As filed with the Securities and Exchange Commission on November 4, 2002
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Star Gas Partners, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 5984 06-1437793
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code) Identification Number)
2187 Atlantic Street
P.O. Box 120011
Stamford, Connecticut 06912-0011
(203) 328-7300
(Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Richard F. Ambury
Vice President and Treasurer
Star Gas LLC
2187 Atlantic Street
P.O. Box 120011
Stamford, Connecticut 06912-0011
(203) 328-7300
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Agent For Service)
Copy to:
Phillips Nizer LLP
666 Fifth Avenue, 28th Floor
New York, New York 10103
(212) 977-9700
Attn: Alan Shapiro, Esq.
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration
Statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of Securities Aggregate Offerin Amount of
to be Registered Price(1) Registration Fee
Common Units(2) ................................
Partnership Securities(2) ......................
Debt Securities(2)(3) ..........................
Total ....................................... $200,000,000 $18,400
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). In no event will the aggregate initial offering
price of all securities offered from time to time pursuant to this
Registration Statement exceed $200,000,000. To the extent applicable, the
aggregate amount of common units registered is further limited to that which
is permissible under Rule 415(a)(4) under the Securities Act. Any securities
registered hereunder may be sold separately or as units with other
securities registered hereunder.
(2) There are being registered hereunder a presently indeterminate number of
common units and partnership securities and an indeterminate principal
amount of debt securities. The common units and other partnership securities
consisting of units of partnership interest include unit purchase rights of
one Right per unit of partnership interest.
(3) If any debt securities are issued at an original issue discount, then the
offering price of those debt securities shall be in an amount that will
result in an aggregate initial offering price not to exceed $200,000,000
less the dollar amount of any registered securities previously issued.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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.
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 2002
PROSPECTUS
Star Gas Partners, L.P.
$200,000,000
[LOGO]
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 November 1,
2002 was $18.75 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 2 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 date of this prospectus is _________________
TABLE OF CONTENTS
GUIDE TO READING THIS
PROSPECTUS .............................................................. iii
WHO WE ARE ................................................................. 1
ABOUT THIS PROSPECTUS ...................................................... 2
RISK FACTORS ............................................................... 2
Risks Inherent in Our Businesses ...................................... 3
Risks Inherent in an Investment in Star
Gas Partners ....................................................... 7
Tax Risks to Common Unitholders ....................................... 11
USE OF PROCEEDS ............................................................ 13
RATIO OF EARNINGS TO FIXED
CHARGES ................................................................. 14
CASH DISTRIBUTION POLICY ................................................... 14
General Description of Cash
Distribution ....................................................... 14
Quarterly Distributions of Available
Cash ............................................................... 15
Distributions of Available Cash from
Operating Surplus During the
Subordination Period ............................................... 15
Distributions of Available Cash from
Operating Surplus After the
Subordination Period ............................................... 16
Incentive Distributions During the
Subordination Period ............................................... 16
Incentive Distributions After the
Subordination Period ............................................... 17
Distributions from Capital Surplus .................................... 18
Limitations and Prohibitions on
Distributions on Subordinated
Interests .......................................................... 18
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 ..................................... 22
DESCRIPTION OF THE COMMON
UNITS ................................................................... 23
The Rights of Unitholders ............................................. 24
Transfer Agent and Registrar .......................................... 24
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Obligations and Procedures for the
Transfer of Units ................................................. 24
DESCRIPTION OF PARTNERSHIP
SECURITIES ............................................................. 25
Limitation on Issuance of Additional
Partnership Securities ............................................ 25
Issuance of Additional Partnership
Securities ........................................................ 26
Unit Purchase Rights ................................................. 27
Adoption of Amendments to Partnership Agreement ...................... 29
DESCRIPTION OF DEBT SECURITIES ............................................ 30
General .............................................................. 30
Specific Terms of Each Series of Debt
Securities in the Prospectus
Supplement ........................................................ 31
Provisions Only in the Senior
Indenture ......................................................... 31
Provisions Only in the Subordinated
Indenture ......................................................... 35
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 ......................................... 45
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 Interest 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
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INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE ................................................... 62
ANNEX A--APPLICATION FOR
TRANSFER OF COMMON UNITS ................................................. A-1
ANNEX B--GLOSSARY OF TERMS .................................................. B-1
---------------------------
You should rely only on the information contained in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
have not authorized anyone else to give you different information. We are not
offering these securities in any state where they do not permit the offer. We
will disclose any material changes in our affairs in an amendment to this
prospectus, a prospectus supplement or a future filing with the SEC incorporated
by reference in this prospectus.
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. ("Petroleum Heat") and certain related
transactions that closed on March 26, 1999;
(2) "Petro" refers to Petro Holdings, Inc. and its home heating oil
and related operations and those of its subsidiaries;
(3) our operations prior to the completion of the Petro transaction
included the operations of Star Gas Propane, L.P., referred to in this
prospectus as "Star Gas Propane" and its subsidiary; and
(4) 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 Petroleum Heat,
which is the parent of our former general partner, except for the home
heating oil business and operations of Meenan Oil Co., L.P. ("Meenan"),
which was acquired by Petro in August 2001. Following the Petro
transaction, the home heating oil business and operations have been
operated by Petro and Petro's wholly-owned subsidiaries, including
Petroleum Heat.
.. 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 Petro transaction,
in which case we are referring to Star Gas Corporation.
iii
.. In April 2000, we acquired a 72.7% interest in Total Gas & Electric, Inc.,
referred to in this prospectus as Total Gas & Electric. In June 2002, we
acquired all minority interests in Total Gas & Electric bringing our
ownership interest in Total Gas & Electric to 100%.
.. 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.
iv
WHO WE ARE
General
We are the seventh 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 subsidiary, 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 our approximately
290,000 propane customers from 116 branch locations and 61 satellite storage
facilities in the Midwest and the Northeast regions, Florida and Georgia. In
addition to our retail business, we also serve wholesale customers from our
facilities in southern Indiana.
For the twelve months ended June 30, 2002, approximately 94% of the total
sales from our propane operations were to retail customers and approximately 6%
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 66% of the retail propane gallons sold and 75% of propane gross
profits.
Home Heating Oil Operations
We are a leading consolidator in the highly fragmented home heating oil
industry. We serve approximately 515,000 home heating oil customers from 35
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.
These services are an integral part of our basic home heating oil service, and
are designed to maximize customer satisfaction and loyalty.
For the twelve months ended June 30, 2002, approximately 73% of our total
sales from the heating oil operations were from sales of home heating oil,
approximately 19% were from the installation and repair of heating and air
conditioning equipment and approximately 8% were from the sale of other
petroleum products, including diesel fuel and gasoline, to commercial customers.
During this period, sales to residential customers represented 82% of the retail
heating oil gallons sold and 92% of heating oil gross profits.
In order to increase operating efficiencies and reduce operating costs at
our home heating oil division, we have commenced a business process redesign
program. Under this program, we will install on-board computers in all of our
heating oil delivery trucks, improve telephone and computer systems, and provide
all of our service technicians with hand-held computers.
Electricity and Natural Gas Operations
Through our subsidiary, 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 and Maryland. 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.
1
Recent Developments
Rating of Home Heating Oil Subsidiary's Debt Affirmed
On August 9, 2002, Fitch Rating Service affirmed the `BBB' rating on the
outstanding Senior Secured Notes of our home heating oil subsidiary. The Senior
Secured Notes were removed from Fitch's Rating Watch Negative where they were
placed on June 6, 2002. Fitch's Rating Outlook is "Negative" pending Petro's
performance during the upcoming heating season.
Weather Insurance
We purchased $20.0 million of weather insurance for the upcoming 2002/2003
winter heating season in order to help minimize the potential impact of weather
volatility on our future cash flows. The insurance is based on weather
conditions over the past ten years, and it covers weather that is up to
approximately 20% warmer than the historical norms during this period. In
addition, we acquired $12.5 million of weather insurance to help stabilize the
cash flows for the four winters following 2002/2003. We cannot assure you that
our weather insurance will be sufficient to offset the adverse effects of warm
weather on our operations.
Principal Executive Offices
Our principal executive offices are located at 2187 Atlantic Street, P.O.
Box 120011, Stamford, Connecticut 06912, and our telephone number there is (203)
328-7300.
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 up to $200 million in
aggregate offering price of 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.
2
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 materially
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 2000 and
fiscal 2002, temperatures were significantly warmer than normal for the areas in
which we sell propane and home heating oil, which adversely affected the amount
of Available Cash from Operating Surplus and EBITDA that we generated during
these periods. 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 customer
gains of approximately 10% per year. In fiscal 1999, Petro had net customer
attrition equal to approximately 2.2%, representing gains of approximately 11.9%
and gross losses of approximately 14.1%; in fiscal 2000, Petro had net customer
gains of approximately 1.3%, representing gains of approximately 14.3% and gross
losses of approximately 13.0%; and in fiscal 2001, Petro had net customer
attrition of approximately 0.7%, representing gains of approximately 13.1% and
gross losses of approximately 13.8%. 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 achieve net gains of home heating oil customers and may
continue to 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.
3
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.
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 2001. To the extent that we purchase
propane from Canadian sources, approximately 6% in fiscal 2001, 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, however, the level of these activities has not been
significant and we are currently engaged to only a minor extent in 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, however, we
cannot assure you that our efforts will be successful.
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
4
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 businesses, 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.
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. In addition, 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
5
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, 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.
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 2001, 37% of our propane purchases in the Midwest were
purchased on the spot market from various Mont Belvieu, Texas sources, 21% of
our propane purchases were from a refinery in Kentucky owned by MarkWest
Hydrocarbon, Inc. and 9% were purchased from a refinery in Illinois owned by BP
Canada Energy Marketing Corporation. Collectively, our fiscal 2001 propane
purchases were purchased from over 20 sources. 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
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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.
In Our Acquisition of Meenan, We Assumed All of Meenan's Environmental
Liabilities
In our acquisition of Meenan in August 2001, 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 remediating known environmental
liabilities. While we believe this reserve will be adequate, it is possible that
the extent of the contamination at issue or the expense of addressing it could
exceed our estimates and thus the costs of remediating these known liabilities
could materially exceed the amounts reserved.
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 Effect on Total Gas & Electric's Operations
Total Gas & Electric is subject to state consumer protection laws and other
state laws and regulations. From time to time, Total Gas & Electric has been
subject to investigations by the authorities in various jurisdictions into its
practices for soliciting customers. To date, Total Gas & Electric has been able
to resolve these investigations on a satisfactory basis. Total Gas & Electric
has adopted a comprehensive sales compliance program to comply with applicable
regulations. However, if Total Gas & Electric fails to comply with these
regulations in the future, it may have a material adverse effect on Total Gas &
Electric's operations.
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.
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. An additional $3.5 million of reserve was
provided during the nine months ended June 30, 2002, of which $0.9 million was
for those terminated accounts, leaving an unreserved accounts receivable balance
for the terminated accounts of approximately $2.4 million as of June 30, 2002.
While we believe that Total Gas & Electric's delinquency and bad debt levels
will improve and will ultimately approximate those at our home 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.
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;
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. 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 $75.4 million. This figure represents $66.6 million for the common
units, $7.2 million for the senior subordinated units, $0.8 million for the
junior subordinated units and $0.8 million for the general partner units. The
amount of distributable cash flow generated in the twelve months ended June 30,
2002 was $39.0 million. This amount does not reflect the full impact of the
results of operations of the businesses that we acquired during the twelve-month
period (only the results commencing from the date that we acquired the
businesses) and does not reflect the results of businesses that we have acquired
since June 30, 2002. In addition, we believe that the overall levels of
available cash were adversely affected during the twelve months ended June 30,
2002 due to temperatures that were significantly warmer than normal. We have
taken measures to reduce the impact of warmer than normal temperatures, such as
purchasing weather insurance and reducing operating expenses. However, we cannot
assure you that these measures will be sufficient to adequately mitigate the
impact of warm weather in the future.
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
Petro's credit facility and its senior secured notes, 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."
As of June 30, 2002, a change of control of Star Gas Partners would result in
approximately $278.3 million of Petro debt becoming immediately due
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and payable, and would result in the re-rating of approximately $147.7 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 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 June
30, 2002, there was $461.5 million of such indebtedness to financial
institutions and $184.6 million of such indebtedness to trade
creditors and others.
We have a Significant Amount of Indebtedness Due in Fiscal 2003 and in
Subsequent Fiscal Years
At June 30, 2002, we had $461.5 million of outstanding indebtedness to
financial institutions, of which $74.4 million is due to be repaid in fiscal
2003, excluding amounts due under our working capital revolving credit
facilities. Of this $74.4 million, $45.3 million was due on October 1, 2002 and
was paid from our cash balances on hand. We expect that funding for the
remainder of the indebtedness due in fiscal 2003 will be provided by a portion
of the proceeds from our September 2002 public offering of common units, funds
from indebtedness refinancing and operating cash flow. Although we believe these
amounts will be sufficient to fund the balance of our indebtedness due in fiscal
2003, if they are not, it could have a material adverse impact on us and our
unitholders. In addition, to the extent that the amounts available to us from
these and similar sources are not sufficient to fund indebtedness maturing
subsequent to fiscal 2003, this will have a material adverse impact on us and
our unitholders.
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 that
substantially limit our ability to issue additional common units at the present
time. These limitations do not apply to issuances in connection with
acquisitions and growth capital expenditures 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.
9
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 units 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.
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:
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. 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 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.
. 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 2002 and for several years thereafter. 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 us, 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
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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 November 4, 2002, 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
November 4, 2002, 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 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 top federal tax rate is currently 35%. 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.
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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 maintain
uniformity and for other reasons, we have adopted certain depreciation and
amortization conventions that 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. We anticipate that substantially all of our income will be
generated in the following states: Connecticut, Florida, Georgia, Illinois,
Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota,
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 applies only 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.
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.
13
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.
Fiscal Year Ended September 30, Nine Months Ended June 30, 2002
------------------------------- -------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Ratio of earnings to fixed charges ............ 1.27x -- -- 1.06x -- 2.2x
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 fiscal
year ended September 30, 1998; and $44.3 million for the fiscal 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 fiscal
year ended September 30, 1999. Earnings were inadequate to cover fixed charges
by $5.2 million for the fiscal year ended September 30, 2001.
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 Petro 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.
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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.
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
15
(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.
. 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:
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. 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.
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
Distributed as Incentive Distributions to
Quarterly Percentage of Percentage of the Specified Unit Class
Distribution Available Cash Available 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% 11.0% 1.2% 1.1%
Third Target Distribution .... 0.926 76.5 23.5 19.4 2.1 2.0
Thereafter ................... -- 51.0 49.0 40.4 4.4 4.2
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.
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. 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 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.
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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.
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.
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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. On November 14,
2001, we distributed 303,000 senior subordinated units, pro rata, to the holders
of record on November 5, 2001 of the senior subordinated units, junior
subordinated units and general partner units, following our announcement that
the partnership had achieved the specified financial test for the four quarter
period ended September 30, 2001.
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 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
20
(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.
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.
21
. 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.
. 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.
22
. 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.
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.
23
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 Equiserve 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;
. 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; and
. the recording of the name of the assignee on the books and records of
Star Gas Partners.
24
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; and
. 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.
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.
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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;
. 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; and
. 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.
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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.
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,
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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.
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
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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.
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;
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(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.
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
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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.
Specific 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;
. 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.
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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 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
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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;
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;
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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
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 (ii) 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.
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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.
"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 paragraph
defining Permitted Liens 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.
35
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.
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;
36
. 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; or
. 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;
. add covenants and events of default or to surrender any rights we have
under the Indenture;
. make any change that does not adversely affect any outstanding debt
securities of a series in any material respect;
. secure the senior debt securities as described above under " -
Provisions Only in the Senior Indenture -Limitations on Liens";
. provide for successor trustees; and
. 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;
37
. 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.
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 or coupon
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
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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.
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.
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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.
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.
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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.
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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
"--Tax Consequences of Unit Ownership - Legal Opinions and Advice," expresses
the opinion of Phillips Nizer 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 November 4,
2002, 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 November
4, 2002 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
November 4, 2002.
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:
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(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,
(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 7.9% 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
44
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 Star Gas Partners 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) 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 2002 and for several years thereafter, 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
45
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.
Tax Rate. The top marginal income tax rate for individuals for 2002 is
38.6%. 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,
46
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.
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. Allocations may also be made to account for the difference between
the fair market value of our assets and their tax basis at the time of any
offering made pursuant to this prospectus. 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.
47
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 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.
48
Under current rules applicable to publicly-traded partnerships, we are
required to withhold as taxes 38.6% 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 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
the Code and related regulations.
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."
49
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 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, Local and
Other 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
50
unitholders that the IRS will not successfully contend in court that such
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 "--Section 754
Election" below, 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.
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
53
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
newly-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 newly-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 of the Internal Revenue Code
54
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 approach may result
in lower annual depreciation or amortization deductions than would otherwise be
allowable to certain unitholders. See "-Tax Treatment of Operations--Uniformity
of 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.
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
twelve-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
55
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, Maryland, Massachusetts, Michigan, Minnesota, 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 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.
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 agreement 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
57
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 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.
58
In order to become a limited partner of Star Gas Partners, a unitholder is
required to agree to be bound by the provisions of the partnership agreement,
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.
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 LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Star Gas Partners,
L.P. and subsidiaries as of September 30, 2000 and 2001 and for each of the
years in the three-year period ended September 30, 2001 have been incorporated
by reference in this prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The balance sheets of Star Gas LLC as of September 30, 2000 and 2001 have
been incorporated by reference in this prospectus in reliance upon the report of
KPMG LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Meenan Oil Co., L.P. as of June
30, 2001 and 2000 and for each of the years in the three-year period ended June
30, 2001 have been incorporated by reference in this prospectus in reliance upon
the report of KPMG LLP, independent certified public accounts, incorporated by
reference herein, and upon the authority of said 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 and also to "Incorporation of Certain Documents by
Reference" below.
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 are
incorporated by reference in this prospectus:
. Star Gas Partners' Annual Report on Form 10-K for the fiscal year ended
September 30, 2001.
. Star Gas Partners' Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 2001.
. Star Gas Partners' Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2002.
. Star Gas Partners' Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2002, as amended.
. Star Gas Partners' Current Report on Form 8-K, dated January 7, 2002.
. Star Gas Partners' Current Report on Form 8-K, dated June 5, 2002.
. Star Gas Partners' Current Report on Form 8-K, dated June 6, 2002.
. Star Gas Partners' Current Report on Form 8-K, dated September 17,
2002.
. Star Gas Partners' Current Report on Form 8-K, dated November 4, 2002.
. The description of the common units representing limited partnership
interests contained in the Registration Statement on Form 8-A,
initially filed May 15, 1998, and any subsequent amendment thereto
filed for the purpose of updating such description.
. Star Gas Partners' Registration Statement on Form 8-A, dated April 17,
2001.
In addition, all other reports and documents we file 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 herein have
the meanings assigned to those terms in the Partnership Agreement.
Date: ________________
____________________________________ _______________________________
Social Security or other identifying Signature of Assignee
number of Assignee
____________________________________ _______________________________
Purchase Price including commissions, if any Name and Address of Assignee
A-1
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
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.
A-2
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-3
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.
B-1
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.
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.
EBITDA: Earnings before interest, taxes, depreciation and amortization,
Total Gas & Electric customer acquisition expense and unit compensation expense,
less net gain (loss) on sales of fixed assets and before the impact of SFAS No.
133.
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:
B-2
(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) 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.
B-3
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
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
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Set forth below are the expenses expected to be incurred in connection with
the initial regulation of the securities registered hereby. We expect to incur
additional fees in connection with the issuance and distribution of the
securities registered hereby, but the amount of such expenses cannot be
estimated at this time as they will depend upon the nature of the securities
offered, the form and timing of any such offerings and related matters. With the
exception of the Securities and Exchange Commission registration fee, the
amounts set forth below are estimates.
SEC Registration Fee ......................... $18,400
Printing and Engraving Expenses .............. 40,000
New York Stock Exchange Listing Fee .......... --
Accounting Fees and Expenses ................. 20,000
Legal Fees and Expenses ...................... 30,000
Transfer Agent and Registrar Fees ............ 1,000
Miscellaneous ................................ 5,600
--------
Total .............................. $115,000
========
Item 15. Indemnification of Directors and Officers
The Registrant's Partnership Agreement and the Operating Partnership
Agreement of the Registrant's operating partnership provide that the Registrant
or the operating partnership, as the case may be, will indemnify (to the fullest
extent permitted by applicable law) certain persons from and against any and all
losses, claims, damages, liabilities (joint or several), expenses (including,
without limitation, legal fees and expenses), judgements, fines and amounts paid
in settlement actually and reasonably incurred by such indemnitee in connection
with any claim, demand, action, suit or proceeding to which the indemnitee is or
was an actual or threatened party and which relates to the Partnership Agreement
or the Operating Partnership Agreement or the property, business, affairs or
management of the Registrant or the operating partnership. This indemnity is
available only if the indemnitee acted in good faith, in a manner in which such
indemnitee believed to be in, or not opposed to, the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. Indemnitees include the Registrant's
general partner, any departing partner, any affiliate of the general partner or
any departing partner or any affiliate of either, or any person who is or was
serving at the request of the general partner, any departing partner, or any
such affiliate as a director, officer, partner, trustee, employee or agent of
another person. Expenses subject to indemnity will be paid by the applicable
partnership to the indemnitee in advance, subject to receipt of an undertaking
by or on behalf of the indemnitee to repay such amount if it is ultimately
determined by a court of competent jurisdiction that the indemnitee is not
entitled to indemnification. The Registrant will, to the extent commercially
reasonable, purchase and maintain insurance on behalf of the indemnitees,
whether or not the Registrant would have the power to indemnify such indemnitees
against liability under the applicable partnership agreement. The general
partner maintains a policy of directors' and officers' liability insurance on
behalf of its officers and directors.
II-1
Item 16. Exhibits
The following is a complete list of Exhibits filed or incorporated by
reference as part of this Registration Statement.
Exhibit Description
-------- --------------------------------------------------------------
1.1 Form of Underwriting Agreement.**
4.1 Form of Amended and Restated Agreement of Limited Partnership of Star
Gas Partners, L.P.+
4.2 Form of Amended and Restated Agreement of Limited Partnership of Star
Gas Propane, L.P.+
4.3 Form of Senior Indenture.++
4.4 Form of Subordinated Indenture.++
4.5 Form of Unit Purchase Rights Agreement between the Partnership and
American Stock Transfer & Trust Company as rights agent.+++
4.6 Form of Amendment No. 1 to Amended and Restated Partnership Agreement
of Star Gas Partners, L.P.++++
5.1 Opinion of Phillips Nizer LLP as to the validity of the securities
being registered.*
8.1 Opinion of Phillips Nizer LLP as to certain federal income tax
matters.*
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.*
23.1 Consents of KPMG LLP.*
23.2 Consents of Phillips Nizer LLP (included in their opinions filed as
Exhibits 5.1 and 8.1).*
24.1 Powers of Attorney (included on pages II-4 and II-5 of the
Registration Statement Signature Page).*
25.1 Form T-1 Statement of Eligibility and Qualification respecting the
Senior Indenture.**
25.2 Form T-1 Statement of Eligibility and Qualification respecting the
Subordinated Indenture.**
----------
* Filed herewith.
** To be filed by amendment or in connection with the offering of the
applicable securities.
+ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-4, File No. 333-66005, filed with the Commission on
October 22, 1998.
++ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-3, File No. 333-94031, filed with the Commission on
January 3, 2000.
+++ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form 8-A, filed with the Commission April 17, 2001.
++++ Incorporated by reference to an exhibit to the Registrant's Current Report
on Form 8-K, filed with the Commission on April 17, 2001.
Item 17. Undertakings
(1) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to directors, officers or controlling persons
of the Registrant pursuant to the provisions described in Item 15 of this
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-2
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(3) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; provided, however, that the
undertakings set forth in paragraph (a)(i) and (a)(ii) above do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the commission by
the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(d) To file an application for the purpose of determining the eligibility
of the trustee to act under subsection (a) of Section 310 of the TIA
in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the TIA.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut, on November 4, 2002.
Star Gas Partners, L.P.
By: STAR GAS LLC,
as General Partner
By: /s/ Irik P. Sevin
-----------------
Irik P. Sevin
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below appoints Irik P. Sevin, Richard
F. Ambury and Ami Trauber and each of them, any of whom may act without the
joinder of the other, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including any pre- or post-effective amendment) of and
supplements to this Registration Statement on Form S-3, and to file the same,
with all exhibits thereto, and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or would do in person, hereby ratifying and confirming all that
said attorney-in-fact and agents or any of them or their or his or her
substitute and substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Irik P. Sevin Chairman of the Board, Chief November 4, 2002
------------------
Irik P. Sevin Executive Officer and
Director (Principal Executive
Officer)
/s/ Ami Trauber Chief Financial Officer November 4, 2002
----------------
Ami Trauber (Principal Financial and
Accounting Officer)
/s/ Audrey L. Sevin Director November 4, 2002
--------------------
Audrey L. Sevin
II-4
/s/ William Nicoletti Director November 4, 2002
---------------------
William Nicoletti
/s/ Paul Biddelman Director November 4, 2002
---------------------
Paul Biddelman
/s/ Thomas J. Edelman Director November 4, 2002
---------------------
Thomas J. Edelman
/s/ I. Joseph Massoud Director November 4, 2002
---------------------
I. Joseph Massoud
/s/ Stephen Russell Director November 4, 2002
---------------------
Stephen Russell
II-5
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
1.1 Form of Underwriting Agreement.**
4.1 Form of Amended and Restated Agreement of Limited Partnership of Star
Gas Partners, L.P.+
4.2 Form of Amended and Restated Agreement of Limited Partnership of Star
Gas Propane, L.P.+
4.3 Form of Senior Indenture.++
4.4 Form of Subordinated Indenture.++
4.5 Form of Unit Purchase Rights Agreement between the Partnership and
American Stock Transfer & Trust Company as rights agent.+++
4.6 Form of Amendment No. 1 to Amended and Restated Partnership Agreement
of Star Gas Partners, L.P.++++
5.1 Opinion of Phillips Nizer LLP as to the validity of the securities
being registered.*
8.1 Opinion of Phillips Nizer LLP as to certain federal income tax
matters.*
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.*
23.1 Consents of KPMG LLP.*
23.2 Consents of Phillips Nizer LLP (included in their opinions filed as
Exhibits 5.1 and 8.1).*
24.1 Powers of Attorney (included on pages II-4 and II-5 of this
Registration Statement).*
25.1 Form T-1 Statement of Eligibility and Qualification respecting the
Senior Indenture.**
25.2 Form T-1 Statement of Eligibility and Qualification respecting the
Subordinated Indenture.**
----------
* Filed herewith.
** To be filed by amendment or in connection with the offering of the
applicable securities.
+ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-4, File No. 333-66005, filed with the Commission on
October 22, 1998.
++ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-3, File No. 333-94031, filed with the Commission on
January 3, 2000.
+++ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form 8-A, filed with the Commission April 17, 2001.
++++ Incorporated by reference to an exhibit to the Registrant's Current Report
on Form 8-K, filed with the Commission on April 17, 2001.
i