FAIRNESS OPINION PRESENTATION TO THE
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF
STAR GAS CORPORATION
Confidential
A.G.EDWARDS & SONS, INC.
INVESTMENT BANKING
October 16, 1998
TABLE OF CONTENTS
Section
-------
Introduction..................................................... I
Review of Events to Date......................................... II
Summary of the Transaction....................................... III
Summary Observations and Conclusions............................. IV
Appendices are separately bound:
Appendix I Analyses Performed Under 30-Year Weather Scenario
Appendix II Analyses Performed Under 15-Year Weather Scenario
Introduction
TRANSACTION PROPOSAL [_] During 1997, Star Gas Partners Corporation (the
"General Partner") and Petroleum Heat and Power Co.,
Inc. ("Petro") discussed the idea of a possible
acquisition of Petro by Star Gas Partners, L.P.
("Star Gas" or the "Partnership"). The overall
transaction (the "Transaction") consists of the
following four principal parts:
- The acquisition of Petro by the Partnership;
- Public offerings of debt and equity by the
Partnership and the redemption of certain debt
and preferred stock of Petro (the
"Financings");
- The withdrawal of Star Gas Corporation as the
general partner of the Partnership and Star Gas
Propane, L.P. (the "Operating Partnership"),
and the election of Star Gas LLC as the new
general partner; and
- Amending the Agreement of Limited Partnership
of the Partnership and the Operating
Partnership in order to consummate the
Transaction.
A.G.EDWARDS' [_] By letter engagement, dated March 23, 1998, A.G.
ENGAGEMENT Edwards & Sons, Inc. ("A.G. Edwards") was engaged by
the Special Committee (the "Special Committee") of
the Board of Directors of the General Partner (the
"Board") to act as its financial advisor with
respect to the Transaction and to issue to the
Special Committee an opinion as to the fairness,
from a financial point of view, to the public common
unitholders of Star (the "Public 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 applied
its judgment to a variety of complex analyses and
assumptions. A.G. Edwards may have given various
analyses more or less weight than other analyses,
and may have deemed 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.
INTRODUCTION
(continued)
AS PART OF ITS ENGAGEMENT, [_] A review of the Form S-4 Registration
A.G. EDWARDS' ACTIVITIES Statement and exhibits thereto, including the
INCLUDED, BUT WERE NOT Agreement and Plan of Merger, the Exchange
LIMITED TO, THE FOLLOWING: Agreement, the Amended and Restated Agreement
of Limited Partnership and the Conveyance and
Contribution Agreements.
[_] A review of certain publicly-available
Partnership and Petro historical audited
financial statements and certain unaudited
interim financial statements;
[_] 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;
[_] 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;
[_] A review of the pro forma impact of the
Transaction on the Partnership and Petro;
[_] 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;
INTRODUCTION
(continued)
[_] A review of the current market environment
generally, and the retail propane
distribution environment and the retail home
heating oil distribution environment in
particular;
[_] A review of information relating to the
financial terms of certain transactions,
including selected mergers and acquisition
transactions;
[_] Conversations with PaineWebber regarding the
nature and extent of development of the terms
of the Transaction; and
[_] A review of such other information, financial
studies, analyses and investigations, and
financial, economic and market criteria that
A.G. Edwards considered relevant.
NATURE OF INFORMATION [_] In rendering its Fairness Opinion, A.G.
REVIEWED AND PRESENTED Edwards has relied upon and assumed, without
independent verification, the completion of
the Financings and the Transaction in
accordance with the Agreement and Plan of
Merger, and 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 Fairness Opinion. 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 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
its 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 such 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.
INTRODUCTION
(continued)
[ ] In performing its analyses, A.G. Edwards made numerous
assumptions with respect to the retail propane distribution
industry and the retail home heating oil distribution
industry, and general business and economic conditions
which are beyond the control of the Partnership and Petro.
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' analysis of the fairness, from a
financial point of view, to the Public Common Unitholders
of the Transaction.
[ ] 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. THE ANALYSES
PRESENTED HEREIN RELATE TO THE FAIRNESS OPINION TO BE
ISSUED BY A.G. EDWARDS, BUT DO NOT COMPRISE THE FAIRNESS
OPINION.
[ ] A.G. Edwards' Fairness Opinion, in any event, is limited to
the fairness, from a financial point of view, to the Public
Common Unitholders of the Transaction. The Fairness Opinion
does not constitute a recommendation to any Public Common
Unitholders as to how to vote with respect to the
Transaction. The Fairness Opinion does not represent tax or
legal advice. The summary description of the analysis
described herein, is qualified in its entirety by reference
to the full text of the Fairness Opinion.
[ ] The Fairness Opinion is necessarily based upon financial
and other conditions and circumstances existing and
disclosed to it as of October 16, 1998. A.G. Edwards has
been requested to update its Fairness Opinion to a date
prior to the mailing of the Form S-4 Registration
Statements by Petro and the Partnership. No assurance can
be given that future market conditions will permit A.G.
Edwards to deliver an updated Fairness Opinion.
ASSUMPTIONS [ ] In rendering it Fairness Opinion, A.G. Edwards has assumed
that the Transaction will be consummated on the terms
contained in the Form S-4 Registration Statement 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, without any waiver of any material
terms or conditions by the Partnership or Petro. The
assumption that the Financings are consummated in
accordance with the closing conditions of the Agreement and
Plan of Merger is a material assumption.
Page 4
Review of Events to Date
FEBRUARY 11 [ ] A.G. Edwards presented its qualifications to the Special
Committee and its legal counsel, Baker & Botts.
MARCH 23 [ ] Special Committee engaged A.G. Edwards.
MARCH 23 [ ] A.G. Edwards met with members of the Partnership's
management and Petro's management and submitted a
preliminary data request list.
[ ] A.G. Edwards began due diligence review with management
and other representatives of the Partnership and of
Petro.
MARCH 30 [ ] A.G. Edwards received data related to its preliminary
data request list.
APRIL 28 [ ] Special Committee and A.G. Edwards met to discuss the
Transaction.
MAY 4 [ ] A.G. Edwards submitted a preliminary status report (the
"Preliminary Status Report") to the Special Committee.
MAY 7 [ ] Special Committee and A.G. Edwards met with Petro's
management and PaineWebber to discuss the Transaction
and the Preliminary Status Report.
MAY 8 [ ] A.G. Edwards continued onsite diligence at Petro.
MAY 19 [ ] A.G. Edwards met with PaineWebber and Petro's management
to discuss the Transaction.
MAY 20 [ ] Special Committee, Baker & Botts and A.G. Edwards met
telephonically to discuss the Transaction.
MAY 26 [ ] A.G. Edwards, submitted a revised proposal (the
"Preliminary Draft Proposal") to the Special Committee,
which was subsequently forwarded to Petro at the
Committee's request.
Page 5
REVIEW OF EVENTS TO DATE
(continued)
JULY 28 [ ] A.G. Edwards submitted another revised proposal
(the "Revised Proposal") on the behalf of the
Special Committee to the Board, the Petro Board
and PaineWebber.
AUGUST 11 [ ] The Special Committee approved the Revised
Proposal.
AUGUST 13 [ ] The Petro Board approved the Revised Proposal.
AUGUST 14 [ ] The Partnership and Petro announced the agreement
in principle.
AUGUST AND SEPTEMBER [ ] The Special Committee, with assistance from Baker
& Botts and A.G. Edwards, negotiated the terms of
a definitive Agreement and Plan of Merger and
Exchange Agreement with Petro, Andrews & Kurth and
PaineWebber.
OCTOBER 16 [ ] Special Committee meeting to review documents and
consider and act upon the legal agreements
necessary to implement the Transaction.
- The Committee had the opportunity to review,
with Baker & Botts and A.G. Edwards, the
following:
[ ] Draft dated October 13, 1998 of the Form
S-4 Registration Statement
[ ] Draft dated October 8, 1998 of the
Agreement and Plan of Merger
[ ] Draft dated October 6, 1998 of the
Amended and Restated Agreement of Limited
Partnership
[ ] Draft dated October 7, 1998 of the
Exchange Agreement
[ ] Draft dated October 9, 1998 of the
Conveyance and Contribution Agreements
Page 6
SUMMARY OF THE TRANSACTION
PRO FORMA STAR GAS UNITS OUTSTANDING
(in thousands)
[ ] There are currently 6,383 Star Gas units outstanding comprised of 3,859
common units, 2,396 subordinated units and 128 implied general partner
("GP") units. The subordinated units and GP units are currently assets
of Petro.
[ ] There are currently 26,574 shares of Petro common stock outstanding
held by public shareholders and "affiliates." The public holds 14,327
Class A shares, 11 Class B shares and 282 Class C shares. The
"affiliates" hold 11,953 shares which include 9,638 Class A shares and
2,315 Class C shares.
[ ] Each shareholder of Petro will receive a certain number of units in
Star Gas such that the implied consideration paid for each Petro share
averages $2.43 based on A.G. Edwards' estimates of the value of the
units being offered to Petro as consideration.
[ ] All of the publicly held 14,327 Class A shares and 282 Class C shares,
and a portion of the "affiliate" held Class A shares (5,243) and Class
C shares (1,328) will receive .13064 units of newly created senior
subordinated units for each share (1,908 units to the public and 859
units to the "affiliates", 2,767 units in total) with an attached
Contingent Unit ("CU"). See the following page for a discussion of the
Contingent Units. A.G. Edwards estimates an implied value for these
units of $18.52/unit. The remaining "affiliates" of Petro not receiving
senior subordinated units, who hold a total of 5,382 shares, will
receive .15920 units for a total of 857 junior subordinated and GP
units, both of which will also include attached CUs. A.G. Edwards
estimates an implied value for these units of $15.41/unit.
[ ] The 2,396 subordinated units and 128 GP units currently owned by Petro
will effectively be retired in the Transaction.
Page 7
SUMMARY OF THE TRANSACTION
PRO FORMA STAR GAS UNITS OUTSTANDING
(in thousands)
(continued)
DESCRIPTION OF CONTINGENT UNITS
[ ] During the five year period, beginning with the first full four
quarters following the Merger, the senior subordinated units, junior
subordinated units and general partner interests will have the right to
receive up to 909,000 senior subordinated units upon Petro meeting a
"Contingent Unit Test." Each time the Contingent Unit Test is met, (but
not more frequently than once every four quarter period), the senior
subordinated units, junior subordinated units and general partner
interests will receive an aggregate of 303,000 senior subordinated
units, subject to a maximum of 909,000 senior subordinated units. The
Contingent Unit Test will be met during any four quarter period when
distributable cash flow per unit attributable to Petro exceeds $2.90
which is 32% higher than the current annualized MQD of $2.20 and 26%
higher than the proposed MQD of $2.30.
Page 8
SUMMARY OF THE TRANSACTION
ALLOCATION OF CURRENT PETRO SHARES OUTSTANDING
(IN THOUSANDS)
---------------------------------------------------------------------------
Class A Class B Total
------- ------- --------
Groups Receiving Senior Sub
---------------------------
Public 14,327 282 14,609
Affiliates 5,243 1,328 6,572
------- ------- -------
Total Receiving Senior Sub 19,570 1,610 21,181
Groups Receiving Junior Sub and GP
----------------------------------
Affiliates 4,395 987 5,382
------- ------- -------
Sub Total 23,965 2,598 26,562
======= =======
Class B 11
-------
Total Shares including Class B 26,574
=======
Page 9
SUMMARY OF THE TRANSACTION
PRO FORMA STAR GAS UNITS OUTSTANDING
PRE-FINANCING ASSUMPTIONS
(IN THOUSANDS)
-----------------------------------------------------------------------------------
Issued to Petro
-------------------
Type of Units Current Public Affiliates Retired Pro Forma
------------- ------- ------ ---------- ------- ---------
Common 3,859 - - - 3,859
Senior Subordinated - 1,908 859 - 2,767
Subordinated 2,396 - - (2,396) -
Junior Subordinated
& New General Partner - - 857 - 857
Old General Partner 128 - - (128) -
------ ---------
6,383 7,482
Page 10
SUMMARY OF THE TRANSACTION
EQUITY PURCHASE PRICE CALCULATION
Implied Equity Value of Petro's Assets
(units in thousands, $ in thousands, except per unit amounts)
- --------------------------------------------------------------------------------
Value of Securities
Event Issued to and Retired from Petro
- --------------------------------------------------------------------------------
Issuance of Senior Subordinated
Units to Public Petro Shareholders 1,908 x $18.52
---------------------
$35,337
Issuance of Senior Subordinated
Units to Affiliate Petro Shareholders 859 x $18.52
---------------------
$15,900
Issuance of Junior Subordinated
& General Partner Units to Affiliate Petro Shareholders 857 x $15.41
---------------------
$13,203
------------
PURCHASE PRICE OF PETRO'S EQUITY $64,439
- -------------------------------------------------------------------------------------
Divided by 26,562 shares of Petro's Common stock = $2.43 per share
(Excludes 11 Class B Shares)
- -------------------------------------------------------------------------------------
Retire Subordinated Units held by Petro (2,396) x $15.41
---------------------
($36,924)
Retire Old General Partner Units held by Petro (128) x $15.41
---------------------
($1,967)
------------
EQUITY VALUE OF PETRO'S HEATING OIL ASSETS $25,549
Page 11
SUMMARY OBSERVATIONS AND CONCLUSIONS
POTENTIAL STRUCTURAL AND [_] Advantages to Public Common Unitholders
QUALITATIVE ADVANTAGES - Increase in cash available for distribution
AND DISADVANTAGES TO - Increase in the MQD to $2.30
THE PUBLIC COMMON - Priority in payment of MQD and arrearages
UNITHOLDERS. over Senior Subordinated, Junior
Subordinated and G.P. unitholders during
subordination period
- Distributions on Senior Subordinated, Junior
Subordinated and General Partner units
limited to amount of distributable cash
generated during subordination period
- Distributions on Senior Subordinated, Junior
Subordinated and General Partner Units and
conversion of Special Incentive Rights based
on actual results versus adjusted for normal
weather
- Earliest date on which the subordination
period would end extended to July 2002
- Acquisition growth opportunities in retail
home heating oil distribution industry at
historically lower multiples than retail
propane distribution industry
- Increase in market capitalization with
potential for more liquidity
- Diversifies geographic customer base
[_] Disadvantages to Public Common Unitholders
- Petro is several times the Partnership's
size, thus changing the nature of the
Partnership's business
- Petro's history of operational and financial
difficulties
- Increases seasonality and weather risk
- Taxable income will increase at a greater
rate
- No assurance that Petro can continue
improvements (reduce attrition and improve
profit margins) while making attractive
acquisitions
- Potential dilution in the event that the
Partnership pro forma for the Transaction
fails to meet its projections
Page 12
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
IMPLIED UNIT [_] A.G. Edwards calculated a range of values for the Senior
VALUE ANALYSIS Subordinated, Junior Subordinated and General Partner
units, based on a required rate of return, trading yield,
and discount to the common units. (See Appendix D -
"Implied Unit Value Analysis")
----------------------------------------------------------
Estimated Unit Prices Summary
Senior Subordinated Units
--------------------------------------------------------------------------------
Range
----------------------
Required rate of return (a) 20.0% - 30.0% $17.90 - 22.28
Trading yield (b) 11.5% - 13.5% $17.04 - 20.00
Discount to common units (c) 10.0% - 20.0% $16.21 - 18.23
Range $16.21 - 22.28
Adjusted Range (d) $17.04 - 20.00
----------------------
Assumed value (e) $18.52
----------------------
Junior Subordinated and GP Units
--------------------------------------------------------------------------------
Range
----------------------
Required rate of return (a) 35.0% - 45.0% $14.52 - 16.84
Trading yield (b) 14.0% - 16.0% $14.38 - 16.43
Discount to common units (c) 25.0% - 35.0% $13.17 - 15.19
Range $13.17 - 16.84
Adjusted Range (d) $14.38 - 16.43
----------------------
Assumed value (f) $15.41
----------------------
(a) Represents required rate of return during subordination period, which is
assumed for the minimum three years. Thereafter, the rate of return is
assumed to equal that of the common units, for a blended required rate of
return of 12.4% to 15.3% for the Senior sub and 16.25% to 18.7% for the
Junior sub and GP units.
(b) Based on a $2.30 annualized MQD.
(c) Based on a discount to the common unit's average closing price for the last
20 trading days ended 10/14/98 of $20.26.
(d) Represents the middle value of both the range of highs and lows.
(e) Implied required rate of return, trading yield and discount to common at a
unit price of $18.52 are 28.1% during subordination (14.7% blended), 12.4%,
and 8.6%, respectively.
(f) Implied required rate of return, trading yield and discount to common at a
unit price of $15.41 are 39.4% during subordination (17.6% blended), 14.9%,
and 23.9%, respectively.
Page 13
SUMMARY OBSERVATIONS AND CONCLUSIONS
(continued)
PRO FORMA MERGER [_] A.G. Edwards analyzed the impact of the Transaction
ANALYSIS on the Partnership's distributable cash flow per
unit, the related accretion, common unit coverage and
total unit coverage on a pro forma basis. (See
Appendix E -"Pro Forma Merger Analysis")
-----------------------------------------------------
15-Year Weather 30-Year Weather
--------------------------- ---------------------------
Star Gas Star Gas
Stand-alone Pro Forma Stand-alone Pro Forma
----------- ---------- ----------- ----------
DCF per unit
1998 Adjusted for Actual $ 1.27 $ 1.53 $ 1.27 $ 1.53
1998 Normalized (a) 1.62 2.15 1.84 2.40
1999 Projected 1.77 2.31 2.02 2.60
Accretion / Dilution
1998 Adjusted for Actual $ 0.26 $ 0.26
1998 Normalized (a) 0.53 0.56
1999 Projected 0.54 0.58
Common unit coverage
1998 Adjusted for Actual 0.96x 0.89x 0.96x 0.89x
1998 Normalized (a) 1.22 1.25 1.38 1.39
1999 Projected 1.30 1.33 1.51 1.51
Total unit coverage
1998 Adjusted for Actual 0.58x 0.66x 0.58x 0.66x
1998 Normalized (a) 0.74 0.94 0.84 1.05
1999 Projected 0.81 1.00 0.92 1.13
_____________________________________________________
(a) Adjusted to represent normal weather.
Page 14
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
MERGER PREMIUMS TO [_] A.G. Edwards analyzed the premium of the
MARKET VALUE ANALYSIS consideration to be received by Petro Common
Stockholders and compared the premium to
Petro's current and historical prices. These
premiums were compared to premiums paid in
acquisitions of majority or remaining
interests announced and completed between
January 1, 1996 and October 7, 1998 where the
target's share price one week prior to the
announcement date was either (i) equal to or
less than $5, (ii) greater than $5 and less
than $10, or (iii) equal to or greater than
$10. (See Appendix F - "Merger Premiums to
Market Value Analysis")
[_] Premiums were calculated one day, one week,
four weeks, three months and one year prior
to the announcement of the agreement in
principle for each merger.
===================================================================================================
COMPARISON OF PREMIUMS PAID
===================================================================================================
Petro at Mean of Transactions Mean of Transactions
Premium to stock price prior $2.43 per Unit Equal to or Greater Than $5
to announcement on August 14th: Offer Price Less Than $5 and Less Than $10
---------------------------------------------------------------------------------------------------
One Day prior: 29.6% 39.7% 34.3%
One week prior: 38.9% 48.8% 42.3%
Four weeks prior: 17.8% 55.4% 48.5%
Three months prior: 52.5% 67.1% 58.0%
One year prior: -19.0% 53.8% 45.8%
-------------------------------------------------------------------------------
Maximum 52.5% 67.1% 58.0%
Minimum -19.0% 39.7% 34.3%
===============================================================================
--------------------------------------------------------------
COMPARISON OF PREMIUMS PAID
--------------------------------------------------------------
Mean of Transactions
Premium to stock price prior Equal to or
to announcement on August 14th: Greater Than $10
--------------------------------------------------------------
One Day prior: 28.1%
One week prior: 32.7%
Four weeks prior: 39.6%
Three months prior: 77.9%
One year prior: 53.2%
------------------------------------------
Maximum 77.9%
Minimum 28.1%
==========================================
[_] A.G. Edwards observed that the means of
transactions equal to or less than $5 were
higher than the Petro premiums and higher
than a majority of the means of other
transactions.
[_] The premium to Petro's current stock price
($1.031 as October 14, 1998) was 135.6%.
Page 15
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
RELATIVE CONTRIBUTION [_] A.G. Edwards analyzed the relative pro forma
ANALYSIS contribution of both Star Gas and Petro to
the ownership of capital in the pro forma
entity based on Star Gas' and Petro's
historical results from operations and their
respective projections. (See Appendix G -
"Relative Contribution Analysis")
[_] During 1996 -1997, Star Gas would have
contributed approximately 26.7% and 35.4% to
the combined entity's gross profit and
EBITDA, respectively.
[_] On a pro forma basis during 1998-1999, using
30-year weather, Star Gas is projected to
contribute approximately 28.8% and 32.8% to
the combined entity's gross profit and
EBITDA, respectively (or 29.0% and 32.4%,
respectively, assuming 15-year weather).
[_] For its gross profit and EBITDA
contributions, Star Gas is expected to
receive approximately 37.1% of the pro forma
implied firm value.
IMPLIED FIRM VALUE
[GRAPH APPEARS HERE]
----------------------------
[_] Petro [_] Star Gas
----------------------------
Page 16
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
DISCOUNTED CASH FLOW [_] A.G. Edwards performed discounted cash flow
ANALYSIS analyses for Petro, Star Gas and Star Gas
Pro Forma using projected tax-adjusted
operating cash flows for 1999 through 2002,
terminal values calculated on 2002 EBITDA,
and discount rates based on the related
weighted average cost of capital. (See
Appendix H -"Discounted Cash Flow Analysis")
=================================================================
PETRO STAND ALONE
-----------------------------------------------------------------
15 YEAR TERMINAL VALUE EBITDA MULTIPLE
-------------------------------------------------
6.0x 6.5x 7.0x 7.5x 8.0x
-----------------------------------------------------------------
13.4% $49,406 $65,422 $81,439 $97,455 $113,472
WACC 13.6% 47,103 62,984 78,865 94,746 110,628
13.9% 44,822 60,570 76,317 92,064 107,812
-----------------------------------------------------------------
-----------------------------------------------------------------
30 YEAR TERMINAL VALUE EBITDA MULTIPLE
-------------------------------------------------------
6.0x 6.5x 7.0x 7.5x 8.0x
-----------------------------------------------------------------
13.4% $64,921 $81,662 $98,403 $115,143 $131,884
WACC 13.6% 62,511 79,110 95,709 112,308 128,908
13.9% 60,124 76,583 93,042 109,502 125,961
-----------------------------------------------------------------
[_] A.G. Edwards noted that the Petro Stand Alone
discounted cash flow values were greater than
the implied equity value being paid for
Petro's heating oil assets of $25.5 million,
as calculated on page C-5 of Appendix I.
Page 17
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
DISCOUNTED CASH FLOW STAR GAS STAND ALONE
-------------------------------------------------------------------
ANALYSIS (continued) 15 YEAR TERMINAL VALUE EBITDA MULTIPLE
-------------------------------------------------
9.0x 9.5x 10.0x 10.5x 11.0x
-------------------------------------------------------------------
6.8% $92,914 $99,255 $105,597 $111,939 $118,281
WACC 7.0% 91,847 98,141 104,436 110,730 117,024
7.2% 90,790 97,037 103,284 109,532 115,779
-------------------------------------------------------------------
-------------------------------------------------------------------
30 YEAR TERMINAL VALUE EBITDA MULTIPLE
-------------------------------------------------
9.0x 9.5x 10.0x 10.5x 11.0x
-------------------------------------------------------------------
6.8% $103,675 $110,428 $117,181 $123,935 $130,688
WACC 7.0% 102,537 109,240 115,942 122,645 129,347
7.2% 101,410 108,062 114,714 121,367 128,019
-------------------------------------------------------------------
STAR GAS PRO FORMA
-------------------------------------------------------------------
15 YEAR TERMINAL VALUE EBITDA MULTIPLE
-------------------------------------------------
9.0x 9.5x 10.0x 10.5x 11.0x
-------------------------------------------------------------------
7.3% $128,663 $136,782 $144,902 $153,021 $161,141
WACC 7.5% 127,328 135,389 143,449 151,510 159,570
7.7% 126,006 134,008 142,010 150,012 158,014
-------------------------------------------------------------------
-------------------------------------------------------------------
30 YEAR TERMINAL VALUE EBITDA MULTIPLE
------------------------------------------------
9.0x 9.5x 10.0x 10.5x 11.0x
-------------------------------------------------------------------
7.3% $139,743 $148,282 $156,820 $165,358 $173,896
WACC 7.5% 138,338 146,815 155,291 163,767 172,243
7.7% 136,946 145,360 153,775 162,190 170,605
-------------------------------------------------------------------
[_] A.G. Edwards noted that the Star Gas Pro
Forma discounted cash flow values were
greater than (1) the Star Gas Stand Alone
discounted cash flow values and (2) the
current equity market value of Star Gas of
$124.9 million as of October 14, 1998.
Page 18
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
COMPARABLE [_] A.G. Edwards noted that public disclosure
TRANSACTIONS ANALYSIS regarding transactions in the retail home heating
oil distribution industry was extremely limited.
[_] A.G. Edwards analyzed the financial terms
related to divestitures by Petro of certain of
its retail home heating oil branches and
compared them to the implied multiples of the
aggregate purchase price of Petro's heating oil
assets.
[_] Petro has sold three branches for an average
EBITDA multiple of 9.0x.
-----------------------
[_] A.G. Edwards calculated the purchase price of
Petro's heating oil assets and calculated
multiples based on Petro's EBITDAs. (See
Appendix I - "Comparable Transaction Analysis")
-------------------------------------------------------
Purchase Price of Heating Oil Assets
-------------------------------------
Equity purchase price of heating oil assets
including SIRs $ 25,549
Cost of debt to be Redeemed ($206,250 + $2,844 premium) 209,094
Cost of Debt to be Assumed 69,646
Cost of Preferred stock at Redemption Value 31,767
Consent Fees 2,110
Transaction Fees 19,343
--------
Aggregate purchase price of heating oil assets $357,509
--------
Multiples
-------------------------------------------------------
Notes
--------------------------------
15 - Year 30 - Year
---------------- ---------------
1997 Normalized EBITDA (a) - - 43,040 8.3x As a multiple of aggregate
transaction value.
Normalized 1998 EBITDA budget (a) 44,749 8.0x 46,900 7.6x As a multiple of aggregate
transaction value.
1999 Projected EBITDA (a) 46,463 7.7x 48,706 7.3x As a multiple of aggregate
transaction value.
______________________________________________________
(a) Calculated as gross profit minus SG&A expense and
direct delivery expense.
Page 19
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
PUBLIC COMPANY [_] A.G. Edwards compared certain financial and market
ANALYSIS information of Star Gas on a historical and pro
forma basis to that of certain public propane
master limited partnerships which A.G. Edwards
deemed relevant for the purposes of this analysis.
A.G. Edwards reviewed the trading multiples of a
total of six master limited partnerships. (See
Appendix J - "Public Company Analysis")
[_] The selected propane master limited partnerships
are as follows:
- AmeriGas Partners, L.P. - Heritage Propane Partners, L.P.
- Cornerstone Propane Partners, L.P. - National Propane Partners, L.P.
- Ferrellgas Partners, L.P. - Suburban Propane Partners, L.P.
[_] No partnership used in the analysis is identical to
Star Gas.
========================================================================================================
PUBLIC COMPARABLE COMPANIES (a)
========================================================================================================
Star Pro Forma Star Public Company Public Company
----------------- ------------------
15-Year 30-Year 15-Year 30-Year Medians Ranges
--------------------------------------------------------------------------------------------------------
Yield 11.2% 11.2% 11.8% 11.8% 10.1% 9.1% to 23.3%
Firm value/LTM EBITDA (b) 12.5x 12.5x 10.0x 10.0x 11.6x 9.0x to 12.7x
Firm value/1999E EBITDA 10.2x 9.6x 8.1x 7.7x 9.2x 8.4x to 11.1x
Equity Market Cap/LTM DCF (c) 15.4x 15.4x 12.5x 12.5x 13.4x 8.1x to 15.3x
Equity Market Cap/1999E DCF 10.6x 9.6x 8.1x 7.4x 9.8x 4.9x to 12.2x
--------------------------------------------------------------------------------------------------------
(a) Public comparable companies include: APU, CNO, FGP,
HPG, NPL and SPH.
(b) Firm value/adjusted for actual 1998 budget EBITDA for
Star and Pro Forma Star.
(c) Equity market cap/adjusted for actual 1998 budget
EBITDA for Star and Pro Forma Star.
Page 20