Round III
UPDATE TO
PRELIMINARY REPORT TO
THE SPECIAL COMMITTEE OF GAS
A.G.EDWARDS & SONS, INC.
INVESTMENT BANKING
May 21, 1998
Table of Contents
Section
-------
Introduction .......................................................... I
Review of Events to Date .............................................. II
Summary of Transaction ................................................ III
Summary Observations .................................................. IV
Updated Report to the Special Committee ............................... V
Recommended Proposal to Board of Directors ............................ VI
INTRODUCTION
TRANSACTION PROPOSAL [ ] During 1997, Gas ("Gas" or the "Company") and Oil
("Oil") discussed the idea of a possible business
combination by and between Gas and Oil. The
series of proposed transactions involved in such
combination is referred to as the "Transaction".
A.G. EDWARDS' [ ] A.G. Edwards & Sons, Inc. ("A.G. Edwards") has
been engaged by the Special Committee (the
"Special Committee") of the Board of Directors of
Gas (the "Board") to act as its financial advisor
with respect to the Transaction and to issue to
the Board an opinion as to the fairness, from a
financial point of view, to the common
unitholders of Gas who are not affiliated with
Oil (the "Common Unitholders"), of the
Transaction (the "Fairness Opinion").
[ ] The preparation of a fairness opinion is not
susceptible to partial analyses or summary. In
rendering its Fairness Opinion, A.G. Edwards will
apply its judgment to a variety of complex
analyses and assumptions. A.G. Edwards may give
various analyses more or less weight than other
analyses, and may deem various assumptions more
or less probable than other assumptions. The
assumptions made and the judgments applied by
A.G. Edwards in rendering its opinion are not
readily susceptible to description beyond that
set forth in the written text of the Fairness
Opinion itself.
Page 1
INTRODUCTION
(continued)
AS PART OF ITS ENGAGEMENT, [ ] A review of the preliminary structure of the
A.G. EDWARDS' ACTIVITIES Transaction;
INCLUDED, BUT WERE NOT [ ] A review of Gas' and Oil's historical
LIMITED TO, THE FOLLOWING: financial statements and the financial
projections of Gas and Oil;
[ ] A review of certain market data of Gas'
Common Units and Oil's Common Stock;
[ ] An analysis of the pro forma financial
statements of Gas giving effect to the
Transaction (as proposed);
[ ] Conversations with PaineWebber regarding the
nature and extent of development of the terms
of the Transaction;
[ ] An investigation regarding current operations
and future prospects of Gas and Oil, through
interviews with members of Gas' and Oil's
management, respectively;
[ ] A review of the industries in which Gas and
Oil operate;
[ ] A review of the market data for stocks of
public companies in the same or similar lines
of business to Gas;
[ ] Analyses of the Transaction using various
valuation methodologies; and
[ ] Other analyses which it deemed necessary.
Page 2
INTRODUCTION
(continued)
NATURE OF INFORMATION [ ] A.G. Edwards relied upon and assumed, without
REVIEWED AND PRESENTED independent verification, the accuracy and
completeness of all financial and other
information publicly available, or furnished to,
or otherwise discussed with A.G. Edwards
including financial statements and financial
projections, as provided by management of Gas and
Oil and Oil's financial advisor. With respect to
financial projections and other information
provided to or otherwise discussed with A.G.
Edwards, A.G. Edwards assumed and was advised by
the senior management of Gas and Oil,
respectively, that such projections and other
information were reasonably prepared on a basis
that reflects the best currently available
estimates and judgments of the senior management
of Gas and Oil, respectively, as to the expected
future financial performance of Gas and Oil, in
each case on a stand-alone basis and after giving
effect to the Transaction. A.G. Edwards was not
engaged to, and did not, independently verify the
information provided and performed no audit of
assets or liabilities and no independent
appraisal of assets or liabilities of either Gas
or Oil. A.G. Edwards has relied upon the
assurances of the management of Gas and Oil that
they are not aware of any facts that would make
such information inaccurate or misleading.
[ ] In performing its analyses, A.G. Edwards made
numerous assumptions with respect to the propane
distribution industry and the home heating oil
distribution industry, and general business and
economic conditions which are beyond the control
of Gas and Oil. The analyses performed by A.G.
Edwards are not necessarily indicative of actual
values or actual future results, which may be
significantly more or less favorable than
suggested by such analyses. Such analyses were
prepared solely as part of A.G. Edwards'
Preliminary Report to the Special Committee.
[ ] This presentation is for the private use of the
Special Committee and may not be distributed to
any other parties without A.G. Edwards' written
permission.
Page 3
REVIEW OF EVENTS TO DATE
FEBRUARY 11 [ ] A.G. Edwards presents its qualifications to the Special
Committee and its legal counsel.
MARCH 23 [ ] Special Committee engaged A.G. Edwards.
MARCH 23 [ ] A.G. Edwards met with members of Gas' and Oil's
management and submitted preliminary data request list.
[ ] A.G. Edwards began due diligence with management and
other representatives of Gas and Oil.
MARCH 30 [ ] A.G. Edwards received data related to its preliminary
data request list.
MARCH 30 [ ] A.G. Edwards continued the due diligence process with
respect to Gas and Oil.
APRIL 28 [ ] Special Committee and A.G. Edwards met to discuss the
Transaction.
MAY 7 [ ] Special Committee and A.G. Edwards met with Oil's
management and PaineWebber to discuss the Transaction.
MAY 8 [ ] A.G. Edwards continued onsite diligence at Oil
MAY 19 [ ] A.G. Edwards met with PaineWebber and Oil's management
to discuss the Transaction.
MAY 20 [ ] Special Committee meeting to discuss the Transaction.
Page 4
Summary of Transaction
Pro Forma Gas Units Outstanding
(in thousands)
To simplify the complexity of the steps in the Transactions, A.G. Edwards
prepared a summary of its understanding.
[_] There are currently 6,355 Gas units outstanding comprised of 3,832
common units, 2,396 subordinated units and 127 general partner ("GP")
units. The subordinated units and GP units are assets of Oil.
[_] There are currently 26,563 shares of Oil common stock outstanding,
comprised of public shareholders and "insiders." The public holds 17,160
Class A shares. The "insiders" hold 9,404 shares which include 6,795
Class A shares, 11 Class B shares and 2,598 Class C shares.
[_] Each shareholder of Oil will receive a certain number of units in Gas
such that the implied consideration paid for each Oil share is $2.50.
Additionally, each shareholder will receive a certain number of deferred
partnership units ("DPUs") such that if each unit is converted at the
earliest possible time, then each shareholder will receive an additional
$0.65 per share in future value.
[_] The publicly held 17,160 Class A shares will initially receive .1316
shares of newly created senior subordinated units (2,258 units in total)
with an implied value (per PaineWebber) of $19.00/unit. This represents
an implied purchase price of $2.50/share for an implied total purchase
price of $42.9 million.
[_] The "insiders" of Oil, who hold a total of 9,404 shares (comprised of A,
B and C shares) will also initially receive an implied purchase price of
$2.50/share for a total of $23.5 million. The consideration received by
these shareholders will be funded by:
- (1) the distribution of existing units of Gas which are currently
owned by Oil
[_] all of the 127 GP units owned by Oil will be given as
consideration at an implied value of $22.13/unit, for a total
of $2.8 million.
[_] 524 of the 2,396 subordinated units owned by Oil will be
given as consideration at an implied value (per PaineWebber)
of $16.00/unit, for a total of $8.4 million.
- (2) the distribution of newly-created units of Gas
[_] to fund the remaining $12.3 million of the $23.5 million due
to the Oil "insiders", Gas will issue 461 newly-created
senior subordinated units and 162 newly-created GP units. The
implied values for these new units are $19.00 and $22.13,
respectively.
Page 5
Summary of Transaction
Pro Forma Gas Units Outstanding
(in thousands)
(continued)
[_] Of the 2,396 subordinated units and 127 GP units owned by Oil, only
1,872 subordinated units will not have been used as consideration paid
to the "inside" Oil shareholders. Hence, these 1,872 subordinated units
will be retired by Gas. A.G. Edwards has assumed that the implied value
of these units are the same as the value PaineWebber is placing on the
subordinated units, which is $16.00/unit, for a total retired value of
approximately $30.0 million.
Page 6
SUMMARY OF GAS UNITS OUTSTANDING
PRE-FINANCING ASSUMPTIONS
- --------------------------------------------------------------------------------
Distributed to Oil Issued to Oil
------------------------ -----------------------
Type of Units Current Public Insiders Public Insiders Retired Pro Forma
- ------------- ---------- -------- ----------- -------- ----------- --------- -----------
Common 3,832 - - - - - 3,832
Senior Subordinated - - - 2,258 461 - 2,718
Subordinated 2,396 - 524 - - (1,872) 524
DPUs - - - 587 322 - 909
General Partner (a) 127 - 127 - 162 - 289
---------- -----------
6,355 8,272
- --------------------------------------------------------------------------------
(a) The number of GP units issued reflects the assumption of a 6,588 common
unit equity offering to refinance certain of the assumed Oil debt and a 475
common unit equity offering to finance Gas' acquisitions. Hence, the number
of GP units reflected in the pro forma column do not equal 2% of the pro
forma outstanding units shown above but do equal exactly 2% of the pro
forma units outstanding on a post financing basis.
Page 7
Equity Purchase Price Calculation
Implied Equity Value Of Oil's Assets
(units in thousands, $ in thousands, except per unit amounts)
Purchase Price of Oil's Equity Purchase Price of Oil's Equity
------------------------------ --------------------------------------------------------
Value of Securities Equity Value of Oil's Value of Oil's GP and
Event Paid to Oil Shareholders Heating Oil Assets Subordinated Units in Star
- -------------------------------- --------------------------- -------------------------- -----------------------------
Issuance of Senior Subordinated
Units to Public Oil Shareholders 2,258 x $19.00
-----------------------
$42,900 $42,900 -
Distribution of General Partner
Units to Inside Oil Shareholders 127 x $22.13
-----------------------
$2,810 - $2,810
Distribution of Subordinated
Units to Inside Oil Shareholders 524 x $16.00
-----------------------
$8,382 - $8,382
Issuance of General Partner
Units to Inside Oil Shareholders 162 x $22.13
-----------------------
$3,584 $3,584 -
Issuance of Senior Subordinated
Units to Inside Oil Shareholders 461 x $19.00
-----------------------
$8,750 $8,750 -
Issuance of DPUs 909 x $19.00
-----------------------
$17,271 $17,271
1,872 x $16.00
----------------
Retire Subordinated Units (29,954) $29,954
$42,551 $41,146
---------------------------------
-------------
Total including DPUs $83,697 $83,697
- -------------------------------------------------------------------
Divided by 26,563 shares, of Oil's Common stock = $3.15 per share
- -------------------------------------------------------------------
Total excluding DPUs $66,426
- -------------------------------------------------------------------
Divided by 26,563 shares of Oil's Common stock = $2.50 per share
- -------------------------------------------------------------------
Page 8
PRO FORMA WEIGHTED AVERAGE COST OF CAPITAL DERIVATION FOR COMMON UNITS
($ IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
TOTAL TOTAL
MARKET TOTAL IMPLIED TOTAL DEBT AS
LEVERED VAL. UNIT UNITS MARKET DEBT/ % OF
BETA DEBT PRICE AT OUT. VALUE OF TOTAL TOTAL UNLEVERED
COMPARABLE COMPANY (A) (BK=MKT) (5/15/98) (MIL) EQUITY EQUITY CAPITAL BETA
- ---------------------------------------------------------------------------------------------------
AmeriGas Partners, L.P. 0.50 $701.7 $24.688 41.9 $1,055.2 66.5% 39.9% 0.300
Cornerstone Propane
Partners, L.P. 0.40 237.1 21.875 19.8 442.7 53.6% 34.9% 0.260
Ferrellgas Partners,
L.P. 0.38 537.2 21.750 31.3 694.5 77.4% 43.6% 0.214
Heritage Propane
Partners, L.P. 0.43 176.9 23.000 8.4 196.7 89.9% 47.3% 0.226
National Propane
Partners, L.P. 0.34 141.0 19.688 11.2 225.7 62.5% 38.5% 0.209
Star Gas Partners, L.P. 0.29 96.0 21.375 6.2 135.8 70.7% 41.4% 0.170
Suburban Propane
Partners, L.P. 0.35 428.2 19.063 28.7 558.8 76.6% 43.4% 0.198
---------------------------
Comparable group's average unlevered Pro forma capitalization--
beta: 0.23 at market (b)
Pro forma debt-to-equity ratio (b): 103.5% Total debt $319.0 50.8%
Pro forma debt as a percent of total
capital (b): 50.85% Total equity 308.3 49.2%
------ -----
Comparable group's beta relevered for
pro forma capital structure: 0.377 $627.3 100.0%
=======
DERIVATION OF WEIGHTED AVERAGE COST OF CAPITAL: MARKET RISK OF PREMIUM RANGE (D)
- -----------------------------------------------
11.3% 12.3% 13.3%
Pro forma theoretical levered beta: 0.377
Assumed % of equity in Pro forma capital structure
(b): 49.2%
Risk-free rate of return (c): 5.7%
Pro forma cost of equity range (at various market
risk premiums): 9.9% 10.3% 10.7%
=== ==== ====
Pro forma assumed tax rate: 35.0%
Assumed % of debt in capital structure (b): 50.8%
Pro forma estimated cost of debt (e): 8.2%
Pro forma estimated after-tax cost of debt: 5.3% 5.3% 5.3% 5.3%
--- ---- ----
Pro forma weighted average cost of capital range
(f): 7.6% 7.8% 8.0%
--- ---- ----
- ------
(a) Source: Bloomberg. 143 week (maximum weekly time period allowed, or the
number of weeks available, which may be less than 143) adjusted beta
relative to the S&P 500 index.
(b) Market value of long-term debt is assumed to be equal to the book value.
(c) Ten-year Treasury rate on May 15, 1998.
(d) Ibbotson Associates 1997. Total returns for small company stocks of 17.7%
minus the risk-free rate.
(e) Based on Pro forma current debt structure.
(f) Calculation based upon use of the Capital Asset Pricing Model (CAPM).
PAGE 9
PRO FORMA WEIGHTED AVERAGE COST OF CAPITAL DERIVATION FOR
SENIOR SUBORDINATED UNITS
($ IN MILLIONS)
===================================================================================================================================
TOTAL IMPLIED TOTAL TOTAL
MARKET UNIT TOTAL MARKET DEBT/ DEBT AS % UN-
LEVERED VAL. DEBT PRICE AT UNITS VALUE OF TOTAL OF TOTAL LEVERED
COMPARABLE COMPANY BETA (A) (BK = MKT) (5/15/98) OUT. (MIL) EQUITY EQUITY CAPITAL BETA
- ----------------------------------------------------------------------------------------------------------------------------
AmeriGas Partners, L.P. 0.50 $701.7 $24.688 41.9 $,1,055.2 66.5% 39.9% 0.300
Cornerstone Propane Partners, L.P. 0.40 237.1 21.875 19.8 442.7 53.6% 34.9% 0.260
Ferrellgas Partners, L.P. 0.38 537.2 21.750 31.3 694.5 77.4% 43.6% 0.214
Heritage Propane Partners, L.P. 0.43 176.9 23.000 8.4 196.7 89.9% 47.3% 0.226
National Propane Partners, L.P. 0.34 141.0 19.688 11.2 225.7 62.5% 38.5% 0.209
Star Gas Partners, L.P. 0.29 96.0 21.375 6.2 135.8 70.7% 41.4% 0.170
Suburban Propane Partners, L.P. 0.35 428.2 19.063 28.7 558.8 76.6% 43.4% 0.198
--------------------------------------------------
Pro forma Capitalization-at market (b)
Comparable group's average unlevered beta: 0.23 Total debt $558.0 89.0%
Pro forma debt-to-equity ratio (b): 805.5% Total equity 69.3 11.0%
------ -----
$627.3 100.0%
--------------------------------------------------
Pro forma debt as a percent of total capital (b): 89.0%
Comparable group's beta relevered for Pro forma capital structure: 1.406
=====
DERIVATION OF WEIGHTED AVERAGE COST OF CAPITAL: MARKET RISK PREMIUM RANGE (D)
- ---------------------------------------------- --------------------------------------
11.3% 12.3% 13.3%
--------------------------------------
Pro forma theoretical levered beta: 1,406
Assumed % of equity in Pro forma capital structure (b): 11.0%
Risk - free rate of return (c): 5.7%
pro forma cost of equity range (at various market risk premiums): 21.6% 23.0% 24.4%
===== ===== =====
--------------------------------------
____________________________________________
(a) Source: Bloomberg. 143 week (maximum weekly time period allowed, or the
number of weeks available, which may be less that 143) adjusted beta
relative to the S&P 500 index.
(b) Market value of long-term debt is assumed to be equal to the book value;
debt includes the market value of pro forma common and GP units; senior
equity includes the value of senior sub and sub units.
(c) Ten - year Treasury rate on May 15, 1998.
(d) Ibbotson Associates 1997. Total returns for small company stocks of 17.7%
minus the risk-free rate.
Page 10
IMPLIED UNIT VALUES
-------------------------------------------------------------------------------------------------------------
1999 2000 2001 THEREAFTER COST OF EQUITY
-------- -------- -------- ------------ ----------------
COMMON UNIT
Indicated Distribution $ 2.30 $2.30 $2.30 $2.30
------------
10.3%
Discount Factor 1.10 1.22 1.34 1.34 10.3%
--------
NPV of future distributions $22.32
--------
SENIOR SUBORDINATED UNIT
Indicated Distribution $ 2.30 $2.30 $2.30 $2.30
------------
10.3%
Discount Factor 1.23 1.51 1.86 1.86 23.0%
--------
NPV of future distributions $16.63
--------
DPU
Indicated Distribution $ 0.00 $0.77 $1.53 $2.30
------------
10.3%
Discount Factor 1.23 1.51 1.86 1.86 23.0%
--------
NPV of future distributions $13.34
--------
Page 11
EQUITY PURCHASE PRICE CALCULATION
IMPLIED EQUITY VALUE OF OIL'S ASSETS WITH REVISED UNIT VALUES
(UNITS IN THOUSANDS, $ IN THOUSAND, EXCEPT PER UNIT AMOUNTS)
================================================================================================================================
Purchase Price of Oil's Equity Purchase Price of Oil's Equity
-------------------------------- ---------------------------------------------------
Value of Securities Equity Value of Oil's Value of Oil's GP and
Event Paid to Oil Shareholders Heating Oil Assets Subordinated Units in Star
- --------------------------------- -------------------------------- ---------------------------------------------------
Issuance of Senior Subordinated
Units to Public Oil Shareholders 2,258 x $16.63
--------------------------------
$37,549 $37,549 -
Distribution of General Partner
Units to Inside Oil Shareholders 127 x $22.13
--------------------------------
$ 2,810 - $2,810
Distribution of Subordinated
Units to Inside Oil Shareholders 524 x $16.63
--------------------------------
$ 8,712 - $8,712
Issuance of General Partner
Units to Inside Oil Shareholders 162 x $22.13
--------------------------------
$ 3,584 $ 3,584 -
Issuance of Senior Subordinated
Units to Inside Oil Shareholders 461 x $16.63
--------------------------------
$ 7,659 $ 7,659 -
Issuance of DPUs 909 x $13.34
--------------------------------
$12,126 $12,126
Retire Subordinated Units 1,872 x $16.00
--------------------
($29,954) $29,954
$30,964 $41,476
----------- -------------------------
Total including DPUs $72,439 $72,439
- ---------------------------------------------------------------------
Divided by 26,563 shares of Oil's Common stock = $2.73 per share
- ---------------------------------------------------------------------
Total excluding DPUs $60,313
- ---------------------------------------------------------------------
Divided by 26,563 shares of Oil's Common stock = $2.27 per share
- ---------------------------------------------------------------------
Page 12
EQUITY PURCHASE PRICE CALCULATION
IMPLIED EQUITY VALUE OF OIL'S ASSETS WITH REVISED DPU VALUE ONLY
(UNITS IN THOUSANDS, $ IN THOUSAND, EXCEPT PER UNIT AMOUNTS)
===============================================================================================================================
Purchase Price of Oil's Equity Purchase Price of Oil's Equity
------------------------------------ ----------------------------------------------------
Value of Securities Equity Value of Oil's Value of Oil's GP and
Event Paid to Oil Shareholders Heating Oil Assets Subordinated Units in Star
- ----------------------------------- ------------------------------------ ----------------------- ----------------------------
Issuance of Senior Subordinated
Units to Public Oil Shareholders 2,258 x $19.00 $42,900 -
----------------------------
$42,900
Distribution of General Partner
Units to Inside Oil Shareholders 127 x $22.13 - $2,810
----------------------------
$2,810
Distribution of Subordinated
Units to Inside Oil Shareholders 524 x $16.00
---------------------------- - $8,382
$8,382
Issuance of General Partner
Units to Inside Oil Shareholders 162 x $22.13
---------------------------- $3,584 -
$3,584
Issuance of Senior Subordinated
Units to Inside Oil Shareholders 461 x $19.00 $8,750 -
----------------------------
$8,750
Issuance of DPUs 909 x $13.34 $12,124
----------------------------
$12,124
Retire Subordinated Units 1,872 x $16.00
-------------------
($29,954) $29,954
Total including DPUs $37,404 $41,146
--------- -------------------------------
$78,550 $78,550
- ----------------------------------------------------------------------
Divided by 26,563 shares of Oil's Common stock = $2.96 per share
- ----------------------------------------------------------------------
Total excluding DPUs $66,426
- ----------------------------------------------------------------------
Divided by 26,563 shares of Oil's Common stock = $2.50 per share
- ----------------------------------------------------------------------
Page 13
SUMMARY OBSERVATIONS
ACCRETION/DILUTION [_] A.G. Edwards reviewed the distributable cash flow
ANALYSIS per unit and the related accretion, common unit
coverage and total unit coverage on a pro forma
basis.
[_] For the purpose of this analysis, A.G. Edwards had
PaineWebber run its pro forma financial model for
four scenarios to determine the sensitivity of
certain assumptions.
-------------------------------------------------------
ACCRETION/DILUTION ANALYSIS
Variations in Margin Growth Rates and Acquisition
Assumptions
$2.50 PER SHARE OF PETRO
-------------------------------------------------------------
GAS $0.005 MARGIN GROWTH $0.00 MARGIN GROWTH
STAND-ALONE $30.0MM AT 4.75X ACQUISITIONS $30.0MM AT 5.25X ACQUISITIONS
----------- ----------------------------- -----------------------------
DCF PER UNIT
1998E (a) $1.220 $1.580 $1.580
1998N (b) 1.760 2.420 2.420
1999P 1.900 2.730 2.440
ACCRETION/DILUTION
1999E (a) 29.5% 29.5%
1998N (b) 37.5% 37.5%
1999P 43.7% 28.4%
COMMON UNIT COVERAGE
1998E (a) 0.90x 0.94x 0.94x
1998N (b) 1.30 1.44 1.44
1999P 1.34 1.54 1.37
TOTAL UNIT COVERAGE
1998E (a) 0.55x 0.72x 0.72x
1998N (b) 0.80 1.10 1.10
1999P 0.86 1.19 1.06
LEVERAGED UNIT COVERAGE (c)
1998E (a) 0.94x 0.97x 0.97x
1998N (b) 1.15 1.20 1.20
1999P 1.17 1.25 1.17
$2.25 PER SHARE OF PETRO
------------------------------------------------------------------------------
$0.005 MARGIN GROWTH $0.000 MARGIN GROWTH
$30.0MM AT 4.75X ACQUISITIONS $30.0MM AT 5.25X ACQUISITIONS
-------------------------------- ---------------------------------
DCF PER UNIT
1998E (a) $1.620 $1.620
1998N (b) 2.480 2.480
1999P 2.800 2.500
ACCRETION/DILUTION
1999E (a) 32.8% 32.8%
1998N (b) 40.9% 40.9%
1999P 47.4% 31.6%
COMMON UNIT COVERAGE
1998E (a) 0.94x 0.94x
1998N (b) 1.44 1.44
1999P 1.54 1.38
TOTAL UNIT COVERAGE
1998E (a) 0.74x 0.74x
1998N (b) 1.13 1.13
1999P 1.22 1.09
LEVERAGED UNIT COVERAGE (c)
1998E (a) 0.97x 0.97x
1998N (b) 1.20 1.20
1999P 1.25 1.17
-------------------------------------------------------
(a) 1998 estimate assumes no acquisitions for either
company, and is adjusted to reflect actual results
through 3/31/98.
(b) 1998 budgeted.
(c) Defined as (DCF + Int)/[((GP units + common
units)*MQD) + Int)]
SUMMARY OBSERVATIONS
(continued)
PUBLIC COMPANY [_] A.G. Edwards compared certain financial and market
ANALYSIS information of Gas on both a stand-alone and pro
forma basis to that of certain public master
limited partnerships.
Public Comparable Companies (a)
==================================================================================================
Public Public
Pro forma Company Company
Gas Gas Medians Ranges
--------------------------------------------------------------------------------------------------
Yield 10.3% 10.8% 9.5% 8.7% to 10.7%
Firm value/LTM EBITDA 12.2x (b) 10.7x (b) 12.3x 9.1x to 18.5x
Firm value/1998 normalized EBITDA 8.8x (c) 8.0x (c) 11.0x 10.2x to 13.7x
Equity Market Cap/LTM DCF 17.6x (d) 14.0x (d) 16.0x 8.6x to 24.8x
Equity Market Cap/1998 normalized DCF 10.4x (e) 7.8x (e) 13.6x 11.6x to 16.6x
LTM common unit coverage 0.9x (f) 0.9x (f) 1.4x 0.6x to 1.5x
1998E common unit coverage 1.3x (g) 1.6x (g) 1.4x 0.9x to 1.8x
LTM total unit coverage 0.6x (f) 0.7x (f) 0.7x 0.4x to 1.1x
1998E total unit coverage 0.9x (g) 1.2x (g) 0.7x 0.7x to 1.0x
1998E leveraged unit coverage 1.2x (g)(h) 1.3x (g)(h) 1.1x 0.9x to 1.3x
--------------------------------------------------------------------------------------------------
(a) Public comparable companies include: APU, CNO, FGP, HPG, CNL and SPH.
(b) Firm value/adjusted 1998 budget EBITDA.
(c) Firm value/1999 estimated EBITDA.
(d) Equity market cap/adjusted 1998 budget EBITDA.
(e) Equity market cap/1999 estimated DCF.
(f) Adjusted 1998 budget.
(g) 1999 estimates.
(h) Defined as (DCF + interest)/(((GP units + common units*MQD)+interest).
Page 15
SUMMARY OBSERVATIONS
(continued)
TRANSACTION MULTIPLE [_] A.G. Edwards calculated the implied transaction
ANALYSIS multiple paid for Oil on a firm valuation basis,
including costs and certain adjustments associated
with the Transaction, and arrived at the following
multiples:
EBITDA MULTIPLE
------ --------
1997 Adjusted 8.4x
Adjusted 1998 Budget 9.7x
1999 Projected 7.3x
[_] A.G. Edwards calculated the implied transaction
multiple paid for Oil's existing heating oil
business, excluding the valuation attributable to
consolidation opportunities, and arrived at the
following multiples:
EBITDA MULTIPLE
------ --------
1997 Adjusted 5.7x
Adjusted 1998 Budget 6.5x
1999 Projected 4.9x
[_] Oil has historically paid EBITDA multiples
averaging 4.5x, with a range of 2.7x to 6.5x, for
its acquisitions.
[_] Oil has historically received EBITDA multiples
averaging 9.0x, with a range of 8.0x to 9.8x, for
certain of its heating oil businesses.
[_] Gas has historically paid EBITDA multiples
averaging 7.0x, with a range of 5.1x to 7.3x, for
its acquisitions.
Page 16
SUMMARY OBSERVATIONS
(continued)
Transacton Multiple Analysis (continued)
Multiples in the Propane Industry
[_] Propane
- Average Propane Multiple 6-7x
- Current Market Multiple of EBITDA 12-13x
- Adjusted for Weather 10-11x
- Multiple Premium for Large, Multi-State Aggregators 4x
[_] Heating Oil
- Average Multiple for Heating Oil Companies 4-5x
- Multiple Premium for Large, Multi-State Aggregators 4x
- Multiple for Heating Oil Aggregator 8-9x
Page 17
SUMMARY OBSERVATIONS
(continued)
DISCOUNTED CASH FLOW [_] A.G. Edwards calculated the implied present value
ANALYSIS of estimated unlevered free cash flows for Gas on
both a stand-alone and pro forma basis.
[_] Key assumptions used in the analysis were:
- Oil maintaining a flat 4.1% attrition rate;
$0.005 margin improvement; and completing $30
million in acquisitions each year at a 4.75x
EBITDA multiple.
- A 7.8% weighted average cost of capital for
both cases.
- A 10.3x terminal EBITDA multiple, representing
the current year normalized EBITDA.
DISCOUNTED CASH FLOW
-----------------------------------------------------------------------------------------------------------
NET PRESENT ORIGINAL EQUITY VALUE
PRESENT CURRENT VALUE COMMON UNITS/ TO ORIGINAL
($ IN THOUSANDS) VALUE NET DEBT (a) OF EQUITY TOTAL UNITS (b) COMMON UNITS (c)
-----------------------------------------------------------------------------------------------------------
PRO FORMA $956,846 ($296,133) $660,713 26.6% $175,506
GAS STAND-ALONE $306,529 ($113,629) $192,900 60.3% $116,310
----------
Increase in value to original common unit holders: $ 59,196
==========
_______________________________________________
(a) Represents total projected debt less cash as of
9/30/98.
(b) Total units include common, subordinated and GP
units.
(c) Current market value of common units is $81,909.
Page 18
SUMMARY OBSERVATIONS
(continued)
COMPARATIVE STOCK [_] A.G. Edwards has compared the historical prices of
PRICE PERFORMANCE Gas' and Oil's common unit/stock to an index of
selected companies.
[_] While Gas' unit price has remained relatively flat
over the last two years, in line with the
comparable index, Oil's stock price has declined
significantly over this period.
COMPARATIVE STOCK PRICE PERFORMANCE
-------------------------------------------------------
PREMIUM OF CURRENT PRICE TO PRICE
------------------------------------------------------------------------
CURRENT 2 YEARS 1 YEAR 180 DAYS 60 DAYS 30 DAYS
PRICE (b) PRIOR PRIOR PRIOR PRIOR PRIOR
----------------------------------------------------------------------------------
Gas 21.38 6.2% 2.4% -2.8% -4.5% -2.8%
Oil 1.88 -73.1% -31.6% -38.6% 25.3% 18.2%
Composite (a) 21.68 -2.9% 5.4% -3.5% -0.5% 0.2%
(a) Composite index includes the following
companies: APU, CNO, HPG, FGP, NPL, SPH.
(b) As of 5/15/98
[GRAPH OF GAS APPEARS HERE] [GRAPH OF OIL APPEARS HERE]
Page 19
SUMMARY OBSERVATIONS
(continued)
EXCHANGE RATIO [_] A.G. Edwards reviewed the historical prices of
ANALYSIS Gas' and Oil's common unit/stock and the
implied historical exchange ratio.
[_] Due to the price decline of Oil's common stock
over the past year, the current exchange ratio,
based on the current consideration of $2.50 per
share and compared to the current unit/share
prices of Gas and Oil ($21.375 and $1.875,
respectively, as of May 15, 1998), represents a
premium of 33.3% to the current market price of
Oil.
[GRAPH OF EXCHANGE RATIO APPEARS HERE]
Factset: Daily
(a) Represents the current price of Gas divided by
the current price of Oil.
(b) Represents the current price of Gas divided by
the proposed $2.50 price in current
consideration offered for each share of Oil.
(c) Represents Gas' average price for the period
divided by Oil's average price for the period.
Page 20
SUMMARY OBSERVATIONS
(continued)
PREMIUMS PAID ANALYSIS [_] An analysis of acquisitions of companies whose
stock traded under $5.00 per share (pre-merger)
versus companies that traded over $10.00 per
share (pre-merger) indicates a substantial
difference in the premiums paid.
[_] Normal premiums for merger of equal transactions
is -2.5% to 21.2% and normal premiums for
companies whose stock trades below $5.00 per
share is 13.5% to 81.0%.
MEAN LESS ONE MEAN PLUS ONE
STANDARD DEVIATION MEAN STANDARD DEVIATION
------------------ --------- ------------------
Merger of Equals -2.5% 9.4% 21.2%
Target Stock Price greater than $10.00 10.7% 33.2% 55.8%
Target Stock Price less than $5.00 13.5% 47.3% 81.0%
======================================================================================================
Page 21
Summary Observations
(continued)
Relative Contribution [_] A.G. Edwards reviewed and compared the relative
Analysis EBITDA contribution of Gas and Oil to each firms'
share of the implied combined firm value. Other
measures of relative contribution analysis were
non-meaningful.
[_] For Gas' contribution of approximately 34% of the
combined entity's EBITDA(a), it will receive
approximately 41% of the implied firm value.
EBITDA (b)
[GRAPH APPEARS HERE]
IMPLIED FIRM VALUE
SEPTEMBER 30, 1998
[PIE CHART APPEARS HERE]
___________________________________
(a) For purposes of its analysis, A.G. Edwards converted Oil's
historical December 31st fiscal year-end to a September 30th
fiscal year-end for comparison purposes. Oil's projections are
based on a December 31st calendar year end. Other measures of
relative contribution analysis are non-meaningful.
(b) Includes only heating oil EBITDA for Oil.
(c) Implied firm value of only Oil's heating oil assets.
Page 22
Updated Report to Gas' Special Committee
A.G. Edwards has continued its diligence reviews of Oil and Gas, has
exchanged data and views with Oil's advisor, and has further updated
its earlier views and opinions of the Proposed Transaction. Certain
additional observations since our last meeting include:
[_] Oil continues to perform relatively better than Gas.
- Additional cost reductions at Oil should add $4.4 million
annually to Oil's ongoing EBITDA.
- Oil continues to show improvements in its attrition rate and
margin growth. YTD through 3/31/98, Oil's attrition rate was
3.3% (4.0% in January, 3.5% in February and 2.8% in March) and
its margin growth was 3.7 cents.
- Gas continues to experience much slower growth than originally
budgeted; management has revised downward its internal growth
projections and budget.
- Although not yet reflected in the market, Gas is now not
---
expecting to earn its $2.20 MQD until possibly 2003.
- Upward revisions at Oil and downward revisions at Gas now
appear to make the Proposed Transaction more accretive than
historically thought; the revisions support a 1999P DCF/share
of $2.73, which should easily support the proposed
distribution increase from $2.20 to $2.30/unit.
[_] Oil's stock price has recently improved while Gas' unit price has
declined slightly.
- Oil's stock price now trades at $2.0625/share vs.
$1.5625/share, an increase of 32.0%.
- Gas' common unit price now trades at $21.125/unit vs.
$22.125/unit, a decrease of 4.5%.
[_] An analysis of premiums paid in acquisitions of companies
whose stocks trade under $5.00 per share supports the view
that such companies generally receive a larger acquisition
premium in this inefficient sector of the market. An analysis
of transactions since 1996 indicated an average premium of
47.3% for companies whose stocks trade under $5.00/share
(normal range: 13.5% - 81.0%) compared to an average premium
of 33.2% for companies whose stocks trade over $10.00/share
(normal range: 10.7% - 55.8%).
Page 23
Updated Report to Gas' Special Committee
(continued)
[_] Although A.G. Edwards cannot presently provide any opinion
regarding the Proposed Transaction, A.G. Edwards does recommend
--------------
that the Special Committee communicate to Oil and Oil's financial
advisor that the Committee is willing to move forward with the
Proposed Transaction as outlined in the "Proposal to Special
Committee, Star Gas Partners, L.P.," attached hereto in Section
VI. It is our understanding that Oil respectfully disagrees with
selected aspects of the proposal.
[_] A.G. Edwards recommends that Joel Swanson, Esq. and Baker &
Botts, LLP consult with Oil's attorneys regarding the proposed
resolution of the myriad of legal issues involving tax,
partnership and corporate compliance and the timing of the
documentation of the Transaction in terms of definitive
agreements, proxy statements and the like.
Page 24
DRAFT 5/21/98
SPECIAL COMMITTEE
STAR GAS PARTNERS, L.P.
REVISED PROPOSAL
After careful consideration of the Proposed Transaction and the views
expressed by Petro and PaineWebber, the Special Committee and its advisors
recommend that further refinement and evaluation of the Proposed Transaction is
appropriate.
Subject to further diligence and assuming no material adverse changes in
Star or Petro, or in market conditions, the Special Committee proposes that the
transaction contain the following safeguards for the benefit of Star's common
unitholders:
(A) Star Partnership Agreement. Appropriate steps should be initiated to
--------------------------
amended the Star Partnership Agreement as of the closing date (assumed
to be September 30, 1998) in order to include as a minimum:
(A-1) authorizing the creation of new classes of senior
subordinated units and deferred partnership units, which
shall be junior to all present and future common units;
(A-2) prohibiting the payment of any distributions to senior
subordinated unitholders and to subordinated unitholders
except from net distributable cash flow available from the
preceding twelve months after first paying $2.30 per unit
to the common unitholders for such period plus any
cumulative common unit arrearages from prior period(s); and
(A-3) providing a surplus available for common unit distributions
equal to $1.10 per new common unit, as part of the
Refinancing Transaction (described below).
(B) Definitive Transaction Agreement. A draft of the definitive
--------------------------------
transaction agreement should be prepared by Petro for Special
Committee's careful consideration (and for future submission to the
Board of Directors and common unitholders of Star and to the Board of
Directors and shareholders of Petro for approval) setting forth at
least the following steps:
(B-1) At closing of the Transaction, Star shall be obligated to
deliver to Petro's common shareholders, subject to
reduction by the Revision Amount as defined in (B-4) below,
the following:
(A) 2,718,000 senior subordinated units of Star;
(B) 524,000 subordinated units of Star; the balance must be
delivered to Star free and clear for retirement;
(C) 289,000 GP units of Star; and
(D) 909,000 deferred partnership units of Star, convertible into
senior subordinated units at 33 1/3% per annum for each year
in which Petro's after-tax income contributes accretion to
every Star unit in excess of [$0.50].
(B-2) The Closing shall be contingent upon the successful completion of
the following (collectively, the "Refinancing Transaction"):
(A) The issuance of no more than 6,588,000 new common units at a
price per unit of at least $21 with a gross spread of no
greater than 5.0%, and
(B) The issuance of $125,000,000 new debt with an interest rate
no higher than [8.5%] with a gross spread of no greater than
3.0%.
The use of proceeds of the Refinancing Transaction shall be
solely to refinance certain of the outstanding indebtedness
assumed from Petro.
(B-3) Prior to the closing of the Transaction, Petro shall represent,
warrant and agree that:
(A) Prior to the Refinancing Transaction, Petro shall have a
balance of debt and preferred stock (at redemption value),
less any cash balance in excess of such amounts required in
(B-3) (B) below, of no more than $331,367,000.
(B) Petro shall have a minimum cash balance of $500,000, a
positive working capital balance, and a total stockholders'
deficit on its balance sheet of no greater than [$__
million], all as of the Closing.
(C) Petro shall set up appropriate reserves and fund all of the
following transactions costs: the gross spread on the
issuance of the new debt referred to in (B-2) (B); financial
advisory fees and fairness opinions for Petro and Star;
legal, accounting and printing fees for Petro and Star; all
exchange and solicitation fees related to the retirement or
redemption of Petro's debt and preferred stock; all
appraisals and environmental reports; all rating agencies
and bank fees; and all other out-of-pocket costs and
expenses associated with the Transaction.
(B-4) In the event Petro is unable or unwilling to represent and
warrant each of the matters set forth in (B-3), then a Revision
Amount
(defined below) will be established. The Revision Amount shall
reduce, on a dollar-for-dollar basis, the number of senior
subordinated units of Star to be delivered to Petro's common
shareholders as set forth in (B-1)(A) with each senior
subordinated unit deemed to equal $19/unit.
The Revision Amount shall be the difference between the net sum
of monies referred to in (B-3) (A), (B) and (C) above that are
transferred to Star at Closing compared to the defined or stated
amounts in (B-3). If the Revision Amount is negative, then the
Revision Amount will be considered to equal zero.
In the event the Revision Amount exceeds [$__million], Star shall
not be obligated to proceed.
(B-5) Prior to the Closing of the Transaction, Petro shall not declare
or distribute any cash dividends to its common shareholders.