UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K / A CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of report (Date of earliest event reported) March 26, 1999 -------------- Star Gas Partners, L.P. ---------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-98490 06-1437793 - ------------------------------------------------------------------------------ (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 2187 Atlantic Street, Stamford, CT 06902 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 328-7300 -------------- Not Applicable - ------------------------------------------------------------------------------ (Former name or former address, if changed since last report.)
Item 7. Financial Statements and Exhibits (b) Pro Forma Financial Information Star Gas Partners, L.P. condensed consolidated pro forma financial statements including: . the unaudited pro forma condensed consolidated balance sheet as of December 31, 1998; . the unaudited pro forma condensed consolidated statement of operations for the twelve months ended September 30, 1998; . the unaudited pro forma condensed consolidated statement of operations for the three months ended December 31, 1998. 2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated financial information gives effect to the acquisition of Petro by Star Gas Partners, the transaction, including the equity offering after giving effect to the partial exercise of the over-allotment option, the debt offering and the application of the net proceeds from these offerings. The information presented is derived from, should be read in conjunction with, and is qualified in its entirety by, reference to the historical financial statements, and related notes, contained in the annual and quarterly reports and other information that Star Gas Partners has filed with the SEC. The unaudited pro forma condensed consolidated balance sheet was prepared as if the transaction had occurred on December 31, 1998. The unaudited pro forma condensed consolidated statement of operations for the twelve months ended September 30, 1998 was prepared as if the transaction had occurred on October 1, 1997. The unaudited pro forma condensed consolidated statement of operations for the three months ended December 31, 1998 was prepared as if the transaction had occurred on October 1, 1998. The pro forma adjustments are based upon the events that transpired as a result of the Star Gas / Petro Transaction. Management believes that the pro forma adjustments provide a reasonable basis for representing the significant effects of the transaction and are properly applied in the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated balance sheet and statement of operations are not necessarily indicative of the financial position or results of operations of Star Gas Partners if the transaction had actually occurred on the dates indicated above. Likewise, the unaudited pro forma condensed consolidated financial information is not necessarily indicative of future financial combined position or future results of combined operations of Star Gas Partners. 3
Star Gas Partners, L.P. and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet (unaudited) December 31, 1998 (In thousands) Star Gas Star Gas Partners, L.P. Partners Pro Forma Pro Forma The Adjusted L.P. Petro Adjustments Combined Offerings Pro Forma -------- --------- ----------- --------- --------- -------------- ASSETS Current assets: Cash............................... $ 5,831 $ 2,004 $ 7,835 $ 87,678 (g) $ 17,366 119,229 (h) (209,176)(o) 11,800 (o) Restricted cash.................... 4,900 4,900 (4,900)(o) Accounts receivable................ 9,153 56,845 65,998 65,998 Inventories........................ 9,898 17,534 27,432 27,432 Prepaid expenses and other current assets............................ 632 7,023 7,655 7,655 -------- --------- -------- --------- -------- Total current assets............. 25,514 88,306 113,820 4,631 118,451 -------- --------- -------- --------- -------- Cash collateral account............ 6,900 6,900 (6,900)(o) Property and equipment, net........ 109,475 28,124 $ 11,985 (f) 149,584 149,584 Intangible and other assets, net... 50,414 76,201 227,663 (f) 354,278 2,322 (g) 356,600 -------- --------- -------- -------- --------- -------- Total assets..................... $185,403 $ 199,531 $239,648 $624,582 $ 53 $624,635 ======== ========= ======== ======== ========= ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current debt and preferred stock... $ 1,384 $ 12,188 $ 13,572 $ (9,726)(o) $ 3,846 Bank credit facility borrowings.... 10,720 -- 10,720 10,720 Accounts payable................... 3,608 10,129 13,737 13,737 Unearned service contract revenue.. 15,430 15,430 15,430 Accrued expenses and income taxes.. 2,500 31,652 $ 4,600 (d) 42,479 (3,727)(o) 38,752 3,727 (e) Accrued interest and dividends..... 2,390 -- 648 (a) 3,038 3,038 Customer credit balances........... 4,684 27,884 32,568 32,568 -------- --------- -------- -------- --------- -------- Total current liabilities........ 25,286 97,283 8,975 131,544 (13,453) 118,091 -------- --------- -------- -------- --------- -------- Long-term debt..................... 103,616 278,731 (6,499)(b) 375,848 90,000 (g) 277,555 (188,293)(o) Deferred income taxes.............. -- 40,000 (d) 40,000 40,000 Other long-term liabilities........ 53 10,764 (3,500)(d) 7,317 7,317 Redeemable and exchangeable preferred stock................... 28,578 (15,750)(b) 12,828 (7,430)(o) -- Partners' capital (5,398)(p) Common unitholders................ 57,347 1,459 (c) 46,454 119,229 (h) 171,081 (12,352)(e) 5,398 (p) Subordinated unitholders.......... (962) 19,252 (f) 9,888 9,888 (8,402)(f) General partner................... 63 1,570 (f) 703 703 (930)(f) Petro's stockholders' deficiency.. (215,825) (648)(a) 22,249 (b) (1,459)(c) (41,100)(d) (3,727)(e) 240,510 (f) -------- --------- -------- -------- --------- -------- Total partners' capital........... 56,448 (215,825) 216,422 57,045 124,627 181,672 -------- --------- -------- -------- --------- -------- Total liabilities and partners' capital.......................... $185,403 $ 199,531 $239,648 $624,582 $ 53 $624,635 ======== ========= ======== ======== ========= ======== 4
Star Gas Partners, L.P. and Subsidiaries Pro Forma Condensed Consolidated Statement of Operations (unaudited) Twelve Months Ended September 30, 1998 (In thousands, except per unit data) Star Gas Combined Partners Propans Propans Pro Forma Pro Forma The L.P. Acquisitions Operations Petro (j) Adjustments Combined Offerings -------- ------------ ---------- --------- ----------- -------- --------- Sales................ $ 111,685 $ 4,386 $ 116,071 $ 452,765 $ (2,681)(k) $ 566,155 Costs and expenses: Cost of sales...... 49,498 1,972 51,470 299,987 (1,985)(k) 349,472 Operating expenses. 43,281 1,090 44,371 117,849 (669)(k) 161,551 Restructuring charges.......... 2,085 2,085 Transaction ex- penses........... 1,029 1,029 Corporate identity expenses......... 1,100 1,100 Provision for supplemental benefits 409 409 Depreciation and amortization..... 11,462 548 12,010 27,514 (87)(k) 34,719 (4,718)(l) Net gain (loss) on sales of assets... (271) (271) 11,507 (11,284)(k) (48) -- --------- -------- -------- --------- -------- --------- --------- Operating income..... 7,173 776 7,949 14,299 (6,506) 15,742 Interest (income) expense, net........ 7,927 427 8,354 30,803 39,157 $ (16,444)(q) Amortization of debt issuance costs...... 176 -- 176 1,432 -- 1,608 (1,160)(n) --------- -------- -------- --------- -------- --------- --------- Income (loss) before income taxes........ (930) 349 (581) (17,936) (6,506) (25,023) 17,604 Income tax expense... 25 25 475 500 --------- Income before equity interest in Star Gas Corporation......... (18,411) Share of income (loss) of Star Gas Corporation......... (317) 317 (m) --------- -------- -------- --------- -------- --------- -------- Net income (loss).... $ (955) $ 349 $ (606) $ (18,728) $ (6,189) $ (25,523) $ 17,604 ========= ======== ======== ========= ======== ========= ======== General partner's interest in net income income (loss)....... $ (19) ========= Limited partners' interest in net income (loss)....... $ (936) ========= Basic and diluted net income (loss) per limited partner unit................ $ (0.16) ========= Weighted average number of limited partner units outstanding......... 6,035 220 6,255 103 (c) 6,723 8,950 (h) (2,396)(f) 401 (p) 345 (f) 2,477 (f) (61)(f) Star Gas Partners, L.P. Adjusted Pro Forma -------------- Sales................ $ 566,155 Costs and expenses: Cost of sales...... 349,472 Operating expenses. 161,551 Restructuring charges.......... 2,085 Transaction ex- penses........... 1,029 Corporate identity expenses......... 1,100 Provision for supplemental benefits 409 Depreciation and amortization..... 34,719 Net gain (loss) on sales of assets... (48) Operating income..... 15,742 Interest (income) expense, net........ 22,713 Amortization of debt issuance costs...... 448 Income (loss) before income taxes........ (7,419) Income tax expense... 500 Income before equity interest in Star Gas Corporation......... Share of income (loss) of Star Gas Corporation......... -- --------- Net income (loss).... $ (7,919) ========= General partner's interest in net income income (loss)....... $ (158) ========= Limited partners' interest in net income (loss)....... $ (7,761) ========= Basic and diluted net income (loss) per limited partner unit................ $ (0.48)(r) ========== Weighted average number of limited partner units outstanding......... 16,074 (r) 5
Star Gas Partners, L.P. and Subsidiaries Pro Forma Condensed Consolidated Statement of Operations (unaudited) Three Months Ended December 31, 1998 (In thousands, except per unit data) Star Gas Star Gas Partners, L.P. Partners, Pro Forma Pro Forma The Adjusted L.P. Petro(j) Adjustments Combined Offerings Pro Forma --------- -------- ----------- --------- --------- -------------- Sales................... $30,237 $116,540 $146,777 $146,777 Costs and expenses: Cost of sales......... 11,978 74,018 85,996 85,996 Operating expenses.... 11,724 30,123 41,847 41,847 Transaction expenses.. -- 3,794 3,794 3,794 Provision for supplemental benefits 90 90 90 Depreciation and amortization......... 3,008 6,166 $ (489)(l) 8,685 8,685 Net gain (loss) on sales of assets...... (4) (15) (19) (19) ------- -------- ------- -------- ------- -------- Operating income 3,523 2,334 489 6,346 6,346 Interest expense, net... 2,178 7,820 9,998 $(3,945)(q) 6,053 Amortization of debt issuance costs......... 45 335 380 (268)(n) 112 ------- -------- ------- -------- ------- -------- Income (loss) before income taxes........... 1,300 (5,821) 489 (4,032) 4,213 181 ------- -------- ------- -------- ------- -------- Income tax expense...... 6 75 81 81 -------- Income before equity interest in Star Gas Corporation............ (5,896) Share of income (loss) of Star Gas Corporation 770 (770)(m) ------- -------- ------- -------- ------- -------- Net income (loss)....... $ 1,294 $ (5,126) $ (281) $ (4,113) $ 4,213 $ 100 ======= ======== ======= ======== ======= ======== General partner's interest in net income (loss)................. $ 26 $ 2 ======= ======== Limited partners' interest in net income (loss)................. $ 1,268 $ 98 ======= ======== Basic and diluted net income (loss) per limited partner unit... $ 0.20 $ -- ======= ======== Weighted average number of limited partner units outstanding...... 6,255 103 (c) 6,723 8,950 (h) 16,074 (2,396)(f) 401 (p) 345 (f) 2,477 (f) (61)(f) 6
Star Gas Partners, L.P. and Subsidiaries Notes to Pro Forma Condensed Consolidated Financial Information The following pro forma adjustments give effect to: (1) the offering of 809,000 common units by Star Gas Partners on December 16, 1997; (2) the acquisition of Petro; (3) the debt offering; and (4) the equity offering, including the sale of 230,000 common units upon the partial exercise of the underwriters' over-allotment option as if each transaction had taken place on December 31, 1998, in the case of the pro forma condensed consolidated balance sheet, or as of October 1, 1997, in the case of the pro forma condensed consolidated statement of operations for the twelve months ended September 30, 1998, or as of October 1, 1998, in the case of the pro forma condensed consolidated statement of operations for the three months ended December 31, 1998. The pro forma adjustments are based upon currently available information, estimates and assumptions and a preliminary determination and allocation of the total purchase price for Petro and therefore the actual results may differ from the pro forma results. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the proforma financial information. Transaction Related Adjustments (a) Reflects the accrued dividends payable on Petro's 1989 preferred stock and 12 7/8% preferred stock. (b) Reflects the negotiated discount of approximately $15.8 million to redeem Petro's 12 7/8% preferred stock, the negotiated discount of approximately $9.4 million to refinance Petro's public debt and the negotiated premium to refinance Petro's private debt of approximately $2.9 million. (c) Reflects the issue of 0.8 million shares of junior preferred stock of Petro, which was converted into 103,000 common units upon completion of the transaction at an assumed value of $14.1875 per unit. The junior preferred stock was issued to the holders of Petro's 9 3/8% subordinated debentures, 10 1/8% subordinated notes, and 12% subordinated debentures, and 12 7/8% preferred stock as consideration for consenting to the early redemption of those securities. The Transaction (Merger and Exchange) (d) Represents: (1) the estimated amount of current federal and state taxes to be incurred of $4.6 million; (2) the estimated amount of deferred federal and state income taxes to be recognized of $40.0 million; and (3) the elimination of the tax liability associated with the Pearl Gas conveyance of $3.5 million. (e) Reflects the estimated additional amount of $3.7 million to be recorded by Petro for legal, professional and advisory fees incurred by Petro and Star Gas Partners in the transaction. Total estimated expenses are $8.5 million. As of September 30, 1998 Petro has recorded $1.1 million in transaction expenses. For the three months December 31, 1998, Petro has recorded $3.8 million in transaction expenses. (f) Represents the exchange of 26.2 million shares of Petro's Class A common stock and Class C common stock valued at $20.8 million for 2.5 million Star Gas Partners senior subordinated units, 0.3 million Star Gas Partners junior subordinated units and 0.3 million general partner units. The 2.4 million Star Gas Partners subordinated units outstanding prior to the transaction will be contributed to Star Gas Partners by Petro. As a result of the transaction, 61,000 common units owned by Petro will be treated as treasury stock. 7
The following table summarizes the preliminary allocation by Star Gas Partners of the excess of purchase price over book value related to the acquisition of Petro. The allocation of the purchase price is based on the results of a preliminary appraisal of property, plant and equipment, customer lists and the December 31, 1998 recorded values for tangible assets and liabilities. The closing date of the transaction was March 26, 1999. This purchase price allocation will be updated for changes in current assets and liabilities based on Petro's operating results from January 1, 1999 to March 26, 1999. From January 1, 1999 to the closing date, it is expected that Petro will generate net income and positive cash flows and that working capital will increase. As a result, the amount of goodwill to be recorded on the closing date will decrease. Subject to Petro's operating results which could be impacted by weather, among other factors, it is estimated that the increase in working capital for Petro from January 1, 1999 to the closing date will range between $35 million to $40 million. The preliminary allocation is as follows: (In thousands) Consideration given for the exchange of Petro shares............. $ 20,822 Transaction expenses (1)......................................... 8,547 ------------ Total consideration.......................................... 29,369 ------------ Fair market value of Petro's assets and liabilities as of December 31, 1998: Current assets................................................. (93,126) Cash collateral account........................................ (6,900) Property, plant and equipment (2).............................. (40,109) Value of Petro's investment in Star Gas........................ (21,684) Current liabilities............................................ 97,283 Accrued income taxes........................................... 4,600 Accrued preferred dividends.................................... 648 Long-term debt................................................. 272,232 Deferred income taxes.......................................... 40,000 Other liabilities.............................................. 7,264 Preferred stock................................................ 12,828 Junior preferred stock......................................... 1,459 ------------ Subtotal..................................................... 274,495 ------------ Total value assigned to intangibles and other assets............. 303,864 Carrying amount of intangibles and other assets.................. (76,201) ------------ Allocation of excess purchase price to intangibles............... $ 227,663 ============ Consisting of: Customer lists................................................. $ 94,000 Goodwill....................................................... 208,899 Other assets................................................... 965 ------------ Total intangibles and other assets........................... $ 303,864 ============ - --------- (1) Transaction expenses include legal, accounting, investment advisory and asset appraisal costs. (2) Includes fair market value adjustment of $12.0 million. The fair market value for property plant and equipment, excluding real estate, was established using the cost approach method. The market approach was used in valuing the real estate. The value assigned to customer lists was derived using a discounted cash flow analysis. The cash flows attributable to the customer lists were discounted back at an equity risk adjusted cost of capital to the net present value. Any excess was attributable to goodwill. 8
The Debt Offering and The Equity Offering (g) Reflects the net proceeds to Petro of approximately $87.7 million from the $90.0 million debt offering, net of underwriting discounts and commissions of approximately $1.4 million and offering expenses of approximately $0.9 million. These costs are being amortized over the term of the related debt which is 8.5 years. (h) Reflects the net proceeds to Star Gas Partners of approximately $119.2 million from the issuance and sale of 8.9 million common units in the equity offering, including the over-allotment option, at an offering price of $14.1875 per common unit, net of underwriting discounts and commissions of approximately $6.3 million and offering expenses of approximately $1.4 million. The Propane Acquisitions (i) Represents the results of certain propane distributors acquired by Star Gas Partners in fiscal 1998 from October 1, 1997 to their dates of acquisition. Results of these distributors from the dates of acquisition to September 30, 1998 are included in Star Gas Partners' twelve months ended September 30, 1998 results adjusted for: (1) cost savings of $0.3 million, primarily executive compensation and legal expenses relating to selling shareholders; (2) additional depreciation and amortization of $0.5 million; and (3) additional interest expense of $0.4 million. There were no propane acquisitions completed in the three months ended December 31, 1998. The Transaction (Acquisition of Petro) (j) Represents the results of operations of Petro for the twelve months ended September 30, 1998 or the three months ended December 31, 1998. Approximate expenses of $8.5 million to be incurred by Petro as a direct result of its acquisition by Star Gas Partners will be included in Petro's actual statement of operations. For the twelve months ended September 30, 1998, Petro has recorded $1.1 million of these expenses. For the three months ended December 31, 1998, Petro has recorded $3.8 million of these expenses. (k) Adjustment to reflect the disposition of Petro's Hartford, Connecticut operations in November 1997. Petro received cash proceeds of $15.6 million and recorded a gain of $11.3 million. The carrying value of these assets at the time of sale was $4.3 million. (l) Adjustment to depreciation and amortization expense attributable to the acquisition of Petro. 9
Star Gas Partners believes that the amortization periods assigned to the assets below are appropriate. However, if the final amortization periods assigned to the tangible and intangible assets were of shorter duration, the amount of depreciation and amortization would increase and reduce net income. For the twelve months ended September 30, 1998, the following table summarizes the effect on depreciation and amortization of the acquisition of Petro. Net Book Value Amount per Petro's Financials Amount per Appraisal Difference --------------------------------------- --------------------------------------- ------------ Property and equipment, net Asset(1) Life Depreciation(2) Asset(1) Life Depreciation(2) Depreciation - --------------- -------- -------------- --------------- -------- -------------- --------------- ------------ Land.................. $ 2,092 $ -- $ 3,300 $ -- $ -- Buildings............. 4,788 20-45 years 419 4,300 30 years 143 (276) Fleet................. 5,908 5 to 7 years 2,866 12,800 6 years 2,135 (731) Leasehold............. 4,270 term of leases 562 5,900 term of leases 457 (105) Computer, furniture and fixtures......... 7,377 5 to 7 years 2,491 9,700 5 to 7 years 1,661 (830) Service & other equipment............ 3,689 5 to 13 years 692 4,109 5 to 13 years 557 (135) ------- ------- -------- ------- ------- Total property and equipment............ $28,124 $ 7,030 $ 40,109 $ 4,953 $(2,077) ======= ======= ======== ======= ======= Intangible and other assets, net Asset(1) Life Depreciation(2) Asset(1) Life Amortization(2) Amortization - - -------------------- -------- -------------- --------------- -------- -------------- --------------- ------------ Customer list......... $52,596 6.5 years $17,364 $ 94,000 10 years $ 9,400 $(7,964) Goodwill.............. 9,013 25 years 1,129 208,899 25 years 8,356 7,227 Covenants not to compete.............. 2,855 5 to 7 years 1,904 -- -- (1,904) Other assets.......... 965 -- 965 -- -- ------- ------- -------- ------- ------- Total intangible and other assets......... $65,429 $20,397 $303,864 $17,756 $(2,641) ======= ------- ======== ------- ------- Totals................ $27,427 $22,709 $(4,718) ======= ======= ======= - -------- (1) As of December 31, 1998. (2) For the twelve months ended September 30, 1998. Petro's property, plant and equipment is being depreciated using a historical cost which is approximately $80 million. The fair market value of these assets is $40.1 million. When depreciation expense is calculated based on the fair market value, this expense is $2.1 million lower than historical depreciation. Pro forma depreciation is less than historical depreciation due to decline in the asset base being depreciated and an extension of the useful lives of those assets. The remaining lives assigned to property, plant and equipment were determined by an independent appraisal firm. All property, plant and equipment is depreciated using the straight-line method. Pro forma customer list amortization is less than historical amortization due to a longer life and a lower amortization asset. The original cost used to amortize historical customer list was approximately $120 million. The longer life represents Petro's improved retention rate as well as the retention of customers obtained through internal marketing, which have a higher retention rate than for customers acquired through acquisition. Petro's previous acquisitions represented the acquisition of customers. The acquisition of Petro by Star Gas Partners is an acquisition of an on-going business. The appraisal assigned a greater allocation to goodwill than what was previously allocated by Petro in their purchase of a 188 relatively small fuel oil dealers. This resulted in approximately $7.8 million of additional amortization, largely offsetting the $7.9 million of less customer list amortization. Restrictive covenants were not assigned a value under the pro forma intangibles due to the minimal amount of the asset value expected at closing. Intangibles are amortized on a straight- line basis. 10
For the three months ended December 31, 1998, the following table summarizes the effect on depreciation and amortization of the acquisition of Petro. Net Book Value Amount per Petro's Financials Amount per Appraisal Difference --------------------------------------- --------------------------------------- ------------ Property and equipment, net Asset(1) Life Depreciation(2) Asset(1) Life Depreciation(2) Depreciation - -------------- -------- -------------- --------------- -------- -------------- --------------- ------------ Land.................. $ 2,092 $ -- $ 3,300 $ -- $ -- Buildings............. 4,788 20-45 years 76 4,300 30 years 36 (40) Fleet................. 5,908 5 to 7 years 676 12,800 6 years 534 (142) Leasehold............. 4,270 term of leases 148 5,900 term of leases 114 (34) Computer, furniture and fixtures......... 7,377 5 to 7 years 655 9,700 5 to 7 years 415 (240) Service & other equipment............ 3,689 5 to 13 years 219 4,109 5 to 13 years 139 (80) ------- ------ -------- ------ ------- Total property and equipment............ $28,124 $1,774 $ 40,109 $1,238 $ (536) ======= ====== ======== ====== ======= Intangible and other assets, net Asset(1) Life Amortization(2) Asset(1) Life Amortization(2) Amortization - -------------------- -------- -------------- --------------- -------- -------------- --------------- ------------ Customer list......... $52,596 6.5 years $3,703 $ 94,000 10 years $2,350 $(1,353) Goodwill.............. 9,013 25 years 248 208,899 25 years 2,089 1,841 Covenants not to compete.............. 2,855 5 to 7 years 441 -- -- (441) Other assets.......... 965 -- 965 -- -- ------- ------ -------- ------ ------- Total intangible and other assets......... $65,429 $4,392 $303,864 $4,439 $ 47 ======= ------ ======== ------ ------- Totals................ $6,166 $5,677 $ (489) ====== ====== ======= - -------- (1) As of December 31, 1998. (2) For the three months ended December 31, 1998. (m) Reflects the elimination of Petro's equity interest in Star Gas Partners. The Offerings (n) Reflects the net adjustment for the twelve months ended September 30, 1998 to amortization of debt issuance costs of $1.2 million attributable to the debt offering and the acquisition of Petro. Amortization of debt issuance costs is decreased by $1.4 million relating to the repayment of Petro debt and is increased by $0.3 million relating to the 7.92% notes. For the three months ended December 31, 1998, amortization of debt issuance costs is decreased by $0.3 million relating to the repayment of Petro debt and is increased by $0.1 million relating to the 7.92% notes. (o) Reflects the use of the net proceeds from the equity offering, including the partial exercise of the over-allotment option, and, the debt offering to repay $79.5 million of Petro's 12 1/4% Senior Subordinated Debentures due 2005 to repay $46.1 million of Petro's 10 1/8% Senior Subordinated Notes due 2003, to repay $68.3 million of Petro's 9 3/8% Senior Subordinated Debentures due 2006, to retire $7.4 million of Petro's 12 7/8% Exchangeable Preferred Stock, to retire $4.2 million of Petro's 14.33% Exchangeable Preferred Stock and to pay $3.7 million of transaction expenses. As of December 31, 1998 Petro had paid $4.9 million in transaction expenses. As a result of the transaction, both Petro's current and long-term restricted cash balances become available for general business purposes. In addition, Petro has entered into private debt agreements with the private noteholders of: (i) its outstanding senior notes in the aggregate principal amount of $60 million; and (ii) its Petro private debt in the aggregate principal amount of $4.1 million (after payment of the January 1999 installment). Under the private debt agreements at the effective time of the transaction: (i) the holders of the senior notes exchanged those notes for $62.7 million aggregate principal amount of new 9% notes; and (ii) the holders of the 14.1% notes exchanged those notes for $4.2 million aggregate principal amount of 10 1/4% notes. The new private notes have been guaranteed by Star Gas Partners and Petro Holdings. (p) Reflects the exchange of $5.4 million of Petro's 12 7/8% exchangeable preferred stock for 0.4 million common units in lieu of cash. (q) Reflects the net reduction to interest expense of $16.4 million for the twelve months ended September 30, 1998. This amount reflects $7.1 million of additional interest expense annually on the $90.0 million in principal amount of the notes at an interest rate of 7.92%. This amount also reflects an annual reduction in interest expense of $21.9 million due to the repayment of $203.2 million of Petro public debt, excluding negotiated discounts, with the proceeds of this offering and the debt offering and a reduction in the interest rate attributable to the private debt agreements described above. In addition interest expense is reduced by $0.1 million, as $2.3 million of Petro's cash is used to finance the transaction. 11
The following table summarizes the effect on interest expense of the transaction for the twelve months ended September 30, 1998: Interest Interest Amount Rate Expense ------- -------- -------- Debt Repaid or Modified Petro 12 1/4% senior subordinated debentures(1).... $80,155 12.25% $ 9,819 Petro 10 1/8% senior subordinated notes............ 48,739 10.125% 4,934 Petro 9 3/8% senior subordinated debentures........ 74,334 9.375% 6,968 Petro 11.96% notes(2).............................. 60,000 11.96% 7,176 Petro 14.10% notes(2).............................. 6,884 14.10% 971 Lower letter of credit fees on acquisition notes... 191 ------- Total reductions to interest expense............. $30,059 Interest Amount Rate ------- -------- New Debt Issued and Cash Balance Reduction Petro 7.92% notes.................................. $90,000 7.92% $(7,128) Petro 9.0% senior notes(2)......................... 62,697 9.0% (5,643) Petro 10.25% senior and subordinated notes(2)...... 7,064 10.25% (724) Lower invested cash balances....................... 2,269 5.31% (120) ------- Net reduction to interest expense.................. $16,444 ======= - --------- (1) Excludes prepayment premium of $2.8 million. (2) Notes exchanged under the private debt agreement. The following table summarizes the effect on interest expense of the transaction for the three months ended December 31, 1998: Interest Interest Amount Rate Expense ------- -------- -------- Debt Repaid or Modified Petro 12 1/4% senior subordinated debentures(1).... $80,155 12.25% $ 2,455 Petro 10 1/8% senior subordinated notes............ 48,739 10.125% 1,234 Petro 9 3/8% senior subordinated debentures........ 74,334 9.375% 1,742 Petro 10.90% notes(2).............................. 60,000 10.90% 1,635 Petro 14.10% notes(2).............................. 6,200 14.10% 219 Lower letter of credit fees on acquisition notes... 48 ------- Total reductions to interest expense............. $ 7,333 Interest Amount Rate ------- -------- New Debt Issued and Cash Balance Reduction Petro 7.92% notes.................................. $90,000 7.92% $(1,783) Petro 9.0% senior notes(2)......................... 62,697 9.0% (1,412) Petro 10.25% senior and subordinated notes(2)...... 6,380 10.25% (163) Lower invested cash balances....................... 2,269 5.31% (30) ------- Net reduction to interest expense.................. $ 3,945 ======= - --------- (1) Excludes prepayment premium of $2.8 million. (2) Notes exchanged under the private debt agreement. (r) The partnership agreement provides that for each non-overlapping four quarter period that occurs after the first anniversary of the transaction, but before the fifth anniversary of the transaction, in which the dollar amount of Petro Adjusted Operating Surplus per Petro Unit equals or exceeds $2.90. Star Gas Partners will issue 303,000 senior subordinated units, pro rata, or 303,000 Class B common units, pro rata, if such issuance occurs after the end of the subordination period. These additional senior subordinated units will be issued to the current holders of the senior subordinated units, junior subordinated units and the general partner units. Star Gas Partners may not issue more than an aggregate of 909,000 senior subordinated units or Class B common units under this provision. In addition, Star Gas Partners has agreed to issue to the holders of Petro's 12 7/8% exchangeable preferred stock 175,000 senior subordinated units contingent upon Star Gas Partners earning $2.40 per unit in distributable cash flow over four consecutive quarters during this period commencing on January 1, 2000 and ending on December 31, 2002. The issuance of these senior subordinated units will not generate any additional proceeds to Star Gas Partners. When these units are issued, an additional amount of goodwill will be recorded. Assuming 303,000 senior subordinated units are issued, the amount of goodwill to be recorded will be $4.9 million. As a result, annual amortization expense would increase by $0.2 million and would decrease net income per limited partner unit by $0.01 per unit. If these senior subordinated units are issued and they are converted into Class B common units, the Class A common units would be diluted in terms of available cash to be used for payment of the quarterly distributions. 12