Round II
Appendices to
Preliminary Report to
The Special Committee of Gas
Analyses Performed at $2.00 Per Share
A. G. Edwards & Sons, Inc.
INVESTMENT BANKING
May 4, 1998
Overview of Oil
EBITDA Reconciliation: 1997 //(a)//
- --------------------------------------------------------------------------------
Oil
---
1997 Actual EBITDA $36,010
NORMALIZING ADJUSTMENTS:
Weather was 3.8% warmer than 30-year normal
3.8% of 1997 budgeted retail gallons 13,482 gallons
Gross profit margin $0.4545
Delivery and garage cost savings ($0.0814)
-------
Net impact per gallon $0.3731
$ impact 5,030
Insurance reserve 2,000
-------
1997 Adjusted EBITDA $43,040
=======
- --------------------------------------------------------------------------------
(a) Management's assumptions.
Page 1
Overview of Oil
EBITDA Reconciliation: 1997-1998 (a)
(continued)
Oil
---
1997 Adjusted EBITDA $43,040
Volume Adjustments for 1998
Sale of TLC Division in 1997 (16,926) gallons
Attrition in 1998 (4.1%) (17,375)
1997 Acquisitions 9,828
-------
(24,473) gallons
@
$0.1700/gallon (b) (4,159)
Gross Profit Margin Increase $0.006 per gallon on 395,086 gallons (c) 2,371
Inflation (3,662)
Operating Cost Reductions (d) 5,850
-------
1998 EBITDA Budget $43,440
=======
- --------------------------------------------------------------------------------
(a) Management's assumptions.
(b) Represents the average gross profit per gallon ($.4700 per gallon) offset
by $.30 per gallon reduction in operating expenses.
(c) Actual gross profit margin increase achieved in first quarter of 1998 was
$5.9 million (156 million gallons @ $0.037/gallon).
(d) Represents already accomplished reductions in branch, regional and
corporate expenses in excess of normal indexing related to volume
reductions as well as 1% productivity improvements.
Page 2
Overview of Oil
EBITDA Reconciliation: 1998 (a)
(continued)
Oil
---
1998 EBITDA Budget $43,440
Actual Differential between first three months
of Fiscal 1998 vs. Budget (9,318)
Revised margin improvement and cost savings
estimates based on first three months of
Fiscal 1998 vs. Budget. 4,318
-------
Adjusted 1998 EBITDA Budget $38,440
=======
- --------------------------------------------------------------------------------
(a) Management's assumptions.
Page 3
OVERVIEW OF OIL
EBITDA RECONCILIATION: 1998-1999 (a)
(continued)
OIL
---
1998 EBITDA Budget $43,440
Internal Attrition (4.1%) and other adjustments (3,897)
Acquisition Growth
$30,000 of acquisitions at 4.75x multiple 6,315
-------
1999 Projection $45,858
=======
- --------------------------------------------------------------------------------
(a) Management's assumptions.
Page 4
OVERVIEW OF OIL
EBITDA SUMMARY
OIL
---
1997 Actual $36,010
1997 Adjusted 43,040
1998 Budget $43,440
Adjusted 1998 Budget $38,440
1999E $45,858
- --------------------------------------------------------------------------------
Page 5
OVERVIEW OF GAS
EBITDA RECONCILIATION: 1997 (a)
($ in thousands)
GAS
---
1997 Actual EBITDA $19,703 (b)
NORMALIZING ADJUSTMENTS:
Weather
Residential - 1,125 gallons @ 0.7106 margin 799
Commercial - 277 gallons @ 0.4459 margin 124
Margin
Residential - 50,832 gallons @ (0.7106-0.6995) (564)
Commercial - 19,864 gallons @ (0.4454-0.4348) (220)
Wholesale - 38,404 gallons @ (0.0975-0.0675) (1,152)
Compensation (56)
Elimination of strategic expense 902 (c)
Pearl Gas EBITDA 3,012
Pearl Gas acquisition adjustments 273 (d)
-------
1997 Adjusted EBITDA $22,821
=======
- --------------------------------------------------------------------------------
(a) Management's assumptions.
(b) Not pro forma for Pearl Gas acquisition.
(c) Certain expenses including the exploration of strategic alternatives by
Morgan Stanley.
(d) Certain cost savings, primarily salary and benefit expenses of certain
selling shareholders.
Page 6
OVERVIEW OF GAS
EBITDA RECONCILIATION: 1997-1999 (a)
($ IN THOUSANDS)
(continued)
- --------------------------------------------------------------------------------
GAS
---
1998 EBITDA Budget $22,781
Actual Differential between first six months
of Fiscal 1998 vs. Budget (4,502)
-------
Adjusted 1998 EBITDA Budget $18,279
=======
1998 EBITDA Budget $22,781
Internal Growth of 1.7% 379
Acquisition Growth
$20 million of acquisitions at 7x multiple
completed on 9/30/98 2,857
$10 million of acquisitions at 7x multiple
completed on 4/1/99 713
-------
1999 EBITDA Projection $26,730
=======
- --------------------------------------------------------------------------------
(a) Management's assumptions.
Page 7
Summary of Transaction
Pro Forma Gas Units Outstanding
(in thousands)
To simplify the
complexity of the steps
in the Transaction,
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 $2.00.
[_] The publicly held 17,160 Class A shares will receive .1000 shares of newly
created senior subordinated units (1,716 units in total) with an implied
value of $20.00/unit. This represents an implied purchase price of
$2.00/share for an implied total purchase price of $34.3 million.
[_] The "insiders" of Oil, who hold a total of 9,404 shares (comprised of A, B
and C shares) will also receive $2.00/share for a total of $18.8 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 $21.62/unit, for a total of
$2.7 million.
[_] 373 of the 2,396 subordinated units owned by Oil will be given as
consideration at an implied value of $16.58/unit, for a total of
$6.2 million.
- (2) the distribution of newly-created units of Gas
[_] to fund the remaining $9.9 million of the $18.8 million due to
the Oil "insiders", Gas will issue 350 newly-created senior
subordinated units and 133 newly-created GP units. The implied
values for these new units are $20.00 and $21.62, respectively.
Page 8
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 2,023
subordinated units will not have been used as consideration paid to the
"inside" Oil shareholders. Hence, these 2,023 subordinated units will be
retired by Gas. A.G. Edwards has assumed that the implied value of these
units are $16.58/unit for a total retired value of approximately $33.5
million.
Page 9
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 - - - 1,716 350 - 2,066
Subordinated 2,396 - 373 - - (2,023) 373
General Partner (a) 127 - 127 - 133 - 260
------- -----------
6,355 6,531
___________________________________
(a) The number of GP units issued reflect the assumption of a 6,461 common unit
equity offering to refinance certain of the assumed Oil debt. 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 10
EQUITY PURCHASE PRICE CALCULATION
IMPLIED EQUITY VALUE OF OIL'S ASSETS
(units in thousands, $ in millions, 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 1,716 x $20.00
---------------------
$34.4 $34.3 -
Distribution of General Partner
Units to Inside Oil Shareholders 127 x $21.62
---------------------
$2.7 - $2.7
Distribution of Subordinated
Units to Inside Oil Shareholders 373 x $16.58
---------------------
$6.2 - $6.2
Issuance of General Partner
Units to Inside Oil Shareholders 133 x $21.62
---------------------
$2.9 $2.9 -
Issuance of Senior Subordinated
Units to Inside Oil Shareholders 350 x $20.00
---------------------
$7.0 $7.0 -
Retire Subordinated Units ($33.5) 2,023 x $16.58
------------------
$33.5
$10.7 $42.5
------- -----------------------------
Total $53.1 $53.1
Divided by 26,563 shares of Oil's Common stock= $2.00 per share
Page 11
PREMIUM PAID ANALYSIS
------------------------------------------------------------------------------------------------------------------------------
Dollars
Stock Price Premium Analysis in thousands Notes
-------------------------------------------- --------------- ----------------------------------------------------------
Equity purchase price of Oil $53,126 $2.00 share price x 26,563 shares.
Premium to stock price one day prior 23.1% $1.625 close on April 22, 1998.
Premium to stock price one month prior 28.0%
Premium to stock price three months prior -20.0%
Premium to stock price six months prior -36.0%
Purchase Price
--------------------------------------------
Equity purchase price of heating oil assets $ 10,657 See page 11.
Debt assumption value (b) 338,223
---------------
Aggregate purchase price of heating oil
assets $348,880
===============
Multiples
-------------------------------------------- ------------------
Multiples Notes
------------------ -----------------------------------
1997 Revenue $548,141 0.6 x As a multiple of aggregate
transaction value.
1997 EBITDA (c) 36,010 9.7 As a multiple of aggregate
transaction value.
1997 EBIT (d) 6,264 55.7 As a multiple of aggregate
transaction value.
1997 Net loss to common shares (d) ($ 19,338) NM As a multiple of equity value.
Equity (e) (177,033) NM As a multiple of equity value.
1997 Adjusted EBITDA (c) 43,040 8.1 x As a multiple of aggregate
transaction value.
1998 EBITDA budget (c) 43,440 8.0 As a multiple of aggregate
transaction value.
Adj. 1998 EBITDA budget (c) 38,440 9.1 As a multiple of aggregate
transaction value.
1999P EBITDA (c) 45,858 7.6 As a multiple of aggregate
transaction value.
==================
________________________________________________________
(a) Updated through April 22, 1998.
(b) Includes cost of debt at assumed redemption value, preferred stock at
assumed redemption value, transaction fees, and certain off-balance
sheet liabilities, net of excess cash. See page 13.
(c) Calculated as gross profit minus SG&A expense and direct delivery
expense.
(d) Excludes restructuring charge, pension curtailment expense, provision
for supplemental benefits and corporate identity expenses.
(e) As of 12/31/97.
Page 12
Transaction Multiple Analysis
Firm Valuation
Equity Purchase Price of Heating Oil Assets $ 10,656,580
-------
+ Cost of Debt at Redemption Value 290,992,000
+ Cost of Preferred stock at Redemption Value 34,375,000
+ Transaction Fees 19,104,000
------- 338,223,100
+ Off-Balance Sheet Pension and Tax Liability 8,500,000
- Excess Cash
Oil's cash balance at 9/30/98(a) 22,355,000
Required cash on hand (500,000)
Additional Surplus (b) (7,107,100) 14,747,900
-------
------------
Firm Value $348,879,680
============
___________________
(a) Includes cash collateral of $9,350,000.
(b) Assumes an Additional Surplus of $1.10 per new common unit issued is funded
by Oil.
Page 13
Transaction Multiple Analysis
Transaction Multiples for Firm Valuation
EBITDA
-------------------------------------
Purchase Price Year Amount Multiple Paid
- -------------- -------------------- ------------- -------------
$348,879,680 1997 Adjusted $43,040,000 8.1x
$348,879,680 Adjusted 1998 Budget $38,440,000 9.1x
$348,879,680 1999 Projected $45,858,000 7.6x
Page 14
Transaction Multiple Analysis
Distribution of Value
- --------------------------------------------------------------------------------
OIL
1997 Adjusted EBITDA
EBITDA Multiple Purchase Price
- ------------- -------- --------------
$43,040,000 8.1x $348,879,680
Ability to Further Consolidate Heating Oil Industry Core Business
- --------------------------------------------------- -------------
Acquisition EBITDA $43,040,000
EBITDA Multiple Purchase Price EBITDA Decline Rate 7.75% (a)
- ------------ ------------- --------------
WACC 7.78% (b)
$6,315,789 4.75x $30,000,000
Decline Rate 7.75% (a)
WACC 7.78% (b)
Perpetuity $40,663,681
Purchase Price $30,000,000
--------------
Net Present Value of the Heating Oil Acq. $10,663,681
Value in perpetuity of Ability to
-------------- -------------
Consolidate Heating Oil Industry $137,034,135 Value of Core Business $277,109,433
============== =============
---------------+----------------------------------
_________________________________________________________________________
Implied Total Valuation $414,143,568
% of Valuation attributable to core business 66.9%
% of Valuation attributable to consolidation opportunities 33.1%
_________________________________________________________________________
(a) A.G. Edwards' estimate of the decline rate of EBITDA based on a 4.1%
attribution rate.
(b) See page 25.
Page 15
Transaction Multiple Analysis
Transaction Multiples for Existing Heating Oil Business
- --------------------------------------------------------------------------------
Revised EBITDA
---------------------------------
Purchased Price (a) Year Amount Multiple Paid
- ------------------- -------------- ------------- ---------------
$233,440,425 1997 Adjusted $43,040,000 5.4x
$233,440,425 Adjusted 1998 Budget $38,440,000 6.1x
$233,440,425 1999 Projected $45,858,000 5.1x
- --------------------------------------------------------------------------------
(a) Represents A.G Edwards' estimate of the portion of the $348.9 million price
being paid for Oil's heating oil business that can be attributable to its
core business. Calculation: $348.9 million x 66.9%. See page 15.
Page 16
Relative Contribution Analysis (a)
($ in thousands)
Gas' EBIDTA Contribution
96-97 35.4%
[CHARTS APPEARS HERE]
98-99 38.4%
96-99 35.1%
For Gas' contribution
of approximately 35% of
the combined entity's
EBITDA, it will receive
approximately 40% of the
implied firm value.
___________________________________
(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) Firm value for all of Oil.
(d) Implied firm value of only Oil's heating oil assets.
Page 17
ACCRETION/DILUTION ANALYSIS
VARIATIONS IN MARGIN GROWTH RATES AND ACQUISITION ASSUMPTIONS
- --------------------------------------------------------------------------------
4.1% ATTRITION 4.1% ATTRITION 4.1% ATTRITION
GAS $0.00 MARGIN GROWTH $0.00 MARGIN GROWTH $0.005 MARGIN GROWTH
STAND-ALONE $30.0MM AT 4.75X ACQUISITIONS $30.0MM AT 5.25X ACQUISITIONS $30.0MM AT 4.75X ACQUISITIONS
----------- ----------------------------- ----------------------------- -----------------------------
DCF PER UNIT
1998E (a) $1.220 $1.770 $1.770 $1.770
1998N (b) 1.930 2.500 2.500 2.500
1999P 2.090 2.780 2.740 2.940
ACCRETION/DILUTION
1998E (a) 45.1% 45.1% 45.1%
1998N (b) 29.5% 29.5% 29.5%
1999P 33.0% 31.1% 40.7%
COMMON UNIT
COVERAGE
1998E (a) 0.90x 1.00x 1.00x 1.00x
1998N (b) 1.42 1.41 1.41 1.41
1999P 1.48 1.50 1.47 1.58
TOTAL UNIT
COVERAGE
1998E (a) 0.55x 0.81x 0.81x 0.81x
1998N (b) 0.88 1.14 1.14 1.14
1999P 0.95 1.21 1.19 1.28
LEVERAGED UNIT
COVERAGE (C)
1998E (a) 0.94x 1.00x 1.00x 1.00x
1998N (b) 1.21 1.18 1.18 1.18
1999P 1.24 1.22 1.21 1.26
4.1% ATTRITION
$0.005 MARGIN GROWTH
$30.0MM AT 5.25X ACQUISITIONS
-----------------------------
DCF PER UNIT
1998E (a) $1.770
1998N (b) 2.500
1999P 2.890
ACCRETION/DILUTION
1998E (a) 45.1%
1998N (b) 29.5%
1999P 38.3%
COMMON UNIT
COVERAGE
1998E (a) 1.00x
1998N (b) 1.41
1999P 1.55
TOTAL UNIT
COVERAGE
1998E (a) 0.81x
1998N (b) 1.14
1999P 1.26
LEVERAGED UNIT
COVERAGE (C)
1998E (a) 1.00x
1998N (b) 1.18
1999P 1.25
- ------
(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)]
PAGE 18
PUBLIC COMPANY ANALYSIS
[_] A.G. Edwards compared certain financial and market information of Gas on a
historical and pro forma basis to that of certain public master limited
partnerships which A.G. Edwards deemed relevant for the purposes of this
analysis. A.G. Edwards reviewed the trading multiples from a total of 6
public propane master limited partnerships.
[_] 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 company used in the analysis is identical to Gas.
PUBLIC COMPARABLE COMPANIES (a)
- ------------------------------------------------------------------------------------------------------------
PUBLIC PUBLIC
PRO FORMA COMPANY COMPANY
GAS GAS MEDIANS RANGES
- ------------------------------------------------------------------------------------------------------------
Yield 10.0% 10.5% 9.6% 8.5% to 10.6%
Firm value/LTM EBITDA 12.7x (b) 10.2x (b) 12.5x 9.8x to 16.7x
Firm value/1998 normalized EBITDA 8.7x (c) 8.0x (c) 11.5x 10.3x to 13.7x
Equity Market Cap/LTM DCF 18.0x (d) 12.4x (d) 15.7x 9.4x to 25.5x
Equity Market Cap/1998 normalized DCF 9.7x (e) 7.9x (e) 13.9x 11.6x to 16.9x
LTM common unit coverage 0.9x (f) 1.0x (f) 1.4x 0.6x to 1.5x
1998E common unit coverage 1.5x (g) 1.5x (g) 1.4x 0.9x to 1.9x
LTM total unit coverage 0.6x (f) 0.8x (f) 0.7x 0.4x to 1.0x
1998E total unit coverage 1.0x (g) 1.2x (g) 0.7x 0.7x to 1.0x
1998E leveraged unit coverage 1.2x (g) (h) 1.2x (g) (h) 1.1x 0.9x to 1.3x
- -------------------------------------------------------------------------------------------------------------
(a) Public comparable companies include: APU, CNO, PGP, 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 19
PUBLIC COMPANY ANALYSIS
($ IN MILLIONS, EXCEPT PER UNIT DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
Closing Implied Implied
Price on Market Value Firm Distribution
Company Ticker (4/22/98) of Equity Value per Unit Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Gas (a) $21.938 $ 139.4 $ 232.0 $2.20 10.0%
AmeriGas Partners, L.P. APU 25.938 1,108.6 1,867.2 2.20 8.5%
Cornerstone Propane Partners, L.P. (d) CNO 22.688 455.7 671.7 2.16 9.5%
Ferrellgas Partners, L.P. (e) FGP 20.875 666.6 1,192.3 2.00 9.6%
Heritage Propane Partners, L.P. HPG 23.125 197.8 371.8 2.00 8.6%
National Propane Partners, L.P. NPL 20.313 232.9 375.6 2.10 10.3%
Suburban Propane Partners, L.P. (f) SPH 18.813 551.4 942.0 2.00 10.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Mean 9.5%
Median 9.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Pro Forma $21.938 $ 285.0 (g) $ 583.8 (h) $2.30 10.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Common LTM Distributable Cash Flow/
----------------------------
Units/ Distribution to Distribution FY98E
Company Ticker Total Units Common Units to Total Units DCF/unit
- ------------------------------------------------------------------------------------------------------------------------------------
Gas (a) 60.3% 0.9x (b) 0.6x (b) $ 2.09 (c)
AmeriGas Partners, L.P. APU 52.8% 1.5x 0.8x 2.14
Cornerstone Propane Partners, L.P. (d) CNO 66.5% 0.6x 0.4x 1.47
Ferrellgas Partners, L.P. (e) FGP 47.0% 1.4x 0.7x 1.34
Heritage Propane Partners, L.P. HPG 55.8% 1.3x 0.8x 2.01
National Propane Partners, L.P. NPL 59.6% 0.9x 0.5x 1.60
Suburban Propane Partners, L.P. (f) SPH 75.1% 1.4x 1.0x 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Mean 59.5% 1.2x 0.7x
Median 57.7% 1.4x 0.7x
- ------------------------------------------------------------------------------------------------------------------------------------
Pro Forma 79.2% 1.0x (b) 0.8x (b) 2.78 (c)
- -----------------------------------------------------------------------------------------------------------
FY98E Distributable Cash Flow /
-------------------------------
Distribution to Distribution
Company Ticker Common Units to Total Units
- -----------------------------------------------------------------------------------------------------------
Gas (a) 1.5x(c) 1.0x(c)
AmeriGas Partners, L.P. APU 1.9x 1.0x
Cornerstone Propane Partners, L.P. (d) CNO 1.1x 0.7x
Ferrell gas Partners, L.P. (e) FGP 1.4x 0.7x
Heritage Propane Partners, L.P. HPG 1.8x 1.0x
National Propane Partners, L.P. NPL 1.3x 0.8x
Suburban Propane Partners, L.P. (f) SPH 0.9x 0.7x
- -----------------------------------------------------------------------------------------------------------
Mean 1.4x 0.8x
Median 1.4x 0.7x
- -----------------------------------------------------------------------------------------------------------
Pro Forma 1.5x (c) 1.2x (c)
_________________________________
1998 estimates per A.G. Edwards' research, except for Gas, Oil and Pro Forma.
Implied Firm Value equals common, subordinated and GP units, multiplied by the
market price of common units plus debt, less cash.
(a) Pro forma for the Pearl Gas acquisition and the common unit offering.
Fiscal 1997 maintenance capital expenditure used as LTM figure.
(b) For Gas and Pro forma only, LTM DCF figures are adjusted 1998 budget DCF
estimates.
(c) For Gas and Pro forma only, FY98E DCF figures are 1999 DCF estimates.
(d) Financial information pro forma for common unit offering. Maintenance
capital expenditures assumed to be 8% of EBITDA due to lack of disclosure.
(e) Maintenance capital expenditures assumed to be 8% of EBITDA due to lack of
disclosure.
(f) Financial figures exclude $5.1 million gain from sale of minority interest.
(g) 12.992 units @ $21.9375.
(h) $285.0 in equity plus $308.316 pro forma debt (see page 24), less $10.839
cash and $9.350 in cash collateral.
Page 20
PUBLIC COMPANY ANALYSIS
LTM 1998E LONG TERM LTM FIRM VALUE/ FIRM VALUE/ EQUITY EQUITY
LEVERAGED LEVERAGED DEBT/ EBITDA/ LTM 1998E MARKET CAP/ MARKET CAP/
UNIT COVERAGE (A) UNIT COVERAGE (A) FIRM VALUE INT. EXP. EBITDA EBITDA LTM DCF 1998E DCF
----------------- ----------------- ---------- --------- ----------- ----------- ----------- -----------
GAS 0.9x(b) 1.2x(c) 41.4% 2.3x(d) 12.7x(d) 8.7x(e) 18.0x(f) 9.7x(g)
AmeriGas
Partners, L.P. 1.2x 1.3x 37.3% 2.2x 12.6x 12.1x 15.5x 14.1x
Cornerstone
Propane
Partners, L.P. 0.8x 1.0x 35.1% 2.1x 16.7x 13.7x 25.5x 16.9x
Ferrellgas
Partners, L.P 1.2x 1.1x 41.5% 2.1x 12.5x 12.0x 15.8x 15.9x
Heritage Propane
Partners, L.P. 1.1x 1.3x 46.0% 2.6x 10.9x 10.6x 15.7x 11.6x
National Propane
Partners, L.P. 0.9x 1.1x 36.8% 3.2x 16.3x 11.0x 18.0x 13.0x
Suburban Propane
Partners, L.P. 1.2x 0.9x 45.5% 2.9x 9.8x 10.3x 9.4x 13.6x
--- --- ---- --- ---- ---- ---- ----
MEAN 1.1x 1.1x 40.4% 2.5x 13.1x 11.6x 16.6x 14.2x
MEDIAN 1.1x 1.1x 39.4% 2.4x 12.5x 11.5x 15.7x 13.9x
=== === ==== === ==== ==== ==== ====
PRO FORMA 1.0x(b) 1.2x(c) 54.6% 2.1x(d) 10.2x(d) 8.0x(e) 12.4x 7.9x(g)
- ------
EBITDA is defined as net income (loss) before extraordinary items plus
interest, income taxes, depreciation and amortization, impairment expense,
and other non-recurring and non-operating items.
(a) Defined as (DCF + interest)/(((GP units + common units)*MQD) + interest).
(b) For Gas and Pro forma only, LTM leveraged unit coverage figures use
adjusted 1998 budget estimates.
(c) For Gas and Pro forma only, 1998E leveraged unit coverage figures use 1999
estimates.
(d) For Gas and Pro forma only, LTM EBITDA figures are adjusted 1998 budget
estimates.
(e) For Gas and Pro forma only, 1998E EBITDA figures are 1999 estimates.
(f) For Gas and Pro forma only, LTM DCF figures are adjusted 1998 budget DCF
estimates.
(g) For Gas and Pro forma only, 1998E DCF figures are 1999 DCF estimates.
Page 21
DISCOUNTED CASH FLOW ANALYSIS
GAS--STAND ALONE
($ IN THOUSANDS)
- --------------------------------------------------------------------------------
INCOME STATEMENT SUMMARY
(a): 1998 1999 2000 2001 2002 TERMINAL
- ------------------------ ------ ------- ------- ------- ------- --------
EBITDA 18,279 26,730 28,541 30,361 32,188
% increase 46.2% 6.8% 6.4% 6.0%
Net income (1,182) 3,733 3,621 3,695 3,953
CASH FLOW SUMMARY:
- ------------------
After-tax EBI 12,847 13,649 14,443 15,229
Depreciation and
amortization 13,858 14,868 15,893 16,934
Maintenance capital
expenditures (3,274) (3,395) (3,694) (3,816)
Working capital
increases (500) (500) (500) (500)
------- ------- ------- -------
Net operating cash flow
(free cash flow) 22,931 24,622 26,142 27,847
---------
WEIGHTED AVERAGE COST OF
CAPITAL (b) 7.9%
---------
TERMINAL EBITDA MULTIPLE (c) 10.2x
---------
Discount factor (d) 0.9629 0.8927 0.8276 0.7673 0.7388
Terminal value (e) $328,318
---------
Present value $329,621 $22,079 $21,980 $21,635 $21,367 $242,560
--------- ------- ------- ------- ------- --------
Current net debt (f) $(113,629)
---------
Net present value of
equity $ 215,992
=========
Common units/Total units
(g) 60.3%
---------
Equity value to common
units (h) $ 130,234
=========
- -------
(a) Based on management projections.
(b) Based on comparable companies' WACC.
(c) Gas' current firm value of $232.0 million/$22.781 million normalized 1998
EBITDA = 10.2x, which represents a multiple of current year normalized
EBITDA.
(d) Discount factor calculated using half-year convention.
(e) Terminal value calculated using EBITDA multiple.
(f) Represents total projected debt less cash as of 9/30/98.
(g) Total units include common, subordinated and GP units.
(h) Current market value of common units is 3,832 units *$21.938 unit price =
$84,065
PAGE 22
DISCOUNTED CASH FLOW ANALYSIS
GAS--PRO FORMA PAINEWEBBER MODEL (a)
($ IN THOUSANDS)
1998 1999 2000 2001 2002 TERMINAL
------- ------- ------- ------- ------- --------
INCOME STATEMENT
SUMMARY (b):
EBITDA 57,219 73,088 77,832 82,549 87,242
% increase 27.7% 6.5% 6.1% 5.7%
Net income (12,056) (5,514) (8,750) (12,482) (16,325)
CASH FLOW SUMMARY:
After-tax EBI 23,954 22,825 21,649 20,427
Depreciation and
amortization 48,609 54,482 60,375 66,290
Maintenance capital
expenditures (6,915) (7,109) (7,482) (7,680)
Working capital
increases (c) 8,839 (1,000) 1,000) (1,000)
------- ------- ------- -------
Net operating cash flow
(free cash flow) 74,487 69,198 73,542 78,037
---------
WEIGHTED AVERAGE COST OF
CAPITAL (d) 7.8%
---------
TERMINAL EBITDA MULTIPLE
(e) 10.2x
---------
Discount factor (f) 0.9632 0.8937 0.8292 0.7693 0.7410
Terminal value (g) $889,868
---------
PRESENT VALUE $ 913,993 $71,748 $61,841 $60,978 $60,033 $659,393
--------- ------- ------- ------- ------- --------
Less net debt (h) $(298,800)
---------
NET PRESENT VALUE OF
EQUITY $ 615,193
=========
Original common
units/Total units (i) 29.5%
---------
EQUITY VALUE TO COMMON
UNITS (j) $ 181,439
=========
- -------
(a) Scenario assumes 4.1% steady attrition, 0% margin improvement, and $30
million in acquisitions at 4.75 multiple.
(b) Based on management projections.
(c) A.G. Edwards' assumption.
(d) Based on comparable companies' WACC.
(e) Gas' current firm value of $232.0 million/$22.781 million normalized 1998
EBITDA = 10.2x, which represents a multiple of current year normalized
EBITDA.
(f) Discount factor calculated using half-year convention.
(g) Terminal value calculated using EBITDA multiple.
(h) Represents total pro forma projected debt less cash and cash collateral as
of 9/30/98.
(i) Total units include common, newly issued common, senior subordinated,
subordinated and GP units.
(j) Current market value of common units is 3,832 units * $21.938 unit price =
$84,065.
Page 23
CAPITAL STRUCTURE ANALYSIS
GAS -- PRO FORMA AS OF 9/30/98
($ IN THOUSANDS)
=====================================================================================================
PRO FORMA
GAS OIL ADJUSTMENTS GAS
-------- -------- ------------- -----------
DEBT:
8.04% First Mortgage Notes $ 85,000 $ 0 $ 0 $ 85,000
7.25% WC Revolver 7,457 - - 7,457
7.25% Acquisition Facility 10,673 - - 10,673
7.17% First Mortgage Notes 11,000 - - 11,000
11.96% Senior Notes - 60,000 (60,000) -
14.10% Senior Notes - 3,100 (3,100) -
14.10% Subordinated Notes - 3,100 (3,100) -
10.13% Sub Notes & Sr Notes - 50,000 (50,000) -
9.38% Sub Notes & Sr Notes - 75,000 (75,000) -
12.25% Sub Notes & Sr Notes - 81,250 (81,250) -
8.00% Existing Acq Notes Payable - 13,859 - 13,859
8.46% Exchange Debt - - 66,000 66,000
8.50% New Debt - - 125,000 125,000
-------- -------- -------- --------
TOTAL DEBT $114,130 $286,309 ($81,450) $318,989
WEIGHTED AVERAGE COST OF DEBT 8.2%
PREFERRED STOCK:
14.33% Preferred Stock $ 0 $ 4,167 ($4,167) $ 0
12.88% Preferred Stock - 30,000 (30,000) -
-------- -------- -------- --------
- 34,167 (34,167) -
COMMON EQUITY $ 67,042 ($210,015) $112,537 ($30,436)
- -----------------------------------------------------------------------------------------------------
Page 24
DISCOUNTED CASH FLOW ANALYSIS
PRO FORMA WEIGHTED AVERAGE COST OF CAPITAL DERIVATION
($ IN MILLIONS)
- --------------------------------------------------------------------------------
TOTAL
MARKET IMPLIED TOTAL TOTAL
LEVERED VAL. UNIT TOTAL MARKET DEBT/ DEBT AS % UN-
BETA DEBT PRICE AT UNITS VALUE OF TOTAL OF TOTAL LEVERED
COMPARABLE COMPANY (A) (BK=MKT) (4/22/98) OUT. (MIL) EQUITY EQUITY CAPITAL BETA
- ------------------ ------- -------- --------- ---------- -------- ------ --------- -------
AmeriGas Partners, L.P. 0.52 $777.8 $25.938 41.9 $1,108.6 70.2% 41.2% 0.306
Cornerstone Propane
Partners, L.P. 0.41 235.8 22.688 19.7 455.7 51.7% 34.1% 0.270
Ferrellgas Partners,
L.P. 0.39 537.2 20.875 31.3 666.6 80.6% 44.6% 0.216
Heritage Propane
Partners, L.P. 0.44 176.9 23.125 8.4 197.8 89.4% 47.2% 0.232
National Propane
Partners, L.P. 0.34 147.4 20.313 11.2 232.9 63.3% 38.8% 0.208
Star Gas Partners, L.P. 0.34 96.0 21.938 6.2 139.4 68.9% 40.8% 0.201
Suburban Propane
Partners, L.P. 0.38 428.2 18.813 28.7 551.4 77.6% 43.7% 0.214
Comparable group's average unlevered
----------------------------------------------------
beta: 0.23 Pro forma capitalization-at market (b)
Pro forma debt-to-equity ratio (b): 111.9% Total debt $319.0 52.8%
Pro forma debt as a percent of total Total equity 285.0 47.2%
capital (b): 52.8% ------ ------
Comparable group's beta relevered for
Pro forma capital structure: 0.392 $604.0 100.0%
------- ----------------------------------------------------
DERIVATION OF WEIGHTED AVERAGE COST OF CAPITAL: MARKET RISK PREMIUM RANGE (D)
---------------------------------------
11.3% 12.3% 13.3%
---------------------------------------
Pro forma theoretical levered beta: 0.392
Assumed % of equity in Pro forma capital structure
(b): 47.2%
Risk-free rate of return (c): 5.7%
Pro forma cost of equity range (at various market
risk premiums): 10.1% 10.5% 10.9%
==== ==== ====
Pro forma assumed tax rate: 35.0%
Assumed % of debt in capital structure (b): 52.8%
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 April 22, 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).
25