FOR DISCUSSION PURPOSES ONLY 5/4 DRAFT
PRELIMINARY STATUS REPORT
BOARD OF DIRECTORS
STAR GAS PARTNERS, L.P.
Petro management and its advisors have been working on a proposed
transaction between Petro and Star for over a year. Star Committee has engaged
Baker & Botts, LLP as its counsel and A.G. Edwards & Sons, Inc. as its financial
advisor. After one month of preliminary due diligence and review, the Committee
and its advisors better understand and appreciate the complexity of the proposed
transaction and the amount of hard work and creativity dedicated to this
proposal.
During the past year, both parties have experienced management changes and
adverse weather conditions. During this period, Petro has suspended its common
dividends and its publicly held common shares have traded down. Star's publicly
held common units have traded flat to slightly up, but Star has made
distributions to its common unitholders and its subordinated unitholders (that
is, Petro) even though such distributions exceeded distributable cash flow (that
is, Star returned capital). The Star Committee notes that Petro's capital
constraints have effectively eliminated its historic acquisition program while
Star has demonstrated a far more viable acquisition program.
In light of these and other significant changes in relative performance,
market conditions and strategic rationale for the proposed transaction, the Star
Committee (after considering the preliminary report of A.G. Edwards and
consulting with counsel), proposes a re-examination, restructuring and repricing
of the proposed transaction between Petro and Star.
Subject to further diligence and assuming no material adverse changes in
the parties or in market conditions, the Star Committee proposes:
(A) Star Partnership Agreement. Appropriate steps should be initiated
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to amend the Star Partnership Agreement as of the closing date
(assumed to be September 30, 1998) in order to:
(A-1) raise the future required minimum quarterly distribution ("MQD")
for common unitholders from $2.20 per annum to $2.30 per annum;
(A-2) authorize a new class of senior subordinated units which shall
be junior to all present and future common units, but senior to
the present subordinated units; and
(A-3) prohibit the payment of any future distributions to senior
subordinated unitholders and to subordinated unitholders except
from net distributable cash
flow available for such period after first paying MQD to the
common unitholders for such period plus any cumulative common
unit arrearages.
(B) Definitive Transaction Agreement. A draft of the definitive
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transaction agreement should be prepared by Petro for Star 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 the following
steps:
(B-1) At closing of the Transaction, Star shall be obligated to pay to
Petro or assume from Petro a "Maximum Aggregate Consideration"
of [$390 million] consisting of (A) the total consideration paid
to Petro's common shareholders calculated at [26,563,000] Petro
common shares at [$ _________] per share; (B) the principal
amount of Petro's total debt and preferred stock outstanding
just prior to closing and any refinancing of such debt or
preferred stock; and (C) any premiums paid above and beyond the
principal amount of such debt and preferred stock to redeem,
exchange, defease or otherwise cancel these liabilities. In
addition, the distributions made to the Petro common
shareholders and the refinancing of any assumed debt or
preferred stock may not result in more than [10,300,000] common
units outstanding at closing and must result in at least [$125
million] of new debt carrying an interest rate of no greater
than [8.50%] having been closed prior to, or simultaneous with,
the closing of this Transaction.
(B-2) Prior to the closing of the Transaction, in return for the
Maximum Aggregate Consideration defined in (B-1), Petro shall
represent, warrant and agree that:
(A) Petro shall set up appropriate reserves and fund the
following:
(1) off-balance sheet pension liabilities of [$5 million],
(2) off-balance sheet tax liabilities relating to Pearl of
[$3.5 million],
(3) surplus cash available for distributions equal to
[$1.10] per new common unit issued,
(4) all of the Transaction costs, including the gross
spread on Star's new MLP equity and debt; 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, and
(5) any "Unearned MQD" monies that Petro wishes to have
available for payment to senior subordinated or
subordinated unitholders following the closing of the
Transaction.
(B) Petro shall have no borrowed money debt of any kind
outstanding other than any such amounts included in (B-1);
(C) Petro shall have no preferred stock of any kind outstanding
other than any such amounts included in (B-1);
(D) Petro shall have transferred to Star a minimum of
[2,000,000] of its subordinated units free and clear for
cancellation;
(E) Petro shall have a minimum balance of cash of [$500,000], a
positive working capital balance (subject to further due
diligence), and a total common shareholders' deficit on its
balance sheet of no greater than [$_______million], all as
of the closing.
(B-3) In the event Petro is unable or unwilling to represent and
warrant each of the matters set forth in (B-2), then the Maximum
Aggregate Consideration set forth in (B-1) shall be reduced on a
dollar-for-dollar basis.