EXHIBIT (b)(19)
FAIRNESS OPINION PRESENTATION TO THE
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF
STAR GAS CORPORATION
CONFIDENTIAL
A.G. EDWARDS & SONS, INC.
INVESTMENT BANKING
February 10, 1999
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;
- A public offering of equity by the Partnership and a private offering of
debt by Petro 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'
Engagement
[_] By letter engagement, dated March 23, 1998, A.G. 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 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.
Page 1
INTRODUCTION
(continued)
As part of its engagement, A.G. Edwards' activities included, but were not
limited to, the following:
[_] A review of the Form S-4 Registration Statement and exhibits thereto,
including the Amended and Restated Agreement and Plan of Merger, the
Exchange 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;
Page 2
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 REVIEWED AND PRESENTED
[_] In rendering its Fairness Opinion, A.G. Edwards has relied upon and
assumed, without independent verification, the completion of the
Financings and the Transaction in accordance with the Amended and
Restated 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 reviewed 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.
Page 3
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 sole 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
February 10, 1999 (except market data, which was as of February 3,
1999.)
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 Amended and
Restated Agreement and the 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 Amended and Restated Agreement and Plan of
Merger is a material assumption. A.G. Edwards has also assumed that
the withdrawal of Star Gas Corporation as the general partner and the
election of Star Gas LLC as the new general partner will have no
financial impact on the public Common Unitholders.
Page 4
REVIEW OF EVENTS TO DATE
February 11, 1998 [_] A. G. Edwards presented its qualifications to the
Special Committee and its legal counsel, Baker & Botts.
March 23, 1998 [_] Special Committee engaged A. G. Edwards.
March 23, 1998 [_] 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, 1998 [_] A. G. Edwards received data related to its preliminary
data request list.
April 28, 1998 [_] Special Committee and A. G. Edwards met to discuss the
Transaction.
May 4, 1998 [_] A. G. Edwards submitted a preliminary status report
(the "Preliminary Status Report") to the Special
Committee.
May 7, 1998 [_] Special Committee and A. G. Edwards met with Petro's
management and PaineWebber to discuss the Transaction
and the Preliminary Status Report.
May 8, 1998 [_] A. G. Edwards continued onsite diligence at Petro.
May 19, 1998 [_] A. G. Edwards met with PaineWebber and Petro's
management to discuss the Transaction.
May 20, 1998 [_] Special Committee, Baker & Botts and A. G. Edwards held
a conference call to discuss the Transaction.
May 26, 1998 [_] 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, 1998 [_] 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, 1998 [_] The Special Committee approved the Revised
Proposal.
AUGUST 13, 1998 [_] The Petro Board approved the Revised Proposal.
AUGUST 14, 1998 [_] 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, 1998 [_] 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
[_] A.G. Edwards delivered its Fairness Opinion dated
October 16, 1998.
Page 6
REVIEW OF EVENTS OF DATE
(continued)
OCTOBER 22, 1998 [_] The Partnership files the Form S-4 Registration
Statement
DECEMBER 3, 1998 [_] The Partnership files the Form S-3 Registration
Statement
DECEMBER 22, 1998 [_] The Partnership files Amendment No. 1 to the Form S-4
Registration Statement to incorporate responses to the
SEC's initial comment letter
JANUARY 13, 1999 [_] The Special Committee, represented by William
Nicoletti, and A.G. Edwards met with Petro and
PaineWebber at Petro's request. Petro proposed a change
to the merger agreement such that the amount of equity
raised in the Refinancing Transaction would be
increased from $140 million to $170 million and the
amount of debt raised in the Refinancing Transaction
would be decreased from $120 million to $90 million
(the "Investment Grade Change").
JANUARY 18, 1999 [_] The Special Committee and A.G. Edwards held a
conference call to discuss the Investment Grade Change.
The Special Committee rejected the change and suggested
that it would only consider the change if it included a
reduction in the purchase price.
JANUARY 21, 1999 [_] The Partnership files Amendment No. 2 to Form S-4
Registration Statement to incorporate responses to the
SEC's second comment letter
JANUARY 25, 1999 [_] The Special Committee, A.G. Edwards, Petro and
PaineWebber received a letter from Thomas Edelman
outlining a proposal that included the Investment Grade
Change in return for, among other things, a 10%
reduction in the conversion ratio. The proposal also
included a modest increase in the Cost of Capital Test,
but only if Petro was successful in obtaining a
purchase price discount from its preferred or other
senior security holders.
Page 7
REVIEW OF EVENTS TO DATE
(continued)
JANUARY 26, 1999 [_] The Special Committee, Baker & Botts and A.G. Edwards
held a conference call to discuss the Edelman proposal.
The Special Committee agreed, with certain
modifications, to approve the Edelman proposal subject
to a re-evaluation of, among others, the Cost of
Capital Trust; the 1999 Distribution Test for the
Senior Subordinated, Junior Subordinated and GP units;
the DPU test; and the working capital test.
FEBRUARY 4, 1999 [_] The Partnership files Amendment No. 3 to the Form S-4
Registration Statement both to incorporate the SEC's
third comment letter and to reflect the proposed
changes to the merger agreement.
FEBRUARY 10, 1999 [_] 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 February 4, 1999 of the Form S-4
Registration Statement
[_] Draft dated February 3, 1999 of the Amended
and Restated Agreement and Plan of Merger
[_] Draft dated February 3, 1999 of the Amended
and Restated Agreement of Limited Partnership
[_] Draft dated February 3, 1999 of the Exchange
Agreement
[_] Draft dated October 22, 1998 of the
Conveyance and Contribution Agreements
Page 8
SUMMARY OF THE TRANSACTION
PRO FORMA STAR GAS UNITS OUTSTANDING
(IN THOUSANDS EXCEPT PER SHARE AND PER UNIT)
[_] 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 26,463 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 291 Class C shares. The "affiliates" hold
11,834 shares which include 9,528 Class A shares and 2,306 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 $1.91 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 291 Class C shares,
and a portion of the "affiliate" held Class A shares (5,243) and Class C
shares (1,328) will receive .11758 units of newly created senior
subordinated units for each share (1,719 units to the public and 773
units to the "affiliates", 2,492 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 $16.22/unit. The remaining "affiliates" of Petro not receiving senior
subordinated units, who hold a total of 5,262 shares, will receive .14318
units for a total of 753 junior subordinated and GP units, both of which
will also include attached CUs. A.G. Edwards estimates an implied value
for these units of $13.35/unit.
[_] The 2,396 subordinated units and 128 GP units currently owned by Petro will
effectively be retired in the Transaction
Page 9
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.
Page 10
SUMMARY OF THE TRANSACTION
ALLOCATION OF CURRENT PETRO SHARES OUTSTANDING
(IN THOUSANDS)
--------------------------------------------------------------------------
Class A Class C Total
--------- --------- --------
Groups Receiving Senior Sub
---------------------------
Public 14,327 291 14,618
Affiliates 5,243 1,328 6,572
--------- --------- --------
Total Receiving Senior Sub 19,570 1,619 21,190
Groups Receiving Junior Sub and GP
----------------------------------
Affiliates 4,284 978 5,262
--------- --------- --------
Sub Total 23,855 2,598 26,452
========= =========
Class B 11
--------
Total Shares including Class B 26,463
========
Page 11
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 - 1,719 773 - 2,492
Subordinated 2,396 - - (2,396) -
Junior Subordinated
& New General Partner - - 753 - 753
Old General Partner 128 - - (128) -
-------- ---------
6,383 7,104
Page 12
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 1,719 x $16.22
----------------------------
$27,879
Issuance of Senior Subordinated
Units to Affiliate Petro Shareholders 773 x $16.22
----------------------------
$12,540
Issuance of Junior Subordinated
& General Partner Units to Affiliate Petro Shareholders 753 x $13.35
----------------------------
$10,059
----------
PURCHASE PRICE OF PETRO'S EQUITY $50,478
--------------------------------------------------------------------------------------------------
Divided by 26,452 shares of Petro's Common Stock = $1.91 per share
(Excludes 11 Class B Shares)
--------------------------------------------------------------------------------------------------
Retire Subordinated Units held by Petro (2,396) x $13.35
----------------------------
($31,988)
Retire Old General Partner Units held by Petro (128) x $19.08 (a)
----------------------------
($2,435)
----------
EQUITY VALUE OF PETRO'S HEATING OIL ASSETS $16,054
___________________
(a) Star 20-day average common unit price through 2/3/99.
Page 13
SUMMARY OBSERVATIONS AND CONCLUSIONS
POTENTIAL STRUCTURAL AND QUALITATIVE ADVANTAGES AND DISADVANTAGES TO THE
PUBLIC COMMON UNITHOLDERS.
[_] Potential advantages to Public Common Unitholders
- Increase in the MQD to $2.30
- Priority in payment of MQD and arrearages over Senior Subordinated,
Junior Subordinated and G.P. unitholders during subordination period
- Distributions on Senior Subordinated, Junior Subordinated and G.P.
units limited to amount of distributable cash generated during
subordination period
- Conversion of Contingent Units based on actual results versus
adjusted for normal weather
- Earliest date on which the subordination period would end
extended to October 2002
- Potentially a greater number of acquisition growth opportunities in
the retail home heating oil distribution industry than in the
retail propane distribution industry and at historically lower
acquisition multiples
- Increase in market capitalization with potential for more liquidity
- Diversifies geographic customer base
[_] Potential disadvantage 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 the Partnership pro forma for the
Transaction fails to meet its projections
Page 14
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
Implied Unit Value Analysis
[_] A. G. Edwards calculated a range of values for the Senior 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% $12.96 - 16.72
Trading yield (b) 12.5% - 14.5% $15.86 - 18.40
Discount to common units (c) 10.0% - 20.0% $15.26 - 17.17
Range $12.96 - 18.40
Adjusted Range (d) $15.26 - 17.17
--------------
Assumed value (e) $16.22
--------------
JUNIOR SUBORDINATED AND GP UNITS
------------------------------------------------------------------
Range
--------------
Required rate of return (a) 35.0% - 45.0% $ 9.19 - 11.50
Trading yield (b) 15.0% - 17.0% $13.53 - 15.33
Discount to common units (c) 25.0% - 35.0% $12.40 - 14.31
Range $ 9.19 - 15.33
Adjusted Range (d) $12.40 - 14.31
--------------
Assumed value (f) $13.35
--------------
(a) Represents required rate of return during subordination period, which
is assumed to continue through the end of fiscal 2002. Thereafter, the
rate of return is assumed to equal that of the common units, for a
blended required rate of return of 13.0% to 16.5% for the Senior sub
and 18.4% to 22.6% 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 as of 2/3/99 of $19.08.
(d) Represents the middle values 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 $16.22 are 21.1% during subordination (13.3%
blended), 14.2%, and 15.0%, respectively.
(f) Implied required rate of return, trading yield and discount to common
at a unit price of $13.35 are 28.8% during subordination (16.0%
blended), 17.2%, and 30.0%, respectively.
Page 15
SUMMARY OBSERVATIONS AND CONCLUSIONS
(continued)
PRO FORMA MERGER
ANALYSIS [_] A.G. Edwards analyzed the impact of the Transaction
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 Actual $1.30 $1.44 $1.30 $1.44
1999 Adjusted for Actual (a) 1.41 1.96 1.51 2.07
2000 Projected 1.77 2.14 2.02 2.39
ACCRETION / DILUTION
1998 Actual $0.13 $0.13
1999 Adjusted for Actual (a) 0.56 0.56
2000 Projected 0.37 0.37
COMMON UNIT COVERAGE
1998 Actual 0.98x 0.78x 0.98x 0.78x
1999 Adjusted for Actual (a) 1.04 1.06 1.13 1.12
2000 Projected 1.27 1.14 1.49 1.29
TOTAL UNIT COVERAGE
1998 Actual 0.59x 0.62x 0.59x 0.62x
1999 Adjusted for Actual (a) 0.64 0.85 0.68 0.90
2000 Projected 0.80 0.93 0.92 1.04
-------------------------------------------------------
(a) Adjusted to include actual results through January
21, 1999.
Page 16
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
MERGER PREMIUMS TO MARKET VALUE ANALYSIS
[_] A.G. Edwards analyzed the premium of the 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 February 3, 1999 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 Mean of Transactions
Premium to stock price prior to announcement $1.91 per Unit Equal to or Greater Than $5 Equal to or
of the transaction on August 14th: Offer Price Less Than $5 and Less Than $10 Greater Than $10
- ------------------------------------------------------------------------------------------------------------------------------------
One day prior: 1.9% 57.8% 34.3% 28.4%
One week prior: 9.1% 68.5% 43.2% 32.9%
Four weeks prior: -7.4% 71.1% 50.1% 39.4%
Three months prior: 19.8% 71.8% 63.6% 54.7%
One year prior: -36.3% 51.9% 51.3% 72.1%
--------------------------------------------------------------------------------------------
Maximum 19.8% 71.8% 63.6% 72.1%
Minimum -36.3% 51.9% 34.3% 28.4%
--------------------------------------------------------------------------------------------
[_] The premium to Petro's current stock price ($1.00 as of February 3, 1999)
was 91.0%.
Page 17
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
RELATIVE CONTRIBUTION ANALYSIS
[_] A.G. Edwards analyzed the relative pro forma 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")
GROSS PROFIT
----------------------------------------------
15-Year Weather 30-Year Weather
--------------------- -----------------------
Star Gas Petro Star Gas Petro
---------- --------- ----------- ----------
1996........................ 24.3% 75.7% 24.3% 75.7%
1997........................ 29.4% 70.6% 29.4% 70.6%
1998........................ 28.9% 71.1% 28.9% 71.1%
1999 Adjusted for Actual.... 29.1% 70.9% 28.9% 71.1%
2000 Project................ 29.7% 70.3% 29.5% 70.5%
EBITDA
----------------------------------------------
15-Year Weather 30-Year Weather
--------------------- -----------------------
Star Gas Petro Star Gas Petro
---------- --------- ----------- ----------
1996........................ 31.3% 68.7% 31.3% 68.7%
1997........................ 39.8% 60.2% 39.8% 60.2%
1998........................ 35.1% 64.9% 35.1% 64.9%
1999 Adjusted for Actual.... 32.0% 68.0% 32.2% 67.8%
2000 Project................ 34.1% 65.9% 34.4% 65.6%
Page 18
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
[_] For its gross profit and EBITDA contributions, Star Gas is expected to
receive approximately 34.8% of the pro forma implied firm value.
IMPLIED FIRM VALUE
[PIE CHART APPEARS HERE]
Page 19
SUMMARY OF OBSERVATION AND CONCLUSIONS
(continued)
DISCOUNTED CASH FLOW ANALYSIS
[_] A.G. Edwards performed discounted cash flow analyses for Petro, Star Gas
and Star Gas Pro Forma. For Petro, A.G. Edwards used projected tax-adjusted
operating cash flows for 1999 through 2002, terminal values calculated on
2002 operating cash flow, and discount rates based on the related weighted
average cost of capital. For Star Gas and Star Gas Pro Forma, A.G. Edwards
used projected DCF for 1999 through 2002, terminal values calculated on
2002 DCF and discount rates based on the related cost of equity. (See
Appendix H -"Discounted Cash Flow Analysis")
===========================================================================================================================
PETRO STAND ALONE
---------------------------------------------------------- ------------------------------------------------------------
15 YEAR TERMINAL VALUE OPERATING CASH FLOW MULTIPLE 30 YEAR TERMINAL VALUE OPERATING CASH FLOW MULTIPLE
------------------------------------------------ ---------------------------------------------------
8.0x 8.5x 9.0x 9.5x 10.0x 8.0x 8.5x 9.0x 9.5x 10.0x
---------------------------------------------------------------------------------------------------------------------------
WACC WACC
13.4% ($40,163) ($30,848) ($21,534) ($12,219) ($2,904) 13.4% ($25,454) ($15,542) ($5,630) $ 4,282 $ 14,194
13.6% (41,742) (32,500) (23,259) (14,017) (4,775) 13.6% (27,131) (17,297) (7,463) 2,372 12,206
13.9% (43,307) (34,137) (24,967) (15,797) (6,628) 13.9% (28,793) (19,036) (9,278) 479 10,237
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STAR GAS STAND ALONE
------------------------------------------------------------ ---------------------------------------------------------
15 YEAR TERMINAL VALUE DCF MULTIPLE 30 YEAR TERMINAL VALUE DCF MULTIPLE
--------------------------------------------------- -------------------------------------------------
8.5x 9.0x 9.5x 10.0x 10.5x 8.0x 8.5x 9.0x 9.5x 10.0x
---------------------------------------------------------------------------------------------------------------------------
Cost of Cost of
Equity Equity
9.5% $77,230 $80,338 $83,447 $86,555 $89,664 9.5% $79,410 $82,745 $86,080 $89,415 $92,749
9.9% 76,359 79,427 82,495 85,563 88,631 9.9% 78,519 81,811 85,102 88,394 91,685
10.3% 75,502 78,530 81,559 84,587 87,616 10.3% 77,642 80,891 84,140 87,389 90,638
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STAR GAS PRO FORMA
------------------------------------------------------------ --------------------------------------------------------
15 YEAR TERMINAL VALUE DCF MULTIPLE 30 YEAR TERMINAL VALUE DCF MULTIPLE
--------------------------------------------------- ---------------------------------------------------
8.5x 9.0X 9.5x 10.0x 10.5x 8.0x 8.5x 9.0x 9.5x 10.0x
---------------------------------------------------------------------------------------------------------------------------
Cost of Cost of
Equity Equity
9.5% $92,737 $96,408 $100,079 $103,750 $107,421 9.5% $94,817 $98,730 $102,642 $106,555 $110,467
9.9% 91,701 95,324 98,948 102,571 106,194 9.9% 93,764 97,626 101,488 105,349 109,211
10.3% 90,682 94,258 97,834 101,411 104,987 10.3% 92,728 96,539 100,351 104,163 107,974
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Page 20
SUMMARY OF OBSERVATIONS AND CONCLUSIONS
(continued)
COMPARABLE TRANSACTIONS ANALYSIS
[_] A.G. Edwards noted that public disclosure 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 $ 16,054
Cost of Debt to be Redeemed ($206,250 + $2,844 premium) 209,094
Cost of Debt to be Assumed 80,501
Cost of Preferred stock at Redemption Value 31,767
Consent Fees 1,961
Transaction Fees 19,139
--------
Aggregate purchase price of heating oil assets $358,516
--------
MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
Notes
--------------------------------------------
15 - YEAR 30 - YEAR
-------------------- ------------------
Actual 4 quarters ended 9/30/98 EBITDA (a) 34,929 10.3x 34,929 10.3x As a multiple of aggregate transaction value
Adjusted for actual 1999 EBITDA (a) 43,475 8.2x 44,415 8.1x As a multiple of aggregate transaction value
Projected 2000 EBITDA (a) 45,978 7.8x 48,195 7.4x As a multiple of aggregate transaction value
__________________________________
(a) Calculated as gross profit minus SG&A expense and direct delivery expense.
Page 21
SUMMARY OF OBSERVATION AND CONCLUSIONS
(continued)
PUBLIC PARTNERSHIP ANALYSIS
[_] A.G. Edwards compared certain financial and market 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 five master limited partnerships. (See Appendix J - "Public
Partnership Analysis")
[_] The selected propane master limited partnerships are as follows:
- AmeriGas Partners, L.P. - Heritage Propane Partners, L.P.
- Cornerstone Propane Partners, L.P. - Suburban Propane Partners, L.P.
- Ferrellgas Partners, L.P.
[_] No partnership used in the analysis is identical to Star Gas.
- ------------------------------------------------------------------------------------------------------------------------------------
PUBLIC COMPARABLE PARTNERSHIPS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
STAR PRO FORMA STAR PUBLIC PARTNERSHIP PUBLIC PARTNERSHIP
-------------------------- --------------------------
15 - Year 30 - Year 15 - Year 30 - Year MEDIANS RANGES
- ------------------------------------------------------------------------------------------------------------------------------------
Yield 12.2% 12.2% 12.7% 12.7% 10.4% 8.6% to 12.3%
Market capitalization/LTM EBITDA 11.9x 11.9x 10.3x 10.3x 11.5x 9.1x to 13.2x
Market capitalization/1999E EBITDA 11.0x 10.7x 8.7x 8.4x 9.8x 8.6x to 11.3x
Equity Market Cap/LTM DCF 13.8x 13.8x 12.6x 12.6x 13.2x 9.6x to 15.5x
Equity Market Cap/1999E DCF (c) 12.5x 11.9x 8.9x 8.5x 10.5x 9.9x to 12.2x
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Public comparable partnerships include: APU, CNO, FGP, HPG and SPH.
(b) Market capitalization/adjusted for actual 1999 EBITDA for Star and Pro
Forma Star.
(c) Equity market cap/adjusted for actual 1999 EBITDA for Star and Pro Forma
Star.
Page 22