FILED PURSUANT TO RULE 424(B)(5)
REGISTRATION NO. 333-57994
PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 27, 2001)
[LOGO] stargas logo
1,500,000 Common Units
Star Gas Partners, L.P.
Representing Limited Partner Interests
-----------------
We are offering 1,500,000 common units representing limited partner
interests. Our common units are traded on the New York Stock Exchange under the
symbol "SGU." On January 7, 2002, the last reported sales price of our common
units on the NYSE was $21.10 per common unit.
-----------------
Investing in our common units involves risks.
See "Risk Factors" beginning on page 3 of the accompanying prospectus and page
S-7
of this prospectus supplement.
-----------------
PRICE $21.10 PER COMMON UNIT
-----------------
Per
Common Unit Total
----------- -----------
Public offering price................................ $21.10 $31,650,000
Underwriting discount................................ $ 1.05 $ 1,575,000
Proceeds, before expenses, to Star Gas Partners, L.P. $20.05 $30,075,000
Star Gas Partners, L.P. has granted the underwriters the right to purchase
up to an additional 225,000 common units to cover over-allotments. The
underwriters expect to deliver the common units to purchasers on or about
January 11, 2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
-----------------
A.G. Edwards & Sons, Inc.
UBS Warburg
Wachovia Securities
Prospectus supplement dated January 7, 2002
TABLE OF CONTENTS
Prospectus Supplement Page
--------------------- ----
Important Notice................................... S-3
Star Gas Partners.................................. S-4
Recent Developments................................ S-5
The Offering....................................... S-6
Risk Factors....................................... S-7
Use of Proceeds.................................... S-7
Price Range of Common Units and Distributions...... S-8
Ratio of Taxable Income to Cash Distributions...... S-8
Recent Tax Developments............................ S-9
Underwriting....................................... S-10
Experts............................................ S-12
Validity of Common Units........................... S-12
Prospectus
----------
Guide to Reading This Prospectus................... 1
Who We Are......................................... 2
About This Prospectus.............................. 3
Risk Factors....................................... 3
Use of Proceeds.................................... 14
Ratio of Earnings to Fixed Charges................. 14
Cash Distribution Policy........................... 15
Description of the Common Units.................... 24
Description of Partnership Securities.............. 26
Description of Debt Securities..................... 31
Federal Income Tax Considerations.................. 42
Conflicts of Interest.............................. 57
Plan of Distribution............................... 60
Validity of Securities............................. 60
Experts............................................ 60
Where You Can Find More Information................ 61
Forward-Looking Statements......................... 61
Incorporation of Certain Documents by Reference.... 62
Annex A -- Application for Transfer of Common Units A-1
Annex B -- Glossary of Terms....................... B-1
S-2
IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
This document is in two parts. The first part is the prospectus supplement,
which describes our business and the specific terms of this common unit
offering. The second part, the base prospectus, gives more general information,
some of which may not apply to this offering. Generally, when we refer only to
the "prospectus," we are referring to both parts combined.
If the description of the offering varies between the prospectus supplement
and the base prospectus, you should rely on the information in the prospectus
supplement.
S-3
The information in this prospectus supplement is not complete. You should
review carefully all of the detailed information appearing in this prospectus
supplement, the accompanying prospectus, and the documents we have incorporated
by reference before making any investment decision. Certain capitalized terms
used but not defined in this prospectus supplement have the meanings assigned
to them in the accompanying prospectus. Throughout this prospectus supplement
and the accompanying prospectus, we refer to ourselves, Star Gas Partners,
L.P., as "we" or "us" or "Star Gas Partners."
STAR GAS PARTNERS
We are the eighth largest retail distributor of propane and the largest
retail distributor of home heating oil in the United States. Our propane
operations serve customers in the Midwest and Northeast regions, Florida and
Georgia, and our home heating oil operations serve customers in the Northeast
and Mid-Atlantic regions. Through our 80% controlling interest in Total Gas &
Electric, we are an independent reseller of natural gas and electricity to
residential homeowners in deregulated energy markets primarily in the Northeast
and Mid-Atlantic regions.
Propane Operations
Our propane operations are primarily engaged in the retail distribution of
propane and related supplies and equipment to residential, commercial,
industrial, agricultural and motor fuel customers. We serve approximately
280,000 propane customers from 112 branch locations and 54 satellite storage
facilities in the Midwest and Northeast regions and Florida and Georgia. In
addition to our retail business, we also serve wholesale customers from our
facilities in southern Indiana.
For the fiscal year ended September 30, 2001, approximately 90% of our total
sales from our propane operations were to retail customers and approximately
10% were to wholesale customers. Our retail sales have historically had a
greater profit margin, more stable customer base and less price sensitivity
than our wholesale business. During this period, sales to residential customers
represented 65% of the retail propane gallons sold and 71% of propane gross
profits.
Home Heating Oil Operations
We are a leading consolidator in the highly fragmented home heating oil
industry. We serve approximately 530,000 home heating oil customers from 35
branch locations in the Northeast and Mid-Atlantic regions. We also install and
repair heating and air conditioning equipment 24 hours a day, seven days a
week, 52 weeks a year, generally within four hours of requests. These services
are an integral part of our basic home heating oil service, and are designed to
maximize customer satisfaction and loyalty.
For the fiscal year ended September 30, 2001, approximately 79% of the total
sales from our heating oil operations were from sales of home heating oil,
approximately 15% were from the installation and repair of heating and air
conditioning equipment and approximately 6% were from the sale of other
petroleum products, including diesel fuel and gasoline, to commercial
customers. During this period, sales to residential customers represented 86%
of the retail heating oil gallons sold and 91% of heating oil gross profits.
Electricity and Natural Gas Operations
Through our 80% controlling interest in Total Gas & Electric, we are an
independent reseller of natural gas and electricity to approximately 50,000
residential customers in deregulated energy markets primarily in New York, New
Jersey, Florida, Maryland and the District of Columbia. In deregulated energy
markets, customers have a choice in selecting energy suppliers to power and/or
heat their homes. Competitors range from independent resellers, similar to
Total Gas & Electric, to large public utilities. Our interest in Total Gas &
Electric gives us the opportunity to extend our installation and equipment
servicing expertise to natural gas and electricity consumers.
S-4
RECENT DEVELOPMENTS
Recent Acquisitions
In August 2001, we completed the purchase of Meenan Oil Co., Inc.
("Meenan"), which we believe to be the third largest home heating oil dealer in
the United States, for $131.8 million. During fiscal 2001, we also purchased
twelve other heating oil dealers for an aggregate purchase price of $52.2
million. In addition, during fiscal 2001 we acquired nine retail propane
dealers for an aggregate purchase price of $60.8 million. These acquisitions
are expected to add approximately 219.3 million gallons of volume annually.
Since our fiscal year end on September 30, 2001, we have acquired four
additional heating oil and propane dealers with approximately 8.8 million
gallons of annual volume for an aggregate purchase price of $23.2 million.
Pending Acquisitions
As part of our ongoing acquisition program, we are continuing to evaluate a
number of potential propane and heating oil acquisitions, which are at various
stages of the due diligence and negotiation process.
Results of Fiscal 2001
For our fiscal year ended September 30, 2001, our sales increased to
$1,086.0 million from $744.7 million in fiscal 2000, and EBITDA increased to
$85.0 million from $66.2 million in fiscal 2000. These results reflect a 25%
volume increase, primarily resulting from our 36 acquisitions during fiscal
2000 and 2001, as well as 2.0% colder than normal temperatures in fiscal 2001.
Also contributing to this performance was an increase in gross profit margins,
despite the relatively high energy prices prevailing during fiscal 2001. These
factors more than offset a $6.4 million provision for bad debts at Total Gas &
Electric, of which $5.7 million related to terminated accounts. In fiscal 2001,
we reported a $0.23 net loss per unit including the impact of SFAS No. 133 and
the bad debt provision, compared to net income of $0.07 per unit in fiscal
2000, during which SFAS No. 133 was not in effect. We recommend that you read
our Annual Report on Form 10-K for the fiscal year ended September 30, 2001 for
additional information concerning our results for this period.
Preliminary Estimate of Impact of Warm Weather on First Quarter of Fiscal 2002
During the quarter ended December 31, 2001, our areas of operation
experienced unusually warm weather. We have purchased weather insurance that we
expect will allow us to record approximately $6.1 million of net weather
insurance recoveries that will partially offset the effects of the extremely
warm weather in the first quarter of fiscal 2002. We estimate that the
resulting weather-related net reduction to EBITDA for the first fiscal quarter
of 2002 will be approximately $13.5 million to $15.0 million. We are also
undertaking certain other measures to further offset the effects of warm
weather, including gross profit margin management and other revenue enhancing
and cost reduction initiatives. While we cannot assure you that these actions
will have their intended effect, we believe they will reduce the impact of the
warm first quarter over the balance of fiscal 2002. The foregoing estimate of
the impact of warm weather on our first quarter of fiscal 2002 is preliminary,
has not been reviewed by our independent certified public accountants and is
subject to change.
S-5
THE OFFERING
Common units offered........................ 1,500,000 (excluding up to 225,000 additional common
units that may be issued upon exercise of the over-
allotment option).
Common units outstanding after
the offering................................ 24,926,946 (excluding over-allotment option).
Distributions of available cash............. . We intend to distribute, to the extent there is available
(See page 15 of the accompanying prospectus) cash, at least a minimum quarterly distribution of $0.575
per unit, or $2.30 per unit on a yearly basis.
. "Available cash" for any quarter consists generally of all
cash on hand at the end of that quarter, as adjusted for
reserves. The general partner has broad discretion in
establishing reserves.
. In general, available cash will be distributed per quarter
based on the following priorities:
. First, to the common units until each has received
$0.575, plus any arrearages from prior quarters.
. Second, to the senior subordinated units until each has
received $0.575.
. Third, to the junior subordinated units and general
partner units until each has received $0.575.
. Finally, after each unit has received $0.575, available
cash will be distributed proportionately to all units
until target levels are met.
. If distributions of available cash exceed target levels
greater than $0.604, the senior subordinated units, junior
subordinated units and general partner units will receive
incentive distributions.
Timing of distributions..................... . We make distributions approximately 45 days after
(See page 16 of the accompanying prospectus) March 31, June 30, September 30 and December 31 to
unitholders on the applicable record date.
Subordination period........................ . The subordination period will end once we meet the
(See page 16 of the accompanying prospectus) financial tests in the partnership agreement, but it
generally cannot end before December 31, 2003.
However, if the general partner is removed under some
circumstances, the subordination period will end.
. When the subordination period ends, all senior
subordinated units and junior subordinated units will
convert into Class B common units on a one-for-one
basis, and each common unit will be redesignated as a
Class A common unit.
S-6
. The main difference between the Class A common units
and Class B common units is that the Class B common
units will continue to have the right to receive incentive
distributions and additional units.
Incentive distributions..................... If quarterly distributions of available cash exceed target
(See page 17 of the accompanying prospectus) levels, the senior subordinated units, junior subordinated
units and general partner units will receive an increased
percentage of distributions, resulting in their receiving a
greater amount on a per unit basis than the common units.
RISK FACTORS
You should read carefully the discussion of the material risks relating to
an investment in the common units offered by Star Gas Partners under the
caption "Risk Factors" beginning on page 3 of the accompanying prospectus. You
should also read carefully the following additional risk factors:
Total Gas & Electric Has Experienced Significant Customer Credit Deficiencies
That Have Adversely Affected Its Operations
Since our acquisition of Total Gas & Electric in April 2000, Total Gas &
Electric has experienced significant customer credit deficiencies and problems
collecting its receivables that we believe were primarily due to the customer
solicitation and credit approval policies adopted by prior management. As a
result, during the fiscal year ended September 30, 2001, Total Gas & Electric
increased its reserve for bad debts by $6.4 million, of which $5.7 million
related to terminated accounts. While we believe that Total Gas & Electric's
delinquency and bad debt levels will improve and will ultimately approximate
those at our heating oil and propane segments as a result of our institution of
new credit policies and information systems, we cannot assure you that these
new initiatives will be successful.
In Our Acquisition of Meenan, We Assumed All of Meenan's Environmental
Liabilities
In our acquisition of Meenan, we assumed all of Meenan's environmental
liabilities, including those related to the cleanup of contaminated properties,
in consideration of a reduction of the purchase price. We established a reserve
of $2.8 million upon the closing of the acquisition to cover potential costs
associated with known environmental issues. While we believe this reserve will
be adequate, it is possible that the ongoing costs associated with those issues
could materially exceed the amounts reserved for such environmental liabilities.
USE OF PROCEEDS
We will receive net proceeds from the sale of the common units, assuming no
exercise of the over-allotment option, of approximately $29.7 million after
deducting estimated underwriting discount and commissions and the estimated
expenses of this offering. We will use approximately $18.7 million of the net
proceeds to repay in full amounts outstanding under our propane operations'
revolving acquisition line of credit (which amounts equaled approximately $18.7
million as of January 4, 2002), which matures on September 30, 2005 and bears
interest at a floating rate that, as of December 31, 2001, was equal to 4.1%
per year. We will use the approximately $11.0 million balance of the net
proceeds to fund acquisitions, and for growth capital expenditures. Pending
such uses, the funds will be used to finance seasonal working capital
requirements and for general partnership purposes.
S-7
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
The common units are listed and traded on the New York Stock Exchange under
the symbol "SGU." The common units began trading on December 20, 1995 on the
Nasdaq National Market System under the symbol "SGASZ," at an initial public
offering price of $22.00 per common unit. The following table shows the high
and low closing prices for the common units on the NYSE and the cash
distribution paid per common unit for the quarterly periods indicated.
Common Unit Closing Price Range
Cash
Price Range High Low Distributions(a)
----------- ------ ------ ----------------
Fiscal 2000
December 31,. $16.88 $12.88 $0.575
March 31,.... 15.88 13.25 0.575
June 30,..... 16.00 13.00 0.575
September 30, 17.94 15.19 0.575
Fiscal 2001
December 31,. $17.81 $15.50 $0.575
March 31,.... 19.00 16.94 0.575
June 30,..... 21.68 18.70 0.575
September 30, 21.45 18.20 0.575
Fiscal 2002
December 31,. $21.99 $19.41 $0.575
March 31,.... 21.10(b) 20.26(b)
--------
(a) Distributions are shown in the quarter they were paid.
(b) Through January 7, 2002.
The last reported sales price of common units on the NYSE on January 7, 2002
was $21.10 per common unit. As of January 7, 2002, there were approximately 758
holders of record of Star Gas Partners' common units.
On July 25, 2000, we announced that we would commence quarterly
distributions on our senior subordinated units at an initial rate of $0.25 per
unit. On January 18, 2001, we announced that we would increase this rate to
$0.575 per unit and that we would also commence distributions at that level for
our junior subordinated and general partner units, the increased distributions
being payable on all of our units for the quarter ended December 31, 2000. The
senior subordinated units are listed and traded on the New York Stock Exchange
under the symbol "SGH."
RATIO OF TAXABLE INCOME TO CASH DISTRIBUTIONS
We estimate that a holder who acquires common units in the offering and owns
those units through December 31, 2004, will be allocated, on a cumulative
basis, an amount of federal taxable income for that period that will be less
than 20% of the cash distributed for that period. Star Gas Partners further
estimates that for periods after December 31, 2004, the taxable income
allocable to a unitholder may constitute an increasing percentage of cash
distributed to him. These estimates are based upon many assumptions regarding
our business and operations, including assumptions regarding capital
expenditures, cash flow and anticipated cash distributions. These estimates and
assumptions are subject to, among other things, numerous business, economic,
S-8
regulatory, competitive and political uncertainties beyond our control.
Further, the estimates are based on current tax law and tax reporting positions
that we have adopted or intend to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that these estimates will prove to be
correct. The actual taxable income that will be allocated, as a percentage of
distributions, could be higher or lower, and any differences could be material
and could materially affect the value of the units. See "Federal Income Tax
Considerations" beginning on page 42 in the prospectus accompanying this
prospectus supplement.
RECENT TAX DEVELOPMENTS
Under recently enacted legislation, the top marginal income tax rate for
individuals for 2002 was lowered to 39.1%. In addition, as a result of this
change under current rules applicable to publicly-traded partnerships, we will
be required to withhold as taxes 39.1% (as opposed to 39.6%) of any cash
distributions made to foreign unitholders during 2002.
S-9
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms and
conditions of the underwriting agreement between the underwriters and us, to
purchase from us the respective number of common units indicated in the
following table at the public offering price less the underwriting discount set
forth on the cover page of this prospectus supplement.
Number of
Underwriters Common Units
------------ ------------
A.G. Edwards & Sons, Inc.... 600,000
UBS Warburg LLC............. 600,000
First Union Securities, Inc. 300,000
---------
Total.................... 1,500,000
=========
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions and that the underwriters will purchase all
such common units if any of the units are purchased. The underwriters are
obligated to take and pay for all of the common units offered by this
prospectus supplement, other than those covered by the over-allotment option
described below, if any are taken.
The underwriters have advised us that they propose initially to offer the
common units to the public at the public offering price set forth on the cover
page of this prospectus supplement and to certain dealers at such price less a
concession not in excess of $0.63 per unit. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $0.10 per unit to
certain other dealers. After the offering, the offering price and other selling
terms may be changed by the underwriters.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus supplement, to purchase up to an additional 225,000
common units at the public offering price, less the underwriting discount and
commissions set forth on the cover page of this prospectus supplement. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of common units that the underwriters have
agreed to purchase.
To the extent the underwriters exercise such option, the underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional units as the number set forth next to such
underwriter's name in the preceding table bears to the total number of units in
the table, and we will be obligated, pursuant to the option, to sell such units
to the underwriters.
Star Gas Partners and several of its affiliates and executives and other
persons have agreed that during the 90 days after the date of this prospectus
supplement, they will not, without the prior written consent of A.G. Edwards &
Sons, Inc., directly or indirectly, offer for sale, contract to sell, sell,
distribute, grant any option, right or warrant to purchase, pledge, hypothecate
or otherwise dispose of any common units, any securities convertible into, or
exercisable or exchangeable for, common units or any other rights to acquire
such common units, other than pursuant to employee benefit plans as in
existence as of the date of this prospectus supplement and other than in
connection with an acquisition by Star Gas Partners, provided the person
receiving such common units or other securities in the acquisition agrees to
the same restriction. A.G. Edwards & Sons, Inc. may, in its sole discretion,
allow any of these parties to dispose of common units prior to the expiration
of the 90-day period. There are, however, no agreements between A.G. Edwards &
Sons, Inc. and these parties that would allow them to do so.
The price of the common units purchased by the underwriters will be the
public offering price set forth on the cover page of this prospectus supplement
less the following underwriting discount and commissions, to be paid to the
underwriters by Star Gas Partners. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
common units.
S-10
No Exercise Full Exercise
----------- -------------
Per Unit $ 1.05 $ 1.05
Total... $1,575,000 $1,811,250
We expect to incur expenses of approximately $350,000 in connection with
this offering.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Until the distribution of the common units is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase the common units. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize,
maintain or otherwise affect the price of the common units.
If the underwriters create a short position in the common units in
connection with the offering, i.e., if they sell a greater aggregate number of
common units than is set forth on the cover page of this prospectus supplement,
the underwriters may reduce the short position by purchasing common units in
the open market. This is known as a "syndicate covering transaction." The
underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase common units in the open
market to reduce the selling group members' short position or to stabilize the
price of the common units, they may reclaim the amount of the selling
concession from the selling group members who sold those common units as part
of the offering.
In general, purchases of the common units for the purpose of stabilization
or to reduce a short position could cause the price of the common units to be
higher than it might be in the absence of such purchases. The imposition of a
penalty bid also may have an effect on the price of the common units to the
extent that it discourages resales of the common units.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common units. In addition, neither we nor
any of the underwriters make any representation that the underwriters will
engage in the transactions or that the transactions, once commenced, will not
be discontinued without notice.
A.G. Edwards & Sons, Inc., UBS Warburg LLC and First Union Securities, Inc.
have in the past performed investment banking, underwriting, broker dealing,
lending and financial advisory services for Star Gas Partners and its
subsidiaries and may continue to perform investment banking, underwriting,
broker dealer, lending and financial advisory services for us, and have
received customary compensation for these services.
First Union Securities, Inc. is an indirect, wholly-owned subsidiary of
Wachovia Corporation. Wachovia Corporation conducts its investment banking,
institutional, and capital markets businesses through its various bank,
broker-dealer and non-bank subsidiaries (including First Union Securities,
Inc.) under the trade name of Wachovia Securities. Any references to Wachovia
Securities in this prospectus supplement, however, do not include Wachovia
Securities, Inc., member NASD/SIPC, a separate broker-dealer subsidiary of
Wachovia Corporation and an affiliate of First Union Securities, Inc., which
may or may not be participating as a selling group member in the distribution
of the common units.
S-11
EXPERTS
The consolidated financial statements and the related financial statement
schedule of Star Gas Partners, L.P. as of September 30, 2000 and 2001, and for
each of the three years in the period ended September 30, 2001, incorporated in
this prospectus supplement and the accompanying prospectus by reference to our
Annual Report on Form 10-K for the fiscal year ended September 30, 2001, have
been audited by KPMG LLP, independent certified public accountants, as stated
in their report, which is incorporated herein by reference, and has been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Meenan Oil Co., L.P., as of June
30, 1999 and 2000 and for each of the three years in the period ended June 30,
2000, incorporated in this prospectus supplement and the accompanying
prospectus by reference to our Current Report on Form 8-K filed on August 3,
2001, have been audited by KPMG LLP, independent certified public accountants,
as stated in their report, which is incorporated herein by reference, and has
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
VALIDITY OF COMMON UNITS
The validity of the common units and certain tax matters will be passed upon
for Star Gas Partners by Phillips Nizer Benjamin Krim & Ballon LLP, New York,
New York. Certain legal matters regarding the common units will be passed upon
for the underwriters by Vinson & Elkins L.L.P., New York, New York.
S-12
PROSPECTUS
Star Gas Partners, L.P.
$200,000,000
[LOGO] Star
Gas
Common Units
Partnership Securities
Debt Securities
This prospectus provides you with a general description of the securities we
may offer. Each time we sell securities we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read this prospectus and any supplement carefully
before you invest.
The common units are listed on the New York Stock Exchange under the symbol
"SGU." The last reported sale price of common units on the NYSE on April 23,
2001 was $20.39 per common unit. We will provide information in the prospectus
supplement for the trading market, if any, for the debt securities and
partnership securities.
You should read "Risk Factors" beginning on page 3 of this prospectus for a
discussion of the material risks relating to an investment in the securities.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
-----------------
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to purchase
these securities in any state where the offer or sale is prohibited.
The date of this prospectus is April 27, 2001
TABLE OF CONTENTS
GUIDE TO READING THIS PROSPECTUS............... 1
WHO WE ARE..................................... 2
ABOUT THIS PROSPECTUS.......................... 3
RISK FACTORS................................... 3
Risks Inherent in Our Businesses............ 3
Risks Inherent in an Investment in Star Gas
Partners.................................. 8
Tax Risks to Common Unitholders............. 11
USE OF PROCEEDS................................ 14
RATIO OF EARNINGS TO FIXED
CHARGES...................................... 14
CASH DISTRIBUTION POLICY....................... 15
General Description of Cash Distribution.... 15
Quarterly Distributions of Available
Cash...................................... 16
Distributions of Available Cash from
Operating Surplus During the
Subordination Period...................... 16
Distributions of Available Cash from
Operating Surplus After the
Subordination Period...................... 17
Incentive Distributions During the
Subordination Period...................... 17
Incentive Distributions After the
Subordination Period...................... 18
Distributions from Capital Surplus.......... 18
Limitations and Prohibitions on
Distributions on Subordinated Interests... 19
Adjustment of Minimum Quarterly
Distribution and Target Distribution
Levels.................................... 19
Issuance of Additional Senior Subordinated
Units..................................... 20
Distributions of Cash upon Liquidation
During the Subordination Period........... 21
Distributions of Cash upon Liquidation
After the Subordination Period............ 23
DESCRIPTION OF THE COMMON UNITS................ 24
The Rights of Unitholders................... 24
Transfer Agent and Registrar................ 24
Obligations and Procedures for the
Transfer of Units......................... 24
DESCRIPTION OF PARTNERSHIP
SECURITIES................................... 26
Limitation on Issuance of Additional
Partnership Securities.................... 26
Issuance of Additional Partnership
Securities............................. 26
Unit Purchase Rights..................... 27
Adoption of Amendments to Partnership
Agreement.............................. 30
DESCRIPTION OF DEBT SECURITIES.............. 31
General.................................. 31
Specific Terms of Each Series of Debt
Securities in the Prospectus
Supplement............................. 31
Provisions Only in the Senior Indenture.. 32
Provisions Only in the Subordinated
Indenture.............................. 36
Provisions That Apply to Both Indentures. 36
The Trustee.............................. 41
FEDERAL INCOME TAX
CONSIDERATIONS............................ 42
Tax Consequences of Unit Ownership---.... 42
Tax Treatment of Unitholders............. 44
Tax-exempt Organizations and Other
Investors.............................. 48
Tax Treatment of Operations.............. 49
Administrative Matters................... 50
Disposition of Units..................... 53
State, Local and Other Tax
Considerations......................... 56
CONFLICTS OF INTEREST....................... 57
Conflicts of Inte-rest May Arise as a
Result of the Publicly-Traded Limited
Partnership Structure.................. 57
Fiduciary Duties Owed to Unitholders by
the General Partner as Prescribed by
Law and the Partnership Agreement...... 58
PLAN OF DISTRIBUTION........................ 60
VALIDITY OF SECURITIES...................... 60
EXPERTS..................................... 60
WHERE YOU CAN FIND MORE
INFORMATION............................... 61
FORWARD-LOOKING STATEMENTS.................. 61
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE.................... 62
ANNEX A--APPLICATION FOR
TRANSFER OF COMMON UNITS.................. A-1
ANNEX B--GLOSSARY OF TERMS.................. B-1
i
GUIDE TO READING THIS PROSPECTUS
The following information should help you understand some of the conventions
used in this prospectus.
. Throughout this prospectus, we refer to ourselves, Star Gas Partners, L.P.,
as "we," or "us" or "Star Gas Partners." Generally we refer to ourselves as
"we" or "us" when discussing operations (such as "We are the seventh largest
retail distributor of propane . . . . . ."), and as "Star Gas Partners" when
discussing our entity or its structure (such as "Star Gas Partners conducts
its operations through Star Gas Propane, L.P. . . . . . .").
. Except as the context otherwise requires, references to:
(1) the "Petro transaction" refers to our acquisition of Petroleum Heat
and Power Co., Inc. ("Petro") and certain related transactions that closed
on March 26, 1999;
(2) our operations prior to the completion of the transaction included the
operations of Star Gas Propane, L.P., referred to in this prospectus as
"Star Gas Propane" and its subsidiary; and
(3) our operations from the time of completion of the Petro transaction
include all of the operations cited above together with Petro's home
heating oil operations.
. When we refer to a fiscal year, we are referring to Star Gas Partners' fiscal
year that ends September 30. Historically, Petro has operated on a calendar
year basis.
. This prospectus generally treats Petro's home heating oil operations as if
they had historically been owned and operated by Star Gas Partners. Prior to
the Petro transaction, the home heating oil business and operations referred
to in this prospectus were owned and operated by Petro, which is the parent
of our former general partner. Following the transaction, the home heating
oil business and operations have been operated by Petro, which is our
wholly-owned subsidiary, Petro's immediate parent corporation, Petro
Holdings, Inc., referred to in this prospectus as "Petro Holdings," and
Petro's wholly-owned subsidiaries.
. As part of the Petro transaction, we appointed a new general partner, Star
Gas LLC. References to the "general partner" generally refer to Star Gas LLC
unless the context refers to the period prior to the transaction, in which
case we are referring to Star Gas Corporation.
. In April 2000, we acquired a 72.7% interest in Total Gas & Electric, Inc.,
referred to in this prospectus as Total Gas & Electric.
. For ease of reference, a glossary of some terms used in this prospectus is
included as Annex B to this prospectus. Capitalized terms not otherwise
defined in this prospectus have the meanings given in the glossary.
1
WHO WE ARE
General
We are the eighth largest retail distributor of propane and the largest
retail distributor of home heating oil in the United States. Our propane
operations serve customers in the Midwest and Northeast regions, Florida, and
Georgia, and our home heating oil operations serve customers in the Northeast
and Mid-Atlantic regions. Through our controlling interest in Total Gas &
Electric, we are an independent reseller of electricity and natural gas to
residential homeowners in deregulated energy markets primarily in the Northeast
and Mid-Atlantic regions.
Propane Operations
Our propane operations are primarily engaged in the retail distribution of
propane and related supplies and equipment to residential, commercial,
industrial, agricultural and motor fuel customers. We serve our approximately
260,000 propane customers from 114 branch locations and 67 satellite storage
facilities in the Midwest and the Northeast. In addition to our retail
business, we also serve approximately 34 wholesale customers from our
facilities in southern Indiana.
For the fiscal year ended September 30, 2000, approximately 90% of our total
sales from our propane operations were to retail customers and approximately
10% were to wholesale customers. Our retail sales have historically had a
greater profit margin, more stable customer base and less price sensitivity
than our wholesale business. During this period, sales to residential customers
represented 64% of the retail propane gallons sold and 73% of propane gross
profits.
Home Heating Oil Operations
We are a leading consolidator in the highly fragmented home heating oil
industry. We serve approximately 385,000 home heating oil customers from 25
branch locations in the Northeast and Mid-Atlantic regions. We also install and
repair heating equipment 24 hours a day, seven days a week, 52 weeks a year,
generally within four hours of requests. These services are an integral part of
our basic home heating oil service, and are designed to maximize customer
satisfaction and loyalty.
For the fiscal year ended September 30, 2000, approximately 78% of our total
sales from our heating oil operations were from sales of home heating oil,
approximately 16% were from the installation and repair of heating equipment
and approximately 6% were from the sale of other petroleum products, including
diesel fuel and gasoline, to commercial customers. During this period, sales to
residential customers represented 85% of the retail heating oil gallons sold
and 91% of heating oil gross profits.
Electricity and Natural Gas Operations
Through our 72.7% controlling interest in Total Gas & Electric, we are an
independent reseller of electricity and natural gas to approximately 110,000
residential customers in 16 deregulated energy markets primarily in New York,
Maryland, Pennsylvania, New Jersey, Washington, D.C. and Florida. In
deregulated energy markets, customers have a choice in selecting energy
suppliers to power and/or heat their homes. Competitors range from independent
resellers, like Total Gas & Electric, to large public utilities. This is a new
business for us that we believe will position us to sell rationally related
products such as electricity to our existing customers. In addition, it gives
us the opportunity to extend our installation and equipment servicing expertise
to electricity and natural gas consumers.
2
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf registration process, we may sell the common units,
partnership securities and debt securities described in this prospectus in one
or more offerings. The common units, partnership securities and debt securities
are sometimes referred to in this prospectus as the "securities". Holders of
common units and partnership securities are referred to as "unitholders" and
holders of debt securities are referred to as "holders." This prospectus
provides you with a general description of us and the securities. Each time we
sell securities with this prospectus, we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add to, update or change information in this
prospectus. The information in this prospectus is accurate as of its date. You
should carefully read this prospectus, the prospectus supplement and the
documents we have incorporated by reference under the heading "Incorporation of
Certain Documents by Reference."
RISK FACTORS
Before you invest in the securities, you should be aware that there are
risks in doing so, including those described below. You should consider
carefully these risk factors together with all of the other information
included in this prospectus, any prospectus supplement and the documents we
have incorporated by reference.
If any of the following risks actually occurs, then our business, financial
condition or results of operations could be materially adversely affected. In
such event, we may be unable to make distributions to our unitholders or pay
interest on or the principal of any debt securities, the trading price of our
securities could decline and you may lose all or part of your investment.
Risks Inherent in Our Businesses
Since Weather Conditions May Adversely Affect the Demand for Propane, Home
Heating Oil, Natural Gas and Electricity, Our Financial Condition Is
Vulnerable to Warm Winters
Weather conditions have a significant impact on the demand for both propane
and home heating oil because our customers depend on these products principally
for space heating purposes. As a result, weather conditions may adversely
impact our operating results and financial condition. During the peak heating
season of October through March, sales of propane represent approximately 70%
to 75% of our annual retail propane volume and sales of home heating oil
represent approximately 75% to 80% of our annual home heating oil volume.
Actual weather conditions can vary substantially from year to year,
significantly affecting our financial performance. Furthermore, warmer than
normal temperatures in one or more regions in which we operate can
significantly decrease the total volume we sell and the gross profit realized
on those sales and, consequently, our results of operations. For example, in
fiscal 1999 and fiscal 2000, temperatures were significantly warmer than normal
for the areas in which we sell propane and home heating oil. We believe that
overall levels of both pro forma Available Cash from Operating Surplus and
EBITDA generated during fiscal 1999 were adversely affected during fiscal 1999
and overall levels of Available Cash from Operating Surplus and EBITDA
generated during fiscal 2000 were also adversely affected during fiscal 2000
primarily due to this abnormally warm weather. Weather variations also affect
demand for propane from agricultural customers, because dry weather during the
harvest season reduces demand for propane used in crop drying. Weather
conditions also have a significant impact on the demand for both natural gas
and electricity because Total Gas & Electric's customers depend on these
products in part for space heating purposes.
Petro's Operating Results Will Be Adversely Affected If It Experiences
Significant Customer Losses That Are Not Offset or Reduced by Customer Gains
Petro's net attrition of home heating oil customers averaged approximately
5% per year over the five years through 1998. This rate represents the net of
its annual gross customer loss rate of approximately 15% offset by
3
customer gains of approximately 10% per year. In 1999, net attrition was
approximately 2.3%, representing gains of approximately 11.9% and gross losses
of approximately 14. 2%. In fiscal 2000, Petro had a net gain of home heating
oil customers equal to 1.3%, representing gains of approximately 14.3% and
gross losses of approximately 13.0%. Customer losses are the result of various
factors, including:
. customer relocations;
. supplier changes based primarily on price and service;
. natural gas conversions; and
. credit problems.
Petro may not be able to continue to achieve net gains of home heating oil
customers and may again experience customer attrition in the future.
Sudden and Sharp Oil and Propane Price Increases And Substantial Fluctuations
in Natural Gas and Electricity Commodity Prices or the Cost of Transmitting
and Distributing These Commodities That Cannot Be Passed on to Customers May
Adversely Affect Our Operating Results
The retail propane and home heating oil industries are "margin-based"
businesses in which gross profits depend on the excess of retail sales prices
over supply costs. Consequently, our profitability is sensitive to changes in
wholesale prices of propane and heating oil caused by changes in supply or
other market conditions. Many of these factors are beyond our control and thus,
when there are sudden and sharp increases in the wholesale costs of propane and
heating oil, we may not be able to pass on these increases to our customers
through retail sales prices. In addition, the timing of cost pass-throughs can
significantly affect margins. Wholesale price increases could reduce our gross
profits and could, if continuing over an extended period of time, reduce demand
by encouraging conservation or conversion to alternative energy sources.
Our home heating oil business also competes for customers with suppliers of
alternative energy products, principally natural gas. We could face additional
price competition from alternative heating sources such as electricity and
natural gas as a result of deregulation in those industries. Over the past five
years, conversions by Petro's customers from heating oil to other sources have
averaged approximately 1% per year of the homes it serves.
Substantial fluctuations in energy commodity prices or the cost of
transmitting and distributing those energy commodities could increase Total Gas
& Electric's costs of operations.
A Significant Portion of Our Home Heating Oil Volume Is Sold to Capped-Price
Customers and Our Operating Results Could Be Adversely Affected By Changes in
the Cost of Supply That We Cannot Pass On To These Customers Or Otherwise
Protect Against
A significant portion of our home heating oil volume is sold to individual
customers under an agreement pre-establishing the maximum sales price of home
heating oil over a twelve month period. The maximum price at which home heating
oil is sold to these capped-price customers is generally renegotiated prior to
the heating season of each year based on current market conditions. We
currently enter into forward purchase contracts, futures contracts and option
contracts for a substantial majority of the heating oil we sell to these
capped-price customers in advance and at a fixed cost. Should events occur
after a capped-sales price is established that increases the cost of home
heating oil above the amount anticipated, margins for the capped-price
customers whose heating oil was not purchased in advance would be lower than
expected, while those customers whose heating oil was purchased in advance
would be unaffected. Conversely, should events occur during this period that
decrease the cost of heating oil below the amount anticipated, margins for the
capped-price customers whose heating oil was purchased in advance could be
lower than expected, while margins for those customers whose heating oil was
not purchased in advance would be unaffected or higher than expected.
4
Market Volatility and/or Inflation May Cause Us to Sell Inventory at Less
Than the Price That We Purchased It, Which Would Adversely Affect Operating
Results
Because of the potential volatility of propane prices, the market price for
propane could fall below the price at which we purchased it, which could
adversely affect gross margin or render sales from inventory unprofitable.
Propane is available from numerous sources, including integrated international
oil companies, independent refiners and independent wholesalers. We purchase
propane from a variety of suppliers under supply contracts and on the spot
market. The major portion of propane purchased by us is produced domestically
representing approximately 94% in fiscal 2000. To the extent that we purchase
propane from Canadian sources, approximately 6% in fiscal 2000, our propane
business will be subject to risks of disruption in foreign supply. We attempt
to minimize inventory risks by purchasing propane on a short-term basis. During
periods of low demand for propane, which generally occur during the summer
months, we have on occasion purchased, and may purchase in the future, large
volumes of propane at relatively attractive prices for storage in our 21
million gallon Indiana underground storage facility for future resale. We may
from time to time engage in transactions, such as options or fixed price
contracts to purchase propane, to hedge product costs in an attempt to reduce
cost volatility. To date, the level of these activities has not been
significant and we are currently engaged to only a minor extent for these
transactions.
Inflation increases our operating and administrative costs. We attempt to
limit the effects of inflation on our operations through cost control efforts,
productivity improvement and increases in gross profit margins.
If We Do not Make Acquisitions on Economically Acceptable Terms, Our Future
Financial Performance Will Be Limited
Neither the propane nor the home heating oil industry is a growth industry
because of increased competition from alternative energy sources. A significant
portion of our growth in the past decade has been directly tied to the success
of our acquisition programs. Accordingly, our future financial performance will
depend on our ability to continue to make acquisitions at attractive prices. We
cannot assure you that we will be able to identify attractive acquisition
candidates, whether in the home heating oil or propane sector, in the future or
that we will be able to acquire businesses on economically acceptable terms. In
particular, competition for acquisitions in the propane business has
intensified and become more costly. Factors that may adversely affect our
propane and home heating oil operating and financial results, such as warm
weather patterns, may limit our access to capital and adversely affect our
ability to make acquisitions. Any acquisition may involve potential risks,
including:
. an increase in our indebtedness;
. the inability to integrate the operations of the acquired business;
. the inability to successfully expand our operations into new territories;
. the diversion of management's attention from other business concerns; and
. an excess of customer loss or loss of key employees from the acquired
business.
In addition, acquisitions may be dilutive to earnings and distributions to
the unitholders and any additional debt incurred to finance acquisitions may
affect our ability to make distributions to the unitholders.
Because of the Highly Competitive Nature of the Retail Propane and Home
Heating Oil Businesses, We May Not Be Able to Retain Existing Customers or
Acquire New Customers, Which Would Have An Adverse Impact on Our Operating
Results and Financial Condition
In both our propane and home heating oil business, if we are unable to
compete effectively, we may lose existing customers or fail to acquire new
customers, which would have a material adverse effect on our results of
operations and financial condition.
5
Many of our propane competitors and potential competitors are larger or have
substantially greater financial resources than we do, which may provide them
with some advantages. Generally, competition in the past few years has
intensified, partly as a result of warmer-than-normal weather and general
economic conditions. Most of our propane retail branch locations compete with
five or more marketers or distributors. The principal factors influencing
competition with other retail marketers are:
. price;
. reliability and quality of service;
. responsiveness to customer needs;
. safety concerns;
. long-standing customer relationships;
. the inconvenience of switching tanks and suppliers; and
. the lack of growth in the industry.
We can make no assurances that we will be able to compete successfully on
the basis of these factors. If a competitor attempts to increase market share
by reducing prices, our operating results and financial condition could be
materially and adversely affected. Competition from alternative energy sources
has been increasing as a result of reduced regulation of many utilities,
including natural gas and electricity.
Our home heating oil business competes with heating oil distributors
offering a broad range of services and prices, from full service distributors,
like Petro, to those offering delivery only. Competition with other companies
in the home heating oil industry is based primarily on customer service and
price. Long-standing customer relationships are typical in the industry. It is
customary for companies to deliver home heating oil to their customers based
upon weather conditions and historical consumption patterns, without the
customer making an affirmative purchase decision. Most companies provide home
heating equipment repair service on a 24-hour per day basis. In some cases,
homeowners have formed buying cooperatives to purchase fuel oil from
distributors at a price lower than individual customers are otherwise able to
obtain. As a result of these factors, it may be difficult for Petro to acquire
new customers.
Total Gas & Electric Faces Strong Competition From Incumbent Utilities And
Other Competitors With Greater Resources And Is Required To Rely On
Utilities, With Which It Competes, To Perform Some Functions For Its Customers
Total Gas & Electric faces strong competition from incumbent utilities and
other competitors with greater resources, which may limit its ability to
acquire customers and materially adversely affect its financial results. Total
Gas & Electric is required to rely on utilities, with which it competes, to
perform some functions for its customers. Because of this reliance, service
failures that are beyond Total Gas & Electric's control may still lead to poor
customer satisfaction and unforeseen costs of operation.
We Are Subject to Operating and Litigation Risks That Could Adversely Affect
Our Operating Results to the Extent Not Covered by Insurance
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and transporting and otherwise providing
customers with combustible liquids such as propane and home heating oil. As a
result, we may be a defendant in various legal proceedings and litigation
arising in the ordinary course of business. We maintain insurance policies with
insurers in amounts and with coverages and deductibles as we believe are
reasonable. However, there can be no assurance that this insurance will be
adequate to protect us from all material expenses related to potential future
claims for personal and property damage or that these levels of insurance will
be available in the future at economical prices. In addition, the occurrence of
an explosion, whether or not we are involved, may have an adverse effect on the
public's desire to use our products.
6
We Are Dependent on Principal Suppliers and Carriers, Increasing the Risk of
an Interruption in Supply That Might Result In a Loss of Revenues and/or
Customers
During fiscal year 2000, 14% of our propane purchases in the Midwest were
purchased on the spot market from various Mont Belvieu, Texas sources, 34% of
our propane purchases were from three refineries in Illinois, Kentucky and
Michigan owned by Marathon Ashland Petroleum, LLC and 13% were purchased from
three refineries in Illinois and Indiana owned by Amoco Canada Marketing Group.
Although we believe that alternative sources of propane are readily available,
if we are unable to purchase propane from our usual sources, the failure to
obtain alternate sources at competitive prices and on a timely basis could have
a material adverse effect on our business.
Historically, a substantial portion of the propane we purchase has
originated in Mont Belvieu, Texas and has been shipped to us through a major
common carrier pipeline. Any significant interruption in the service at Mont
Belvieu or on the common carrier pipeline could have a material adverse effect
on our business.
Our Results of Operations and Financial Condition May Be Adversely Affected
by Governmental Regulation and Associated Environmental and Regulatory Costs
Our home heating oil business is subject to a wide range of federal and
state laws and regulations related to environmental and other regulated
matters. Petro has implemented environmental programs and policies designed to
avoid potential liability and costs under applicable environmental laws. It is
possible, however, that Petro will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance
with operating or other regulatory permits. New environmental regulations might
adversely impact Petro's operations, including underground storage and
transportation of home heating oil. In addition, the environmental risks
inherently associated with our home heating oil operations, such as the risks
of accidental release or spill, are greater than those associated with our
propane operations. It is possible that material costs and liabilities will be
incurred, including those relating to claims for damages to property and
persons.
If Total Gas & Electric Fails To Comply With State Consumer Protection Laws
And Other State Laws And Regulations To Which It Is Subject, It May Have A
Material Adverse Affect On Total Gas & Electric's Operations
Total Gas & Electric is subject to state consumer protection laws and other
state laws and regulations. Total Gas & Electric currently has been subject to
investigations by the Attorneys General of New York and New Jersey and an
informal investigation by the Pennsylvania Public Utility Commission into its
practices for soliciting customers. Total Gas & Electric has been in
discussions with these agencies to resolve their investigations, has settled
the New Jersey investigation and anticipates that the remaining investigations
will be satisfactorily resolved. Total Gas & Electric has adopted a
comprehensive sales compliance program to comply with applicable regulations.
A Reversal Of Or Delay In The Trend Towards Competitive Restructuring Of The
Electric And Natural Gas Markets Could Materially Adversely Affect Total Gas
& Electric's Business Prospects And Financial Condition
If the trend towards competitive restructuring of the electric and natural
gas markets is delayed or reversed, Total Gas & Electric's business prospects
and financial condition could be materially adversely affected. The current
electricity shortage in California may cause such a delay or reversal.
Total Gas & Electric Will Be Subject To Credit Risks From Its Customers That
May Adversely Affect Its Operations
In most markets Total Gas & Electric will be required to bear credit risk
for its customers, which may result in additional costs of operations to the
extent it is not able to effectively manage this credit risk.
7
Risks Inherent in an Investment in Star Gas Partners
Cash Distributions Are Not Guaranteed and May Fluctuate with Our Performance
and Reserve Requirements
Because distributions on the common units and partnership securities are
dependent on the amount of cash generated, distributions may fluctuate based on
our performance. The actual amount of cash that is available will depend upon
numerous factors, including:
. profitability of operations;
. required principal and interest payments on debt;
. cost of acquisitions;
. issuance of debt and equity securities;
. fluctuations in working capital;
. capital expenditures;
. adjustments in reserves;
. prevailing economic conditions; and
. financial, business and other factors.
Some of these factors are beyond the control of the general partner.
The partnership agreement gives the general partner discretion in
establishing reserves for the proper conduct of our business. These reserves
will also affect the amount of cash available for distribution. The general
partner may establish reserves for distributions on the senior subordinated
units only if those reserves will not prevent us from distributing the full
minimum quarterly distribution, plus any arrearages, on the common units for
the following four quarters.
The amount of cash needed to pay the minimum quarterly distribution for the
next four quarters on units outstanding on the date of this prospectus is
approximately $53.1 million. This figure represents $45.4 million for the
common units, $6.2 million for the senior subordinated units, $0.8 million for
the junior subordinated units and $0.7 million for the general partner units.
The amount of distributable cash flow generated in the twelve months ended
December 31, 2000 was $44.5 million.
Our Indebtedness May Limit Our Ability to Make Distributions and Affect our
Operations
We have debt that is substantial compared to our partners' capital.
Principal and interest payable on this debt will reduce cash available to make
distributions on the common units and partnership securities. Under specified
circumstances, the terms of our debt instruments, including the guarantee of
the senior secured notes which were issued in the Petro transaction,will limit
our ability to distribute cash to our unitholders and to borrow additional
funds. The limitations and restrictions in new debt that we and our
subsidiaries issue may be more restrictive than those in current debt. In
addition, some of our debt is secured by our assets. If we defaulted on this
secured debt, the lenders could institute foreclosure proceedings to seize our
assets. Any attempt to stay these foreclosure actions by seeking to reorganize
under the federal Bankruptcy Code would have a material adverse effect on us
and our unitholders.
Provisions Concerning Change of Control, Default and Preclusion From Paying
Distributions in Our Debt Instruments May Affect Distributions
Our debt instruments contain provisions relating to a "change of control." A
change of control of Star Gas Partners would result in approximately $170
million of Petro debt becoming immediately due and payable, and would result in
the re-rating of approximately $152.5 million of Star Gas Propane debt which
could lead to an increase in the interest rate of such debt. A change of
control at the Petro level would accelerate the Petro debt
8
but not the Star Gas Propane debt. In either case, this would necessarily
affect our ability to make distributions to unitholders. Neither Star Gas
Partners nor Petro is restricted from entering into a transaction that would
trigger the change of control provisions. If these change of control provisions
are triggered, some of the outstanding debt may become due. It is possible that
Star Gas Partners or Petro would not have sufficient funds at the time of any
change of control to make the required debt payments or that restrictions in
its other debt instruments would not permit those payments. In some instances,
lenders would have the right to foreclose on Star Gas Partners' or Petro's
assets if debt payments were not made upon a change of control.
Our Holding Company Structure May Limit Our Ability Repay Debt Securities
We are a holding company and have no material operations and only limited
assets. Accordingly, our ability to service our debt obligations will be
entirely dependent upon the receipt of distributions from Star Gas Propane and
Total Gas & Electric.
Our holding company structure results in two principal risks:
. Star Gas Propane and Total Gas & Electric may be restricted by contractual
provisions or applicable laws from providing us the cash that we need to
pay our debt service obligations, including payments on any debt
securities we offer under this prospectus; and
. In any liquidation, reorganization or insolvency proceeding involving Star
Gas Partners or in any other proceeding involving claims of creditors
(other than Star Gas Partners) of Star Gas Propane and Total Gas &
Electric (including trade creditors, secured creditors, taxing authorities
and creditors holding guarantees), your claim as a holder of any debt
securities we offer under this prospectus will be effectively subordinated
and junior to the claims of holders of any indebtedness of Star Gas
Propane and Total Gas & Electric. As of September 30, 2000 there was
$140.3 million of such indebtedness.
We May Sell Additional Limited Partner Interests, Diluting Existing Interests
of Unitholders
Our partnership agreement generally allows us to issue additional common
units and partnership securities. During the subordinated period, however, the
number of common units that we may issue is subject to certain limitations.
These limitations do not apply to issuances in connection with acquisitions
that are accretive. When we issue additional equity securities, your
proportionate partnership interest will decrease. Such an issuance could
negatively affect the amount of cash distributed to unitholders and the market
price of common units and partnership securities. Issuance of additional common
units will also diminish the relative voting strength of the previously
outstanding units. Following the end of the subordination period there are no
limits on the total number of common units or partnership securities that we
may issue.
The Partnership Agreement Contains Provisions Intended to Discourage a Change
of Management That May Diminish Trading Value
The partnership agreement contains specific provisions that may discourage
attempts to remove an incumbent general partner or otherwise change the
management of Star Gas Partners. These provisions may diminish the trading
price of the units under some circumstances.
Unitholders Have Limited Voting Rights and Do Not Control the General Partner
Unitholders have no right to elect the general partner on an annual or other
continuing basis. The general partner manages and operates Star Gas Partners
and Star Gas Propane. Unlike the holders of common stock in a corporation,
unitholders have only limited voting rights on matters affecting our business.
The general partner generally may not be removed unless approved by the holders
of 66 2/3% of the outstanding units, voting together as a single class but
excluding those held by the general partner and its affiliates. As a result,
unitholders have only limited influence on matters affecting our operation, and
it would be difficult for third parties to control or influence us. Although
the partnership agreement provides that the general partner may not, with
specified exceptions, transfer its general partner units to another person
before December 31, 2005 unless approved by a unit majority, the members of
Star Gas LLC may transfer their limited liability company interests in Star Gas
LLC to a third party at any time without the approval of the unitholders.
9
There Is a Limited Call Right That May Require Unitholders to Sell Their
Units at an Undesirable Time or Price
If at any time less than 20% of the outstanding units of any class are held
by persons other than the general partner and its affiliates, the general
partner has the right to acquire all, but not less than all, of those units
held by the unaffiliated persons. The price for these units will generally
equal the then-current market price of the units. As a consequence, a
unitholder may be required to sell his units at an undesirable time or price.
The general partner may assign this acquisition right to any of its affiliates
or Star Gas Partners. After the subordination period ends, if we acquire more
than 66 2/3% of the Class B common units in a twelve-month period, then we will
have a similar call right.
Our Ability to Make Distributions May Be Adversely Affected by Our Obligation
to First Reimburse the General Partner
Before we make any distributions on the units, we will reimburse the general
partner for all expenses it has incurred on our behalf. The reimbursement of
those expenses and the payment of reasonable fees charged by the general
partner for services could adversely affect our ability to make distributions.
Reimbursable expenses and fees are determined by the general partner in its
sole discretion.
Unitholders May Not Have Limited Liability in Some Circumstances
A number of states have not clearly established limitations on the liability
of limited partners for the obligations of a limited partnership. If it were
determined that we had been conducting business in any state and had failed to
comply with the applicable limited partnership statute, or that the rights or
exercise of the rights by the limited partners as a group under the partnership
agreement constituted participation in the "control" of Star Gas Partners, then
a unitholder might be held liable to the same extent as the general partner for
our obligations.
The General Partner Has Conflicts of Interest and Limited Fiduciary
Responsibilities, Which May Permit the General Partner to Favor Its Own
Interests to the Detriment of Unitholders
Conflicts of interest have arisen and could arise in the future as a result
of relationships between the general partner and its affiliates, on the one
hand, and Star Gas Partners or any of the limited partners, on the other hand.
As a result of these conflicts the general partner may favor its own interests
and those of its affiliates over the interests of the unitholders. The nature
of these conflicts is ongoing and includes the following considerations:
. The general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of
fiduciary duty. Unitholders are deemed to have consented to some actions
and conflicts of interest that might otherwise be deemed a breach of
fiduciary or other duties under applicable state law.
. The general partner is allowed to take into account the interests of
parties in addition to Star Gas Partners in resolving conflicts of
interest, thereby limiting its fiduciary duty to the unitholders.
. Except for Irik P. Sevin, who is subject to a non-competition agreement,
the general partner's affiliates are not prohibited from engaging in other
business or activities, including direct competition with us.
. The general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings and reserves, each of which
can impact the amount of cash that is distributed to unitholders.
. The general partner determines whether to issue additional units or other
equity securities of Star Gas Partners.
. The general partner determines which costs are reimbursable by us.
. The general partner controls the enforcement of obligations owed to us by
the general partner.
10
. The general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
. Some officers of the general partner, who will provide services to us, may
also devote significant time to the businesses of the general partner's
affiliates and will be compensated by these affiliates for the services
rendered to them.
. The general partner is not restricted from causing us to pay the general
partner or its affiliates for any services rendered on terms that are fair
and reasonable to us or entering into additional contractual arrangements
with any of these entities on our behalf.
. In some instances the general partner may borrow funds in order to permit
the payment of distributions.
Our Unit Purchase Rights Agreement and Provisions In Our Partnership
Agreement May Inhibit A Takeover, Which Could Adversely Affect the Value of
Our Partnership Securities.
Our unit purchase rights agreement and partnership agreement contain
provisions that could delay or prevent a change in control of our management.
These provisions apply even if the offer may be considered beneficial by some
of our unitholders. If a change of control is delayed or prevented, the market
price of our partnership securities could decline.
Tax Risks to Common Unitholders
The Increase in Taxes Payable By Petro In the Future Will Reduce Dividends to
Star Gas Partners, Which May Reduce Distributions to Unitholders
Petro and its corporate affiliates do not expect to pay significant federal
income tax for several years following the Petro transaction. However, over
time the amount of federal income taxes paid by Petro and its corporate
affiliates will increase. In addition, a successful IRS challenge to the
deductions of Petro, including depreciation or interest, will increase Petro's
and its corporate affiliates' tax liability. This will reduce the amount of
cash that Petro can distribute to Star Gas which in turn will reduce the amount
of cash that we can distribute to our unitholders. In addition, Petro and its
corporate affiliates do expect to generate earnings and profits, which will
make part of the distributions from these entities to Star Gas Partners taxable
dividend income to the unitholders. This dividend income cannot be offset by
past or future losses generated by our propane activities.
The Petro transaction resulted in income to Petro equal to the difference in
the value of the Star Gas Partners units distributed in the merger, including
the amount of any debt of which Petro was relieved, and the federal income tax
basis Petro had in those units. Petro's net operating losses generally offset
this income and it incurred only nominal tax. The IRS could challenge the
amount of Petro's net operating losses and the use of the net operating losses
to offset income realized in the Petro transaction. A successful challenge
could reduce the cash we have available for distribution.
The IRS Could Classify Us as an Association Taxable as a Corporation, Which
Could Result in Our Paying Tax as an Entity Which Would Substantially Reduce
the Cash Available for Distribution to Unitholders
The federal income tax benefit of an investment in Star Gas Partners depends
largely on Star Gas Partners' classification as a partnership for federal
income tax purposes. Assuming the accuracy of factual matters represented as
true by the general partner and Star Gas Partners, counsel is of the opinion
that, as of April 24, 2001, Star Gas Partners has been and will be classified
as a partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, we intend to
rely on the opinion of counsel, which is not binding on the IRS. Based on the
representations of Star Gas Partners and the general partner and a review of
applicable legal authorities, counsel is also of the opinion that, as of April
24, 2001, at least 90% of our gross income is "qualifying income," within the
meaning of Section 7704 of the Internal Revenue Code. This means that our
income is derived from the exploration, development, mining or
11
production, processing, refining, transportation or marketing of any mineral or
natural resource or other items. Whether we will continue to be classified as a
partnership depends, at least partly, on our ability to continue to meet this
qualifying income test in the future.
If we were classified as an association taxable as a corporation for federal
income tax purposes, we would pay tax on our income at corporate rates, which
is currently a 35% federal rate. If this were to occur, distributions to the
unitholders would generally be taxed again as corporate distributions, and no
income, gains, losses or deductions would flow through to the unitholders.
Because a tax would be imposed upon Star Gas Partners as an entity, the cash
available for distribution to unitholders would be substantially reduced.
Treatment of Star Gas Partners as an association that is taxable as a
corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the market value of the units.
There can be no assurance that the law will not change so as to cause Star
Gas Partners to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The partnership agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects Star Gas
Partners to taxation as a corporation or otherwise subjects Star Gas Partners
to entity-level taxation for income tax purposes, then specified provisions of
the partnership agreement are subject to change, including a decrease in
distributions to reflect the impact of that law on us.
A Unitholder May Be Required to Pay Taxes on Income From Star Gas Partners
Even if He Receives No Cash Distributions
A unitholder will be required to pay federal income taxes and, in some
cases, state and local income taxes on his allocable share of our income,
whether or not he receives cash distributions from us. No assurance can be
given that a unitholder will receive cash distributions equal to his allocable
share of our taxable income or even equal to the actual tax liability that
results from this allocable share of income. Further, upon the sale of his
units, a unitholder may incur a tax liability in excess of the amount of cash
he receives.
Investors, Other Than Individuals That Are U.S. Residents, May Have Adverse
Tax Consequences From Owning Units
Investment in units by specific tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to these persons. For
example, for any unitholder that is an organization exempt from federal income
tax, including IRAs and other retirement plans, virtually all of the
unitholder's allocable share of taxable income in the first few years will
constitute unrelated business taxable income and thus will be taxable to this
unitholder.
Because We Are a Registered Tax Shelter, A Unitholder or Star Gas Partners
Faces an Increased Risk of an IRS Audit Resulting In Taxes Payable on Star
Gas Partners' and Non-Star Gas Partners' Income
We are registered with the Secretary of the Treasury as a "tax shelter." The
IRS has issued the following tax shelter registration number to Star Gas
Partners: 96026000016. We cannot assure unitholders that we will not be audited
by the IRS or that adjustments to our income or losses will not be made. Any
unitholder owning less than a 1% profit interest in Star Gas Partners has very
limited rights to participate in the income tax audit process. Further, any
adjustments in our tax returns will lead to adjustments in the unitholders' tax
returns and may lead to audits of unitholders' tax returns and adjustments of
items unrelated to us. Each unitholder is responsible for any tax owed as the
result of an examination of his personal tax return.
There Is A Possibility Of Loss Of Tax Benefits Relating To Nonuniformity Of
Common Units And Nonconforming Depreciation Conventions
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of common units of the same class must be maintained. To
12
maintain uniformity and for other reasons, we have adopted certain depreciation
and amortization conventions which to a certain extent may arguably not conform
to Treasury regulations. In addition, under our partnership agreement, the
general partner is authorized to adopt a convention to preserve the uniformity
of units even if that convention is not consistent with Treasury regulations. A
successful challenge to those conventions by the IRS could adversely affect the
amount of tax benefits available to a purchaser of common units and could have
a negative impact on the value of the common units.
There Are State, Local and Other Taxes To Which Unitholders Will Probably Be
Subject Solely Because of an Investment In the Units
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. A unitholder will likely
be required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which we do
business or own property and may be subject to penalties for failure to comply
with those requirements. The general partner anticipates that substantially all
of our income will be generated in the following states: Connecticut, Florida,
Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Massachusetts, Minnesota,
Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island
and West Virginia and Wisconsin. Each of these states currently imposes a
personal income tax; however, New Hampshire's tax only applies to interest and
dividend income. It is the responsibility of each unitholder to file all United
States federal, state and local tax returns that may be required of him.
Counsel has not rendered an opinion on the state or local tax consequences of
ownership or sale of units.
13
USE OF PROCEEDS
Except as we may otherwise disclose in a prospectus supplement relating to
an offering of securities, we will use the net proceeds from the sale of the
securities for general partnership purposes. If we decide to allocate the net
proceeds of an offering of securities to a specific purpose we will make this
decision at the time of the offering and we will describe this allocation in
the related prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES
The table below sets forth the ratio of earnings to fixed charges of Star
Gas Partners for the periods indicated.
Year Ended September 30,
--------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Ratio of earnings to fixed charges 1.35x 1.27x -- -- 1.06x
For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings (loss) from continuing operations before income taxes,
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness, the amortization of deferred debt issuance costs and the portion
of operating rental expense that is representative of the interest factor.
Earnings were inadequate to cover fixed charges by $0.9 million for the year
ended September 30, 1998; and $44.3 million for the year ended September 30,
1999. On a pro forma basis after giving effect to the Petro transaction, the
ratio of earnings to fixed charges was 1.07x for the year ended September 30,
1999.
14
CASH DISTRIBUTION POLICY
General Description of Cash Distribution
In general, we distribute to our partners on a quarterly basis, all of our
Available Cash in the manner described below. Available Cash is defined in the
glossary and generally means, for any of our fiscal quarters, all cash on hand
at the end of that quarter, less the amount of cash reserves that are necessary
or appropriate in the reasonable discretion of the general partner to:
(1)provide for the proper conduct of our business;
(2)comply with applicable law, any of our debt instruments or other
agreements; or
(3)provide funds for distributions to the common unitholders and the senior
subordinated unitholders during the next four quarters, in some
circumstances.
The general partner may not establish cash reserves for distributions to the
senior subordinated units unless the general partner has determined that the
establishment of reserves will not prevent us from distributing the minimum
quarterly distribution on all common units and any common unit arrearages for
the next four quarters. As discussed below, the restrictions on distributions
to senior subordinated units, junior subordinated units and general partner
units could result in cash that would otherwise be Available Cash being
reserved for other purposes.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed among different classes of units. See "--Quarterly Distributions of
Available Cash."
Operating Surplus is defined in the glossary and generally means:
(1)the cash balance of Star Gas Partners on the date we began operations,
plus approximately $20.3 million, plus all of our cash receipts,
excluding cash receipts that constitute Capital Surplus; less
(2)all of our operating expenses, debt service payments, maintenance
capital expenditures and reserves established for future operations;
provided, however, that Operating Surplus is calculated without any
reduction for costs or expenses incurred in the transaction.
Capital Surplus is also defined in the glossary and is generally generated
only by borrowings other than for working capital purposes, sales of debt and
equity securities and sales or other dispositions of assets for cash, other
than inventory, accounts receivable and other assets, all as disposed of in the
ordinary course of business.
All Available Cash distributed from any source will be treated as
distributed from Operating Surplus until the sum of all Available Cash
distributed since our commencement equals the Operating Surplus as of the end
of the quarter before that distribution. This method of cash distribution
avoids the difficulty of trying to determine whether Available Cash is
distributed from Operating Surplus or Capital Surplus. Any excess Available
Cash, irrespective of its source, will be deemed to be Capital Surplus and
distributed accordingly.
If Capital Surplus is distributed on each common unit issued in our initial
public offering in an aggregate amount per unit equal to $22.00 per common
unit, the distinction between Operating Surplus and Capital Surplus will cease.
All distributions after that date will be treated as from Operating Surplus.
The general partner does not expect that there will be significant
distributions from Capital Surplus.
The senior subordinated units and the junior subordinated units are each a
separate class of interests in Star Gas Partners, and the rights of holders of
those interests to participate in distributions differ from the rights of the
holders of common units. When issued, the Class B common units will also be a
separate class of interests in Star Gas Partners.
15
Quarterly Distributions of Available Cash
Except for the limitations and prohibitions on distributions discussed
below, we will make distributions to our partners for each of our fiscal
quarters before liquidation in an amount equal to all of our Available Cash for
that quarter. Distributions will be made approximately 45 days after each March
31, June 30, September 30 and December 31, to holders of record on the
applicable record date. For a discussion of the restrictions on distributions
to the holders of subordinated interests, see "--Limitations and Prohibitions
on Distributions on Subordinated Interests."
Upon expiration of the subordination period, all senior subordinated units
and junior subordinated units will be converted, on a one-for-one basis, into
Class B common units, and distributions on the general partner units will no
longer be subordinated to distributions on the common units. All references to
common units after the expiration of the subordination period are references to
Class A common units and Class B common units, collectively, unless otherwise
indicated. Neither Class A common units nor Class B common units will accrue
arrearages for any quarter after the subordination period, and senior
subordinated units, junior subordinated units and general partner units will
not accrue any arrearages on distributions for any quarter.
Distributions of Available Cash from Operating Surplus During the Subordination
Period
The subordination period is defined in the glossary and will generally
extend until the first day of any quarter beginning on or after October 1, 2002
that each of the following three events occur:
(1)distributions of Available Cash from Operating Surplus on the common
units, senior subordinated units, junior subordinated units and general
partner units equal or exceed the sum of the minimum quarterly
distributions on all of the outstanding common units, senior
subordinated units, junior subordinated units and general partner units
for each of the three non-overlapping four-quarter periods immediately
preceding that date;
(2)the Adjusted Operating Surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equaled or
exceeded the sum of the minimum quarterly distributions on all of the
outstanding common units, senior subordinated units, junior subordinated
units and general partner units during those periods on a fully diluted
basis for employee options or other employee incentive compensation.
This includes all outstanding units and all common units issuable upon
exercise of employee options that have, as of the date of determination,
already vested or are scheduled to vest before the end of the quarter
immediately following the quarter for which the determination is made.
It also includes all units that have as of the date of determination
been earned by but not yet issued to our management for incentive
compensation; and
(3)there are no arrearages in payment of the minimum quarterly distribution
on the common units.
In specific circumstances, if the general partner is removed without cause,
the subordination period will end, any existing arrearages on the common units
will be extinguished, the senior subordinated units and junior subordinated
units will immediately convert into Class B common units and distributions on
the general partner units will no longer be subordinated.
Distributions of Available Cash from Operating Surplus for any quarter
during the subordination period will be made in the following manner:
. First, 100% to the common units, pro rata, until there has been
distributed for each common unit an amount equal to the minimum quarterly
distribution for that quarter.
. Second, 100% to the common units, pro rata, until there has been
distributed for each common unit an amount equal to any cumulative common
unit arrearages on each common unit for any prior quarter.
. Third, 100% to the senior subordinated units, pro rata, until there has
been distributed for each senior subordinated unit an amount equal to the
minimum quarterly distribution for that quarter.
16
. Fourth, 100% to the junior subordinated units and general partner units,
pro rata, until there has been distributed for each junior subordinated
unit and general partner unit an amount equal to the minimum quarterly
distribution for that quarter.
. Thereafter, in the manner described in "--Incentive Distributions During
the Subordination Period" below.
The general partner has a 1.85% general partner interest in Star Gas
Partners in the form of general partner units and a 0.01% general partner
interest in Star Gas Propane. References in this prospectus to distributions on
the general partner units disregard the general partner's 0.01% general partner
interest in Star Gas Propane.
Distributions of Available Cash from Operating Surplus After the Subordination
Period
Distributions of Available Cash from Operating Surplus for any quarter after
the subordination period will be made in the following manner:
(1)First, 100% to all units, pro rata, until there has been distributed to
each unit an amount equal to the minimum quarterly distribution for that
quarter.
(2)Thereafter, in the manner described in "--Incentive Distributions After
the Subordination Period" below.
Incentive Distributions During the Subordination Period
For any quarter that both (1) and (2) below occur, holders of the senior
subordinated units, junior subordinated units and general partner units will
receive incentive distributions as described below.
(1)Available Cash from Operating Surplus is distributed to each of the
common units, senior subordinated units, junior subordinated units and
general partner units in an amount equal to the minimum quarterly
distribution.
(2)Available Cash has been distributed on outstanding common units in the
amount as may be necessary to eliminate any cumulative common unit
arrearages.
After the distributions described in (1) and (2) above are met, additional
Available Cash from Operating Surplus for that quarter will be distributed
among the units in the following manner:
. First, 100% to all units, until each unit has received, in addition to
any distributions to the common units to eliminate any cumulative common
unit arrearages, a total of $0.604 per unit for that quarter (the "First
Target Distribution").
. Second, 86.7% to all units, pro rata, and 13.3% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata, until each common unit has received, in addition to any
distributions to eliminate any cumulative common unit arrearages, a total
of $0.711 per unit for that quarter (the "Second Target Distribution").
. Third, 76.5% to all units, pro rata, and 23.5% to all senior subordinated
units, junior subordinated units and general partner units, pro rata,
until each common unit has received, in addition to any distributions to
eliminate any cumulative common unit arrearages, a total of $0.926 per
unit for that quarter (the "Third Target Distribution").
. Thereafter, 51.0% to all units, pro rata, and 49.0% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata.
The partnership agreement may not be amended, including the issuance of
additional Star Gas Partners securities, in any manner that would increase the
aggregate amount of incentive distributions without the approval of a majority
of the outstanding units of the classes, each class voting separately, that
would be adversely affected.
17
The following table illustrates the amount of Available Cash from Operating
Surplus distributed pro rata as the base distribution to all unitholders pro
rata and the percentage of Available Cash distributed as incentive
distributions to the holders of senior subordinated units, junior subordinated
units and general partner units only at the target distribution levels. The
percentages in the table below are the percentage interests of the unitholders
in Available Cash from Operating Surplus distributed as base distributions to
all unitholders and distributed as incentive distributions based on the number
of units outstanding on the date of this prospectus.
Percentage of Available Cash
Percentage of Percentage of Distributed as Incentive Distributions
Quarterly Available Available to the Specified Unit Class
Distribution Cash Cash -------------------------------------
Amount per Distributed as Distributed as Senior Junior General
Common Base Incentive Subordinated Subordinated Partner
Unit Distributions Distributions Units Units Units
------------ -------------- -------------- ------------ ------------ -------
Minimum Quarterly Distribution $0.575 100.0% -- -- -- --
First Target Distribution..... 0.604 100.0 -- -- -- --
Second Target Distribution.... 0.711 86.7 13.3% 10.6% 1.4% 1.3%
Third Target Distribution..... 0.926 76.5 23.5 18.8 2.4 2.3
Thereafter.................... -- 51.0 49.0 39.2 5.0 4.8
The percentage allocation of incentive distributions among senior
subordinated units, junior subordinated units and general partner units, will
change in the future if there are additional non-proportional issuances of
units.
Incentive Distributions After the Subordination Period
For any quarter for which Available Cash from Operating Surplus is
distributed to each of the Class A common units, the Class B common units and
general partner units in an amount equal to the minimum quarterly distribution,
then any additional Available Cash from Operating Surplus for that quarter will
be distributed among the unitholders in the following manner:
. First, 100% to all units, pro rata, until each unit has received the
First Target Distribution.
. Second, 86.7% to all units, pro rata, and 13.3% to all Class B common
units and general partner units, pro rata, until each Class A common unit
has received the Second Target Distribution.
. Third, 76.5% to all units, pro rata, and 23.5% to all Class B common
units and general partner units, pro rata, until each Class A common unit
has received the Third Target Distribution.
. Thereafter, 51% to all units, pro rata, and 49% to all Class B common
units and general partner units, pro rata.
Distributions from Capital Surplus
Distributions of Available Cash from Capital Surplus will be made 100% on
all units, pro rata, until each common unit that was issued in our initial
public offering has received distributions equal to $22.00. This was the unit
price from the initial public offering. Thereafter, all distributions from
Capital Surplus will be distributed as if they were from Operating Surplus.
When a distribution is made from Capital Surplus, it is treated as if it
were a repayment of the unit price from the initial public offering. To reflect
repayment, the minimum quarterly distribution and the target distribution
levels will be adjusted downward by multiplying each amount by a fraction. This
fraction is determined as follows: the numerator is the unrecovered initial
unit price immediately after giving effect to the repayment and the denominator
is the unrecovered initial unit price immediately before the repayment. For
example, based on the Unrecovered Initial Unit Price of $22.00 per unit and
assuming Available Cash from
18
Capital Surplus of $11.00 per unit is distributed on all common units issued in
the initial public offering, then the amount of the minimum quarterly
distribution and the target distribution levels would each be reduced to 50% of
its initial level.
A "payback" of the unit price from the initial public offering occurs when
the unrecovered initial unit price is zero. At that time, the minimum quarterly
distribution and the target distribution levels each will have been reduced to
zero. All distributions of Available Cash from all sources after that time will
be treated as if they were from Operating Surplus. Because the minimum
quarterly distribution and the target distribution levels will have been
reduced to zero, the holders of the rights to incentive distributions will then
be entitled to receive 49% of all distributions of Available Cash, after
distributions for cumulative common unit arrearages.
Distributions from Capital Surplus will not reduce the minimum quarterly
distribution or any of the target distribution levels for the quarter in which
they are distributed.
Limitations and Prohibitions on Distributions on Subordinated Interests
Distributions on the senior subordinated units, junior subordinated units
and general partner units were prohibited during our fiscal year 1999 following
the completion of the Petro transaction. There was no prohibition on
distributions to common units during this time and all minimum quarterly
distributions were paid to common unitholders.
Beginning with the first quarter of our fiscal year 2000, which began on
October 1, 1999, no distributions will be made on the senior subordinated
units, junior subordinated units or general partner units, unless the aggregate
amount of distributions on all units for all quarters, beginning with the first
quarter of our fiscal year 2000, is equal to or less than the total Operating
Surplus generated by us since October 1, 1999. Solely for purposes of this
limitation, Operating Surplus does not include our cash balance on the date we
began operations, plus approximately $20.3 million.
The holders of the senior subordinated units, junior subordinated units and
general partner units are not prohibited from receiving distributions from
Capital Surplus in a partial liquidation during the subordination period.
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjustments made upon a distribution of Available Cash from
Capital Surplus, the following will each be proportionately adjusted upward or
downward, as appropriate, if any combination or subdivision of units should
occur:
(1)the minimum quarterly distribution;
(2)the target distribution levels;
(3)the Unrecovered Initial Unit Price;
(4)the number of additional common units issuable during the
subordination period without a unitholder vote;
(5)the number of Class B common units issuable upon conversion of the
senior subordinated units and the junior subordinated units; and
(6)other amounts calculated on a per unit basis.
However, no adjustment will be made by reason of the issuance of additional
units for cash or property. For example, if a two-for-one split of the common
units should occur, the minimum quarterly distribution, the target distribution
levels and the Unrecovered Initial Unit Price would each be reduced to 50% of
its initial level.
19
The minimum quarterly distribution and target distribution levels may also
be adjusted if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes. In this event, the minimum quarterly distribution and target
distribution levels for each quarter after that time would be reduced to
amounts equal to the product of:
(1) the minimum quarterly distribution or target distribution level;
multiplied by
(2) one minus the sum of:
(x) the highest marginal federal corporate income tax rate to
which we are then subject as an entity; plus
(y) any increase in the effective overall state and local income
tax rate to which we are subject as a result of the new
imposition of the entity level tax, after taking into
account the benefit of any deduction allowable for federal
income tax purposes for the payment of state and local
income taxes, but only to the extent of the increase in
rates resulting from that legislation or interpretation.
For example, assuming we are not previously subject to state and local income
tax, if we were to become taxable as an entity for federal income tax purposes
and we became subject to a maximum marginal federal, and effective state and
local, income tax rate of 38%, then the minimum quarterly distribution and the
target distribution levels would each be reduced to 62% of the amount thereof
immediately before the adjustment.
The minimum quarterly distributions and target level distributions may also
be adjusted in connection with the occurrence of certain events under our unit
purchase rights agreement.
Issuance of Additional Senior Subordinated Units
The partnership agreement provides for the issuance of up to 909,000
additional senior subordinated units if Petro meets specified financial tests.
Specifically, if the dollar amount of Petro Adjusted Operating Surplus per
Petro Unit equals or exceeds $2.90 for any four-quarter period that occurs
between the first and fifth anniversaries of the Petro transaction, we will
issue 303,000 senior subordinated units to the holders of the senior
subordinated units, junior subordinated units and general partner units of
record for the final quarter of that four-quarter period. After the end of the
subordination period, we would instead issue 303,000 Class B common units to
the holders of the Class B common units and the general partner units. In any
case, we may not issue more than 303,000 senior subordinated units or Class B
common units in any 365-day period. Furthermore, we may not issue more than
909,000 senior subordinated units or Class B common units under this provision
in the aggregate. We will not issue any fractional units in the issuance of
these additional units but will pay to each holder who would otherwise be
entitled to a fractional unit an amount in cash in lieu of those fractional
units. The amount of cash to be paid will be determined by multiplying the
fraction by the current market price of a senior subordinated unit or a Class B
common unit, as the case may be. For this purpose, the current market price is
set as of the date three days prior to issuance of the additional units. On the
first day after the record date for distributions for the first quarter ending
on or after the fifth anniversary of completion of the Petro transaction, the
right to receive the additional units shall lapse and all conversion rights
shall cease to exist.
In addition, in lieu of a portion of the cash purchase price that would
otherwise be due to the holders of the Petro 12 7/8% preferred stock, we may in
the future issue an additional 175,000 senior subordinated units.
"Petro Adjusted Operating Surplus" means, for any four-quarter period, the
Adjusted Operating Surplus generated by Petro, which includes all subsidiaries
of Star Gas Partners primarily engaged in the home heating oil business, during
that four quarter period. The determination of this amount is made in good
faith by a
20
majority of the members of the board of directors of the general partner acting
with the concurrence of the audit committee. In calculating Petro Adjusted
Operating Surplus:
(1)debt service, including the payment of principal, interest and
premium on all debt incurred or assumed by Petro or any of its
affiliates, the proceeds of which are used by or for the benefit of
Petro, including the proceeds from the debt offering, shall be
included to the extent that debt service is included in the
calculation of Operating Surplus; and
(2)debt service, including the payment of principal, interest and
premium, on all debt incurred or assumed by Petro or any of its
affiliates, the proceeds of which are not used by or for the benefit
of Petro, shall be excluded.
"Petro Units", for any date, means the sum of:
(1)the excess of the number of units outstanding at completion of the
Petro transaction over the number of units outstanding immediately
before the completion of the Petro transaction;
(2)the number of units issued by Star Gas Partners after the transaction
to the extent the net proceeds of which are contributed to Petro,
which for these purposes includes all subsidiaries of Star Gas
Partners primarily engaged in the home heating oil business;
(3)the number of senior subordinated units or Class B common units
issued under the partnership agreement based on the performance of
Petro; and
(4)the deemed number of units outstanding based upon a contribution of
capital to Petro by Star Gas Partners or any of its affiliates after
completion of the transaction, which contribution is not covered by
(2) above or traceable to debt proceeds, which number of deemed units
is obtained by dividing:
(A)the amount of that Star Gas Partners' contribution; by
(B)the Current Market Price of a common unit, or of a Class A common
unit after the termination of the subordination period.
For purposes of (4) above, the amount used to pay down the Petro debt discussed
below will be treated as if it were contributed to Petro by Star Gas Partners.
Specifically, Petro debt paid or debt allocated to Petro from internally
generated funds that exist at Petro only because Petro has not paid dividends
up to Star Gas Partners in an amount equal to the distributions that would have
been paid on the Petro Units had they been actual outstanding units of Star Gas
Partners will fall within (4) above. The distribution per senior subordinated
unit of Star Gas Partners shall be the amount that Star Gas Partners would have
been deemed to have distributed per Petro Unit had they been actual outstanding
units of Star Gas Partners. For purposes of the number of deemed outstanding
units in (4) above, those units shall be deemed to be issued on the date of the
capital contribution. For purposes of determining the number of outstanding
Petro Units for any period of time, the number of units issued under (2), (3)
and (4) above shall be determined on a weighted average basis based on the
amount of time they have been outstanding. For this purpose, common unit means
Class A common unit upon expiration of the subordination period. Petro Units
are not "units" as such term is used in this prospectus.
The terms upon which any of the said additional units may be issued may not
be amended in a manner that would materially adversely affect the rights of the
holders of those units without the affirmative vote of the holders of a
majority of the outstanding senior subordinated units, junior subordinated
units and general partner units, voting together as a single class.
Distributions of Cash upon Liquidation During the Subordination Period
Following the beginning of the dissolution and liquidation, assets will be
sold or otherwise disposed of and the partners' capital account balances will
be adjusted to reflect any resulting gain or loss. The proceeds of liquidation
will first be applied to the payment of our creditors in the order of priority
provided in the partnership agreement and by law and, thereafter, be
distributed on the units in accordance with respective capital account
balances, as so adjusted.
21
Partners are entitled to liquidation distributions in accordance with
capital account balances. Although operating losses are allocated on all units
pro rata, the allocations of gains and losses attributable to liquidation are
intended to favor the holders of outstanding common units over the holders of
all other outstanding units, to the extent of the unrecovered initial unit
price plus any cumulative common unit arrearages. However, no assurance can be
given that there will be sufficient gain upon liquidation of Star Gas Partners
to enable the holders of common units to fully recover their Unrecovered
Initial Unit Price and arrearages, even though there may be cash available for
distribution to the holders of senior subordinated units and junior
subordinated units. The manner of the adjustment is provided in the partnership
agreement. If our liquidation occurs before the end of the subordination
period, any gain, or unrealized gain attributable to assets distributed in
kind, will be allocated to the partners in the following manner:
. First, to the partners that have negative balances in their capital
accounts, to the extent of and in proportion to, those negative balances.
. Second, 100% to the common units, pro rata, until the capital account for
each common unit is equal to the Unrecovered Initial Unit Price for that
common unit plus the amount of the minimum quarterly distribution for the
fiscal quarter during which the dissolution occurs, plus any cumulative
common unit arrearages on those common units.
. Third, 100% to the senior subordinated units, pro rata, until the capital
account for each senior subordinated unit is equal to the Unrecovered
Initial Unit Price plus the amount of the minimum quarterly distribution
for the fiscal quarter during which the dissolution occurs.
. Fourth, 100% to the junior subordinated units and general partner units,
pro rata, until the capital account for each junior subordinated unit is
equal to the Unrecovered Initial Unit Price plus the amount of the
minimum quarterly distribution for the fiscal quarter during which the
dissolution occurs.
. Fifth, 100% to all units, pro rata, until there has been allocated under
this clause an amount per common unit equal to (a) the excess of the
First Target Distribution per unit over the then effective minimum
quarterly distribution per unit for each quarter of Star Gas Partners'
existence, less (b) the amount per common unit of any distributions of
Available Cash from Operating Surplus in excess of the then effective
minimum quarterly distribution per unit that was distributed 100% to all
units, pro rata, for each quarter of Star Gas Partners' existence.
. Sixth, 86.7% to all units, pro rata, 13.3% to senior subordinated units,
junior subordinated units and general partner units, pro rata, until
there has been allocated under this clause an amount per common unit
equal to (a) the excess of the Second Target Distribution per common unit
over the First Target Distribution per common unit for each quarter of
Star Gas Partners' existence, less (b) the amount per common unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per common unit but not in excess of the Second
Target Distribution for each quarter of Star Gas Partners' existence.
. Seventh, 76.5% to all units, pro rata, and 23.5% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata, until there has been allocated under this clause an amount per
common unit equal to (a) the excess of the Third Target Distribution per
common unit over the Second Target Distribution but not in excess of the
Third Target Distribution for each quarter of Star Gas Partners'
existence.
. Thereafter, 51.0% to all units, pro rata, and 49.0% to all senior
subordinated units, junior subordinated units and general partner units,
pro rata.
Any loss or unrealized loss will be allocated to the unitholders in the
following manner:
. First, 100% to the junior subordinated units and general partner units,
pro rata, in proportion to the positive balances in their capital
accounts until the positive balances in their capital accounts have been
reduced to zero.
22
. Second, 100% to the senior subordinated units in proportion to the
positive balances in their capital accounts until the positive balances
in their capital accounts have been reduced to zero.
. Third, 100% to the common units in proportion to the positive balances in
their capital accounts until the positive balances in their capital
accounts have been reduced to zero.
. Thereafter, to the general partner units.
Distributions of Cash upon Liquidation After the Subordination Period
If our liquidation occurs after the end of the subordination period, any
gain, or unrealized gain attributable to assets distributed in kind, will be
allocated to the partners in the following manner:
. First, to the partners that have negative balances in their capital
accounts to the extent of and in proportion to those negative balances.
. Second, 100% to all Class A common units and Class B common units, until
the capital account for each Class A common unit and Class B common unit
is equal to the Unrecovered Initial Unit Price, plus the amount of the
minimum quarterly distribution for the fiscal quarter during which the
dissolution occurs.
. Third, 100% to all units, pro rata, until there has been allocated under
this clause an amount per Class A common unit equal to (a) the excess of
the First Target Distribution per Class A common unit over the then
effective minimum quarterly distribution for each quarter of our
existence, less (b) the amount per Class A common unit of any
distributions of Available Cash from Operating Surplus in excess of the
then effective minimum quarterly distribution per Class A common unit
that was distributed 100% to units, pro rata, for each quarter of our
existence.
. Fourth, 86.7% to all units, pro rata, and 13.3% to Class B common units
and general partner units, pro rata, until there has been allocated under
this clause an amount per Class A common unit equal to (a) the excess of
the Second Target Distribution per Class A common unit over the First
Target Distribution per Class A common unit for each quarter of our
existence, less (b) the amount per Class A common unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution but not in excess of the Second Target
Distribution for each quarter of our existence.
. Fifth, 76.5% to all units, pro rata, and 23.5% to Class B common units
and general partner units, pro rata, until there has been allocated under
this clause an amount per Class A common unit equal to (a) the excess of
the Third Target Distribution per Class A common unit over the Second
Target Distribution per Class A common unit for each quarter of our
existence, less (b) the amount per Class A common unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution but not in excess of the Third Target
Distribution for each quarter of our existence.
. Thereafter, 51.0% to all units, pro rata, and 49.0% to all Class B common
units and general partner units, pro rata.
Any loss or unrealized loss will be allocated to the general partner units,
the Class A common units and the Class B common units, pro rata, in proportion
to the positive balances in their capital accounts, until the positive balances
in those capital accounts have been reduced to zero.
Interim adjustments to capital accounts will be made at the time we issue
additional interests or make distributions of property. These adjustments will
be based on the fair market value of the interests issued or the property
distributed and any gain or loss resulting from the adjustments will be
allocated to the unitholders in the same manner as gain or loss is allocated
upon liquidation.
23
DESCRIPTION OF THE COMMON UNITS
The common units have been registered under the Exchange Act and we are
subject to the reporting and certain other requirements of the Exchange Act. We
are required to file periodic reports containing financial and other
information with the SEC.
Purchasers of common units in this offering and later transferees of common
units, or their brokers, agents or nominees on their behalf, will be required
to execute transfer applications. The form of transfer application is included
as Annex A to this prospectus and is also shown on the reverse side of the
certificate representing common units. Purchasers may hold common units in
nominee accounts, provided that the broker, or other nominee, executes and
delivers a transfer application and becomes a limited partner. We will be
entitled to treat the nominee holder of a common unit as the absolute owner of
that unit, and the beneficial owner's rights will be limited solely to those
that it has against the nominee holder.
The Rights of Unitholders
Generally, the common units represent limited partner interests, which
entitle the holders of those units to participate in our distributions and
exercise the rights or privileges available to limited partners under the
partnership agreement. For a description of the relative rights and preferences
of holders of common units in and to our distributions, see "Cash Distribution
Policy."
Transfer Agent and Registrar
We have retained BankBoston N.A. as registrar and transfer agent for the
common units. The transfer agent receives a fee from us for serving in these
capacities. All fees charged by the transfer agent for transfers of common
units will be borne by us and not by the holders of common units, except that
fees similar to those customarily paid by stockholders for surety bond premiums
to replace lost or stolen certificates, taxes and other governmental charges,
special charges for services requested by a holder of a common unit and other
similar fees or charges will be borne by the unitholder. There will be no
charge to holders for disbursements of cash distributions. We will indemnify
the transfer agent, its agents and each of their shareholders, directors,
officers and employees against all claims and losses that may arise out of acts
performed or omitted for its activities as transfer agent, except for any
liability due to any negligence, gross negligence, bad faith or intentional
misconduct of the indemnified person or entity.
The transfer agent may resign, or be removed by us. If no successor is
appointed within 30 days, the general partner may act as the transfer agent and
registrar until a successor is appointed.
Obligations and Procedures for the Transfer of Units
Until a common unit has been transferred on our books, we and the transfer
agent, notwithstanding any notice to the contrary, may treat the record holder
as the absolute owner for all purposes, except as otherwise required by law or
stock exchange regulations. The transfer of the common units to persons that
purchase directly from underwriters will be accomplished through the
completion, execution and delivery of a transfer application by that purchaser
for that purchase. Any later transfers of a common unit will not be recorded by
the transfer agent or recognized by us unless the transferee executes and
delivers a transfer application. By executing and delivering a transfer
application, the transferee of common units does the following:
. Becomes the record holder of those units and shall be constituted as an
assignee until admitted into Star Gas Partners as a substituted limited
partner;
. Automatically requests admission as a substituted limited partner in Star
Gas Partners;
. Agrees to be bound by the terms and conditions of, and executes, the
partnership agreement;
. Represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
24
. Grants powers of attorney to the general partner and any liquidator of
Star Gas Partners as specified in the partnership agreement; and
. Makes the consents and waivers contained in the partnership agreement.
An assignee will become a substituted limited partner of Star Gas Partners
for the transferred common units upon satisfaction of the following two
conditions:
. The consent of the general partner, which may be withheld for any reason
in its sole discretion.
. The recording of the name of the assignee on the books and records of
Star Gas Partners.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in Star Gas Partners for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only the following rights:
. The right to assign the common unit to a purchaser or other transferee.
. The right to transfer the right to seek admission as a substituted
limited partner in Star Gas Partners for the transferred common units.
Thus, a purchaser or transferee of common units who does not execute and
deliver a transfer application will not receive cash distributions, unless the
common units are held in a nominee or "street name" account and the nominee or
broker has executed and delivered a transfer application for those common
units. In addition, such purchaser or transferee may not receive some federal
income tax information or reports furnished to record holders of common units.
The transferor of common units will have a duty to provide the transferee with
all information that may be necessary to obtain registration of the transfer of
the common units, but a transferee agrees, by acceptance of the certificate
representing common units, that the transferor will not have a duty to insure
the execution of the transfer application by the transferee and will have no
liability or responsibility if the transferee neglects or fails to execute and
forward the transfer application to the transfer agent.
25
DESCRIPTION OF PARTNERSHIP SECURITIES
Limitation on Issuance of Additional Partnership Securities
Except as discussed below, the general partner is authorized to cause us to
issue an unlimited number of additional partnership securities for the
consideration and on the terms and conditions established in its sole
discretion, without the approval of any limited partners. Partnership
securities means any class or series of units of limited partner interest other
than common units, any option, right, warrant or appreciation rights relating
to these securities or any other type of equity interest or rights to acquire
any equity interest that Start Gas Partners may issue according to its
partnership agreement.
Except as described in (1) through (3) below, during the subordination
period, we may not issue an aggregate of more than 2,500,000 additional common
units or units on a parity with the common units without the prior approval of
at least a majority of the outstanding common units, other than those held by
the general partner and its affiliates.
(1) If the issuance occurs:
(a)for an acquisition or a capital improvement; or
(b)to repay debt incurred for an acquisition or a capital
improvement;
in each case, where the acquisition or capital improvement involves
assets that would have, on a pro forma basis, resulted in an increase in
the amount of Adjusted Operating Surplus calculated on a per units basis
for all outstanding units for each of the four most recently completed
quarters.
(2) If the proceeds from the issuance are used exclusively to repay up to
$20 million of indebtedness of Star Gas Partners, Star Gas Propane or
any of its subsidiaries.
(3) The issuance of Class B common units upon the conversion of the senior
subordinated units and junior subordinated units at the end of the
subordination period.
Also, the partnership agreement may not be amended, including to permit the
issuance of additional partnership securities, in any manner that would
increase the aggregate amount of incentive distributions without the approval
of a majority of the outstanding units of the classes, each class voting
separately, that would be adversely affected.
Issuance of Additional Partnership Securities
The following is a description of the general terms and provisions of the
partnership securities. The particular terms of any series of partnership
securities will be described in the applicable prospectus supplement and the
amendment to the partnership agreement relating to that series of partnership
securities, which will be filed as an exhibit to or incorporated by reference
in this prospectus at or prior to the time of issuance of any such series of
partnership securities. If so indicated in a prospectus supplement, the terms
of any such series may differ from the terms set forth below.
Subject to the limitations described above, the general partner is
authorized to approve the issuance of one or more series of partnership
securities without further authorization of the limited partners and to fix the
number of securities, the designations, rights, privileges, restrictions and
conditions of any such series.
The applicable prospectus supplement will set forth the number of
securities, particular designation, relative rights and preferences and the
limitations of any series of partnership securities in respect of which this
prospectus is delivered. The particular terms of any such series will including
the following:
. the maximum number of securities to constitute the series and the
designation and ranking thereof;
26
. the annual distribution rate, if any, on securities of the
series, whether such rate is fixed or variable or both, the dates
from which distributions will begin to accrue or accumulate,
whether distributions will be cumulative and whether such
distributions shall be paid in cash, securities or otherwise;
. whether the securities of the series will be redeemable and, if
so, the price at the terms and conditions on which the securities
of the series may be redeemed, including the time during which
securities of the series may be redeemed and any accumulated
distributions thereof that the holders of the securities of the
series shall be entitled to receive upon the redemption thereof;
. the liquidation preference, if any, applicable to securities of
the series;
. the terms and conditions, if any, on which the securities of the
series shall be convertible into, or exchangeable for, securities
of any other class or classes of partnership securities,
including the price or prices or the rate or rates of conversion
or exchange and the method, is any, of adjusting the same;
. the voting rights, if any, of the securities of the series;
The holders of partnership securities will have no preemptive rights.
Partnership securities will be fully paid and nonassessable when issued upon
full payment of the purchase price therefor. The prospectus supplement will
contain, if applicable, a description of the material United States federal
income tax consequences relating to the purchase and ownership of the series of
partnership securities offered by the prospectus supplement. The transfer
agent, registrar and distributions disbursement agent for the partnership
securities will be designated in the applicable prospectus supplement.
Unit Purchase Rights
Each common unit and each other partnership security consisting of a unit of
limited or general partnership interest includes a right to purchase from us a
Class A common unit at a purchase price of $80.00 per unit, subject to
adjustment. The rights are issued pursuant to a rights agreement between us and
American Stock Transfer & Trust Company as rights agent. We have summarized
selected portions of the rights agreement and the rights below. For a complete
description of the rights, we encourage you to read the summary below and the
rights agreement, which we have filed as an exhibit to the registration
statement of which this prospectus is a part.
Detachment of Rights; Exercisability
The rights are attached to all certificates representing our currently
outstanding units and will attach to all unit certificates we issue prior to
the "distribution date." That date will occur, except in some cases, on the
earlier of:
. ten days following a public announcement that a person or group
of affiliated or associated persons, who we refer to collectively
as an "acquiring person," has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of either our
outstanding common units or the aggregate of our outstanding
senior subordinated units and junior subordinated units, or
. ten business days following the start of a tender offer or
exchange offer that would result in a person becoming an
acquiring person.
Our general partner may defer the distribution date in some circumstances.
Also, some inadvertent acquisitions of our units will not result in a person
becoming an acquiring person if the person promptly divests itself of
sufficient units.
27
Until the distribution date:
. unit certificates will evidence the rights,
. the rights will be transferable only with those certificates,
. new unit certificates will contain a notation incorporating the
rights agreement by reference, and
. the surrender for transfer of any unit certificate will also
constitute the transfer of the rights associated with the units
represented by the certificate.
The rights are not exercisable until the distribution date and will expire
at the close of business on April 16, 2011, unless we redeem or exchange them
at an earlier date as described below.
As soon as practicable after the distribution date, the rights agent will
mail certificates representing the rights to holders of record of units as of
the close of business on the distribution date. From that date on, only
separate rights certificates will represent the rights. We will issue rights
with all units issued prior to the distribution date. We will also issue rights
with units issued after the distribution date in connection with some employee
benefit plans or upon conversion of some securities. Except as otherwise
determined by our board of directors, we will not issue rights with any other
units issued after the distribution date.
Flip-In Event
A "flip-in event" will occur under the rights agreement when a person
becomes an acquiring person otherwise than pursuant to a "permitted offer." The
rights agreement defines "permitted offer" as a tender or exchange offer for
all outstanding units at a price and on terms that our general partner
determines to be fair to and otherwise in the best interests of our unitholders.
If a flip-in event occurs, each right, other than any right that has become
null and void as described below, will become exercisable following the end of
the subordination period to receive the number of Class A common units, or in
some specified circumstances, cash, property or other securities, which has a
"current per unit market price" equal to two times the exercise price of the
right. Please refer to the rights agreement for the definition of "current per
unit market price."
Flip-Over Event
A "flip-over event" will occur under the rights agreement when, at any time
from and after the time a person becomes an acquiring person:
. we are acquired or we acquire such person in a merger or other
business combination transaction, other than specified mergers
that follow a permitted offer, or
. 50% or more of our assets, cash flow or earning power is sold,
leased or transferred.
If a flip-over event occurs, each holder of a right, except rights that are
voided as described below, will thereafter have the right to receive, on
exercise of the right, a number of common units or equivalent securities of the
acquiring company that has a current market price equal to two times the
exercise price of the right.
When a flip-in event or a flip-over event occurs, all rights that then are,
or under the circumstances the rights agreement specifies previously were,
beneficially owned by an acquiring person or specified related parties will
become null and void in the circumstances the rights agreement specifies.
Class A Common Units
After the distribution date and following the end of the subordination
period, each right will entitle the holder to purchase Class A common units,
which is how we refer to common units in the partnership agreement following
the end of the subordination period. Please refer to the "Description of Common
Units" section in this prospectus for additional information about our common
units.
28
Antidilution
The number of rights associated with a unit, the number of Class A common
units issuable upon exercise of a right and the exercise price of the right are
subject to adjustment in the event of a unit distribution on, or a subdivision,
combination or reclassification of, our common units occurring prior to the
distribution date. The exercise price of the rights and the number of Class A
common units or other securities or property issuable on exercise of the rights
are subject to adjustment from time to time to prevent dilution in the event of
some specified transactions affecting the common units.
With some exceptions, we will not be required to adjust the exercise price
of the rights until cumulative adjustments amount to at least 1% of the
exercise price. The rights agreement also will not require us to issue
fractional Class A common units and, in lieu thereof, we will make a cash
payment based on the market price of the common units.
Redemption of Rights
At any time until the time a person becomes an acquiring person, we may
redeem the rights in, whole, but not in part, at a price of $0.01 per right,
payable, at our option, in cash, securities or such other consideration as our
general partner may determine. Upon such redemption, the rights will terminate
and the only right of the holders of rights will be to receive the $0.01
redemption price.
Exchange of Rights
At any time after the occurrence of a flip-in event and prior to a person's
becoming the beneficial owner of 50% or more of our outstanding units or the
occurrence of a flip-over event, we may exchange the rights, other than rights
owned by an acquiring person or an affiliate or an associate of an acquiring
person, which will have become void, in whole or in part, at an exchange ratio
of one Class A common unit, and/or other equity securities deemed to have the
same value as one Class A common unit, per right, subject to adjustment.
Substitution
If we have an insufficient number of authorized but unissued Class A common
units available to permit an exercise or exchange of rights upon the occurrence
of a flip-in event, we may substitute other specified types of property for
Class A common units so long as the total value received by the holder of the
rights is equivalent to the value of the Class A common units that the
unitholder would otherwise have received. We may substitute cash, property,
equity securities or debt, reduce the exercise price of the rights or use any
combination of the foregoing.
No Rights as a Unitholder; Taxes
Until a right is exercised, a holder of rights will have no rights to vote
or receive distributions or any other rights as a holder of our units.
Unitholders may, depending upon the circumstances, recognize taxable income in
the event that the rights become exercisable for our Class A common units, or
other consideration, or for the common units or equivalent securities of the
acquiring company or are exchanged as described above.
Amendment of Terms of Rights
Our general partner may amend any of the provisions of the rights agreement,
other than some specified provisions relating to the principal economic terms
of the rights and the expiration date of the rights, at any time prior to the
time a person becomes an acquiring person. Thereafter, our general partner may
only amend the rights agreement in order to cure any ambiguity, defect or
inconsistency or to make changes that do not materially and adversely affect
the interests of holders of the rights, excluding the interests of any
acquiring person.
29
Rights Agent
American Stock Transfer & Trust Company serves as rights agent with regard
to the rights.
Antitakeover Effects
The rights will have anti-takeover effects. They will cause substantial
dilution to any person or group that attempts to acquire us without the
approval of our general partner. As a result, the overall effect of the rights
may be to make more difficult or discourage any attempt to acquire us even if
such acquisition may be favorable to the interests of our unitholders. Because
our general partner can redeem the rights or approve a permitted offer, the
rights should not interfere with a merger or other business combination
approved by our general partner.
Adoption of Amendments to Partnership Agreement
On April 17, 2001, we adopted Amendment No. 1 to our amended and restated
partnership agreement to provide for new Article 36 which is substantially the
same as Section 203 of the Delaware General Corporation Law.
New Article 36 prohibits an "interested holder," which is defined generally
as a person or group owning 15% or more of the partnership's outstanding units,
from engaging in a "business combination" with the partnership for three years
following the date such person became an interested holder unless:
(i) Before such person or group became an interested holder, the general
partner approved either the transaction in which the interested holder
became an interested holder or the proposed business combination;
(ii) Upon consummation of the transaction that resulted in the interested
holder becoming an interested holder, the interested holder owns at least
85% of the outstanding units at the time the transaction commenced
(excluding units held by the general partner and its affiliates); or
(iii) Following the transaction in which such person or group became an
interested holder, the business combination is approved by the general
partner and authorized at a meeting of the unitholders by the affirmative
vote of the holders of two-thirds of the outstanding units that are not
owned by the interested holder.
Amendment No. 1 also includes certain amendments to the terms of our
partnership agreement that are necessary in order to implement the rights
agreement.
30
DESCRIPTION OF DEBT SECURITIES
General
The debt securities will be:
. our direct secured or unsecured general obligations; and
. either senior debt securities or subordinated debt securities.
Senior debt securities will be issued under a Senior Indenture and
subordinated debt securities will be issued under a Subordinated Indenture. The
Senior Indenture and the Subordinated Indenture are each referred to as an
"Indenture" and collectively referred to as the "Indentures." We will enter
into the Indentures with a trustee that is qualified to act under the Trust
Indenture Act of 1939, as amended (the "TIA") (together with any other
trustee(s) chosen by us and appointed in a supplemental indenture with respect
to a particular series of debt securities, the "Trustee"). The Trustee for each
series of debt securities will be identified in the applicable prospectus
supplement. Any supplemental indentures will be filed by us from time to time
by means of an exhibit to a Current Report on Form 8-K and will be available
for inspection at the corporate trust office of the Trustee, or as described
below under "Where You Can Find More Information." The Indentures will be
subject to, and governed by, the TIA. We will execute an Indenture and
supplemental indenture if and when we issue any debt securities.
We have summarized below the material provisions of the Indentures in the
following order:
. those provisions that apply only to the Senior Indenture;
. those provisions that apply only to the Subordinated Indenture; and
. those provisions that apply to both Indentures.
We have not restated the Indentures in their entirety in this prospectus.
You should read the Indentures, because they, and not this description, control
your rights as holders of the debt securities. Capitalized terms used in the
summary have the meanings specified in the Indentures.
In the Indentures, the term "Subsidiary" means, with respect to any person:
. any partnership of which more than 50% of the partners' equity interests
(considering all partners' equity interests as a single class) is at the
time owned or controlled, directly or indirectly, by such person or one
or more of the other Subsidiaries of such person or combination thereof;
or
. any corporation, association or other business entity of which more than
50% of the total voting power of the equity interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such person or one or more of the
other Subsidiaries of such person or combination thereof.
Specified Terms of Each Series of Debt Securities in the Prospectus Supplement
A prospectus supplement and a supplemental indenture relating to any series
of debt securities being offered will include specific terms relating to such
debt securities. These terms will include some or all of the following:
. whether the debt securities are senior or subordinated debt securities;
. the title of the debt securities;
. the total principal amount of the debt securities;
. the assets, if any, that are pledged as security for the payment of the
debt securities;
31
. whether we will issue the securities in individual certificates to each
holder in registered form, or in the form of temporary or permanent
global securities held by a depository on behalf of holders;
. the prices at which we will issue the debt securities;
. the portion of the principal amount that will be payable if the maturity
of the debt securities is accelerated;
. the currency or currency unit in which the debt securities will be
payable, if not U.S. dollars;
. any right we may have to defer payments of interest by extending the
dates payments are due and whether interest on those deferred amounts
will be payable as well;
. the date or dates on which the principal of the debt securities will be
payable;
. the interest rate that the debt securities will bear and the interest
payment dates for the debt securities;
. any conversion or exchange provisions;
. any optional redemption provisions;
. any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
. any changes to or additional Events of Default or covenants; and
. any other terms of the debt securities.
Provisions Only in the Senior Indenture
Summary
The senior debt securities will rank equally in right of payment with all of
our other senior and unsubordinated debt and senior in right of payment to any
of our subordinated debt (including the subordinated debt securities). The
Senior Indenture will contain provisions that:
. limit our ability to put liens on our principal assets; and
. limit our ability to sell and lease back our principal assets.
The Subordinated Indenture will not contain any similar provisions. We have
described below these provisions and some of the defined terms used in them.
Limitations on Liens
The Senior Indenture will provide that Star Gas Partners will not, nor will
it permit any Subsidiary to, create, assume, incur of suffer to exist any lien
upon any property or assets, whether owned or leased on the date of the Senior
Indenture or thereafter acquired, to secure any debt of Star Gas Partners or
any other person (other than the senior debt securities issued thereunder),
without in any such case making effective provision whereby all of the senior
debt securities outstanding thereunder shall be secured equally and ratably
with, or prior to, such debt so long as such debt shall be so secured.
There is excluded from this restriction:
1. Permitted Liens (as defined below);
2. with respect to any series, any lien upon any property or assets of Star
Gas Partners or any Subsidiary in existence on the date the senior debt
securities of such series are first issued or provided for pursuant to
agreements existing on such date;
3. any lien upon any property or assets created at the time of acquisition
of such property or assets by Star Gas Partners or any Subsidiary or
within one year after such time to secure all or a portion of
indebtedness incurred to refund other indebtedness used to pay the
purchase price for such property
32
or assets or debt incurred to finance such purchase price, whether
such debt was incurred prior to, at the time of or within one year
after the date of such acquisition;
4. any lien upon any property or assets existing thereon at the time of
the acquisition thereof by Star Gas Partners or any Subsidiary;
provided, however, that such lien only encumbers the property or
assets so acquired;
5. any lien upon property or assets of a person existing thereon at the
time such person becomes a Subsidiary by acquisition, merger or
otherwise; provided, however, that such lien only encumbers the
property or assets of such person at the time such person becomes a
Subsidiary;
6. any lien upon any property or assets to secure all or part of
indebtedness incurred to refund other indebtedness used to pay the
cost of construction, development, repair or improvements thereon or
to secure debt incurred prior to, at the time of, or within one year
after completion of such construction, development, repair or
improvements or the commencement of full operations thereof (whichever
is later), to provide funds for any such purpose;
7. liens are imposed by law or order as a result of any proceeding before
any court or regulatory body that are being contested in good faith,
and liens which secure a judgment or other court-ordered award or
settlement as to which Star Gas Partners or the applicable Subsidiary
has not exhausted its appellate rights;
8. any lien upon any additions, improvements, replacements, repairs,
fixtures, appurtenances or component parts thereof attaching to or
required to be attached to property or assets pursuant to the terms of
any mortgage, pledge agreement, security agreement or other similar
instrument, creating a lien upon such property or assets permitted by
clauses (1) through (7) above; or
9. any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or
replacements) of liens, in whole or in part, referred to in clauses
(1) through (8) above; provided, however, that any such extension,
renewal, refinancing, refunding or replacement lien shall be limited
to the property or assets covered by the lien extended, renewed,
refinanced, refunded or replaced and that the obligations secured by
any such extension, renewal, refinancing, refunding or replacement
lien shall be in an amount not greater than the amount of the
obligations secured by the lien extended, renewed, refinanced,
refunded or replaced plus any expenses of Star Gas Partners and its
subsidiaries (including any premium) incurred in connection with such
extension, renewal, refinancing, refunding replacement; or
10. any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of Star Gas
Partners or any Subsidiary.
Notwithstanding the foregoing, under the Senior Indenture, Star Gas Partners
may, and may permit any Subsidiary to, create, assume, incur, or suffer to
exist any lien upon any property or assets to secure debt of Star Gas Partners
or any person (other than the senior debt securities) that is not excepted by
clauses (1) through (10), inclusive, above without securing the senior debt
securities issued under the Senior Indenture, provided that the aggregate
principal amount of all debt then outstanding secured by such lien and all
similar liens, together with all Attributable Indebtedness (as defined below)
from Sale-Leaseback Transactions (excluding Sale-Leaseback Transactions
permitted by clauses (1) through (4), inclusive, of the first paragraph of the
restriction on sale-leaseback covenant described below) does not exceed 10% of
Consolidated Net Worth (as defined below).
"Permitted Liens" means:
1. zoning restrictions, easements, licenses, covenants, reservations,
restrictions on the use of real property or minor irregularities of
title incident thereto that do not, in the aggregate, materially detract
from the value of the property or the assets of Star Gas Partners and
its Subsidiaries taken as a whole;
33
2. any statutory or governmental lien or lien arising by operation of
law, or any mechanics', repairmen's, materialmen's, suppliers',
carriers', landlords', warehousemen's or similar lien incurred in the
ordinary course of business which is not yet due or which is being
contested in good faith by appropriate proceedings and any
undetermined lien which is incidental to construction, development,
improvement or repair;
3. the right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant, license,
permit or by any provision of law, to purchase or recapture or to
designate a purchaser of any property;
4. liens of taxes and assessments which are (A) for the then current
year, (B) not at the time delinquent, or (C) delinquent but the
validity of which is being contested at the time by Star Gas Partners
or any Subsidiary in good faith;
5. liens of, or to secure performance of, leases, other than capital
leases;
6. any lien upon, or deposits of, any assets in favor of any surety
company or clerk of court for the purpose of obtaining indemnity or
stay of judicial proceedings;
7. any lien upon property or assets acquired or sold by Star Gas Partners
or any Subsidiary resulting from the exercise of any rights arising
out of defaults on receivables;
8. any lien incurred in the ordinary course of business in connection
with workers' compensation, unemployment insurance, temporary
disability, social security, retiree health or similar laws or
regulations or to secure obligations imposed by statute or
governmental regulations;
9. any lien in favor of Star Gas Partners or any Subsidiary;
10. any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to
secure partial, progress, advance, or other payments pursuant to any
contract or statute, or any debt incurred by Star Gas Partners or any
Subsidiary for the purpose of financing all or any part of the
purchase price of, or the cost of constructing, developing, repairing
or improving, the property or assets subject to such lien;
11. any lien securing industrial development, pollution control or similar
revenue bonds;
12. any lien securing debt of Star Gas Partners or any Subsidiary, all or
a portion of the net proceeds of which are used, substantially
concurrent with the funding thereof (and for purposes of determining
such "substantial concurrence," taking into consideration, among other
things, required notices to be given to holders of outstanding
securities under the Indenture (including the debt securities) in
connection with such refunding, refinancing or repurchase, and the
required corresponding durations thereof), to refinance, refund or
repurchase all outstanding securities under this Indenture (including
the debt securities), including the amount of all accrued interest
thereon and reasonable fees and expenses and premium, if any, incurred
by Star Gas Partners or any Subsidiary in connection therewith;
13. liens in favor of any person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or surety
obligations required or requested by any governmental authority in
connection with any contract or statute;
14. any lien upon or deposits of any assets to secure performance of bids,
trade contracts, leases or statutory obligations;
15. liens if any securing the payment of the securities; or
34
16. liens existing on any property of any person at the time it becomes a
Subsidiary, or existing prior to the time of acquisition (and not
created in anticipation of such acquisition) upon any property
acquired by Star Gas Partners or any Subsidiary through purchase,
merger or consolidation or otherwise, whether or not assumed by or
such Subsidiary, provided that (i) any such lien shall be confined
solely to the item or items of property so acquired and, if required
by the terms of the instrument originally creating such lien, other
property which is an improvement to or is acquired for specific use in
connection with such acquired property and (i) the principal amount of
the debt secured by any such lien shall at no time exceed an amount
equal to the lesser of (A) the cost of such property to Star Gas
Partners such Subsidiary, as the case may be, and (B) the fair market
value of such property (as determined in good faith by the general
partner of Star Gas Partners) at the time such person owning such
property becomes a Subsidiary or at the time of such acquisition by
Star Gas Partners or such Subsidiary, as the case may be.
"Consolidated Net Worth" means the amount by which
1. the total assets appearing on a consolidated balance sheet of Star Gas
Partners and its Subsidiaries prepared in accordance with generally
accepted accounting principles as of the date of determination (after
eliminating all amounts properly attributable to minority interests in
the stock and surplus, if any, of its Subsidiaries) exceeds
2. total liabilities of Star Gas Partners and its Subsidiaries appearing
on a consolidated balance sheet of Star Gas Partners and its
Subsidiaries prepared in accordance with generally accepted accounting
principles as of the date of determination;
in each case after eliminating all intercompany transactions.
Restriction on Sale-Leasebacks
The Senior Indenture will provide that Star Gas Partners will not and will
not permit any Subsidiary to, engage in the sale or transfer by Star Gas
Partners or any Subsidiary of any property or assets to a person (other than
Star Gas Partners or a Subsidiary) and the taking back by Star Gas Partners or
any Subsidiary, as the case may be, of a lease of such property or assets (a
"Sale-Leaseback Transaction"), unless:
1. such Sale-Leaseback Transaction occurs within one year from the date
of completion of the acquisition of the property or assets subject
thereto or the date of the completion of construction, development or
substantial repair or improvement, or commencement of full operations
on such property or assets, whichever is later;
2. the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than the lesser of (A) three years and
(B) 60% of the useful remaining life of such property as determined in
good faith by the general partner of Star Gas Partners;
3. Star Gas Partners or such Subsidiary would be entitled to incur debt
secured by a lien on the property or assets subject thereto in a
principal amount equal to or exceeding the Attributable Indebtedness
from such Sale-Leaseback Transaction without equally and ratably
securing the senior debt securities; or
4. Star Gas Partners or such Subsidiary, within a one-year period after
such Sale-Leaseback Transaction, applies or causes to be applied an
amount not less than the Attributable Indebtedness from such
Sale-Leaseback Transaction to (A) the prepayment, repayment,
redemption, reduction or retirement of any debt of Star Gas Partners
or any Subsidiary that is not subordinated to the senior debt
securities, or (B) the expenditure or expenditures for property or
assets used or to be used in the ordinary course of business of Star
Gas Partners or its Subsidiaries.
35
"Attributable Indebtedness," when used with respect to any Sale-Leaseback
Transaction, means, as at the time of determination, the present value
(discounted at the rate set forth or implicit in the terms of the lease
included in such transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of property taxes,
repairs, maintenance, insurance, assessments, utilities, operating and labor
costs and other items that do not constitute payments for property rights)
during the remaining term of the lease included in such Sale-Leaseback
Transaction (including any period for which such lease has been extended). In
the case of any lease that is terminable by the lessee upon the payment of a
penalty or other termination payment, such amount shall be the lesser of the
amount determined assuming termination upon the first date such lease may be
terminated (in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it may be so
terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Senior Indenture Star Gas Partners
may, and may permit any Subsidiary to, effect any Sale-Leaseback Transaction
that is not excepted by clauses (1) through (4), inclusive, of the above
paragraph, provided that the Attributable Indebtedness from such Sale-Leaseback
together with the aggregate principal amount of outstanding debt (other than
the senior debt securities) secured by liens upon property and assets not
excepted by clauses (1) through (16), inclusive, of the second paragraph of the
limitation on liens covenant described above, do not exceed 10% of Consolidated
Net Worth.
Provisions Only in the Subordinated Indenture
Subordinated Debt Securities Subordinated to Senior Debt
The subordinated debt securities will rank junior in right of payment to all
of our Senior Debt. "Senior Debt" is defined to include all notes or other
evidences of indebtedness not expressed to be subordinate or junior in right of
payment to the subordinated debt securities or any other indebtedness of Star
Gas Partners ranking pari passu or junior in right of payment to the
subordinated debt securities.
Payment Blockages
The Subordinated Indenture will provide that no payment of principal,
interest and any premium on the subordinated debt securities may be made in the
event:
. we or our property are involved in any voluntary or involuntary
liquidation or bankruptcy;
. we fail to pay the principal, interest, any premium or any other amounts
on any Senior Debt when due; or
. we have a nonpayment default on any Senior Debt that imposes a payment
blockage on the subordinated debt securities for a maximum of 179 days at
any one time.
No Limitation on Amount of Senior Debt
The Subordinated Indenture will not limit the amount of Senior Debt that we
incur.
Provisions That Apply to Both Indentures
Consolidation, Merger or Asset Sale
Each Indenture will, in general, allow us to consolidate or merge with
another domestic entity. They will also allow us to sell, lease or transfer all
or substantially all of our property and assets to another domestic entity. If
this happens, the remaining or acquiring entity must assume all of our
responsibilities and liabilities under the Indentures including the payment of
all amounts due on the debt securities and performance of the covenants in the
Indentures.
36
However, we may only consolidate or merge with or into an entity or sell,
lease or transfer all or substantially all of our assets according to the terms
and conditions of the Indentures, which will include the following requirements:
. the remaining or acquiring entity is organized under the laws of the
United States, any state or the District of Columbia;
. the remaining or acquiring entity assumes Star Gas Partners' obligations
under the Indentures; and
. immediately after giving effect to the transaction no Default or Event of
Default (as defined below) exists.
The remaining or acquiring entity will be substituted for us in the
Indentures with the same effect as if it had been an original party to the
Indentures. Thereafter, the successor may exercise our rights and powers under
the Indentures, in our name or in its own name. If we sell or transfer all or
substantially all of our assets, we will be released from all our liabilities
and obligations under the Indentures and under the debt securities. If we lease
all or substantially all of our assets, we will not be released from our
obligations under the Indentures.
Modification of Indentures
We may modify or amend each Indenture if the holders of a majority in
principal amount of the outstanding debt securities of all series issued
under the Indenture affected by the modification or amendment consent to it.
Without the consent of each outstanding debt security affected, however, no
modification may:
. change the stated maturity of the principal of or any installment of
principal of or interest on any debt security
. reduce the principal amount of, the interest rate on or the premium
payable upon redemption of any debt security
. change the redemption date for any debt security
. Change our obligation, if any, to pay additional amounts
. reduce the principal amount of an original discount debt security payable
upon acceleration of maturity
. change the currency in which any debt security or any premium or interest
on any debt security is payable
. change the redemption right of any holder
. impair the right to institute suit for the enforcement of any payment on
any debt security
. reduce the percentage in principal amount of outstanding debt securities
of any series necessary to modify the Indenture, to waive compliance with
certain provisions of the Indenture or to waive certain defaults
. reduce quorum or voting requirements
. change our obligation to maintain an office or agency in the places and
for the purposes required by the Indenture
. modify any of the above provisions
We may modify or amend the Indenture without the consent of any holders of
the debt securities in certain circumstances, including:
. to provide for the assumption of our obligations under the Indenture and
the debt securities by a successor upon any merger, consolidation or
asset transfer
37
. to add covenants and events of default or to surrender any rights we have
under the Indenture
. to make any change that does not adversely affect any outstanding debt
securities of a series in any material respect
. to secure the senior debt securities as described above under "Provisions
Only in the Senior Indenture-Limitations on Liens"
. to provide for successor trustees
. to cure any ambiguity, omission, defect or inconsistency
The holders of a majority in principal amount of the outstanding debt
securities of any series may waive past defaults under the Indenture and
compliance by us with our covenants with respect to the debt securities of that
series only. Those holders may not however, waive any default in any payment on
any debt security of that series or compliance with a provision that cannot be
modified or amended without the consent of each holder affected.
Events of Default and Remedies
"Event of Default" when used in an Indenture, will mean any of the following:
. failure to pay the principal of, or any premium on, any debt security
when due;
. failure to pay interest on any debt security for 30 days after such
payment is due;
. failure to perform any other covenant in the Indenture that continues for
60 days after being given written notice;
. certain events of bankruptcy, insolvency or reorganization of Star Gas
Partners; or
. any other Event of Default included in any Indenture or supplemental
indenture.
The subordination does not affect our obligation, which is absolute and
unconditional, to pay, when due, the principal of and any premium and interest
on the subordinated debt securities. In addition, the subordination does not
prevent the occurrence of any default under the subordinated indenture.
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under an Indenture. The Trustee may withhold notice to the
holders of debt securities of any default (except in the payment of principal
or interest) if it considers such withholding of notice to be in the best
interests of the holders.
If an Event of Default for any series of debt securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of the series may declare the entire principal of
all the debt securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the debt securities of that series can void the
declaration.
Other than its duties in case of a default, a Trustee is not obligated to
exercise any of its rights or powers under any Indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnification. If they provide this reasonable indemnification, the holders
of a majority in principal amount of any series of debt securities may direct
the time, method and place of conducting any proceeding or any remedy available
to the Trustee, or exercising any power conferred upon the Trustee, for any
series of debt securities.
38
No Limit on Amount of Debt Securities
Neither of the Indentures will limit the amount of debt securities that we
may issue. Each Indenture allows us to issue debt securities up to the
principal amount that we authorize.
Registration of Notes
We may issue debt securities of a series in registered, bearer, coupon or
form.
Minimum Denominations
Unless the prospectus supplement for each issuance of debt securities states
otherwise, the debt securities will be issued in registered form in amounts of
$1,000 each or multiples of $1,000.
No Personal Liability of General Partner
Unless otherwise stated in a prospectus supplement and supplemental
indenture relating to a series of debt securities being offered, the general
partner and its directors, officers, employees and stockholders will not have
any liability for our obligations under the Indentures or the debt securities.
Each holder of debt securities by accepting a debt security waives and releases
all such liability. The waiver and release are part of the consideration for
the issuance of the debt securities.
Payment and Transfer
Principal, interest and any premium on fully registered securities will be
paid at designated places. Payment will be made by check mailed to the persons
in whose names the debt securities are registered on days specified in the
Indentures or any prospectus supplement. Debt securities payments in other
forms will be paid at a place designated by us and specified in a prospectus
supplement.
Fully registered securities may be transferred or exchanged at the corporate
trust office of the Trustee or at any other office or agency maintained by us
for such purposes, without the payment of any service charge except for any tax
or governmental charge.
Form, Exchange, Registration and Transfer
Debt securities of any series will be exchangeable for other debt securities
of the same series, the same total principal amount and the same terms but in
different authorized denominations in accordance with the Indenture. Holders
may present debt securities for registration of transfer at the office of the
security registrar or any transfer agent we designate. The security registrar
or transfer agent will effect the transfer or exchange when it is satisfied
with the documents of title and identity of the person making the request. We
will not charge a service charge for any registration of transfer or exchange
of the debt securities. We may, however, require the payment of any tax or
other governmental charge payable for that registration.
We will appoint the trustee under each Indenture as security registrar for
the debt securities issued under that Indenture. We are required to maintain an
office or agency for transfers and exchanges in each place of payment. We may
at any time designate additional transfer agents for any series of debt
securities.
In the case of any redemption in part, we will not be required:
. to issue, register the transfer of or exchange debt securities of a
series either during a period beginning 15 business days prior to the
selection of debt securities of that series for redemption and ending on
the close of business on the day of mailing of the relevant notice of
redemption or
. to register the transfer of or exchange any debt security, or portion of
any debt security, called for redemption, except the unredeemed portion
of any debt security we are redeeming in part.
39
Discharging our Obligations
We may choose to either discharge our obligations on the debt securities of
any series in a legal defeasance, or to release ourselves from our covenant
restrictions on the debt securities of any series in a covenant defeasance. We
may do so at any time on the 91st day after we deposit with the Trustee
sufficient cash or government securities to pay the principal, interest, any
premium and any other sums due to the stated maturity date or a redemption date
of the debt securities of the series. If we choose the legal defeasance option,
the holders of the debt securities of the series will not be entitled to the
benefits of the Indenture except for registration of transfer and exchange of
debt securities, replacement of lost, stolen or mutilated debt securities,
conversion or exchange of debt securities, sinking fund payments and receipt of
principal and interest on the original stated due dates or specified redemption
dates.
We may discharge our obligations under the Indentures or release ourselves
from covenant restrictions only if we meet certain requirements. Among other
things, we must deliver an opinion of our legal counsel that the discharge will
not result in holders of debt securities having to recognize taxable income or
loss or subject then to different tax treatment. In the case of legal
defeasance, this opinion must be based on either an IRS letter ruling or change
in federal tax law. We may not have a default on the debt securities discharged
on the date of deposit. The discharge may not violate any of our agreements.
The discharge may not result in our becoming an investment company in violation
of the Investment Company Act of 1940.
Book Entry, Delivery and Form
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a
depositary identified in a prospectus supplement.
Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Book-entry notes of
a series will be issued in the form of a global note that will be deposited
with DTC. This means that we will not issue certificates to each holder. One
global note will be issued to DTC who will keep a computerized record of its
participants (for example, your broker) whose clients have purchased the notes.
The participant will then keep a record of its clients who purchased the notes.
Unless it is exchanged in whole or in part for a certificated note, a global
note may not be transferred, except that DTC, its nominees and their successors
may transfer a global note as a whole to one another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
United States Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act
of 1934. DTC holds securities that its participants ("Direct Participants")
deposit with DTC. DTC also records the settlement among Direct Participants of
securities transactions, such as transfers and pledges, in deposited securities
through computerized records for Direct Participant's accounts. This eliminates
the need to exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on
file with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
40
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global notes as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with notes on a record date, by using an omnibus proxy. Payments by
participants to owners of beneficial interests in the global notes, and voting
by participants, will be governed by the customary practices between the
participants and owners of beneficial interests, as is the case with notes held
for the account of customers registered in "street name." However, payments
will be the responsibility of the participants and not of DTC, the Trustee or
us.
Notes represented by a global note will be exchangeable for certificated
notes with the same terms in authorized denominations only if:
. DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
. we determine not to require all of the notes of a series to be
represented by a global note and notify the Trustee of our decision.
The Trustee
Resignation or Removal of Trustee
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act of 1939, as amended, the Trustee shall
either eliminate its interest or resign, to the extent and in the manner
provided by, and subject to the provisions of, the Trust Indenture Act and
either the Senior Indenture or Subordinated Indenture. Any resignation will
require the appointment of a successor trustee under the applicable Indenture
in accordance with the terms and conditions of such Indenture.
The Trustee may resign or be removed by us with respect to one or more
series of debt securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the debt securities of any series may remove the Trustee with respect
to the debt securities of such series.
Limitations on Trustee if it is a Creditor of Star Gas Partners
Each Indenture will contain certain limitations on the right of the Trustee
thereunder, in the event that it becomes a creditor of Star Gas Partners, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise.
Annual Trustee Report to Holders of Debt Securities
The Trustee is required to submit an annual report to the holders of the
debt securities regarding, among other things, the Trustee's eligibility to
serve as such, the priority of the Trustee's claims regarding certain advances
made by it, and any action taken by the Trustee materially affecting the debt
securities.
Certificates and Opinions to be Furnished to Trustee
Each Indenture will provide that, in addition to other certificates or
opinions that may be specifically required by other provisions of an Indenture,
every application by us for action by the Trustee shall be accompanied by a
certificate of certain of our officers and an opinion of counsel (who may be
our counsel) stating that, in the opinion of the signers, all conditions
precedent to such action have been complied with by us.
41
FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of the material tax considerations that may be
relevant to prospective unitholders and, to the extent described below under
"--Legal Opinions and Advice," expresses the opinion of Phillips Nizer Benjamin
Krim & Ballon, LLP special counsel to the General Partner and us, insofar as it
relates to matters of law and legal conclusions. This section is based upon
provisions of the Internal Revenue Code, its existing and proposed regulations
and administrative rulings and court decisions as of April 24, 2001, all of
which are subject to change even with retroactive effect. Later changes in
these authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to we or us are references to both us and Star Gas Propane.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds. Accordingly, each prospective
unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences peculiar to
him of the ownership or disposition of units.
Tax Consequences of Unit Ownership
Legal Opinions and Advice. Counsel is of the opinion that, as of April 24,
2001 and based on the representations and subject to the qualifications in the
detailed discussion that follows, for federal income tax purposes:
(1)Star Gas Partners and Star Gas Propane have been and will each be
treated as a partnership; and
(2)owners of units, with certain exceptions, as described in "--Tax
Treatment of Unitholders--Limited Partner Status" below, will be treated
as partners of Star Gas Partners, but not Star Gas Propane.
In addition, all statements as to matters of law and legal conclusions
contained in this section, unless otherwise noted, reflect the opinion of
counsel as of April 24, 2001.
No ruling has been or is expected to be requested from the IRS regarding our
classification as a partnership for federal income tax purposes, whether our
operations generate "qualifying income" under Section 7704 of the Code or any
other matter affecting us or prospective unitholders. An opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS or
the courts. Thus, no assurance can be provided that the opinions and statements
made here would be sustained by a court if contested by the IRS. Any contest of
this sort with the IRS may materially and adversely impact the market for the
units and the prices at which units trade. In addition, the costs of any
contest with the IRS will be borne directly or indirectly by the unitholders
and the general partner. Furthermore, no assurance can be given that the
treatment of Star Gas Partners or an investment in Star Gas Partners will not
be significantly modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion on the
following specific federal income tax issues:
(1)the treatment of a unitholder whose units are loaned to a short seller
to cover a short sale of units (see "--Tax Treatment of
Unitholders--Treatment of Short Sales");
(2)whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (see "--Disposition of
Units--Allocations Between Transferors and Transferees");
42
(3)whether our method for depreciating Section 743 adjustments is
sustainable (see "--Disposition of Units--Section 754 Election"); and
(4)whether the allocations of recapture income contained in the partnership
agreement will be respected (see "Tax Treatment of
Unitholders--Allocation of Star Gas Partners Income, Gain, Loss and
Deduction").
Partnership Status. A partnership is not a taxable entity and incurs no
federal income tax liability. Instead, each partner is required to take into
account his allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of cash distributed is in
excess of the partner's adjusted basis in his partnership interest.
No ruling has been or is expected to be sought from the IRS as to the status
of Star Gas Partners or Star Gas Propane as a partnership for federal income
tax purposes. Instead, we have relied on the opinion of counsel that, based
upon the Code, its regulations, published revenue rulings and court decisions
and representations described below, Star Gas Partners and Star Gas Propane
have been and will each be classified as a partnership for federal income tax
purposes.
In rendering its opinion, counsel has relied on factual representations made
by Star Gas Partners and the general partner. Such factual matters for taxable
years beginning before December 31, 1996 are as follows:
(a)For Star Gas Partners and Star Gas Propane, the general partner, at
all times while acting as general partner of the relevant
partnership, had a net worth, computed on a fair market value basis,
excluding its interest in Star Gas Partners and Star Gas Propane and
any notes or receivables due from such partnerships, equal to at
least $6.0 million;
(b)Star Gas Partners has been operated in accordance with
(1)all applicable partnership statutes,
(2)the partnership agreement and
(3)its description in this prospectus;
(c)Star Gas Propane has been operated in accordance with
(1)all applicable partnership statutes,
(2)the limited partnership agreement for Star Gas Propane and
(3)its description in this prospectus;
(d)The general partner has at all times acted independently of the
limited partners; and
(e)For each taxable year, less than 10% of the gross income of Star Gas
Partners has been derived from sources other than
(1)the exploration, development, production, processing, refining,
transportation or marketing of any mineral or natural resource,
including oil, gas or products thereof, or
(2)other items of qualifying income within the meaning of Section
7704(d) of the Code.
These factual matters for taxable years beginning after December 31, 1996
are as follows:
(a)Neither Star Gas Partners nor Star Gas Propane has elected, or will
elect, to be treated as an association or corporation;
(b)Star Gas Partners has been and will be operated in accordance with
(1)all applicable partnership statutes,
43
(2)the partnership agreement of Star Gas Partners as it may be
amended or restated, and
(3)its description in this prospectus;
(c)Star Gas Propane has been and will be operated in accordance with
(1)all applicable partnership statutes,
(2)the Star Gas Propane partnership agreement, and
(3)its description in this prospectus; and
(d)For each taxable year, more than 90% of the gross income of Star Gas
Partners has been and will be
(1)derived from the exploration, development, production,
processing, refining, transportation or marketing of any mineral
or natural resource, including oil, gas or their products or
(2)other items of "qualifying income" within the meaning of Section
7704(d) of the Code.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships, 90% or more of whose gross income for every taxable year consists
of "qualifying income." Qualifying income includes interest from other than a
financial business, dividends and income and gains from the transportation and
marketing of crude oil, natural gas, and products thereof, including the retail
and wholesale marketing of propane and the transportation of propane and
natural gas liquids. Based upon the representations of Star Gas Partners and
the general partner and a review of the applicable legal authorities, counsel
is of the opinion that at least 90% of our gross income will constitute
qualifying income. We estimate that less than 7.0% of our gross income for each
taxable year will not constitute qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
that is determined by the IRS to be inadvertent and is cured within a
reasonable time after discovery, we will be treated as if we had transferred
all of our assets (subject to liabilities) to a newly formed corporation, on
the first day of the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then distributed that
stock to the partners in liquidation of their interests in Star Gas Partners.
This contribution and liquidation should be tax-free to unitholders and Star
Gas Partners, so long as we, at that time, do not have liabilities in excess of
the tax basis of our assets. Thereafter, we would be treated as a corporation
for federal income tax purposes.
If Star Gas Partners or Star Gas Propane were taxable as a corporation in
any taxable year, either as a result of a failure to meet the Qualifying Income
Exception or otherwise, its items of income, gain, loss and deduction would be
reflected only on its tax return rather than being passed through to the
unitholders, and its net income would be taxed to Star Gas Partners or Star Gas
Propane at corporate rates. In addition, any distribution made to a unitholder
would be treated as either taxable dividend income, to the extent of Star Gas
Partners' current or accumulated earnings and profits, or, in the absence of
earnings and profits, a nontaxable return of capital, to the extent of the
unitholder's tax basis in his units, or taxable capital gain, after the
unitholder's tax basis in the units is reduced to zero. Accordingly, treatment
of either Star Gas Partners or Star Gas Propane as an association taxable as a
corporation would result in a material reduction in a unitholder's cash flow
and after-tax return and thus would likely result in a substantial reduction of
the value of the units.
The discussion below is based on the assumption that we will be classified
as a partnership for federal income tax purposes.
Tax Treatment of Unitholders
Limited Partner Status. Unitholders who have become limited partners of Star
Gas Partners will be treated as partners of Star Gas Partners for federal
income tax purposes. Counsel is of the opinion that (a)
44
assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners and (b) Star Gas Partners unitholders
whose units are held in street name or by a nominee and who have the right to
direct the nominee in the exercise of all substantive rights attendant to the
ownership of their units will be treated as partners of Star Gas Partners for
federal income tax purposes. As there is no direct authority addressing
assignees of units who are entitled to execute and deliver transfer
applications and thereby become entitled to direct the exercise of attendant
rights, but who fail to execute and deliver transfer applications, Phillips
Nizer's opinion does not extend to these persons. Furthermore, a purchaser or
other transferee of units who does not execute and deliver a transfer
application may not receive some federal income tax information or reports
furnished to record holders of units unless the units are held in a nominee or
street name account and the nominee or broker has executed and delivered a
transfer application for those units.
A beneficial owner of units whose units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such units for federal income tax purposes. See "--Treatment
of Short Sales." Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal income tax
purposes, and any cash distributions received by this unitholder would
therefore be fully taxable as ordinary income. These holders should consult
their own tax advisors with respect to their status as partners in Star Gas
Partners for federal income tax purposes.
Flow-through of Taxable Income. No federal income tax will be paid by Star
Gas Partners. Instead, each Star Gas Partners unitholder who is a partner for
federal income tax purposes will be required to report on his income tax return
his allocable share of the income, gains, losses and deductions of Star Gas
Partners without regard to whether corresponding cash distributions are
received by that unitholder. Consequently, a unitholder may be allocated income
from Star Gas Partners even if he has not received a cash distribution. Each
unitholder will be required to include in income his allocable share of Star
Gas Partners income, gain, loss and deduction for the taxable year of Star Gas
Partners ending with or within the taxable year of the unitholder.
Although it is not expected that Petro and its affiliates will pay
significant federal income tax for several years, Petro and its affiliates
expect to generate earnings and profits during that time making a portion of
the distributions from them to Star Gas Partners taxable dividend income to
Star Gas Partners and thus, to the unitholders. Such dividend income cannot be
offset by past or future losses generated by our propane activities.
Treatment of Partnership Distributions. Distributions by Star Gas Partners
to a unitholder generally will not be taxable to him for federal income tax
purposes to the extent of the tax basis he has in his units immediately before
the distribution. Our cash distributions in excess of a Star Gas Partners
unitholder's tax basis generally will be considered to be gain from the sale or
exchange of the units, taxable in accordance with the rules described under
"Disposition of Units" below. Any reduction in a unitholder's share of our
liabilities for which no partner, including the general partner, bears the
economic risk of loss, known as "nonrecourse liabilities", will be treated as a
distribution of cash to that unitholder. To the extent our distributions cause
a unitholder's "at risk" amount to be less than zero at the end of any taxable
year, he must recapture any losses deducted in previous years. See
"--Limitations on Deductibility of Star Gas Partners Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional units will decrease his share of our nonrecourse
liabilities, and will result in a corresponding deemed distribution of cash. A
non-pro rata distribution of money or property may result in ordinary income to
a unitholder, regardless of the tax basis he has in his units, if such
distribution reduces his share of our "unrealized receivables", including
depreciation recapture, and/or substantially appreciated "inventory items",
both as defined in Section 751 of the Code, and collectively, "Section 751
Assets". To that extent, he will be treated as having received a distribution
of his proportionate share of the Section 751 Assets and having exchanged those
assets with us in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will generally result in
a unitholder's realization of ordinary income under Section 751(b) of the Code.
That income will equal the excess of (1) the non-pro rata portion of that
distribution over (2) the Star Gas Partners unitholder's tax basis for the
share of such Section 751 Assets deemed relinquished in the exchange.
45
Tax Rate. The top marginal income tax rate for individuals for 2001 is
39.6%. In general, net capital gains of an individual are generally subject to
a maximum 20% tax rate if the asset was held for more than 12 months at the
time of disposition. However, a portion of the capital gain that a unitholder
realizes upon the sale or exchange of a unit may be subject to a maximum tax
rate of 25% (instead of 20%) to the extent of the "unrecaptured section 1250
gain."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, deduction, or
loss for purposes of the alternative minimum tax. The minimum tax rate for
non-corporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders should consult with
their tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Basis of Units. A unitholder will have an initial tax basis for his units
equal to the price he paid for them or, generally, the adjusted basis of any
property contributed in exchange for units. His basis will be increased by his
share of our income and by any increases in his share of our nonrecourse
liabilities. That basis will be decreased, but not below zero, by distributions
from Star Gas Partners and by the unitholder's share of Star Gas Partners'
losses, by any decreases in his share of our nonrecourse liabilities and by his
share of our expenditures that are not deductible in computing taxable income
and are not required to be capitalized. A limited partner will have no share of
our debt that is recourse to the general partner, but will have a share,
generally based on his share of profits, of our nonrecourse liabilities. See
"--Disposition of Units--Recognition of Gain or Loss."
Limitations on Deductibility of Star Gas Partners Losses. The deduction by a
Star Gas Partners unitholder of his share of our losses will be limited to the
tax basis in his units and, in the case of an individual unitholder or a
corporate unitholder, if more than 50% of the value of its stock is owned
directly or indirectly by five or fewer individuals or tax-exempt
organizations, to the amount for which the unitholder is considered to be "at
risk" regarding our activities, if that is less than his tax basis. A
unitholder must recapture losses deducted in previous years to the extent that
distributions made to him cause his "at risk" amount to be less than zero at
the end of any taxable year. Losses disallowed to a unitholder or recaptured as
a result of these limitations will carry forward and will be allowable to the
extent that his tax basis or "at risk" amount, whichever is the limiting
factor, is subsequently increased. Upon the taxable disposition of a unit, any
gain recognized by a unitholder can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended
by the basis limitation. Any excess loss above such gain previously suspended
by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire
or hold his units, if the lender of such borrowed funds owns an interest in us,
is related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of his
units increases or decreases, other than tax basis increases or decreases
attributable to increases or decreases in his share of our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely held corporations and personal service corporations can
deduct losses from passive activities, which are generally, activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately for each publicly-traded partnership. Consequently, any
passive losses we generate will only be available to offset our passive income
generated in the future and will not be available to offset income from other
passive activities or investments, including other publicly-traded companies,
interest and dividend income generated by us, such as dividends from Petro and
its affiliates, or salary or active business income. Passive losses that are
not deductible because they exceed a unitholder's income generated by us may be
deducted in full when he disposes of his entire investment in us in a fully
taxable transaction with an unrelated party. The passive activity loss rules
are applied after other applicable limitations on deductions such as the at
risk rules and the basis limitation.
46
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded companies. The IRS has announced that Treasury Regulations will
be issued that characterize net passive income from a publicly-traded
partnership as investment income for purposes of the limitations on the
deductibility of investment interest.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
such taxpayer's "net investment income." As noted, a unitholder's share of our
net passive income will be treated as investment income for this purpose. In
addition, the unitholder's share of our portfolio income will be treated as
investment income. Investment interest expense includes:
(1)interest on indebtedness properly allocable to property held for
investment;
(2)our interest expense attributed to portfolio income; and
(3)the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
Allocation of Star Gas Partners Income, Gain, Loss and Deduction. In
general, if we have a net profit, our items of income, gain, loss and deduction
will be allocated among the general partner and the unitholders in accordance
with their percentage interests in us. At any time that distributions are made
to the common units and not to the senior subordinated units or junior
subordinated units, or that incentive distributions are made to holders of
senior subordinated units, junior subordinated units or general partner units
or to holders of senior subordinated units and not to junior subordinated units
or general partner units, gross income will be allocated to the recipients to
the extent of those distributions. If we have a net loss, our items of income,
gain, loss and deduction will generally be allocated first, to the general
partner and the unitholders in accordance with their percentage interests to
the extent of their positive capital accounts, as maintained under our
partnership, agreement, and, second, to the general partner.
As required by Section 704(c) of the Code and as permitted by its
Regulations, some items of our income, deduction, gain and loss will be
allocated in a manner to account for the difference between the tax basis and
fair market value of property that is contributed or deemed contributed to us
by a partner ("Contributed Property"). The effect of these allocations to a
noncontributing unitholder will be essentially the same as if the tax basis of
the Contributed Property were equal to its fair market value at the time of
contribution or deemed contribution. In addition, specified items of recapture
income will be allocated to the extent possible to the partner who was
allocated the deduction giving rise to the treatment of that gain as recapture
income in order to minimize the recognition of ordinary income by some
unitholders. Finally, although we do not expect that our operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be allocated in an
amount and manner sufficient to eliminate the negative balance as quickly as
possible.
Regulations provide that an allocation of items of Star Gas Partners income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Code to eliminate the difference between a partner's "book" capital
account, credited with the fair market value of Contributed Property, and "tax"
capital account, credited with the tax basis of Contributed Property, (the
"Book-Tax Disparity"), will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item
47
will be determined on the basis of the partner's interest in Star Gas Partners,
which will be determined by taking into account all the facts and
circumstances, including the partner's relative contributions to Star Gas
Partners, the interests of the partners in economic profits and losses, the
interest of the partners in cash flow and other nonliquidating distributions
and rights of the partners to distributions of capital upon liquidation.
Counsel is of the opinion that allocations under our partnership agreement,
with the possible exception of the allocation of recapture income discussed
above, will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or
any general partner or any former unitholder, Star Gas Partners is authorized
to pay those taxes from our funds. That payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be determined,
we are authorized to treat the payment as a distribution to current Star Gas
Partners unitholders. We are authorized to amend the partnership agreement in
the manner necessary to maintain uniformity of intrinsic tax characteristics of
units and to adjust later distributions, so that after giving effect to these
distributions, the priority and characterization of distributions otherwise
applicable under the partnership agreement is maintained as nearly as is
practicable. Payments by Star Gas Partners as described above could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
Treatment of Short Sales. A Star Gas Partners unitholder whose units are
loaned to a "short seller" to cover a short sale of units may be considered as
having disposed of ownership of those units. If so, he would no longer be a
partner for those units during the period of the loan and may recognize gain or
loss from the disposition. As a result, during this period, any of our income,
gain, deduction or loss for those units would not be reportable by the
unitholder, any cash distributions received by the unitholder for those units
would be fully taxable and all of these distributions would appear to be
treated as ordinary income. Unitholders desiring to assure their status as
partners and avoid the risk of gain recognition should modify any applicable
brokerage account agreements to prohibit their brokers from borrowing their
units. The IRS has announced that it is actively studying issues relating to
the tax treatment of short sales of partnership interests. See also
"--Disposition of Units--Recognition of Gain or Loss."
Tax-exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations that are exempt from federal income
tax, including individual retirement accounts and other retirement plans, are
subject to federal income tax on unrelated business taxable income. Virtually
all of the taxable income derived by such an organization from the ownership of
a unit will be unrelated business taxable income and thus will be taxable to
that unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income at least in the next few years.
Under current rules applicable to publicly-traded partnerships, we are
required to withhold as taxes 39.6% of any cash distributions made to foreign
unitholders. A foreign unitholder may claim a credit for those taxes. If that
tax exceeds the taxes due from the foreign unitholder, he may claim a refund.
Each foreign unitholder must obtain a taxpayer identification number from the
IRS and submit that number to our transfer agent on the applicable Form W-8 in
order to obtain a credit for the taxes withheld. A change in applicable law may
require us to change these procedures. In addition, non-resident aliens and
foreign corporations, trusts or estates that
48
own units will be considered to be engaged in business in the United States on
account of ownership of those units. As a consequence, they will be required to
file federal tax returns for their share of our income, gain, loss or deduction
and pay federal income tax at regular rates on any net income or gain.
Because a foreign corporation that owns units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax a rate of 30%, in addition to regular federal income
tax, on its share of our income and gain, as adjusted for changes in the
foreign corporation's "U.S. net equity", which are effectively connected with
the conduct of a United States trade or business. That tax may be reduced or
eliminated by an income tax treaty between the United States and the country in
which the foreign corporate unitholder is a "qualified resident." In addition,
such a unitholder is subject to special information reporting requirements
under Section 6038C of the Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on
the disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business. Except to the extent the
ruling applies, as to which counsel has not opined, a foreign unitholder will
not be taxed or subject to withholding upon the disposition of a unit if he has
owned less than 5% in value of the units during the five-year period ending on
the date of the disposition and if the units are regularly traded on an
established securities market at the time of the disposition.
Tax Treatment of Operations
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and we have adopted the accrual method of accounting for
federal income tax purposes. Each Star Gas Partners unitholder will be required
to include in income his allocable share of our income, gain, loss and
deduction for our taxable year ending within or with his taxable year. In
addition, a unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his units following the close of our
taxable year but before the close of his taxable year must include his
allocable share of our income, gain, loss and deduction in income for his
taxable year, with the result that he will be required to report in income for
his taxable year his share of more than one year of our income, gain, loss and
deduction. See "--Disposition of Units--Allocations Between Transferors and
Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets is used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of such assets. The
federal income tax burden associated with the difference between the fair
market value of property contributed and the tax basis established for such
property will be borne by the contributors of such property. See "--Tax
Treatment of Unitholders--Allocation of Star Gas Partners Income, Gain, Loss
and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions for goodwill conveyed to us on formation. Property
subsequently acquired or constructed by us may be depreciated using accelerated
methods permitted by the Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions for
our property may be required to recapture such deductions as ordinary income
upon a sale of his interest in us. See "--Tax Treatment of
Unitholders--Allocation of Star Gas Partners Income, Gain, Loss and Deduction"
and "--Disposition of Units--Recognition of Gain or Loss."
Uniformity of Units. Because we cannot match transferors and transferees of
units, uniformity of the economic and tax characteristics of the units to a
purchaser of these units must be maintained. In the absence of
49
uniformity, compliance with a number of federal income tax requirements, both
statutory and regulatory, could be substantially diminished. A lack of
uniformity can result from a literal application of Treasury Regulation Section
1.167(c)-1(a)(6) and Treasury Regulation Section 1.197-2(g)(3). Any
non-uniformity could have a negative impact on the value of the units. See
"--Disposition of Units--Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property or
adjusted property, to the extent of any unamortized Book-Tax Disparity, using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the basis of such property, or
treat that portion as nonamortizable, to the extent attributable to property
the basis of which is not amortizable consistent with the regulations under
Section 743, but despite its inconsistency with Treasury Regulation Section
1.167(c)-1(a)(6) and Treasury Regulation Section 1.197-2(g)(3), neither of
which is expected to directly apply to a material portion of the Partnership's
assets. See "--Disposition of Units--Section 754 Election." To the extent this
Section 743(b) adjustment is attributable to appreciation in value in excess of
the unamortized Book-Tax Disparity, we will apply the rules described in the
regulations and legislative history. If we determine that this a position
cannot reasonably be taken, we may adopt a depreciation and amortization
convention under which all purchasers acquiring units in the same month would
receive depreciation and amortization deductions, whether attributable to basis
or Section 743(b) adjustment, based upon the same applicable rate as if they
had purchased a direct interest in our property. If such an aggregate approach
is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to certain unitholders and risk
the loss of depreciation and amortization deductions not taken in the year that
such deductions are otherwise allowable. This convention will not be adopted if
we determine that the loss of depreciation and amortization deductions will
have a material adverse effect on the unitholders. If we choose not to utilize
this aggregate method, we may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any units that would not have a material adverse effect on
the unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If this type of challenge were
sustained, the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of additional deductions.
See "--Disposition of Units--Recognition of Gain or Loss."
Valuation of Star Gas Partners Property and Basis of Properties. The federal
income tax consequences of the ownership and disposition of units will depend
in part on our estimates of the relative fair market values, and determinations
of the initial tax bases, of our assets. Although we may from time to time
consult with professional appraisers regarding valuation matters, we will make
many of the relative fair market value estimates. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are later found to be incorrect, the character and amount of items of
income, gain, loss or deductions previously reported by Star Gas Partners
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years.
State and Local Tax Considerations. For a discussion of the state and local
tax considerations arising from an investment in units, see "--State and Local
Tax Considerations" at the end of this section.
Administrative Matters
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes each unitholder's share
of our income, gain, loss and deduction for our preceding taxable year. In
preparing this information, which will generally not be reviewed by counsel, we
will use various accounting and reporting conventions, some of which have been
mentioned earlier, to determine the unitholder's share of income, gain, loss
and deduction. There is no assurance that any of those conventions will yield a
result that conforms to the requirements of the Code, regulations or
administrative interpretations of the IRS. Neither we nor counsel can assure
prospective Star Gas Partners unitholders that the IRS will not successfully
contend in court that such
50
accounting and reporting conventions are impermissible. Any such challenge by
the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any audit of this kind may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an audit of that
unitholder's own return. Any audit of a unitholder's return could result in
adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The amended and restated partnership agreement appoints the general partner as
the Tax Matters Partner of Star Gas Partners.
The Tax Matters Partner will make specified elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a Star Gas Partners
unitholder with less than a 1% profits interest in us to a settlement with the
IRS unless that unitholder elects, by filing a statement with the IRS, not to
give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review, by which all the unitholders are bound, of a final
partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any unitholder having at
least a 1% interest in profits and by the unitholders having in the aggregate
at least a 5% profits interest. However, only one action for judicial review
will go forward, and each unitholder with an interest in the outcome may
participate. If Star Gas Partners elects to be treated as a large partnership,
which we have not done and do not currently intend to do, a unitholder will not
have the right to participate in settlement conferences with the IRS or to seek
a refund.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
However, if we elect to be treated as a large partnership, which it does not
currently intend to do, the unitholders would be required to treat all
partnership items in a manner consistent with our return.
Each partner in an electing large partnership takes into account separately
a number of items determined at the partnership level. In addition,
miscellaneous itemized deductions of an electing large partnership are not
passed through to the partners and 30% of such deductions are used at the
partnership level.
A number of changes have recently been made to the tax compliance and
administrative rules relating to electing large partnerships. Adjustments
relating to partnership items for a previous taxable year are generally taken
into account by those persons who were partners in the previous taxable year.
Each partner in an electing large partnership, however, must take into account
his share of any adjustments to partnership items in the year those adjustments
are made. Alternatively, an electing large partnership could elect, or in some
circumstances could be required to, directly pay the tax resulting from any
adjustments of this kind. In either case, therefore, unitholders could bear
significant costs associated with tax adjustments relating to periods predating
their acquisition of units. Although we are authorized under our partnership
agreement to do so, we have not and do not expect to elect to have the large
partnership provisions apply to us because of the cost of their application.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a)the name, address and taxpayer identification number of the beneficial
owner and the nominee;
(b)whether the beneficial owner is;
51
(1)a person that is not a United States person,
(2)a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing, or
(3)a tax-exempt entity.
(c) the amount and description of units held, acquired or transferred for the
beneficial owner; and
(d) specific information including the dates of acquisitions and transfers,
means of acquisitions and transfers, and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Code for failure to report this information to us. The nominee
is required to supply the beneficial owner of the units with the information
furnished to us.
Registration as a Tax Shelter. The predecessor general partner, as our
organizer, has registered us as a tax shelter with the Secretary of the
Treasury in the absence of assurance that we will not be subject to tax shelter
registration and in light of the substantial penalties which might be imposed
if registration is required and not undertaken.
The IRS has issued the following tax shelter registration number to Star Gas
Partners: 96026000016. Issuance of this Registration Number does not indicate
that investment in Star Gas Partners or the claimed tax benefits have been
reviewed, examined or approved by the IRS.
We must furnish the registration number to the unitholders, and a unitholder
who sells or otherwise transfers a unit in a later transaction must furnish the
registration number to the transferee. The penalty for failure of the
transferor of a unit to furnish the registration number to the transferee is
$100 for each failure. The unitholders must disclose the tax shelter
registration number of Star Gas Partners on Form 8271 to be attached to the tax
return on which any deduction, loss or other benefit generated by Star Gas
Partners is claimed or income of Star Gas Partners is included. A unitholder
who fails to disclose the tax shelter registration number on his return,
without reasonable cause for that failure, will be subject to a $250 penalty
for each failure. Any penalties discussed are not deductible for federal income
tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Code. No penalty will be imposed, however, for
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000, $10,000 for most
corporations. The amount of any understatement subject to penalty generally is
reduced if any portion of the understatement is attributable to a position
adopted on the return (1) for which there is, or was, "substantial authority"
or (2) as to which there is a reasonable basis and the pertinent facts of such
position are disclosed on the return. More stringent rules apply to "tax
shelters," a term that in this context does not appear to include Star Gas
Partners. If any Star Gas Partners item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in such an
"understatement" of income for which no "substantial authority" exists, we must
disclose the pertinent facts on its return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
52
A substantial valuation misstatement exists if the value of any property, or
the adjusted basis of any property, claimed on a tax return is 200% or more of
the amount determined to be the correct amount of that valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000, $10,000
for most corporations. If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
Disposition of Units
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis in the units that were sold. The amount realized by the unitholder
will be measured by the sum of the cash or the fair market value of other
property received plus his share of our nonrecourse liabilities. Because the
amount realized includes a unitholder's share of our nonrecourse liabilities,
the gain recognized on the sale of units could result in a tax liability in
excess of any cash received from such sale.
Prior distributions from us in excess of cumulative net taxable income for a
unit that decreased a unitholder's tax basis in that unit will, in effect,
become taxable income if the unit is sold at a price greater than the
unitholder's tax basis in that unit, even if the price is less than his
original cost.
Should the IRS successfully contest our convention to amortize only a
portion of the Section 743(b) adjustment, described under "--Disposition of
Units--Section 754 Election", attributable to an amortizable Section 197
intangible after a sale by the general partner of units, a unitholder could
realize additional gain from the sale of units than if that convention had been
respected. In that case, the unitholder may have been entitled to additional
deductions against income in prior years but may be unable to claim them,
resulting in greater overall taxable income allocable to him than appropriate.
Counsel is unable to opine as to the validity of the convention but believes
such a contest by the IRS is unlikely because a successful contest could result
in substantial additional deductions to other unitholders.
Gain or loss recognized by a unitholder, other than a "dealer" in units, on
the sale or exchange of a unit held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized by an individual on
the sale of units held more than 12 months will generally be taxed a maximum
rate of 20%. However, a portion of the capital gain that a unitholder realizes
upon the sale or exchange of a unit may be subject to a maximum tax rate of 25%
(instead of 20%) to the extent of the "unrecaptured section 1250 gain." A
portion of this gain or loss, which could be substantial, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" owned by
us. The term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the unit and may be recognized even if there is
a net taxable loss realized on the sale of the unit. Thus, a unitholder may
recognize both ordinary income and a capital loss upon a disposition of units.
Net capital loss may offset no more than $3,000 of ordinary income in the case
of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. However, a selling unitholder who
can identify the units transferred with an ascertainable holding period can
elect to use the actual holding period of the units transferred. Thus,
according to the ruling, a unitholder will be unable to select high or low
basis units to sell as would be the case with corporate stock, but, according
to the Treasury regulations, may designate specific units sold for purposes of
determining the holding period of units transferred. A unitholder electing to
use the actual holding period of units transferred must use that identification
method for all subsequent sales or exchange of units. A unitholder considering
the purchase of additional units or a sale of units purchased in separate
transactions should consult his tax advisor.
53
Specific provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a
taxpayer as having sold an "appreciated" partnership interest, one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value, if the taxpayer or related persons enter(s) into:
(1) a short sale;
(2) an offsetting notional principal contract; or
(3) a futures or forward contract for the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract for a
partnership interest, the taxpayer will be treated as having sold that position
if the taxpayer or a related party then acquires the partnership interest or
substantially identical property. The Secretary of Treasury is also authorized
to issue regulations that treat a taxpayer who or that enters into transactions
or positions that have substantially the same effect as the preceding
transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the principal
national securities exchange on which the units are then traded on the first
business day of the month (the "Allocation Date"). However, gain or loss
realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a unitholder transferring units in the open market may be allocated
income, gain, loss and deduction accrued after the date of transfer.
The use of this allocation method may not be permitted under existing
Treasury Regulations. Accordingly, counsel is unable to opine on the validity
of this method of allocating income and deductions between the transferors and
the transferees of units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests
otherwise vary during a taxable period, to conform to a method permitted under
future Treasury Regulations.
A unitholder who owns units any time during a quarter and who disposes of
these units prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to that quarter but will not be entitled to receive that cash
distribution.
Section 754 Election. We have made the election permitted by Section 754 of
the Code, which generally permits us to adjust a unit purchaser's tax basis in
our assets ("inside basis") under Section 743(b) of the Code to reflect his
purchase price. That election is irrevocable without the consent of the IRS.
The Section 743(b) adjustment belongs to the purchaser and not to other
unitholders. For purposes of this discussion, a unitholder's inside basis in
our assets will be considered to have two components: (1) his share of our tax
basis in such assets ("Basis") and (2) his Section 743(b) adjustment to that
basis.
Treasury regulations under Section 743 of the Internal Revenue Code require
a partnership that adopts the remedial allocation method (which we have done)
to depreciate the portion of the Section 743(b) increase with respect to the
recovery property that is attributable to Section 704(c) built-in gain over the
remaining cost recovery period for the Section 704(c) built-in gain. Any
remaining portion of the Section 743(b) adjustment is recovered as if it were
newely-purchased recovery property placed in service when the purchaser
purchased his partnership interest. The recovery allowance for the purchaser's
share of common basis is unaffected by the Section 743(b) adjustment.
However, the Treasury regulations under Section 197 indicate that the
Section 743(b) adjustment attributable to a section 197 intangible should be
treated as a newely-acquired asset placed in service in the month when the
purchaser acquires the common unit. Furthermore, under Treasury regulation
Section 1.167(c)-1(a) (6), a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167
54
of the Internal Revenue Code rather than cost recovery deductions under Section
168 of the Internal Revenue is generally required to be depreciated using
either the straight-line method or the 150% declining balance method.
Pursuant to our partnership agreement, we have adopted a convention to
preserve the uniformity of common units even if such convention is not
consistent with certain Treasury regulations. See "Tax Treatment of
Operations--Uniformity of Common Units." Although counsel is unable to opine as
to the validity of this method, we intend to depreciate the portion of Section
743(b) adjustment attributable to unrealized appreciation in the value of
contributed property, to the extent of any unamortized book-tax disparity,
using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of such
property. This method is consistent with the regulations under Section 743, but
arguably inconsistent with Treasury regulation Section 1.167(c)-1(a) (6), which
is not expected to directly apply to a material portion of our assets, and
Treasury regulation Section 1.197-2(g) (3). To the extent such Section 743(b)
adjustment is attributable to appreciation in value in excess of the
unamortized book-tax disparity, we will apply the rules described in the
Treasury regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation or
amortization convention under which all purchasers acquiring common units in
the same month would receive depreciation or amortization, whether attributable
to common basis or Section 743(b) adjustment, based upon the same applicable
rate as if they had purchased a direct interest in our assets. Such an
aggregate approch may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain unitholders. See "Tax
Treatment of Operations--Uniformity of Common Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by us to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than our tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than those units' share of the aggregate tax basis to us of our
assets immediately prior to the transfer. In such a case, as a result of the
election, the transferee would have a higher tax basis in his share of our
assets for purposes of calculating, among other items, his depreciation and
depletion deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in his units is lower than those unit's share of the aggregate tax basis
of our assets immediately prior to the transfer. Thus, the fair market value of
the units may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and we
will make them on the basis of assumptions as to the value of our assets and
other matters. We cannot assure that our determinations will not be
successfully challenged by the IRS and that the deductions resulting from them
will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If such permission is granted, a
subsequent purchaser of Star Gas Partners units may be allocated more income
than he would have been allocated had the election not been revoked.
Notification Requirements. A Star Gas Partners unitholder who sells or
exchanges units is required to notify us in writing of that sale or exchange
within 30 days after the sale or exchange and in any event by no later than
January 15 of the year following the calendar year in which the sale or
exchange occurred. We are required to notify the IRS of that transaction and to
furnish certain information to the transferor and transferee. However, these
reporting requirements do not apply to a sale by an individual who is a citizen
of the United States and who effects the sale or exchange through a broker.
Additionally, a transferor and a transferee of a unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that describe the amount
of the consideration received for the unit that is allocated to our goodwill or
going concern value. Failure to satisfy these reporting obligations may lead to
the imposition of substantial penalties.
55
Constructive Termination. Star Gas Partners and Star Gas Propane will be
considered to have been terminated if there is a sale or exchange of 50% or
more of the total interests in Star Gas Partners capital and profits within a
12-month period. A termination of Star Gas Partners will cause a termination of
Star Gas Propane. A termination of Star Gas Partners will result in the closing
of Star Gas Partners' taxable year for all Star Gas Partners unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of the tax year of Star Gas Partners may result
in more than 12 months' taxable income or loss of Star Gas Partners being
includable in his taxable income for the year of termination. Tax elections
required to be made by Star Gas Partners, including a new election under
Section 754 of the Code, must be made after a termination and a termination
could result in a deferral of Star Gas Partners deductions for depreciation. A
termination could also result in penalties if Star Gas Partners were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject Star Gas Partners to, any tax
legislation enacted before the termination.
State, Local and Other Tax Considerations
In addition to federal income taxes, a unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he or she resides or in which we do business or own
property. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in Star Gas Partners. A unitholder will likely be required to file
state and local income tax returns and pay state and local income taxes in some
or all of the various jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those requirements. Star
Gas LLC anticipates that substantially all of our income will be generated in
the following states: Connecticut, Florida, Georgia, Illinois, Indiana, Iowa,
Kentucky, Maine, Massachusetts, Minnesota, Michigan, New Hampshire, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island, West Virginia and Wisconsin. Each
of these states currently imposes a personal income tax; however, New
Hampshire's tax only applies to interest and dividend income. Some of them may
require us, or we may elect, to withhold a percentage of income from amounts to
be distributed to a unitholder who is not a resident of the state. A unitholder
will be required to file state income tax returns and to pay state income taxes
in some or all of these states and may be subject to penalties for failure to
comply with those requirements. In some states, tax losses may not produce a
tax benefit in the year incurred and also may not be available to offset income
in subsequent taxable years. Withholding, the amount of which may be greater or
less than a particular unitholder's income tax liability to the state,
generally does not relieve the non-resident unitholder from the obligation to
file an income tax return. Amounts withheld may be treated as if distributed to
unitholders for purposes of determining the amounts distributed by us. See
"--Tax Treatment of Unitholders--Entity-Level Collections." Based on current
law and our estimate of our future operations, we do not anticipate that any
amounts required to be withheld will be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences of his investment in us, under the laws of pertinent states and
localities. Accordingly, each prospective unitholder should consult, and must
depend upon, his own tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all U.S. federal,
state and local, tax returns that may be required. Counsel has not rendered an
opinion on the state or local tax consequences of an investment in us.
56
CONFLICTS OF INTEREST
Conflicts of Interest May Arise as a Result of the Publicly-Traded Limited
Partnership Structure
Conflicts of interest have arises and could arise in the future as a result
of relationships between the general partner and its affiliates, on the one
hand, and Star Gas Partners or any of the limited partners, on the other hand.
The directors and officers of the general partner have fiduciary duties to
manage the general partner in a manner beneficial to its members. In general
the general partner has a fiduciary duty to manage Star Gas Partners in a
manner beneficial to Star Gas Partners and the unitholders. The partnership
agreement contains provisions that allow the general partner to take into
account the interests of parties in addition to Star Gas Partners in resolving
conflicts of interest. In effect, these provisions limit its fiduciary duty to
the unitholders. The partnership agreement also restricts the remedies
available to unitholders for actions taken that without those limitations,
constitute breaches of fiduciary duty. An audit committee of the Star Gas LLC
board has been created, consisting of two directors who are not officers of the
general partner. At the request of the general partner the audit committee will
review conflicts of interest that may arise between the general partner or its
affiliates, on the one hand, and Star Gas Partners, on the other. Conflicts of
interest could arise in the situations described below, among others:
Actions Taken by the General Partner May Affect the Amount of Cash Available
for Distribution to Unitholders or Accelerate the Right to Convert Senior
Subordinated Units and Junior Subordinated Units. The amount of cash that is
available for distribution to unitholders is affected by decisions of the
general partner regarding matters such as:
. cash expenditures;
. participation in capital expansions and acquisitions;
. borrowings;
. issuance of additional units; and
. establishment of reserves.
In addition, borrowings by Star Gas Partners do not constitute a breach of
any duty owed by the general partner to the unitholders, including those
borrowings that have the purpose or effect of:
. causing incentive distributions to be made; or
. hastening the expiration of the subordination period.
The partnership agreements provides that we may borrow funds from the general
partner and its affiliates although the general partner and its affiliates may
not borrow funds from us.
Star Gas Partners' Borrowings May Enable the General Partner to Permit
Distributions on the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units. Typically the general partner must act as a fiduciary to
Star Gas Partners and the unitholder, and therefore must consider our best
interests. However, it is not a breach of the general partner's fiduciary duty
under the partnership agreement if our borrowings are effected in a manner
that, directly or indirectly, enables the general partner to permit the payment
of distributions on the senior subordinated units, junior subordinated units
and general partner units.
The General Partner Intends to Limit Its Liability with Respect to Star Gas
Partners' Obligations. The general partner intends to limit its liability under
contractual arrangements so that the other party has recourse only as to all or
particular assets of Star Gas Partners, and not against the general partner or
its assets. The partnership agreement provides that any action taken by the
general partner to limit its liability, or that of Star Gas Partners, is not a
breach of the general partner's fiduciary duties, even if we could have
obtained more favorable terms without the limitation on liability.
Unitholders Have No Right to Enforce Obligations of the General Partner and
Its Affiliates Under Agreements with Star Gas Partners. We will acquire
services from, or provide services to, the general partner
57
and its affiliates on an ongoing basis. The agreements relating to these
arrangements will not grant to the unitholders, separate and apart from Star
Gas Partners, the right to enforce the obligations of the general partner and
its affiliates in favor of Star Gas Partners.
Contracts Between Star Gas Partners on the One Hand, and the General Partner
and Its Affiliates on the Other Will Not Be the Result of Arm's-Length
Negotiations. The partnership agreement allows the general partner to pay
itself or its affiliates for any services rendered, provided these services are
rendered on terms that are fair and reasonable to us. The general partner may
also enter into additional contractual arrangements with any of its affiliates
on our behalf. Neither the partnership agreement nor any of the other
agreements, contracts and arrangements between Star Gas Partners, on the one
hand, and the general partner and its affiliates, on the other, are or will be
the result of arm's-length negotiations. All of these transactions entered into
are required to be on terms that are fair and reasonable to us.
The General Partner's Affiliates May Compete with Star Gas Partners. Except
for Irik P. Sevin, affiliates of the general partner are not prohibited from
competing with us. Mr. Sevin's noncompetition agreement with us provides that
he will not engage in the retail propane or retail home heating oil business in
the United States so long as he:
. is a director, officer or employee of the general partner, Star Gas
Partners or a subsidiary of Star Gas Partners; or
. has access to information that would put Star Gas Partners at a
competitive disadvantage.
Further, Mr. Sevin is precluded from employing any person who was a managerial
employee of the general partner, Star Gas Partners or a subsidiary of Star Gas
Partners for the twelve-months after that employment so long as Mr. Sevin and
his mother, Ms. Audrey Sevin, own in the aggregate more than a 10% voting
interest in the general partner.
Fiduciary Duties Owed to Unitholders by the General Partner as Prescribed by
Law and the Partnership Agreement
The general partner is accountable to us and the Star Gas Partners
unitholders as a fiduciary. Consequently, the general partner must exercise
good faith and integrity in handling our assets and affairs. In contrast to the
relatively well-developed law concerning fiduciary duties owed by officers and
directors to the common stockholders of a corporation, the law concerning the
duties owed by general partners to other partners and to partnerships is
relatively undeveloped. Neither the Delaware Act nor case law defines with
particularity the fiduciary duties owed by general partners to limited partners
of a limited partnership. The Delaware Act does provide that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties owed by general partners to limited partners and the
partnership. Fiduciary duties are generally considered to include an obligation
to act with the highest good faith, fairness and loyalty. Such duty of loyalty,
in the absence of a provision in a partnership agreement providing otherwise,
would generally prohibit a general partner from taking any action or engaging
in any transaction where a conflict of interest is present. In order to induce
the general partner to manage the business of Star Gas Partners, the
partnership agreement contains various provisions limiting the fiduciary duties
that might otherwise be owed by the general partner. The partnership agreement
also contains provisions that waive or consent to conduct by the general
partner that might otherwise raise issues of compliance with fiduciary duties
or applicable law.
In order to become a limited partner of Star Gas Partners, a unitholder is
required to agree to be bound by its provisions, including the provisions
discussed above. This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the enforceability of
partnership agreements. The Delaware Act also provides that a partnership
agreement is enforceable even if not signed by a person being admitted as a
limited partner or becoming an assignee of a limited partner interest in
accordance with the terms of that agreement.
58
Whenever a conflict of interest arises between the general partner or its
affiliates, on the one hand, and Star Gas Partners or any other partner, on the
other, the general partner shall resolve this conflict. The general partner
shall not be in breach of its obligations under the partnership agreement or
its duties to Star Gas Partners or the unitholders if the resolution of this
conflict is fair and reasonable to Star Gas Partners. Any resolution is deemed
to be fair and reasonable to Star Gas Partners if the resolution is:
(1) approved by the audit committee, although no party is obligated to seek
approval and the general partner may adopt a resolution or course of
action that has not received approval;
(2) on terms no less favorable to us than those generally being provided to
or available from unrelated third parties; or
(3) fair to us, taking into account the totality of the relationships
between the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
59
PLAN OF DISTRIBUTION
We may sell securities covered by this prospectus to or through underwriters
or dealers, and we also may sell securities directly to other purchasers or
through agents.
We will prepare a prospectus supplement for each offering that will disclose
the terms of the offering, including the name or names of any underwriters,
dealers or agents, the purchase price of the securities and the proceeds to us
from the sale, any underwriting discounts and other items constituting
compensation to underwriters, dealers or agents.
If we use underwriters or dealers in the sale, they will acquire the
securities for their own account and they may resell these securities from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of
sale. The securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more of such firms. Unless otherwise disclosed in the prospectus supplement,
the obligations of the underwriters to purchase securities will be subject to
certain conditions precedent, and the underwriters will be obligated to
purchase all of the securities offered by the prospectus supplement if any are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
We may sell the securities directly or through agents designated by us from
time to time. We will name any agent involved in the offering and sale of the
securities for which this prospectus is delivered, and disclose any commissions
payable by us to the agent or the method by which the commissions can be
determined in the prospectus supplement. Unless otherwise indicated in the
prospectus supplement, any agent will be acting on a best efforts basis for the
period of its appointment.
We may agree to indemnify underwriters, dealers and agents who participate
in the distribution of securities against certain liabilities, including
liabilities under the Securities Act.
VALIDITY OF SECURITIES
The validity of the securities will be passed upon for Star Gas Partners by
Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Star Gas Partners, and
its subsidiary as of September 30, 1999 and 2000 and for the fiscal years ended
September 30, 1998, 1999 and 2000 incorporated by reference in this prospectus,
have been incorporated by reference in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference and upon
the authority of that firm as experts in accounting and auditing.
The balance sheets of Star Gas LLC as of September 30, 1999 and 2000
included in this prospectus have been included in this prospectus in reliance
upon the report of KPMG LLP, independent certified public accountants, included
upon authority of that firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Petro for the fiscal
year ended December 31, 1998, have been incorporated by reference in this
prospectus in reliance upon the report of KPMG LLP, independent certified
public accountants, incorporated by reference and upon the authority of that
firm as experts in accounting and auditing.
60
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read our SEC filings over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy documents at
the SEC's public reference room in Washington, D.C. at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room.
We have filed with the SEC a registration statement on Form S-3, regarding
the securities offered by this prospectus. The SEC allows us to "incorporate by
reference" the information we file with them, which means we can disclose
important information to you by referring you to those documents. Regarding
Star Gas Partners and the Securities offered by this prospectus, we refer you
to that registration statement on Form S-3 and its related exhibits and
schedules for further information.
FORWARD-LOOKING STATEMENTS
Many of the statements contained in this prospectus, including, without
limitation, statements regarding our business strategy, plans and objectives of
our management for future operations and statements made under "Cash Available
for Distribution" are forward-looking within the meaning of the federal
securities laws. These statements use forward-looking words, such as
"anticipate," "continue," "expect," "may," "will," "estimate," "believe" or
other similar words. These statements discuss future expectations or contain
projections. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, actual results may differ from those
suggested by the forward-looking statements for various reasons, including:
. the effect of weather conditions on our financial performance;
. our ability to obtain new customers and retain existing customers;
. the price and supply of propane, home heating oil, natural gas and
electricity;
. our ability to successfully identify and close strategic acquisitions and
make cost saving changes in operations;
. the effect of national and regional economic conditions;
. the condition of the capital markets in the U.S.; and
. the political and economic stability of the oil producing regions of the
world.
When considering forward-looking statements, you should keep in mind the
risk factors referred to in this prospectus. The risk factors could cause our
actual results to differ materially from those contained in any forward-looking
statement. We disclaim any obligation to update the above list or to announce
publicly the result of any revisions to any of the forward-looking statements
to reflect future events or developments.
You should consider the above information when reading any forward-looking
statement in:
. this prospectus; or
. documents incorporated by reference in this prospectus.
61
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Star Gas Partners with the SEC (File No.
33-98490) are incorporated by reference in this prospectus:
. Star Gas Partners' 2000 Annual Report on Form 10-K.
. Star Gas Partners' Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 2000.
. Star Gas Partners' Current Report on Form 8-K, dated February 18, 1999.
. Star Gas Partners' Current Report on Form 8-K, dated March 26, 1999.
. Star Gas Partners' Current Report on Form 8-K, dated April 17, 2001.
. Star Gas Partners' Registration Statement on Form 8-A, dated April 17,
2001.
In addition, all other reports and documents, we have filed under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and before the termination of this offering shall be deemed incorporated by
reference in this prospectus from the date of filing of those reports and
documents. If information in incorporated documents conflicts with information
in this prospectus you should rely on the most recent information. If
information in an incorporated document conflicts with information in another
incorporated document, you should rely on the most recent incorporated document.
This prospectus incorporates documents by reference that are not included
with this prospectus. These documents, excluding exhibits to the documents, are
available without charge, upon oral or written request by any person to whom
this prospectus is delivered. Contact Star Gas LLC, 2187 Atlantic Street,
Stamford, Connecticut 06902, Attention: Richard F. Ambury, Vice President and
Treasurer, telephone (203) 328-7313.
62
ANNEX A--APPLICATION FOR TRANSFER OF COMMON UNITS
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form shown or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee
(a) requests admission as a Substituted Limited Partner and agrees to comply
with and be bound by, and hereby executes, the Amended and Restated
Agreement of Limited Partnership of Star Gas Partners, L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof
(the "Partnership Agreement"),
(b) represents and warrants that the Assignee has all right, power and
authority and, if an individual, the capacity necessary to enter into
the Partnership Agreement,
(c) appoints the General Partner and, if a Liquidator shall be appointed,
the Liquidator of the Partnership as the Assignee's attorney-in-fact to
execute, swear to, acknowledge and file any document, including, without
limitation, the Partnership Agreement and any amendment thereto and the
Certificate of Limited Partnership of the Partnership and any amendment
hereto, necessary or appropriate for the Assignee's admission as a
Substituted Limited Partner and as a party to the Partnership Agreement,
(d) gives the powers of attorney provided for in the Partnership Agreement
and
(e) makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined here have the
meanings assigned to those terms in the Partnership Agreement.
Date: _______________________
---------------------------------------------- ----------------------------
Social Security or other identifying number of Signature of Assignee
Assignee
---------------------------------------------- ----------------------------
Purchase Price including commissions, if any Name and Address of Assignee
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify)_______________________
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Foreign Corporation [_] Non-resident Alien
A-1
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended, the
Partnership must withhold tax with respect to certain transfers of property if
a holder of an interest in the Partnership is a foreign person. To inform the
Partnership that no withholding is required with respect to the undersigned
interestholder's interest in it, the undersigned hereby certifies the following
(or, if applicable, certifies the following on behalf of the interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is _.
3. My home address is _________________________________________________.
B. Partnership, Corporation or Other Interestholder
1. ___________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is _______ .
3. The interestholder's office address and place of incorporation (if
applicable) is ______________________________________________________
___________________________________________________________________ .
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
---------------------
(Name of Interestholder)
---------------------
Signature and Date
---------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-2
ANNEX B--GLOSSARY OF TERMS
Adjusted Operating Surplus: For any period, Operating Surplus generated
during that period as adjusted to:
(a)decrease Operating Surplus by;
(1)any net increase in working capital borrowings during that
period, and
(2)any net reduction in cash reserves for Operating Expenditures
during that period not relating to an Operating Expenditure made
during that period; and
(b)increase Operating Surplus by;
(1)any net decrease in working capital borrowings during that
period; and
(2)any net increase in cash reserves for Operating Expenditures
during that period required by any debt instrument for the
repayment of principal, interest or premium.
Adjusted Operating Surplus does not include that portion of Operating
Surplus included in clause (a)(1) of the definition of Operating Surplus.
Available Cash: For any quarter prior to liquidation:
(a)the sum of:
(1)all cash and cash equivalents of the Star Gas Partners and its
subsidiaries on hand at the end of that quarter; and
(2)all additional cash and cash equivalents of Star Gas Partners and
its subsidiaries on hand on the date of determination of
Available Cash for that quarter resulting from Working Capital
Borrowings after the end of that quarter;
(b)less the amount of cash reserves that is necessary or appropriate in
the reasonable discretion of the general partner to:
(1)provide for the proper conduct of the business of Star Gas
Partners and its subsidiaries (including reserves for future
capital expenditures) after that quarter;
(2)provide funds for minimum quarterly distributions and cumulative
common unit arrearages for any one or more of the next four
quarters; or
(3)comply with applicable law or any debt instrument or other
agreement or obligation to which any member of Star Gas Partners
and its subsidiaries is a party or its assets are subject;
provided, however, that the general partner may not establish cash
reserves for distributions to the senior subordinated units unless the
general partner has determined that in its judgment the establishment of
reserves will not prevent Star Gas Partners from distributing the
minimum quarterly distribution on all common units and any common unit
arrearages thereon for the next four quarters; and,
provided further, that disbursements made by Star Gas Partners and
its subsidiaries or cash reserves established, increased or reduced
after the end of that quarter but on or before the date of determination
of Available Cash for that quarter shall be deemed to have been made,
established, increased or reduced, for purposes of determining Available
Cash, within that quarter if the general partner so determines.
Capital Account: The capital account maintained for a partner under the
amended and restated partnership agreement. The Capital Account for a common
unit, a subordinated unit, a junior subordinated unit, a general partner unit
or any other specified interest in Star Gas Partners shall be the amount which
that Capital Account would be if that common unit, subordinated unit, junior
subordinated unit, general partner unit or other interest in Star Gas Partners
were the only interest in Star Gas Partners held by a partner.
B-1
Capital Surplus: All Available Cash distributed by Star Gas Partners from
any source will be treated as distributed from Operating Surplus until the sum
of all Available Cash distributed since the commencement of Star Gas Partners
equals the Operating Surplus as of the end of the quarter before that
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
Closing Price: The last sale price on a day, regular way, or in case no sale
takes place on that day, the average of the closing bid and asked prices on
that day, regular way. In either case, as reported in the principal
consolidated transaction reporting system for securities listed or admitted to
trading on the principal national securities exchange on which the units of
that class are listed or admitted to trading. If the units of that class are
not listed or admitted to trading on any national securities exchange, the last
quoted price on that day. If no quoted price exists, the average of the high
bid and low asked prices on that day in the over-the-counter market, as
reported by the Nasdaq Stock Market or any other system then in use. If on any
day the units of that class are not quoted by any organization of that type,
the average of the closing bid and asked prices on that day as furnished by a
professional market maker making a market in the units of the class selected by
the board of directors of the general partner. If on that day no market maker
is making a market in the units of that class, the fair value of such units on
that day as determined reasonably and in good faith by the board of directors
of the general partner.
Current Market Price: With respect to any class of units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices for the 20 consecutive trading days immediately prior
to such date.
Interim Capital Transactions:
(a)borrowings, refinancings or refundings of indebtedness and sales of
debt securities (other than Working Capital Borrowings and other than
for items purchased on open account in the ordinary course of
business) by any member of Star Gas Partners and its subsidiaries;
(b)sales of equity interests (including common units sold to the
underwriters in the exercise of their over-allotment option) by any
member of Star Gas Partners and its subsidiaries; and
(c)sales or other voluntary or involuntary dispositions of any assets of
any member of Star Gas Partners and its subsidiaries (other than
sales or other dispositions of inventory in the ordinary course of
business, sales or other dispositions of other current assets,
including, without limitation, receivables and accounts, in the
ordinary course of business and sales or other dispositions of assets
as a part of normal retirements or replacements), in each case before
the dissolution and liquidation of Star Gas Partners.
Operating Expenditures: All expenditures of Star Gas Partners and its
subsidiaries including taxes, reimbursements of the general partner, debt
service payments, and capital expenditures, subject to the following:
(a)Payments (including prepayments) of principal and premium on a debt
shall not be an Operating Expenditure if the payment is;
(1)required for the sale or other disposition of assets or
(2)made for the refinancing or refunding of indebtedness with the
proceeds from new indebtedness or from the sale of equity
interests. For purposes of the foregoing, at the election and in
the reasonable discretion of the general partner, any payment of
principal or premium shall be deemed to be refunded or refinanced
by any indebtedness incurred or to be incurred by Star Gas
Partners and its subsidiaries within 180 days before or after
that payment to the extent of the principal amount of that
indebtedness.
B-2
(b)Operating Expenditures shall not include;
(1)capital expenditures made for acquisitions or for capital
improvements (as opposed to capital expenditures made to maintain
assets);
(2)payment of transaction expenses relating to Interim Capital
Transactions;
(3)payment of transaction expenses related to the merger and the
transactions contemplated by the merger; or
(4)distributions to partners. Where capital expenditures are made in
part for acquisitions or capital improvements and in part for
other purposes, the general partner's good faith allocation
between the amounts paid for each shall be conclusive.
Operating Surplus: As to any period before liquidation:
(a)the sum of:
(1)$20,340,600 plus all cash of Star Gas Partners and its
subsidiaries on hand as of the close of business on the closing
date of the initial public offering;
(2)all the cash receipts of Star Gas Partners and its subsidiaries
for the period beginning on the closing date of the initial
public offering and ending with the last day of that period,
other than cash receipts from Interim Capital Transactions
(except to the extent specified in the amended and restated
partnership agreement; and
(3)all cash receipts of Star Gas Partners and its subsidiaries after
the end of that period but on or before the date of determination
of Operating Surplus for the period resulting from borrowings for
working capital purposes; less
(b)the sum of:
(1)Operating Expenditures for the period beginning on the date of
the closing of the initial public offering and ending with the
last day of that period; and
(2)the amount of cash reserves that is necessary or advisable in the
reasonable discretion of the general partner to provide funds for
future Operating Expenditures; provided, however, that
disbursements made (including contributions to Star Gas Partners
or any of its subsidiaries or disbursements on behalf of Star Gas
Partners or any of its subsidiaries) or cash reserves
established, increased or reduced after the end of that period
but on or before the date of determination of Available Cash for
that period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating
Surplus, within that period if the general partner so determines.
Notwithstanding the foregoing, "Operating Surplus" for the quarter in which the
liquidation date occurs and any later quarter shall equal zero.
subordination period: The subordination period will extend from the date of
the closing of the initial public offering until the first to occur of the
following:
(a)the first day of any quarter beginning on or after October 1, 2002
for which;
(1)distributions of Available Cash from Operating Surplus on each of
the outstanding common units, senior subordinated units, junior
subordinated units and general partner units equaled or exceeded
the sum of the minimum quarterly distribution on all of the
outstanding common units and junior subordinated units for each
of the three non-overlapping four-quarter periods immediately
preceding that date;
(2)the Adjusted Operating Surplus, generated during each of the
three immediately preceding, non-overlapping four quarter periods
equaled or exceeded the sum of minimum quarterly
B-3
distribution on all of the common units, senior subordinated
units, junior subordinated units and general partner units that
were outstanding during those periods on a fully diluted basis
for employee options or other employee incentive compensation
(i.e., taking into account for purposes of that determination all
outstanding common units, senior subordinated units, junior
subordinated units and general partner units and all common units
issuable upon exercise of employee options that have, as of the
date of determination, already vested or are scheduled to vest
before the end of the quarter immediately following the quarter
for which determination is made, and all units that have, as of
the date of determination, been earned by but not yet issued to
management of Star Gas Partners for incentive compensation); and
(3)there are no arrearages in payment of the minimum quarterly
distribution on the common units.
(b)the date on which the general partner is removed as general partner
of Star Gas Partners upon the requisite vote by limited partners
under circumstances where cause does not exist; provided, however,
that if the general partner is removed during the subordination
period within 12 months after the end of a six-quarter period in
which the minimum quarterly distribution was not made on the common
units for more than one of those quarters (excluding for this purpose
the payment of any common unit arrearages) and the first quarter of
that six-quarter period that the minimum quarterly distribution on
common units was not made occurs after March 31, 2001, then the
subordination period will not end. In the event that the general
partner is removed under the circumstances described above, the
junior subordinated units shall convert into senior subordinated
units on a one-for-one basis and the distribution rights on the
general partner units will rank equally with the senior subordinated
units.
Working Capital Borrowings: Borrowings under to a facility or other
arrangement requiring all of its borrowings to be reduced to a relatively small
amount each year for an economically meaningful period of time. Borrowings that
are not intended exclusively for working capital purposes shall not be treated
as Working Capital Borrowings.
B-4
--------------------------------------
--------------------------------------
We have not authorized anyone to provide information different from that
contained in this prospectus supplement and the accompanying prospectus.
Neither the delivery of this prospectus supplement and the accompanying
prospectus nor the sale of common units means that information contained in
this prospectus supplement and the accompanying prospectus is correct after the
dates of this prospectus supplement and the accompanying prospectus. This
prospectus supplement and the accompanying prospectus is not an offer to sell
or a solicitation of an offer to buy these common units in any circumstances
under which the offer or solicitation is unlawful.
-----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
Important Notice...................... S-3
Star Gas Partners..................... S-4
Recent Developments................... S-5
The Offering.......................... S-6
Risk Factors.......................... S-7
Use of Proceeds....................... S-7
Price Range of Common Units and
Distributions....................... S-8
Ratio of Taxable Income to Cash
Distributions....................... S-8
Recent Tax Developments............... S-9
Underwriting.......................... S-10
Experts............................... S-12
Validity of Common Units.............. S-12
PROSPECTUS
Guide to Reading This Prospectus...... 1
Who We Are............................ 2
About This Prospectus................. 3
Risk Factors.......................... 3
Use of Proceeds....................... 14
Ratio of Earnings to Fixed Charges.... 14
Cash Distribution Policy.............. 15
Description of the Common Units....... 24
Description of Partnership Securities. 26
Description of Debt Securities........ 31
Federal Income Tax Considerations..... 42
Conflicts of Interest................. 57
Plan of Distribution.................. 60
Validity of Securities................ 60
Experts............................... 60
Where You Can Find More Information... 61
Forward-Looking Statements............ 61
Incorporation of Certain Documents by
Reference........................... 62
Annex A -- Application for Transfer of
Common Units........................ A-1
Annex B -- Glossary of Terms.......... B-1
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
1,500,000 Common Units
Star Gas Partners, L.P.
Representing
Limited Partner Interests
-----------------
PROSPECTUS SUPPLEMENT
-----------------
A.G. Edwards & Sons, Inc.
UBS Warburg
Wachovia Securities
January 7, 2002
--------------------------------------
--------------------------------------