro as of the most recent date for which internal
Petro financial statements are available (but in any event no more than 15
calendar days after the end of the preceding month) shall exceed the amount
of Working Capital of Petro required pursuant to Section 7.13(c), shall not
exceed $331,367,000;
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<PAGE>
(b) Petro and its subsidiaries shall have cash balances of not less than
$500,000;
(c) At the Closing Date, the Working capital of Petro as of the most
recent date for which internal Petro financial statements are available
(which date or the availability of Petro financial statements shall in any
event not be more than 15 calendar days after the end of the preceding
month) shall exceed the following amounts:
<TABLE>
<CAPTION>
Petro
Working
Capital
Closing Date Requirement
------------ -----------
<S> <C>
February 15, 1999 to the date of availability of Febru-
ary 1999 Petro financial statements.................... $18,000,000
Date of availability of February 1999 Petro financial
statements to date of availability of March 1999 Petro
financial statements................................... $35,000,000
Date of availability of March 1999 Petro financial
statements to date of availability of April 1999 Petro
financial statements................................... $46,000,000
</TABLE>
(d) Petro shall have cash balances in an amount equal to or not less than
(or shall have arranged for payment out of the proceeds of the Debt
Offering or the Equity Offering), and shall pay, all out-of-pocket costs
and expenses associated with the transactions contemplated by this
Agreement, including the underwriting discounts and commissions on the debt
and equity issued pursuant to the Debt Registration Statement and Equity
Registration Statement or the Debt Offering Memorandum (excluding any over-
allotment option), the financial and advisory and fairness opinion fees
incurred by Petro and Star Partners, the legal, accounting and printing
fees incurred by Petro and Star Partners, all solicitation and exchange
fees related to the retirement or redemption of Petro debt or Petro
Preferred Stock and all appraisals and environmental reports, required
credit agreement and indenture modification; provided, however, that all
such expenses in excess of $19,139,000 shall (without duplication) reduce
Petro's Working Capital for purposes of the calculation to be made pursuant
to subparagraph (c) above;
(e) The Private Debt Conditions, 12 7/8% Preferred Stock Conditions, Public
Debt Conditions, 1989 Preferred Stock Conditions and Star Propane Debt
Conditions shall have been satisfied; and
(f) Star Partners shall have received a certificate signed by the Chief
Financial Officer of Petro, dated the Closing Date, to the effect set forth
in clauses (a) through (e) of this Section 7.11.
7.14. Dissenters' Rights. The shares of Petro Common Stock held by Dissenting
Common Holders shall not exceed 10% of the outstanding shares of Petro Common
Stock.
7.15. Covenant Not to Compete. Star Partners shall have received an agreement
from Irik Sevin substantially in the form of Exhibit H.
7.16. Working Capital Loan. Petro shall have entered into a working capital
credit facility of not less than $30 million reasonably satisfactory to the
Special Committee.
7.17. Debt Offering. The Special Committee shall not have reasonably objected
to the restrictive covenants governing the notes issued in the Debt Offering.
7.18. Restructuring Transactions. The Restructuring Transactions shall have
occurred on the terms provided in this Agreement.
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7.19. Special Committee. The Special Committee shall not have withdrawn its
approval of this Agreement, the Merger and the transactions contemplated hereby
and thereby as of the date of the Joint Proxy Statement.
7.20. Custody Agreement. All of the Petro Insiders have executed a Custody
Agreement substantially in the form attached to the Exchange Agreement on or
prior to February 28, 1999.
ARTICLE VIII.
TERMINATION
8.1. Termination.
(a) This Agreement may be terminated, and the Merger may be abandoned at any
time prior to the Effective Time, whether prior to or after approval by the
Common Unitholders of Star Partners or the stockholders of Petro:
(i) Mutual Consent. By the mutual consent of Star Partners and Petro in a
written instrument, if the Board of Directors of Petro and the Special
Committee each so determines by vote of a majority of its members;
(ii) Breach. By Star Partners (upon the vote of the Special Committee) or
by Petro (upon the vote of a majority of the members of the Board of
Directors) (provided that the terminating party is not then in material
breach of any representation, warranty, covenant or other agreement
contained herein), in the event of either: (i) a breach by the other party
of any representation or warranty contained herein (subject to the standard
set forth in Section 5.02), which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach or (ii) a material breach by the other party of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the
breaching party of such breach;
(iii) No Approval. By Star Partners (upon the vote of the Special
Committee) or by Petro (upon the vote of a majority of the members of the
Board of Directors), if its Board of Directors (or the Special Committee in
the case of Star Partners) so determines by a vote of a majority of the
members of its entire Board, in the event (i) the approval under the HSRA
required for consummation of the Merger and the other transactions
contemplated by the Merger shall have been denied by final nonappealable
action or any governmental entity of competent jurisdiction shall have
issued a final nonappealable order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement; provided,
however, the party seeking termination shall have complied fully with its
obligations under Section 6.01(b) of this Agreement; or (ii) any
stockholder or unitholder approval required by Section 7.01 herein is not
obtained at the Petro Meeting or the Star Partners Meeting, and such
meetings (including adjournments and postponements) have been held; and
(iv) by either the Board of Directors of the General Partner or the Board
of Directors of Petro, if the Board of Directors of the other party shall
have withdrawn, modified or changed in a manner adverse to the terminating
party its approval or recommendation of this Agreement and the transactions
contemplated hereby.
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<PAGE>
(b) This Agreement shall be terminated if the Merger shall not have been
consummated on or prior to April 1, 1999 unless Star Partners (upon the vote of
the Special Committee) and Petro (upon the vote of a majority of the members of
the Board of Directors) elect to extend such termination date.
8.2. Effect Of Termination And Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
no party to this Agreement shall have any liability or further obligation to
any other party hereunder except (i) as set forth in Section 9.1 and (ii) that
termination will not relieve a breaching party from liability for any willful
breach of this Agreement giving rise to such termination.
ARTICLE IX.
MISCELLANEOUS
9.1. Survival. All representations, warranties, agreements and covenants
contained in this Agreement shall not survive the Closing or termination of
this Agreement if this Agreement is terminated prior to the Closing; provided,
however, if the Closing occurs, the agreements of the parties in Sections 3.4,
3.7, 6.15, 9.1, 9.4 and 9.8 shall survive the Closing, and if this Agreement is
terminated prior to the Closing, the agreements of the parties in Sections
6.6(b), 8.2, 9.1, 9.4, 9.5, 9.6, 9.7 and 9.8 shall survive such termination.
9.2. Waiver; Amendment. Subject to compliance with applicable law, prior to
the Closing, any provision of this Agreement may be (i) waived by the party
benefitted by the provision or (ii) amended or modified at any time, by an
agreement in writing between the parties hereto approved by their respective
Boards of Directors (and in the case of Star Partners, by the Special
Committee) and executed in the same manner as this Agreement. Prior to
submission of this Agreement for approval by the stockholders of Petro, Star
Partners may make such amendments as are permitted by Section 2.1, and Petro's
Board of Directors shall approve the supplements and amendments specified in
this sentence.
9.3. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.4. Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of New York, without regard to the
conflict of law principles thereof (except to the extent that mandatory
provisions of federal law govern).
9.5. Expenses. Whether or not the Merger is consummated, all reasonable costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by Petro.
9.6. Confidentiality. Each of the parties hereto and their respective agents,
attorneys and accountants will maintain the confidentiality of all information
provided in connection herewith in accordance, and subject to the limitations
of, the Confidentiality Agreement.
9.7. Notices. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed
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<PAGE>
by registered or certified mail (return receipt requested) to such party at its
address set forth below or such other address as such party may specify by
notice to the parties hereto.
If to Star Partners, to:
Star Gas Corporation
Clearwater House
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Fax: 203-328-739
With copies to:
Elizabeth K. Lanier
GE Power Systems
One River Road
Building 37, 6th Floor
Schenectady, NY 12345
Fax: 518-385-4725
William P. Nicoletti
Managing Director
McDonald Investments Inc.
575 Fifth Avenue
18th Floor
New York, NY 10017
Fax: 917-368-2272
Baker & Botts LLP
3000 One Shell Plaza 910 Louisiana
Houston, Tx 77002-4995
Attn: R. Joel Swanson, Esq.
Fax: 713-229-1522
If to Petro, to:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street--5th Fl.
P.O. Box 1457
Stamford, CT 06902
Fax: 203-328-7421
With copies to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attn: Alan Shapiro, Esq.
Fax: 212-262-5152
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<PAGE>
9.8. Entire Understanding; No Third Party Beneficiaries. Except for the
Confidentiality Agreement, which shall remain in effect, this Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made, including without limitation the Original
Merger Agreement. Except for Sections 6.12 and 6.14, nothing in this Agreement,
expressed or implied, is intended to confer upon any person, other than the
parties hereto or their respective successors, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.9. Headings. The headings contained in this Agreement are for reference
purposes only and are not part of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
PETROLEUM HEAT AND POWER CO., INC.
By: _________________________________
Name: William G. Powers, Jr.
Title: President
STAR GAS PARTNERS, L.P.
By: Star Gas Corporation
By: _________________________________
Name: Joseph P. Cavanaugh
Title: President
STAR GAS PROPANE, LP
By: Star Gas Corporation
By: _________________________________
Name: Joseph P. Cavanaugh
Title: President
PETRO/MERGECO, INC.
By: _________________________________
Name: William G. Powers, Jr.
Title: President
A-41
<PAGE>
Annex B
EXCHANGE AGREEMENT
Agreement entered into as of this 17th day of October, 1998 ("Agreement") by
and among Star Gas Partners, L.P., a Delaware limited partnership ("Star
Partners"), and the shareholders of Petroleum Heat and Power Co., Inc., a
Minnesota corporation, ("Petro") who have executed this Agreement in such
capacity (individually a "Shareholder" and collectively the "Shareholders").
1. Recitals. This Agreement is entered into with reference to the following
facts:
1.1 Petro, Star Partners and certain direct and indirect subsidiaries of
Star Partners have this date entered into an Agreement and Plan of Merger
(the "Merger Agreement").
1.2 It is a condition to the Merger that immediately prior to the
Effective Time each of the Shareholders shall exchange (the "Exchange")
certain shares of Petro Class A Common Stock, par value $.10 per share, and
Petro Class C Common Stock, par value $.10 per share (collectively the
"Petro Common Stock") with Star Partners for certain units of Senior
Subordinated Limited Partnership Units ("Senior Subordinated Units") and
Junior Subordinated Partnership Units (the "Junior Subordinated Units" and
together with the Senior Subordinated Units, the "Subordinated Units"), all
as set forth on Exhibit 1.2 hereto, except that record and beneficial
ownership of certain shares of Class A Common Stock and Class C Common
Stock owned by Audrey Sevin, Irik Sevin, Wolfgang Traber, Hanseatic
Corporation and Hanseatic Americas LDS (collectively the "GP Group") as
contemplated under clause 6 of the definition of "Restructuring
Transactions" in the Merger Agreement will be transferred by the GP Group
to Star Gas LLC and by Star Gas LLC to Star Partners as part of the
Exchange.
1.3 As a condition to executing the Merger Agreement, Star Partners has
required that the Shareholders execute (i) this Agreement, pursuant to
which each of them agrees to exchange his Petro Common Stock with Star
Partners and Star Partners agrees to issue the Subordinated Units in
exchange for the Petro Common Stock, on the terms and conditions contained
herein and (ii) on or before December 31, 1998, a custody agreement of even
date between them and American Stock Transfer & Trust Company substantially
in the form of Exhibit 1.4 hereto (the "Custody Agreement").
1.4 All terms with initial capitals which are not defined herein shall
have the meaning assigned to them in the Merger Agreement.
2. Exchange of Petro Shares for Subordinated Units.
2.1 Subject to the terms and conditions of this Agreement, and
conditioned on the occurrence of the closing under the Merger Agreement, at
the closing under the Merger Agreement (the "Closing"), each of the
Shareholders agrees to transfer and convey to Star Partners the Petro
Common Stock indicated as owned by such Shareholder on Exhibit 1.2 and Star
Partners agrees to accept such transfers and conveyances and to issue to
each such Petro Shareholder the Subordinated Units issuable to such Petro
Shareholder at the Closing as set forth on Exhibit 1.2, except that the GP
Group agrees that on or before November 1, 1998 they will transfer to Star
Gas LLC those shares of Petro Common Stock specified on Exhibit 1.2 as
<PAGE>
transferable to Star Gas LLC and will cause Star Gas LLC to execute a
Custody Agreement and to transfer and convey such Petro Common Stock to
Star Partners at the Closing.
2.2 As security for the performance of its obligations pursuant to
Section 2.1 each of the Petro Shareholders has entered into the Custody
Agreement.
3. Representations and Warranties of each of the Shareholders.
Each of the Shareholders represents and warrants to Star Partners:
3.1 Each Shareholder is the lawful owner of the number of Petro Shares
listed opposite the name of such Shareholder on Exhibit 1.2 free and clear
of all liens, restrictions, encumbrances and claims of any kind to Star
Partners.
3.2 Upon consummation of the Exchange, Star Partners will acquire good
title to all of the Petro Common Stock owned by such Shareholder, free and
clear of any liens, restrictions, encumbrances and claims of any kind
whatsoever.
4. Representations and Warranties of Star Partners.
4.1 Star Partners hereby represents and warrants to the Petro
Shareholders as follows:
(a) The Subordinated Units to be delivered to the Petro Shareholders at
the Closing, and the additional Senior Subordinated Units which may be
issued to holders of the Senior Subordinated Units upon Petro's achieving
certain specified performance levels during the period of five years
following the Closing ("Contingent Senior Subordinated Units"), (i) have
been duly authorized and will be, when issued to the Petro Shareholders in
accordance with the terms hereof, or in the case of the Contingent Senior
Subordinated Units, when issued in accordance with the terms of the Amended
and Restated Agreement of Limited Partnership of Star Partners (the
"Partnership Agreement"), validly issued in accordance with the Partnership
Agreement, fully paid (to the extent required under the Partnership
Agreement) and nonassessable (except as such nonassessability may be
affected by matters described in the Registration Statement relating to the
Merger Agreement under the caption "Description of the Partnership
Agreement--Limited Liability"), and (ii) in the case of the Senior
Subordinated Units, on the Closing Date shall be approved for trading on
the NYSE subject to official notice of issuance.
(b) Neither the execution and delivery of this Agreement nor (upon the
adoption of the amendments to the Partnership Agreement provided for in the
Merger Agreement) the consummation of the transactions contemplated hereby
will violate any provisions of the Partnership Agreement or other
organizational documents of Star Partners or be in conflict with, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or cause the acceleration of the
maturity of any debt or obligation pursuant to, or result in the creation
or imposition of any security interest, lien or other encumbrance upon any
property or assets of Star Partners, under any agreement or commitment to
which Star Partners is a party or by which Star Partners is bound, or
violate any applicable statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority.
B-2
<PAGE>
(c) When delivered to the Shareholders pursuant to the Exchange, the
Senior Subordinated Units will be registered under the Securities Act of
1933, as amended (the "Securities Act") and will be transferable by the
Petro Shareholders free of any restrictions imposed by the Securities Act.
5. Representations and Acknowledgments of Shareholders Regarding the Junior
Subordinated Units
Each of the Shareholders hereby represents and acknowledges:
5.1 No Distribution.
The Junior Subordinated Units being acquired by such Shareholder as set
forth on Exhibit 1.2 are being acquired for his/its own account, for
investment and not with a view to or for resale in connection with any
"distribution" thereof as such term is used in connection with the
registration provisions of the Securities Act.
5.2 Legend.
The following legend shall be affixed to the certificates for Junior
Subordinated Units issued pursuant to this Agreement:
The securities represented by this Certificate have not been registered
under the Securities Act of 1933, as amended, nor the laws of any
state. Accordingly, these securities may not be offered, sold,
transferred, pledged or hypothecated in the absence of registration, or
the availability, in the opinion of counsel for the issuer, of an
exemption from registration under the Securities Act of 1933, as
amended, or the laws of any state. Therefore, the stock transfer agent
will effect transfer of this Certificate only in accordance with the
above instructions.
5.3 Review of Applicable Laws. Each Shareholder acknowledges that Star
Partners has informed him/it that the Junior Subordinated Units to be
received pursuant to the Exchange have not been registered under the
Securities Act and may not be sold until they have been registered or
unless an exemption from such registration is available.
5.4 Knowledge and Experience. Each Shareholder has the knowledge and
experience in the financial and business matters necessary for making an
informed decision on the merits and risk of his investment in the Junior
Subordinated Units.
6. Registration of Senior Subordinated Units. The Senior Subordinated
Units will be entitled to the registration rights provided in the
Partnership Agreement for the benefit of affiliates of the General Partner.
7. Termination. This Agreement may terminate under any of the following
circumstances:
7.1 If the Closing has not occurred on or before May 1, 1999, then any
party may terminate this Agreement by giving notice as provided in 7.9;
7.2 If Petro and Star Partners publicly announce that they have abandoned
the Merger, then this Agreement shall automatically terminate;
7.3 If the Merger Agreement is terminated, then this Agreement shall
automatically terminate;
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<PAGE>
7.4 At any time, by the written consent of all parties.
7. Miscellaneous.
7.1 Complete Agreement. This Agreement constitutes the entire agreement
of the parties hereto pertaining to the subject matter hereof and
supersedes all prior or contemporaneous conversations, understandings,
negotiations and discussions, whether oral or written, on the subject
matter. It can be amended only in writing signed by all parties. The
representations and warranties set forth herein shall survive the Closing.
7.2 Governing Law. This Agreement is intended to be performed in the
State of New York and shall be construed and enforced in accordance with
the laws of the State of New York.
7.3 The parties hereto agree that they will, at the expense of the
requesting party, from time to time execute and deliver any and all
additional and supplemental instruments, and do such other reasonable acts
and things which may be necessary or desirable to effect the purpose of
this Agreement and the transactions contemplated hereby.
7.4 Waiver by any of the parties hereto of any breach of, or exercise of
any right under this Agreement, shall not be deemed a waiver of similar or
other breaches or rights.
7.5 Captions and section headings used herein are for convenience only,
and are not a part of this Agreement, and shall not be used in construing
it.
7.6 All of the terms and provisions of this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective transferees, successors and assigns. Neither party may assign
this Agreement or any interest therein.
7.7 Each Shareholder will indemnify and hold Star Partners harmless
against and in respect of any claims from brokerage or other commissions
relating to this Agreement or the transactions contemplated hereby
resulting from such Shareholder's own dealing with any person in connection
with the Exchange and Star Partners will indemnify and hold the
Shareholders harmless against and in respect of any claims from brokerage
or other commissions relating to this Agreement or the transactions
contemplated hereby resulting from its own dealing with any person in
connection with the Exchange.
7.8 This Agreement is intended to benefit only the parties hereto and
there shall be no third party beneficiaries of this Agreement.
7.9 Notices. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally
delivered, telecopied (with confirmation) or mailed by registered or
certified mail (return receipt requested) to such party at its address set
forth below or such other address as such party may specify by notice to
the parties hereto.
B-4
<PAGE>
If to Star Partners, to:
Star Gas Corporation
Clearwater House
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Fax: 203-328-7393
Attn: Joseph P. Cavanaugh, President
With copies to:
Baker & Botts
One Shell Plaza
910 Louisiana
Houston, TX 77002-4995
Fax: 713-229-1522
Attn: R. Joel Swanson, Esq.
If to a Shareholder:
To his Address set forth on the
Signature Page
With copies to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attn: Alan Shapiro, Esq.
Fax: 212-262-5152
Star Gas Partners, L.P.
by Star Gas Corporation, its General
Partner
By __________________________________
Joseph P. Cavanaugh, President
Shareholders:
- ------------------------------------- -------------------------------------
Irik P. Sevin Wolfgang Traber
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
B-5
<PAGE>
- ------------------------------------- -------------------------------------
Audrey L. Sevin Paul Biddelman
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
Phillip Ean Cohen Hubertus Langen
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Brentwood Corporation United Capital Corp.
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Barcell Corporation
By: _________________________________ -------------------------------------
Thomas J. Edelman
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
B-6
<PAGE>
GABES SA TORTOSA GmbH
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Minneford Corp. MM Warburg & Co.
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
- -------------------------------------
Fernando Montero
- -------------------------------------
Address
- -------------------------------------
Hanseatic Americas LDC Hanseatic Corporation
By: _________________________________ By: _________________________________
- -------------------------------------
Richard O'Connell
- -------------------------------------
Address
- -------------------------------------
B-7
<PAGE>
Exhibit 1.2
<TABLE>
<CAPTION>
Shareholder Class A Class C Total
- ----------- --------- --------- ----------
<S> <C> <C> <C>
P. Cohen........................................ 679,262 113,423 792,685
T. Edelman...................................... 653,312 129,019 782,331
R. O'Connell.................................... 1,128,745 302,461 1,431,206
A. Sevin........................................ 1,876,863 477,716 2,354,579
I. Sevin........................................ 630,227 201,641 831,868
W. Traber....................................... -- 9,038 9,038
Brentwood Corp.................................. 681,873 120,985 802,858
Gabes S.A....................................... 597,617 124,314 721,931
Minneford Corp.................................. 73,638 12,000 85,638
Fernando Montero................................ -- 35,287 35,287
M.M. Warburg & Co............................... -- 31,808 31,808
Hanseatic Corp.................................. -- 298,717 298,717
Hanseatic Americas LDC.......................... 1,777,279 -- 1,777,279
Barcel Corp..................................... 605,151 151,231 756,382
Hubertus Langen................................. 731,473 9,038 740,511
Tortosa GmbH.................................... -- 298,717 298,717
P. Biddelman.................................... 2,386 -- 2,386
United Capital Corp............................. 90,000 -- 90,000
--------- --------- ----------
9,527,826 2,315,395 11,843,221
========= ========= ==========
</TABLE>
All shareholders to receive senior subordinated units of Star Partners at the
ratio of .11758 per share, except A. Sevin, I. Sevin, W. Traber, Hanseatic
Corp. and Hanseatic Americas LDC, which will receive junior subordinated units
and general partner units at the ratio of .14318 per share.
B-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annex C
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
STAR GAS PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[] [/] Symbols denote language that has been stricken from this document.
- ------ Symbol denotes language that has been underlined on the Page.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
ORGANIZATIONAL MATTERS
<TABLE>
<C> <S> <C>
Section 1.1 Formation and Continuation................................. 2[]1[/]
----------------
Section 1.2 Name....................................................... []1[/]2
Section 1.3 Registered Office; Principal Office........................ []1[/]2
Section 1.4 Power of Attorney.......................................... 2
Section 1.5 Term....................................................... []3[/]4
Section 1.6 Possible Restrictions on Transfer.......................... []3[/]4
</TABLE>
ARTICLE II
DEFINITIONS
ARTICLE III
PURPOSE
<TABLE>
<C> <S> <C>
Section 3.1 Purpose and Business...................................... []22[/]25
Section 3.2 Powers.................................................... []22[/]26
</TABLE>
ARTICLE IV
CONTRIBUTIONS AND UNITS
<TABLE>
<C> <S> <C>
Section 4.1 Organization Contributions and Return............. []22[/]26
** 1 Section []4.3[/] 4.2 Contributions by Initial Limited Partners......... []24[/]27
Section []4.2[/]4.3 Contributions at the Effective Time; General
-----------------------------------
Partner Contributions............................. []23[/]27
* 1 moved from here; text not shown
Section 4.4 Issuances of Additional Partnership Securities.... []24[/]28
Section 4.5 Limitations on Issuance of Additional Partnership
Securities........................................ []25[/]29
Section 4.6 []Conversion of[/]Special Issuance of Senior
--------------------------
Subordinated Units and Conversion of Senior
--------------------
Subordinated Units and Junior Subordinated Units.. []26[/]30
------------------------------------------------
Section 4.7 Limited Preemptive Rights......................... []27[/]31
Section 4.8 Splits and Combinations........................... []27[/]31
Section 4.9 Capital Accounts.................................. []28[/]32
Section 4.10 Interest and Withdrawal........................... []31[/]35
</TABLE>
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
<TABLE>
<C> <S> <C>
Section 5.1 Allocations for Capital Account Purposes................ []31[/]35
Section 5.2 Allocations for Tax Purposes............................ []39[/]43
Section 5.3 Requirement and Characterization of Distributions....... []42[/]45
Section 5.4 Distributions of Operating Surplus...................... []43[/]47
Section 5.5 Distributions of Cash from Capital Surplus.............. []44[/]49
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels..................................... []45[/]49
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
Section 5.7 Special Provisions Relating to the Senior Subordinated
------
Units and Junior Subordinated Units..................... []45[/]49
-----------------------------
Section 5.8 Entity-Level Taxation................................... []45[/]50
</TABLE>
ARTICLE []VI
MANAGEMENT AND OPERATION OF BUSINESS[/]
<TABLE>
<C> <S> <C>
Section 6.1 Management.............................................. []46[/]50
Section 6.2 Certificate of Limited Partnership...................... []48[/]52
Section 6.3 Restrictions on General Partner's Authority............. []49[/]53
Section 6.4 Reimbursement of the General Partner.................... []49[/]53
Section 6.5 Outside Activities...................................... []50[/]54
Section 6.6 Loans from the General Partner; Contracts with
Affiliates; Certain Restrictions on the General
Partner................................................. []51[/]55
Section 6.7 Indemnification......................................... []53[/]57
Section 6.8 Liability of Indemnitees................................ []55[/]58
Section 6.9 Resolution of Conflicts of Interest..................... []55[/]59
Section 6.10 Other Matters Concerning the General Partner............ []57[/]60
Section 6.11 Title to Partnership Assets............................. []58[/]61
Section 6.12 Purchase or Sale of Units............................... []58[/]61
Section 6.13 Registration Rights..................................... 62
------------ -------------------------------------------------------- --
Section 6.14 Reliance by Third Parties............................... []61[/]64
</TABLE>
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
<TABLE>
<C> <S> <C>
Section 7.1 Limitation of Liability................................... []61[/]65
Section 7.2 Management of Business.................................... []61[/]65
Section 7.3 Outside Activities........................................ []62[/]65
Section 7.4 Return of Capital......................................... []62[/]65
Section 7.5 Rights of Limited Partners to the Partnership............. []62[/]65
</TABLE>
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
<TABLE>
<C> <S> <C>
Section 8.1 Records and Accounting................................... []63[/]66
Section 8.2 Fiscal Year.............................................. []63[/]66
Section 8.3 Reports.................................................. []63[/]67
</TABLE>
ARTICLE IX
TAX MATTERS
<TABLE>
<C> <S> <C>
Section 9.1 Tax Returns and Information............................... []64[/]67
Section 9.2 Tax Elections............................................. []64[/]67
Section 9.3 Tax Controversies......................................... []65[/]68
Section 9.4 Withholding............................................... []65[/]68
</TABLE>
ii
<PAGE>
ARTICLE X
CERTIFICATES
<TABLE>
<C> <S> <C>
Section 10.1 Certificates............................................ []65[/]68
Section 10.2 Registration, Registration of Transfer and Exchange..... []65[/]68
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates....... []66[/]69
Section 10.4 Record Holder........................................... []67[/]70
</TABLE>
ARTICLE XI
TRANSFER OF INTERESTS
<TABLE>
<C> <S> <C>
Section 11.1 Transfer................................................ []67[/]70
Section 11.2 Transfer of a General Partner's Partnership Interest.... []68[/]70
Section 11.3 Transfer of Units....................................... []68[/]71
Section 11.4 Restrictions on Transfers............................... []69[/]71
Section 11.5 Citizenship Certificates; Non-citizen Assignees......... []69[/]72
Section 11.6 Redemption of Interests................................. []70[/]72
</TABLE>
ARTICLE XII
ADMISSION OF PARTNERS
<TABLE>
<C> <S> <C>
Section 12.1 Admission of Initial Limited Partners................... []71[/]74
Section 12.2 Admission of Substituted Limited Partners............... []72[/]74
Section 12.3 Admission of Successor General Partner.................. []72[/]74
Section 12.4 Admission of Additional Limited Partners................ []72[/]75
Section 12.5 Amendment of Agreement and Certificate of Limited
Partnership............................................. []73[/]75
</TABLE>
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
<TABLE>
<C> <S> <C>
Section 13.1 Withdrawal of the General Partner....................... []73[/]75
Section 13.2 Removal of the General Partner.......................... []75[/]77
Section 13.3 Interest of Departing Partner and Successor General
Partner................................................. []75[/]77
Section 13.4 Withdrawal of Limited Partners.......................... []77[/]78
</TABLE>
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
<TABLE>
<C> <S> <C>
Section 14.1 Dissolution............................................. []77[/]79
Section 14.2 Continuation of the Business of the Partnership After
Dissolution............................................. []78[/]79
Section 14.3 Liquidator.............................................. []78[/]80
Section 14.4 Liquidation............................................. []79[/]80
Section 14.5 Cancellation of Certificate of Limited Partnership...... []80[/]81
Section 14.6 Return of Contributions................................. []80[/]81
Section 14.7 Waiver of Partition..................................... []80[/]81
Section 14.8 Capital Account Restoration............................. []80[/]81
</TABLE>
iii
<PAGE>
ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
<TABLE>
<C> <S> <C>
Section 15.1 Amendment to be Adopted Solely by General Partner....... []80[/]82
Section 15.2 Amendment Procedures.................................... []82[/]83
Section 15.3 Amendment Requirements.................................. []82[/]83
Section 15.4 Meetings................................................ []83[/]84
Section 15.5 Notice of a Meeting..................................... []84[/]84
Section 15.6 Record Date............................................. []84[/]84
Section 15.7 Adjournment............................................. []84[/]85
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes................................................. []84[/]85
Section 15.9 Quorum.................................................. []85[/]85
Section 15.10 Conduct of Meeting...................................... []85[/]86
Section 15.11 Action Without a Meeting................................ []86[/]86
Section 15.12 Voting and Other Rights................................. []86[/]87
</TABLE>
[]ARTICLE XVI[/]
MERGER
<TABLE>
<C> <S> <C>
Section 16.1 Authority................................................ []87[/]87
Section 16.2 Procedure for Merger or Consolidation.................... []87[/]87
Section 16.3 Approval by Limited Partners of Merger or Consolidation.. []88[/]88
Section 16.4 Certificate of Merger.................................... []88[/]88
Section 16.5 Effect of Merger......................................... []89[/]89
</TABLE>
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
<TABLE>
<C> <S> <C>
Section 17.1 Right to Acquire Units................................... []89[/]89
</TABLE>
ARTICLE XVIII
GENERAL PROVISIONS
<TABLE>
<C> <S> <C>
Section 18.1 Addresses and Notices.................................... []91[/]91
Section 18.2 References............................................... []92[/]92
Section 18.3 Pronouns and Plurals..................................... []92[/]92
Section 18.4 Further Action........................................... []92[/]92
Section 18.5 Binding Effect........................................... []92[/]92
Section 18.6 Integration.............................................. []92[/]92
Section 18.7 Creditors................................................ []92[/]92
Section 18.8 Waiver................................................... []92[/]92
Section 18.9 Counterparts............................................. []93[/]92
Section 18.10 Applicable Law........................................... []93[/]92
Section 18.11 Invalidity of Provisions................................. []93[/]93
Section 18.12 Consent of Partners...................................... []93[/]93
EXHIBIT A............................................................... A-1
------------------------------------------------------------------------ ---
EXHIBIT B............................................................... B-1
------------------------------------------------------------------------ ---
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED
--------------------
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF STAR GAS
--------------------
PARTNERS, L.P., dated as of , [] 1995 [1] 1999, is entered into by
----
and among Star Gas Corporation; STAR GAS LLC, a Delaware corporation limited
------------------------ -------
liability company, as the General Partner, and [] William G. Powers, Jr., as
- ------------------
the Organizational Limited Partner, together with any other Persons who [1]
those Persons who are or become Partners in the Partnership or parties hereto
- ------------------------
as; provided, however, herein. In consideration of the covenants, conditions and
agreements contained herein, the parties hereto hereby agree as follows:
RECITALS:
---------
WHEREAS, Star Gas Corporation, a Delaware corporation and the initial general
-----------------------------------------------------------------------------
partner of the Partnership (the "Initial General Partner"), and certain other
- -----------------------------------------------------------------------------
parties organized the Partnership as a Delaware limited partnership pursuant to
- -------------------------------------------------------------------------------
an Agreement of Limited Partnership dated as of December 20, 1995 (the
- ----------------------------------------------------------------------
"Original Agreement"); and
- --------------------------
WHEREAS, the Partnership, the Operating Partnership, Petro and Mergeco have
---------------------------------------------------------------------------
entered into that Merger Agreement dated as of October 22, 1998 (the "Petro
- ---------------------------------------------------------------------------
Merger Agreement") providing for the merger (the "Merger") of Mergeco with and
- ------------------------------------------------------------------------------
into Petro; and
- ---------------
WHEREAS, in order to effect the transactions contemplated by the Petro Merger
-----------------------------------------------------------------------------
Agreement, it is necessary to amend this Agreement as provided herein; and
- --------------------------------------------------------------------------
WHEREAS, the Petro Merger Agreement and the transactions contemplated thereby
-----------------------------------------------------------------------------
(including, without limitation, the form of this Agreement and the amendments
- -----------------------------------------------------------------------------
effected hereby and the withdrawal of the Initial General Partner as the
- ------------------------------------------------------------------------
general partner of the Partnership and the Operating Partnership and the
- ------------------------------------------------------------------------
election of Star Gas LLC as the successor general partner of the Partnership
- ----------------------------------------------------------------------------
and the Operating Partnership) have been submitted to, and approved by the
- --------------------------------------------------------------------------
requisite vote of, the Limited Partners; and
- --------------------------------------------
WHEREAS, the General Partner has the authority to adopt certain amendments to
-----------------------------------------------------------------------------
this Agreement without the approval of any Limited Partner or Assignee to
- -------------------------------------------------------------------------
reflect, among other things: (i) subject to the terms of Section 4.4, any
- -------------------------------------------------------------------------
change that is necessary or desirable in connection with the authorization for
- ------------------------------------------------------------------------------
issuance of any class or series of Partnership Securities pursuant to Section
- -----------------------------------------------------------------------------
4.4 and (ii) a change that, in the sole discretion of the General Partner, does
- -------------------------------------------------------------------------------
not adversely affect the Limited Partners in any material respect.
- ------------------------------------------------------------------
NOW, THEREFORE, the Original Agreement is hereby amended and, as so amended,
----------------------------------------------------------------------------
is restated in its entirety as follows:
- ---------------------------------------
<PAGE>
ARTICLE I
ORGANIZATIONAL MATTERS
Section 1.1 Formation and Continuation.
------------
The Initial General Partner and the Organizational Limited Partner []hereby
-------
form[/] previously formed the Partnership as a limited partnership pursuant to
----------
the provisions of the Delaware Act. The General Partner and the Limited Partners
- --------------------------------------------------------------------------------
hereby amend and restate this Agreement in its entirety to continue the
- -----------------------------------------------------------------------
Partnership as a limited partnership pursuant to the provisions of the Delaware
- -------------------------------------------------------------------------------
Act and to set forth the rights and obligations of the Partners and certain
- ---------------------------------------------------------------------------
matters related thereto. This amendment and restatement shall become effective
- ------------------------------------------------------------------------------
on the date of this Agreement. Except as expressly provided to the contrary in
- ------------------------------
this agreement, the rights and obligations of the Partners and the
administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes.
Section 1.2 Name.
The name of the Partnership []shall be[/] is "Star Gas Partners, L.P." The
--
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner, including the name of the
General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary
for the purpose of complying with the laws of any jurisdiction that so
requires. The General Partner in its sole discretion may change the name of the
Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
Section 1.3 Registered Office; Principal Office.
Unless and until changed by the General Partner, the registered office of the
Partnership in the State of Delaware shall be located at 32 Loockerman Square,
Suite L-100, Dover, Delaware 19904, and the registered agent for service of
process on the Partnership in the State of Delaware at such registered office
shall be The Prentice-Hall Corporation System, Inc. The principal office of the
Partnership shall be located at, and the address of the General Partner shall
be, 2187 Atlantic Street, Stamford, []CT[/] Connecticut 06902, or such other
-----------
place as the General Partner may from time to time designate by notice to the
Limited Partners. The Partnership may maintain offices at such other place or
places within or outside the State of Delaware as the General Partner deems
necessary or appropriate.
Section 1.4 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
each of the General Partner and, if a Liquidator shall have been selected
pursuant to Section 14.3, the Liquidator, severally (and any successor to
either thereof by merger, transfer, assignment, election or otherwise) and each
of their authorized officers and attorneys-in-fact, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full
power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the
C-2
<PAGE>
Certificate of Limited Partnership and all amendments or restatements
thereof) that the General Partner or the Liquidator deems necessary or
appropriate to form, qualify or continue the existence or qualification of
the Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other instruments that
the General Partner or the Liquidator deems necessary or appropriate to
reflect, in accordance with its terms, any amendment, change, modification
or restatement of this Agreement; (C) all certificates, documents and other
instruments (including conveyances and a certificate of cancellation) that
the General Partner or the Liquidator deems necessary or appropriate to
reflect the dissolution and liquidation of the Partnership pursuant to the
terms of this Agreement; (D) all certificates, documents and other
instruments relating to the admission, withdrawal, removal or substitution
of any Partner pursuant to, or other events described in, Articles XI, XII,
XIII and XIV; (E) all certificates, documents and other instruments
relating to the determination of the rights, preferences and privileges of
any class or series of Partnership Securities issued pursuant to Section
4.4; and (F) all certificates, documents and other instruments (including
agreements and a certificate of merger) relating to a merger or
consolidation of the Partnership pursuant to Article XVI; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the sole discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the sole discretion of the General Partner
or the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 15.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner or the Liquidator may exercise the power of attorney made
in this Section 1.4(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 1.4(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XV or
as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and not be affected by
the subsequent death, incompetency, disability, incapacity, dissolution,
bankruptcy or termination of any Limited Partner or Assignee and the transfer
of all or any portion of such Limited Partner's or Assignee's Partnership
Interest and shall extend to such Limited Partner's or Assignee's heirs,
successors, assigns and personal representatives. Each such Limited Partner or
Assignee hereby agrees to be bound by any representation made by the General
Partner or the Liquidator acting in good faith pursuant to such power of
attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of
the General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the
C-3
<PAGE>
General Partner's or the Liquidator's request therefor, such further
designation, powers of attorney and other instruments as the General Partner or
the Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 1.5 Term.
The Partnership commenced upon the filing of the Certificate of Limited
Partnership in accordance with the Delaware Act and shall continue in existence
until the close of Partnership business on December 31, 2085, or until the
earlier dissolution of the Partnership in accordance with the provisions of
Article XIV.
Section 1.6 Possible Restrictions on Transfer.
The General Partner may impose restrictions on the transfer of Partnership
Interests if a subsequent Opinion of Counsel determines that such restrictions
are necessary to avoid a significant risk of the Partnership's or the Operating
Partnership's becoming taxable as a corporation or otherwise as an entity for
federal income tax purposes. The restrictions may be imposed by making such
amendments to this Agreement as the General Partner in its sole discretion may
determine to be necessary or appropriate to impose such restrictions; provided,
however, that any amendment that the General Partner believes, in the exercise
of its reasonable discretion, could result in the delisting or suspension of
trading of any class of Units on any National Securities Exchange on which such
class of Units is then traded must be approved by the holders of at least a
majority of the Outstanding Units of such class.
ARTICLE II
DEFINITIONS
The following definitions shall be for all purposes, unless otherwise clearly
indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity of the
Partnership Group from the operating capacity of the Partnership Group existing
immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent to which Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
C-4
<PAGE>
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property
is increased as a result of such Book-Down Event, an allocable portion of
any such increase in Carrying Value shall be treated as Additional Book
Basis; provided that the amount treated as Additional Book Basis pursuant
hereto as a result of such Book-Down Event shall not exceed the amount by
which the Aggregate Remaining Net Positive Adjustments after such Book-Down
Event exceeds the remaining Additional Book Basis attributable to all of
the Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's
Adjusted Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning of such period
(the "Excess Additional Book Basis"), the Additional Book Basis Derivative
Items for such period shall be reduced by the amount that bears the same ratio
to the amount of Additional Book Basis Derivative Items determined without
regard to this sentence as the Excess Additional Book Basis bears to the
Additional Book Basis as of the beginning of such period.
[]"Additional Capital Contribution Obligation" has the meaning assigned to such
term in Section 4.2(b).[/]
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 12.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and
Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such fiscal year, are reasonably expected
to be made to such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting increases to
such Partner's Capital Account that are reasonably expected to occur during (or
prior to) the year in which such distributions are reasonably expected to be
made (other than increases as a result of a minimum gain chargeback pursuant to
Section 5.1(d)(i) or 5.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
The "Adjusted Capital Account" in respect of a Common Unit, a Senior
------
Subordinated Unit, a Junior Subordinated Unit, a General Partner Unit or any
---------------------------------------------------
other specified interest in the Partnership shall be the amount that such
Adjusted Capital Account would be if such Common Unit, a Senior Subordinated
--------
Unit, a Junior Subordinated Unit, a General Partner Unit or other interest in
- ---------------------------------------------------
the Partnership were the only interest in the Partnership held by a Partner.
"Adjusted Distributable Cash" has the meaning assigned to such term in
----------------------------------------------------------------------
Section 5.3(b).
- ---------------
C-5
<PAGE>
"Adjusted Operating Surplus" for any period means Operating Surplus generated
during such period as adjusted to (a) decrease Operating Surplus by (i) any net
increase in Working Capital Borrowings during such period and (ii) any net
- - -
reduction in cash reserves for Operating Expenditures during such period and
[] (iii) any capital contribution pursuant to the Additional Capital
Contribution Obligation [/] not relating to an Operating Expenditure made during
----------------------------------------------------
such period, and (b) increase Operating Surplus by (i) any net decrease in
- ------------
Working Capital Borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. [] Solely with
respect to the test of the Reduction Threshold, Operating Surplus will be
increased by any net increases in cash reserves for Operating Expenditures
(other than any increase already taken into account in (b)(ii) above) during
such period.[/] Adjusted Operating Surplus does not include that portion of
Operating Surplus included in clause (a)(i) of the definition of Operating
Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 4.9(d)(i) or 4.9(d)(ii). [] Once an Adjusted
Property is deemed distributed by, and recontributed to, the Partnership for
federal income tax purposes upon a termination thereof pursuant to Section 708
of the Code, such property shall thereafter constitute a Contributed Property
until the Carrying Value of such property is subsequently adjusted pursuant to
Section 4.9(d)(i) or 4.9(d)(ii). [/]
"Affiliate" means, with respect to any Person, any other Person that directly
or indirectly through one or more intermediaries controls, is controlled by or
is under common control with, the Person in question. As used herein, the term
"control" means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"Aggregate Remaining Net Positive Adjustments" means as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 5.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. []; provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Section 4.9(c)(i). [/] Subject to Section
4.9(c)(i), the General Partner shall, in its sole discretion, use such method as
it deems reasonable and appropriate to allocate the aggregate Agreed Value of
Contributed Properties contributed to the Partnership in a single or integrated
transaction among each separate property on a basis proportional to the fair
market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
--------------------
of Star Gas Partners, L.P., as it may be amended, supplemented or restated from
time to time.
C-6
<PAGE>
"Assignee" means a Non-citizen Assignee or a Person to whom one or more Units
representing a Limited Partner Interest have been transferred in a manner
- ---------------------------------------
permitted under this Agreement and who has executed and delivered a Transfer
Application as required by this Agreement, but who has not become a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
-------------------------
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, with [] who has [/] the
----
same residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the General
Partner composed entirely of two or more directors who are neither members,
-------
officers nor employees of the General Partner or members, stockholders (other
----------------------------
than holders of Common Units or Senior Subordinated Units), officers, directors
- -----------------------------------------------------------
or employees of any Affiliate of the General Partner.
"Available Cash," as to any Quarter ending before the Liquidation Date, means
(a) the sum of (i) all cash and cash equivalents of the Partnership Group on
hand at the end of such Quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination of
Available Cash with respect to such Quarter resulting from Working Capital
---------------
Borrowings subsequent to the end of such Quarter, less
- ----------
(b) the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the proper
conduct of the business of the Partnership Group (including reserves for future
capital expenditures) subsequent to such Quarter, (ii) provide funds for
distributions under Sections 5.4(a)(i), (ii) and (iii) or 5.4(b)(i) in respect
of any one or more of the next four Quarters, or (iii) comply with applicable
law or any debt instrument or other agreement or obligation to which any member
of the Partnership Group is a party or its assets are subject; provided,
-----------
however, that the General Partner may not establish cash reserves for
- ---------------------------------------------------------------------
distributions pursuant to Section 5.4(a)(iii) unless the General Partner has
- ----------------------------------------------------------------------------
determined that in its judgment the establishment of reserves will not prevent
- ------------------------------------------------------------------------------
the Partnership from distributing the Minimum Quarterly Distribution on all
- ---------------------------------------------------------------------------
Common Units and any Common Unit Arrearages thereon with respect to the
- -----------------------------------------------------------------------
next four Quarters; and, provided, further, that disbursements made by a Group
- ------------------------------------------------------------------------------
Member or cash reserves established, increased or reduced after the end of such
- -------------------------------------------------------------------------------
Quarter but on or before the date of determination of Available Cash with
- -------------------------------------------------------------------------
respect to such Quarter shall be deemed to have been made, established,
- -----------------------------------------------------------------------
increased or reduced, for purposes of determining Available Cash, within such
- -----------------------------------------------------------------------------
Quarter if the General Partner so determines.
- ---------------------------------------------
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
---------------------------------------------------------------------------
in which the Liquidation Date occurs and any subsequent Quarter shall equal
- ---------------------------------------------------------------------------
zero.
- -----
"Book Basis Derivative Items" means any item of income, deduction, gain, or
loss included in the determination of Net Income, Net Loss, Net Termination
Gain or Net Termination Loss that is computed with reference to the Carrying
Value of an Adjusted Property (e.g., depreciation, depletion, or gain or loss
with respect to an Adjusted Property).
C-7
<PAGE>
"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 4.9(d).
* 2 moved from here; text not shown
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property
and the adjusted basis thereof for federal income tax purposes as of such date.
A Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to
Section 4.9 and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal
income tax accounting principles.
** 2 "Book-Up Event" means an event which triggers a positive adjustment to
the Capital Accounts of the Partners pursuant to Section 4.9(d).
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States or the states
of New York or Connecticut shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner pursuant
to Section 4.9. The "Capital Account" in respect of a Common Unit, a Senior
------
Subordinated Unit, a Junior Subordinated Unit, a General Partner Unit or any
---- -------------------------- ---------------
other specified interest in the Partnership shall be the amount which such
Capital Account would be if such Common Unit, Senior Subordinated Unit, Junior
------ ----
Subordinated Unit, General Partner Unit or other interest in the Partnership
- ----------------- ---------------
were the only interest in the Partnership held by a [] Limited [/] Partner.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes or has contributed to
------------------
the Partnership pursuant to this Agreement and the Conveyance and Contribution
------------------
[] Agreement or Sections 4.1, 4.2, 4.3, 4.4, 4.9(c)(i), 13.3(c) or 14.8. [/]
Agreements.
"Capital Improvements" means (a) additions or improvements to the capital
assets owned by any Group Member or (b) the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities and related assets), made
to increase the operating capacity of the Partnership Group from the operating
capacity of the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
"Capital Surplus" has the following meaning: all Available Cash distributed
by the Partnership from any source will be treated as distributed from
Operating Surplus until the sum of all Available Cash distributed since the
commencement of the Partnership equals the Operating Surplus as of the end of
the Quarter prior to such distribution. Any excess Available Cash will be
deemed to be Capital Surplus.
"Carrying Value" means (a) with respect to a Contributed Property, the Agreed
Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions
C-8
<PAGE>
charged to the Partners' and Assignees' Capital Accounts in respect of such
Contributed Property, and (b) with respect to any other Partnership property,
the adjusted basis of such property for federal income tax purposes, all as of
the time of determination. The Carrying Value of any property shall be adjusted
from time to time in accordance with Sections 4.9(d)(i) and 4.9(d)(ii) and to
reflect changes, additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as deemed appropriate
by the General Partner.
"Cause" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
"Certificate" means a certificate, (i) substantially in the form of Exhibit A
---
[] to this Agreement [/] hereto with respect to Common Units and Exhibit B
-------------------------------------------------
hereto with respect to Senior Subordinated Units or (ii) issued in global form
- ------------------------------------------------ --------------------------
in accordance with the rules and regulations of the Depositary, or (iii) in such
- ------------------------------------------------------------------------
other form as may be adopted by the General Partner in its sole discretion,
issued by the Partnership evidencing ownership of one or more Common Units or
--
Senior Subordinated Units, as the case may be, or a certificate, in such form as
- ---------------------------------------------
may be adopted by the General Partner in its sole discretion, issued by the
Partnership evidencing ownership of one or more other Units.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Delaware as
referenced in Section 6.2, as such Certificate of Limited Partnership may be
amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 6.13(c).
[] "Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement. [/] "Class A Common Unit" means a Unit representing a fractional part
-----------------------------------------------------------------
of the Partnership Interests of all Limited Partners and Assignees and having
- -----------------------------------------------------------------------------
the rights and obligations specified with respect to Class A Common Units in
- ----------------------------------------------------------------------------
this Agreement; no Class A Common Units shall be outstanding until the
- ----------------------------------------------------------------------
expiration of the Subordination Period, at which time all Common Units
- ----------------------------------------------------------------------
Outstanding immediately prior to the expiration of the Subordination Period
- ---------------------------------------------------------------------------
shall be redesignated as Class A Common Units.
- ---------------------------------------------
[] "Closing Price" has the meaning assigned to such term in Section 17.1(a). [/]
"Class B Common Unit" means a Unit representing a fractional part of the
- ------------------------------------------------------------------------
Partnership Interests of all Limited Partners and Assignees and having the
- --------------------------------------------------------------------------
rights and obligations specified with respect to Class B Common Units in this
- -----------------------------------------------------------------------------
Agreement; no Class B Common Units shall be outstanding until the expiration of
- -------------------------------------------------------------------------------
the Subordination Period, at which time each Outstanding Senior Subordinated
- ----------------------------------------------------------------------------
Unit and Junior Subordinated Unit shall convert into one Class B Common Unit.
- -----------------------------------------------------------------------------
"Closing Price" for any day means the last sale price on such day, regular
--------------------------------------------------------------------------
way, or in case no such sale takes place on such day, the average of the
- ------------------------------------------------------------------------
closing bid and asked prices on such day, regular way, in either case as
- ------------------------------------------------------------------------
reported in the principal consolidated transaction reporting system with
- ------------------------------------------------------------------------
C-9
<PAGE>
respect to securities listed or admitted to trading on the principal National
- -----------------------------------------------------------------------------
Securities Exchange (other than the Nasdaq Stock Market) on which the Units of
- ------------------------------------------------------------------------------
such class are listed or admitted to trading or, if the Units of such class are
- -------------------------------------------------------------------------------
not listed or admitted to trading on any National Securities Exchange (other
- ----------------------------------------------------------------------------
than the Nasdaq Stock Market), the last quoted price on such day or, if not so
- ------------------------------------------------------------------------------
quoted, the average of the high bid and low asked prices on such day in the
- ---------------------------------------------------------------------------
over-the-counter market, as reported by the Nasdaq Stock Market or such other
- -----------------------------------------------------------------------------
system then in use, or, if on any such day the Units of such class are not
- --------------------------------------------------------------------------
quoted by any such organization, the average of the closing bid and asked
- -------------------------------------------------------------------------
prices on such day as furnished by a professional market maker making a market
- ------------------------------------------------------------------------------
in the Units of such class selected by the Board of Directors of the General
- ----------------------------------------------------------------------------
Partner, or if on any such day no market maker is making a market in the Units
- ------------------------------------------------------------------------------
of such class, the fair value of such Units on such day as determined
- ---------------------------------------------------------------------
reasonably and in good faith by the Board of Directors of the General Partner.
- ------------------------------------------------------------------------------
"Code" means the Internal Revenue Code of 1986, as amended and in effect from
time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
future law.
"Combined Interest" has the meaning assigned to such term in Section 13.3(a).
"Commission" means the Securities and Exchange Commission.
* 4 moved from here; text not shown
"Common Unit" means a Unit representing a fractional part of the Partnership
----------------------------------------------------------------------------
Interests of all Limited Partners and Assignees and having the rights and
- -------------------------------------------------------------------------
obligations specified with respect to Common Units in this Agreement. All
- -------------------------------------------------------------------------
references herein to Common Units after the expiration of the Subordination
- ---------------------------------------------------------------------------
Period shall be deemed to be references to both Class A Common Units and Class
- ------------------------------------------------------------------------------
B Common Units, unless otherwise indicated.
- -------------------------------------------
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, and as to any Quarter within the Subordination Period, the excess, if
any, of (a) the Minimum Quarterly Distribution then in effect with respect to
--------------
such Common Unit over (b) the sum of all Available Cash distributed with
respect to such Common Unit in respect of such Quarter pursuant to Section
5.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 4.9(d), such
property shall no longer constitute a Contributed Property, but shall be deemed
an Adjusted Property.
[] "Contribution" means any cash, cash equivalents or the Net Agreed Value of
any other property or asset that a Partner contributes to the Partnership
pursuant to the [/] "Conveyance and Contribution Agreements" means collectively,
-----------------------------------------------------------
(i) that certain Conveyance and Contribution Agreement, dated as of the
- ---------------- ---------------
Effective Time, among the Partnership, the Operating Partnership, Petro and the
- -------------------------------------------------------------------------------
General Partner and (ii) [] Article IV or Section 13.3(c). [/]
- ------------------------
C-10
<PAGE>
[]"Conveyance and Contribution Agreement" means[/] that certain Conveyance and
Contribution Agreement, []dated as of the Closing Date, between Star Gas,[/]
among the Partnership, the Operating Partnership and certain other parties[/],
- -----
Petro and Petro Holdings, together with the additional conveyance documents and
- ------------------------
instruments contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to a Unit
issued in the Initial Offering for each of the Quarters within the
Subordination Period ending on or before the last day of such Quarter over (b)
the sum of any distributions theretofore made pursuant to Section 5.4(a)(ii)
with respect to such Common Unit (including any distributions to be made in
respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1(d)(xi).
"Current Market Price" [] has the meaning assigned to such term in Section
17.1(a). as of any date of any class of Units listed or admitted to trading on
---------------------------------------------------------------------
any National Securities Exchange means the average of the daily Closing Prices
- ------------------------------------------------------------------------------
per Unit of such class for the 20 consecutive Trading Days immediately prior to
- -------------------------------------------------------------------------------
such date.
- ---------
"Debt Offering" means the offering and sale by Petro of $ million Senior
----------------------------------------------------------------------------
Subordinated Notes due .
- ------------------------------
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. (S)17-(S)17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 13.1 or 13.2.
"Depositary" means with respect to any Units issued in global form, the
-----------------------------------------------------------------------
Depository Trust Company and its successors and permitted assigns.
- ------------------------------------------------------------------
"EBITDA" means operating income plus depreciation, amortization and non-cash
---------------------------------------------------------------------------
charges (excluding expenses related to the consummation of the Merger and the
- -----------------------------------------------------------------------------
transactions contemplated thereby).
- ----------------------------------
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Effective Time" means the effective time of the Merger, which shall be the
--------------------------------------------------------------------------
later to occur of (i) the filing in the office of the Secretary of State of the
- -------------------------------------------------------------------------------
State of Delaware of a properly executed certificate of merger and (ii) the
- ---------------------------------------------------------------------------
filing with the Department of State of Minnesota of properly executed articles
- ------------------------------------------------------------------------------
of merger, or such later date and time as may be set forth in such certificate
- ------------------------------------------------------------------------------
of merger and articles of merger.
- --------------------------------
"Eligible Citizen" means a Person qualified to own interests in real property
in jurisdictions in which any Group Member does business or proposes to do
business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Equity Offering" means the offering and sale by the Partnership of Common
-------------------------------------------------------------------------
Units to the public, as described in the Equity Registration Statement.
- ----------------------------------------------------------------------
C-11
<PAGE>
** 3 "Equity Registration Statement" means the Registration Statement on Form
------
S-3 (Registration No. []33-98490)[/]-333-68329), as it has been or as it may be
amended or supplemented from time to time, filed by the Partnership with the
Commission under the Securities Act to register the offering and sale of the
Common Units in the []Initial[/] Equity Offering.
------
"Event of Withdrawal" has the meaning assigned to such term in Section
13.1(a).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 5.1(c)(i)(5).
------------
"First Target Distribution" means $0.604 per Unit[] (or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.604 multiplied by a fraction of which the numerator is the number of days
in such period and of which the denominator is 91),[/] subject to adjustment in
accordance with Sections 5.6 and 5.8.
"General Partner" means Star Gas LLC, a Delaware limited liability company,
------------------------------------------
and its successor as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
- -------------------------------------------------------------------------------
Partner in the Partnership (in its capacity as a general partner without
- -------------------------------------------------------------------------------
reference to any Limited Partner Interest held by it) which is evidenced by
- -------------------------------------------------------------------------------
General Partner Units and includes any and all benefits to which the General
- -------------------------------------------------------------------------------
Partner is entitled as provided in this Agreement, together with all
- -------------------------------------------------------------------------------
obligations of the General Partner to comply with the terms and provisions of
- -------------------------------------------------------------------------------
this Agreement.
- --------------
"General Partner Unit" means a Unit representing a fractional part of the
- -------------------------------------------------------------------------------
General Partner Interest and having the rights and obligations specified with
- -------------------------------------------------------------------------------
respect to the General Partner Interest.
- ---------------------------------------
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with any
other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Interests.
"Group Member" means a member of the Partnership Group.
"Holder" has the meaning assigned to such term in Section 6.13(a).
[]"Incentive Distribution" means any amount of cash distributed to the General
Partner, in its capacity as general partner of the Partnership, pursuant to
Sections 5.4(a)(v), (vi) or (vii) and Sections 5.4(b)(iii), (iv) or (v) which
exceeds an amount equal to 1.0% of the aggregate amount of cash then being
distributed pursuant to such provisions.[/]
"includes" means includes, without limitation, and "including" means
including, without limitation.
"Indemnified Persons" has the meaning assigned to such term in Section
6.13(c).
C-12
<PAGE>
"Indemnitee" means (a) the General Partner, any Departing Partner, any Person
who is or was an Affiliate of the General Partner or any Departing Partner, (b)
any Person who is or was an officer, director, employee, partner, agent or
trustee of the General Partner or any Departing Partner or any such Affiliate,
or (c) any Person who is or was serving at the request of the General Partner
or any Departing Partner or any such Affiliate as a director, officer,
employee, partner, agent, fiduciary or trustee of another Person; provided that
a Person shall not be an Indemnitee pursuant to this clause (c) by reason of
providing, on a fee-for-services basis, trustee, fiduciary or custodial
services.
"Initial Closing Date" means December 20, 1995.
----------------------------------------------
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial General Partner" means Star Gas Corporation, a Delaware corporation.
----------------------------------------------------------------------------
"Initial Limited Partners" means Star Gas, Silgas, Inc. and Silgas of
Illinois, Inc. [](with respect to the Subordinated Units received by them
pursuant to Section 4.2) and the[/] and the Initial Underwriters, in each case
---------------
upon being admitted to the Partnership in accordance with Section 12.1.
"Initial Offering" means the initial offering and sale of Common Units to the
public on December 20, 1995, as described in the Initial Registration
-------------------- -------
Statement.
"Initial Overallotment Closing Date" means January 18, 1996.
--------------------------------------------------
"Initial Registration Statement" means the Registration Statement on Form S-l
(Registration No. 33-98490), as amended or supplemented from time to time,
filed by the Partnership with the Commission under the Securities Act to
register the offering and sale of the Initial Common Units in the Initial
Offering.
"Initial Underwriters" means each person named as an underwriter in the
Initial Offering.
"Initial Unit Price" means (a) []the initial public offering price per Common
Unit at which the Underwriters offered the Common Units to the public for sale
as set forth on the cover page of the prospectus first issued at or after the
time the Registration Statement first became effective[/] with respect to each
--------------------
Common Unit, Senior Subordinated Unit, Junior Subordinated Unit and General
- ---------------------------------------------------------------------------
Partner Unit, $22.00 or (b) with respect to any other class or series of Units,
- --------------------
the price per Unit at which such class or series of Units is initially sold by
the Partnership, as determined by the General Partner, in each case adjusted as
the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they occur
prior to the Liquidation Date: (a) borrowings, refinancings or refundings of
indebtedness and sales of debt securities (other than []Working Capital
purposes[/] Working Capital Borrowings and other than for items purchased on
--------------------------
open account in the ordinary course of business) by any Group Member; (b) sales
of equity interests (including Common Units sold to the Underwriters pursuant to
the exercise of the Overallotment Option, []but excluding the contributions made
pursuant to the Additional Capital Contribution Obligation[/]) by any Group
Member; and (c) sales or other voluntary or involuntary dispositions of any
assets of any Group Member other than (x) sales or other dispositions of
C-13
<PAGE>
inventory in the ordinary course of business, (y) sales or other dispositions
of other current assets, including receivables and accounts in the ordinary
course of business, and (z) sales or other dispositions of assets as part of
normal retirements or replacements.
** 4 "[]Common[/] Junior Subordinated Unit" means a Unit representing a
fractional part of the Partnership Interests of all Limited Partners and
Assignees and having the rights and obligations specified with respect to Common
Junior Subordinated Units in this Agreement.
- -------------------
[]"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership. [/]"Limited Partner" means, unless the
context otherwise requires, (a) the Organizational Limited Partner, each Initial
Limited Partner, each Substituted Limited Partner, each Additional Limited
Partner and any Departing Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 13.3; and (b) solely for purposes
of Articles IV, V, VI and IX and Sections 14.3 and 14.4, each Assignee.
"Limited Partner Interest" means the ownership interest of a Limited Partner
----------------------------------------------------------------------------
in the Partnership which is evidenced by Common Units, Senior Subordinated
- --------------------------------------------------------------------------
Units and Junior Subordinated Units or other Partnership Securities and
- -----------------------------------------------------------------------
includes any and all benefits to which a Limited Partner is entitled as
- -----------------------------------------------------------------------
provided in this Agreement, together with all obligations of a Limited Partner
- ------------------------------------------------------------------------------
to comply with the terms and provisions of this Agreement.
- ----------------------------------------------------------
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 14.2, the date on which the applicable time
period during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means the General Partner or other Person approved pursuant to
Section 14.3 who performs the functions described therein.
"Maintenance Capital Expenditures" means cash capital expenditures made to
maintain, up to the level thereof that existed at the time of such expenditure,
the operating capacity of the capital assets of the Partnership Group, as such
assets existed at the time of such expenditure and shall, therefore, not
include cash capital expenditures made in respect of Acquisitions and Capital
Improvements. Where cash capital expenditures are made in part to maintain the
operating capacity level referred to in the immediately preceding sentence and
in part for other purposes, the General Partner's good faith allocation thereof
between the portion used to maintain such operating capacity level and the
portion used for other purposes shall be conclusive.
"Mergeco" has the meaning assigned to such term in the introductory paragraph
-----------------------------------------------------------------------------
to this Agreement.
- ------------------
"Merger" has the meaning assigned to such term in the introductory paragraph
----------------------------------------------------------------------------
to this Agreement.
- ------------------
C-14
<PAGE>
"Merger Agreement" has the meaning assigned to such term in Section 16.1.
"Minimum Quarterly Distribution" means []$0.55[/] $0.575 per Unit per
Quarter [] (or with respect to [/], subject to adjustment in accordance with
Sections 5.6 and 5.8; provided, however, the Minimum Quarterly Distribution with
respect to the Senior Subordinated Units, Junior Subordinated Units and General
Partner Units for the period commencing on the [] Closing Date [/]Effective Time
and ending on []March 31, 1996, [/] June 30, 1999, shall be equal to the product
of [] $0.55[/] $0.575 multiplied by a fraction of which the numerator is the
number of days in such period and of which the denominator is 91 []), subject to
adjustment in accordance with Sections 5.6 and 5.8.[/]
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 4.9(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable year. The items included in the
calculation of Net Income shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or
Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess, if
any, of the total positive adjustments over the total negative adjustments made
to the Capital Account of such Partner pursuant to Book-Up and Book-Down
Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such
C-15
<PAGE>
amounts recognized through the Operating Partnership) after the Liquidation
Date. The items included in the determination of Net Termination Gain shall be
determined in accordance with Section 4.9(b) and shall not include any items of
income, gain or loss specially allocated under Section 5.1(d).
"Net Termination Loss" means, for any taxable period, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through the Operating
Partnership) after the Liquidation Date. The items included in the
determination of Net Termination Loss shall be determined in accordance with
Section 4.9(b) and shall not include any items of income, gain or loss
specially allocated under Section 5.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has determined
in its sole discretion does not constitute an Eligible Citizen and as to whose
Partnership Interest the General Partner has become the Substituted Limited
Partner, pursuant to Section 11.5.
"Non-competition Agreement" means that certain non-competition agreement
[] between Petroleum Heat and Power Co., Inc. ("Petro") and the Partnership
pursuant to which Petro has agreed with the Partnership that neither Petro nor
any of its Affiliates will acquire a business which derives any revenues from
the sale of propane, if, after giving effect to such acquisition, Petro's Pro
Forma Propane Volumes would equal or exceed the lesser of (i) 15% of the
Partnership's reported propane volumes sold for the most recently completed
four fiscal quarters which ended at least 90 days prior to the date of such
acquisition or (ii) 15 million gallons of propane. Petro's Pro Forma Propane
Volume means the actual propane volumes sold by Petro and any of its Affiliates
(other than the Partnership) for the most recently completed four fiscal
quarters which ended at least 90 days prior to the date of determination plus
the propane volumes sold by the propane business to be acquired for the most
recently completed four fiscal quarters which ended at least 90 days prior to
the date of determination. Petro and the Partnership have further agreed
pursuant to the Non-competition Agreement that in the event that Petro or an
Affiliate owns a propane business, Petro or such Affiliate may not accept as a
customer any person who is a customer of the Partnership. [/] among Irik. P.
Sevin, the Partnership and the Operating Partnership.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated
to the Partners pursuant to Sections 5.2(b)(i)(1), 5.2(b)(ii)(1) and
- -
5.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in
accordance with the principles of Treasury Regulation Section 1.704-2(b), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 17.1(b).
C-16
<PAGE>
"Old Subordinated Units" means the Subordinated Units issued to the Initial
- -----------------------------------------------------------------------------
General Partner on the Initial Closing Date.
- --------------------------------------------
"Operating Expenditures" means all Partnership Group expenditures, including
taxes, reimbursements of the General Partner, debt service payments, and
capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a debt shall
not be an Operating Expenditure if the payment is (i) required in connection
with the sale or other disposition of assets or (ii) made in connection with
the refinancing or refunding of indebtedness with the proceeds from new
indebtedness or from the sale of equity interests. For purposes of the
foregoing, at the election and in the reasonable discretion of the General
Partner, any payment of principal or premium shall be deemed to be refunded or
refinanced by any indebtedness incurred or to be incurred by the Partnership
Group within 180 days before or after such payment to the extent of the
principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures made
for Acquisitions or for Capital Improvements, (ii) payment of transaction
expenses relating to Interim Capital Transactions [] or (iii) [/], (iii)
-------
payment of transaction expenses related to the Merger and the transactions
- --------------------------------------------------------------------------
contemplated thereby or (iv) distributions to Partners. Where capital
- ----------------------------
expenditures are made in part for Acquisitions or Capital Improvements and in
part for other purposes, the General Partner's good faith allocation between the
amounts paid for each shall be conclusive.
"Operating Partnership" means Star Gas Propane, L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," as to any period ending before the Liquidation Date,
means
(a) the sum of (i) $[20,071,225] plus all cash of the Partnership Group on
hand as of the close of business on the Initial Closing Date [] and [/], (ii)
-------
all the cash receipts of the Partnership Group for the period beginning on the
Initial Closing Date and ending with the last day of such period, other than
- -------
cash receipts from Interim Capital Transactions (except to the extent specified
-------------------------------
in Section 5.5) and (iii) all cash receipts of the Partnership Group after the
- ------------------------------------------------------------------------------
end of such period but on or before the date of determination of Operating
- --------------------------------------------------------------------------
Surplus with respect to such period resulting from Working Capital Borrowings,
- ------------------------------------------------------------------------------
less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Initial Closing Date and ending with the last day of such period, and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
-----------------------------------------------------
contributions to a Group Member or disbursements on behalf of a Group Member)
- -----------------------------------------------------------------------------
or cash reserves established, increased or reduced after the end of such period
- -------------------------------------------------------------------------------
but on or before the date of determination of Available Cash with respect to
- ----------------------------------------------------------------------------
such period shall be deemed to have been made, established, increased or
- ------------------------------------------------------------------------
reduced, for purposes of determining Operating Surplus, within such period if
- --------------------------------------------------------------------------------
the General Partner so determines.
- ----------------------------------
C-17
<PAGE>
Notwithstanding the foregoing, "Operating Surplus" with respect to the Quarter
- ------------------------------------------------------------------------------
in which the Liquidation Date occurs and any subsequent Quarter shall equal
- ---------------------------------------------------------------------------
zero.
- -----
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to []Star Gas any Affiliate of Star Gas, the Partnership or the General
Partner)[/] the Partnership, the General Partner or any of its Affiliates)
--------------------------------------------------------------
acceptable to the General Partner in its reasonable discretion.
"Organizational Limited Partner" means William G. Powers, Jr., in his
capacity as the organizational limited partner of the Partnership.
"Original Agreement" has the meaning assigned to such term in the Recitals to
-----------------------------------------------------------------------------
this Agreement.
- ---------------
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination.
"Overallotment Option" means the overallotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Star Gas Partners, L.P., a Delaware limited partnership,
and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and any
Subsidiary of either such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
[]include general partner interests, Common Units, Subordinated Units or other
Partnership Securities, or a combination thereof or interest therein, as the
case may be. [/] General Partner Interests and Limited Partner Interests.
--------------------------------------------------------
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
C-18
<PAGE>
"Partnership Security" means any class or series of Unit, any option, right,
warrant or appreciation rights relating thereto, or any other type of equity
interest that the Partnership may lawfully issue, or any unsecured or secured
debt obligation of the Partnership that is convertible into any class or series
of equity interests of the Partnership.
"Percentage Interest" means as of the date of such determination (a) []as to
the General Partner, 1%, (b),[/] as to any []Limited[/] Partner or Assignee
holding Units, the product of (i) []99%[/] 100% less the percentage applicable
----
to paragraph (c) (b) multiplied by (ii) the quotient of the number of Units held
by such []Limited[/] Partner or Assignee divided by the total number of all
Outstanding Units, and (c)(b) as to the holders of additional Partnership
Securities issued by the Partnership in accordance with Section []4.3[/] 4.4,
the percentage established as a part of such issuance.
[]"Permitted Investments" means securities with a maturity of one year or less
that are (x) direct obligations of the United States of America for the payment
of which its full faith and credit is pledged, (y) obligations of a Person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the payment of which is unconditionally guaranteed as
a full faith and credit obligation by the United States of America, which, in
either case, are not callable or redeemable at the option of the issuer thereof
or (z) securities of mutual or similar funds which invest exclusively in
securities of the type permitted under clauses (x) and (y) above, in each case
having assets in excess of $100 million.[/]
"Person" means an individual or a corporation, limited liability company,
--------------------------
partnership, joint venture, trust, unincorporated organization, association or
-----
other entity.
"Per Unit Capital Amount" means, as of any date of determination, the Capital
Account, stated on a per Unit basis, underlying any Unit held by a Person
[]other than the General Partner or any Affiliate.[/]
"Petro" means Petroleum Heat and Power Co., Inc., a Minnesota corporation, an
-----------------------------------------------------------------------------
indirect subsidiary of the Operating Partnership.
- -------------------------------------------------
"Petro Adjusted Operating Surplus" means, with respect to any four-Quarter
-------------------------------------------------------------------------
period, the Adjusted Operating Surplus generated by Petro (which for purposes
- -----------------------------------------------------------------------------
of this definition includes all subsidiaries of the Partnership primarily
- -------------------------------------------------------------------------
engaged in the home heating oil business) during such four-Quarter period, as
- -----------------------------------------------------------------------------
determined in good faith by a majority of the members of the Board of Directors
- -------------------------------------------------------------------------------
of the General Partner []who holds Units. [/](with the concurrence of the Audit
- -------------------------------------------------------------------------------
Committee). In calculating Petro Adjusted Operating Surplus, (i) debt service
- -----------------------------------------------------------------------------
(including the payment of principal, interest and premium) on all debt incurred
- -------------------------------------------------------------------------------
or assumed by Petro or any of its Affiliates, the proceeds of which are used by
- -------------------------------------------------------------------------------
or for the benefit of Petro (including the proceeds from the Debt Offering),
- ----------------------------------------------------------------------------
shall be included to the extent such debt service is included in the
- --------------------------------------------------------------------
calculation of Operating Surplus, and (ii) debt service (including the payment
- ------------------------------------------------------------------------------
of principal, interest and premium) on all debt incurred or assumed by Petro or
- -------------------------------------------------------------------------------
any of its Affiliates, the proceeds of which are not used by or for the benefit
- -------------------------------------------------------------------------------
of Petro, shall be excluded.
- ----------------------------
[]"Pro Rata" [/]"Petro Class A Common Stock" means the Class A Common Stock, par
----------------------------------------------------------------
value $.10 per share, of Petro.
- -------------------------------
C-19
<PAGE>
"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
---------------------------------------------------------------------------
per share, of Petro.
- --------------------
"Petro Holdings" means Petro Holdings, Inc., a Minnesota corporation, a
-----------------------------------------------------------------------
wholly-owned indirect subsidiary of the Operating Partnership.
- --------------------------------------------------------------
"Petro Merger Agreement" has the meaning set forth in the Recitals to this
--------------------------------------------------------------------------
Agreement.
- ----------
"Petro Units," with respect to any date, means the sum of (i) the excess of
---------------------------------------------------------------------------
the number of Units outstanding at the Effective Time over the number of Units
- ------------------------------------------------------------------------------
outstanding immediately prior to the Effective Time (assuming the simultaneous
- ------------------------------------------------------------------------------
closing of the Equity Offering), (ii) the number of Units issued by the
- -----------------------------------------------------------------------
Partnership thereafter to the extent the net proceeds of which are contributed
- ------------------------------------------------------------------------------
to Petro (which for purposes hereof includes all subsidiaries of the
- --------------------------------------------------------------------
Partnership primarily engaged in the home heating oil business), (iii) the
- --------------------------------------------------------------------------
number of Senior Subordinated Units or Class B Common Units issued pursuant to
- ------------------------------------------------------------------------------
Section 4.6, and (iv) the deemed number of Units outstanding based upon a
- -------------------------------------------------------------------------
contribution of capital to Petro by the Partnership or any Affiliate thereof
- ----------------------------------------------------------------------------
after the Effective Time (which contribution is not covered by (ii) above or
- ----------------------------------------------------------------------------
traceable to debt proceeds), which number of deemed Units is obtained by
- ------------------------------------------------------------------------
dividing (A) the amount of such contribution by (B) the Current Market Price of
- -------------------------------------------------------------------------------
a Common Unit. If Petro pays down debt of Petro or debt allocated to Petro from
- -------------------------------------------------------------------------------
internally generated funds of Petro and if those internally generated funds
- ---------------------------------------------------------------------------
exist at Petro only because Petro has not paid dividends up to the Partnership
- ------------------------------------------------------------------------------
in an amount equal to the distributions that would have been paid on the Petro
- ------------------------------------------------------------------------------
Units had they been actual outstanding Units of the Partnership, then the
- -------------------------------------------------------------------------
amount used to pay down such debt will be treated as if it were contributed to
- ------------------------------------------------------------------------------
Petro by the Partnership. The distribution per Senior Subordinated Unit of the
- ------------------------------------------------------------------------------
Partnership shall be the amount that the Partnership would have been deemed to
- ------------------------------------------------------------------------------
have distributed per Petro Unit had they been actual outstanding Units of the
- -----------------------------------------------------------------------------
Partnership. For purposes of the number of deemed outstanding Units in (iv)
- ---------------------------------------------------------------------------
above, such Units shall be deemed to be issued on the date of such Capital
- --------------------------------------------------------------------------
Contribution. For this purpose, Common Unit means Class A Common Units upon
- ---------------------------------------------------------------------------
expiration of the Subordination Period.
- ---------------------------------------
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
--------------------
equally among all designated Units [], and [/]in accordance with their
------------------------
respective Percentage Interests, and (b) when modifying Partners []means 1% of
- ---------------------------------------------
the General Partner and 99% to the Unitholders Pro Rata, [/]and Assignees,
----------
apportioned among all Partners and Assignees in accordance with their respective
- --------------------------------------------------------------------------------
Percentage Interests.
- ---------------------
"Proxy Statement" means the Registration Statement on Form S-4 (Registration
----------------------------------------------------------------------------
No. 333-66005) as it has been or as it may be amended or supplemented from time
- -------------------------------------------------------------------------------
to time, filed jointly by the Partnership and Petro relating to the Merger and
- ------------------------------------------------------------------------------
the transactions contemplated thereby.
- --------------------------------------
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units
------------------
owned by the General Partner and its Affiliates) pursuant to Article XVII.
"Quarter" means, unless the context requires otherwise, a three-month period
of time ending on March 31, June 30, September 30, or December 31.
C-20
<PAGE>
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution.
"Record Holder" means the Person in whose name a Common Unit or a Senior
Subordinated Unit is registered on the books of the Transfer Agent as of the
opening of business on a particular Business Day, or with respect to a holder of
a []general partner interest [/]Junior Subordinated Unit or General Partner Unit
------------------------------------------------
or other Partnership Security, the Person in whose name such []general partner
- ------------------------------
interest [/]Junior Subordinated Unit or General Partner Unit or other
---------------------------------------------------------
Partnership Security is registered on the books of the General Partner as of the
- --------------------
opening of business on such Business Day.
"Redeemable Units" means any []Units [/]Partnership Interests for which a
---------------------
redemption notice has been given, and has not been withdrawn, pursuant to
Section 11.6.
[]"Reduction Threshold" has the meaning assigned to such term in Section
4.2(b).[/]
*3 moved from here; text not shown
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Limited Partners, as a class, the excess of (a)
the Net Positive Adjustments of the Limited Partners as of the end of such
period over (b) the sum of those Partners' Share of Additional Book Basis
Derivative Items for each prior taxable period, and (ii) with respect to the
General Partner, the excess of (a) the Net Positive Adjustments of the General
Partner as of the end of such period over (b) the sum of the General Partner's
Share of Additional Book Basis Derivative Items for each prior taxable period.
"Required Allocations" means any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a)
Section 5.1(b)(ii) or (b) Sections 5.1(d)(i), 5.1(d)(ii), 5.1(d)(iv),
5.1(d)(v), 5.1(d)(vi), 5.1(d)(vii) and 5.1(d)(ix), such allocations (or
limitations thereon) being directly or indirectly required by the Treasury
Regulations promulgated under Section 704(b) of the Code.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Sections 5.2(b)(i)(1) or 5.2(b)(ii)(1), respectively, to eliminate
------------------------------
Book-Tax Disparities.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 5.1(c)(i)(6).
-------------
C-21
<PAGE>
"Second Target Distribution" means $0.711 per Unit [](or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.711 multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is 91)[/], subject to
adjustment in accordance with Sections 5.6 and 5.8.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
** 5 "Senior Subordinated Unit" means a Unit representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees, and having
the rights and obligations specified with respect to Senior Subordinated Units
in this Agreement.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable
period, (i) with respect to the Limited Partners, as a class, the amount that
bears the same ratio to such Additional Book Basis Derivative Items as the
Limited Partners' Remaining Net Positive Adjustments as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, and (ii) with respect to
the General Partner, the amount that bears the same ratio to such Additional
Book Basis Derivative Items as the General Partner's Remaining Net Positive
Adjustments as of the end of such period bears to the Aggregate Remaining Net
Positive Adjustments as of that time.
"Shelf Registration Statement" has the meaning assigned to such term in
Section 6.13(f).
"Special Approval" means approval by the Audit Committee.
"Star Gas" means Star Gas Corporation, a Delaware corporation []and a wholly
owned subsidiary of Petroleum Heat and Power Co., Inc., a Minnesota
corporation.[/]
* 5 moved from here; text not shown
"Subordination Period" means the period []commencing [/]that commenced on the
Initial Closing Date and ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning on or after []January[/] October 1,
[]2001[/] 2002 in respect of which (A) (i) distributions of Available Cash from
Operating Surplus on each of the Outstanding Common Units []and[/], Senior
----------- ------
Subordinated Units, Junior Subordinated Units and General Partner Units equaled
----------------------------------------------------------
or exceeded the Minimum Quarterly Distribution for each of the three non-
overlapping four-Quarter periods immediately preceding such date and (ii) the
Adjusted Operating Surplus generated during each of the three immediately
preceding non-overlapping four-Quarter periods equaled or exceeded the sum of
the Minimum Quarterly Distribution on all of the Common Units []and[/], Senior
------
Subordinated Units, []plus the related distributions on the general partner
interest, [/]Junior Subordinated Units and General Partner Units that were
-------------------------------------------------------------
Outstanding during such periods on a fully diluted basis with respect to
- ------------------------------------------------------------------------
employee options or other employee incentive compensation (i.e., taking into
- ----------------------------------------------------------------------------
account for purposes of such determination all Outstanding Common Units, Senior
- -------------------------------------------------------------------------------
Subordinated Units, Junior Subordinated Units and General Partner Units and all
- -------------------------------------------------------------------------------
Common Units issuable upon exercise of employee options that have, as of the
- ----------------------------------------------------------------------------
date of determination, already vested or are scheduled to vest prior to
- ----------------------------------------------------------------------------
the end of the Quarter immediately following the Quarter with respect to which
- ------------------------------------------------------------------------------
C-22
<PAGE>
determination is made, and all Units that have as of the date of determination
- ------------------------------------------------------------------------------
been earned by but not yet issued to management of the Partnership in respect
- -----------------------------------------------------------------------------
of incentive compensation) and (B) there are no Cumulative Common Unit
- --------------------------
Arrearages; and
(b) the date on which the General Partner is removed as general partner of
the Partnership upon the requisite vote by Limited Partners under circumstances
where Cause does not exist; provided, however, that if the General Partner is
-------------------------------------------------
removed during the Subordination Period within 12 months after the end of a
- ---------------------------------------------------------------------------
six-Quarter period in which the Minimum Quarterly Distribution was not made on
- ------------------------------------------------------------------------------
the Common Units with respect to more than one of such Quarters (excluding for
- ------------------------------------------------------------------------------
this purpose the payment of any Common Unit Arrearages) and the first quarter
- -----------------------------------------------------------------------------
in such six-Quarter period that the Minimum Quarterly Distribution on Common
- ----------------------------------------------------------------------------
Units was not made occurs after March 31, 2001, then the Subordination Period
- -----------------------------------------------------------------------------
will not end. In the event that the General Partner is removed under the
- ------------------------------------------------------------------------
circumstances set forth in the above proviso, the Junior Subordinated Units
- ---------------------------------------------------------------------------
shall convert into Senior Subordinated Units on a one-for-one basis and the
- ---------------------------------------------------------------------------
distribution rights on the General Partner Units will rank pari passu with the
- ------------------------------------------------------------------------------
Senior Subordinated Units.
- --------------------------
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, by such
Person, by one or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) in which such Person or a
Subsidiary of such Person is, at the date of determination, a general or
limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned or controlled,
directly or indirectly, by such Person, by one or more Subsidiaries of such
Person, or a combination thereof, or (c) any other Person (other than a
corporation or a partnership) in which such Person, directly or indirectly, at
the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors
or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 12.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
16.2(b).
"Termination Capital Transaction" means a transaction in which Net
------------------------------------------------------------------
Termination Gain or Net Termination Loss is recognized.
- -------------------------------------------------------
"Third Target Distribution" means $0.926 per Unit [](or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.926 multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is 91),[/] subject to
adjustment in accordance with Sections 5.6 and 5.8.
"Trading Day" means a day on which the principal National Securities Exchange
---------------------------------------------------------------
on which the Units of any class are listed or admitted to trading is open for
- -----------------------------------------------------------------------------
the transaction of business or, if Units of a class are not listed or admitted
- ------------------------------------------------------------------------------
to trading on any National Securities Exchange, a day on which banking
- ----------------------------------------------------------------------
institutions in New York City generally are open.
- -------------------------------------------------
C-23
<PAGE>
"Transfer" has the meaning assigned to such term in Section 11.1(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
[]Units.[/] Common Units and Senior Subordinated Units and as may be appointed
from time to time by the General Partner to act as registrar and transfer agent
for any other Partnership Securities; provided that if no Transfer Agent is
specifically designated for any such other Partnership Securities, the General
Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule 1 to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement []dated December 14,
1995,[/] relating to the Equity Offering, dated , among the
--------------------------------------
Underwriters, the Partnership and other parties providing for the purchase of
Common Units by such Underwriters.
"Unit" means a Partnership Interest of a []Limited[/] Partner or Assignee in
the Partnership representing a fractional part of the Partnership Interests of
all []Limited[/] Partners and Assignees and shall include[], without limitation,
Common Units and Subordinated [/]Common Units (Class A Common Units and Class B
----------------------------------------------
Common Units after the expiration of the Subordination Period), Senior
- ----------------------------------------------------------------------
Subordinated Units, Junior Subordinated Units and General Partner Units;
- -----------------------------------------------------------------
provided that each []Common[/] Unit at any time Outstanding shall represent the
same fractional part of the Partnership Interests of all []Limited[/] Partners
and Assignees holding []Common Units as each other []Common[/] Unit and each
Subordinated Unit at any time Outstanding shall represent the same fractional
part of the Partnership Interests of all Limited Partners and Assignees
holding Subordinated[/] Units as each other Unit. A Unit shall not include a
----------------------------------------------------
Petro Unit.
- -----------
"Unit Majority" means, during the Subordination Period, at least (i) a
majority of the Outstanding Common Units []other than Common Units owned by the
General Partner or any Affiliate and, thereafter, at least[/] voting as a class
-----------------
and (ii) a majority of the Outstanding Senior Subordinated Units and Junior
- --------
Subordinated Units voting as a single class, in each case excluding Units owned
- -------------------------------------------------------------------------------
by the General Partner or any Affiliate, and, after the Subordination Period,
- -----------------------------------------------------------------------------
at least a majority of the Outstanding Common Units.
- ----------------------------------------------------
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 4.9(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 4.9(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 4.9(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 4.9(d)).
C-24
<PAGE>
"Unrecovered Initial Unit Price" means, at any time, with respect to []a class
or series of Units (other than Subordinated Units), the price per Unit at which
such class or series of Units was initially offered to the public for sale by
the underwriters in respect of such offering, as determined by the General
Partner,[/] Common Units, Senior Subordinated Units, Junior Subordinated Units
------------------------------------------------------------------
or General Partner Units, the Initial Unit Price less the sum of all
- ------------------------------------------------
distributions constituting Capital Surplus theretofore made in respect of []a
Unit of such class or series that was sold in the initial offering of Units of
said class or series constituting Capital Surplus[/] an Initial Common Unit and
----------------------
any distributions of cash (or the Net Agreed Value of any distributions in kind)
in connection with the dissolution and liquidation of the Partnership
theretofore made in respect of []a Unit of such class or series that was sold in
the initial offering of Units of such class or series[/] an Initial Common Unit,
----------------------
adjusted as the General Partner determines to be appropriate to give effect to
any distribution, subdivision or combination of Units.
[]"Unrecovered Subordinated Unit Capital" means, at any time, with respect to
a Subordinated Unit, prior to its conversion into a Common Unit pursuant to
Sections 5.7(b) and (c), the excess, if any, of (a) the Net Agreed Value (at the
time of conveyance) of the undivided interest in the Contributed Property
conveyed to the Partnership pursuant to Section 4.2 in exchange for such
Subordinated Unit, over (b) the sum of all distributions in respect of a
Subordinated Unit constituting Capital Surplus and any distributions of cash (or
the Net Agreed Value of any distributions in kind) in connection with the
dissolution and liquidation of the Partnership, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of Subordinated Units.[/]
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 13.1(b).
"Working Capital Borrowings" means borrowings pursuant to a facility or other
-----------------------------------------------------------------------------
arrangement requiring all borrowings thereunder to be reduced to a relatively
- -----------------------------------------------------------------------------
small amount each year for an economically meaningful period of time. It being
- ------------------------------------------------------------------------------
the intent hereof, that borrowings which are not intended exclusively for
- -------------------------------------------------------------------------
working capital purposes shall not be treated as Working Capital Borrowings.
- ---------------------------------------------------------------------------
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a limited partner in the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a limited partner in the Operating Partnership pursuant to the
Operating Partnership Agreement or otherwise, (b) engage directly in, or to
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that the Operating Partnership is permitted to engage in by the
Operating Partnership Agreement and, in connection therewith, to exercise all
of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, (c) engage directly in, or to
enter into or form any corporation, partnership, joint venture, limited
C-25
<PAGE>
liability company or other arrangement to engage indirectly in, any business
activity that is approved by the General Partner and which lawfully may be
conducted by a limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and powers conferred
upon the Partnership pursuant to the agreements relating to such business
activity, and (d) do anything necessary or appropriate to the foregoing,
including the making of capital contributions or loans to the Operating
Partnership. The General Partner has no obligation or duty to the Partnership,
the Limited Partners, or the Assignees to propose or approve, and in its sole
discretion may decline to propose or approve, the conduct by the Partnership of
any business.
Section 3.2 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 3.1 and for the protection and benefit of the Partnership.
ARTICLE IV
CONTRIBUTIONS AND UNITS
Section 4.1 Organization Contributions and Return.
In connection with the formation of the Partnership under the Delaware Act,
the Initial General Partner made an initial Capital Contribution to the
-------
Partnership []in the amount of $10 for an interest in the Partnership and has
been [/]and was admitted as the general partner of the Partnership, and the
-------
Organizational Limited Partner made an initial Capital Contribution to the
Partnership[] in the amount of $990 for an interest in the Partnership and has
been[/] and was admitted as a limited partner of the Partnership.
-------
As of the Closing Date, after giving effect to the transactions contemplated by
Sections 4.2 and 4.3[/] Section 4.2 Contributions by Initial Limited Partners.
On the Initial Closing Date, the Initial Underwriters contributed cash to the
-----------------------------------------------------------------------------
Partnership in exchange for 2,600,000 Common Units. On the Initial
- ------------------------------------------------------------------
Overallotment Closing Date, the Initial Underwriters contributed cash to the
- ----------------------------------------------------------------------------
Partnership in exchange for 275,000 Common Units. On the Initial Closing Date,
- ------------------------------------------------------------------------------
the Initial General Partner, Silgas, Inc. and Silgas of Illinois, Inc.
- ----------------------------------------------------------------------
contributed their interests in the Operating Partnership to the Partnership in
- ------------------------------------------------------------------------------
exchange for 2,396,078 Old Subordinated Units. Immediately after these
- ----------------------------------------------------------------------
contributions, the interest of the Organizational Limited Partner []shall be
- ---------------------------------------------------------
terminated; the initial Capital Contributions of each partner shall be
refunded;[/] was terminated and the Organizational Limited Partner []shall
-------------------------------------------------
cease [/]ceased to be a Limited Partner []of the Partnership. Ninety-nine
------------------------------
percent of any interest or other profit that may have resulted from the
investment or other use of such initial Capital Contributions shall be allocated
and distributed to the Organizational Limited Partner, and the balance thereof
shall be allocated and distributed to the General Partner.[/]
C-26
<PAGE>
[]Section 4.2[/] Section 4.3 Contributions at the Effective Time; General
Partner Contributions.
(a) []On[/] At the []Closing Date[/] Effective Time and pursuant to the
- -------------------------------------------------------------------------
Conveyance and Contribution []Agreement[/] Agreements, the General Partner
- --------------------------------------------------------------------------
contributed shares of Petro Class A Common Stock and shares of Petro
- --------------------------------------------------------------------------
Class C Common Stock to the Partnership in exchange for General Partner
- -----------------------------------------------------------------------------
Units representing a 1.99% General Partner Interest and shares of Petro
- ----------------------------------------------------------------------------
Class A Common Stock and shares of Petro Class C Common Stock to the
- --------------------------------------------------------------------------
Operating Partnership in exchange for a 0.01% general partner interest in the
- -----------------------------------------------------------------------------
Operating Partnership. At the Effective Time, pursuant to the Merger and
- ------------------------------------------------------------------------
related transactions, Senior Subordinated Units, Junior
- -----------------------------------------------------------------------
Subordinated Units and Common Units were issued to former stockholders
- -----------------------------------------------------------------------------
of Petro and the outstanding Old Subordinated Units were cancelled.
- -------------------------------------------------------------------
(b) Upon the making of any Capital Contribution to the Partnership by any
- ---------------------------------------------------------------------------
Person, the General Partner, in its sole discretion, may []Silgas, Inc. and
- ---------------------------------------------------------
Silgas of Illinois, Inc. shall contribute to the Partnership, as a Capital
Contribution, a limited partner interest in the Operating Partnership in
exchange for 2,220,444, 175,633 and one Subordinated Units, respectively. The
limited partner interest in the Operating Partnership contributed by the
General Partner, Silgas, Inc. and Silgas of Illinois, Inc. will represent a
98.9899% Percentage Interest (as defined in the Operating Partnership
Agreement) in the Operating Partnership.[/]
[](b) To enhance the Partnership's ability to pay the Minimum Quarterly
Distribution on the Common Units, the General Partner shall be obligated to
contribute up to $6.0 million in additional capital to the Partnership (the
"Additional Capital Contribution Obligation"), if, and to the extent that, the
amount of Available Cash constituting Operating Surplus (without giving effect
to any such additional contribution) with respect to any quarter is less than
the amount necessary to distribute the Minimum Quarterly Distribution on all
outstanding Common Units for such quarter. If (i) distributions of Available
Cash from Operating Surplus (without giving effect to any such additional
contribution) with respect to any quarter equaled or exceeded the Minimum
Quarterly Distributions on all of the then outstanding Common Units and (ii)
the Adjusted Operating Surplus generated during that quarter equaled or
exceeded 150% of the sum of the Minimum Quarterly Distribution on all of the
then outstanding Common Units (the "Reduction Threshold"), the Additional
Capital Contribution Obligation will be reduced by $1.5 million. To the extent
that the Adjusted Operating Surplus generated during a quarter exceeds (or is
less than) the Reduction Threshold applicable to such quarter, the amount of
such excess (or deficit) shall be carried forward on a cumulative basis and
included in determining the Adjusted Operating Surplus in succeeding quarters.
If the Partnership is liquidated or the General Partner either (i) is removed
as General Partner of the Partnership other than for Cause or (ii) withdraws as
General Partner of the Partnership not in violation of this Partnership
Agreement, the Additional Capital Contribution Obligation will terminate.[/]
[](c) Upon the making of any Capital Contribution to the Partnership by any
Person, the General Partner shall be required to[/] make an additional Capital
--------------------------
Contribution []in an amount equal to 1.01% of the Net Agreed Value of[/] only to
- ------------ -------
the extent necessary such that after taking into account the additional Capital
- -------------------------------------------------------------------------------
Contribution made by such Person; []provided, however, that the General Partner
- ---------------------------------
shall be obligated to make a Capital Contribution pursuant to this Section
4.2(c) only to the extent necessary such that after taking into account the
additional Capital Contribution made by such Person[/]
C-27
<PAGE>
and the General Partner pursuant to this Section []4.2(c) and any Capital
- ------------------------------------------------
Contribution made by the General Partner pursuant to Section 4.2(b), [/]4.3(b)
------
the General Partner will have a Capital Account equal to at least[] 1% [/]1.99%
- ----------------------------------------------------------------- --------
of the total of all Capital Accounts.
- ------------------------------------
[]Section 4.3 Contributions by Initial Limited Partners.[/]
[]On the Closing Date, subject to completion of the Capital Contributions
referred to in Section 4.2, each Underwriter shall contribute to the
Partnership cash in an amount equal to the Issue Price per Common Unit,
multiplied by the number of Common Units specified in the Underwriting
Agreement to be purchased by such Underwriter at the "First Closing Date," as
such term is defined in the Underwriting Agreement. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall issue Common
Units to each Underwriter on whose behalf such Capital Contribution is made in
an amount equal to the quotient obtained by dividing (i) the cash contribution
to the Partnership by or on behalf of such Underwriter by (ii) the Issue Price
per Common Unit.[/]
Section 4.4 Issuances of Additional Partnership Securities.
(a) Subject to Section 4.5, the General Partner is authorized to cause the
Partnership to issue additional Partnership Securities for any Partnership
purpose at any time and from time to time to such Persons for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole discretion, all without the approval of any Limited
Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 4.4(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series
of Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion and, if so, the terms and
conditions of such conversion; (vi) the terms and conditions upon which each
Partnership Security will be issued, evidenced by certificates and assigned or
transferred; and (vii) the right, if any, of each such Partnership Security to
vote on Partnership matters, including matters relating to the relative rights,
preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all actions
that it deems necessary or appropriate in connection with each issuance of
Partnership Securities pursuant to this Section 4.4 and to amend this Agreement
in any manner that it deems necessary or appropriate to provide for each such
issuance, to admit Additional Limited Partners in connection therewith and to
specify the relative rights, powers and duties of the holders of the Units or
other Partnership Securities being so issued. The General Partner shall do all
things necessary to comply with the Delaware Act and is authorized and directed
to do all things it deems to be necessary or advisable in connection with any
future issuance of Partnership Securities, including compliance with any
statute,
C-28
<PAGE>
rule, regulation or guideline of any federal, state or other governmental
agency or any National Securities Exchange on which the Units or other
Partnership Securities are listed for trading.
Section 4.5 Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 4.4 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue an
aggregate of more than []1,300,000[/] 2,500,000 additional Parity Units without
---------
the prior approval of holders of at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and its Affiliates).
-----------------------------------------------------------------------
In applying this limitation, there shall be excluded Common Units issued (i) in
[]connection with the exercise of the Overallotment Option[/] the Equity
----------
Offering, (ii) in accordance with Section 4.5(b) and 4.5(c) and (iii) in
- --------
connection with the []conversion[/] issuance of Senior Subordinated Units or
-------- ------ --------
Class B Common Units pursuant to Section 4.6.
- -------------- -----------------------
(b) The Partnership may also issue an unlimited number of Parity Units prior
to the end of the Subordination Period without the approval of the Unitholders
if such issuance occurs (i) in connection with an Acquisition or a Capital
Improvement or (ii) within 365 days of, and the net proceeds from such issuance
are used to repay debt incurred in connection with, an Acquisition or a Capital
Improvement, in each case where such Acquisition or Capital Improvement
involves assets that, if acquired by the Partnership as of the date that is one
year prior to the first day of the Quarter in which such Acquisition is to be
consummated or such Capital Improvement is to be completed, would have
resulted, on a pro forma basis, in an increase in
--------------------
(i) the amount of Adjusted Operating Surplus generated by the Partnership
on a per-Unit basis (for all Outstanding Units) with respect to each of the
four most recently completed Quarters (on a pro forma basis) over
----------------------
(ii) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
----------
Adjusted Operating Surplus attributable to the Acquisition or Capital
---------------------------------------------------------------------
Improvement) with respect to each of such four Quarters.
------------
The amount in clause (i) shall be determined on a pro forma basis assuming
that (A) all of the Parity Units to be issued in connection with or within 365
days of such Acquisition or Capital Improvement had been issued and
outstanding, (B) all indebtedness for borrowed money to be incurred or assumed
in connection with such Acquisition or Capital Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such offering) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (C) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the
acquired assets, and (D) the non-personnel costs and expenses are computed on
the same basis as those incurred by the Partnership in the operation of the
Partnership's business at similarly situated Partnership facilities.
(c) The Partnership may also issue an unlimited number of Parity Units prior
to the end of the Subordination Period without the approval of the Unitholders
if the use of proceeds from such issuance is exclusively to repay up to $20
million of indebtedness of the Partnership or the Operating Partnership.
C-29
<PAGE>
(d) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of []a Unit Majority.[/] at least a majority of the Outstanding Common
----------------------------------------------
Units (excluding Common Units held by the General Partner and its Affiliates).
- ------------------------------------------------------------------------------
[](e)[/](e)During the Subordination Period, the Partnership shall not issue
-------------------------------------------------------------------
additional Partnership Securities that would reduce the percentage of
- ---------------------------------------------------------------------
distributions allocable to all Units under Sections 5.4(a)(vi)(A),
- ------------------------------------------------------------------
5.4(a)(vii)(A) or 5.4(a)(viii)(A), and Sections 5.4(b)(iii)(A), 5.4(b)(iv)(A)
- -----------------------------------------------------------------------------
or 5.4(b)(v)(A), without the prior approval of holders of at least a majority
- -----------------------------------------------------------------------------
of the Outstanding Common Units (excluding Common Units held by the General
- ---------------------------------------------------------------------------
Partner and its Affiliates).
- ----------------------------
(f) No fractional Units shall be issued by the Partnership.
---
Section 4.6 []Conversion of[/] Special Issuance of Senior Subordinated Units and
- ----------- -------------------------------------------------
Conversion of Senior Subordinated Units and Junior Subordinated
---------------------------------------------------------------
Units.
------
(a) For each full non-overlapping four-Quarter period ending on or after the
----------------------------------------------------------------------------
first anniversary of the Effective Time, but prior to the fifth anniversary of
- ------------------------------------------------------------------------------
the Effective Time, in which the dollar amount of Petro Adjusted Operating
- --------------------------------------------------------------------------
Surplus per Petro Unit equals or exceeds $2.90, the Partnership will issue (i)
- ------------------------------------------------------------------------------
during the Subordination Period, 303,000 Senior Subordinated Units to the
- -------------------------------------------------------------------------
holders of the Senior Subordinated Units, Junior Subordinated Units and the
- ---------------------------------------------------------------------------
General Partner Units on the Record Date in respect of the distribution for the
- -------------------------------------------------------------------------------
final Quarter of such non-overlapping four Quarter period, Pro Rata, and (ii)
- -----------------------------------------------------------------------------
after the Subordination Period, 303,000 Class B Common Units to the holders of
- ------------------------------------------------------------------------------
the Class B Common Units and the General Partner Units on the Record Date in
- ----------------------------------------------------------------------------
respect of the distribution for the final Quarter of such non-overlapping four-
- -------------------------------------------------------------------------------
Quarter period, Pro Rata; provided, that the Partnership may not issue more
- ---------------------------------------------------------------------------
than 909,000 Senior Subordinated Units and Class B Common Units in the
- ----------------------------------------------------------------------
aggregate pursuant to this Section 4.6; and provided, further that the
- ----------------------------------------------------------------------
Partnership may not issue more than 303,000 Senior Subordinated Units and Class
- --------------------------------------------------------------------------------
B []A total of 599,020 Subordinated Units will convert into Common Units on the
- -
first day after the Record Date for distribution in respect of any Quarter
ending on or after March 31, 1999, and an additional 599,020 Subordinated Units
will convert into Common Units on the first day after the Record Date for
distributions in respect of any Quarter ending on or after March 31, 2000, in
respect of which[/]
[](i) distributions under Section 5.4 in respect of all Outstanding Common
Units and Subordinated Units equals or exceeds the sum of the Minimum
Quarterly Distribution (as prorated for the actual length of the period
from the Closing Date through March 31, 1996) on all of the Outstanding
Common Units and Subordinated Units with respect to each of the three non-
overlapping four-Quarter periods immediately preceding such date;[/]
[](ii) the Adjusted Operating Surplus generated during each of the three
immediately preceding non-overlapping four-Quarter periods equals or
exceeds the sum of the Minimum Quarterly Distribution (as prorated for the
actual length of the period from the Closing Date through March 31, 1996)
on all of the Outstanding Common Units and Subordinated Units, plus related
distributions on the general partner interest, during such periods; and[/]
[](iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.[/]
C-30
<PAGE>
[]In the event less than all of the Outstanding Subordinated Units shall
convert into [/]Common Units pursuant to this Section 4.6 [](a) at a time when
there shall be more than one holder of Subordinated Units, then, unless all of
the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata in respect of the number of
Subordinated Units held by each such holder. [/]within any 365-day period.
[](b) The remaining Subordinated Units shall convert into Common Units[/](b)
The Partnership shall not issue any fractional Senior Subordinated Units or
Class B Common Units. Each holder who would otherwise be entitled to a
fractional Senior Subordinated Unit or Class B Common Unit shall receive an
amount in cash determined by multiplying such fraction by the Current Market
Price of a Senior Subordinated Unit or a Class B Common Unit, as the case may
be, as of the date three days prior to the date on which Senior Subordinated
Units or Class B Common Units, as the case may be, are issued pursuant to this
Section 4.6.
(c) Each Senior Subordinated Unit and Junior Subordinated Unit shall convert
into one Class B Common Unit on the first day following the Record Date for
distributions in respect of the final[] quarter[/] Quarter of the Subordination
Period.
[](c) On the date a Subordination Unit is converted, it shall possess all the
rights and obligations of Common Units. Prior to such time, a Subordinated Unit
shall have all of the rights and obligations of a Common Unit, except with
respect to the right to vote on or approve matters requiring the vote or
approval of a percentage of the holders of Outstanding Common Units and the
right to participate in allocations of income, gain, loss and deductions and
distributions made with respect to Common Units.[/]
Section 4.7 Limited Preemptive Rights.
No Person shall have any preemptive, preferential or other similar right with
respect to the issuance of any Partnership Security, whether unissued, held in
the treasury or hereafter created, except that the General Partner shall have
the right, which it may from time to time assign in whole or in part to any of
its Affiliates, to purchase Partnership Securities from the Partnership
whenever, and on the same terms that, the Partnership issues Partnership
Securities to Persons other than the General Partner and its Affiliates, to the
extent necessary to maintain the Percentage Interests of the General Partner
and its Affiliates equal to that which existed immediately prior to the
issuance of such Partnership Securities.
Section 4.8 Splits and Combinations.
(a) Subject to Sections []4.8(d)[/] 4.9(d), 5.6 and 5.8 (dealing with
------
adjustments of distribution levels), the General Partner may make a pro rata
distribution of Partnership Securities to all Record Holders or may effect a
subdivision or combination of Partnership Securities so long as, after any such
event, each Partner shall have the same Percentage Interest in the Partnership
as before such event, and any amounts calculated on a per Unit basis (including
the number of Class B Common Units issuable upon conversion of the Senior
------- ------
Subordinated Units and Junior Subordinated Units, the number of Senior
- ----------------------------------------------------------------------
Subordinated Units or Class B Common Units issuable pursuant to Section 4.6 and
- ---------------------------------------------------------------------------
the number of additional Parity Units that may be issued pursuant to Section 4.5
without a Unitholder vote) are proportionately adjusted retroactive to the
beginning of the Partnership.
C-31
<PAGE>
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of the date not less than 10 days prior to the date of such notice.
The General Partner also may cause a firm of independent public accountants
selected by it to calculate the number of Units to be held by each Record
Holder after giving effect to such distribution, subdivision or combination.
The General Partner shall be entitled to rely on any certificate provided by
such firm as conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or combination, the
General Partner may cause Certificates to be issued to the Record Holders of
Units as of the applicable Record Date representing the new number of Units
held by such Record Holders, or the General Partner may adopt such other
procedures as it may deem appropriate to reflect such changes. If any such
combination results in a smaller total number of Units Outstanding, the General
Partner shall require, as a condition to the delivery to a Record Holder of
such new Certificate, the surrender of any Certificate held by such Record
Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions this Section 4.8(d), each fractional Unit shall be rounded to
the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher
Unit).
Section 4.9 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner of
Units Partnership Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate
Capital Account with respect to such Partnership Interest in accordance with
the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital
Account shall be increased by (i) the amount of all Capital Contributions made
to the Partnership with respect to such Partnership Interest pursuant to this
Agreement and (ii) all items of Partnership income and gain (including, without
limitation, income and gain exempt from tax) computed in accordance with
Section 4.9(b) and allocated with respect to such Partnership Interest pursuant
to Section 5.1, and decreased by (x) the amount of cash or Net Agreed Value of
all actual and deemed distributions of cash or property made with respect to
such Partnership Interest pursuant to this Agreement and (y) all items of
Partnership deduction and loss computed in accordance with Section 4.9(b) and
allocated with respect to such Partnership Interest pursuant to Section 5.1.
(b) For purposes of computing the amount of any item of income, gain, loss or
deduction to be reflected in the Partners' Capital Accounts, the determination,
recognition and classification of any such item shall be the same as its
determination, recognition and classification for federal income tax purposes
(including, without limitation, any method of depreciation, cost recovery or
amortization used for that purpose) provided that:
(i) Solely for purposes of this Section 4.9, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership.
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<PAGE>
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 5.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
4.9(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c)(i) Except as otherwise provided in Section 4.9(c)(ii)-(v), a transferee
---
of a Partnership Interest shall succeed to a Pro Rata portion of the Capital
- -
Account of the transferor relating to the Partnership Interest so transferred;[]
provided, however, that, if the transfer causes a termination of the
Partnership under Section 708(b)(1)(B) of the Code, the Partnership's
properties shall be deemed to have been distributed in liquidation of the
Partnership to the Partners (including any transferee of a Partnership Interest
that is a party to the transfer causing such termination).[/]
(ii) If and when a Senior Subordinated Unit is issued pursuant to Section
------------------------------------------------
[]14.4 and recontributed by such Partners in reconstitution of the Partnership.
Any such deemed distribution shall be treated as[/]
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<PAGE>
[]an actual distribution for purposes of this Section 4.9. In such event, the
Carrying Values of the Partnership properties shall be adjusted immediately
prior to such deemed distribution[/] 4.6 with respect to one or more Senior
--------------------------------------
Subordinated Units, the Capital Accounts associated with the existing Senior
- ----------------------------------------------------------------------------
Subordinated Units shall be reallocated as required to make the Capital Account
- -------------------------------------------------------------------------------
associated with each Senior Subordinated Unit be the same.
- ----------------------------------------------------------
(iii) If and when a Class B Common Unit is issued pursuant to Section
-------------------------------------------
[]4.9(d)(ii) and such Carrying Values shall then constitute the Agreed Values of
such properties upon such deemed contribution to the reconstituted Partnership.
The Capital Accounts of such reconstituted Partnership shall be maintained in
accordance with the principles of this Section 4.9.[/] 4.6 with respect to one
-----------------------
or more Class B Common Units, the Capital Accounts associated with the existing
- -------------------------------------------------------------------------------
Class B Common Units shall be reallocated as required to make the Capital
- -------------------------------------------------------------------------
Account associated with each Class B Common Unit be the same.
- -------------------------------------------------------------
[](ii) Immediately prior to the conversion of a Subordinated Unit into a Common
Unit[/] (iv) If and when a Senior Subordinated Unit or a Class B Common Unit is
-----------------------------------------------------------------------
issued pursuant to Section 4.6 []or the sale, exchange or other disposition of a
- ------
Subordinated Unit by a holder thereof, the Capital Account maintained for such
Person with respect to its Subordinated Units will (A) first, be allocated to
the Subordinated Units to be converted or transferred, as the case may be, in
an amount equal to the product of (x) the number of such Subordinated Units to
be converted or transferred, as the case may be, and (y)[/] with respect to one
-------------------
or more Junior Subordinated Units or General Partner Units, the Capital Accounts
- --------------------------------------------------------------------------------
associated with the existing Units shall be reallocated to the new Unit until
- -----------------------------------------------------------------------------
the Capital Account of the new Unit is the same as all other Units of the same
- ------------------------------------------------------------------------------
class or until the Capital Account associated with the existing Units is reduced
- --------------------------------------------------------------------------------
to zero.
- --------
(v) If at the time of conversion of a Junior Subordinated Unit, the Per Unit
-----------------------------------------------------------
Capital Amount []for a Common Unit, and (B) second, any remaining balance in
such Capital Account will be retained by the transferor, regardless of whether
it has retained any Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the retained[/]
attributable to a Junior Subordinated Unit exceeds the existing Per Unit Capital
- --------------------------------------------------------------------------------
Amount of Senior Subordinated Units, []if any, will have a balance equal to the
- ----------------
amount allocated under clause (B) hereinabove, and the transferee's Capital
Account established with respect to the transferred Subordinated Units will have
a balance equal to the amount allocated under clause (A) hereinabove.[/] the
---
amount of excess shall be reallocated to the Capital Accounts attributable to
- -----------------------------------------------------------------------------
the General Partner Units through contribution of such excess to the General
- ----------------------------------------------------------------------------
Partner.
- --------
(d) (i) Consistent with the provisions of Treasury Regulation Section 1.704-
1(b)(2)(iv)(f), on an issuance of additional Units for cash or Contributed
Property or the conversion of the General Partner's []Partnership[/] Combined
--------
Interest to Common Units pursuant to Section 13.3(b), the Capital Account of
all Partners and the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership property,
as if such Unrealized Gain or Unrealized Loss had been recognized on an actual
sale of each such property immediately prior to such issuance and had been
allocated to the Partners at such time pursuant to Section 5.1(c). In
determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount
and fair market value of all Partnership assets (including, without limitation,
cash or cash equivalents) immediately prior to the issuance of
C-34
<PAGE>
additional Units shall be determined by the General Partner using such
reasonable method of valuation as it may adopt; provided, however, the General
Partner, in arriving at such valuation, must take fully into account the fair
market value of the Partnership Interests of all Partners at such time. The
General Partner shall allocate such aggregate value among the assets of the
Partnership (in such manner as it determines in its sole discretion to be
reasonable) to arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section 5.1(c).
Any Unrealized Gain or Unrealized Loss attributable to such property shall be
allocated in the same manner as Net Termination Gain or Net Termination Loss
pursuant to Section 5.1(c); provided, however, that, in making any such
allocation, Net Termination Gain or Net Termination Loss actually realized
shall be allocated first. In determining such Unrealized Gain or Unrealized
Loss the aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
a distribution shall (A) in the case of an actual distribution which is not
made pursuant to Section 13.3 or 13.4 or []in the case of a deemed distribution
occurring as a result of a termination of the Partnership pursuant to Section
708 of the Code, be determined and allocated in the same manner as that;
provided, however, in Section 4.9(d)(i) or[/] (B) in the case of a liquidating
distribution pursuant to Section 14.4, be determined and allocated by the
Liquidator using such reasonable method of valuation as it may adopt.
Section 4.10 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions, and no
-------
Partner or Assignee shall be entitled to withdraw any part of its Capital
-- -------- -------
Contributions or otherwise to receive any distribution from the Partnership,
except as provided in Section 4.1 and Articles V, VII, XIII and XIV.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 4.9(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
C-35
<PAGE>
(a) Net Income. After giving effect to the special allocations set forth in
Section 5.1(d), Net Income for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 5.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
5.1(b)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 5.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
5.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partner and the
Limited Partners in accordance with their respective Percentage Interests.
(b) Net Losses. After giving effect to the special allocations set forth in
Section 5.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the aggregate
Net Losses allocated pursuant to this Section 5.1(b)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Income allocated to such Partners pursuant to Section 5.1(a)(iii) for all
previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners in
accordance with their respective Percentage Interests; provided that Net
Losses shall not be allocated pursuant to this Section 5.1(b)(ii) to the
extent that such allocation would cause any Limited Partner to have a
deficit balance in its Adjusted Capital Account at the end of such taxable
year (or increase any existing deficit balance in its Adjusted Capital
Account); and
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 5.1(d), all items of income gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder.
All allocations under this Section 5.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this
Section 5.1 and after all distributions of Available Cash provided under
Section 5.4 have been made with respect to the taxable period ending on the
date of the Partnership's liquidation pursuant to Section 14.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such Net
Termination Gain shall be allocated among the General Partner and the
Limited Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
C-36
<PAGE>
[](A)[/](1) First, to each Partner having a deficit balance in its Capital
---
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
[](B)[/](2) Second, []99%[/] 100% to all []Limited[/] Partners holding
--- ----
Common Units, in accordance with their relative Percentage Interests, []and
1% to the General Partner[/] until the Capital Account in respect of each
Common Unit then Outstanding is equal to the sum of (1) its Unrecovered
Initial Unit Price plus (2) the Minimum Quarterly Distribution for the
Quarter during which such Net Termination Gain is recognized, reduced by any
distribution pursuant to Sections 5.4(a)(i) or (b)(i) with respect to such
Common Unit for such Quarter (the amount determined pursuant to this clause
(2) is hereinafter defined as the "Unpaid MQD") plus (3) any then existing
Cumulative Common Unit Arrearage []with respect to a Common Unit sold by the
Underwriters on the Closing Date;[/];
(C)(3) Third, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the expiration of the Subordination Period,
[]99% to the Limited Partners holding Subordinated Units, in the
proportion that the total number of Subordinated Units held by each
such Limited Partner bears to the total number of Subordinated Units
then Outstanding, and 1% to the General Partner, in the amount which
will increase[/] 100% to all Partners holding Senior Subordinated Units, in
---- --- ------
accordance with their relative Percentage Interests, until the Capital
Account []of each such Limited Partner maintained with respect to such
Subordinated Units to that amount which equal[/]s in respect of each Senior
------
Subordinated Unit then Outstanding is equal to the sum of (1) the
------------ ------------------------------
Unrecovered []Subordinated Unit Capital attributable to such Subordinated
-----------
Units, determined for the taxable year (or portion thereof) to which this
allocation of gain relate[/]s Initial Unit Price plus (2) the Minimum
---------------------------------------
Quarterly Distribution for the Quarter during which such Net Termination
------------------------------------------------------------------------
Gain is recognized, reduced by any distribution pursuant to Section
-------------------------------------------------------------------
5.4(a)(iii) with respect to such Senior Subordinated Unit for such Quarter;
---------------------------------------------------------------------------
(4) Fourth, if such Termination Capital Transaction occurs (or is
-----------------------------------------------------------------
deemed to occur) prior to the expiration of the Subordination Period,
---------------------------------------------------------------------
100 % to all Partners holding Junior Subordinated Units and General
-------------------------------------------------------------------
Partner Units, Pro Rata, in accordance with their relative Percentage
---------------------------------------------------------------------
Interests, until the Capital Account in respect of each Junior
--------------------------------------------------------------
Subordinated Unit then Outstanding is equal to the sum of (1) the
-----------------------------------------------------------------
Unrecovered Initial Unit Price plus (2) the Minimum Quarterly
-------------------------------------------------------------
Distribution for the Quarter during which such Net Termination Gain is
----------------------------------------------------------------------
recognized, reduced by any distribution pursuant to Section 5.4(a)(iv)
----------------------------------------------------------------------
with respect to such Junior Subordinated Unit for such Quarter;
---------------------------------------------------------------
[](D) Fourth, 99%[/] (5) Fifth, 100% to all []Limited[/] Partners, in
------------------------------------------------
accordance with their relative Percentage Interests, []and 1% to the
----------------------------------------------------
General Partner[/] until the Capital Account in respect of each Common
---------------------------------------------------
Unit then Outstanding (if such Termination Capital Transaction occurs,
----------------------------------------------------------------------
or is deemed to occur, prior to the expiration of the Subordination
-------------------------------------------------------------------
Period) or Class A Common Unit then Outstanding (if such Termination
--------------------------------------------------------------------
Capital Transaction occurs, or is deemed to occur, after the expiration
-----------------------------------------------------------------------
of the Subordination Period) is equal to the sum of (1) its Unrecovered
----------------------------
Initial Unit Price, plus (2) the Unpaid MQD, if any, for such Common
Unit with respect to the Quarter during which such Net Termination Gain
is recognized,
C-37
<PAGE>
plus (3) any then existing Cumulative Common Unit Arrearage []with
respect to a Common Unit sold by the Underwriters on the Closing Date[/],
plus (4) the excess of (aa) the First Target Distribution less the
Minimum Quarterly Distribution for each Quarter of the Partnership's
existence over (bb) the amount of any distributions of Operating
Surplus that was distributed pursuant to Sections 5.4(a)(v) or 5.4
(b)(i) (the sum of (1) plus (2) plus (3) plus (4) is hereinafter
defined as the "First Liquidation Target Amount");
[](E) Fifth, 85.8673%[/] (6) Sixth, 86.7% to all []Limited[/] Partners, in
-----
accordance with their relative Percentage Interests, and []14.1327% to
the General Partner[/] 13.3% to the Senior Subordinated Units, Junior
----------------------------------------------------
Subordinated Units and General Partner Units, Pro Rata (if such
---------------------------------------------------------------------------
Termination Capital Transaction occurs, or is deemed to occur, prior to
---------------------------------------------------------------------------
the expiration of the Subordination Period), or 13.3% to the Class B
---------------------------------------------------------------------------
Common Units and General Partner Units, Pro Rata (if such Termination
---------------------------------------------------------------------------
Capital Transaction occurs, or is deemed to occur, after the expiration
---------------------------------------------------------------------------
of the Subordination Period), until the Capital Account in respect of
-----------------------------
each Common Unit then Outstanding (if such Termination Capital
----------------------------
Transaction occurs, or is deemed to occur, prior to the expiration of
---------------------------------------------------------------------
the Subordination Period) or Class A Common Unit then Outstanding (if
---------------------------------------------------------------------
such Termination Capital Transaction occurs, or is deemed to occur,
-------------------------------------------------------------------
after the expiration of the Subordination Period) is equal to the sum
-------------------------------------------------
of (1) the First Liquidation Target Amount, plus (2) the excess of (aa)
the Second Target Distribution less the First Target Distribution for
------ -----
each Quarter of the Partnership's existence over (bb) the amount of any
distributions of Operating Surplus that was distributed pursuant to
Section []5.4(a)(v) or 5.4(b)(iv)[/] 5.4(a)(vi) or 5.4(b)(iii) (the sum of
-----------------------------------------------------------------
(1) plus (2) is hereinafter defined as the "Second Liquidation Target
---------------------------------------------------------------------------
Amount");
--------
[](F) Sixth, 75.7653%[/] (7) Seventh, 76.5% to all []Limited[/] Partners,
-------- -----
in accordance with their relative Percentage Interests, and []24.2347% to
the General Partner[/] 23.5% to the Senior Subordinated Units, Junior
----------------------------------------------------
Subordinated Units and General Partner Units, Pro Rata (if such Termination
---------------------------------------------------------------------------
Capital Transaction occurs, or is deemed to occur, prior to the expiration
---------------------------------------------------------------------------
of the Subordination Period), or 23.5% to the Class B Common Units and
---------------------------------------------------------------------------
General Partner Units, Pro Rata (if such Termination Capital Transaction
---------------------------------------------------------------------------
occurs, or is deemed to occur, after the expiration of the Subordination
---------------------------------------------------------------------------
Period), until the Capital Account in respect of each Common Unit then
---------------------------------------------------------------------------
Outstanding (if such Termination Capital Transaction occurs, or is deemed to
---------------------------------------------------------------------------
occur, prior to the expiration of the Subordination Period) or Class A
---------------------------------------------------------------------------
Common Unit then Outstanding (if such Termination Capital Transaction
---------------------------------------------------------------------------
occurs, or is deemed to occur, after the expiration of the Subordination
---------------------------------------------------------------------------
Period) is equal to the sum of (1) the Second Liquidation Target Amount,
---------------------------------------------------------------------------
plus (2) the excess of (aa) the Third Target Distribution less the Second
---------------------------------------------------------------------------
Target Distribution for each Quarter of the Partnership's existence over
-------------------
(bb) the amount of any distributions of Operating Surplus that was
distributed pursuant to Section 5.4(a)(vii) or []5.4(b)(v);[/] 5.4(b)(iv);
------------------- ----------
and
---
[](G)[/] (8) Finally, any remaining amount []50.5102%[/] 51% to all
----------------------------- ---
[]Limited[/] Partners, in accordance with their relative Percentage
--------------------------------------------------------------
Interests, and []49.4898% to the[/] 49% to the Senior Subordinated Units,
-------------- ---------------------------------------
Junior Subordinated Units and General Partner Units, Pro Rata (if such
---------------------------------------------------------------------------
Termination Capital Transaction occurs, or is deemed to occur, prior to the
---------------------------------------------------------------------------
expiration of the Subordination Period), or 49% to the Class B Common Units
---------------------------------------------------------------------------
and General Partner Units, Pro Rata (if such Termination Capital Transaction
---------------------------------------------------------------------------
occurs, or is deemed to occur, after the expiration of the Subordination
---------------------------------------------------------------------------
Period).
-------
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<PAGE>
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such Net
Termination Loss shall be allocated to the Partners in the following
manner:
[](A) First, 100% to the General Partner to the extent the General
Partner has contributed additional capital to the Partnership pursuant
to its Additional Capital Contribution Obligation reduced by the amount
such Additional Capital Contribution Obligation has reduced the General
Partner's obligation pursuant to Section 4.2(c);[/]
[](B) Second,[/](1) First, if such Termination Capital Transaction occurs
----------
(or is deemed to occur) prior to the conversion of the last outstanding
Junior Subordinated Unit, []99%[/] 100% to the Partners holding
------ ----
[]Subordinated Units, in proportion that the total number of Subordinated
Units held by each such Limited Partner bears to the total number of
Subordinated Units then Outstanding, and 1% to the General Partner,[/]
Junior Subordinated Units and General Partner Units, Pro Rata, until the
-------------------------------------------------------------
Capital Account in respect of each Junior Subordinated Unit []then
------
Outstanding[/] has been reduced to zero;
(2) Second, if such Termination Capital Transaction occurs (or is
-------------------------------------------------------------------
deemed to occur) prior to the conversion of the last outstanding Senior
-----------------------------------------------------------------------
Subordinated Unit, 100% to the Partners holding Senior Subordinated
-------------------------------------------------------------------
Units, in accordance with their relative Percentage Interests, until
--------------------------------------------------------------------
the Capital Account in respect of each Senior Subordinated Unit then
--------------------------------------------------------------------
Outstanding has been reduced to zero;
-------------------------------------
(3) Third, 100% to all Partners holding Common Units, the Capital
-----------------------------------------------------------------
Account balances attributable to which are in excess of the Capital
-------------------------------------------------------------------
Account balances attributable to the remainder of the Common Units then
-----------------------------------------------------------------------
Outstanding, in accordance with their relative Percentage Interests,
--------------------------------------------------------------------
until the Capital Accounts in respect of each Common Unit then
--------------------------------------------------------------
Outstanding are equal;
----------------------
(4) Fourth, 100% to all [](C) Third, 99% to all Limited[/] Partners
----------------------- --------
holding Common Units, in accordance with their relative Percentage
------------------------------------------------------------------
Interests, and 1% to the General Partner, until the Capital Account in
----------
respect of each Common Unit then Outstanding has been reduced to zero;
and
[](D)[/](5) Fifth, the balance, if any, 100% to the General Partner.
---------
(d) Special Allocations. Notwithstanding any other provision of this Section
5.1, the following special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 5.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-
2(j)(2)(i), or any successor provision. For purposes of this Section
5.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 5.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 5.1(d)(vi) and 5.1(d)(vii)). This Section
5.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
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<PAGE>
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding
the other provisions of this Section 5.1 (other than Section 5.1(d)(i)),
except as provided in Treasury Regulation Section 1.704-2(i)(4), if there
is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Partnership taxable period, any Partner with a share of Partner Nonrecourse
Debt Minimum Gain at the beginning of such taxable period shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any
successor provisions. For purposes of this Section 5.1(d), each Partner's
Adjusted Capital Account balance shall be determined, and the allocation of
income or gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this Section 5.1(d), other
than Section 5.1(d)(i) and other than an allocation pursuant to Sections
5.1(d)(vi) and 5.1(d)(vii), with respect to such taxable period. This
Section 5.1(d)(ii) is intended to comply with the chargeback of items of
income and gain requirement in Treasury Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations. If the amount of cash or the Net Agreed Value
of any property distributed (except cash or property distributed pursuant
to Section 14.4) to any Limited Partner with respect to a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Limited Partners (on a per Unit
basis), then (1) each Limited Partner receiving such greater cash or
property distribution shall be allocated gross income in an amount equal to
the product of (aa) the amount by which the distribution (on a per Unit
basis) to such Limited Partner exceeds the distribution (on a per Unit
basis) to the Limited Partners receiving the smallest distribution and (bb)
the number of Units owned by the Limited Partner receiving the greater
distribution.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income
and gain shall be specifically allocated to such Partner in an amount and
manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 5.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this Section 5.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit balance in its Capital Account as adjusted
after all other allocations provided for in this Section 5.1 have been
tentatively made as if this Section 5.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General
C-40
<PAGE>
Partner determines in its good faith discretion that the Partnership's
Nonrecourse Deductions must be allocated in a different ratio to satisfy
the safe harbor requirements of the Treasury Regulations promulgated under
Section 704(b) of the Code, the General Partner is authorized, upon notice
to the Limited Partners, to revise the prescribed ratio to the numerically
closest ratio that satisfies such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that bears the
Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation Section 1.704-2(i). If more than one Partner bears the
Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(b) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. []At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, if any, shall be
allocated 100% to each Partner holding Subordinated Units in the proportion
of the number of Subordinated Units held by such Partner to the total
number of Subordinated Units then Outstanding, until each such Partner has
been allocated an amount of gross income or gain which increases the
Capital Account maintained with respect to such Subordinated Units to an
amount equal to the product of (A) the number of Subordinated Units held by
such Partner and (B) the Per Unit Capital Amount for a Common Unit. The
purpose of this allocation is to establish uniformity between the Capital
Accounts underlying Subordinated Units and the Capital Accounts underlying
Common Units held by Persons other than the General Partner and its
Affiliates immediately prior to the conversion of such Subordinated Units
into Common Units. This allocation method for establishing such economic
uniformity will only be available to the General Partner if the method for
allocating[/] Upon the issuance of any Unit pursuant to Section 4.6 or upon
the conversion of any Unit into another class after application of Section
4.9(c)(iii), gross income shall be allocated to the holder of such Unit
until the Capital Account of such Unit is the same as the Capital Account
[]maintained with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to Section 4.9(c)(ii)[/]
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<PAGE>
[]does not otherwise provide such economic uniformity to the Subordinated
Units.[/] per Unit of all other Units of the same class.
(xi) Curative Allocation.
[](A)[/](1) Notwithstanding any other provision of this Section 5.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related
Curative Allocation not otherwise been provided in this Section 5.1.
Notwithstanding the preceding sentence, Required Allocations relating
to (1) Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partnership Minimum Gain
and (2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
5.1(d)(xi)[](A)[/](1) shall only be made with respect to Required
Allocations to the extent the General Partner reasonably determines
that such allocations will otherwise be inconsistent with the economic
agreement among the Partners. Further, allocations pursuant to this
Section 5.1(d)(xi)[](A)[/](1) shall be deferred with respect to allocations
pursuant to clauses (1) and (2) hereof to the extent the General
Partner reasonably determines that such allocations are likely to be
offset by subsequent Required Allocations.
[](B)[/](2) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
5.1(d)(xi)[](A)[/](1) in whatever order is most likely to minimize the
economic distortions that might otherwise result from the Required
Allocations, and (2) divide all allocations pursuant to Section
5.1(d)(xi)[](A)[/](1) among the Partners in a manner that is likely to
minimize such economic distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event, the
following rules shall apply:
[](A)[/](1) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 4.9(d) hereof), the General Partner shall
allocate additional items of gross income and gain to the Limited
Partners or additional items of deduction and loss to the General
Partner to the extent that the Additional Book Basis Derivative Items
allocated to the Limited Partners exceeds their Share of those
Additional Book Basis Derivative Items. For this purpose, the Limited
Partners shall be treated as being allocated Additional Book Basis
Derivative Items to the extent that such Additional Book Basis
Derivative Items have reduced the amount of income that would otherwise
have been allocated to the Limited Partners under the Partnership
Agreement (e.g., Additional Book Basis Derivative Items taken into
account in computing cost of goods sold would reduce the amount of book
income otherwise available for allocation among the Partners). Any
allocation made pursuant to this Section 5.1(d)(xii)[](A)[/](1) shall be
made after all of the other Agreed Allocations have been made as if
this Section 5.1(d)(xii) were not in the Partnership Agreement and, to
the extent
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<PAGE>
necessary, shall require the reallocation of items that have been
allocated pursuant to such other Agreed Allocations.
(B)(2) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event, such
negative adjustment (1) shall first be allocated between the General
Partner and the Limited Partners in proportion to and to the extent of
their Remaining Net Positive Adjustments and (2) any remaining negative
adjustment shall be allocated pursuant to Section 5.1(c) hereof. The
aggregate amount so allocated to the Limited Partners in respect of
each class or series of Units shall be allocated among them ratably on
a per Unit basis.
(C)(3) In making the allocations required under this Section
5.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to
satisfy the purpose of this Section 5.1(d)(xii).
(xiii) []First Year Allocation. Net Income or Net Loss[/] Depreciation.
Depreciation deductions of the Partnership for []the period beginning on the
Closing Date and ending on the last day of the taxable year of the
Partnership that includes the Closing Date shall be allocated 100% to the
General Partner. For the immediately succeeding taxable year of the
Partnership, items of income or gain (if the allocation in the prior year
was an allocation of Net Income) or items of loss and deduction (if the
allocation in the prior year was an allocation of Net Loss) shall be
allocated 100% to the Limited Partners, [/]each period shall be allocated
among the Partners in accordance with their[] Percentage Interests, in an
amount equal to 99% of the Net Income or Net Loss allocated to the General
Partner in the prior taxable year. [/]Relative Capital Account balances as
------------------------------------
they existed immediately after the most recent book adjustments pursuant to
---------------------------------------------------------------------------
Section 4.9(d) of this Agreement that occurred prior to such period and
-----------------------------------------------------------------------
without regard to allocations made after such adjustment.
---------------------------------------------------------
Section 5.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 5.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A)(1) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B)(2) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 5.1.
(ii) (A)(1) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 4.9(d)(i) or (ii), and (2) second,
in the event such
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<PAGE>
[]property was originally a Contributed Property, be allocated among the
Partners in a manner[/] consistent with Section 5.2(b)(i)[/](A)(1); and (B)(2)
any item of Residual Gain or Residual Loss attributable to an Adjusted
Property shall be allocated among[/] the Partners in the same manner as its
correlative item of "book" gain or loss is allocated pursuant to Section
5.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the preservation
of uniformity of the Units (or any class or classes thereof), the General
Partner shall have sole discretion to (i) adopt such conventions as it deems
appropriate in determining the amount of depreciation, amortization and cost
recovery deductions; (ii) make special allocations for federal income tax
purposes of income (including, without limitation, gross income) or deductions;
and (iii) amend the provisions of this Agreement as appropriate (x) to reflect
the proposal or promulgation of Treasury Regulations under Section 704(b) or
Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity
of the Units (or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments to this
Agreement as provided in this Section 5.2(c) only if such conventions,
allocations or amendments would not have a material adverse effect on the
Partners, the holders of any class or classes of Units issued and Outstanding
or the Partnership, and if such allocations are consistent with the principles
of Section 704 of the Code.
(d) The General Partner in its sole discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite the inconsistency of such
approach with Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
------------
Treasury Regulation Section 1.197-2(g)(3) or any successor regulations thereto.
- -------------------------------------------------------------------------------
If the General Partner determines that such reporting position cannot
reasonably be taken, the General Partner may adopt depreciation and
amortization conventions under which all purchasers acquiring Units in the same
month would receive depreciation and amortization deductions, based upon the
same applicable rate as if they had purchased a direct interest in the
Partnership's property. If the General Partner chooses not to utilize such
aggregate method, the General Partner may use any other reasonable depreciation
and amortization conventions to preserve the uniformity of the intrinsic tax
characteristics of any Units that would not have a material adverse effect on
the Limited Partners or the Record Holders of any class or classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this Section
5.2, be characterized as Recapture Income in the same proportions and to the
same extent as such Partners (or their predecessors in interest) have been
allocated any deductions directly or indirectly giving rise to the treatment of
such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
C-44
<PAGE>
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable to
a transferred Partnership Interest []of the General Partner or to transferred
Units[/] shall, for federal income tax purposes, be determined on an annual
basis and prorated on a monthly basis and shall be allocated to the Partners as
of the opening of the New York Stock Exchange on the first Business Day of each
month; provided, however, that (i) if the []Underwriter's[/] Overallotment
Option is not exercised, such items for the period beginning on the Closing Date
and ending on the last day of the month in which the []Closing Date[/] Effective
Time occurs shall be allocated to Partners as of the opening of the New York
Stock Exchange on the first Business Day of the next succeeding month or (ii) if
the []Underwriters'[/] Overallotment Option is exercised, such items for the
period beginning on the Closing Date and ending on the last day of the month in
which the []Second Delivery Date (as defined in the Underwriting Agreement)[/]
closing of the Overallotment Option occurs shall be allocated to the Partners as
- -----------------------------------
of the opening of the New York Stock Exchange on the first Business Day of the
next succeeding month; and; provided, further, that gain or loss on a sale or
other disposition of any assets of the Partnership other than in the ordinary
course of business shall be allocated to the Partners as of the opening of the
New York Stock Exchange on the first Business Day of the month in which such
gain or loss is recognized for federal income tax purposes. The General Partner
may revise, alter or otherwise modify such methods of allocation as it
determines necessary, to the extent permitted or required by Section 706 of the
Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article V shall instead be made to the beneficial owner of
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c) of
the Code or any other method acceptable to the General Partner in its sole
discretion.
Section 5.3 Requirement and Characterization of Distributions.
(a) []Within[/] Subject to (b), (c) and (d) below, within 45 days following
the end of (i) the period beginning on the Initial Closing Date and ending on
March 31, 1996 and (ii) each Quarter commencing with the Quarter beginning on
April 1, 1996 an amount equal to 100% of Available Cash with respect to such
period or Quarter shall be distributed in accordance with this Article V by the
Partnership to the Partners, as of the Record Date selected by the General
Partner in its reasonable discretion; provided, however, that the distribution
-----------------------------------------
of Available Cash to the holders of Senior Subordinated Units, Junior
- -------------------------------------------------------------------------------
Subordinated Units and General Partner Units shall commence with respect to the
- -------------------------------------------------------------------------------
Quarter beginning on April 1, 1999 (and shall include the time period beginning
- -------------------------------------------------------------------------------
on the Effective Time and ending on March 31, 1999). All amounts of Available
- ---------------------------------------------------
Cash distributed by the Partnership on any date from any source shall be deemed
to be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to Partners pursuant to Section 5.4
equals the Operating Surplus from the Initial Closing Date through the close of
-------
the immediately preceding Quarter. Any remaining amounts of Available Cash
distributed by the Partnership on such date shall, except as otherwise provided
in Section 5.5, be deemed to be from Capital Surplus.
C-45
<PAGE>
(b) A distribution of Available Cash may be made on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units with respect to the
time period beginning on the Effective Time and ending on June 30, 1999 in an
amount up to the Minimum Quarterly Distribution for such period to the extent
the sum of EBITDA, less interest, less taxes, and less Maintenance Capital
Expenditures consolidated (combined actual from October 1, 1998 until the
Effective Time) for Petro and the Partnership ("Adjusted Distributable Cash")
for the period beginning October 1, 1998 and ending on June 30, 1999 exceeds
the sum of
(i) $57,172,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending December 31, 1998 exceeds
or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending June 30, 1999 exceeds or
is less than 10,544,000.
(c) A distribution of Available Cash may be made on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, with respect to the
time period beginning on July 1, 1999 and ending on September 30, 1999 in an
amount up to the Minimum Quarterly Distribution for such period to the extent
the Adjusted Distributable Cash for the period beginning on October 1, 1998 and
ending on September 30, 1999 exceeds the sum of
(i) $25,307,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending December 31, 1998 exceeds
or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending June 30, 1999 exceeds or
is less than 10,544,000, plus or minus
(v) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending September 30, 1999
exceeds or is less than 10,544,000.
(d) Beginning with the distribution for the Quarter ending on December 31,
1999, no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, unless the aggregate amount of
distributions on all Units with respect to all Quarters, beginning with the
Quarter ending on December 31, 1999 shall be equal to or less than the total
C-46
<PAGE>
Operating Surplus generated by the Partnership since October 1, 1999 (which
does not include that portion of Operating Surplus included in clause (a)(i) of
the definition of Operating Surplus).
(e) Notwithstanding the definitions of Available Cash and Operating Surplus
contained herein, [](i) cash receipts of the Partnership from the capital
contributions pursuant to the Additional Capital Contribution Obligation shall
be deemed to be received, for purposes of determining Available Cash from
Operating Surplus, during the quarter in respect of which such capital
contributions are made, even if such capital contributions are received by the
Partnership after the last day of such quarter; and (ii)[/] disbursements
(including, without limitation, contributions to the Operating Partnership or
disbursements on behalf of the Operating Partnership) made or cash reserves
established, increased or reduced (including, without limitation, cash reserves
established, increased or reduced by the Operating Partnership) after the end
of any Quarter but on or before the date on which the Partnership makes its
distribution of Available Cash in respect of such Quarter pursuant to Section
5.3(a) shall be deemed to have been made, established, increased or reduced for
purposes of determining Available Cash and Operating Surplus, within such
Quarter if the General Partner so determines. Notwithstanding the foregoing, in
the event of the dissolution and liquidation of the Partnership, all proceeds
of such liquidation shall be applied and distributed in accordance with, and
subject to the terms and conditions of, Section 14.4.
(f) Nothing in this Section 5.3 prohibits the holders of the Senior
Subordinated Units, Junior Subordinated Units or General Partner Units from
receiving distributions from Capital Surplus in a partial liquidation during
the Subordination Period.
Section 5.4 Distributions of Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 5.3 or 5.5 shall, subject to Section 5.3 and
--------------------------
subject to Section 17-607 of the Delaware Act, be distributed as follows,
- ----------------------------------------------
except as otherwise required by Section 4.4(b) in respect of additional
Partnership Securities issued pursuant thereto:
(i) First, []99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner[/] 100% to the Common Units, Pro Rata, until there has been
-----------------------------------
distributed in respect of each Common Unit then Outstanding an amount equal
to the Minimum Quarterly Distribution;
(ii) Second, []99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner[/] 100% to the Common Units, Pro Rata, until there has been
-----------------------------------
distributed in respect of each Common Unit then Outstanding an amount equal
to the Cumulative Common Unit Arrearage, if any, existing with respect to
such any prior Quarter;
---------
(iii) Third, []99%[/] 100% to the []Limited Partners holding[/] Senior
---- ------
Subordinated Units, []in accordance with their relative Percentage Interests,
and 1% to the General Partner[/] Pro Rata, until there has been distributed in
---------
respect of each Senior Subordinated Unit then Outstanding an amount equal to
------
the Minimum Quarterly Distribution;
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<PAGE>
(iv) Fourth, []99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner [/]100% to the
-----------
Junior Subordinated Units and General Partner Units, Pro Rata, until there
--------------------------------------------------------------
has been distributed in respect of each Junior Subordinated Unit and
----------------------------
General Partner Unit then Outstanding an amount equal to the []excess of the
---------------
First Target Distribution over the [/]Minimum Quarterly Distribution;
(v) Fifth, []85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner [/]100% to
-------
all Units, Pro Rata, until there has been distributed in respect of each
--------------------
Unit then Outstanding an amount equal to the excess of the []Second[/] First
-----
Target Distribution over the []First Target[/] Minimum Quarterly Distribution;
-----------------
(vi) Sixth, []75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner [/](A)
86.7% to all Units, Pro Rata, and (B) 13.3% to all Senior Subordinated
----------------------------------------------------------------------
Units, Junior Subordinated Units and General Partner Units, Pro Rata, until
---------------------------------------------------------------------
there has been distributed in respect of each Common Unit then Outstanding
------
an amount equal to the excess of the Second Target Distribution over the
-----------------------------------
First Target Distribution;
-------------------------
(vii) Seventh, (A) 76.5% to all Units, Pro Rata, and (B) 23.5% to all
---------------------------------------------------------------------
Senior Subordinated Units, Junior Subordinated Units and General Partner
------------------------------------------------------------------------
Units, Pro Rata, until there has been distributed in respect of each Common
---------------------------------------------------------------------------
Unit then Outstanding an amount equal to the excess of the Third Target
------------------------------------------------------
Distribution over the Second Target Distribution; and
[] (vii) Thereafter, 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, and 49.4898% to the General Partner;[/]
(viii) Thereafter, (A) 51% to all Units, Pro Rata, and (B) 49% to all
---------------------------------------------------------------------
Senior Subordinated, Junior Subordinated and General Partner Units, Pro
-----------------------------------------------------------------------
Rata;
-----
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6(a),
the distributions of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made in accordance with[] Section 5.4(a)(vii)[/]
5.4(a)(viii).
- ------------
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 5.3 or 5.5 shall, subject to Section 17-607 of the
----------------------------------
Delaware Act, be distributed as follows, except as otherwise required by
- -------------
Section 4.4(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, []99% to all Limited Partners, in accordance with their relative
Percentage Interests, and 1% to the General Partner [/]100% to all Units, Pro
----------------------
Rata, until there has been distributed in respect of each Unit then
-----
Outstanding an amount equal to the Minimum Quarterly Distribution;
(ii) Second, []99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner [/]100% to all
-----------
Units, Pro Rata, until there has been distributed in respect of each Unit
----------------
then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution;
(iii) Third, []85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner (A)[/]
86.7% to all Units, Pro Rata, and (B) 13.3% to all Class B Common Units and
---------------------------------------------------------------------------
General Partner Units, Pro Rata, until there has been
--------------------------------
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<PAGE>
distributed in respect of each Class A Common Unit then Outstanding an
--------------
amount equal to the excess of the Second Target Distribution over the First
Target Distribution;
(iv) Fourth,[] 75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner (A)[/]
76.5% to all Units, Pro Rata, and (B) 23.5% to all Class B Common Units and
---------------------------------------------------------------------------
General Partner Units, Pro Rata, until there has been distributed in
--------------------------------
respect of each Class A Common Unit then Outstanding an amount equal to the
--------------
excess of the Third Target Distribution over the Second Target
Distribution; and
(v) Thereafter,[] 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, and 49.4898% to the General Partner;[/]
(A) 51% to all Units, Pro Rata, and (B) 49% to all Class B Common Units and
---------------------------------------------------------------------------
General Partner Units, Pro Rata;
--------------------------------
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6(a),
the distributions of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made in accordance with Section 5.4(b)(v).
Section 5.5 Distributions of Cash from Capital Surplus.
Available Cash that constitutes Capital Surplus shall, subject to Section 17-
----------------------
607 of the Delaware Act, be distributed, unless the provisions of Section 5.3
- ------------------------
require otherwise,[] 99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner[/] 100% to all
-----------
Units, Pro Rata, until a hypothetical holder of a Common Unit acquired on the
- ---------------
Initial Closing Date has received with respect to such Common Unit, during the
- -------
period since the Initial Closing Date through such date, distributions of
-------
Available Cash that are deemed to be Capital Surplus in an aggregate amount
equal to the Initial Unit Price. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 5.4.
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall be proportionately
adjusted in the event of any distribution, combination or subdivision (whether
effected by a distribution payable in Units or otherwise) of Units or other
Partnership Securities in accordance with Section 4.8. In the event of a
distribution of Available Cash that is deemed to be from Capital Surplus, the
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction
of which the numerator is the Unrecovered Initial Unit Price of the Common
Units immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Initial Unit Price of the Common Units
immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 5.8.
C-49
<PAGE>
Section 5.7 Special Provisions Relating to the Senior Subordinated Units and
-----------------------------
Junior Subordinated Units.
------
Except with respect to the right to vote on or approve matters requiring the
vote or approval of a percentage of the holders of Outstanding Common Units and
the right to participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units pursuant to this
Article V,[] the holder of a[/] and except as provided in Section 6.12 and
------------------------------------------
Section 17.1, the holder of a Senior Subordinated Unit or a Junior Subordinated
- ------------------------------------------------------------------
Unit shall have all of the rights and obligations of a Limited Partner holding
Common Units hereunder; provided, however, that immediately upon the end of the
Subordination Period[] or upon the conversion of Subordinated Units as;
provided, however, in Section 4.6,[/] the holder of a Senior Subordinated Unit
------------------------
or Junior Subordinated Unit shall possess all of the rights and obligations of a
- ---------
Limited Partner holding Class B Common Units hereunder, including, without
limitation, the right to vote as a Common Unitholder and the right to
participate in allocations of income, gain, loss and deduction and distributions
of cash made with respect to Common Units pursuant to this Article V (but such
converted Senior Subordinated Units and Junior Subordinated Units shall remain
------------------------------------
subject to the provisions of Sections 4.9(c)(ii) and 5.1(d)(x)).
Section 5.8 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution or Third
Target Distribution, as the case may be, shall be equal to the product obtained
by multiplying (a) the amount thereof by (b) one minus the sum of (i) the
highest marginal federal corporate (or other entity, as applicable) income tax
rate of the Partnership for the taxable year of the Partnership in which such
Quarter occurs (expressed as a percentage) plus (ii) the effective overall
state and local income tax rate (expressed as a percentage) applicable to the
Partnership for the calendar year next preceding the calendar year in which
such Quarter occurs (after taking into account the benefit of any deduction
allowable for federal income tax purposes with respect to the payment of state
and local income taxes), but only to the extent of the increase in such rates
resulting from such legislation or interpretation. Such effective overall state
and local income tax rate shall be determined for the taxable year next
preceding the first taxable year during which the Partnership or the Operating
Partnership is taxable for federal income tax purposes as an association
taxable as a corporation or is otherwise subject to entity-level taxation by
determining such rate as if the Partnership or the Operating Partnership had
been subject to such state and local taxes during such preceding taxable year.
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<PAGE>
ARTICLE VI
[]Management and Operation of Business[/] MANAGEMENT AND
OPERATION OF BUSINESS
Section 6.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 6.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 3.2 and to effectuate the purposes set forth in Section
3.1, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
-------------------------------------------------------------------
to any prior approval that may be required by Section 6.3);
----------------------------------------------------------
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership or the
Operating Partnership, the lending of funds to other Persons (including the
[]Operating Partnership, the General Partner and its Affiliates)[/] Group
-----
Members), the repayment of obligations of the Partnership and the Operating
-------
Partnership and the making of capital contributions to the Operating
Partnership;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees, including those of the
----------------------
Operating Partnership (including employees having titles such as
---------------------
"president," "vice president," "secretary" and
C-51
<PAGE>
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests
in, and the contributions of property to, the Operating Partnership from
time to time);
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Units from, or
requesting that trading be suspended on, any such exchange (subject to any
prior approval that may be required under Section 1.6);
(xiii) the purchase, sale or other acquisition or disposition of Units
(subject to Section 6.12 and Section 17.1); and
-------------------------------------------
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of the Operating
Partnership Agreement, the Underwriting Agreement, the Conveyance and
Contribution Agreements, the agreements and other documents filed as exhibits
-
to the Proxy Statement and the Equity Offering Registration Statement, and the
---------------------------------------
other agreements described in or filed as a part of the Proxy Statement and the
-----------------------
Equity Registration Statement; (ii) agrees that the General Partner (on its own
- ------
or through any officer of the Partnership) is authorized to execute, deliver
and perform the agreements referred to in clause (i) of this sentence and the
other agreements, acts, transactions and matters described in or contemplated
by the Proxy Statement and the Equity Registration Statement on behalf of the
------------------------------
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Units; and (iii)
agrees that the execution, delivery or performance by the General Partner, any
Group Member or any Affiliate of any of them, of this Agreement or any
agreement authorized or permitted under this Agreement (including the exercise
by the General Partner or any Affiliate of the General Partner of the rights
accorded pursuant to Article XVII), shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the Partnership or
the Limited Partners or the Assignees or any other Persons under this Agreement
(or any other agreements) or of any duty stated or implied by law or equity.
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<PAGE>
Section 6.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership in which the limited
partners have limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to do business or own
property. Subject to the terms of Section 7.5(a), the General Partner shall not
be required, before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document or any amendment
thereto to any Limited Partner or Assignee.
Section 6.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific act
by all of the Outstanding Units or by other written instrument executed and
delivered by all of the Outstanding Units subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the Partnership;
(ii) possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XIV and XVI, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership, without the approval of holders of a Unit Majority; provided,
however, that this provision shall not preclude or limit the General Partner's
ability to mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the Partnership or Operating Partnership and
shall not apply to any forced sale of any or all of the assets of the
Partnership or Operating Partnership pursuant to the foreclosure of, or other
realization upon, any such encumbrance. Without the approval of holders of a
Unit Majority, the General Partner shall not, on behalf of the Partnership, (i)
consent to any amendment to the Operating Partnership Agreement or, except as
expressly permitted by Section 6.9(d), take any action permitted to be taken by
a partner of the Operating Partnership, in either case, that would have a
material adverse effect on the Partnership as a partner of the Operating
Partnership or (ii) except as permitted under Sections 11.2, 13.1 and 13.2,
elect or cause the Partnership to elect a successor general partner of the
Operating Partnership.
C-53
<PAGE>
[](c) At all times while serving as the general partner of the Partnership, the
General Partner shall not make any dividend or distribution on, or repurchase
any shares of, its stock or take any other action within its control if the
effect of such action would cause its net worth, independent of its interest in
the Partnership Group, to be less than $6.0 million.[/]
Section 6.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 6.4 and elsewhere in this Agreement or
in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such other
basis as the General Partner may determine in its sole discretion, for (i) all
direct and indirect expenses it incurs or payments it makes on behalf of the
Partnership (including salary, bonus, incentive compensation and other amounts
paid to any Person to perform services for the Partnership, the Operating
-------------
Partnership or for the General Partner in the discharge of its duties to the
- -----------
Partnership), and (ii) all other necessary or appropriate expenses allocable to
the Partnership or otherwise reasonably incurred by the General Partner in
connection with operating the Partnership's business (including expenses
allocated to the General Partner by its Affiliates). The General Partner shall
determine the expenses that are allocable to the Partnership in any reasonable
manner determined by the General Partner in its sole discretion. Reimbursements
pursuant to this Section 6.4 shall be in addition to any reimbursement to the
General Partner as a result of indemnification pursuant to Section 6.7.
(c) Subject to Section 4.5, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose, adopt and amend on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Units), or issue
Partnership Securities pursuant to any employee benefit plan, employee program
or employee practice maintained or sponsored by the General Partner or any of
its Affiliates, in each case for the benefit of employees of the General
Partner, any Group Member or any Affiliate, or any of them, in respect of
services performed, directly or indirectly, for the benefit of the Partnership
Group. The Partnership agrees to issue and sell to the General Partner or any
of its Affiliates any Units or other Partnership Securities that the General
Partner or such Affiliate is obligated to provide to any employees pursuant to
any such employee benefit plans, employee programs or employee practices.
Expenses incurred by the General Partner in connection with any such plans,
programs and practices (including the net cost to the General Partner or such
Affiliate of Units or other Partnership Securities purchased by the General
Partner or such Affiliate from the Partnership to fulfill options or awards
under such plans, programs and practices) shall be reimbursed in accordance
with Section 6.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by the
General Partner as permitted by this Section 6.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all of the General Partner's Partnership Interest
(which is represented by the General Partner Units) as a general partner in the
- ---------------------------------------------------
Partnership pursuant to Section 11.2.
C-54
<PAGE>
Section 6.5 Outside Activities.
(a) After the Closing Date Effective Time, the General Partner, for so long
as it is the general partner of the Partnership, shall not engage in any
business or activity or incur any debts or liabilities except in connection
with or incidental to (i) its performance as general partner of one or more
Group Members or as described in or contemplated by the Registration Proxy
-----
Statement or (ii) the acquiring, owning or disposing of debt or equity
securities in any Group Member.
(b)[] Petroleum Heat and Power Co., Inc. ("Petro") or an Affiliate may engage
in the propane business provided it complies with the Non-competition
Agreement[/] Certain Affiliates of the General Partner have entered into the
---------------------------------------------------------------
Non-competition Agreement with the Partnership and the Operating Partnership,
- -----------------------------------------------------------------------------
which agreement sets forth certain restrictions on the ability of such
- ----------------------------------------------------------------------
Affiliates to compete with the Partnership and the Operating Partnership. Any
- -------------------------------------------------------------------------
amendments or waivers to the Non-competition Agreement must be approved by the
Audit Committee.
(c) Except as restricted by Sections 6.5(a) or (b) and the Non-competition
-----------------------
Agreement, each Indemnitee (other than the General Partner) shall have the
- ---------- --------------------------------
right to engage in businesses of every type and description and other
activities for profit and to engage in and possess an interest in other
business ventures of any and every type or description, whether in businesses
engaged in or anticipated to be engaged in by any Group Member, independently
or with others, including business interests and activities in direct
competition with the business and activities of any Group Member, and none of
the same shall constitute a breach of this Agreement or any duty to any Group
Member or any Partner or Assignee. Neither any Group Member, any Limited
Partner nor any other Person shall have any rights by virtue of this Agreement,
the Operating Partnership Agreement or the partnership relationship established
hereby or thereby in any business ventures of any Indemnitee.
(d) []Notwithstanding[/] Subject to Sections 6.5(a), (b) and (c) and the terms
-----------------------------------------------------
of the Non-competition Agreement, but otherwise notwithstanding anything to the
- ---------------------------------------------------------------
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
--------------------------------
of this Section 6.5 is hereby approved by the Partnership and all Partners and
(ii) it shall be deemed not to be a breach of the General Partner's fiduciary
duty or any other obligation of any type whatsoever of the General Partner for
the Indemnitees (other than the General Partner) to engage in such business
--------------------------------
interests and activities in preference to or to the exclusion of the Partnership
(including, without limitation, the General Partner and the Indemnitees shall
have no obligation to present business opportunities to the Partnership).
(e) The General Partner and any of its Affiliates may acquire Units or other
Partnership Securities in addition to those acquired []on[/] at the []Closing
--
Date[/] Effective Time and, except as otherwise provided in this Agreement,
--------------
shall be entitled to exercise all rights of an Assignee or Limited Partner, as
applicable, relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 6.5(b) with respect to the
General Partner shall not include any Group Member or any Subsidiary of the
Group Member.
C-55
<PAGE>
Section 6.6 Loans from the General Partner; Contracts with Affiliates; Certain
Restrictions on the General Partner.
(a) The General Partner or any Affiliate thereof may lend to any Group
Member, and any Group Member may borrow, funds needed or desired by the Group
Member for such periods of time and in such amounts as the General Partner may
determine; provided, however, that in any such case the lending party may not
charge the borrowing party interest at a rate greater than the rate that would
be charged the borrowing party or impose terms less favorable to the borrowing
party than would be charged or imposed on the borrowing party by unrelated
lenders on comparable loans made on an arms'-length basis (without reference to
the lending party's financial abilities or guarantees). The borrowing party
shall reimburse the lending party for any costs (other than any additional
interest costs) incurred by the lending party in connection with the borrowing
of such funds. For purposes of this Section 6.6(a) and Section 6.6(b), the term
"Group Member" shall include any Affiliate of the Group Member that is
controlled by the Group Member. []The Partnership and the Operating Partnership
may not[/] No Group Member may lend funds to the General Partner or any of its
Affiliates.
(b) The Partnership may lend or contribute to any Group Member, and any Group
Member may borrow, funds on terms and conditions established in the sole
discretion of the General Partner; provided, however, that the Partnership may
not charge the Group Member interest at a rate greater than the rate that would
be charged to the Group Member (without reference to the General Partner's
financial abilities or guarantees), by unrelated lenders on comparable loans.
The foregoing authority shall be exercised by the General Partner in its sole
discretion and shall not create any right or benefit in favor of any Group
Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to the Partnership or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to the Partnership by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 6.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. The provisions of Section 6.4 shall apply to the rendering
of services described in this Section 6.6(c).
(d) The Partnership may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 6.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to
C-56
<PAGE>
Sections 4.1, 4.2 and 4.3, the Conveyance and Contribution Agreements and any
-
other transactions described in or contemplated by the []Registration[/] Proxy
-----
Statement, (ii) any transaction approved by Special Approval, (iii) any
transaction, the terms of which are no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties, or
(iv) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Units, the Audit Committee, in determining whether
the appropriate number of Units are being issued, should take into account,
among other things, the fair market value of the assets, the liquidated and
contingent liabilities assumed, the tax basis in the assets, the extent to
which tax-only allocations to the transferor will protect the existing partners
of the Partnership against a low tax basis, and such other factors as the Audit
Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to permit
any Group Member to use any facilities or assets of the General Partner and its
Affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation on
the part of the General Partner or its Affiliates to enter into such contracts.
(g) []Notwithstanding any provision of this Agreement to the contrary, prior
to the termination of the Additional Capital Contribution Obligation, the
General Partner may not, (i) make any dividends or distributions of any cash or
other assets to its stockholders, other than (v) the proceeds of the First
Mortgage Notes (other than the $6.0 million used to fund the Additional Capital
Contribution Obligation), (w) the Subordinated Units, (x) distributions from the
Partnership or the Operating Partnership, (y) interest and profits earned on
Permitted Investments and (z) interest on any loan to Petro, (ii) incur any
indebtedness for borrowed money (other than its obligations with respect to
indebtedness of the Partnership, Operating Partnership or any other subsidiary
entity of the Partnership) or (iii) merge with or into any other Person or
permit any Person to merge with or into the General Partner or to sell all or
substantially all of its assets in one or a series of transactions. In addition,
prior to the termination of the Additional Capital Contribution Obligation the
General Partner shall maintain $6.0 million in Permitted Investments; provided,
however, that such $6.0 million shall be reduced from time to time to the extent
and in the amount the Additional Capital Contribution Obligation is reduced in
accordance with Section 4.2(b).[/]
[](h) [/]Without limitation of Sections 6.6(a) through 6.6(f), and
------
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the []Registration [/]Proxy Statement are
-----
hereby approved by all Partners.
Section 6.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee; provided, that in each
case the Indemnitee acted
C-57
<PAGE>
[]in good faith and in a manner that such Indemnitee reasonably believed to be
in, or not opposed to, the best interests of the Partnership and, with respect
to any criminal proceeding, had no reasonable cause to believe its conduct was
unlawful; provided, further, no indemnification pursuant to this Section 6.7
shall be available to the General Partner or Petro with respect to their
respective obligations incurred pursuant to the Underwriting Agreement or the
Conveyance and Contribution[/] Agreements (other than obligations incurred by
----------
the General Partner on behalf of the Partnership or the Operating Partnership).
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that the Indemnitee acted in a manner contrary to
that specified above. Any indemnification pursuant to this Section 6.7 shall be
made only out of the assets of the Partnership, it being agreed that the General
Partner shall not be personally liable for such indemnification and shall have
no obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
6.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of an undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 6.7.
(c) The indemnification provided by this Section 6.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee and
as to actions in any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee who has ceased
to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner and such other Persons as the General Partner shall determine, against
any liability that may be asserted against or expense that may be incurred by
such Person in connection with the Partnership's activities, regardless of
whether the Partnership would have the power to indemnify such Person against
such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.7, the Partnership shall be deemed to have
requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 6.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
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<PAGE>
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or any provision
hereof shall in any manner terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 6.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
Section 6.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Units, for losses sustained or liabilities incurred as a result of any act or
omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 6.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 6.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership and the Limited Partners of the
General Partner, its directors, officers and employees and any other
Indemnitees under this Section 6.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be
asserted.
Section 6.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee, on
the other hand, any resolution or course of action in respect of such conflict
of interest shall be permitted and deemed approved by all Partners, and shall
not constitute a breach of this Agreement, of the Operating Partnership
Agreement, of any agreement contemplated herein or
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therein, or of any duty stated or implied by law or equity, if the resolution
or course of action is, or by operation of this Agreement is deemed to be, fair
and reasonable to the Partnership. The General Partner shall be authorized but
not required in connection with its resolution of such conflict of interest to
seek Special Approval of a resolution of such conflict or course of action. Any
conflict of interest and any resolution of such conflict of interest shall be
conclusively deemed fair and reasonable to the Partnership if such conflict of
interest or resolution is (i) approved by Special Approval, (ii) on terms no
less favorable to the Partnership than those generally being provided to or
available from unrelated third parties or (iii) fair to the Partnership, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership). The General Partner may also adopt a
resolution or course of action that has not received Special Approval. The
General Partner (including the Audit Committee in connection with Special
Approval) shall be authorized in connection with its determination of what is
"fair and reasonable" to the Partnership and in connection with its resolution
of any conflict of interest to consider (A) the relative interests of any party
to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person;
(C) any applicable generally accepted accounting practices or principles; and
(D) such additional factors as the General Partner (including the Audit
Committee) determines in its sole discretion to be relevant, reasonable or
appropriate under the circumstances. Nothing contained in this Agreement,
however, is intended to nor shall it be construed to require the General
Partner (including the Audit Committee) to consider the interests of any Person
other than the Partnership. In the absence of bad faith by the General Partner,
the resolution, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any
standard of care or duty imposed herein or therein or, to the extent permitted
by law, under the Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
the General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, the Operating Partnership, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) in "good faith" or under another
express standard, the General Partner or such Affiliate shall act under such
express standard and shall not be subject to any other or different standards
imposed by this Agreement, the Operating Partnership Agreement, any other
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth in
the definitions of Available Cash or Operating Surplus shall not constitute a
breach of any duty of the General Partner to the Partnership or the Limited
Partners. The General Partner shall have no duty, express or implied, to sell
or otherwise dispose of any asset of the Partnership Group. No borrowing by any
Group Member
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or the approval thereof by the General Partner shall be deemed to constitute a
breach of any duty of the General Partner to the Partnership or the Limited
Partners by reason of the fact that the purpose or effect of such borrowing is
directly or indirectly to (A) []enable distributions respect of the general
partner interest to exceed 1%[/] on the General Partner Units to exceed the
------------------------------------------
General Partner's Percentage Interest of the total amount distributed or (B)
- ------------------------------------- --
hasten the expiration of the Subordination Period or the conversion of any
Senior Subordinated Units or Junior Subordinated Units into []Common Units or
- -----------------------------------
(C) enable the General Partner to avoid or reduce its Additional Capital
Contribution Obligation.[/] Class B Common Units.
---------------------
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Limited Partners hereby authorize the General Partner, on behalf of
the Partnership as a partner of a Group Member, to approve of actions by the
general partner of such Group Member similar to those actions permitted to be
taken by the General Partner pursuant to this Section 6.9.
Section 6.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its powers
or obligations hereunder, to act through any of its duly authorized officers, a
duly appointed attorney or attorneys-in-fact or the duly authorized officers of
the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority prescribed
in this Agreement, so long as such action is reasonably believed by the General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
Section 6.11 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually
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or collectively, shall have any ownership interest in such Partnership assets
or any portion thereof. Title to any or all of the Partnership assets may be
held in the name of the Partnership, the General Partner, one or more of its
Affiliates or one or more nominees, as the General Partner may determine. The
General Partner hereby declares and warrants that any Partnership assets for
which record title is held in the name of the General Partner or one or more of
its Affiliates or one or more nominees shall be held by the General Partner or
such Affiliate or nominee for the use and benefit of the Partnership in
accordance with the provisions of this Agreement; provided, however, that the
General Partner shall use its reasonable efforts to cause record title to such
assets (other than those assets in respect of which the General Partner
determines that the expense and difficulty of conveyancing makes transfer of
record title to the Partnership impracticable) to be vested in the Partnership
as soon as reasonably practicable; provided that, prior to the withdrawal or
removal of the General Partner or as soon thereafter as practicable, the
General Partner shall use reasonable efforts to effect the transfer of record
title to the Partnership and, prior to any such transfer, will provide for the
use of such assets in a manner satisfactory to the Partnership. All Partnership
assets shall be recorded as the property of the Partnership in its books and
records, irrespective of the name in which record title to such Partnership
assets is held. The General Partner covenants and agrees that at the []Closing
Date[/] Effective Time, the Partnership Group shall have all licenses, permits,
---------------
certificates, franchises, or other governmental authorizations or permits
necessary for the ownership of their properties or for the conduct of their
businesses, except for such licenses, permits, certificates, franchises, or
other governmental authorizations or permits, failure to have obtained which
will not, individually or in the aggregate, have a material adverse effect on
the Partnership Group.
Section 6.12 Purchase or Sale of Units.
The General Partner may cause the Partnership to purchase or otherwise
acquire Units; provided that, except as permitted pursuant to Section 11.6 and
Section 17.1(a), the General Partner may not cause the Partnership to purchase
[]Subordinated[/] Units other than Common Units during the Subordination Period.
-----------------------
As long as Units are held by any Group Member, such Units shall not be
considered Outstanding for any purpose, except as otherwise provided herein. The
General Partner or any Affiliate of the General Partner (other than a Group
-------------------
Member) may also purchase or otherwise acquire and sell or otherwise dispose of
- -------
Units for its own account, subject to the provisions of Articles XI and XII.
Section 6.13 Registration Rights.
[]6.13 Registration Rights of Star Gas and its Affiliates.[/] (a) If (i)
[]Star Gas the General Partner or any Affiliate of []Star Gas[/] the General
------------------- -----------
Partner (including for purposes of this Section 6.13, any Person that is an
- -------
Affiliate of []Star Gas[/] the General Partner at the date hereof
-------------------
notwithstanding that it may later cease to be an Affiliate of []Star Gas[/] the
---
General Partner) holds Units or other Partnership Securities that it desires to
- ----------------
sell and (ii) Rule 144 of the Securities Act (or any successor rule or
regulation to Rule 144) or another exemption from registration is not available
to enable such holder of Units (the "Holder") to dispose of the number of Units
or other []securities[/] Partnership Securities it desires to sell at the time
----------------------
it desires to do so without registration under the Securities Act, then upon the
request of []Star Gas[/] the General Partner or any of its Affiliates, the
-------------------
Partnership shall file with the Commission as promptly as practicable after
receiving such request, and use all reasonable efforts to cause to become
effective and remain effective for a period of not less than six months
following its effective
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date or such shorter period as shall terminate when all Units or other
- ----------------------------------------------------------------------
Partnership Securities covered by such registration statement have been sold, a
- -------------------------------------------------------------------------------
registration statement under the Securities Act registering the offering and
- ----------------------------------------------------------------------------
sale of the number of Units or other[] securities[/] Partnership Securities
- ------------------------------------ ----------------------
specified by the Holder; provided, however, that the Partnership shall not be
required to effect more than three registrations pursuant to this Section
6.13(a); and provided, further, however, that if the Audit Committee determines
in its good faith judgment that a postponement of the requested registration
for up to six months would be in the best interests of the Partnership and its
Partners due to a pending transaction, investigation or other event, the filing
of such registration statement or the effectiveness thereof may be deferred for
up to six months, but not thereafter. In connection with any registration
pursuant to the immediately preceding sentence, the Partnership shall promptly
prepare and file (x) such documents as may be necessary to register or qualify
the []securities[/] Partnership Securities subject to such registration under
----------------------
the securities laws of such states as the Holder shall reasonably request;
provided, however, that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Partnership would become subject
to general service of process or to taxation or qualification to do business as
a foreign corporation or partnership doing business in such jurisdiction, and
(y) such documents as may be necessary to apply for listing or to list the
[]securities[/] Partnership Securities subject to such registration on such
----------------------
National Securities Exchange as the Holder shall reasonably request, and do any
and all other acts and things that may reasonably be necessary or advisable to
enable the Holder to consummate a public sale of such Units in such states.
Except as set forth in Section 6.13(c), all costs and expenses of any such
registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of []securities[/] Partnership Securities held by the Holder in
----------------------
such registration statement as the Holder shall request. If the proposed
offering pursuant to this Section 6.13(b) shall be an underwritten offering,
then, in the event that the managing underwriter of such offering advises the
Partnership and the Holder in writing that in its opinion the inclusion of all
or some of the Holder's Partnership Securities would adversely and materially
----------------------
affect the success of the offering, the Partnership shall include in such
offering only that number or amount, if any, of Partnership Securities held by
the Holder which, in the opinion of the managing underwriter, will not so
adversely and materially affect the offering. Except as set forth in Section
6.13(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 6.13(a) or (f), the Partnership shall provide
indemnification, representations, covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory to such
underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 6.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder, its
officers, directors and each Person who controls the Holder (within the meaning
of the Securities Act) and any agent thereof (collectively, "Indemnified
Persons") against any losses, claims, demands, actions, causes of action,
assessments, damages, liabilities (joint or several), costs
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and expenses (including interest, penalties and reasonable attorneys' fees and
disbursements), resulting to, imposed upon, or incurred by the Indemnified
Persons, directly or indirectly, under the Securities Act or otherwise
(hereinafter referred to in this Section 6.13(c) as a "claim" and in the plural
as "claims") based upon, arising out of or resulting from any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which any Units were registered under the Securities Act or any
state securities or Blue Sky laws, in any preliminary prospectus (if used prior
to the effective date of such registration statement), or in any summary or
final prospectus or in any amendment or supplement thereto (if used during the
period the Partnership is required to keep the registration statement current),
or arising out of, based upon or resulting from the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading; provided,
however, that the Partnership shall not be liable to any Indemnified Person to
the extent that any such claim arises out of, is based upon or results from an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, such preliminary, summary or final
prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Partnership by or on behalf of such
Indemnified Person specifically for use in the preparation thereof. For
---
purposes of this Section 6.13(c), the term "Holder" shall also include
- ----------------------------------------------------------------------
Affiliates or former Affiliates of Petro holding Common Units and Senior
- ------------------------------------------------------------------------
Subordinated Units.
- -------------------
(d) The provisions of Section 6.13(a) and (b) shall continue to be applicable
with respect to the General Partner (and any of the General Partner's
------------------- ---------------
Affiliates) after it ceases to be a Partner of the Partnership, during a period
of two years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Units or other
[]securities[/] of the Partnership Securities with respect to which it has
----------
requested during such two-year period that a registration statement be filed;
provided, however, that the Partnership shall not be required to file successive
registration statements covering the same []securities[/] Partnership Securities
----------------------
for which registration was demanded during such two-year period. The provisions
of Section 6.13(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
6.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such []shares[/] Partnership Securities for distribution, (iii)
----------------------
describe the nature or method of the proposed offer and sale of Partnership
Securities, and (iv) contain the undertaking of such Person to provide all such
information and materials and take all action as may be required in order to
permit the Partnership to comply with all applicable requirements in connection
with the registration of such Partnership Securities.
(f) Prior to the Effective Time, the Partnership shall have filed with the
--------------------------------------------------------------------------
Commission a registration statement (the "Shelf Registration Statement") on an
- ------------------------------------------------------------------------------
appropriate form under the Securities Act relating to the resale of Common
- --------------------------------------------------------------------------
Units and Senior Subordinated Units issued to Affiliates or former Affiliates
- -----------------------------------------------------------------------------
of Petro. The Partnership shall use all reasonable efforts to cause the Shelf
- -----------------------------------------------------------------------------
Registration Statement to become effective and remain effective for a period of
- -------------------------------------------------------------------------------
not less than one year from the Effective Time or such shorter period as shall
- ------------------------------------------------------------------------------
terminate when all Common Units and Senior Subordinated Units covered by the
- ----------------------------------------------------------------------------
Shelf Registration Statement have been sold pursuant to such registration
- -------------------------------------------------------------------------
statement; provided, however, that if the Audit Committee determines in its
- ---------------------------------------------------------------------------
good
- ----
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faith judgment that the sale or distribution of Common Units or Senior
- ----------------------------------------------------------------------
Subordinated Units pursuant to the Shelf Registration Statement would not be in
- -------------------------------------------------------------------------------
the best interests of the Partnership and its Partners due to a pending
- -----------------------------------------------------------------------
transaction, investigation or other event, the Audit Committee may elect that
- -----------------------------------------------------------------------------
the Shelf Registration Statement may not be used for a reasonable period of
- ---------------------------------------------------------------------------
time, not to exceed 120 days in any 365-day period.
- ---------------------------------------------------
Section 6.14 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the Partnership authorized by the General Partner to
act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest,
both legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to
contest, negate or disaffirm any action of the General Partner or any such
officer in connection with any such dealing. In no event shall any Person
dealing with the General Partner or any such officer or its representatives be
obligated to ascertain that the terms of this Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or any such officer or its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or
claiming thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
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<PAGE>
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 7.1 Limitation of Liability.
The Limited Partners, the Organizational Limited Partner and the Assignees
shall have no liability under this Agreement except as expressly provided in
this Agreement or the Delaware Act.
Section 7.2 Management of Business.
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates or any officer, director, employee, partner, agent or trustee of the
General Partner or any of its Affiliates, in its capacity as such, if such
Person shall also be a Limited Partner or Assignee) shall participate in the
operation, management or control (within the meaning of the Delaware Act) of
the Partnership's business, transact any business in the Partnership's name or
have the power to sign documents for or otherwise bind the Partnership. The
transaction of any such business by the General Partner, any of its Affiliates
or any member, officer, director, employee, partner, agent or trustee of the
-------
General Partner or any of its Affiliates, in its capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
Section 7.3 Outside Activities.
Subject to the provisions of Section 6.5 and the Non-competition Agreement,
----------------------------------
which shall continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited Partners or Assignees,
any Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to
the Partnership, including business interests and activities in direct
competition with the Partnership Group. Neither the Partnership nor any of the
other Partners or Assignees shall have any rights by virtue of this Agreement
in any business ventures of any Limited Partner or Assignee.
Section 7.4 Return of Capital.
No Limited Partner or Assignee shall be entitled to the withdrawal or return
of its Capital Contribution, except to the extent, if any, that distributions
-------
made pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent provided by Article V or as otherwise expressly
provided in this Agreement, no Limited Partner or Assignee shall have priority
over any other Limited Partner or Assignee either as to the return of Capital
-------
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
[](S)[/] Section 17-502(b) of the Delaware Act.
-------
Section 7.5 Rights of Limited Partners to the Partnership.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 7.5(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable demand and at such
Limited Partner's own expense:
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(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him, upon notification to the General Partner,
a current list of the name and last known business, residence or mailing
address of each Partner;
(iv) to have furnished to him, upon notification to the General Partner,
a copy of this Agreement and the Certificate of Limited Partnership and all
amendments thereto, together with a copy of the executed copies of all
powers of attorney pursuant to which this Agreement, the Certificate of
Limited Partnership and all amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
-------
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the
nature of trade secrets or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreements with third parties to keep
confidential (other than agreements with Affiliates the primary purpose of
which is to circumvent the obligations set forth in this Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office of
the Partnership appropriate books and records with respect to the Partnership's
business, including all books and records necessary to provide to the Limited
Partners any information required to be provided pursuant to Section 7.5(a).
Any books and records maintained by or on behalf of the Partnership in the
regular course of its business, including the record of the Record Holders and
Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with generally accepted accounting principles.
Section 8.2 Fiscal Year.
The fiscal year of the Partnership shall be October 1 to September 30.
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Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed to each Record Holder of a Unit as of a date selected by the
General Partner in its sole discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with generally accepted accounting principles,
including a balance sheet and statements of operations, Partners' equity and
cash flows, such statements to be audited by a firm of independent public
accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed to each Record Holder of a Unit, as of a date
selected by the General Partner in its sole discretion, a report containing
unaudited financial statements of the Partnership and such other information as
may be required by applicable law, regulation or rule of any National
Securities Exchange on which the Units are listed for trading, or as the
General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information.
The General Partner shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be furnished to them
within 90 days of the close of the calendar year in which the Partnership's
taxable year ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the accrual method of
accounting for federal income tax purposes.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. For the purposes of computing the adjustments under Section 743(b) of
the Code, the General Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of Units will be deemed to be
the lowest quoted closing price of the Units on any National Securities
Exchange on which such Units are traded during the calendar month in which such
transfer is deemed to occur pursuant to Section 5.2(g) without regard to the
actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing the
Partnership ratably over a sixty-month period as provided in Section 709 of the
Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
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Section 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in Section 6231 of the Code) and is authorized
and required to represent the Partnership (at the Partnership's expense) in
connection with all examinations of the Partnership's affairs by tax
authorities, including resulting administrative and judicial proceedings, and
to expend Partnership funds for professional services and costs associated
therewith. Each Partner agrees to cooperate with the General Partner and to do
or refrain from doing any or all things reasonably required by the General
Partner to conduct such proceedings.
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner is
authorized to take any action that it determines in its sole discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income to any Partner
or Assignee (including, without limitation, by reason of Section 1446 of the
Code), the amount withheld shall be treated as a distribution of cash pursuant
to Section 5.3 in the amount of such withholding from such Partner.
ARTICLE X
CERTIFICATES
Section 10.1 Certificates.
Upon the Partnership's issuance of Common Units or Senior Subordinated Units
------
to any Person, the Partnership shall issue one or more Certificates in the name
of such Person evidencing the number of such Units being so issued.
Certificates shall be executed on behalf of the Partnership by the General
Partner. No Common Unit or Senior Subordinated Unit Certificate shall be valid
---------------------------
for any purpose until it has been countersigned by the Transfer Agent;
provided, however, that if the General Partner elects to issue Units in global
- ------------------------------------------------------------------------------
form, the Certificates shall be valid upon receipt of a certificate from the
- ----------------------------------------------------------------------------
Transfer Agent certifying that such Units have been duly registered in
- ----------------------------------------------------------------------
accordance with the directions of the Partnership and the Underwriters. The
- -----------------------------------------------------------------------
Partners holding Certificates evidencing Senior Subordinated Units may exchange
------
such Certificates for Certificates evidencing Class B Common Units on or after
the []date on which such Subordinated Units are converted into Common Units
pursuant to the terms of Section 4.6.[/] expiration of the Subordination Period.
Section 10.2 Registration, Registration of Transfer and Exchange.
(a) The General Partner shall cause to be kept on behalf of the Partnership a
register in which, subject to such reasonable regulations as it may prescribe
and subject to the provisions of Section 10.2(b), the General Partner will
provide for the registration and transfer of Units. The Transfer Agent is
appointed registrar and transfer agent for the purpose of registering Common
Units and Senior Subordinated Units and transfers of such Units as provided.
The Partnership shall not
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recognize transfers of Certificates representing Units unless such transfers
are effected in the manner described in this Section 10.2. Upon surrender for
registration of transfer of any Units evidenced by a Certificate, and subject
to the provisions of Section 10.2(b), the General Partner on behalf of the
Partnership shall execute, and the Transfer Agent shall countersign and deliver
(or, in the case of Units issued in global form, register in accordance with
- ----------------------------------------------------------------------------
the rules and regulations of the Depositary), in the name of the holder or the
- ---------------------------------------------
designated transferee or transferees, as required pursuant to the holder's
instructions, one or more new Certificates evidencing the same aggregate number
of Units as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 11.5, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units
are surrendered for registration of transfer and such Certificates are
accompanied by a Transfer Application duly executed by the transferee (or the
transferee's attorney-in-fact duly authorized in writing). No charge shall be
imposed by the Partnership for such transfer; provided that as a condition to
the issuance of any new Certificate under this Section 10.2, the General
Partner may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
General Partner on behalf of the Partnership shall execute, and upon its
request the Transfer Agent shall countersign and deliver in exchange therefor,
a new Certificate evidencing the same number of Units as the Certificate so
surrendered.
(b) The General Partner on behalf of the Partnership shall execute, and upon
its request the Transfer Agent shall countersign and deliver (or, in the case
of Units issued in global form, register in accordance with the rules and
regulations of the Depositary) a new Certificate in place of any Certificate
previously issued if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the Partnership a
bond, in form and substance satisfactory to the General Partner, with
surety or sureties and with fixed or open penalty as the General Partner
may reasonably direct, in its sole discretion, to indemnify the
Partnership, the General Partner and the Transfer Agent against any claim
that may be made on account of the alleged loss, destruction or theft of
the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the General
Partner.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units represented by the Certificate is
registered before the Partnership, the General Partner or the Transfer Agent
receives such notification, the Limited Partner or Assignee shall be precluded
from making any claim against the Partnership, the General Partner or the
Transfer Agent for such transfer or for a new Certificate.
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(c) As a condition to the issuance of any new Certificate under this Section
10.3, the General Partner may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto
and any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
Section 10.4 Record Holder.
In accordance with Section 10.2(b), the Partnership shall be entitled to
recognize the Record Holder as the Limited Partner or Assignee with respect to
any Units and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such Units on the part of any other Person,
regardless of whether the Partnership shall have actual or other notice
thereof, except as otherwise provided by law or any applicable rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are listed for trading. Without limiting the foregoing, when a
Person (such as a broker, dealer, bank, trust company or clearing corporation
or an agent of any of the foregoing) is acting as nominee, agent or in some
other representative capacity for another Person in acquiring and/or holding
Units, as between the Partnership on the one hand, and such other Persons, on
the other, such representative Person (a) shall be the Limited Partner or
Assignee (as the case may be) of record and beneficially, (b) must execute and
deliver a Transfer Application and (c) shall be bound by this Agreement and
shall have the rights and obligations of a Limited Partner or Assignee (as the
case may be) hereunder and as provided for herein.
ARTICLE XI
TRANSFER OF INTERESTS
Section 11.1 Transfer.
(a) The term "transfer," when used in this Article XI with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its Partnership General Partner Interest (which is
----------------------------------
represented by the General Partner Units) []as a general partner in the
- -----------------------------------------
Partnership[/] to another Person or by which the holder of a Limited Partner
---------------
Interest assigns such Unit Limited Partner Interest to another Person who is or
- -------- ------------------------
becomes an Assignee, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part, except
in accordance with the terms and conditions set forth in this Article XI. Any
transfer or purported transfer of a Partnership Interest not made in accordance
with this Article XI shall be null and void.
(c) Nothing contained in this Article XI shall be construed to prevent a
disposition by the []parent entity[/] members of the General Partner of any or
-------
all of the issued and outstanding []capital stock of[/] member interests in the
-------------------
General Partner.
(d) Nothing contained in this Article XI, or elsewhere in this Partnership
Agreement, shall preclude the settlement of any transactions involving
[]Common[/] Units entered into through the facilities of any National Securities
Exchange on which the Units are listed for trading.
---
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Section 11.2 Transfer of a General Partner's Partnership Interest.
Except for a transfer by the General Partner of all, but not less than all, of
its []Partnership[/] General Partner Interest []as a general partner in the
---------------
Partnership[/] to (a) an Affiliate of the General Partner or (b) another Person
in connection with the merger or consolidation of the General Partner with or
into another Person, which in either case, shall only be limited by the
provisions of this Section 11.2, the transfer by the General Partner of all or
any part of its []Partnership[/] General Partner Interest []as a general partner
---------------
in the Partnership[/] to a Person prior to December 31, 2005 shall be subject to
the prior approval of holders of a Unit Majority. Notwithstanding anything
herein to the contrary, no transfer by the General Partner of all or any part of
its []Partnership[/] General Partner Interest []as a general partner in the
---------------
Partnership[/] to another Person shall be permitted unless (i) the transferee
agrees to assume the rights and duties of the General Partner under this
Agreement and the Operating Partnership Agreement and to be bound by the
provisions of this Agreement and the Operating Partnership Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer would not result
in the loss of limited liability of any Limited Partner or of any limited
partner of any Group Member or cause any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes and (iii) such transferee also agrees to purchase
all (or the appropriate portion thereof, if applicable) of the partnership
interest of the General Partner as the general partner of each Group Member. In
the case of a transfer pursuant to and in compliance with this Section 11.2, the
transferee or successor (as the case may be) shall, subject to compliance with
the terms of Section 12.3, be admitted to the Partnership as a General Partner
immediately prior to the transfer of the []Partnership[/] General Partner
---------------
Interest, and the business of the Partnership shall continue without
dissolution.
Section 11.3 Transfer of Units.
(a) Units may be transferred only in the manner described in []Section 10[/]
Article X. The transfer of any Units and the admission of any new Partner shall
- ---------
not constitute an amendment to this Agreement.
(b) Until admitted as a Substituted Limited Partner pursuant to Article XII,
the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees, or any other individual or
entity in its own or any representative capacity.
(c) Each distribution in respect of Units shall be paid by the Partnership,
directly or through the Transfer Agent or through any other Person or agent,
only to the Record Holders thereof as of the Record Date set for the
distribution. Such payment shall constitute full payment and satisfaction of
the Partnership's liability in respect of such payment, regardless of any claim
of any Person who may have an interest in such payment by reason of an
assignment or otherwise.
(d) A transferee who has completed and delivered a Transfer Application shall
be deemed to have (i) requested admission as a Substituted Limited Partner,
(ii) agreed to comply with and be bound by and to have executed this Agreement,
(iii) represented and warranted that such transferee has the right, power and
authority and, if an individual, the capacity to enter into this Agreement,
(iv) granted the powers of attorney set forth in this Agreement and (v) given
the consents and approvals and made the waivers contained in this Agreement.
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Section 11.4 Restrictions on Transfers.
Notwithstanding the other provisions of this Article XI, no transfer of any
Unit or interest therein of any Limited Partner or Assignee shall be made if
such transfer would (a) violate the then applicable federal or state securities
laws or rules and regulations of the Commission, any state securities
commission or any other governmental authorities with jurisdiction over such
transfer, (b) affect any Group Member's existence or qualification as a limited
partnership under the laws of the jurisdiction of its formation, or (c) result
in entity-level taxation for federal income tax purposes of the Partnership or
the Operating Partnership.
Section 11.5 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General Partner,
creates a substantial risk of cancellation or forfeiture of any property in
which the Group Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner or Assignee, the General Partner may
request any Limited Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality, citizenship
or other related status (or, if the Limited Partner or Assignee is a nominee
holding for the account of another Person, the nationality, citizenship or
other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Units owned by such Limited Partner or Assignee shall be subject to redemption
in accordance with the provisions of Section 11.6. In addition, the General
Partner may require that the status of any such Limited Partner or Assignee be
changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Units.
(b) The General Partner shall, in exercising voting rights in respect of
Units held by it on behalf of Non-citizen Assignees, distribute the votes in
the same ratios as the votes of Limited Partners in respect of Units other than
those of Non-citizen Assignees are cast, either for, against or abstaining as
to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no
right to receive a distribution in kind pursuant to Section 14.4 but shall be
entitled to the cash equivalent thereof, and the General Partner shall provide
cash in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the General Partner from the Non-citizen
Assignee of his Partnership Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Units of
such Non-citizen Assignee not redeemed pursuant to Section 11.6, and upon his
admission pursuant to Section 12.2, the General Partner shall cease to be
deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Units.
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Section 11.6 Redemption of Interests.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 11.5(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his Units to a
Person who furnishes a Citizenship Certification to the General Partner prior
to the date fixed for redemption as provided below, redeem the Partnership
Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Units, the date fixed for redemption,
the place of payment, that payment of the redemption price will be made
upon surrender of the Certificate evidencing the Redeemable Units and that
on and after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Units will accrue or be made.
(ii) The aggregate redemption price for Redeemable Units shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Units of the class to be
so redeemed multiplied by the number of Units of each such class included
among the Redeemable Units. The redemption price shall be paid, in the sole
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest, commencing
one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Units, duly endorsed in blank or accompanied by
an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Units shall no longer
constitute issued and Outstanding Units.
(b) The provisions of this Section 11.6 shall also be applicable to Units
held by a Limited Partner or Assignee as nominee of a Person determined to
be other than an Eligible Citizen.
(c) Nothing in this Section 11.6 shall prevent the recipient of a notice
of redemption from transferring his Units before the redemption date if
such transfer is otherwise permitted under this Agreement. Upon receipt of
notice of such a transfer, the General Partner shall withdraw the notice of
redemption provided the transferee of such Units certifies in the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make
such certification, such redemption shall be effected from the transferee
on the original redemption date.
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ARTICLE XII
ADMISSION OF PARTNERS
Section 12.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of the Old Subordinated Units to the
Initial General Partner []as described in Section 4.2, the[/] in connection with
- ------- ------------------
the Initial Offering, the Initial General Partner []shall be deemed to have[/]
- -----------
been was admitted to the Partnership as a Limited Partner []in respect of the
---
Subordinated Units issued to it.[/] Upon the issuance by the Partnership of
Common Units to the Initial Underwriters as described in Section 4.3 in
-------
connection with the Initial Offering and the execution by []each Underwriter[/]
the Initial Underwriters of a Transfer Application, the General Partner shall
- ------------------------
admit the Initial Underwriters were admitted to the Partnership as Initial
------- -------------
Limited Partners []in respect of the Common Units purchased by them[/].
Section 12.2 Admission of Substituted Limited Partners.
By transfer of a Unit representing a Limited Partner Interest in accordance
---------------------------------------
with Article XI, the transferor shall be deemed to have given the transferee
the right to seek admission as a Substituted Limited Partner subject to the
conditions of, and in the manner permitted under, this Agreement. A transferor
of a Certificate representing a Limited Partner Interest shall, however, only
---------------------------------------
have the authority to convey to a purchaser or other transferee who does not
execute and deliver a Transfer Application (a) the right to negotiate such
Certificate to a purchaser or other transferee and (b) the right to transfer
the right to request admission as a Substituted Limited Partner to such
purchaser or other transferee in respect of the transferred Units. Each
transferee of a Unit representing a Limited Partner Interest (including any
---------------------------------------
nominee holder or an agent acquiring such Unit for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Units so transferred
to such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given
or withheld in the General Partner's sole discretion, and (y) when any such
admission is shown on the books and records of the Partnership. If such consent
is withheld, such transferee shall be an Assignee. An Assignee shall have an
interest in the Partnership equivalent to that of a Limited Partner with
respect to allocations and distributions, including liquidating distributions,
of the Partnership. With respect to voting rights attributable to Units that
are held by Assignees, the General Partner shall be deemed to be the Limited
Partner with respect thereto and shall, in exercising the voting rights in
respect of such Units on any matter, vote such Units at the written direction
of the Assignee who is the Record Holder of such Units. If no such written
direction is received, such Units will not be voted. An Assignee shall have no
other rights of a Limited Partner.
Section 12.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all []of the General Partner's Partnership
Interest as a general partner in the Partnership[/] the General Partner Interest
----------------------------
pursuant to Section 11.2 who is proposed to be admitted as a successor General
Partner shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the General Partner pursuant
to Section 13.1 or 13.2 or the transfer of the General []Partner's Partnership
Interest as a general partner in the Partnership[/] Partner
-------
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Interest pursuant to Section 11.2; provided, however, that no such successor
- --------
shall be admitted to the Partnership until compliance with the terms of Section
11.2 has occurred and such successor has executed and delivered such other
documents or instruments as may be required to effect such admission. Any such
successor shall, subject to the terms hereof, carry on the business of the
Partnership and Operating Partnership without dissolution.
Section 12.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or a
Substituted Limited Partner) who makes a Capital Contribution to the
-------
Partnership in accordance with this Agreement [](other than by virtue of a
capital contribution pursuant to the Additional Capital Contribution
Obligation)[/] shall be admitted to the Partnership as an Additional Limited
Partner only upon furnishing to the General Partner (i) evidence of acceptance
in form satisfactory to the General Partner of all of the terms and conditions
of this Agreement, including the power of attorney granted in Section 1.4, and
(ii) such other documents or instruments as may be required in the discretion
of the General Partner to effect such Person's admission as an Additional
Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 12.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's sole discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person
is recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
Section 12.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act
to amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practical an amendment of this Agreement and,
if required by law, to prepare and file an amendment to the Certificate of
Limited Partnership, and the General Partner may for this purpose, among
others, exercise the power of attorney granted pursuant to Section 1.4.
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 13.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 13.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its rights as General Partner
pursuant to Section 11.2;
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(iii) the General Partner is removed pursuant to Section 13.2;
(iv) the General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the General Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 13.1(a)(iv); or (E) seeks, consents to or
acquiesces in the appointment of a trustee (but not a debtor in
possession), receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) a final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) a certificate of dissolution or its equivalent is filed for the
General Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation or formation.
-------------
If an Event of Withdrawal specified in Section 13.1(a)(iv), (v) or (vi) occurs,
the withdrawing General Partner shall give notice to the Limited Partners
within 30 days after such occurrence. The Partners hereby agree that only the
Events of Withdrawal described in this Section 13.1 shall result in the
withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2005, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Limited Partners holding at least a Unit Majority and
the General Partner delivers to the Partnership an Opinion of Counsel
("Withdrawal Opinion of Counsel") that such withdrawal (following the selection
of the successor General Partner) would not result in the loss of the limited
liability of any Limited Partner or of the limited partner of any Group Member
or cause any Group Member to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes; (ii) at any time after 12:00 midnight, Eastern Standard Time, on
December 31, 2005, the General Partner voluntarily withdraws by giving at least
90 days' advance notice to the Limited Partners, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the General
Partner ceases to be a General Partner pursuant to Section 13.1(a)(ii) or is
removed pursuant to Section 13.2; or (iv) notwithstanding clause (i) of this
sentence, at any time that the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners, such withdrawal to take effect on the date specified in the notice,
if at the time such notice is given one Person and its Affiliates (other than
the General Partner and its Affiliates) own beneficially or of record or
control at least 50% of the Outstanding Units. The withdrawal of the General
Partner from the Partnership upon the occurrence of an Event of Withdrawal
shall also constitute the withdrawal of the General Partner as general partner
of the other Group Members. If the General Partner gives a notice of withdrawal
pursuant to Section 13.1(a)(i), holders of at least a
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Unit Majority may, prior to the effective date of such withdrawal, elect a
successor General Partner. The Person so elected as successor General Partner
shall automatically become the successor general partner of the other Group
Members. If, prior to the effective date of the General Partner's withdrawal, a
successor is not selected by the Limited Partners as provided herein or the
Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership
shall be dissolved in accordance with Section 14.1. Any successor General
Partner elected in accordance with the terms of this Section 13.1 shall be
subject to the provisions of Section 12.3.
Section 13.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by Limited
Partners holding at least two-thirds of the Outstanding Units, voting together
---------------
as a single class (excluding those Units held by the General Partner and its
- -----------------
Affiliates). Any such action by such Limited Partners for removal of the
General Partner must also provide for the election of a successor General
Partner by Limited Partners holding at least a majority of the Outstanding
Units (excluding for purposes of such determination Units owned by the General
Partner and its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant to Article XII.
The removal of the General Partner shall also automatically constitute the
removal of the General Partner as general partner of the other Group Members.
If a person is elected as a successor General Partner in accordance with the
terms of this Section 13.2, such person shall, upon admission pursuant to
Article XII, automatically become the successor general partner of the other
Group Members. The right of the Limited Partners holding Outstanding Units to
remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 13.2 shall be subject to the
provisions of Section 12.3.
Section 13.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under circumstances
where such withdrawal does not violate this Agreement or (ii) removal of the
General Partner by the Limited Partners under circumstances where Cause does
not exist, if a successor General Partner is elected in accordance with the
terms of Section 13.1 or 13.2, the Departing Partner shall have the option
exercisable prior to the effective date of the departure of such Departing
Partner to require its successor to purchase its Partnership Interest as a
general partner in the Partnership (which is represented by the General Partner
--------------------------------------------
Units) and its partnership interest as the general partner in the other Group
- ------
Members (collectively, the "Combined Interest") in exchange for an amount in
cash equal to the fair market value of such Combined Interest, such amount to
be determined and payable as of the effective date of its departure. If the
General Partner is removed by the Limited Partners under circumstances where
Cause exists or if the General Partner withdraws under circumstances where such
withdrawal violates this agreement, and if a successor General Partner is
elected in accordance with the terms of Section 13.1 or 13.2, such successor
shall have the option, exercisable prior to the effective date of the departure
of such Departing Partner, to purchase the Combined Interest of the Departing
Partner for such fair market value of such Combined Interest. In either event,
the Departing Partner shall be entitled to receive all reimbursements due such
Departing Partner pursuant to Section 6.4, including any employee-related
liabilities (including severance liabilities), incurred in connection with the
termination of any employees employed by the General Partner for the benefit of
the Partnership or the other Group Members.
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For purposes of this Section 13.3(a), the fair market value of the Departing
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing agreement within 30 days after
the effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such firms
or experts shall mutually select a third independent investment banking firm or
independent expert, which shall determine the fair market value of the Combined
Interest. In making its determination, such independent investment banking firm
or other independent expert shall consider the then current trading price of
Units on any National Securities Exchange on which Units are then listed, the
value of the Partnership's assets, the rights and obligations of the General
Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 13.3(a), the Departing Partner shall become a Limited Partner and the
Combined Interest shall be converted into Common Units pursuant to a valuation
made by an investment banking firm or other independent expert selected
pursuant to Section 13.3(a), without reduction in such Partnership Interest
(but subject to proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the Departing Partner
as to all debts and liabilities of the Partnership arising on or after the date
on which the Departing Partner becomes a Limited Partner. For purposes of this
Agreement, conversion of the General Partner's Combined Interest to Common
Units will be characterized as if the General Partner contributed its Combined
Interest to the Partnership in exchange for the newly issued Common Units. For
---
purposes of this Section 13.3(b), in the event that the Subordination Period
- ----------------------------------------------------------------------------
has expired, the Combined Interest shall be converted into Class A Common
- -------------------------------------------------------------------------
Units.
- ------
(c) If a successor General Partner is elected in accordance with the terms of
Section 13.1 or 13.2 and the option described in Section 13.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in an amount equal to []1.01% of the Net Agreed Value of the
Partnership's assets the fair market value of the General Partner Units[/] on
such date. In such event, such successor General Partner shall, subject to the
following sentence, be entitled to such Percentage Interest of all Partnership
allocations and distributions and any other allocations and distributions to
which the Departing Partner was entitled. []In addition, such successor General
Partner shall cause this Agreement to be amended to reflect that, from and after
the date of such successor General Partner's admission, the successor General
Partner's interest in all Partnership distributions and allocations shall be 1%,
and that of the holders of Outstanding Unit shall be 99%.[/]
Section 13.4 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Units becomes
a Record Holder, such transferring Limited Partner shall cease to be a Limited
Partner with respect to the Units so transferred.
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ARTICLE XIV
DISSOLUTION AND LIQUIDATION
Section 14.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 13.1 or 13.2, the Partnership shall not
be dissolved and such successor General Partner shall continue the business of
the Partnership. The Partnership shall dissolve, and (subject to Section 14.2)
its affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 1.5;
(b) an Event of Withdrawal of the General Partner as provided in Section
13.1(a) (other than Section 13.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 13.1(b) or 13.2
and such successor is admitted to the Partnership pursuant to Section 12.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by holders of at least a Unit Majority;
(d) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 14.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 13.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 13.1 or 13.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or
(vi), then within 180 days thereafter, holders of at least a majority of the
Outstanding Units (excluding for purposes of such determination any Units held
by the General Partner or its Affiliates) may elect to reconstitute the
Partnership and continue its business on the same terms and conditions set
forth in this Agreement by forming a new limited partnership on terms identical
to those set forth in this Agreement and having as the successor general
partner a Person approved by holders of at least a majority of the Outstanding
Units (excluding for purposes of such determination any Units held by the
General Partner or its Affiliates). Unless such an election is made within the
applicable time period as set forth above, the Partnership shall conduct only
activities necessary to wind up its affairs. If such an election is so made,
then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 1.5 unless earlier dissolved in accordance with
this Article XIV;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be dealt with in the
manner provided in Section 13.3(b); and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and
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certificate of limited partnership, and the successor general partner may
for this purpose exercise the powers of attorney granted the General
Partner pursuant to Section 1.4; provided, however, that the right of
holders of at least a majority of Outstanding Units to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor any
other Group Member would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
Section 14.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 14.2, the General Partner, or in the event the dissolution is the
result of an Event of Withdrawal, a liquidator or liquidating committee
approved by holders of at least a majority of the Outstanding Units
-----
representing Limited Partner Interests, shall be the Liquidator. The Liquidator
- --------------------------------------
(if other than the General Partner) shall be entitled to receive such
compensation for its services as may be approved by holders of at least a
majority of the Outstanding Units representing Limited Partner Interests. The
--------------------------------------
Liquidator shall agree not to resign at any time without 15 days' prior notice
and (if other than the General Partner) may be removed at any time, with or
without cause, by notice of removal approved by holders of at least a majority
of the Outstanding Units representing Limited Partner Interests. Upon
dissolution, removal or resignation of the Liquidator, a successor and
substitute Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days thereafter be approved
by holders of at least a majority of the Outstanding Units representing Limited
--------------------
Partner Interests. The right to approve a successor or substitute Liquidator in
- -----------------
the manner provided herein shall be deemed to refer also to any such successor
or substitute Liquidator approved in the manner herein provided. Except as
expressly provided in this Article XIV, the Liquidator approved in the manner
provided herein shall have and may exercise, without further authorization or
consent of any of the parties hereto, all of the powers conferred upon the
General Partner under the terms of this Agreement (but subject to all of the
applicable limitations, contractual and otherwise, upon the exercise of such
powers, other than the limitation on sale set forth in Section 6.3(b)) to the
extent necessary or desirable in the good faith judgment of the Liquidator to
carry out the duties and functions of the Liquidator hereunder for and during
such period of time as shall be reasonably required in the good faith judgment
of the Liquidator to complete the winding up and liquidation of the Partnership
as provided for herein.
Section 14.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property
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shall be deemed for purposes of Section 14.4(c) to have received cash equal
to its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. For purposes of computing
Net []Liquidation[/] Termination Gain, gain or loss on distributed property
-----------
shall be recognized as if such property had been sold for its fair market
value.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise in respect of their distribution rights
under Article V. With respect to any liability that is contingent or is
otherwise not yet due and payable, the Liquidator shall either settle such
claim for such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any unused
portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 14.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of this clause) for the taxable year of the Partnership
during which the liquidation of the Partnership occurs (with such date of
occurrence being determined pursuant to Treasury Regulation Section 1.704-
1(b)(2)(ii)(g)), and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such
occurrence).
Section 14.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Sections 14.3 and 14.4 in connection with the liquidation of the
Partnership, the Partnership shall be terminated and the Certificate of Limited
Partnership and all qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware shall be canceled
and such other actions as may be necessary to terminate the Partnership shall be
taken.
Section 14.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
-------
Partners, or any portion thereof, it being expressly understood that any such
return shall be made solely from Partnership assets.
Section 14.7 Waiver of Partition.
[]Each[/] To the maximum extent permitted by law, each Partner hereby waives
--------------------------------------------
any right to partition of the Partnership property.
Section 14.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable year
of the Partnership during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
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ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 15.1 Amendment to be Adopted Solely by General Partner.
Each Limited Partner agrees that the General Partner (pursuant to its powers
of attorney from the Limited Partners and Assignees), without the approval of
any Limited Partner or Assignee, may amend any provision of this Agreement and
execute, swear to, acknowledge, deliver, file and record whatever documents may
be required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or to ensure
that the Partnership and the Operating Partnership will not be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
(d) a change that, in the sole discretion of the General Partner, (i)
does not adversely affect the Limited Partners in any material respect,
(ii) is necessary or advisable to (A) satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute (including the Delaware Act) or
(B) facilitate the trading of the Units (including the division of
Outstanding Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are or will be listed for trading, compliance with any of
which the General Partner determines in its sole discretion to be in the
best interests of the Partnership and the Limited Partners, (iii) is
necessary or advisable in connection with action taken by the General
Partner pursuant to Section 4.8, or (iv) is required to effect the intent
of the provisions of this Agreement or is otherwise contemplated by this
Agreement;
(e) a change in the fiscal year and or taxable year of the Partnership
and any changes that, in the sole discretion of the General Partner, are
necessary or advisable as a result of a change in the fiscal year and or
taxable year of the Partnership including, if the General Partner shall so
determine, a change in the definition of "Quarter" and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership or the General Partner or its directors or officers from in
any manner being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, as amended, regardless of whether such are
substantially similar to plan asset regulations currently applied or
proposed by the United States Department of Labor;
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(g) subject to the terms of Section 4.4, an amendment that, in the sole
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 4.4;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 16.3;
(j) an amendment that, in the sole discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Partnership, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
3.1; or
(k) any other amendments substantially similar to the foregoing.
Section 15.2 Amendment Procedures.
Except as provided in Sections 15.1 and 15.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner. A proposed amendment shall be effective upon its approval by
the holders of at least a Unit Majority, unless a greater or different
percentage is required under this Agreement or by Delaware law. Each proposed
amendment that requires the approval of the holders of a specified percentage
of Outstanding Units shall be set forth in a writing that contains the text of
the proposed amendment. If such an amendment is proposed, the General Partner
shall seek the written approval of the requisite percentage of Outstanding
Units or call a meeting of the Limited Partners to consider and vote on such
proposed amendment. The General Partner shall notify all Record Holders upon
final adoption of any such proposed amendments.
Section 15.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 15.1 and 15.2, no provision of
this Agreement that establishes a percentage of Outstanding Units required to
take any action shall be amended, altered, changed, repealed or rescinded in
any respect that would have either (i) the effect of reducing such voting
percentage or (ii) more than an immaterial effect on a Unitholder unless such
amendment is approved by the written consent or the affirmative vote of holders
of Outstanding Units whose aggregate Outstanding Units constitute not less than
the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment to
this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 15.3(c), (ii) enlarge the obligations
of, restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable to, the General
Partner without its consent, which may be given or withheld in its sole
discretion, (iii) change Section 14.1(a) or (c), or (iv) change the term of the
Partnership or, except as set forth in Section 14.1(c), give any Person the
right to dissolve the Partnership.
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(c) Except as otherwise provided and without limitation of the General
Partner's authority to adopt amendments to this Agreement as contemplated in
Section 15.1, any amendment that would have a material adverse effect on the
rights or preferences of any class of Outstanding Units in relation to other
classes of Units must be approved by the holders of not less than a majority of
the Outstanding Units of the classes affected (excluding, during the
-------
Subordination Period, Common Units owned by the General Partner and its
Affiliates).
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 6.3 or 15.1 and except as otherwise provided by
Section 16.3(b), no amendments shall become effective without the approval of
the holders of at least 90% of the Outstanding Units unless the Partnership
obtains an Opinion of Counsel to the effect that such amendment will not affect
the limited liability of any Limited Partner or any limited partner of the
other Group Members under applicable law.
(e) This Section 15.3 shall only be amended with the approval of the holders
of at least 90% of the Outstanding Units.
Section 15.4 Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XV. Meetings of the Limited
Partners may be called by the General Partner or by Limited Partners owning 20%
or more of the Outstanding Units of the class or classes for which a meeting is
proposed. Limited Partners shall call a meeting by delivering to the General
Partner one or more requests in writing stating that the signing Limited
Partners wish to call a meeting and indicating the general or specific purposes
for which the meeting is to be called. Within 60 days after receipt of such a
call from Limited Partners or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes, rules, regulations,
listing agreements or similar requirements governing the holding of a meeting
or the solicitation of proxies for use at such a meeting, the General Partner
shall send a notice of the meeting to the Limited Partners either directly or
indirectly through the Transfer Agent. A meeting shall be held at a time and
place determined by the General Partner on a date not less than 10 days nor
more than 60 days after the mailing of notice of the meeting. []Limited Partners
shall not vote on matters that would cause the Limited Partners to be deemed to
be taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability under
the Delaware Act or the law of any other state in which the Partnership is
qualified to do business.[/]
Section 15.5 Notice of a Meeting.
Notice of a meeting called pursuant to Section 15.4 shall be given to the
Record Holders in writing by mail or other means of written communication in
accordance with Section 18.1. The notice shall be deemed to have been given at
the time when deposited in the mail or sent by other means of written
communication.
Section 15.6 Record Date.
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 15.11, the General Partner may set a Record
Date, which shall not be less than 10 nor more than 60 days
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before (a) the date of the meeting (unless such requirement conflicts with any
rule, regulation, guideline or requirement of any National Securities Exchange
on which the Units are listed for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern) or (b) in the event
that approvals are sought without a meeting, the date by which Limited Partners
are requested in writing by the General Partner to give such approvals.
Section 15.7 Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XV.
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if occurred at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 15.9 Quorum.
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called represented in person or by proxy shall
constitute a quorum at a meeting of Limited Partners of such class or classes
unless any such action by the Limited Partners requires approval by holders of
a greater percentage of such Units, in which case the quorum shall be such
greater percentage (excluding, in either case, if such are to be excluded from
the vote, Outstanding Units owned by the General Partner and its Affiliates).
At any meeting of the Limited Partners duly called and held in accordance with
this Agreement at which a quorum is present, the act of Limited Partners
holding Outstanding Units that in the aggregate represent a majority of the
Outstanding Units entitled to vote and be present in person or by proxy at such
meeting shall be deemed to constitute the act of all Limited Partners, unless a
greater or different percentage is required with respect to such action under
the provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at least such greater
or different percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present
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may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the required percentage of
Outstanding Units specified in this Agreement. In the absence of a quorum any
meeting of Limited Partners may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the Outstanding Units
represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 15.7.
Section 15.10 Conduct of Meeting.
The General Partner shall have full power and authority concerning the manner
of conducting any meeting of the Limited Partners or solicitation of approvals
in writing, including the determination of Persons entitled to vote, the
existence of a quorum, the satisfaction of the requirements of Section 15.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with the applicable law and this
Agreement as it may deem advisable concerning the conduct of any meeting of the
Limited Partners or solicitation of approvals in writing, including regulations
in regard to the appointment of proxies, the appointment and duties of
inspectors of votes and approvals, the submission and examination of proxies
and other evidence of the right to vote, and the revocation of approvals in
writing.
Section 15.11 Action Without a Meeting.
Any action that may be taken at a meeting of the Limited Partners may be
taken without a meeting if an approval in writing setting forth the action so
taken is signed by Limited Partners owning not less than the minimum percentage
of the Outstanding Units that would be necessary to authorize or take such
action at a meeting at which all the Limited Partners were present and voted.
Prompt notice of the taking of action without a meeting shall be given to the
Limited Partners who have not approved in writing. The General Partner may
specify that any written ballot submitted to Limited Partners for the purpose
of taking any action without a meeting shall be returned to the Partnership
within the time period, which shall be not less than 20 days, specified by the
General Partner. If a ballot returned to the Partnership does not vote all of
the Units held by the Limited Partner, the Partnership shall be deemed to have
failed to receive a ballot for the Units that were not voted. If approval of
the taking of any action by the Limited Partners is solicited by any Person
other than by or on behalf of the General Partner, the written approvals shall
have no force and effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals sufficient to take
the action proposed are dated as of a date not more than 90 days prior to the
date sufficient approvals are deposited with the Partnership and (c) an Opinion
of Counsel is delivered to the General Partner to the effect that the exercise
of such right and the action proposed to be taken with respect to any
particular matter (i) will not cause the Limited Partners to be deemed to be
taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability, and
(ii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
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Section 15.12 Voting and Other Rights.
(a) Only those Record Holders of the Units on the Record Date set pursuant to
Section 15.6 (and also subject to the limitations contained in the definition
of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which the holders of
the Outstanding Units have the right to vote or to act. All references in this
Agreement to votes of, or other acts that may be taken by, the Outstanding
Units shall be deemed to be references to the votes or acts of the Record
Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such other Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 15.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions
of Section 10.4.
ARTICLE XVI
Merger MERGER
Section 16.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
business trusts or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a general partnership []or[/],
limited partnership or limited liability company, formed under the laws of the
----------------------------
State of Delaware or any other state of the United States of America, pursuant
to a written agreement of merger or consolidation ("Merger Agreement") in
accordance with this Article XVI.
Section 16.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XVI
requires the prior approval of the General Partner. If the General Partner
shall determine, in the exercise of its sole discretion, to consent to the
merger or consolidation, the General Partner shall approve the Merger
Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged
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or converted solely for, or into, cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving
Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership, certificate of limited liability company
------------------------------------------
or other similar charter or governing document) of the Surviving Business
Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 16.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
Section 16.3 Approval by Limited Partners of Merger or Consolidation.
(a) The General Partner, upon its approval of the Merger Agreement, shall
direct that the Merger Agreement be submitted to a vote of Limited Partners,
whether at a meeting or by written consent, in either case in accordance with
the requirements of Article XV. A copy or a summary of the Merger Agreement
shall be included in or enclosed with the notice of a meeting or the written
consent.
(b) The Merger Agreement shall be approved upon receiving the affirmative
vote or consent of the holders of at least a Unit Majority unless the Merger
Agreement contains any provision that, if contained in an amendment to this
Agreement, the provisions of this Agreement or the Delaware Act would require
the vote or consent of a greater percentage of the Outstanding Units or of any
class of Limited Partners, in which case such greater percentage vote or
consent shall be required for approval of the Merger Agreement.
(c) After such approval by vote or consent of the Limited Partners, and at
any time prior to the filing of the certificate of merger pursuant to Section
16.4, the merger or consolidation may be abandoned pursuant to provisions
therefor, if any, set forth in the Merger Agreement.
Section 16.4 Certificate of Merger.
Upon the required approval by the General Partner and the Limited Partners of
a Merger Agreement, a certificate of merger shall be executed and filed with
the Secretary of State of the State of Delaware in conformity with the
requirements of the Delaware Act.
C-89
<PAGE>
Section 16.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another having occurred.
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
Section 17.1 Right to Acquire Units.
(a) Notwithstanding any other provision of this Agreement, if at any time not
more than 20% of the total Units of any class then Outstanding are held by
Persons other than the General Partner and its Affiliates, the General Partner
shall then have the right, which right it may assign and transfer to the
Partnership or any Affiliate of the General Partner, exercisable in its sole
discretion, to purchase all, but not less than all, of the Units of such class
then Outstanding held by Persons other than the General Partner and its
Affiliates, at the greater of (x) the Current Market Price as of the date three
days prior to the date that the notice described in Section []17.1(b)[/] 17.1(c)
-------
is mailed, and (y) the highest cash price paid by the General Partner or any of
its Affiliates for any such Unit purchased during the 90-day period preceding
the date that the notice described in Section []17.1(b) is mailed. As used in
this Agreement, (i) "Current Market Price" as of any date of any class of Units
listed or admitted to trading on any National Securities Exchange means the
average of the daily Closing Prices (as hereinafter defined) per Unit of such
class for the 20 consecutive Trading Days (as hereinafter defined) immediately
prior to such date; (ii) "Closing Price" for any day means the last sale price
on such day, regular way, or in case no such sale takes place on such day, the
average of the closing bid and asked prices on such day, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which the Units of
such class are listed or admitted to trading or, if the Units of such class are
not listed or admitted[/]
C-90
<PAGE>
[]to trading on any National Securities Exchange (other than the Nasdaq Stock
Market), the last quoted price on such day or, if not so quoted, the average of
the high bid and low asked prices on such day in the over-the-counter market,
as reported by the Nasdaq Stock Market or such other system then in use, or, if
on any such day the Units of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in the Units of such
class selected by the Board of Directors of the General Partner, or if on any
such day no market maker is making a market in the Units of such class, the
fair value of such Units on such day as determined reasonably and in good faith
by the Board of Directors of the General Partner; and (iii) "Trading Day" means
a day on which the principal National Securities Exchange on which the Units of
any class are listed or admitted to trading is open for the transaction of
business or, if Units of a class are not listed or admitted to trading on any
National Securities Exchange, a day on which banking institutions in New York
City generally are open.[/] 17.1(c) is mailed.
-----------------
(b)(b) Notwithstanding any other provision of this Agreement, if at any time
-------------------------------------------------------------------------
after the expiration of the Subordination Period and the earlier to occur of
- ----------------------------------------------------------------------------
(A) the fifth anniversary of the Effective Time or (B) the issuance of 909,000
- ------------------------------------------------------------------------------
Senior Subordinated Units and Class B Common Units in the aggregate pursuant to
- -------------------------------------------------------------------------------
Section 4.6, the Partnership acquires, through purchase or exchange, in a
- -------------------------------------------------------------------------
twelve-month period, 66 2/3% or more of the total Class B Common Units, the
- ---------------------------------------------------------------------------
Partnership shall then have the right, which it may not assign or transfer,
- --------------------------------------------------------------------------
exercisable in its sole discretion, to purchase all, but not less than all, of
- ------------------------------------------------------------------------------
the remaining Class B Common Units then Outstanding during the following
- ------------------------------------------------------------------------
twelve-month period, at the greater of (x) the Current Market Price as of the
- -----------------------------------------------------------------------------
date three days prior to the date that the notice described in Section 17(c) is
- -------------------------------------------------------------------------------
mailed, and (y) the highest cash price paid by the Partnership for any such
- ---------------------------------------------------------------------------
Unit purchased during the 90-day period preceding the date that the notice
- --------------------------------------------------------------------------
described in Section 17(c) is mailed.
- ------------------------------------
(c) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Units granted pursuant to
Section 17.1(a) or the Partnership elects to exercise the right granted
-------------------------------------------------------
pursuant to Section 17(b) to purchase Class B Common Units, the General Partner
- ----------------------------------------------------------
or the Partnership, as the case may be, shall deliver to the Transfer Agent
- --------------------------------------
notice of such election to purchase (the "Notice of Election to Purchase") and
shall cause the Transfer Agent to mail a copy of such Notice of Election to
Purchase to the Record Holders of such Units (as of a Record Date selected by
the General Partner) at least 10, but not more than 60, days prior to the
Purchase Date. Such Notice of Election to Purchase shall also be published for
a period of at least three consecutive days in at least two daily newspapers of
general circulation printed in the English language and published in the
Borough of Manhattan, New York. The Notice of Election to Purchase shall
specify the Purchase Date and the price (determined in accordance with Section
17. l(a)) at which Units will be purchased and state that the General Partner,
its Affiliate or the Partnership, as the case may be, elects to purchase such
Units, upon surrender of Certificates representing such Units in exchange for
payment, at such office or offices of the Transfer Agent as the Transfer Agent
may specify, or as may be required by any National Securities Exchange on which
the Units are listed or admitted to trading. Any such Notice of Election to
Purchase mailed to a Record Holder of Units at his address as reflected in the
records of the Transfer Agent shall be conclusively presumed to have been given
regardless of whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the
C-91
<PAGE>
Transfer Agent cash in an amount sufficient to pay the aggregate purchase price
of all of the Units to be purchased in accordance with this Section 17.1. If
the Notice of Election to Purchase shall have been duly given as aforesaid at
least 10 days prior to the Purchase Date, and if on or prior to the Purchase
Date the deposit described in the preceding sentence has been made for the
benefit of the holders of Units subject to purchase as provided herein, then
from and after the Purchase Date, notwithstanding that any Certificate shall
not have been surrendered for purchase, all rights of the holders of such Units
(including any rights pursuant to Articles IV, V and XIV) shall thereupon
cease, except the right to receive the purchase price (determined in accordance
with Section 17.1(a)) for Units therefor, without interest, upon surrender to
the Transfer Agent of the Certificates representing such Units, and such Units
shall thereupon be deemed to be transferred to the General Partner, its
Affiliate or the Partnership, as the case may be, on the record books of the
Transfer Agent and the Partnership, and the General Partner or any Affiliate of
the General Partner, or the Partnership, as the case may be, shall be deemed to
be the owner of all such Units from and after the Purchase Date and shall have
all rights as the owner of such Units (including all rights as owner of such
Units pursuant to Articles IV, V and XIV).
[](c)[/](d) At any time from and after the Purchase Date, a holder of an
---
Outstanding Unit subject to purchase as provided in this Section 17.1 may
surrender his Certificate evidencing such Unit to the Transfer Agent in
exchange for payment of the amount described in Section 17.1(a), therefor,
without interest thereon.
ARTICLE XVIII
GENERAL PROVISIONS
Section 18.1 Addresses and Notices.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Unit at his address as shown on the records of the Transfer
Agent or as otherwise shown on the records of the Partnership, regardless of
any claim of any Person who may have an interest in such Unit or the
Partnership Interest of a General Partner by reason of any assignment or
otherwise. An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this Section 18.1 executed by the
General Partner, the Transfer Agent or the mailing organization shall be prima
facie evidence of the giving or making of such notice, payment or report. If
any notice, payment or report addressed to a Record Holder at the address of
such Record Holder appearing on the books and records of the Transfer Agent or
the Partnership is returned by the United States []Post Office[/] Postal Service
--------------
marked to indicate that the United States Postal Service is unable to deliver
it, such notice, payment or report and any subsequent notices, payments and
reports shall be deemed to have been duly given or made without further mailing
(until such time as such Record Holder or another Person notifies the Transfer
Agent or the Partnership of a change in his address) if they are available for
the Partner or Assignee at the
C-92
<PAGE>
principal office of the Partnership for a period of one year from the date of
the giving or making of such notice, payment or report to the other Partners
and Assignees. Any notice to the Partnership shall be deemed given if received
by the General Partner at the principal office of the Partnership designated
pursuant to Section 1.3. The General Partner may rely and shall be protected in
relying on any notice or other document from a Partner, Assignee or other
Person if believed by it to be genuine.
Section 18.2 References.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 18.3 Pronouns and Plurals.
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 18.4 Further Action.
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
Section 18.5 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 18.6 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 18.7 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 18.8 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 18.9 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
C-93
<PAGE>
Section 18.10 Applicable Law.
This Agreement shall be construed in accordance with and governed by the laws
of the State of Delaware, without regard to the principles of conflicts of law.
Section 18.11 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 18.12 Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be
bound by the results of such action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
General Partner:
[]Star Gas Corporation[/]
By:
William G. Powers, Jr., President
ORGANIZATIONAL LIMITED PARTNER:
[]By:[/]
[]William G. Powers, Jr.[/]
[]APPENDIX B[/] Star Gas LLC
------------
By:
Name:
Title:
Limited Partners:
-----------------
All Limited Partners now and
-------------------------------------
hereafter admitted as limited
-------------------------------------
partners of the Partnership,
-------------------------------------
pursuant to the Powers of Attorney
-------------------------------------
now and hereafter executed in favor
-------------------------------------
of, and granted and delivered to,
-------------------------------------
the General Partner.
-------------------------------------
By: Star Gas LLC
----------------
General Partner, as attorney-in-fact
-------------------------------------
for all Limited Partners pursuant to
-------------------------------------
the Powers of Attorney granted
-------------------------------------
pursuant to Section 1.4
-------------------------------------
By:
---
Name:
-----
Title:
------
C-94
<PAGE>
EXHIBIT A
to the Amended and Restated
Agreement of Limited Partnership of
STAR GAS PARTNERS, L.P.
Certificate Evidencing Common Units
Representing Limited Partner Interests
STAR GAS PARTNERS, L.P.
No. Common Units
STAR GAS, LLC., a Delaware limited liability company, as the General Partner
of STAR GAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the registered owner of
Common Units representing limited partner interests in the Partnership (the
"Common Units") transferable on the books of the Partnership, in person or by
duly authorized attorney, upon surrender of this Certificate properly endorsed
and accompanied by a properly executed application for transfer of the Common
Units represented by this Certificate. The rights, preferences and limitations
of the Common Units are set forth in, and this Certificate and the Common Units
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Agreement of Limited Partnership of
STAR GAS PARTNERS, L.P., as amended, supplemented or restated from time to time
(the "Partnership Agreement"). Copies of the Partnership Agreement are on file
at, and will be furnished without charge on delivery of written request to the
Partnership at, the principal office of the Partnership located at 2187
Atlantic Street, Stamford, Connecticut 06912-0011. Capitalized terms used
herein but not defined shall have the meaning given them in the Partnership
Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Star Gas, LLC.,
as General Partner
Countersigned and Registered by: By: _________________________________
President
By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
C-A-1
<PAGE>
[Reverse of Certificate]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of
survivorship and not as tenants in
common (Cust) (Minor)
under Uniform Gifts to Minors
Act
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
in
STAR GAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF STAR GAS PARTNERS, L.P.
You have acquired an interest in Star Gas Partners, L.P., 2187 Atlantic
Street, Stamford, Connecticut 06912-0011, whose taxpayer identification number
is 06-1437793. The Internal Revenue Service has issued Star Gas Partners, L.P.
the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Star Gas Partners, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS
PARTNERS, L.P.
If you transfer your interest in Star Gas Partners, L.P. to another person,
you are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date on
which you transferred the interest and (c) the name, address and tax shelter
registration number of Star Gas Partners, L.P. If you do not want to keep such
a list, you must (1) send the information specified above to the Partnership,
which will keep the list for this tax shelter, and (2) give a copy of this
notice to the person to whom you transfer your interest. Your failure to comply
with any of the above-described responsibilities could result in the imposition
of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of
1986, as amended, unless such failure is shown to be due to reasonable cause.
C-A-2
<PAGE>
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and
transfers unto
- ------------------------------------- -------------------------------------
(Please print or typewrite name (Please insert Social Security or
and address of Assignee) other identifying number of
Assignee)
Common Units representing limited partner interests evidenced by this
Certificate, subject to the Partnership Agreement, and does hereby irrevocably
constitute and appoint as its attorney-in-fact with full power of substitution
to transfer the same on the books of Star Gas Partners, L.P.
Date: NOTE: The signature to any
endorsement hereon must correspond
with the name as written upon the
face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY
-------------------------------------
(Signature)
-------------------------------------
(Signature)
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form set forth below or (b) on a separate application that the Partnership
will furnish on request without charge. A transferor of the Common Units shall
have no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the transfer
of the Common Units.
C-A-3
<PAGE>
APPENDIX A
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form set forth below or (b) on a separate application that the Partnership
will furnish on request without charge. A transferor of the Common Units shall
have no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the transfer
of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
-----------
Restated Agreement of Limited Partnership of Star Gas Partners, L.P. []the
- --------
"Partnership"[/], as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner and, if
a Liquidator shall be appointed, the Liquidator of the Partnership as the
Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's
admission as a Substituted Limited Partner and as a party to the Partnership
Agreement, (d) gives the powers of attorney provided for in the Partnership
Agreement and (e) makes the waivers and gives the consents and approvals
contained in the Partnership Agreement. Capitalized terms not defined herein
have the meanings assigned to such terms in the Partnership Agreement.
Date: _______________________________
- -------------------------------------
Signature of Assignee
- -------------------------------------
Social Security or other identifying
number of Assignee
C-A-4
<PAGE>
- -------------------------------------
Name and Address of Assignee
- -------------------------------------
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify) _______
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity [_] Non[]-Foreign Corporation--
Non-[/]resident Alien
[_] Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is
3.My home address is
B. Partnership, Corporation or Other Interestholder
1. is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as those
terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is
3.The interestholder's office address and place of incorporation (if
applicable) is
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign []person. The[/] person. The
-----------
interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
C-A-5
<PAGE>
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
-------------------------------------
(Name of Interestholder)
-------------------------------------
Signature and Date
-------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
C-A-6
<PAGE>
EXHIBIT B
to the Amended and Restated
Agreement of Limited Partnership of
STAR GAS PARTNERS, L.P.
Certificate Evidencing Senior Subordinated Units
Representing Limited Partner Interests
STAR GAS PARTNERS, L.P.
No. Senior Subordinated Units
STAR GAS, LLC., a Delaware limited liability company, as the General Partner
of STAR GAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the
registered owner of Senior Subordinated Units representing limited
partner interests in the Partnership (the "Senior Subordinated Units")
transferable on the books of the Partnership, in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed and accompanied
by a properly executed application for transfer of the Senior Subordinated
Units represented by this Certificate. The rights, preferences and limitations
of the Senior Subordinated Units are set forth in, and this Certificate and the
Senior Subordinated Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Amended and Restated
Agreement of Limited Partnership of STAR GAS PARTNERS, L.P., as amended,
supplemented or restated from time to time (the "Partnership Agreement").
Copies of the Partnership Agreement are on file at, and will be furnished
without charge on delivery of written request to the Partnership at, the
principal office of the Partnership located at 2187 Atlantic Street, Stamford,
Connecticut 06912-0011. Capitalized terms used herein but not defined shall
have the meaning given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Star Gas, LLC.,
as General Partner
Countersigned and Registered by:
By: _________________________________
President
_____________________________________ By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
C-B-1
<PAGE>
[Reverse of Certificate]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as
tenants in common under Uniform Gifts to Minors
Act
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF SENIOR SUBORDINATED UNITS
IN
STAR GAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF STAR GAS PARTNERS, L.P.
You have acquired an interest in Star Gas Partners, L.P. 2187 Atlantic
Street, Stamford, Connecticut 06912-0011, whose taxpayer identification number
is 06-1437793. The Internal Revenue Service has issued Star Gas Partners, L.P.
the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN Star Gas PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Star Gas Partners, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS
PARTNERS, L.P.
If you transfer your interest in Star Gas Partners, L.P. to another person,
you are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date on
which you transferred the interest and (c) the name, address and tax shelter
registration number of Star Gas Partners, L.P. If you do not want to keep such
a list you must (1) send the information specified above to the Partnership,
which will keep the list for this tax shelter, and (2) give a copy of this
notice to the person to whom you transfer your interest. Your failure to comply
with any of the above-described responsibilities could result in the imposition
of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of
1986, as amended unless such failure is shown to be due to reasonable cause.
C-B-2
<PAGE>
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and
transfers unto
_____________________________________ _____________________________________
(Please print or typewrite name (Please insert Social Security or
and address of Assignee) other identifying number of
Assignee)
Senior Subordinated Units representing limited partner interests
evidenced by this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint as its attorney-in-fact
with full power of substitution to transfer the same on the books of Star Gas
Partners, L.P.
Date: _______________________________ NOTE: The signature to any
endorsement hereon must correspond
with the name as written upon the
face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY.
SIGNATURE(S) GUARANTEED _____________________________________
(Signature)
_____________________________________
(Signature)
No transfer of the Senior Subordinated Units evidenced hereby will be
registered on the books of the Partnership, unless the Certificate evidencing
the Senior Subordinated Units to be transferred is surrendered for registration
or transfer and an Application for Transfer of Senior Subordinated Units has
been executed by a transferee either (a) on the form set forth below or (b) on
a separate application that the Partnership will furnish on request without
charge. A transferor of the Senior Subordinated Units shall have no duty to the
transferee with respect to execution of the transfer application in order for
such transferee to obtain registration of the transfer of the Senior
Subordinate Units.
C-B-3
<PAGE>
APPENDIX A
No transfer of the Senior Subordinated Units evidenced hereby will be
registered on the Books of the Partnership, unless the Certificate evidencing
the Senior Subordinated Units to be transferred is surrendered for registration
or transfer and an Application for Transfer of Senior Subordinated Units has
been executed by a transferee either (a) on the form set forth below or (b) on
a separate application that the Partnership will furnish on request without
charge. A transferor of the Senior Subordinated Units shall have no duty to the
transferee with respect to execution of the transfer application in order for
such transferee to obtain registration of the transfer of the Senior
Subordinated Units.
APPLICATION FOR TRANSFER OF SENIOR SUBORDINATED UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Senior Subordinated Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Star Gas Partners, L.P., as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right, power
and authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (c) appoints the General Partner and, if a Liquidator
shall be appointed, the Liquidator of the Partnership as the Assignee's
attorney-in-fact to execute, swear to, acknowledge and file any document,
including, without limitation, the Partnership Agreement and any amendment
thereto and the Certificate of limited Partnership and any amendment thereto,
necessary or appropriate for the Assignee's admission as a Substituted Limited
Partner and as a party to the Partnership Agreement, (d) gives the powers of
attorney provided for in the Partnership Agreement and (e) makes the waivers
and gives the consents and approvals contained in the Partnership Agreement.
Capitalized terms not defined herein have the meanings assigned to such terms
in the Partnership Agreement.
Date: _______________________________
_____________________________________
Signature of Assignee
_____________________________________
Social Security or other identifying
number of Assignee
_____________________________________
Name and Address of Assignee
C-B-4
<PAGE>
_____________________________________
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify) _______
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity [_] Non-resident Alien
[_] Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is
3.My home address is
B. Partnership, Corporation or Other Interestholder
1. is not a foreign corporation, foreign
partnership, foreign
(Name of Interestholder)
trust or foreign estate (as those terms are defined in the Code and
Treasury Regulations).
2.The interestholder's U.S. employer identification number is
3.The interestholder's office address and place of incorporation (if
applicable) is
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person. The interestholder
understands that this certificate may be disclosed to the Internal Revenue
Service by the Partnership and that any false statement contained herein could
be punishable by fine, imprisonment or both.
C-B-5
<PAGE>
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
_____________________________________
(Name of Interestholder)
_____________________________________
Signature and Date
_____________________________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
C-B-6
<PAGE>
Annex D
Form of A.G. Edwards Opinion to be delivered
February , 1999
The Special Committee of the Board of Directors
Star Gas Corporation
2187 Atlantic Street
Stamford, CT 06912-0011
Members of the Special Committee of the Board of Directors:
You (the "Special Committee") have requested the opinion of A.G. Edwards &
Sons, Inc. ("A.G. Edwards"), the financial advisor to the Special Committee, as
to the fairness, from a financial point of view, of the Transaction (as
hereinafter defined) to the public common unitholders (the "Public Common
Unitholders"), of Star Gas Partners, L.P., (the "Partnership").
As more fully described in the Partnership's Registration Statement on Form
S-4, the "Transaction" consists of the following four interrelated principal
parts:
(1) the acquisition of Petroleum Heat and Power Co., Inc. ("Petro") by
the Partnership;
(2) the public offering of equity by the Partnership and the private
placement of debt by Petro (in accordance with the terms set forth in the
Agreement and Plan of Merger) and the redemption of certain debt and
preferred stock of Petro;
(3) the withdrawal of Star Gas Corporation, the current general partner
of the Partnership (the "General Partner") from the Partnership (as well as
from the operating partnership), and the admission of Star Gas L.L.C. as
the new general partner; and
(4) the adoption of certain amendments to the Agreement of Limited
Partnership (and the operating partnership's agreement of limited
partnership) in order to consummate the Transaction.
For purposes of our opinion with respect to the Transaction, we have assumed
that the Partnership will be able to complete the requisite financings in (2)
and understand that the Transaction will not be consummated if the Partnership
is unable to complete the requisite financings in accordance with the specified
terms and conditions. We have also assumed that the General Partner's
withdrawal and the related admission of a successor general partner in (3) will
have no financial impact on the Public Common Unitholders.
A.G. Edwards, as part of its investment banking business, is regularly
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, initial public
offerings, secondary distribution of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. We are
familiar with the Partnership through acting as exclusive financial advisor and
placement agent in the Partnership's private placement of 7.17% First Mortgage
Notes due 2010 and through our securities research coverage of the
<PAGE>
Partnership. In connection with this engagement, we will receive fees (a
portion of which is contingent upon the consummation of the Transaction) as
well as our standard indemnification. We are not aware of any relationship
between A.G. Edwards and the Partnership, the General Partner or Petro, which
in our opinion would affect our ability to render a fair and independent
opinion in this matter.
In connection with the opinion, A.G. Edwards' activities included, among
other things:
(i) A review of the most recently available drafts of the Partnership's
Registration Statement on Form S-4 and exhibits thereto, including the
Agreement and Plan of Merger, the Exchange Agreement, the Amended and
Restated Agreement of Limited Partnership and the Conveyance and
Contribution Agreements.
(ii) A review of certain publicly-available Partnership and Petro
historical audited financial statements and certain unaudited interim
financial statements;
(iii) A review of certain financial analyses and forecasts of the
Partnership prepared by and reviewed with management of the General Partner
and the views of management of the General Partner regarding the
Partnership's past and current business operations, results thereof,
financial condition and future prospects, including the impact of the
Transaction, as well as information relating to the retail propane
distribution industry and the potential strategic, financial and
operational benefits and challenges anticipated from the Transaction;
(iv) A review of certain financial analyses and forecasts of Petro
prepared by and reviewed with management of Petro and the views of
management of Petro regarding Petro's past and current business operations,
results thereof, financial condition and future prospects, including the
impact of the Transaction, as well as information relating to the retail
home heating oil distribution industry and the potential strategic,
financial and operational benefits and challenges anticipated from the
Transaction;
(v) A review of the pro forma impact of the Transaction on the
Partnership and Petro;
(vi) A review of the publicly reported historical price and trading
activity for the Partnership's Common Units and Petro's Class A Common
Stock, including a comparison of certain financial and stock market
information for the Partnership with similar publicly available information
for certain other companies, the securities of which are publicly traded;
(vii) A review of the current market environment generally, and the
retail propane distribution environment and the retail home heating oil
distribution environment in particular;
(viii) A review of information relating to the financial terms of certain
transactions, including selected mergers and acquisition transactions; and
(ix) A review of such other information, financial studies, analyses and
investigations, and financial, economic and market criteria that A.G.
Edwards considered relevant.
In rendering our opinion, A.G. Edwards has relied upon and assumed, without
independent verification, the accuracy and completeness of all financial and
other information, publicly available, furnished to, or otherwise discussed
with A.G. Edwards for the purposes of the opinion. With respect to financial
projections and other information provided to or otherwise discussed with
D-2
<PAGE>
A.G. Edwards, A.G. Edwards assumed and was advised by the management of the
General Partner and Petro, respectively, that such projections and other
information were reasonably prepared on a basis that reflects the best
currently available estimates and judgments of the management of the General
Partner and Petro, respectively. A.G. Edwards did, however, review numerous
sets of projections for Petro and analyzed what it believed were certain of the
major assumptions embedded within Petro's projections. A.G. Edwards used two
sets of projections for Petro to perform A.G. Edwards' analyses. A.G. Edwards
used a set of projections based on 30-year weather and a set of projections
based on 15-year weather. The Special Committee did not, however, engage A.G.
Edwards to, and therefore A.G. Edwards did not, verify the accuracy or
completeness of any information. A.G. Edwards has relied upon the assurances of
the management of the General Partner and Petro that the respective managements
are not aware of any facts that would make such information inaccurate or
misleading. A.G. Edwards did not conduct a physical inspection of the
properties or facilities of the Partnership or Petro nor did it make or obtain
any independent evaluation or appraisals of any such properties or facilities
or assets and liabilities. A.G. Edwards also assumed that the final form of the
Partnership's Registration Statement on Form S-4, the Agreement and Plan of
Merger, the Exchange Agreement, the Amended and Restated Agreement of Limited
Partnership and the Conveyance and Contribution Agreements would be
substantially similar to the last draft reviewed by A.G. Edwards.
A.G. Edwards did not express an opinion as to what the value of the
Partnership's Senior Subordinated Units, Junior Subordinated Units or General
Partner Units will be when issued to the holders of Petro's Common Stock
pursuant to the Transaction, or the price at which the Partnership's Common
Units or Senior Subordinated Units will trade subsequent to the Transaction.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Our opinion as expressed herein is limited to the fairness, from a financial
point of view, to the Public Common Unitholders, of the Transaction and does
not constitute tax advice, or a recommendation to any Public Common Unitholder
as to how such unitholder should vote with respect to the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Transaction is fair, from a financial point of view, to the
Public Common Unitholders.
Very truly yours,
A.G. Edwards & Sons, Inc.
D-3
<PAGE>
Annex E
Form of Dain Rauscher Wessels Opinion to be delivered
February , 1999
The Board of Directors
Petroleum Heat & Power Co., Inc.
Clearwater House
2187 Atlantic Street
Stamford, CT 06904-1457
Lady and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the non-affiliate, public holders ("Public Common Stockholders") of
Class A common stock and Class C common stock (collectively, "Petro Common
Stock"), of Petroleum Heat & Power Co., Inc., a Minnesota corporation
("Petro"), of the terms of the proposed merger as set forth in the Agreement
and Plan of Merger, anticipated to be executed in February 1999 (the "Merger
Agreement"), by and among Petro; Star Gas Propane, L.P. (the "Operating
Partnership"), a Delaware limited partnership and wholly-owned subsidiary of
Star Gas Partners, L.P., a Delaware limited partnership (the "Partnership");
and a wholly-owned indirect subsidiary of the Operating Partnership
("Mergeco"). Pursuant to the Merger Agreement, Mergeco will be merged with and
into Petro (the "Merger"), with Petro surviving the Merger as a wholly-owned
indirect subsidiary of the Operating Partnership, and each share of Petro
Common Stock held by the Public Common Stockholders shall be converted into the
right to receive 0.11758 of a Senior Subordinated Unit ("Senior Subordinated
Unit") of the Partnership. Cash will be paid in lieu of fractional Senior
Subordinated Units based upon the market price of the Senior Subordinated Units
following the Merger. The Merger will be treated as a taxable transaction for
the Public Common Stockholders, and will be accounted for as a purchase
transaction under generally accepted accounting principles. The terms and
conditions of the Merger and the rights and preferences of the Senior
Subordinated Units are set forth more fully in the Merger Agreement and the
Amended and Restated Partnership Agreement ("Partnership Agreement").
In arriving at our opinion, we have reviewed the most recently available
drafts of the Merger Agreement, the Partnership Agreement, the Joint Proxy
Statement / Prospectus of Petro and the Partnership (the "Proxy Statement")
filed as a part of the Registration Statement on Form S-4 (the "Registration
Statement") of the Partnership, and certain publicly available financial
information concerning Petro and the Partnership. In addition, we have reviewed
certain internal analyses, forecasts and other internal information concerning
the businesses and operations of Petro and the Partnership prepared by the
respective senior managements of Petro and the Partnership. We have also met
with the senior managements of Petro and the Partnership to discuss the
businesses, operations and prospects of Petro and the Partnership. In addition,
we have considered certain long-term strategic benefits of the Merger, both
operational and financial, that were described to us by the senior managements
of Petro and the Partnership.
We have reviewed the terms of the Merger in relation to, among other things,
current and historical market prices and trading volume for the Petro Class A
Common Stock and the Partnership
<PAGE>
Common Units ("Common Units"); the respective companies' cash flow, net income
and book value per share/unit; the capitalization and financial condition of
Petro and the Partnership; the pro forma financial impact of the Merger on
Petro and the Partnership, including the potential relative ownership of
various classes of units of the Partnership after the Merger by the current
holders of Petro Common Stock and the current unitholders of the Partnership;
and, to the extent publicly available, the terms of recent merger and
acquisition transactions involving comparable companies. In addition, we have
reviewed the merger premiums paid in recent stock-for-stock acquisitions of
public companies generally, and energy industry companies in particular. We
have also analyzed certain financial, stock market and other publicly available
information relating to the business of other companies and partnerships whose
operations we consider comparable to the respective operations of Petro and the
Partnership. In addition to the foregoing, we have considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as we deemed relevant in arriving at our opinion.
In connection with our review, we have not independently verified any of the
foregoing information, and we have relied upon such information being complete
and accurate in all material respects. We have assumed, with your consent, that
the financial forecasts provided to us and discussed with us have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the senior managements of Petro and the Partnership
as to the respective expected future performance of Petro and the Partnership,
and of the combined companies subsequent to the proposed Merger. In addition,
we have not conducted a physical inspection or made an independent evaluation
or appraisal of the assets of Petro or the Partnership, nor have we been
furnished with any such evaluation or appraisal. In rendering our opinion, we
have assumed that in the course of obtaining the necessary regulatory and
governmental approvals for the proposed Merger, no restriction will be imposed
that will have a material adverse effect on the contemplated benefits of the
proposed Merger. Our opinion is based on circumstances as they exist and can be
evaluated on, and the information made available to us at, the date hereof.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. We will receive a fee for our
services in connection with rendering our opinion. In the ordinary course of
our business, we may actively trade the securities of Petro and the Partnership
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Petro in connection with its consideration of the Merger and is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without Dain Rauscher Wessels' prior written
consent. We understand that this letter will be reprinted in its entirety in
the Proxy Statement sent to the holders of Petro Common Stock and unitholders
of the Partnership in connection with the Merger and that we will have the
opportunity to review and comment on all descriptions thereof in the Proxy
Statement prior to the filing of the
E-2
<PAGE>
Proxy Statement, the Registration Statement and any supplements and amendments
thereto, with the Securities and Exchange Commission and prior to its
dissemination to holders of Petro Common Stock and the unitholders of the
Partnership.
Our opinion does not address the merits of the underlying decision by Petro
to engage in the Merger, and does not constitute a recommendation to any holder
of Petro Common Stock as to how such holder should vote on the approval and
adoption of the Merger Agreement or any matter related thereto. We are not
expressing any opinion herein as to the prices at which Common Units or Senior
Subordinated Units of the Partnership will trade following the consummation of
the Merger.
Based upon our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that as of the date hereof the consideration to be received by the
Public Common Stockholders in the proposed Merger is fair, from a financial
point of view, to the Public Common Stockholders.
Very truly yours,
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
E-3
<PAGE>
Annex F
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
Subd. 1. Actions creating rights. A shareholder of a corporation may dissent
from, and obtain payment for the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares
or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise
to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially all
of the property and assets of the corporation, but not including a transaction
permitted without shareholder approval in section 3024A.66, subdivision 1, or a
disposition in dissolution described in section 302A.725, subdivision 2, or a
disposition pursuant to an order of a court, or a disposition for cash on terms
requiring that all or substantially all of the net proceeds of disposition be
distributed to the shareholders in accordance with their respective interests
within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on
whose behalf the
F-1
<PAGE>
shareholder dissents. In that event, the rights of the dissenter shall be
determined as if the shares as to which the shareholder has dissented and the
other shares were registered in the names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the
corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
Subd. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at
law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
Subd. 1. Definitions. (a) For purposes of this section, the terms defined in
this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a corporation
immediately before the effective date of the corporate action referred to in
section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1 up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all
F-2
<PAGE>
shareholders who have complied with subdivision 3 and to all shareholders
entitled to dissent if no shareholder vote was required, a notice that
contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person
who was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and
F-3
<PAGE>
cancel all transfer restrictions. However, the corporation may again give
notice under subdivision 4 and require deposit or restrict transfer at a later
time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable.
F-4
<PAGE>
These fees and expenses may also be assessed against a person who has acted
arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and
may be awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
F-5
<PAGE>
Annex G
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of pro forma Available Cash from
Operating Surplus and should be read only in conjunction with "Cash Available
for Distribution," the Partnership's unaudited pro forma condensed consolidated
financial information.
<TABLE>
<CAPTION>
Year Ended
September 30,
1998
-------------
(In
thousands)
<S> <C>
Pro forma net income (loss)....................................... ($10,856)
Add (deduct):
Loss (gain) on sale of assets................................... 48
Depreciation and amortization................................... 36,765
Provision for supplemental benefits............................. 409
Amortization of debt issuance costs............................. 383
Corporate identity expenses(a).................................. 1,100
Restructuring charges(a)........................................ 2,085
Transaction expenses(b)......................................... 1,029
Maintenance capital expenditures................................ (4,874)
---------
$ 26,089
=========
</TABLE>
- --------
(a) Represents infrequent charges associated with Petro's branding, corporate
identity and restructuring programs.
(b) Represents expenses associated with the Transaction.
G-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
(a) The Registrant
The Section of the Registrant's Joint Proxy Statement/Prospectus which forms
a part of this Registration Statement, entitled "The Amended and Restated
Partnership Agreement--Indemnification" is incorporated herein by this
reference.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreements, Section 17-108 of the Delaware Revised Limited
Partnership Act empowers a Delaware limited partnership to indemnify and hold
harmless any partner or other person from and against any and all claims and
demands whatsoever.
(b) Petro
Section 302A.521 of the Minnesota Business Corporation Act (the "MBCA")
provides mandatory and exclusive standards for indemnification, although the
Articles of Incorporation or by-laws of a corporation can specifically limit
the statutory indemnification. Minnesota law generally provides that a
corporation shall indemnify a person made or threatened to be made a party to
a proceeding by reason of such person's official capacity as an officer,
director or employee of the corporation, against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by that person in
connection with the proceeding, if such person (a) has not been indemnified by
another entity for the same proceedings and in connection with the same acts
or omission; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of a criminal proceeding, had no reason to believe
such person's conduct was unlawful; and (e) in connection with the acts or
omissions in question, the person reasonably believed that such person's
conduct was in the best interests of the corporation (or, in the case of a
question of improper personal benefit, believed that the conduct was not
opposed to the best interests of the corporation; or in the case of an
employee benefit plan, believed that the conduct was in the best interests of
the participants or beneficiaries of the employee benefit plan).
Section 302A.521 of the MBCA further provides that if an officer, director
or employee is made or threatened to be made a party to a proceeding in such
person's official capacity, such person is entitled, upon written request to
the corporation, to payment or reimbursement by the corporation of reasonable
expenses incurred by such person in advance of the final disposition of the
proceeding (a) upon receipt by the corporation of a written confirmation by
such person of such person's good faith belief that the criteria for
indemnification set forth under Minnesota law have been satisfied, an
undertaking by such person to repay all amounts paid or reimbursed by the
corporation if it is ultimately determined that the criteria for
indemnification have not been satisfied, and (b) after a determination that
the facts then known to those making the determination would not preclude
indemnification under Minnesota law.
Finally, Section 302A.521 of the MBCA provides that a corporation's articles
of incorporation or by-laws may prohibit indemnification or advances or may
impose conditions on such indemnification or advance, as long as those
conditions apply equally to all persons or to all persons within a given
class.
Petro's restated articles of incorporation, as amended, contain the
limitation of liability provision set forth below:
"ARTICLE VIII--A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under
II-1
<PAGE>
Section 302A.559 of the Minnesota Business Corporation Act or Section
80A.23 of the Minnesota Securities Law, or (iv) for any transaction from
which the director derived an improper personal benefit. If the Minnesota
Business Corporation Act is hereafter amended to authorize any further
limitation of the liability of a director, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Minnesota Business Corporation Act, as amended. No
amendment or repeal of this Article VIII shall apply to or have any effect
on the liability or alleged liability of any director of the corporation
for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal."
Petro's by-laws, as amended, contain the indemnification provision set forth
below:
"Section 8.01. The corporation shall indemnify all officers and directors
of the corporation, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent as permitted by Minnesota
Statutes Section 302A.521, as now enacted or hereafter amended. Unless
otherwise approved by the Board of Directors, the corporation shall not
indemnify or advance expenses to any employee of the corporation who is not
otherwise entitled to indemnification pursuant to the prior sentence of
this Section 8.01."
Indemnification Agreements with Directors
In March 1996 Petro entered into Indemnification Agreements with each of its
directors. The Agreements generally provide that Petro will indemnify the
directors against certain liabilities arising out of legal actions brought or
threatened against them for their conduct on behalf of Petro to the fullest
extent permitted by applicable law. The agreements contain provisions
implementing the director's rights thereunder with respect to, among other
things: (i) indemnification of expenses to a party who is wholly or partly
successful; (ii) indemnification of expenses of a witness; (iii) advancement of
expenses; (iv) procedure for determination of entitlement to indemnification;
(v) certain presumptions; (vi) remedies of an indemnitee; (vii) subrogation;
(viii) establishment of a trust and the funding thereof by Petro, upon the
indemnitee's request, in the event of change in Control or potential Change in
Control (as defined therein); and (ix) contribution in the event
indemnification may be unavailable.
ITEM 21. EXHIBITS
<TABLE>
<C> <S>
2.1 Merger Agreement dated as of September 25, 1998, as amended, by and among
Petroleum Heat and Power Co., Inc., the Registrant and Star Gas Propane,
L.P. (included as Annex A to the Joint Proxy Statement/ Prospectus which
forms a part of this Registration Statement).
3.1 Form of Agreement of Limited Partnership of the Registrant(1)
3.2 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(1)
3.3 Form of Amended and Restated Limited Partnership Agreement of the
Registrant (included as Annex C to the Joint Proxy Statement/Prospectus
which forms a part of this Registration Statement).
3.4 Form of Amended and Restated Limited Partnership Agreement of Star Gas
Propane, L.P.**
3.5 Restated and Amended Articles of Incorporation of Petro, as amended, and
Articles of Amendment thereto.(2)
3.6 Restated By-Laws of Petro.(2)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the legality
of the securities being registered**
8.1 Opinion of Andrews & Kurth L.L.P. relating to tax matters**
10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain
banks(3)
10.2 Form of Conveyance and Contribution Agreement among Star Gas Corporation,
the Partnership and the Operating Partnership.(3)
10.3 Form of First Mortgage Note Agreement among certain insurance companies,
Star Gas Corporation and Star Gas Propane L.P.(3)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.4 Intercompany Debt(3)
10.5 Form of Non-competition Agreement between Petro and the Partnership(3)
10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)
10.7 Amoco Supply Contract(3)
10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the Pearl Gas Acquisition(4)
10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas Acquisition(4)
10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement dated as of December 13, 1995
among the Operating Partnership, Bank Boston, N.A. and NationsBank, N.A.(4)
10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas and The Northwestern Mutual
Life Insurance Company(5)
10.12 Exchange Agreement (included as Annex B to the Joint Proxy Statement/Prospectus which forms a part
of this Registration Statement)
10.13 Projections**
10.14 Form of Proxy Card for the Registrant**
10.15 Form of Proxy Card for Petro**
21 Subsidiaries of the Registrant(5)
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in Exhibit 5.1)**
23.3 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)**
23.4 Consent of A.G. Edwards & Sons, Inc.**
23.5 Consent of Dain Rauscher Wessels**
24.1 Powers of Attorney**
99.1 Supplemental Proxy Materials*
</TABLE>
- --------
* Filed herewith.
** Previously filed.
+ To be filed by amendment.
(1) Incorporated by reference to Appendix A to the Prospectus filed as part of
Registrant's Registration Statement on Form S-l, File No. 33-90496.
(2) Filed as exhibits to Petro's Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-98496, filed with the Commission on
December 13,1995.
(4) Incorporated by reference to the same Exhibit to Registrant's Periodic
Report on Form 8-K, as amended, as filed with the Commission on October 23
and 29, 1997.
(5) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-3, File No. 333-47295, as filed with the Commission on
March 4, 1998.
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
(2) The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(b) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
Provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by reference
into this Prospectus within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Stamford, Connecticut, on February
4, 1999.
STAR GAS PARTNERS, L.P.
By: STAR GAS CORPORATION,
as General Partner
/s/ Joseph P. Cavanaugh
By: _________________________________
Joseph P. Cavanaugh
President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joseph P. Cavanaugh President (Principal February
____________________________________ Executive Officer) 4, 1999
Joseph P. Cavanaugh
/s/ Richard F. Ambury Vice President--Finance February
____________________________________ (Principal Financial and 4, 1999
Richard F. Ambury Accounting Officer)
/s/ Irik P. Sevin Director February 4,
____________________________________ 1999
Irik P. Sevin
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
* Director February
____________________________________ 4, 1999
Elizabeth K. Lanier
* Director February
____________________________________ 4, 1999
Paul Biddelman
* Director February
____________________________________ 4, 1999
Thomas J. Edelman
* Director February
____________________________________ 4, 1999
Wolfgang Traber
* Director February
____________________________________ 4, 1999
William G. Powers, Jr.
</TABLE>
/s/ Irik P. Sevin
*By____________________________
Irik P. Sevin Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
Exhibit Description
------- -----------
2.1 Merger Agreement dated as of September 25, 1998, as amended, by and
among Petroleum Heat and Power Co., Inc., the Registrant and Star Gas
Propane, L.P. (included as Annex A to the Joint Proxy Statement/
Prospectus which forms a part of this Registration Statement).
3.1 Form of Agreement of Limited Partnership of the Registrant(1)
3.2 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(1)
3.3 Form of Amended and Restated Limited Partnership Agreement of the
Registrant (included as Annex C to the Joint Proxy
Statement/Prospectus which forms a part of this Registration
Statement).
3.4 Form of Amended and Restated Limited Partnership Agreement of Star Gas
Propane, L.P.**
3.5 Restated and Amended Articles of Incorporation of Petro, as amended,
and Articles of Amendment thereto.(2)
3.6 Restated By-Laws of Petro.(2)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the
legality of the securities being registered**
8.1 Opinion of Andrews & Kurth L.L.P. relating to tax matters**
10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain
banks(3)
10.2 Form of Conveyance and Contribution Agreement among Star Gas
Corporation, the Partnership and the Operating Partnership.(3)
10.3 Form of First Mortgage Note Agreement among certain insurance
companies, Star Gas Corporation and Star Gas Propane L.P.(3)
10.4 Intercompany Debt(3)
10.5 Form of Non-competition Agreement between Petro and the Partnership(3)
10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)
10.7 Amoco Supply Contract(3)
10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the
Pearl Gas Acquisition(4)
10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas
Acquisition(4)
10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement
dated as of December 13, 1995 among the Operating Partnership, Bank
Boston, N.A. and NationsBank, N.A.(4)
10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas
and The Northwestern Mutual Life Insurance Company(5)
10.12 Exchange Agreement (included as Annex B to the Joint Proxy
Statement/Prospectus which forms a part of this Registration
Statement)
10.13 Projections**
10.14 Form of Proxy Card for the Registrant**
10.15 Form of Proxy Card for Petro**
21 Subsidiaries of the Registrant(5)
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in
Exhibit 5.1)**
23.3 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)**
23.4 Consent of A.G. Edwards & Sons, Inc.**
23.5 Consent of Dain Rauscher Wessels**
24.1 Powers of Attorney**
99.1 Supplemental Proxy Materials*
</TABLE>
<PAGE>
- --------
* Filed herewith.
** Previously filed.
+ To be filed by amendment.
(1) Incorporated by reference to Appendix A to the Prospectus filed as part of
Registrant's Registration Statement on Form S-l, File No. 33-90496.
(2) Filed as exhibits to Petro's Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-98496, filed with the Commission on
December 13,1995.
(4) Incorporated by reference to the same Exhibit to Registrant's Periodic
Report on Form 8-K, as amended, as filed with the Commission on October 23
and 29, 1997.
(5) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-3, File No. 333-47295, as filed with the Commission on
March 4, 1998.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Star Gas Partners, L.P.
We consent to incorporation by reference in the registration statement to be
filed on Form S-4 of Star Gas Partners, L.P. of our report dated November 13,
1998, relating to the consolidated balance sheets of Star Gas Partners, L.P.
and subsidiary as of September 30, 1998 and 1997, and the related consolidated
statements of operations, partners' capital and predecessor equity and cash
flows for each of the years in the three-year period ended September 30, 1998
and related schedule, which report appears in the September 30, 1998 annual
report on Form 10-K of Star Gas Partners, L.P.
Additionally, we consent to the incorporation by reference in the registration
statement to be filed on Form S-4 of Star Gas Partners, L.P. of our report
dated October 22, 1997 relating to the balance sheets of Pearl Gas Co. as of
December 31, 1996 and 1995, and the related statements of income, shareholders'
equity, and cash flows for the years then ended, which report appears in the
November 24, 1997 current report on Form 8-K/A of Star Gas Partners, L.P.
Additionally, we consent to incorporation by reference in the registration
statement to be filed on Form S-4 of Star Gas Partners, L.P. of our report
dated March 20, 1998, relating to the consolidated balance sheets of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in shareholders'
equity (deficiency) and cash flows for each of the years in the three-year
period ended December 31, 1997 and related schedule, which report appears in
the December 31, 1997 annual report on Form 10-K of Petroleum Heat and Power
Co., Inc.
We also consent to the reference to our firm under the heading "Experts" in the
prospectus.
Stamford, CT
February 3, 1999
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 99.1
The MERGER of
Star Gas Partners, L.P. (Star)
and
Petroleum Heat and Power Co., Inc. (Petro)
A
"POWER"ful
Combination
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
Enclosed in this package are the details of an important merger that we are
submitting to you for your approval.
We will summarize some key points here, but we urge you to read the entire
enclosed proxy for a complete description of our plan.
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
A merger is proposed and
YOUR "FOR" VOTE IS VERY IMPORTANT
[In fact, not voting is the same as saying
----------
no to the merger]
--
The Star Gas/Petro merger unites the country's eighth largest propane
distributor with the nation's leading distributor of home heating oil, and
the principal consolidator of this highly fragmented industry.
VOTE NOW!
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
WHAT IS HAPPENING?
You and your fellow unitholders/shareholders are being asked to vote on a
proposal to merge Star Gas Partners, L.P. (Star) and Petroleum Heat and Power
Co., Inc. (Petro).
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
WHY?
. The Star/Petro Merger has been structured with the intent of providing an
increase in the Parnership's cash flow. Given Petro's strong position in the
--------------------------------------
home heating oil industry, it is the belief of the respective Boards and
Managements that the Transaction will also provide the Partnership with an
additional source of acquisition and expansion opportunities.
Additionally, it is also anticipated that the larger size of the Partnership
will:
. Enhance Common Unit market liquidity;
. Raise investment community awareness; and,
. Result in additional securities analyst research coverage
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
Based on the expectation of the Partnership's enhanced cash flow, upon
completion of the Transaction, Star Common Unitholders will receive an
increase in their minimum quarterly distribution (MQD) from $2.20 to $2.30
--------------------------------------------------------------------------
per unit, on an annual basis.
----------------------------
Star Subordinated Unitholders (former Petro Common Stockholders) will also
receive an MQD of $2.30 annually, if earned on a cumulative basis, beginning
with the quarter ending December 31, 1999 (first distribution is expected
February 2000) and the Common Unitholders have received all of their
distributions.
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
Petro shareholders can determine approximately how many Star Gas Senior
Subordinated Units they will receive following the consummation of the
merger:
Petro shares owned prior to the merger ________
multiplied by the exchange ratio X 0.11758
= approximate Star Gas
Senior Subordinated Units
you will initially receive ________
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
VOTE NOW!
Questions and Answers for
Petro Shareholders
<TABLE>
<S> <C>
What is being proposed? Common stockholders are considering
Star Gas Partners' acquisition of
Petro, which is currently Star Gas
Partners' largest equity owner and the
parent of its current general partner.
What are Petro's reasons for
the transaction? Petro does not have the financial
flexibility to fully capitalize upon
the acquisition, operating and
corporate-branding opportunities that
result from its position as the
principal consolidator in the home
heating oil industry. This transaction
will recapitalize Petro, providing it
with access to lower cost capital to
better realize these growth
opportunities.
Which parts of the transaction
are the Petro common
stockholders considering? Common stockholders are only voting on Star
Gas Partners' acquisition of Petro.
When is the transaction expected
to occur? Star Gas Partners and Petro anticipate
completing the transaction in March 1999.
What do I need to do right now? Common stockholders need to return the
signed proxy card in the enclosed return
envelope as soon as possible in order for
their shares to be represented at the
meetings. For more information on voting
please call our proxy solicitor, Morrow &
Co., at 1(800) 662-5200.
The Petro board of directors unanimously
recommends that common stockholders vote
FOR the proposal to be acquired by Star Gas
Partners.
What do I do with my certificates? After the transaction is approved, common
stockholders will receive written
instructions on how to deliver their Petro
stock certificates in exchange for senior
subordinated units.
</TABLE>
VOTE FOR THE ACQUISITION!
<PAGE>
STAR GAS/PETRO...a "POWER"ful Combination
VOTE NOW!
Questions and Answers for
Star Gas Unitholders
<TABLE>
<S> <C>
What is being proposed? Common unitholders are considering Star
Gas Partners' acquisition of Petro, which
is currently Star Gas Partners' largest
equity owner and the parent of its current
general partner.
What are Star Gas Partners' reasons
for the transaction? Petro is the largest home heating oil
distributor in the country and has been a
principal consolidator of that highly
fragmented industry. Star Gas Partners
believes Petro's strong position in the
home heating oil industry will provide
Star Gas Partners with attractive
acquisition and expansion opportunities.
In addition, the acquisition of Petro has
been structured with the intent of
providing an increase in Star Gas
Partners' cash flow. Based on this
expectation, the minimum quarterly
distribution will increase from $0.55 to
$0.575 per unit, or from $2.20 to $2.30 on
a yearly basis, upon completion of the
transaction.
What are the proposals the Star
Gas Partners common
unitholders will vote on? Common unitholders are voting on three
proposals:
. The proposal to acquire Petro through a
merger and an exchange of equity (i.e.,
common stock of Petro for senior
subordinated units of Star Gas
Partners).
. The proposal to amend the partnership
agreement to facilitate the
transaction.
. The proposal to elect a new general
partner.
When is the transaction expected
to occur? Star Gas Partners and Petro anticipate
completing the transaction in March 1999.
What do I need to do right now? Common unitholders need to return the
signed proxy card in the enclosed return
envelope as soon as possible in order for
their units to be represented at the
meetings. For more information on voting
please call our proxy solicitor, Morrow &
Co., at 1(800) 662-5200.
Based on the recommendation of a special
committee of the Star Gas Corporation
board of directors, the Star Gas
Corporation board of directors unanimously
recommends that the common unitholders
vote FOR each of the proposals.
What do I do with my certificates? Common unitholders should hold their unit
certificates. Common units will continue
to be listed and traded on the New York
Stock Exchange.
</TABLE>
VOTE FOR THE PROPOSALS!
