Draft 5/7/98
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 to
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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 [$390 million] consisting of:
(A) The issuance of 6,400 new common units at a price per
common unit of [$______]. The gross spread on this
offering shall not exceed 5.0%.
(B) The issuance of $125,000 of new debt. The gross spread on
this offering shall not exceed 3.0%.
(C) The principal amount of all of Petro's outstanding debt
and preferred stock of at closing, less the value of
Petro's cash balance at closing.
(D) The issuance of no greater than 2,100 new senior
subordinated units. The value of such units is assumed to
equal $20.00 per unit.
(E) The outstanding balance of subordinated units at closing.
The value of such units is assumed to equal $16.58 per
unit.
(F) The outstanding balance of GP units, which shall be no
greater than 2% of all outstanding units. The value of
such units is assumed to equal [$21.62] per unit.
(B-2) Consideration paid to Petro's common shareholders shall consist
only of the senior subordinated, subordinated and GP units
included in (B-1)(D), (B-1)(E) and (B-1)(F).
(B-3) 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) surplus cash available for distributions equal to
[$1.10] per new common unit issued,
(2) excluding only the gross spreads on the new MLP
equity and debt offerings, all other Transaction
costs, including 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
(3) 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 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-4) In the event Petro is unable or unwilling to represent and
warrant each of the matters set forth in (B-3), then the
Maximum Aggregate Consideration set forth in (B-1) shall be
reduced on a dollar-for-dollar basis.