<PAGE>



                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K


              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997        Commission File No. 1-9358

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997   OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from                      to
                              ---------------------   -----------------
Commission file number
                      -------------------------------------------------

                       PETROLEUM HEAT AND POWER CO., INC. 

             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

    Minnesota                                            06-1183025 
-----------------------------------                ----------------------
(State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                       Identification No.)


2187 Atlantic Street, Stamford, CT                       06902
----------------------------------------           -----------------------
(Address of principal executive offices)            (Zip code)


     Registrant's telephone number, including area code: (203) 325-5400

     Securities registered pursuant to Section 12(g) of the Act:

     Class A Common Stock
     --------------------
     (Title of Each Class)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
                     ---  ---
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, 
and will not be contained, to the best of registrant's knowledge, in 
definitive proxy or information statements incorporated by reference in Part 
III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 17, 1998 was approximately $25,079,204.

As of March 17, 1998 there were 23,954,560 shares of the Registrant's Class A
Common Stock, 11,228 shares of the Registrant's Class B Common Stock and
2,597,519 shares of the Registrant's Class C Common Stock outstanding.


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

     The documents incorporated by reference into this Form 10-K and the parts
hereof into which such documents are incorporated are listed below:

<TABLE>
<CAPTION>

Document                                                            Part
----------------------------------------------                     ------
<S>                                                                <C>
Those portions of the registrant's proxy                            III
statement for the registrant's 1998 Annual
Meeting (the "Proxy Statement") that are
specifically identified herein as incorporated
by reference into this Form 10-K

</TABLE>

                                     PART I

                                ITEM 1. BUSINESS

     Petroleum Heat and Power Co., Inc. is the largest retail distributor of
home heating oil in the United States, with total sales of $548.1 million for
the year ended December 31, 1997. Petro serves approximately 350,000 customers
in the Northeast and Mid-Atlantic states, including the metropolitan areas of
Boston, New York City, Baltimore, Providence, and Washington, D.C.

     In addition to selling home heating oil, the Company installs and repairs
heating equipment. The Company considers such services, which are typically not
designed to generate profits, to be an integral part of its basic fuel oil
business and generally does not provide service to any person who is not a
heating oil customer. The Company provides home heating equipment repair service
24 hours a day, 365 days a year, generally within four hours of request, and
regularly provides various service incentives to obtain and retain customers. To
a limited extent, the Company also markets other petroleum products, including
diesel fuel and gasoline, to commercial customers.

     The Company's volume, cash flow and operating profits before depreciation
and amortization have increased significantly since 1980, primarily because of
its acquisition of other home heating oil businesses. The home heating oil
industry is large, highly fragmented and undergoing consolidation, with
approximately 3,700 independently owned and operated home heating oil
distributors in the Northeast. Petro is the principal consolidator in this
industry and, since 1979, when current management assumed control, has acquired
188 retail heating oil distributors. Petro acquires distributors in both new and
existing markets and integrates them into the Company's existing operations.
Economies of scale are realized from these purchases through the centralization
of accounting, data processing, fuel oil purchasing, credit and marketing
functions. Due to its acquisition history, the Company is well known in the
heating oil industry and is regularly contacted by potential sellers. As a
result of its growth strategy, heating oil volume sold increased from 59.4
million gallons in 1980 to 410.3 million gallons for the year ended December 31,
1997, a compound annual growth rate of 12.0%. Despite the Company's size, Petro
estimates that its customer base represents only approximately 5% of the
residential home heating oil customers in the Northeast.

     In recent years, the company has increased its focus on its operating
strategy. As a result of a major strategic study aimed at improving
organizational and marketing effectiveness, Petro has begun to implement an
operational restructuring program designed to improve the Company's productivity
and responsiveness to customers. Based on its size, the Company has redefined
its organizational structure and is accessing developments in communications and
computer technology which are currently in use by other large distribution
businesses, but which are generally not used by retail heating oil companies. In
addition, Petro is seeking to create a premium brand image that will capitalize
on both its size and the lack of consumer brand awareness in the heating oil
industry. These efforts are designed to reduce operating costs, maximize
customer satisfaction, build name recognition and minimize net customer
attrition.

                                       2
<PAGE>

     As part of the implementation of this operational restructuring program, 
in April 1996, the company opened a regional customer service center on Long 
Island, New York. This state-of-the-art facility currently conducts all 
activities which interface with the Company's approximate 120,000 Long Island 
and New York City customers, including sales, customer service, credit and 
accounting. The Company is also now operating under the single brand name of 
"Petro" throughout this area, rather than the many brand names previously in 
use. Because of the existence of this customer service center, eight 
full-function branches were consolidated into four strategically located 
delivery and service depots to serve the Company's customers more 
efficiently. Furthermore, in keeping with the focus of its operating 
strategy, late in 1997 the Company continued to reorganize select branch and 
corporate responsibilities in order to eliminate redundant functions, and 
regionalize responsibilities where they can best serve customers and the 
Company.

INVESTMENT IN STAR GAS

     In December 1993, the Company purchased a 29.5% equity interest in Star Gas
Corporation ("Star Gas") for $16.0 million and acquired options to purchase the
remaining equity interest. In December 1994, the Company completed the
acquisition of Star Gas for approximately $25.9 million by exercising its right
to purchase the remaining outstanding common equity of Star Gas through the
payment of $3.8 million in cash and the issuance of 2.5 million shares of the
Company's Class A Common Stock. In November 1995, Star Gas Partners, L.P., a
Delaware limited partnership ("Star Gas Partners"), and Star Gas organized Star
Gas Propane, L.P., a Delaware limited partnership (the "Operating Partnership").
Star Gas is the general partner of both Star Gas Partners and the Operating
Partnership. In December 1995, Petro transferred substantially all of its
propane assets and liabilities to Star Gas, which then transferred substantially
all of its assets and liabilities to the Operating Partnership in exchange for
general and limited partner interests. In December 1995, Star Gas Partners
completed its initial public offering of approximately 2.9 million common units
of limited partner interests at a price of $22 per unit and, concurrently, Star
Gas issued approximately $85.0 million in first mortgage notes to certain
institutional investors.

     As a result of the foregoing transactions (the "Star Gas Transactions"),
Star Gas received a 46.5% equity interest in Star Gas Partners and Petro
received net proceeds of $134.7 million, of which $72.6 million was used to
repay $67.8 million in principal amount of long-term debt and $6.0 million was
reserved to guarantee Star Gas Partners' minimum quarterly distribution. At
December 31, 1997 these funds were no longer restricted at the Star Gas level
and had been released to Petro since the quarterly guarantee provisions were
fulfilled. In accordance with the Company's accounting policies, the Company
deferred the gain of approximately $20.0 million for this transaction because
the Company holds subordinate units which do not have a readily ascertainable
market price creating an uncertainty regarding realization. The Company will
recognize the gain from this transaction when the Company's subordinated units
convert into common units in accordance with the terms of the partnership
agreement. Petro also received $5.5 million of minimum quarterly distributions
from Star Gas Partners for the year ended December 31, 1997.

     With the acquisition of Star Gas on December 7, 1994, and its operation as
a wholly-owned subsidiary of the Company until December 19, 1995, the Company's
operations were consolidated and classified into two business segments: Home
Heating Oil and Propane. For financial information regarding the Company's
business segments, see Note 17 to the Company's Consolidated Financial
Statements included elsewhere herein. As a result of the Star Gas Transactions,
the Company currently accounts for its investment in Star Gas Partners following
the equity method of accounting.

     In October 1997, Star Gas acquired the outstanding stock of an unaffiliated
Ohio propane company ("1997 Star Gas Transaction") and in an equal exchange
subsequently transferred all of such assets to the Partnership for the
assumption of $23 million of debt incurred by Star Gas in connection with this
acquisition, a 0.00027% general partnership interest in the Partnership along
with 148,000 Partnership common units. In connection with this transaction, 
Star Gas assumed all future income tax liabilities for this conveyance.

     At December 31, 1997 the Company had a 41.66% equity interest in the 
Partnership, (which was reduced to 40.66% with the January 1998 sale of 
63,000 common units) which is being accounted for by the equity method.

                                       3
<PAGE>


FUNDAMENTAL CHARACTERISTICS

Unaffected by General Economy

     The Company's business is relatively unaffected by business cycles. As home
heating oil for residential use is such a basic necessity, variations in the
amount purchased as a result of general economic conditions have been limited.

Customer Stability

     The Company has a relatively stable customer base due to the tendency of
homeowners to remain with their traditional distributors or home buyers to
remain with the previous homeowner's distributor. While the Company loses
approximately 90% of the customers acquired in an acquisition (during the first
six years), approximately 40% of these losses are as a result of customers
moving, and of these losses the Company is able to retain approximately 65% of
the homes underlying the original customer list purchased.

     In addition, approximately 90% of the Company's customers receive their
home heating oil pursuant to an automatic delivery system without the customer
having to make an affirmative purchase decision. These deliveries are scheduled
by computer, based upon each customer's historical consumption patterns and
prevailing weather conditions. The Company delivers home heating oil
approximately six times during the year to the average customer. The Company's
practice is to bill customers promptly after delivery. In addition,
approximately 40% of the Company's customers are on the Company's budget payment
plan, whereby their estimated annual oil purchases and service contract are paid
for in a series of equal monthly payments over a twelve month period.

Weather Stability

     The Company's business is directly related to the heating needs of its
customers. Although temperatures have been relatively stable over the past 37
years, the weather can have a material effect on the Company's sales in any
particular year. The following table presents the average daily temperature (in
degrees Fahrenheit) in the metropolitan New York City area for January through
March and October through December of the year indicated (which are considered
to be the heating season months):

<TABLE>
<CAPTION>

                         Average                              Average                                   Average
      Year             Temperature           Year           Temperature            Year               Temperature
     <S>               <C>                   <C>            <C>                    <C>                <C>                   
     1960....             40.4               1973....           43.8               1986....              42.5
     1961....             41.9               1974....           41.9               1987....              42.1
     1962....             40.0               1975....           43.5               1988....              41.1
     1963....             41.1               1976....           39.3               1989....              40.8
     1964....             42.1               1977....           40.1               1990....              47.0
     1965....             41.5               1978....           39.5               1991....              44.3
     1966....             41.9               1979....           43.0               1992....              41.9
     1967....             40.5               1980....           39.8               1993....              41.9
     1968....             40.2               1981....           41.1               1994....              41.8
     1969....             40.4               1982....           42.6               1995....              42.1
     1970....             39.8               1983....           42.9               1996....              40.8
     1971....             41.9               1984....           43.4               1997....              42.3
     1972....             40.5               1985....           42.5

</TABLE>
--------------
Source:  National Oceanic and Atmospheric Administration

Insulation from Oil Price Volatility

     Although the price of crude oil can be volatile, historically this has not
materially affected the performance of the Company since over the years it has
added a gross margin onto its wholesale costs, designed to offset the impact of
inflation, account attrition and weather. As a result, variability in supply
prices has affected net sales, but generally has not affected gross profit or
net income, and as such, the Company's margins are most meaningfully measured on
a per gallon basis and not as a percentage of sales. While fluctuations in
wholesale prices have not significantly affected demand to date, it is possible
that significant wholesale price increases over an extended period of time could
have the effect of encouraging conservation. If demand were reduced and the
Company was unable to increase its gross profit margin or reduce its operating
expenses, the effect of the decrease in volume would be to reduce net income.

                                       4
<PAGE>

     Approximately 25% of the Company's total sales are made to individual
customers under an agreement pre-establishing the maximum sales price of oil
over a twelve month period. The maximum price at which oil is sold to these
individual customers is renegotiated in April of each year in light of then
current market conditions. The Company currently enters into forward purchase
contracts and futures contracts for a substantial majority of the oil it sells
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 oil
above the amount anticipated, margins for the capped-price customers whose oil
was not purchased in advance would be lower than expected, while those customers
whose oil was purchased in advance would be unaffected. Conversely, should
events occur during this period that decrease the cost of oil below the amount
anticipated, margins for the capped-price customers whose oil was purchased in
advance could be lower than expected, while those customers whose oil was not
purchased in advance would be unaffected or higher than expected.

     The Company uses put options to hedge and reduce the risk associated with a
substantial portion of the heating oil forward purchase contracts and futures
contracts acquired as of December 31, 1997. Should the cost of heating oil
significantly decline below the acquisition cost, these options would
substantially offset the effects of such decline.

Conversions to Natural Gas

     The rate of conversion from the use of home heating oil to natural gas is
primarily affected by the relative prices of the two products and the cost of
replacing an oil fired heating system with one that uses natural gas. The
Company believes that approximately 1% of its customer base annually converts
from home heating oil to natural gas. Even when natural gas had a significant
price advantage over home heating oil, such as in 1980 and 1981 when there were
government controls on natural gas prices or, for a short time in 1990 and 1991,
during the Persian Gulf crisis, the Company's customers converted to natural gas
at only a 2% annual rate. During the latter part of 1991 and through 1997,
natural gas conversions have returned to their approximate 1% historical annual
rate as the prices for the two products have been at parity.

Business Strategy

     Current management assumed control of the Company in 1979 and restructured
the Company's fuel oil operation by consolidating operating branches and
focusing primarily on the retail sale of home heating oil. After this
reorganization, management perceived an opportunity to achieve substantial
growth and increased profitability by acquiring fuel oil distributors in new and
existing markets. In recent years, management has also increased its focus on
achieving competitive advantages in the home heating oil industry by redefining
its operating strategy to utlize its size to access developments in computer 
and communication technology to lower operating cost and provide customers 
with more sensitive service.

Acquisition Strategy

     In the past, the Company's acquisition strategy was to continue to grow 
its fuel oil operations through the acquisition and integration of additional 
distributors in existing and new markets. The Company's acquisitions 
typically result in significant economies of scale through centralization of 
the accounting, data processing and fuel oil purchasing functions of the 
acquired distributor. The Company's capital position and limited available 
funds for acquisitions is limiting its ability to continue its historical 
acquisition pace. The Company is reviewing various alternatives to access 
capital to enable it to maintain acquisitions at its historical pace.

                                       5
<PAGE>



Marketing Strategy

     The Company's marketing strategy is based on providing heating equipment 
repair and maintenance service to quality-minded customers who desire a full 
range of heating oil and services from their heating oil supplier. As 
described above, the Company is consolidating its operations under one brand 
name, and is building that brand name by employing an upgraded, 
professionally trained and managed sales force and using a professionally 
developed marketing campaign, including radio and print advertising media. 
The Company has a nationwide toll free telephone number, 1-800-OIL-HEAT, 
which the Company believes helps it to build customer awareness and brand 
identity. In addition, the Company is employing new means of acquiring 
customers, including co-marketing arrangements with realtors, builders, home 
inspectors, security companies and other affinity groups. The Company is also 
test marketing a product/pricing strategy designed to better meet the needs 
of various customer segments. The Company is also seeking to develop cross 
marketing relationships with other energy providers.

Customers and Sales

     The Company currently serves approximately 350,000 customers in the
following 25 markets:

<TABLE>
<CAPTION>

<S>                                          <C>                                         <C>    
New York                                     Massachusetts                               New Jersey
Bronx, Queens and                            Boston (Metropolitan)                       Camden
 Kings Counties                              Northeastern Massachusetts                  Neptune
Dutchess County                               (Centered in Lawrence)                     Newark(Metropolitan)
Staten Island                                Worcester                                   North Brunswick
Eastern Long Island                                                                      Rockaway
Western Long Island                                                                      Trenton

Connecticut                                  Pennsylvania                                Rhode Island
Bridgeport--New Haven                        Allentown                                   Providence
Litchfield County                            Berks County                                Newport
Southern Fairfield                            (Centered in Reading)
 County                                      Bucks County                                Maryland/Virginia/D.C.
                                              (Centered in Southampton)                  Baltimore (Metropolitan)
                                             Lebanon County                              Washington, D.C.
                                              (Centered in Palmyra)                       (Metropolitan)

</TABLE>

     Approximately 85% of the Company's #2 fuel oil sales are made to
homeowners, with the balance to industrial, commercial and institutional
customers. Historically, the Company has lost a portion of its customer base
each year for various reasons, including customer relocation, price competition,
conversions to natural gas and service.


SUPPLIERS

     The Company obtains its fuel oil in either barge or truckload quantities,
and has contracts with over 80 non-Company owned storage terminals for the right
to temporarily store its heating oil at their facilities. Purchases are made
pursuant to supply contracts or on the spot market. The Company has market price
based contracts for substantially all its petroleum requirements with 13
different suppliers, the majority of which have significant domestic sources for
their product, and many of which have been suppliers to the Company for over 10
years. The Company's current suppliers are: Amerada Hess Corporation; Bayway
Refining Co.; Citgo Petroleum Corp.; Coastal New York; George E. Warren Corp.;
Global Petroleum Corp.; Koch Refining Company, L.P.; Louis Dreyfus Energy Corp.;
Mieco, Inc.; Mobil Oil Corporation; Northeast Petroleum, a division of Cargill,
Inc.; Sprague Energy; and Sun Oil Company. Typically the Company's supply
contracts have terms of 12 months. All of the supply contracts provide for
maximum and in some cases minimum quantities, and in most cases do not establish
in advance the price at which fuel oil is sold, which, like the Company's 
price to most of its customers, is based upon market prices at the time of
delivery.

     The Company believes that its policy of contracting for substantially all
its supply needs with diverse and reliable sources will enable it to obtain
sufficient product should unforeseen shortages develop in worldwide supplies.
The Company further believes that relations with its current suppliers are
satisfactory.

                                       6
<PAGE>

COMPETITION

     The Company's business is highly competitive. The Company competes with
fuel oil distributors offering a broad range of services and prices, from full
service distributors, like the Company, to those offering delivery only.
Competition with other companies in the fuel oil industry is based primarily on
price and customer service.

     Long-standing customer relationships are typical in the retail home heating
oil industry. Many companies in the industry, including Petro, deliver home
heating oil to their customers based upon weather conditions and historical
consumption patterns without the customer making an affirmative purchase
decision each time oil is needed. In addition, most companies, including Petro,
provide home heating equipment repair service on a 24-hour per day basis, which
tends to build customer loyalty.


EMPLOYEES

     As of December 31, 1997, the Company had 2,211 employees, of whom 556 were
office, clerical and customer service personnel, 666 were heating equipment
repairmen, 585 were oil truck drivers and mechanics, 222 were management and
staff and 182 were employed in sales. Approximately 400 of those employees are
seasonal and are rehired annually to support the requirements of the heating
season. Approximately 700 employees are represented by 20 different local
chapters of labor unions.

     Management believes that its relations with both its union and non-union
employees are satisfactory.


ENVIRONMENTAL MATTERS

     The Company has implemented environmental programs and policies designed 
to avoid potential liability under applicable environmental laws and to 
reduce exposure to environmental cleanup cost. The Company has not incurred 
any significant environmental compliance costs and compliance with 
environmental regulations has not had a material effect on the Company's 
operating or financial condition. This is primarily due to the Company's 
general policy of not owning or operating fuel oil terminals and of closely 
monitoring its compliance with all environmental laws. In light of the 
Company's general policy regarding operations and environmental compliance, 
the Company does not expect environmental compliance to have a material 
effect on its operations and financial condition in the future. The Company's 
policy for determining the timing and amount of any environmental cost is to 
reflect an expense as and when the cost becomes probable and reasonably 
capable of estimation.

PROPANE BUSINESS

     In addition to its heating oil business, the Company currently owns a
40.66% equity interest in Star Gas Partners, which is primarily engaged in the
retail distribution of propane and related supplies and equipment to
residential, commercial, industrial, agricultural and motor fuel customers. The
Company believes that Star Gas Partners is the eighth largest retail propane
distributor in the United States, providing a major presence in the propane
distribution industry, serving customers in 14 states in the Midwest and
Northeast.

     Star Gas Partners' strategy is to maximize its cash flow and 
profitability, primarily through internal growth, controlling operating costs 
and acquisitions which have the potential for generating attractive returns 
on investment. The retail propane industry is mature and experiences only 
limited growth in total demand for product. The propane industry is also 
large and highly fragmented, with approximately 6,000 independently owned and 
operated distributors. Star Gas Partners focuses on acquiring smaller to 
medium-sized local and regional independent propane distributors. In 
particular, the Company has focused on high margin distributorships with a 
relatively large percentage of residential customers, which generate higher 
margins than other types of customers, and those located in the Midwest and 
Northeast, where it believes higher margins than in other areas in the United 
States can be attained.

                                       7
<PAGE>

     During the fiscal year ended September 30, 1997, approximately 71% of Star
Gas Partners' sales (by volume of gallons sold) were to retail customers (of
which approximately 52%, 21%, 18% and 9% were sales to residential customers,
industrial/commercial customers, agricultural customers and motor fuel
customers, respectively) and approximately 29% were to wholesale customers.
Sales to residential customers in fiscal year 1997 accounted for 62% of its
gross profit on propane sales, reflecting the higher-margin nature of this
segment of the market.

     Star Gas Partners obtains propane from over 25 sources, all of which are
domestic or Canadian companies. Supplies from these sources have traditionally
been readily available, although no assurance can be given that supplies of
propane will be readily available in the future. Substantially all of Star Gas
Partners' propane supply for its Northeast retail operations are purchased under
annual or longer term supply contracts, which generally provide for pricing in
accordance with market prices at the time of delivery. Certain of the contracts
provide for minimum and maximum amounts of propane to be purchased. During the
fiscal year 1997, none of its Northeast suppliers accounted for more than 10% of
the volume purchased.

     Star Gas Partners typically supplies its Midwest retail and wholesale
operations by a combination of (i) spot purchases from Mont. Belvieu, Texas,
which are transported by pipeline to Star Gas Partners' 21 million gallon
underground storage facility in Seymour, Indiana, and then delivered to the
Midwest branches and (ii) purchases from a number of Midwest refineries which
are transported by truck to the branches either directly or via the Seymour
facility. Most of the refinery purchases are purchased under contract.

     Star Gas Partners' business is highly competitive. Propane competes
primarily with electricity, natural gas and fuel oil as an energy source on the
basis of price, availability and portability. In addition to competing with
alternative energy sources, Star Gas Partners competes with numerous other
companies engaged in the retail propane distribution business. Competition in
the propane industry is highly fragmented and generally occurs on a local level
with other large full-service multi-state propane marketers, smaller local
independent marketers and farm cooperatives. However, long-standing customer
relationships are typical of the retail propane industry. Retail propane
customers generally lease their storage tanks from their supplier. The lease
terms and, in most states, certain fire safety regulations restrict the
refilling of a leased tank solely to the propane supplier that owns the tank.
The inconvenience of switching tanks minimizes a customer's tendency to switch
among suppliers of propane.

     Based on industry publications, Star Gas Partners believes that the ten
largest multi-state marketers, including Star Gas Partners, account for less
than 35% of the total retail sales of propane in the United States, and that no
single marketer has a greater than 10% share of the total retail market in the
United States. Most of Star Gas Partners' retail distribution branches compete
with five or more marketers or distributors.

                               ITEM 2. PROPERTIES

     The Company provides services to its customers from 23 branches/depots and
18 satellites, 7 of which are owned and 34 of which are leased, in 25 marketing
areas in the Northeast and Mid-Atlantic Regions of the United States.

     The Company believes its existing facilities are maintained in good
condition and are suitable and adequate for present needs. In addition, there
are numerous comparable facilities available at similar rentals in each of its
marketing areas should they be required.

                            ITEM 3. LEGAL PROCEEDINGS

     The Company is not currently involved in any legal proceeding which could
have a material adverse effect on the results of operations or the financial
condition of the Company.

           ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                       8
<PAGE>

                                     PART II


  ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Class A Common Stock

     The Company's Class A Common Stock is traded on the National Association of
Securities Dealers Inc. National Market under the symbol "HEAT". The high and
low per share price of the Class A Common Stock and dividends declared on the
Class A Common Stock for 1996 and 1997 were as follows:

<TABLE>
<CAPTION>

                                   1996                                   1997 
                  -----------------------------------     ---------------------------------
Quarter              High           Low      Dividend        High          Low     Dividend
--------            -----          ----      --------        ----          ---     --------
<S>                  <C>            <C>      <C>           <C>            <C>       <C>  
1st               $ 8 1/4       $ 6 1/2       $.1500       $ 6 3/4       $ 3 3/8    $.075
2nd                 7 3/4         6 1/2        .1500         3 7/8         2 1/2     .075
3rd                 7 3/4         6 1/4        .1500         3 1/2         2 5/8     .075
4th                 7 3/4         5 5/8        .1500         3 1/2         2 1/8     .075
</TABLE>


     The last sale price of the Class A Common Stock on March 17, 1998 was $
1.50 per share. As of March 17, 1998 the Company had 259 shareholders of record
of its Class A Common Stock. The Company declared a dividend of $.075 per share
of Class A Common Stock which was paid on January 2, 1998 to holders of record
as of December 15, 1997. On February 24, 1998 the Company announced that it will
suspend its regularly scheduled quarterly common stock dividend and that it did
not expect to pay common stock dividends for the remainder of the year. In
arriving at this decision, the Company's Board considered the impact of
unusually warm winter weather on its earnings and cash flow, as well as a
variety of other factors.

Class B Common Stock

     During July 1994, the Company exercised its right to terminate the Special
Dividends on the Class B Common Stock, effective August 31, 1994. The Company's
Articles of Incorporation provide that when the Company terminates the Special
Dividends, the holders of Class B Common Stock have the right to require the
Company to purchase their shares at $17.50 per share plus all accrued and unpaid
Special Dividends. As a result of terminating the Special Dividends, the Company
has repurchased 206,303 shares of Class B Common Stock for approximately $3.6
million.

     As of March 17, 1998 there were 11,228 shares of Class B Common Stock
outstanding which are no longer listed on the American Stock Exchange, nor is
there an established public trading market for them.

Class C Common Stock

     There is no established trading market for the Company's Class C Common
Stock, $.10 par value. The number of record holders of the Company's Class C
Common Stock at March 17, 1998 was 24.

     The Company declared cash dividends on its Class C Common Stock of $.60 per
share in 1996 and declared cash dividends of $.30 per share in 1997. In
addition, the Company declared a dividend of $.075 per share of Class C Common
Stock which was paid on January 2, 1998 to holders of record as of December 15,
1997. As with its Class A Common Stock, the Company suspended its regularly
scheduled quarterly Class C Common Stock dividend and does not expect to pay any
Class C Common Stock dividend for the remainder of the year.

                                       9
<PAGE>


Dividend Policy

     In 1997 the Company paid a quarterly dividend on its Class A and Class C
Common Stock at an annual rate of $.30 per share. The Company historically paid
dividends on January 2, April 1, July 1 and October 1 of each year.

     The Company reviews its dividend policy from time to time in light of the
Company's results of operations, financial condition, capital needs, future
projects and other facts deemed relevant by the Board of Directors. While the
board of Directors may vary the dividend policy to reduce or eliminate
dividends, the approval of the Class C Common Stockholders is required to reduce
dividends lower than the level established by a shareholders' agreement among
the Class C Common Stockholders.

     The Company may pay dividends on the Class A Common Stock and Class C
Common Stock only upon paying all current and cumulative dividends on the
Redeemable Preferred Stock and the 12 7/8% Exchangeable Preferred Stock. The
Company has paid all current and cumulative dividends on such stock.

     Under the terms of the Company's debt instruments, the Company is
restricted to the amount of dividend distributions it can make on its capital
stock. Under the most restrictive dividend limitations, $26.1 million was
available for the payment of dividends on all classes of Common Stock at
December 31, 1997. The amount available for dividends is increased each quarter
by 50% of the cash flow, as defined, for the previous fiscal quarter, and by the
new issuance of capital stock.

     On February 24, 1998 the Company announced that it will not pay its
regularly scheduled quarterly common stock dividend of $0.075 per share for the
1998 first quarter. The Company also announced that it does not expect to pay
common stock dividends for the remainder of the year. In arriving at this
decision, the Company's Board considered the impact of unusually warm winter
weather on its earnings and cash flow, as well as a variety of other factors.


                                       10
<PAGE>

                    ITEM 6. SELECTED FINANCIAL AND OTHER DATA

     The following table sets forth selected financial and other data of the
Company and should be read in conjunction with the more detailed financial
statements included elsewhere in this Report. The Company typically generates
net income in the quarters ending in March and December and experiences net
losses during the non-heating season quarters ending in June and September.
Although EBITDA should not be considered a substitute for net income (loss) as
an indicator of the Company's operating performance, it is included in the
following tables as it is the principal basis upon which the Company assesses
its financial performance. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition."

<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                   ---------------------------------------------------------------------------
                                                     1993            1994             1995             1996              1997 
                                                   --------        --------         --------         --------         --------
                                                                         (in thousands, except per share data)
<S>                                                  <C>             <C>              <C>              <C>              <C>   
Income Statement Data:
Net sales                                          $538,526        $546,677         $609,507         $608,161         $548,141
Cost of sales                                       366,809         362,981          387,825          427,388          379,748
                                                   --------        --------         --------         --------         --------
  Gross profit                                      171,717         183,696          221,682          180,773          168,393

Operating expenses                                  123,280         128,310          164,929          143,069          140,023
Amortization of customer lists                       23,183          19,748           20,527           18,611           17,903
Depreciation of plant and equipment                   5,933           6,469           12,374            6,574            7,204
Amortization of deferred charges                      5,548           6,177            6,142            4,760            4,639
Provision for supplemental benefit                      264             373            1,407              873              565
                                                   --------        --------         --------         --------         --------
  Operating income (loss)                            13,509          22,619           16,303            6,886           (1,941)

Interest expense-net                                 20,508          23,766           38,792           32,412           31,668
Other income (expense)-net                             (165)            109              218            1,842           11,445
                                                   --------        --------         --------         --------         --------
  Loss before income taxes,
   equity interest in Star Gas,
   and extraordinary item                            (7,164)        (1,038)          (22,271)         (23,684)         (22,164)
Income taxes                                            400            600               500              500              500
                                                   --------        --------         --------         --------         --------
  Loss before equity interest in
   Star Gas and extraordinary item                   (7,564)        (1,638)          (22,771)         (24,184)         (22,664)
                                                                    
  Share of income (loss) of Star Gas                      -         (1,973)              728            2,283             (235) 
                                                   --------        --------         --------         --------         --------
  Loss before extraordinary item                     (7,564)        (3,611)          (22,043)         (21,901)         (22,899)
Extraordinary item-loss on
  early extinguishment of debt                         (867)          (654)           (1,436)          (6,414)            -    
                                                   --------        --------         --------         --------         --------
Net loss                                           $ (8,431)       $(4,265)         $(23,479)        $(28,315)        $(22,899)
                                                   --------        --------         --------         --------         --------
                                                   --------        --------         --------         --------         --------

Net loss applicable to Common Stock                $(11,798)       $(7,776)         $(26,742)        $(30,704)        $(27,543)

Basic and Diluted earnings (losses)
 per common share:
  Class A Common Stock                             $   (.57)       $   (.37)        $  (1.06)        $  (1.20)        $  (1.06)
  Class B Common Stock                                 1.88            1.10                -                -                -
  Class C Common Stock                                 (.57)           (.37)           (1.06)           (1.20)           (1.06)

Cash dividends declared per
 common share:
  Class A Common Stock                               $0.525           $0.55            $0.60            $0.60            $0.30
  Class B Common Stock                                1.88             1.10                -                -                -
  Class C Common Stock                                0.525            0.55             0.60             0.60             0.30

Weighted average number of
 common shares outstanding:
  Class A Common Stock                               18,993          19,195           22,711           22,983           23,441
  Class B Common Stock                                  217             152               15               12               11
  Class C Common Stock                                2,545           2,550            2,598            2,598            2,598
</TABLE>

                                       11
<PAGE>

<TABLE>
<CAPTION>




                                                      1993            1994             1995             1996             1997
                                                   --------        --------         --------         --------         --------
<S>                                               <C>             <C>              <C>              <C>              <C> 
Balance Sheet Data:
Cash                                               $  4,614        $ 15,474         $ 78,285         $  3,257         $  2,390
Working capital                                      16,694          28,344           65,408           18,093           12,436
Total assets                                        256,589         397,174          357,241          275,025          247,846
Long-term debt                                      185,311         309,945          294,429          291,337          288,957
Redeemable preferred stock
 (long-term portion)                                 20,833          36,632           12,500            8,333           32,489
Stockholders' deficiency                            (61,964)        (66,176)        (100,903)        (145,733)        (177,033)

Summary Cash Flow Data:
Net Cash provided by (used in)
  operating activities                             $ 36,637        $ 31,449         $ (1,707)        $ (3,852)        $ 18,644
Net Cash provided by (used in)
  investing activities                              (34,337)        (31,672)          16,613          (26,193)            (980)
Net Cash provided by (used in)
  financing activities                               (1,546)         11,083           47,905          (44,983)         (18,531)

Other Data:
EBITDA(1)                                          $ 48,437        $ 55,386         $ 56,753         $ 37,704         $ 28,370
Gallons of home heating oil
  and retail propane sold                           443,487         456,719          503,610          456,141          410,291

</TABLE>

-----------------------
(1)     "EBITDA" (Earnings Before Interest, Taxes, Depreciation
        and Amortization) is defined as operating income before depreciation,
        amortization, non-cash charges relating to the grant of stock 
        options to executives of the Company, non-cash charges associated with 
        deferred compensation plans and other non-cash charges of a similar 
        nature, if any. EBITDA should not be considered as an alternative to
        net income (as an indicator of operating performance) or as an
        alternative to cash flow (as a measure of liquidity or availability to
        service debt obligations), but provides additional significant
        information in that EBITDA is a principal basis upon which the Company
        assesses its financial performance.


                                       12
<PAGE>

           ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
                       OPERATIONS AND FINANCIAL CONDITION

Overview

In analyzing the Company's results, investors should consider a variety of
factors unique to the Company and the heating oil industry. These include the
Company's active acquisition program and the rapid rate of amortization of
customer lists purchased in home heating oil acquisitions. First, the financial
results of a given year do not reflect the full impact of the year's
acquisitions. Acquisitions made during the spring and summer months generally
have a negative effect on earnings in the calendar year in which they are made.
Second, substantially all purchased intangibles are comprised of customer lists
and convenants not to compete. Amortization of customer lists is a non-cash
expense which is amortized 90% over a six-year period and the balance over a
25-year period. The covenants not to compete are amortized over the lives of the
covenants, which generally range from five to seven years.

A significant focus of the Company has been the restructuring and corporate 
identity programs begun in April of 1996. These programs are targeted to 
heighten responsiveness to customers, improve brand awareness among heating 
oil consumers and increase operational productivity, as well as reduce 
overhead costs. The regionalization of the Company's New York/Long Island 
operations was completed in 1997, and similar efforts in the Mid-Atlantic 
region have begun. In order to optimize the impact of these programs, the 
Company continues to evaluate appropriate operating structures for the rest 
of the Company. During the first full year of this program in Long Island, 
the Company's first consolidated region, measurable improvements were 
recorded in almost all significant operating categories. Despite these 
indications, however, it should be noted that no assurances can be given as 
to the ultimate impact of the program on the Company's financials in any of 
the Company's regions.

1997 Compared to 1996

Volume. Home heating oil volume decreased 10.1% to 410.3 million gallons for the
twelve months ended December 31, 1997, as compared to 456.1 million gallons for
the twelve months ended December 31, 1996. In addition to 5.8% fewer degree days
in 1997 than in 1996, volume was negatively impacted by net account attrition
and the sale of the Company's Hartford, CT operations, partially offset by the
acquisition of 24 individually insignificant heating oil companies since the
beginning of 1996.

Net sales. Net sales decreased 9.9% to $548.1 million for the twelve months
ended December 31, 1997, as compared to $608.2 million for the twelve months
ended December 31, 1996 due to the decreased volume described above.

Gross profit. Gross profit decreased 6.8% to $168.4 million for the twelve
months ended December 31, 1997, as compared to $180.8 million for the twelve
months ended December 31, 1996. Gross profit did not decline to the same extent
as volume due to an increase of 2.0 cents per gallon in home heating oil margins
in 1997 as compared to 1996.

Selling, general and administrative expenses. Selling, general and 
administrative expenses decreased 3.2% to $102.4 million for the twelve 
months ended December 31, 1997, as compared to $105.6 million for the twelve 
months ended December 31, 1996. This decline was due both to reductions in 
certain expenses resulting from the Company's operational efficiency programs 
and to the Company's ability to reduce certain overhead costs in response to 
a decline in volume and was achieved despite inflationary pressures. Also of 
importance, but of smaller impact on 1997 financials, were significant 
corporate staff reductions taken in December of 1997 as part of our corporate 
restructuring programs.

Direct delivery expenses. Direct delivery expenses decreased 9.4% to $30.0
million for the twelve months ended December 31, 1997, as compared to $33.1
million for the twelve months ended December 31, 1996, reflecting the 
Company's ability to reduce costs relating to weather impacted lower volume.

                                       13
<PAGE>


Restructuring charges. Restructuring charges increased from $1.2 million for the
twelve months ended December 31, 1996 to $2.9 million for the twelve months
ended December 31, 1997, representing costs associated with the Company's
regionalization and consolidation programs in the New York/Long Island and Mid
Atlantic regions.

Corporate identity expenses. Corporate identity expenses for the twelve months
ended December 31, 1997 were $4.1 million, as compared to $2.7 million for the
twelve months ended December 31, 1996. These costs are associated with the
Company's brand identity program, implemented in Long Island during 1996 and the
Company's New York and Mid Atlantic regions during 1997, and include the cost of
repainting all delivery and service vehicles to reflect the Company's new
identity. Through this program the Company intends to capitalize on its size by
building significant brand equity in one "Petro" brand name, rather than the
multiple names previously in use.

Pension curtailment. Pension curtailment expenses for the twelve months ended
December 31, 1997 were $0.7 million, as compared to $0.6 million for the twelve
months ended December 31, 1996. These expenses represent the freezing of
benefits under the Company's defined benefit pension plan resulting from the
consolidation of Long Island and New York City operations.

Amortization of customer lists. Amortization of customer lists decreased 3.8% to
$17.9 million for the twelve months ended December 31, 1997, as compared to
$18.6 million for the twelve months ended December 31, 1996, as the impact of
certain customer lists becoming fully amortized exceeded the impact of
amortization associated with the Company's recent acquisitions.

Depreciation of plant and equipment. Depreciation and amortization of plant and
equipment increased 9.6% to $7.2 million for the twelve months ended December
31, 1997, as compared to $6.6 million for the twelve months ended December 31,
1996, as a result of certain investments related to the Company's operational
restructuring programs in the New York and Mid Atlantic regions, as well as the
impact of the Company's acquisitions.

Amortization of deferred charges. Amortization of deferred charges decreased
2.5% to $4.6 million for the twelve months ended December 31, 1997, as compared
to $4.8 million for the twelve months ended December 31, 1996, as the impact of
certain deferred charges becoming fully amortized exceeded the impact of the
amortization associated with the Company's recent acquisitions.

Provision for supplemental benefits. Provision for supplemental benefits
declined to $0.6 million for the twelve months ended December 31, 1997, as
compared to $0.9 million for the twelve months ended December 31, 1996. These
supplemental benefits reflect the extension of the exercise date of certain
options previously issued and a change in the provision due to a reduction of
the accrual required under the vesting schedule of those options.

Operating income (loss): Operating income decreased to an operating loss of $1.9
million for the twelve months ended December 31, 1997, as compared to operating
income of $6.9 million for the twelve months ended December 31, 1996. This
decline was largely a result of the weather-related decline in volume and an
increase in restructuring and corporate identity expenses, partially offset by
the Company's ability to reduce certain operating expenses and an increase in
the Company's heating oil margins.

Net interest expense. Net interest expense improved slightly to $31.7 million
for the twelve months ended December 31, 1997, as compared to $32.4 million for
the twelve months ended December 31, 1996. This reduction resulted from both a
slight decline in average borrowings outstanding and average rate.

Other income. Other income for the twelve months ended December 31, 1997 was
$11.4 million, as compared to $1.8 million for the twelve months ended December
31, 1996. These amounts reflect the sale of the Company's Hartford, CT heating
oil operations in 1997 and the Company's Springfield, MA operations in 1996.
Proceeds from these sales were used to make investments in other regions of the
Company's operations and to repay debt.

                                       14

<PAGE>

Equity in income (loss) of Star Gas partnership. Equity in the earnings of Star
Gas Partnership declined to a loss of $0.2 million for the twelve months ended
December 31, 1997, as compared to earnings of $2.3 million for the twelve months
ended December 31, 1996. This decrease was due to the impact of warm weather on
Star Gas' propane volume and net income.

Extraordinary item. The extraordinary charge in 1996 of $6.4 million resulted
from the retirement of $43.8 million of 12.25% Subordinated Debentures due 2005.
This charge included both a prepayment premium of $4.8 million and a write-off
of deferred charges of $1.6 million associated with the issuance of that debt.

Net loss. Net loss improved 19.1% to a net loss of $22.9 million for the twelve
months ended December 31, 1997, as compared to a net loss of $28.3 million for
the twelve months ended December 31, 1996. This improvement was due to the gain
recognized on the sale of the Company's Hartford, CT business during the year,
partially offset by the impact of warm first quarter weather on both the
Company's and Star's volume, and to an increase in restructuring and corporate
identity expenses.

EBITDA*. EBITDA decreased to $28.4 million for the twelve months ended December
31, 1997, as compared to $37.7 million for the twelve months ended December 31,
1996. This decline was due to decreased volume resulting from the warm 1997
weather and to an increase in restructuring and corporate identity costs,
partially offset by improved heating oil margins. Excluding expenses related to
the Company's operational programs, and taking into account distributions
actually received from Star Gas (which distributions are not included in the
calculation of EBITDA), EBITDA declined to $41.5 million from $46.4 million.


_______________________
*     EBITDA is defined as operating income before  depreciation,  amortization,
  non-cash charges relating to the grant of stock options to executives of the
  Company, non-cash charges associated with deferred compensation plans and 
  other non-cash charges of a similar nature, if any.


                                       15
<PAGE>


1996 Compared to 1995

     Volume. Heating oil volume increased 8.7% to 456.1 million gallons for
1996, as compared to 419.6 million gallons for 1995. This increase was largely
due to gallonage from twenty three heating oil acquisitions completed since
January 1, 1995, as well as to colder weather than in the previous year.
Combined total retail gallons of heating oil and propane decreased 9.4% from
1995 to 1996, as retail propane volume, which amounted to 84.0 million gallons
in 1995, was excluded from Petro's 1996 operating results as a result of the
Star Gas Transactions.

     Net sales. Net sales for the Company's heating oil business increased 19.5%
to $608.2 million for 1996, as compared to $509.1 million for 1995. This growth
was due both to increased volume and to higher selling prices associated with
the significant increases in wholesale product costs during fiscal 1996.
Combined total sales of heating oil and propane remained relatively unchanged
from 1995 to 1996, as propane sales, which amounted to $100.4 million in 1995,
were excluded from Petro's 1996 financials as a result of the Star Gas
Transactions.

     Gross profit. Gross profit for the Company's heating oil business increased
8.0% to $180.8 million for 1996, as compared to $167.4 million for 1995. The
growth in gross profit resulted primarily from the increased volume and was
partially offset by an unusual slight decline in home heating oil margins caused
by significant and rapid increases in supply costs and the effect of record
winter storms in early 1996 on net service expense, which is included in the
Company's calculation of gross profit. Combined total gross profit declined
18.5% from 1995 to 1996, as propane gross profit, which amounted to $54.2 in
1995, was excluded from Petro's 1996 operating results as a result of the Star
Gas Transactions.

     Selling, general and administrative expenses. Selling, general and
administrative expenses for the Company's heating oil business increased 8.7% to
$105.6 million for 1996, as compared to $97.2 million for 1995. Despite the
impact of inflation-related cost increases and the impact of certain expenses
related to the operational restructuring, selling, general and administrative
expenses declined slightly on a per gallon basis, reflecting economies resulting
from the increased volume. Combined total selling, general and administrative
expenses decreased 17.7% from 1995 to 1996, as propane expenses, which amounted
to $31.1 million in 1995, were excluded from Petro's 1996 operating results as a
result of the Star Gas Transactions.

     Direct delivery expenses. Direct delivery expenses for the Company's
heating oil business increased 15.4% to $33.1 million for 1996, as compared to
$28.7 million for 1995. In addition to the growth in volume delivered, this
increase was also due to inflation-related cost increases and the severe first
quarter snow storms, which impacted delivery productivity and required the
Company to pay unusually high overtime and retain additional temporary
personnel. Combined total direct delivery expenses decreased 9.6% from 1995 to
1996, as propane delivery expenses, which amounted to $7.9 million in 1995, were
excluded from Petro's 1996 operating results as a result of the Star Gas
Transactions.

     Restructuring charges. Restructuring charges for 1996 were $1.2 million.
These charges represent costs associated with the Company's regionalization and
consolidation of its five full-function Long Island branches into one regional
customer service center and three strategically located delivery and service
depots. The customer service center began operation during May 1996 and
represents the first stage of implementation of an operational effectiveness
study conducted by a nationally recognized consulting firm and senior management
in 1995.

     Corporate identity expenses. Corporate identity expenses for 1996 were $2.7
million. These expenses represent costs associated with the Company's brand
identity program in Long Island, and include the repainting of over 400 delivery
and service vehicles in the region. Through this program, the Company is seeking
to build significant brand equity by marketing its services throughout the
region under the "Petro" brand name, rather than the twelve brands previously in
use.

     Pension curtailment costs. Pension curtailment costs for 1996 were $0.6
million. This non-cash charge represents the one-time costs associated with the
"freezing" of one of the Company's two defined benefits plans, which resulted in
the acceleration of previously unrecognized prior service costs.


                                       16
<PAGE>



     Amortization of customer lists. Amortization of heating oil customer lists
increased 1.6% to $18.6 million for 1996, as compared to $18.3 million for 1995,
due to the Company's recent acquisitions, which were partially offset by the
impact of certain customer lists becoming fully amortized. Combined total
amortization of customer lists decreased 9.3% from 1995 to 1996, as propane
customer list amortization, which amounted to $2.2 million in 1995, was excluded
in Petro's 1996 operating results as a result of the Star Gas Transactions.

     Depreciation of plant and equipment. Depreciation of heating oil plant and
equipment increased 10.7% to $6.6 million for 1996, as compared to $5.9 million
for 1995, as a result of the Company's recent fixed asset additions associated
with acquisitions, which outpaced the impact of certain assets becoming fully
depreciated. Combined total depreciation of plant and equipment decreased 46.9%
from 1995 to 1996, as propane-related depreciation, which amounted to $6.4
million in 1995, was excluded from Petro's 1996 operating results as a result of
the Star Gas Transactions.

     Amortization of deferred charges. Amortization of heating oil deferred
charges decreased 8.5% to $4.8 million for 1996, as compared to $5.2 million for
1995, as a result of certain deferred items becoming fully amortized. Combined
total amortization of deferred charges decreased from $6.1 million for 1995 to
$4.8 million for 1996, as the impact of propane-related amortization of deferred
charges, which amounted to $0.9 million in 1995, was excluded in Petro's 1996
operating results as a result of the Star Gas Transactions.

     Provision for supplemental benefits. Provision for supplemental benefits
declined to $0.9 million for 1996, as compared to $1.4 million for 1995. These
supplemental benefits reflect the extension of the exercise date of certain
options previously issued. The decrease in the provision for supplemental
benefits is due to a reduction in the required accrual pertaining to those
options.

     Operating income. Operating income for the Company's heating oil business
decreased to $6.9 million for 1996, as compared to $10.7 million for 1995.
Excluding restructuring and corporate identity costs associated with the
Company's regionalization program and one-time pension curtailment costs
associated with the termination of one of the Company's two defined benefit
plans, operating income increased 4.9% to $11.3 million. This improvement was
largely a result of higher volume. Combined total operating income decreased
$9.4 million, as the impact of propane-related operating income, which amounted
to $5.6 million in 1995, was excluded from Petro's 1996 operating results as a
result of the Star Gas Transactions.

     Net interest expense. Net interest expense declined 16.4% to $32.4 million
for 1996, as compared to $38.8 million for 1995. This decrease was due to the
decline in average borrowings versus the prior period resulting from the
application of proceeds from the Star Gas Transactions to debt repayment.

     Other income. Other income was $1.8 million for 1996 and $0.2 million for
1995, reflecting the sale of the Company's underperforming Springfield,
Massachusetts and New Hampshire heating oil operations during the second quarter
of 1996 and the first quarter of 1995, respectively.

     Equity in earnings of Star Gas Partnership. The Company's share of earnings
of Star Gas Partners was $2.3 million for 1996. For 1995, Star Gas' results were
consolidated with the Company's through December 20, 1995, and equity in
earnings of Star Gas were $0.7 million for the final eleven days of 1995. In
1996, the Company received $4.3 million in distributions from Star Gas Partners,
reflecting the Company's ownership of partnership interests for the period of
December 20, 1995 to September 30, 1996. Due to the lagged nature of these
distributions, the Company received distributions on its interest from October
1, to December 31, 1996 during the first quarter of fiscal year 1997. Total
distributions received by the Company for its ownership interest in Star Gas
Partners for the full year 1996 were $5.5 million.


                                       17
<PAGE>


     Income before extraordinary items. Income before extraordinary items
remained relatively unchanged at a loss of $21.9 million for 1996, as compared
to a loss of $22.0 million for 1995. Excluding the restructuring, corporate
identity and pension curtailment costs, income before extraordinary items
improved to a loss of $17.5 million. This improvement was largely due to the
$6.4 million reduction in interest expense and the $1.6 million increase in
other income. Partially offsetting these gains was the elimination of $5.6
million of Star Gas operating income in 1995 as a result of the Star Gas
Transactions, which was greater than the $1.6 million increase in equity in
earnings of Star Gas for 1996 versus 1995.

     Extraordinary item - loss on early extinguishment of debt. In February
1996, the Company recorded an extraordinary charge of $6.4 million in connection
with the retirement of $43.8 million of 12 1/4% Subordinated Debentures due
2005. This amount includes both a prepayment premium of $4.8 million and a
write-off of deferred charges of $1.6 million associated with the issuance of
that debt. In 1995, the Company recorded an extraordinary charge of $1.4 million
related to the repayment of $12.8 million of debt due March 2000.

     Net income/(loss). Net loss increased to $28.3 million for 1996, as
compared to a loss of $23.5 million for 1995. This increase was largely due to
the extraordinary item described above.

     EBITDA. EBITDA for the Company's heating oil business decreased 9.3% to
$37.7 million, as compared to $41.6 million for 1995. Excluding one-time
restructuring, corporate identity and pension curtailment expenses, EBITDA
increased to $42.1 million for 1996. This increase of 1.2% was less than the
increase in volume as a result of the unusual decline in gross profit margins.
Combined total EBITDA before these one-time costs and adding distributions of
$4.3 million from Star Gas, representing Petro's ownership interest in Star
through September 30, 1996, decreased 18.3% from 1995 to 1996, as the impact of
propane EBITDA, which amounted to $15.2 million in 1995, was excluded from
Petro's 1996 operating results as a result of the Star Gas Transactions. The
majority of Petro's proceeds from the sale of a 53.5% interest in Star Gas were
applied to the reduction of long-term debt and associated interest expense,
which did not impact EBITDA.


                                       18
<PAGE>


Liquidity and Financial Condition
 
In February 1997, the Company entered into agreements ("Private Debt
Modifications") to among other things, exchange the remaining $30.0 million of
its $60.0 million 11.85%, 12.17%, and 12.18% notes ("11.96% Notes") ranked as
subordinated debt for $30.0 million senior debt, and to extend the maturity date
of the $60.0 million 11.96% Notes from October 1, 1998 to October 1, 2002 with
$15.0 million sinking fund payments due on October 1, 2000 and October 1, 2001
and the remaining $30.0 million balance due on October 1, 2002. In addition,
effective October 1, 1998, the interest on the 11.96% notes will be lowered to
10.9%.

Also in February 1997, the Company issued $30.0 million of 12 7/8% Exchangeable
Preferred Stock due February 15, 2009. The net proceeds of $28.3 million were
used for general corporate purposes, as well as funding the Company's
operational restructuring and acquisition programs.

Prior to October 1997, the Company had a $60.0 million working capital revolving
credit facility, but related to its agreement to sell its branch in Hartford,
Connecticut for approximately $15.6 million, the working capital revolving
credit facility was reduced to $47.0 million. $9.4 million of the proceeds from
this sale were set aside to collateralize a portion of outstanding acquisition
letters of credit. Cash collateral requirements had originally been scheduled to
begin in June 1998.

Net cash provided by operating activities of $18.6 million combined with the
$28.3 million net proceeds from the 12 7/8% Exchangeable Preferred Stock
offering and the $15.6 million from the sale of its branch in Hartford
Connecticut described in the preceding paragraph, amounted to $62.5 million.
These funds were utilized in investing activities for acquisitions and the
purchase of fixed assets of $23.2 million; and in financing activities to repay
notes payable of $1.1 million, repay subordinated notes of $1.1 million, repay
net credit facility borrowings of $19.0 million, redeem preferred stock of $4.2
million, pay cash dividends of $14.3 million, set aside $9.4 million to satisfy
certain cash collateral requirements, and for other financing activities of $3.3
million, which includes $1.2 million associated with the Private Debt
Modification of the 11.96% Notes. These financing activities were partially
offset by cash provided from the Star Gas minimum quarterly distribution of $5.5
million, the release of $3.0 million in restricted cash as all Star Gas
quarterly guarantee provisions were fulfilled, the proceeds from the sale of
fixed assets of $1.1 million, and proceeds from dividend reinvestments of $2.4
million. As a result of the above activities, the Company's cash balance at
December 31, 1997 decreased by $0.9 million to $2.4 million.

The Company currently has available a $47.0 million working capital revolving
credit facility which expires June 30, 1998. At December 31, 1997 there were
$3.0 million of borrowings outstanding under this credit facility, and the
Company had $12.4 million of working capital.

For 1998, the Company anticipates repaying $2.5 million of long-term debt, 
repaying $2.1 million of senior and subordinated notes, redeeming $4.2 
million of redeemable Preferred Stock and paying $5.1 million in preferred 
dividends. Furthermore, the Company currently has no material commitments for 
capital expenditures.

                                       19
<PAGE>


The Company expects the 1998 first quarter financial results to be negatively 
impacted by weather, which, through February 28, 1998 has been approximately 
25% warmer than normal. In response to this warm weather, the Company has 
taken several steps to attempt to mitigate the impact of the weather on its 
earnings and cash flow. These steps include the suspension of the common 
stock dividend, reduction in planned capital expenditures, selected 
elimination of corporate positions, and freezing of salaries, as well as 
significant operating expense reductions. Despite these efforts, as well as 
an improvement in the Company's retail heating oil gross profit margins, 
however, the Company still expects to be significantly impacted by the 
extremely warm weather experienced in January and February.

The Company expects to renew or replace the working capital revolving credit 
facility and based on this and the Company's current working capital position 
and expected net cash provided by operating activities, the Company expects 
to be able to meet all of the above mentioned obligations in 1998.

Year 2000

The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, which the Company expects to
implement on a timely basis, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. Estimated costs associated with this conversion is anticipated to be
less then two hundred thousand dollars. However, if such modifications and
conversions are not completed timely, the Year 2000 problem may have a material
adverse impact on the operations of the Company.

Accounting Changes

In February 1997, the FASB issued SFAS No. 128 - "Earnings Per Share." SFAS No.
128 requires presentation of "basic" and "diluted" earnings per share for
periods ending after December 15, 1997. The Company adopted SFAS No. 128 and had
no effect on previously reported earnings (losses) per share.

In February 1997, the FASB issued SFAS No. 129 - "Disclosure of Information
about Capital Structure." SFAS No. 129 requires disclosure of all the pertinent
rights and privileges of securities outstanding for periods ending after
December 15, 1997. The Company adopted SFAS No. 129, which had no effect on
previous disclosures.

In June 1997, the FASB issued SFAS No. 130 - "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying changes in
equity that results from non-owner transactions and events. This statement is
effective for fiscal years beginning after December 15, 1997 and will be
reflected in the Company's First Quarter Report on Form 10-Q.

In June 1997 the FASB issued SFAS No. 131 - "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires disclosures about
segments of an enterprise and related information such as the different types of
business activities and economic environments in which a business operates. This
statement is effective for fiscal years beginning after December 15, 1997. The
Company is still assessing the disclosure requirements of SFAS No. 131.


                                       20
<PAGE>


Statement Regarding Forward-Looking Disclosure

This Report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act which represent
the Company's expectations or beliefs concerning future events that involve
risks and uncertainties, including those associated with the effect of weather
conditions on the Company's financial performance, the price and supply of home
heating oil, the ability of the Company to obtain new accounts and retain
existing accounts and the ability of the Company to realize cost reductions from
its operational restructuring program. All statements other than statements of
historical facts included in this Report including, without limitation, the
statements under "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business" and elsewhere herein, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in this Report, including
without limitation, in conjunction with the forward-looking statements included
in this report. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.


               ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   See Index to Financial Statements, Page F-1


            ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE.

                                      None.


                                    PART III


          ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information appearing in the Proxy Statement under the caption ELECTION
OF DIRECTORS and under the caption EXECUTIVE OFFICERS, is incorporated herein by
this reference.


                        ITEM 11. EXECUTIVE COMPENSATION.

     The information appearing in the Proxy Statement under the caption
EXECUTIVE COMPENSATION, is incorporated herein by this reference.


    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information appearing in the Proxy Statement under the caption ELECTION
OF DIRECTORS -- Ownership of Equity Securities in the Company, is incorporated
herein by this reference.


            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information appearing in the Proxy Statement under the caption ELECTION
OF DIRECTORS -- Certain Transactions, is incorporated herein by this reference.


                                       21
<PAGE>


                                     PART IV


     ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K

(a)  The following documents are filed as part of this report:

     1. The following consolidated financial statements are included in Part II,
        Item 8:

        Consolidated Financial Statements of Petroleum Heat and Power Co., Inc. 
        and Subsidiaries:

        Independent Auditors' Reports

        Consolidated Balance Sheets, December 31, 1996 and 1997

        Consolidated Statements of Operations, years ended
          December 31, 1995, 1996 and 1997

        Consolidated Statements of Changes in Stockholders' Equity
         (Deficiency) years ended December 31, 1995, 1996 and 1997

        Consolidated Statements of Cash Flows, years ended
            December 31, 1995, 1996 and 1997

         Notes to Consolidated Financial Statements

 
     2. The following financial schedule is submitted herewith:

        Schedule II - Valuation and Qualifying Accounts -
         Years Ended December 31, 1995, 1996 and 1997

        All other schedules are omitted because they are not
        applicable or the required information is shown in
        the consolidated financial statements or notes thereto.

 
     3. (a) Exhibits

        The Exhibits which are listed on the Exhibit Index attached hereto.
 

     4. Reports on Form 8-K

        None.


                                       22
<PAGE>

(a)               Exhibits

<TABLE>
<CAPTION>


Exhibit
  No.    Description of Exhibit
-------  ----------------------
<S>     <C>    
3.1 -    Restated and Amended Articles of Incorporation, as amended, and Articles of Amendment thereto.(2)

3.2 -    Restated By-Laws of the Registrant.(2)

4.1 -    Indenture, dated as of April 1, 1993, between the Company and Chemical Bank, as trustee,
         including Form of Notes.(1)

4.2 -    Form of Indenture, dated as of October 1, 1985 between the Company and Manufacturers Hanover
         Trust Company, as trustee, including Form of Notes.(3)

4.3 -    Restated and Amended Articles of Incorporation and Articles of Amendment thereto.(3)

4.4 -    Certificate of Designation creating a series of preferred stock designated as Cumulative
         Redeemable Exchangeable 1991 Preferred Stock and Certificate of Amendment relating thereto.(6)

4.5 -    Certificate of Designation creating a series of preferred stock designated as Cumulative
         Redeemable 1991 Preferred Stock.(3)

4.6 -    Form of Indenture between the Company and Chemical Bank, as trustee, including Form of Debentures.(7)

4.7 -    Certificate of Designation creating a series of Preferred Stock designated as Cumulative
         Redeemable Exchangeable 1993 Preferred stock.(7)

4.8 -    Certificate of Designation, as amended, creating a series of Preferred Stock designated as
         12 7/8% Exchangeable Preferred Stock due 2009. (6)

4.9 -    Registration Rights Agreement, dated as of February 18, 1997, by and between the registrant
         and Donaldson, Lufkin & Jenrette Securities Corporation. (6)

9.1 -    Shareholders' Agreement dated as of July 1992, among the Company and certain of its stockholders.(2)

10.1-    Fourth Amended and Restated Credit Agreement dated as of September 27, 1996 among the
         Company, certain banks party thereto and Chase Manhattan Bank, as Agent. (8)

10.2-    Pension Plan, of Petroleum Heat and Power Co., Inc. (2)

10.3-    Amendment No. 1 to Pension Plans. (6)

10.4-    Supplemental Executive Retirement Plan of Petroleum Heat and Power Co., Inc.(2)

10.5-    Amendment No. 1 to Supplemental Executive Retirement Plan. (6)

10.6-    Lease dated December 1, 1985 with respect to office and garage located at 3600-3620 19th
         Avenue, Astoria, New York. (3)

10.7-    Lease dated October 26, 1990 with respect to office and garage located at 1 Coffey Street,
         Brooklyn, New York. (2)

10.8-    Lease dated February 6, 1990 with respect to office and garage located at 62 Oakland Avenue
         and 64 Oakland Avenue, East Hartford, Connecticut.(2)

10.9-    Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988 with respect to office,
         garage and terminal located at 224 North Main Street, Southampton, New York.(2)

10.10-   Lease dated December 1, 1990 with respect to garage located at 10 Coffey Street, Brooklyn, New York.(2)

10.11-   Lease dated November 8, 1996 with respect to office located at 467 Creamery Way, Exton, Pennsylvania. (6)

10.12-   Option dated October 18, 1984 granted to Irik P. Sevin to purchase 64,000 shares of common
         stock of Petroleum Heat and Power Co., Inc.(3)

10.13-   Agreement dated October 22, 1986 relating to purchase of 64,000 shares of Class A Common
         Stock by Irik P. Sevin.(5)

10.14-   Agreement dated December 2, 1986 relating to stock options granted to Irik P. Sevin.(5)

10.15-   Agreements dated December 28, 1987 and March 6, 1989 relating to stock options granted to
         Irik P. Sevin and Malvin P. Sevin.(2)

10.16-   Lease dated June 17, 1993 with respect to office facilities located at 2187 Atlantic Street
         in Stamford, Connecticut. (7)

10.17-   First Amendment to the Company's 10 1/8% Subordinated Notes Indenture dated as of January
         12, 1994.(7)

10.18-   Employment Agreement dated July 21, 1994 with Thomas Isola.(8)

10.19-   Agreement dated April 4, 1994 relating to stock options granted to Irik P. Sevin.(9)

10.20-   Employment Agreement dated June 2, 1994 with Alex Szabo. (6)

10.21-   Agreement dated December 31, 1995, in the amount of $1,751,468 due December 31, 1999 from
         Irik P. Sevin to the Company. (6)

</TABLE>


                                       23
<PAGE>

<TABLE>
<CAPTION>

Exhibit
  No.    Description of Exhibit
-------  ----------------------
<S>      <C>          
10.22-   Lease dated January 25, 1996 with respect to regional office located at 48 Harbor
         Park Drive, Port Washington, New York. (8)

10.23-   Note Purchase Agreement dated as of February 1, 1997 re:  60,000,000 in Senior Notes due October 1, 2002. (6)

10.24-   Third Amendment and Restatements of Purchase Agreements dated as of February 1, 1997
         re:  250,000 shares of 1989 Preferred Stock. (6)

10.25-   Sixth Amendment and Restatements of Note Agreement dated as of February 1, 1997
         re:  14.10% Senior and Subordinated Notes due January 15, 2001. (6)

10.26-   Consent Number 2 and Second Amendment dated as of October 15, 1997 to the Fourth Amended and Restated Credit
         Agreement, dated as of September 27, 1996, among Petroleum Heat and Power Co., Inc., the several banks and
         financial institutions from time to time parties thereto and The Chase Manhattan Bank, as agent for such  Banks. (8)

10.27-   Lease Agreement by and between Capital Distributors Corp. a New York Corporation and Petroleum Heat and Power
         Co., Inc. dated as of February 7, 1997 for 55-60 58th Street, Maspeth, New York 11378. (8)


11.0-    Computation of Per Share Earnings.(10)

21.0-    Subsidiaries of Registrant.(10)

23.1-    Consent of KPMG Peat Marwick LLP (10)

27.0-    Financial Data Schedule (10)

</TABLE>
--------------------
(1)  Filed as Exhibits to Registration Statement on Form S-2, File No. 
     33-58034.

(2)  Filed as Exhibits to Registration Statement on Form S-1, File No. 
     33-48051, and incorporated herein by reference.

(3)  Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794,
     and incorporated herein by reference.

(4)  Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526, 
     and incorporated herein by reference.

(5)  Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088, 
     and incorporated herein by reference.

(6)  Filed as an Exhibit to the Company's Periodic Annual Report on Form 10-K 
     File No. 1-9358, and incorporated herein by reference.

(7)  Filed as Exhibits to the Registration Statement on Form S-2, File No. 
     33-72354, and incorporated herein by reference.
 
(8)  Filed as an Exhibit to the Company's Periodic Report on Form 10-Q and 
     incorporated herein by reference.

(9)  Filed as Exhibits to the Registration Statement on Form S-2, File 
     No.33-57059, and incorporated herein by reference.

(10) Filed herein.


                                       24
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


March 26, 1998

                                              PETROLEUM HEAT AND POWER CO., INC.
                                               (Registrant)



                                            By: Irik P. Sevin
                                                -------------------------
                                                Irik P. Sevin
 
                                  Chairman of the Board, Chief Executive     
                                  Officer and Chief Financial and Accounting
                                  Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



    Irik P. Sevin            Chairman of the Board           March 26, 1998
--------------------         Chief Executive Officer, 
    Irik P. Sevin            Chief Financial and
                             Accounting Officer
                             and Director



    Audrey L. Sevin          Secretary and Director          March 26, 1998
--------------------
    Audrey L. Sevin



   Phillip Ean Cohen         Director                        March 26, 1998
--------------------
   Phillip Ean Cohen



    Paul Biddelman           Director                        March 26, 1998
--------------------
    Paul Biddelman



    Wolfgang Traber          Director                        March 26, 1998
--------------------
    Wolfgang Traber



                                       25
<PAGE>

              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<S>                                                                        <C>
Consolidated Financial Statements of Petroleum Heat and Power Co., 
  Inc. and Subsidiaries

  Independent Auditors' Report.......................................       F-2

  Consolidated Balance Sheets, December 31, 1996 and 1997............       F-3

  Consolidated Statements of Operations, Years ended 
    December 31, 1995, 1996 and 1997.................................       F-4

  Consolidated Statements of Changes in Stockholders' Equity 
    (Deficiency), Years ended December 31, 1995, 1996 and 1997.......       F-5

  Consolidated Statements of Cash Flows, Years ended 
    December 31, 1995, 1996 and 1997.................................       F-6

  Notes to Consolidated Financial Statements.........................       F-7

Schedule for the years ended December 31, 1995, 1996 and 1997:

  II--Valuation and Qualifying Accounts..............................      F-26
</TABLE>

    All other schedules are omitted because they are not applicable or the 
required information is shown in the consolidated financial statements or 
notes thereto.

                                       F-1

<PAGE>

                         INDEPENDENT AUDITORS' REPORT


The Stockholders and Board of Directors of
Petroleum Heat and Power Co., Inc.:


    We have audited the accompanying consolidated balance sheets of Petroleum 
Heat and Power Co., Inc. and subsidiaries as of December 31, 1996 and 1997, 
and the related consolidated statements of operations, changes in 
stockholders' equity (deficiency) and cash flows for each of the years in the 
three-year period ended December 31, 1997. In connection with our audits of 
the consolidated financial statements, we also have audited the financial 
statement schedule as listed in the accompanying index. These consolidated 
financial statements and financial statement schedule are the responsibility 
of the Company's management. Our responsibility is to express an opinion on 
these consolidated financial statements and financial statement schedule 
based on our audits.

    We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Petroleum 
Heat and Power Co., Inc. and subsidiaries as of December 31, 1996 and 1997, 
and the results of their operations and their cash flows for each of the 
years in the three-year period ended December 31, 1997 in conformity with 
generally accepted accounting principles. Also in our opinion, the related 
financial statement schedule, when considered in relation to the basic 
consolidated financial statements taken as a whole, presents fairly, in all 
material respects, the information set forth therein.


                                       KPMG PEAT MARWICK LLP

Stamford, Connecticut
March 20, 1998

                                       F-2

<PAGE>

              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            ----------------------
ASSETS                                                                                         1996        1997
------                                                                                      ----------  ----------
<S>                                                                                         <C>         <C>
Current assets:
  Cash....................................................................................  $    3,257  $    2,390
  Restricted cash.........................................................................       3,000        --
  Accounts receivable (net of allowance of $1,088 and $980)...............................      93,362      78,987
  Inventories.............................................................................      22,084      16,285
  Prepaid expenses........................................................................       7,008       6,203
  Notes receivable and other current assets...............................................       1,299       1,259
                                                                                            ----------  ----------
      Total current assets................................................................     130,010     105,124
                                                                                            ----------  ----------

Property, plant and equipment--net........................................................      30,666      30,615

Intangible assets (net of accumulated amortization of $283,486 and $285,850)
  Customer lists..........................................................................      77,778      69,265
  Deferred charges........................................................................      25,718      24,924
                                                                                            ----------  ----------
                                                                                               103,496      94,189
                                                                                            ----------  ----------

Investment in and advances to the Star Gas Partnership....................................      29,907      27,499
Deferred gain on Star Gas Transaction.....................................................     (19,964)    (19,964)
                                                                                            ----------  ----------
                                                                                                 9,943       7,535
                                                                                            ----------  ----------

Cash collateral account...................................................................        --         9,350
Other assets..............................................................................         910       1,033
                                                                                            ----------  ----------
                                                                                            $  275,025  $  247,846
                                                                                            ----------  ----------
                                                                                            ----------  ----------

Liabilities and Stockholders' Equity (Deficiency)
-------------------------------------------------

Current liabilities:
  Working capital borrowings..............................................................  $   22,000  $    3,000
  Current debt............................................................................       3,047       2,391
  Current maturities of redeemable preferred stock........................................       4,167       4,167
  Accounts payable........................................................................      18,988      14,759
  Customer credit balances................................................................      17,468      20,767
  Unearned service contract revenue.......................................................      15,388      15,321
  Accrued expenses and other liabilities..................................................      30,859      32,283
                                                                                            ----------  ----------
      Total current liabilities...........................................................     111,917      92,688
                                                                                            ----------  ----------

Supplemental benefits and other long-term liabilities.....................................       1,584       5,043
Pension plan obligation...................................................................       7,587       5,702
Notes payable and other long-term debt....................................................      16,787      16,507
Senior notes payable......................................................................      34,150      63,100
Subordinated notes payable................................................................     240,400     209,350

Redeemable and exchangeable preferred stock...............................................       8,333      32,489

Common stock redeemable at option of stockholder (124 Class A and 31 Class C shares and 83
  Class A and 21 Class C shares)..........................................................         984         656
Note receivable from stockholder..........................................................        (984)       (656)

Stockholders' equity (deficiency):
  Class A common stock-par value $.10 per share; 40,000 shares authorized, 22,931 and 
    23,606 shares issued and outstanding..................................................       2,294       2,361
  Class B common stock-par value $.10 per share; 6,500 shares authorized, 11 and 11 
    shares issued and outstanding.........................................................           1           1
  Class C common stock-par value $.10 per share; 5,000 shares authorized, 2,567 and 2,577
    shares issued and outstanding.........................................................         257         258
  Additional paid-in capital..............................................................      78,804      81,358
  Deficit.................................................................................    (221,024)   (256,365)
  Minimum pension liability adjustment....................................................      (6,065)     (4,646)
                                                                                            ----------  ----------
      Total stockholders' equity (deficiency).............................................    (145,733)   (177,033)
                                                                                            ----------  ----------
                                                                                            $  275,025  $  247,846
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>

              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

                          CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                               ----------------------------------
                                                                                  1995        1996        1997
                                                                               ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
Net sales....................................................................  $  609,507  $  608,161  $  548,141
Cost of sales................................................................     387,825     427,388     379,748
                                                                               ----------  ----------  ----------
  Gross profit...............................................................     221,682     180,773     168,393

Selling, general and administrative expenses.................................     128,295     105,601     102,377
Direct delivery expense......................................................      36,634      33,102      30,006
Restructuring charges........................................................        --         1,150       2,850
Corporate identity expenses..................................................        --         2,659       4,136
Pension curtailment expense..................................................        --           557         654
Amortization of customer lists...............................................      20,527      18,611      17,903
Depreciation of plant and equipment..........................................      12,374       6,574       7,204
Amortization of deferred charges.............................................       6,142       4,760       4,639
Provision for supplemental benefits..........................................       1,407         873         565
                                                                               ----------  ----------  ----------
  Operating income (loss)....................................................      16,303       6,886      (1,941)

Other income (expense):
  Interest expense...........................................................     (41,084)    (34,669)    (33,813)
  Interest income............................................................       2,292       2,257       2,145
  Other......................................................................         218       1,842      11,445
                                                                               ----------  ----------  ----------

  Loss before income taxes, equity interest and extraordinary item...........     (22,271)    (23,684)    (22,164)
Income taxes.................................................................         500         500         500
                                                                               ----------  ----------  ----------
  Loss before equity interest and extraordinary item.........................     (22,771)    (24,184)    (22,664)
                                                                               ----------  ----------  ----------

Share of income (loss) of Star Gas Partnership...............................         728       2,283        (235)
                                                                               ----------  ----------  ----------
  Loss before extraordinary item.............................................     (22,043)    (21,901)    (22,899)
                                                                               ----------  ----------  ----------
Extraordinary item-loss on early extinguishment of debt......................      (1,436)     (6,414)       --
                                                                               ----------  ----------  ----------
  Net loss...................................................................  $  (23,479) $  (28,315) $  (22,899)
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------

Preferred Stock dividends....................................................      (3,263)     (2,389)     (4,644)
                                                                               ----------  ----------  ----------
  Net loss applicable to common stock........................................  $  (26,742) $  (30,704) $  (27,543)
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------


Basic and Diluted losses per common share before extraordinary item:
  Class A and C Common Stock.................................................  $    (1.00) $    (0.95) $    (1.06)

Extraordinary loss per common share:
  Class A and C Common Stock.................................................       (0.06)      (0.25)       --

Basic and Diluted losses per common share:
  Class A and C Common Stock.................................................  $    (1.06) $    (1.20) $    (1.06)
</TABLE>

        See accompanying notes to consolidated financial statements.

                                       F-4


<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
    Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
                  Years Ended December 31, 1995, 1996 and 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                  COMMON STOCK
                                 ------------------------------------------------------------------------------
                                         CLASS A                    CLASS B                    CLASS C
                                 ------------------------  --------------------------  ------------------------  ADDITIONAL
                                   NO. OF                    NO. OF                      NO. OF                    PAID-IN
                                   SHARES       AMOUNT       SHARES        AMOUNT        SHARES       AMOUNT       CAPITAL
                                 -----------  -----------  -----------  -------------  -----------  -----------  -----------
<S>                              <C>          <C>          <C>          <C>            <C>          <C>          <C>
Balance at December 31, 1994...      21,340    $   2,134           21     $       2         2,558    $     256    $  71,036

Net loss.......................
Cash dividends declared and
  paid (See notes 6 and 7).....
Cash dividends payable (See
  notes 6 and 7)...............
Repurchase of Class A Common
  Stock........................      (1,521)        (152)                                                           (13,439)
Class A Common Stock issued....       2,875          288                                                             18,229
Class A Common Stock issued
  under the Dividend
  Reinvestment Plan............          18            2                                                                137
Minimum pension liability
  adj..........................
Other..........................         (59)          (6)          (7)           (1)                                    455
                                 -----------  -----------         ----     --------         -----        -----   -----------
Balance at December 31, 1995...      22,653        2,266           14             1         2,558          256       76,418

Net loss.......................
Cash dividends declared and
  paid (See notes 6 and 7).....
Cash dividends payable (See
  notes 6 and 7)...............
Class A Common Stock issued
  under the Dividend
  Reinvestment Plan............         302           30                                                              2,034
Minimum pension liability
  adj..........................
Other..........................         (24)          (2)          (3)       --                 9            1          352
                                 -----------  -----------         ----     --------         -----        -----   -----------
Balance at December 31, 1996...      22,931        2,294           11             1         2,567          257       78,804

Net loss.......................
Cash dividends declared and
  paid (See notes 6 and 7).....
Cash dividends payable (See
  notes 6 and 7)...............
Class A Common Stock issued
  under the Dividend
  Reinvestment Plan............         691           69                                                              2,331
Minimum pension liability
  adj..........................
Other..........................         (16)          (2)                                                   10            1
                                 -----------  -----------         ----     --------         -----        -----   -----------
Balance at December 31, 1997...      23,606    $   2,361           11     $       1         2,577    $     258    $  81,358
                                 -----------  -----------         ----     --------         -----        -----   -----------
                                 -----------  -----------         ----     --------         -----        -----   ----------- 
<CAPTION>
 
                                               MINIMUM
                                               PENSION
                                              LIABILITY
                                  DEFICIT       ADJ.         TOTAL
                                 ---------  -------------  ---------
<S>                              <C>        <C>            <C>
Balance at December 31, 1994...  $(132,953)   $  (6,651)   $ (66,176)

Net loss.......................    (23,479)                  (23,479)
Cash dividends declared and
  paid (See notes 6 and 7).....    (14,718)                  (14,718)
Cash dividends payable (See
  notes 6 and 7)...............     (3,822)                   (3,822)
Repurchase of Class A Common
  Stock........................                              (13,591)
Class A Common Stock issued....                               18,517
Class A Common Stock issued
  under the Dividend
  Reinvestment Plan............                                  139
Minimum pension liability
  adj..........................                   1,779        1,779
Other..........................                                  448
                                 ---------  -------------  ---------
Balance at December 31, 1995...   (174,972)      (4,872)    (100,903)

Net loss.......................    (28,315)                  (28,315)
Cash dividends declared and
  paid (See notes 6 and 7).....    (13,880)                  (13,880)
Cash dividends payable (See
  notes 6 and 7)...............     (3,857)                   (3,857)
Class A Common Stock issued
  under the Dividend
  Reinvestment Plan............                                2,064
Minimum pension liability
  adj..........................                  (1,193)      (1,193)
Other..........................                                  351
                                 ---------  -------------  ---------
Balance at December 31, 1996...   (221,024)      (6,065)    (145,733)

Net loss.......................    (22,899)                  (22,899)
Cash dividends declared and
  paid (See notes 6 and 7).....    (10,479)                  (10,479)
Cash dividends payable (See
  notes 6 and 7)...............     (1,963)                   (1,963)
Class A Common Stock issued
  under the Dividend
  Reinvestment Plan............                                2,400
Minimum pension liability
  adj..........................                   1,419        1,419
Other..........................        223                       222
                                 ---------  -------------  ---------
Balance at December 31, 1997...  $(256,365)   $  (4,646)   $(177,033)
                                 ---------  -------------  ---------
                                 ---------  -------------  ---------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------
<S>                                                                             <C>         <C>         <C>
                                                                                   1995        1996        1997
                                                                                ----------  ----------  ----------
Cash flows from (used in) operating activities:
Net loss......................................................................  $  (23,479) $  (28,315) $  (22,899)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
  Amortization of customer lists..............................................      20,527      18,611      17,903
  Depreciation of plant and equipment.........................................      12,374       6,574       7,204
  Amortization of deferred charges............................................       6,142       4,760       4,639
  Share of (income)loss of Star Gas...........................................        (728)     (2,283)        235
  Provision for losses on accounts receivable.................................       1,856       1,882       1,853
  Provision for supplemental benefits.........................................       1,407         873         565
  Loss on early extinguishment of debt........................................       1,436       6,414          --
  Gain on sale of business....................................................        (788)     (1,781)    (11,284)
  Other.......................................................................         544         105        (186)
 
  Change in Operating Assets and Liabilities, net of effects of acquisitions
    and dispositions:
    Decrease (increase) in accounts receivable................................     (19,285)        117      12,522
    Decrease (increase) in inventory..........................................      (3,391)     (1,671)      5,799
    Decrease (increase) in other current assets...............................        (430)       (575)        845
    Decrease (increase) in other assets.......................................         240         (86)       (123)
    Increase (decrease) in accounts payable...................................       5,872      (3,836)     (4,229)
    Increase (decrease) in customer credit balances...........................      (5,938)     (2,142)      3,299
    Increase (decrease) in unearned service contract revenue..................       1,201        (147)        (67)
    Increase (decrease) in accrued expenses...................................         733      (2,352)      2,568
                                                                                ----------  ----------  ----------
Net cash provided by (used in) operating activities...........................      (1,707)     (3,852)     18,644
                                                                                ----------  ----------  ----------
Cash flows from (used in) investing activities:
  Sale of Star Gas limited partnership interest...............................      51,046          --          --
  Minimum quarterly distributions from Star Gas Partnership...................          --       4,313       5,507
  Acquisitions................................................................     (26,438)    (28,493)    (16,252)
  Capital expenditures........................................................     (11,174)     (6,874)     (6,980)
  Proceeds from sale of business..............................................       1,477       4,073      15,571
  Net proceeds from sales of fixed assets.....................................       1,702         788       1,174
                                                                                ----------  ----------  ----------
    Net cash provided by (used in) investing activities.......................      16,613     (26,193)       (980)
                                                                                ----------  ----------  ----------
Cash flows from (used in) financing activities:
  Net proceeds from Star Gas Corporation debt offering........................      83,687          --          --
  Net proceeds from issuance of common stock..................................      18,656       2,064       2,400
  Net proceeds from issuance of preferred stock...............................          --          --      28,323
  Net proceeds from issuance of subordinated notes............................     120,350          --          --
  Repayment of notes payable..................................................     (80,206)     (1,050)     (1,050)
  Redemption of preferred stock...............................................     (24,133)     (4,167)     (4,167)
  Repurchase of common stock..................................................     (14,150)        (39)         --
  Repurchase of subordinated notes............................................          --     (49,612)     (1,050)
  Credit facility borrowings..................................................      20,000      51,000      16,000
  Credit facility repayments..................................................     (49,100)    (29,000)    (35,000)
  Decrease (increase) in restricted cash......................................      (6,000)      3,000       3,000
  Cash collateral account payment.............................................          --          --      (9,350)
  Cash dividends paid.........................................................     (18,201)    (17,702)    (14,336)
  Other.......................................................................      (2,998)        523      (3,301)
                                                                                ----------  ----------  ----------
    Net cash provided by (used in) financing activities.......................      47,905     (44,983)    (18,531)
                                                                                ----------  ----------  ----------
    Net increase (decrease) in cash...........................................      62,811     (75,028)       (867)
    Cash at beginning of year.................................................      15,474      78,285       3,257
                                                                                ----------  ----------  ----------
    Cash at end of year.......................................................  $   78,285  $    3,257  $    2,390
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
 
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
  Interest....................................................................  $   35,122  $   37,007  $   33,879
  Income taxes................................................................       3,255         215         140
Noncash investing and financing activities:
  Issuance of notes payable...................................................       8,000          --          --
  Acquisitions................................................................      (8,000)         --     (26,467)
  Asset conveyance to Star Gas................................................          --          --      26,467
  Star Gas units received pursuant to asset conveyance........................          --          --      (3,467)
  Increase in tax liability from asset conveyance.............................          --          --       3,467
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
    The consolidated financial statements include the accounts of Petroleum Heat
and Power Co., Inc. ("Petro") and its subsidiaries ("the Company"), each of
which is wholly owned. The Company currently operates in twenty-five major
markets in the Northeast, including the metropolitan areas of Boston, New York
City, Baltimore, Providence, and Washington DC serving approximately three
hundred and fifty thousand customers in those areas. Credit is granted to
substantially all of these customers with no individual account comprising a
concentrated credit risk.
 
    The Company is primarily engaged in the retail distribution of #2 home
heating oil, related equipment services, and equipment sales to residential and
commercial customers. It operates from 23 branches / depots and 18 satellites
primarily in the Northeast United States. #2 home heating oil is principally
used by the Company's residential and commercial customers to heat their homes
and buildings, and as a result, weather conditions have a significant impact on
the demand for the product. Actual weather conditions can vary substantially
from year to year, and accordingly can significantly affect the Company's
performance.
 
Use of Estimates
 
    The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
 
Inventories
 
    Inventories are stated at the lower of cost or market using the first-in,
first-out method. The components of inventories were as follows at the dates
indicated:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                            --------------------
<S>                                                         <C>        <C>
                                                              1996       1997
                                                            ---------  ---------
Fuel oil..................................................  $  14,066  $   9,246
Parts and equipment.......................................      8,018      7,039
                                                            ---------  ---------
                                                            $  22,084  $  16,285
                                                            ---------  ---------
                                                            ---------  ---------
</TABLE>
 
Property, Plant and Equipment
 
    Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
 
Customer Lists and Deferred Charges
 
    Customer lists are recorded at cost less accumulated amortization.
Amortization for the fuel oil customer lists is computed using the straight-line
method with 90% of the cost amortized over six years and 10% of the cost
amortized over 25 years. Amortization for propane customer lists was computed
using the straight-line method with cost amortized over fifteen years.
 
    Deferred charges include goodwill, acquisition costs and payments related to
covenants not to compete. The covenants are amortized using the straight-line
method over the terms of the related contracts; acquisition costs are amortized
using the straight-line method over a six-year period; while goodwill is
amortized using the straight-line method over a twenty-five year period. Also
included as deferred charges are the costs associated with the issuance of the
Company's subordinated debt. Such costs are being amortized using the interest
method over the lives of the instruments.
 
    The Company assesses the recoverability of intangible assets at the end of
each fiscal year and, when appropriate, at the end of each fiscal quarter, by
comparing the carrying values of such intangibles to market values, where a
market exists, supplemented by cash flow analyses to determine that the carrying
values are recoverable over the remaining estimated lives of the intangibles
through undiscounted future operating cash flows. When an intangible asset is
deemed to be impaired, the amount of impairment is measured based on market
values, as available, or by projected operating cash flows, using a discount
rate reflecting the Company's assumed average cost of funds.
 
                                      F-7
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Advertising Expenses
 
    Advertising costs are expensed as they are incurred. Advertising expenses
were $2,352, $2,947, and $3,294 for 1995, 1996, and 1997 respectively.
 
Issuance of Stock by Subsidiaries
 
    At the time a subsidiary sells its stock to an unrelated party a gain is
recognized only if there are no significant uncertainties regarding realization.
 
Customer Credit Balances
 
    Customer credit balances represent payments received from customers pursuant
to a budget payment plan (whereby customers pay their estimated annual fuel
charges on a fixed monthly basis) in excess of actual deliveries billed.
 
Revenue Recognition
 
    Sales of fuel oil and heating equipment are recognized at the time of
delivery of the product to the customer or at the time of sale or installation.
Revenue from repairs and maintenance service is recognized upon completion of
the service. Payments received from customers for heating equipment service
contracts are deferred and amortized into income over the terms of the
respective service contracts, on a straight line basis, which generally do not
exceed one year.
 
Concentration of Revenue with Guaranteed Maximum Price Customers
 
    Approximately 25% of the Company's heating oil volume is sold to individual
customers under an agreement pre-establishing the maximum sales price of oil
over a twelve month period. The maximum price at which oil is sold to these
capped-price customers is renegotiated in the Spring of each year in light of
then current market conditions. The Company currently enters into forward
purchase contracts and futures contracts for a substantial majority of the oil
it sells 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 oil above the amount anticipated, margins for the capped-price customers
whose oil was not purchased in advance would be lower than expected, while those
customers whose oil was purchased in advance would be unaffected. Conversely,
should events occur during this period that decrease the cost of oil below the
amount anticipated, margins for the capped-price customers whose oil was
purchased in advance could be lower than expected, while those customers whose
oil was not purchased in advance would be unaffected or higher than expected.
 
    The Company purchases put options to hedge the risk associated with a
decrease in heating oil prices in situations where forward purchase contracts
and futures contracts have been entered into to match capped-price customer
commitments. Should the market price of heating oil decline below the forward
purchase contract or futures contract price, these options would substantially
offset the effects of such decline. The cost of acquiring these options is
recognized in cost of goods sold over the life of each option agreement.
 
    In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
contracts are classified as a hedge when the item to be hedged exposes the
company to price risk and the futures contract reduces that risk exposure.
Future contracts that relate to transactions that are expected to occur are
accounted for as a hedge when the significant characteristics and expected terms
of the anticipated transactions are identified and it is probable that the
anticipated transaction will occur. If a transaction does not meet the criteria
to qualify as a hedge, it is considered to be speculative. Any gains or losses
associated with futures contracts which are classified as speculative are
recognized in the current period. If a futures contract that has been accounted
for as a hedge is closed or matures before the date of the anticipated
transaction, the accumulated change in value of the contract is carried forward
and included in the measurement of the related transaction. Option contracts are
accounted for in the same manner as futures contracts. At December 31, 1996
there were no futures contracts outstanding, and at December 31, 1997 the
Company had futures contracts to buy #2 home heating oil with notional amounts
totaling $11,925 and futures contracts to sell #2 home heating oil with notional
amounts totaling $5,061.
 
                                      F-8
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Concentration of Revenue with Guaranteed Maximum Price Customers--(Continued)
 
    At December 31, 1996 the Company had put options outstanding with an
aggregate notional value of $12,088 to hedge the risk associated with
approximately 66% of the 32.9 million gallons of heating oil forward purchase
contracts. Additionally, the Company had put options outstanding at December 31,
1997 with an aggregate notional value of $14,438 to hedge the risk associated
with approximately 60% of the 33.8 million gallons of heating oil forward
purchase contracts and 11.6 million gallons under futures contracts, and expire
at various times with no option expiring later than April 1998. The unrealized
gains (losses) on these options was not significant at December 31, 1996 and
1997. The carrying amount of these options at December 31, 1996 and 1997 was
$258 and $488 respectively, and were included in Prepaid Expenses on the
Consolidated Balance Sheet. The risk that counterparties to such instruments may
be unable to perform is minimized by limiting the counterparties to major oil
companies and major financial institutions. The Company does not expect any
losses due to such counterparty default.
 
Environmental Costs
 
    The Company expenses, on a current basis, costs associated with managing
hazardous substances and pollution in ongoing operations. The Company also
accrues for costs associated with the remediation of environmental pollution
when it becomes probable that a liability has been incurred and the amount can
be reasonably estimated.
 
Income Taxes
 
    The Company files a consolidated Federal Income Tax return with its
subsidiaries. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amount of assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
 
Pensions
 
    The Company funds accrued pension costs currently on its pension plans, all
of which are noncontributory.
 
    Basic and Diluted Earnings (Losses) per Common Share
 
    The company computes basic and diluted earnings per share in accordance with
the requirements of the Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 128--"Earnings Per Share". As the
impact of converting dilutive securities would be antidilutive, the computation
treats such conversions as having no effect and presents basic and diluted
earnings per share as the same amount (see note 18).
 
Accounting Changes
 
    In February 1997, the FASB issued SFAS No. 128--"Earnings Per Share." SFAS
No. 128 requires presentation of "basic" and "diluted" earnings per share for
periods ending after December 15, 1997. The Company adopted SFAS No. 128 and had
no effect on previously reported earnings (losses) per share.
 
    In February 1997, the FASB issued SFAS No. 129--"Disclosure of Information
about Capital Structure." SFAS No. 129 requires disclosure of all the pertinent
rights and privileges of securities outstanding for periods ending after
December 15, 1997. The Company adopted SFAS No. 129, which had no effect on
previous disclosures.
 
    In June 1997, the FASB issued SFAS No. 130--"Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying changes
in equity that results from non-owner transactions and events. This statement is
effective for fiscal years beginning after December 15, 1997 and will be
reflected in the Company's First Quarter Report on Form 10-Q.
 
    In June 1997 the FASB issued SFAS No. 131--"Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires disclosures about
segments of an enterprise and related information such as the different types of
business activities and economic environments in which a business operates. This
statement is effective for fiscal years beginning after December 15, 1997. The
Company is still assessing the disclosure requirements of SFAS No. 131.
 
                                      F-9
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(2) STAR GAS INVESTMENT
 
    In December 1993, the Company acquired an approximate 29.5% equity interest
(42.8% voting interest) in Star Gas for $16.0 million in cash. Each of the other
investors in Star Gas granted the Company an option, exercisable to December 31,
1998, to purchase such investor's interest in Star Gas. In December 1994, the
Company exercised its right to purchase the remaining outstanding common equity
of Star Gas by paying $3.8 million in cash and issuing approximately 2.5 million
shares ($22.1 million) of the Company's Class A Common Stock. The Company also
incurred $0.9 million of acquisition related cost in connection with the Star
Gas acquisition. The acquisition was accounted for as a purchase and accordingly
the purchase price was allocated to the underlying assets and liabilities based
upon the Company's estimate of their respective fair value at the date of
acquisition. The fair value of assets acquired was $141.3 million (including
$3.3 million in cash) and liabilities and preferred stock was $109.5 million.
The excess of the purchase price over the fair value of assets acquired and
liabilities assumed was $9.0 million and was being amortized over a period of
twenty-five years.
 
    The Company's investment in Star Gas Corporation was accounted for using the
equity method from December 23, 1993 to December 7, 1994, at which time the
Company exercised its right to purchase the remaining outstanding common equity
of Star Gas (the "Star Gas Acquisition"). From December 8, 1994 to December 19,
1995 while Star Gas was a wholly owned subsidiary of Petro, Star Gas operations,
assets and liabilities were included in the consolidated financial statements of
the Company.
 
    In November 1995, Star Gas organized Star Gas Partners, L.P. a Delaware
limited partnership ("Partnership") and Star Gas and the Partnership together
organized Star Gas Propane, L.P., a Delaware limited partnership ("Operating
Partnership"). In December 1995, Petro transferred substantially all of its
propane assets and liabilities to Star Gas, and Star Gas transferred ("Star Gas
Conveyance") substantially all of its assets (including the propane assets
transferred by Petro) in exchange for a general partnership interest in the
Operating Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of Star Gas. The total value of the assets
conveyed to the Operating Partnership was $156.5 million. Concurrently with the
Star Gas Conveyance, Star Gas issued approximately $85.0 million in First
Mortgage Notes to certain institutional investors. In connection with the Star
Gas Conveyance, the Operating Partnership assumed $91.5 million of Star Gas
liabilities including the $85.0 million of First Mortgage Notes; however, Star
Gas retained approximately $83.7 million in cash from the proceeds of the First
Mortgage Notes. As a result of the foregoing transactions ("1995 Star Gas
Transaction"), Star Gas received a 46.5% equity interest in the Partnership, and
Petro received distributions from the public sale of 2.6 million Master Limited
Partnership units at $20.46 per share for $51.0 million in cash. In order for
the Partnership to begin operations with $6.2 million of working capital, Star
Gas and the Operating Partnership agreed that the amount of debt assumed by the
Operating Partnership would be adjusted upward or downwards to the extent that
the working capital of the Operating Partnership at closing was more or less
than $6.2 million. At closing, the net working capital of the Operating
Partnership was $9.2 million and as a result, $3.0 million was paid to Petro in
January 1996.
 
    In accordance with the Company's accounting policies, the Company deferred
the gain of approximately $20.0 million for this transaction because the Company
holds subordinate units which do not have a readily ascertainable market price
creating an uncertainty regarding realization, and due to the fact that Star Gas
as general partner had a $6.0 million additional capital contribution obligation
to enhance the Partnership's ability to make quarterly distributions on the
common units (at December 31, 1997, these funds were no longer restricted at the
Star Gas level and had been released to Petro since the quarterly guarantee
provisions were fulfilled). The Company will recognize the gain from this
transaction when the Company's subordinated units convert into common units in
accordance with the terms of the partnership agreement. In general, full
conversion of subordinated units to common units will take place no earlier than
the first day of any quarter beginning on or after January 1, 2001, based upon
the satisfaction of certain performance criteria for a period of at least three
non-overlapping consecutive four-quarter periods immediately preceding the
conversion date.
 
                                      F-10
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(2) STAR GAS INVESTMENT (CONTINUED)
 
    In October 1997, Star Gas acquired the outstanding stock of an unaffiliated
Ohio propane company ("1997 Star Gas Transaction") and in an equal exchange
subsequently transferred all of such assets to the Partnership for the
assumption of $23 million of debt incurred by Star Gas in connection with this
acquisition, a 0.00027% general partnership interest in the Partnership along
with 148 Partnership common units, and the assumption by Star Gas of
approximately $3.5 million of future income tax liabilities resulting from this
asset conveyance. Subsequently in December 1997, the Company sold 24 common
units and in January 1998 sold 63 common units.
 
    As a result of the 1997 Star Gas Transaction, at December 31, 1997 the
Company had a 41.66% equity interest in the Partnership, which was reduced to
40.66% after the January 1998 sale of common units, which is being accounted for
by the equity method. Additionally, the Partnership's secondary public offering
in December 1997 resulted in a difference of $2.4 million between the Company's
carrying value of its investment in the Partnership and its ownership percentage
of the underlying net assets of the Partnership, which is being amortized to
income over twenty-five years.
 
(3) PROPERTY, PLANT AND EQUIPMENT
 
    The components of property, plant and equipment and their estimated useful
lives were as follows at the indicated dates:
 
<TABLE>
<CAPTION>
                                                 DECEMBER
                                           --------------------           ESTIMATED
                                             1996       1997            USEFUL LIVES
                                           ---------  ---------  ---------------------------
<S>                                        <C>        <C>        <C>
Land.....................................  $   2,049  $   2,088
Buildings................................      6,030      5,641                  20-45 years
Fleet and other equipment................     38,480     38,065                    3-7 years
Tanks and equipment......................      1,438      1,460                   8-30 years
Furniture and fixtures...................     18,436     18,678                    5-7 years
Leasehold improvements...................      5,820      7,465               Term of leases
                                           ---------  ---------
                                              72,253     73,397
Less accumulated depreciation                 41,587     42,782
                                           ---------  ---------
                                           $  30,666  $  30,615
                                           ---------  ---------
                                           ---------  ---------
</TABLE>
 
(4) NOTES PAYABLE AND OTHER LONG-TERM DEBT
 
    Notes payable and other long-term debt, including working capital borrowings
and current maturities of long-term debt, consisted of the following at the
indicated dates:
 
<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,
                                                                                                   --------------------
<S>                                                                                                <C>        <C>
                                                                                                     1996       1997
                                                                                                   ---------  ---------
Notes payable to banks under credit facility (a).................................................  $  22,000  $   3,000
Notes payable in connection with the purchase of fuel oil dealers and other notes payable, due in
  monthly, quarterly and annual installments with interest at various rates ranging from 8% to
  10% per annum, maturing at various dates through the year 2004.................................     17,734     16,798
                                                                                                   ---------  ---------
                                                                                                      39,734     19,798
Less current maturities, including working capital borrowings....................................     22,947      3,291
                                                                                                   ---------  ---------
                                                                                                   $  16,787  $  16,507
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
----------------------------------
a)  Pursuant to a Credit Agreement, dated October 15, 1997 as restated and
    amended (Credit Agreement), the Company may borrow up to $47.0 million under
    a working capital revolving credit facility with a sublimit under a
    borrowing base established each month. Amounts borrowed under the working
    capital revolving credit facility are subject to a 60 day clean-up
    requirement during the period April 1 to September 30 of each year, and this
    portion of the Credit Agreement expires on June 30, 1998. The Company
    expects to renew or replace this working capital revolving credit facility
    prior to June 30, 1998. The Company pays a facility fee of 0.375% on the
    unused portion of this facility. At December 31, 1997, $3.0 million was
    outstanding under the working capital revolving credit facility.
 
                                      F-11
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(4) NOTES PAYABLE AND OTHER LONG-TERM DEBT (CONTINUED)
 
a)--(Continued)
 
    The Credit Agreement also includes a $16.8 million acquisition letter of 
    credit facility all of which has been used to support notes given to 
    certain sellers of heating oil companies. The Credit Agreement provides 
    that on or prior to June 30, 1998, repayments and/or sinking fund deposits 
    equal to two-thirds of the initial facility outstanding at September 30, 
    1996 would be payable with the final payment due June 30, 1999. In October 
    1997, in connection with the Company's sale of its Hartford, Connecticut 
    branch $9.4 million of the proceeds from the sale were set aside to 
    fulfill the June 1998 cash collateral requirement, and the working capital 
    portion of the Credit Agreement was reduced from $60.0 million to $47.0 
    million.
 
    Interest under the Credit Agreement is payable monthly on the working 
    capital revolving credit facility and is based upon a floating rate 
    selected by the Company of either the Eurodollar Rate or the Alternate 
    Base Rate, plus 0 to 75 basis points on Alternate Base Rate Loans and 125 
    to 200 basis points on Eurodollar Loans, based upon the ratio of 
    Consolidated Operating Profit to Interest Expense (as defined in the 
    Credit Agreement). Eurodollar Rate means the prevailing rate in the 
    interbank Eurodollar market adjusted for reserve requirements. Alternate 
    Base Rate means the greater of (i) the prime or base rate of The Chase 
    Manhattan Bank in effect or (ii) the Federal funds rate in effect plus 1/2 
    of 1%. The weighted average rate for 1996 and 1997 was 8.48% and 7.75% 
    respectively.
 
    The fees for the Credit Agreement acquisition letters of credit range from 
    175 to 250 basis points based upon the same ratio as that used for the 
    working capital revolving credit facility. To the extent that the letters 
    of credit are cash collateralized the fee is reduced to 25 basis points.
 
    Under the terms of the Credit Agreement, the Company is restricted from
    incurring any indebtedness except subordinated debt and certain other
    indebtedness specifically authorized, if certain ratios of EBITDA to
    interest are met. The Company is also restricted from selling, transferring,
    or conveying customer lists except, among other exceptions, from a sale
    where the net cash proceeds are used to cash collateralize the acquisition
    letters of credit. The Credit Agreement also provides that the Company is
    required to maintain certain minimum levels of cash flow and EBITDA, as well
    as certain ratios of EBITDA to net interest expense. In the event of
    noncompliance with certain of the covenants, the bank has the right to
    declare all amounts outstanding to be due and payable immediately.
 
    As collateral for the Credit Agreement, the Company granted to the lenders a
    security interest in the inventories, receivables, and customer lists,
    trademarks and trade names which are carried on the December 31, 1997
    Consolidated Balance Sheet at $16.3 million, $79.0 million, and $69.3
    million respectively.
 
    Aggregate annual maturities including working capital borrowings, but
excluding the June 1998 acquisition letter of credit facility cash collateral
requirement which was satisfied by the $9.4 million October 1997 cash collateral
account payment, are as follows as of December 31, 1997:
 
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S>           <C>
1998........  $   3,291
1999........  $   8,126
2000........      8,141
2001........         60
2002........         60
Thereafter..        120
              ---------
              $  19,798
              ---------
              ---------
</TABLE>
 
                                      F-12
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(5) SENIOR AND SUBORDINATED NOTES PAYABLE
 
    Senior and Subordinated notes payable at the dates indicated, consisted of:
 
<TABLE>
<CAPTION>
                                                                                                                   DECEMBER 31,
                                                                                                               --------------------
                                                                                                                 1996       1997
                                                                                                               ---------  ---------
<S>                                                                                                            <C>        <C>
11.85%, 12.17% and 12.18% Senior Notes (a)...................................................................  $  60,000  $  60,000
14.10% Subordinated and Senior Notes (b).....................................................................     10,400      8,300
10 1/8% Subordinated Notes (c)...............................................................................     50,000     50,000
9 3/8% Subordinated Debentures (d)...........................................................................     75,000     75,000
12 1/4% Subordinated Debentures (e)..........................................................................     81,250     81,250
                                                                                                               ---------  ---------
Total Senior and Subordinated Notes Payable..................................................................    276,650    274,550
  Less short-term Subordinated Notes (b).....................................................................      1,050      1,050
  Less short-term Senior Notes (b)...........................................................................      1,050      1,050
  Less long-term Senior Notes (a)(b).........................................................................     34,150     63,100
                                                                                                               ---------  ---------
Total long-term Subordinated Notes Payable...................................................................  $ 240,400  $ 209,350
                                                                                                               ---------  ---------
                                                                                                               ---------  ---------
</TABLE>
 
----------------------------------
(a) On September 1, 1988, the Company authorized the issuance of $60.0 million
    of Subordinated Notes originally due October 1, 1998 bearing interest
    payable semiannually at an average rate of 11.96% ("11.96% Notes"). In
    connection with the Company's 9 3/8% Subordinated Debenture offering in
    February 1994 (see note 5d) $30.0 million of the 11.96% Notes became ranked
    as senior debt. In February 1997 the Company entered into agreements
    ("Private Debt Modification") to among other things, exchange $30.0 million
    of the 11.96% Notes then ranked as subordinated debt for senior debt, and to
    extend the maturity date of the 11.96% Notes from October 1, 1998 to October
    1, 2002 with $15.0 million sinking fund payments due on October 1, 2000 and
    October 1, 2001 and the remaining $30.0 million balance due on October 1,
    2002. The Company paid approximately $1.1 million in fees and expenses to
    obtain such modifications. In addition, effective October 1, 1998, the
    interest on these notes will be lowered to 10.9%. All such notes are
    redeemable at the option of the Company, in whole or in part upon payment of
    a premium rate as defined.
 
(b) On January 15, 1991, the Company authorized the issuance of $12.5 million of
    14.10% Subordinated Notes due January 15, 2001 bearing interest payable
    quarterly. In connection with the Company's 9 3/8% Subordinated Debenture
    offering in February 1994 (see note 5d) $6.25 million of these notes became
    ranked as senior debt. The notes are redeemable at the option of the
    Company, in whole or in part upon payment of a premium rate as defined. On
    each January 15th commencing 1996 and ending January 15, 2000, the Company
    is required to repay $2.1 million of these Notes. The remaining principal of
    $2.0 million is due on January 15, 2001. No premium is payable in connection
    with these required payments.
 
(c) On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated
    Notes due April 1, 2003 which are redeemable at the Company's option, in
    whole or in part, at any time on or after April 1, 1998 upon payment of a
    premium rate as defined. Interest is payable semiannually.
 
(d) On February 3, 1994, the Company issued $75.0 million of 9 3/8% Subordinated
    Debentures due February 1, 2006 which are redeemable at the Company's
    option, in whole or in part, at any time on or after February 1, 1999 upon
    payment of a premium rate as defined. Interest is payable semiannually. In
    connection with the offering of its 9 3/8% Subordinated Debentures, the
    Company received consents of the holders of a majority of each class of
    subordinated debt and redeemable preferred stock (see note 7) to certain
    amendments to the respective agreements. In consideration for the consents,
    the Company paid holders of certain subordinated debt a cash payment of $0.6
    million and caused approximately $42.6 million of the subordinated debt at
    December 31, 1994 to be ranked as senior debt. In addition, the Company
    agreed to increase dividends on the redeemable preferred stock by $2.00 per
    share per annum. The Company also paid approximately $1.5 million in fees
    and expenses to obtain such consents.
 
                                      F-13
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(5) SENIOR AND SUBORDINATED NOTES PAYABLE (CONTINUED)
 
(e) On February 3, 1995, the Company issued $125.0 million of 12 1/4%
    Subordinated Debentures due February 1, 2005 which are redeemable at the
    Company's option, in whole or in part, at any time on or after February 1,
    2000 upon payment of a premium rate as defined. On February 5, 1996, a
    portion of the proceeds received as a result of the Star Gas MLP Offering
    (see note 2) were used to retire $43.8 million of the $125.0 million 12 1/4%
    Subordinated Debentures. The Company paid $4.8 million, representing an 11%
    premium to retire this portion of the debt. Interest on these debentures is
    payable semi-annually.
 
    Expenses connected with the above outstanding offerings, and amendments
thereto, amounted to approximately $15.8 million, which includes $1.2 million
paid in debt consents permitting the Star Gas MLP Offering (see note 2). At
December 31, 1996 and 1997, the unamortized balances relating to notes still
outstanding amounted to approximately $8.7 million and $8.4 million
respectively, and such balances are included in Deferred Charges and Pension
Costs on the Consolidated Balance Sheet.
 
    Aggregate annual maturities including sinking fund payments at December 31,
1997 are as follows:
 
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
<S>           <C>
1998........  $   2,100
1999........      2,100
2000........     17,100
2001........     17,000
2002........     30,000
Thereafter..    206,250
              ---------
              $ 274,550
              ---------
              ---------
</TABLE>
 
    Total accrued interest on notes payable, and senior and subordinated notes
which were included in accrued expenses and other liabilities were $10,730 and
$10,664 at December 31, 1996 and 1997 respectively.
 
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS
 
    The Company's outstanding Common Stock consists of Class A Common Stock,
Class B Common Stock and Class C Common Stock, each with various designations,
rights and preferences.
 
    Holders of Class A Common Stock and Class C Common Stock have identical
rights, except that holders of Class A Common Stock are entitled to one vote per
share and holders of Class C Common Stock are entitled to ten votes per share.
Holders of Class B Common Stock do not have voting rights, except as required by
law, or in certain limited circumstances.
 
    The following table summarizes the cash dividends declared on Common Stock
and the cash dividends declared per common share for the years indicated:
<TABLE>
<CAPTION>
                                                                                                        YEARS ENDED DECEMBER
                                                                                                                31,
                                                                                                        --------------------
                                                                                                          1995       1996
                                                                                                        ---------  ---------
<S>                                                                                                     <C>        <C>
Cash dividends declared
  Class A.............................................................................................  $  13,716  $  13,789
  Class C.............................................................................................      1,559      1,559
Cash dividends declared per share
  Class A.............................................................................................  $     .60  $     .60
  Class C.............................................................................................        .60        .60
 
<CAPTION>
 
                                                                                                          1997
                                                                                                        ---------
<S>                                                                                                     <C>
Cash dividends declared
  Class A.............................................................................................  $   7,019
  Class C.............................................................................................        779
Cash dividends declared per share
  Class A.............................................................................................  $     .30
  Class C.............................................................................................        .30
</TABLE>
 
    Under the Company's most restrictive dividend limitation imposed by certain
debt covenants, $26.1 million was available at December 31, 1997 for the payment
of dividends on all classes of Capital Stock. The amount available for dividends
is increased each quarter by 50% of the cash flow, as defined, for the previous
fiscal quarter, and by the new issuance of capital stock. On February 24, 1998,
the Company announced the suspension of cash dividends.
 
                                      F-14
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(6) COMMON STOCK AND COMMON STOCK DIVIDENDS (CONTINUED)
 
    On February 3, 1995, the Company issued 2,875 shares of Class A Common Stock
in a public offering in connection with the issuance of $125.0 million of 12
1/4% Subordinated Debentures due February 1, 2005 and used a portion of the
proceeds to retire 1,521 shares of Class A Common Stock which shares were issued
to a third party in the Star Gas Acquisition (see note 5e).
 
    On October 1, 1995 the Company began offering a Dividend Reinvestment and
Stock Purchase Plan which provides holders of the Company's Class A Common Stock
and Class C Common Stock a vehicle to reinvest their dividends and purchase
additional shares of Class A Common Stock at a 5% discount from the current
market price without incurring any fees. In addition, optional cash deposits
receive a 3% discount from the market price. Pursuant to the plan offering, 18,
302, and 691 additional Class A Common Shares were issued in 1995, 1996, and
1997 respectively.
 
(7) REDEEMABLE AND EXCHANGEABLE PREFERRED STOCK
 
    The Company entered into agreements dated as of August 1, 1989 with John
Hancock Mutual Life Insurance Company and Northwestern Mutual Life Insurance
Company to sell up to two hundred and fifty thousand shares of its Redeemable
Preferred Stock, par value $0.10 per share, at a price of one hundred dollars
per share, which shares are exchangeable into Subordinated Notes due August 1,
1999 (1999 Notes).
 
    On August 1 of each year, one-sixth of the number of originally issued
shares of each series of Redeemable Preferred shares outstanding, less the
number of shares of such series previously exchanged for 1999 Notes, are to be
redeemed, with the final redemption occurring on August 1, 1999. The redemption
price is one hundred dollars per share plus all accrued and unpaid dividends to
such August 1. As of December 31, 1996 and 1997, 125 shares and 83 shares
respectively were outstanding of which 42 shares were reflected as current.
 
    In February 1997 the Company issued one million two hundred thousand 
shares of its 12 7/8% Exchangeable Preferred Stock (Exchangeable Preferred 
Stock) due February 15, 2009, par value $0.10 per share, at a price of 
twenty-five dollars per share. The Company incurred $1,678 of offering costs 
in connection with this preferred stock issuance. Dividends are payable on 
these shares on February 15, May 15, August 15 and November 15 of each year. 
The liquidation preference on the Exchangeable Preferred Stock is twenty-five 
dollars per share, and they are redeemable at the option of the Company in 
whole or in part, at any time on or after February 15, 2002 upon payment of a 
premium rate as defined. Subject to certain conditions the Company may also 
issue an additional eight hundred thousand shares of Exchangeable Preferred 
Stock. Also, on any scheduled dividend payment date on or after February 15, 
2000 at the Company's option these Exchangeable Preferred Stock may be 
exchanged into 12 7/8% Junior Subordinated Exchange Debentures due 2009. At 
December 31, 1997 $30.0 million of Exchangeable Preferred Stock was 
outstanding.
 
    Preferred dividends of $3,263, $2,389, and $4,644 were declared on all
classes of preferred stock in 1995, 1996, and 1997 respectively.
 
    Aggregate annual maturities of Redeemable Preferred Stock and Exchangeable
Preferred Stock are as follows as of December 31, 1997:
 
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
------------
<S>           <C>
1998........  $   4,167
1999........      4,167
2000........     --
2001........     --
2002........     --
Thereafter..     30,000
              ---------
              $  38,334
              ---------
              ---------
</TABLE>
 
                                      F-15
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(8) PENSION PLANS
 
    Effective December 31, 1996 the Company consolidated all of its defined
contribution pension plans and froze the benefits for nonunion personnel covered
under defined benefit pension plans. In the third quarter of 1997 the Company
froze the benefits of its New York City union defined benefit pension plan as a
result of operation consolidations. In freezing the defined benefit pension
plans and the New York City union defined benefit pension plan the Company
incurred $557 and $654 in 1996 and 1997 respectively, for pension curtailment
expenses relating to the amortization of certain previously unrecognized pension
costs.
 
    The defined benefit and defined contribution plans covered substantially all
of the Company's nonunion employees. Benefits under the frozen defined benefit
plans were generally based on years of service and each employee's compensation.
Benefits under the consolidated defined contribution plan are based on an
employees compensation. Pension expense under all non-union plans for the years
ended December 31, 1995, 1996 and 1997 was $4,378, $4,350 and $4,036
respectively, net of amortization of the pension obligation acquired.
 
    The following table sets forth the defined benefit plans' funded status, all
of which are underfunded, and amounts recognized in the Company's balance sheets
at the indicated dates:
 
<TABLE>
<CAPTION>
                                                                                                     1996       1997
                                                                                                   ---------  ---------
<S>                                                                                                <C>        <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $28,731 and $28,910................  $  29,323  $  29,258
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
Projected benefit obligation.....................................................................  $ (29,323) $ (29,258)
Plan assets at fair value (primarily listed stocks and bonds)....................................     20,367     22,292
                                                                                                   ---------  ---------
Projected benefit obligation in excess of plan assets............................................     (8,956)    (6,966)
Unrecognized net loss from past experience different from the assumed and effects of changes in
  assumptions....................................................................................      6,053      5,609
Unrecognized net transitional obligation.........................................................        (65)       (52)
Unrecognized prior service cost due to plan amendments...........................................        453     --
Additional liability.............................................................................     (6,441)    (5,557)
                                                                                                   ---------  ---------
Accrued pension cost for defined benefit plans...................................................  $  (8,956) $  (6,966)
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
    Net pension cost for defined benefit plans for the periods indicated
included the following components:
 
<TABLE>
<CAPTION>
                                                                                                YEARS ENDED DECEMBER 31,
                                                                                             -------------------------------
<S>                                                                                          <C>        <C>        <C>
                                                                                               1995       1996       1997
                                                                                             ---------  ---------  ---------
Service cost-benefits earned during the period.............................................  $   1,459  $   1,630  $     116
Interest cost on projected benefit obligation..............................................      2,032      1,974      1,895
Actual return on assets....................................................................     (3,116)    (2,058)    (2,780)
Net amortization and deferral of losses....................................................      2,517      1,299      1,492
                                                                                             ---------  ---------  ---------
    Net periodic pension cost for defined benefit plans....................................      2,892      2,845        723
                                                                                             ---------  ---------  ---------
Curtailment loss...........................................................................     --            557        654
                                                                                             ---------  ---------  ---------
    Total cost.............................................................................  $   2,892  $   3,402  $   1,377
                                                                                             ---------  ---------  ---------
                                                                                             ---------  ---------  ---------
Assumptions used in the pension calculations were:
Discount rate..............................................................................        7.0%       6.5%       6.5%
Rates of increase in compensation levels...................................................        4.0%       4.0%       4.0%
Expected long-term rate of return on assets................................................        8.5%       8.5%       8.5%
</TABLE>
 
    In addition, the Company made contributions to union-administered pension
plans during the years ended December 31, 1995, 1996 and 1997 of $3,148, $2,996
and $2,508 respectively.
 
                                      F-16
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(8) PENSION PLANS (CONTINUED)
 
    The Company recorded an additional minimum pension liability for underfunded
plans of $4,594 as of December 31, 1997, representing the excess of unfunded
accumulated benefit obligations over plan assets. A corresponding amount is
recognized as an intangible asset except to the extent that these additional
liabilities exceed the related unrecognized prior service costs and net
transition obligation, in which case the increase in liabilities is charged as a
reduction of stockholders' equity of $4,646 as of December 31, 1997.
 
    In connection with the purchase of shares of a predecessor company as of
January 1, 1979 by a majority of the Company's present holders of Class C Common
Stock, the Company assumed a pension liability in the aggregate amount of $1,512
as adjusted, representing the excess of the actuarially computed present value
of accumulated vested plan benefits over the net assets available for such
benefits. Such liability, which amounted to $1,108 and $1,134 at December 31,
1997 and 1996 is being amortized over 40 years and is included in supplemental
benefits and other long-term liabilities at those dates.
 
    Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's
then Chairman and Co-Chief Executive Officer, was entitled to receive $25 per
month for a period of one hundred twenty months following his retirement. In the
event of his death, his designated beneficiary is entitled to receive such
benefit. Mr. Sevin passed away in December 1992, prior to his retirement. The
amounts accrued for such benefit payable net of payments made at December 31,
1996 and 1997 were $1,387 and $1,204 respectively and are included in
supplemental benefits and other long-term liabilities on the balance sheets at
those dates.
 
(9) LEASES
 
    The Company leases office space and other equipment under noncancelable
operating leases which expire at various times through 2017. Certain of the real
property leases contain renewal options and require the Company to pay property
taxes.
 
    The future minimum rental commitments at December 31, 1997 for all operating
leases having an initial or remaining noncancelable term of one year or more are
as follows:
 
<TABLE>
<CAPTION>
YEARS ENDING   OPERATING
  DECEMBER      LEASES
------------  -----------
<S>           <C>
1998........   $   4,375
1999........       3,890
2000........       3,357
2001........       2,973
2002........       3,001
Thereafter..      19,892
              -----------
               $  37,488
              -----------
              -----------
</TABLE>
 
    Rental expense under operating leases for the years ended December 31, 1995,
1996 and 1997 was $7,624, $6,461 and $7,475 respectively.
 
(10) INCOME TAXES
 
    Income tax expense was comprised of the following for the indicated periods:
 
<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                                  -------------------------------------
                                                                     1995         1996         1997
                                                                     -----        -----        -----
<S>                                                               <C>          <C>          <C>
Current:
Federal.........................................................   $  --        $  --        $  --
State...........................................................         500          500          500
                                                                       -----        -----        -----
                                                                   $     500    $     500    $     500
                                                                       -----        -----        -----
                                                                       -----        -----        -----
</TABLE>
 
                                      F-17
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(10) INCOME TAXES (CONTINUED)
 
    The sources of deferred income tax expense (benefit) and the tax effects of
each were as follows:
<TABLE>
<CAPTION>
                                                                                                          YEARS ENDED DECEMBER
                                                                                                                  31,
                                                                                                          --------------------
                                                                                                            1995       1996
                                                                                                          ---------  ---------
<S>                                                                                                       <C>        <C>
Excess of book over tax (tax over book) depreciation....................................................  $   1,624  $     (81)
Excess of book over tax amortization expense............................................................     (1,139)    (2,051)
Excess of book over tax vacation expense................................................................        (75)      (180)
Excess of book over tax restructuring expense...........................................................     --           (206)
(Excess of book over tax) tax over book bad debt expense................................................         44        (41)
(Excess of book over tax) tax over book supplemental benefit expense....................................        (14)       (14)
Equity in income (loss) of Star Gas.....................................................................       (187)     2,597
Other, net..............................................................................................        (40)      (228)
Recognition of tax benefit of net operating loss to the extent of current and previous recognized
  temporary differences.................................................................................     (7,843)    (9,114)
Change in valuation allowance...........................................................................      7,630      9,318
                                                                                                          ---------  ---------
                                                                                                          $       -  $  --
                                                                                                          ---------  ---------
                                                                                                          ---------  ---------
 
<CAPTION>
 
                                                                                                            1997
                                                                                                          ---------
<S>                                                                                                       <C>
Excess of book over tax (tax over book) depreciation....................................................  $    (227)
Excess of book over tax amortization expense............................................................     (2,490)
Excess of book over tax vacation expense................................................................       (107)
Excess of book over tax restructuring expense...........................................................       (618)
(Excess of book over tax) tax over book bad debt expense................................................         37
(Excess of book over tax) tax over book supplemental benefit expense....................................         14
Equity in income (loss) of Star Gas.....................................................................      1,037
Other, net..............................................................................................          5
Recognition of tax benefit of net operating loss to the extent of current and previous recognized
  temporary differences.................................................................................     (4,491)
Change in valuation allowance...........................................................................      6,840
                                                                                                          ---------
                                                                                                          $  --
                                                                                                          ---------
                                                                                                          ---------
</TABLE>
 
    The components of the net deferred tax assets and the related valuation
allowance for 1996 and 1997 using current rates were as follows:
 
<TABLE>
<CAPTION>
                                                                                                   YEARS ENDED DECEMBER
                                                                                                           31,
                                                                                                   --------------------
                                                                                                     1996       1997
                                                                                                   ---------  ---------
<S>                                                                                                <C>        <C>
Net operating loss carryforwards.................................................................  $  35,199  $  39,690
Excess of tax over book depreciation.............................................................     (5,041)    (4,814)
Excess of book over tax amortization.............................................................      3,624      6,114
Excess of book over tax vacation expense.........................................................      1,493      1,600
Excess of book over tax restructuring expense....................................................        206        824
Excess of book over tax supplemental benefit expense.............................................        680        666
Excess of book over tax bad debt expense.........................................................        370        333
Equity in loss (income) of Star Gas..............................................................     (1,738)    (2,775)
Other, net.......................................................................................        365        360
                                                                                                   ---------  ---------
                                                                                                      35,158     41,998
Valuation allowance..............................................................................    (35,158)   (41,998)
                                                                                                   ---------  ---------
                                                                                                   $       -  $  --
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
    A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent history of annual net losses, that a
full valuation allowance is appropriate.
 
    At December 31, 1997, the Company had the following income tax loss
carryforwards for Federal Income Tax reporting purposes:
 
<TABLE>
<CAPTION>
 EXPIRATION
    DATE
-------------
<S>            <C>
2005.........  $  26,651
2006.........     15,012
2007.........      1,367
2008.........      8,400
2009.........      1,662
2010.........     23,356
2011.........     26,554
2012.........     13,734
               ---------
               $ 116,736
               ---------
               ---------
</TABLE>
 
                                      F-18
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(11) RELATED PARTY TRANSACTIONS
 
    The Company leased two buildings for a total of $435 from certain related
parties under lease agreements that were established by an independent fair
market rental evaluation. In the fourth quarter of 1997 one of the facilities
was sold to an independent party who continued to rent the property under the
same terms to the Company, while the other was sold and the lease terminated as
part of the 1997 New York Region consolidation.
 
    In October 1986, Irik P. Sevin purchased one hundred sixty-one thousand
shares of Class A Common Stock and forty thousand shares of Class C Common Stock
of the Company for $1,280 (which was the fair market value as established by the
Pricing Committee pursuant to the Stockholders' Agreement). The purchase price
was financed by a note due December 31, 1999. The note requires annual payments
of interest and principal, payable in cash or Class A Common Stock of the
Company, until complete satisfaction. In accordance with the note repayment
schedule and the criteria for stock payment valuation, Mr. Sevin surrendered
fifty-nine thousand Class A Common Shares representing $439 of value, sixty-one
thousand Class A Common Shares representing $411 of value, and sixty-two
thousand Class A Common Shares representing $392 of value in December 1995, 1996
and 1997 respectively. The criteria agreed upon for valuing stock payment for
this transaction is the average market price ten days prior to payment or
$6.3479 per share, whichever is greater. The outstanding balance of the note was
$1,312, $984, and $656 at December 31, 1995, 1996, and 1997 respectively.
Interest accrues on the outstanding balance of the note at the LIBOR rate in
effect for each month plus 0.75%. Mr. Sevin has entered into an agreement with
the Company that he will not sell or otherwise transfer to a third party any of
the shares of Class A Common Stock or Class C Common Stock received pursuant to
this transaction until the note has been paid in full.
 
    The existing holders of Class C Common Stock of the Company have entered
into a Shareholders' Agreement which provides that each will vote his shares to
elect certain designated directors. The Shareholders' Agreement also provides
for first refusal rights to the Company if a holder of Class C Common Stock
receives a bona fide written offer from a third party to buy such holder's Class
C Common Stock.
 
(12) RESTRUCTURING CHARGES
 
    Late in 1995 the Company completed a study engaged with a leading consulting
firm to help provide a structure for superior customer service, a brand image,
and reduced operating costs. Over the last few years the Company has dedicated a
large amount of effort toward defining the best organizational structure, and
has implemented various initiatives toward achieving this objective.
 
    As part of the initial implementation of this program, Petro undertook
certain business improvement strategies in its Long Island, New York region.
These steps included the consolidation of the region's five home heating oil
branches into one central customer service center and three depots. The regional
customer service center consolidated accounting, credit, customer service and
the sales function into a single new facility in Port Washington, Long Island.
All external communications and marketing previously undertaken in the five
branches were centralized into this one location freeing the three newly
configured depots to focus on oil delivery and heating equipment repair,
maintenance and installation, in mutually exclusive operating territories. The
Company incurred $1.2 million in restructuring expenses in 1996, for costs
associated with the initial implementation of the restructuring program.
 
    In 1997 the Company continued with its restructuring program and combined
its three New York City branches into one new central depot that specialized in
delivery, installation, maintenance, and service functions, and like the Long
Island depots, be supported by the Port Washington facility. The Company also
proceeded with its commitment to define the best possible organizational
structure, by restructuring select branch and corporate responsibilities to
eliminate redundant functions and locate responsibilities where they can best
serve customers and the Company. Toward achieving these strategic intentions the
Company incurred $2.9 million in restructuring expenses in 1997, which comprised
of $2.0 million in termination benefit arrangements with certain branch and
corporate employees and $0.9 million for continuing lease obligations for
unused, non-cancelable, non-strategic facilities. The total unpaid amounts
included in accrued expenses and other liabilities are $605 and $2,421
respectively at December 31, 1996 and 1997.
 
                                       F-19
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

(13) STOCK OPTIONS
 
    On March 3, 1989, the Company issued stock options to purchase seventy-two
thousand shares of Class A Common Stock and eighteen thousand shares of Class C
Common to Irik P. Sevin and forty-eight thousand shares of Class A Common Stock
and twelve thousand shares of Class C Common Stock to Malvin P. Sevin. The
option price for each such share is $11.25. These options are nontransferable.
Malvin P. Sevin's options expired in March 1994 unexercised while the expiration
date of Irik P. Sevin's options were extended to March 3, 1999.
 
    In March 1994 the Company issued stock options to Irik P. Sevin to purchase
one hundred thousand shares of Class A Common Stock. The option price for each
such share is $8.50, the then market value of the stock on the date the options
were granted. These options are non-transferable and expire on March 31, 2004.
 
    None of the aforementioned options of Irik and Malvin Sevin were granted
under a Stock Option Plan and no other options were authorized at the time the
options were issued. All options granted vested upon issuance and were issued at
an exercise price that was estimated to be fair value at the date of grant.
 
    In June 1994, the Board of Directors and shareholders adopted the Petroleum
Heat and Power Co., Inc. 1994 Stock Option Plan, which authorized one million
shares of the Company's Class A Common Stock to be granted from time to time,
and to vest at various times, to key employees, officers, directors,
consultants, advisers, or agents, who help contribute to the long-term success
and growth of the firm, at prices not less than the fair market value at the
date of grant and at terms not to exceed ten years.
 
    As allowable by SFAS No. 123, the Company will continue to apply APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock compensation plan, and accordingly will not recognize
compensation expense for its stock-based compensation plan.
 
    Had compensation cost for this plan been determined based upon the fair 
value at the grant date for awards under this plan consistent with the 
methodology prescribed under SFAS No. 123, the Company's net loss and loss 
per share for 1996 and 1997 would have been increased by approximately 
forty-four thousand dollars, or $0.0017 per share, and nineteen thousand 
dollars, or $0.0007 per share respectively. All options were granted at an 
amount equal to the quoted market price of the Company's stock at the date of 
the grants and vest at various times with no vesting period exceeding five 
years. The costs charged against income for options granted are based on the 
following assumptions calculated on a straight line basis over the vesting 
period of the grants. The average fair value of the options granted during 
1996 was $0.76 per option on the date of grant using the Black-Scholes 
option-pricing model with the following assumptions: dividend yield of 9.41%, 
volatility of 27%, risk-free interest rate of 6.26%, assumed forfeiture rate 
of 0%, and an average expected life of 8.19 years. The average fair value of 
the options granted during 1997 was $0.21 per option on the date of grant 
using the Black-Scholes option-pricing model with the following assumptions: 
dividend yield of 12.97%, volatility of 35%, risk-free interest rate of 
6.19%, assumed forfeiture rate of 0%, and an average expected life of 10 
years.

                                       F-20
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                    (IN THOUSANDS, EXCEPT PER SHARE DATA) 
 
(13) STOCK OPTIONS (CONTINUED)

 
    Information relating to stock options during 1995, 1996 and 1997 are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                                 NUMBER OF SHARES    WEIGHTED-AVERAGE
                                                   RANGE OF      -----------------     OPTION PRICE
                                               EXERCISE PRICES   CLASS A   CLASS C      PER SHARE        TOTAL
                                               ----------------  -------   -------   ----------------   -------
<S>                                            <C>               <C>       <C>       <C>                <C>
Shares under option at December 31, 1994.....  $4.10 to $11.25    1,343      103          $7.64         $11,047
Granted......................................  $8.00 to $8.00        50     --             8.00             400
Exercised....................................         --           --       --           --               --
Expired......................................         --           --       --           --               --
                                               ----------------  -------   -------        -----         -------
Shares under option at December 31, 1995.....  $4.10 to $11.25    1,393      103           7.66          11,447
Granted......................................  $6.87 to $7.38       132     --             7.21             955
Exercised....................................         --           --       --           --               --
Expired......................................  $7.50 to $7.50        24        6           7.50             225
                                               ----------------  -------   -------        -----         -------
Shares under option at December 31, 1996.....  $4.10 to $11.25    1,501       97           7.62          12,177
Granted......................................  $3.13 to $3.13        15     --             3.13              47
Exercised....................................         --           --       --           --               --
Expired......................................  $4.10 to $8.77     1,097       79           7.16           8,410
                                               ----------------  -------   -------        -----         -------
Shares under option at December 31, 1997.....  $3.13 to $11.25      419       18          $8.72         $ 3,814
                                               ----------------  -------   -------        -----         -------
                                               ----------------  -------   -------        -----         -------
Shares exercisable from......................  $6.88 to $8.50       209     --            $8.02         $ 1,673
Shares exercisable from......................  $11.00 to $11.25     117       18          11.17           1,508
                                               ----------------  -------   -------        -----         -------
Total shares exercisable at December 31,
  1997.......................................  $6.88 to $11.25      326       18          $9.26         $ 3,181
                                               ----------------  -------   -------        -----         -------
                                               ----------------  -------   -------        -----         -------
</TABLE>
 
    The weighted average life of the shares exercisable from $6.88 to $8.50 is
4.9 years, and the weighted average life of the shares exercisable from $11.00
to $11.25 is 1.9 years.
 
                                       F-21
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                    (IN THOUSANDS, EXCEPT PER SHARE DATA) 
 
(14) ACQUISITIONS
 
    During 1995, the Company acquired the customer lists and equipment of ten
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $34,400.
 
    During 1996, the Company acquired the customer lists and equipment of
thirteen unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $28,500.
 
    In June 1996, the Company sold its Springfield Massachusetts operations to
an unaffiliated fuel oil dealer. The Company received proceeds of approximately
$4,100 and realized a gain on this transaction of approximately $1,800.
 
    During 1997, the Company acquired the customer lists and equipment of eleven
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately $16,300.
 
    In November 1997, the Company sold its Hartford Connecticut operation to an
unaffiliated fuel oil dealer. The Company received proceeds of approximately
$15,600 and recognized a gain on this transaction of approximately $11,400.
 
    Sales and net income of the acquired companies are included in the
consolidated statements of operations from the respective dates of acquisition.
 
    Unaudited pro forma data giving effect to the purchased and disposed
businesses, and to the acquisition of Star Gas Corporation, as described in Note
2, as if they had been acquired on January 1 of the year preceding the year of
purchase and disposal, with adjustments, primarily for amortization of
intangibles are as follows:
 
<TABLE>
<CAPTION>
                                                                                  1995        1996        1997
                                                                               ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
Net sales....................................................................  $  657,703  $  607,240  $  538,988
Loss before extraordinary item...............................................  $  (20,889) $  (23,029) $  (22,397)
Net loss.....................................................................  $  (22,325) $  (29,443) $  (22,397)
Preferred stock dividends....................................................      (3,263)     (2,389)     (4,644)
                                                                               ----------  ----------  ----------
Net loss applicable to common stockholders (Numerator).......................  $  (25,588) $  (31,832) $  (27,041)
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Class A Common Stock.........................................................      22,711      22,983      23,441
Class B Common Stock.........................................................          15          12          11
Class C Common Stock.........................................................       2,598       2,598       2,598
                                                                               ----------  ----------  ----------
Weighted average number of shares outstanding (Denominator)..................      25,324      25,593      26,050
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Basic and Diluted losses per common share before extraordinary item:
Class A and C Common Stock...................................................  $    (0.95) $    (0.99) $    (1.04)
Extraordinary loss per common share:
Class A and C Common Stock...................................................  $    (0.06) $    (0.25) $   --
Basic and Diluted losses per common share:
Class A and C Common Stock...................................................  $    (1.01) $    (1.24) $    (1.04)
</TABLE>
 
(15) LITIGATION
 
    The Company is not party to any litigation which individually or in the
aggregate could reasonably be expected to have a material adverse effect on the
Company.
 
                                       F-22
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    Cash, Restricted Cash, Accounts Receivable, Notes Receivable and Other
Current Assets, Working Capital Borrowings, Accounts Payable and Accrued
Expenses
 
    The carrying amount approximates fair value because of the short maturity of
these instruments.
 
    Long-Term Debt, Subordinated Notes Payable, Senior Notes Payable and
Cumulative Redeemable Exchangeable Preferred Stock
 
    The fair values of each of the Company's long-term financing instruments,
including current maturities, are based on the amount of future cash flows
associated with each instrument, discounted using the Company's current
borrowing rate for similar instruments of comparable maturity.
 
    The estimated fair value of the Company's financial instruments are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                                       AT DECEMBER 31, 1996    AT DECEMBER 31, 1997
                                                                      ----------------------  ----------------------
<S>                                                                   <C>        <C>          <C>        <C>
                                                                      CARRYING    ESTIMATED   CARRYING    ESTIMATED
                                                                       AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                                                      ---------  -----------  ---------  -----------
Long-term debt......................................................  $  17,734   $  17,333   $  16,798   $  15,853
Subordinated notes payable..........................................    241,450     251,940     210,400     197,883
Senior notes payable................................................     35,200      36,965      64,150      64,343
Preferred stock.....................................................     12,500      13,700      36,656      39,722
</TABLE>
 
LIMITATIONS
 
    Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
 
(17) SEGMENT INFORMATION
 
    From December 8, 1994 to December 19, 1995 the operations, assets and
liabilities of Star Gas Corporation ("Star Gas"), a wholly owned subsidiary,
were included in the consolidated financial statements of the Company.
Accordingly, during this period the Company's operations were classified into
two business segments: Home Heating Oil and Propane. However, as a result of the
Star Gas Master Limited Partnership transaction in December 1995 involving the
conveyance of the Company's propane operations
 
to Star Gas Propane, L.P., a minority owned entity, for the twelve months ended
December 31, 1996 and 1997 the Company had no propane revenues or expenses.
<TABLE>
<CAPTION>
                                  YEAR ENDED DECEMBER 31, 1995      YEAR ENDED DECEMBER 31, 1996
                                --------------------------------   ------------------------------
                                  HOME                               HOME
                                HEATING      *                     HEATING    **
                                  OIL     PROPANE   CONSOLIDATED     OIL     PROP.   CONSOLIDATED
                                --------  --------  ------------   --------  -----   ------------
<S>                             <C>       <C>       <C>            <C>       <C>     <C>
Net sales.....................  $509,122  $100,385    $609,507     $608,161   $--      $608,161
Gross profit..................   167,447    54,235     221,682      180,773    --       180,773
Operating expenses............   125,859    39,070     164,929      143,069    --       143,069
Depreciation & amortization...    30,863     9,587      40,450       30,818    --        30,818
Operating income (loss).......    10,725     5,578      16,303        6,886    --         6,886
Assets........................   357,241     --        357,241      275,025    --       275,025
Capital expenditures..........  $  3,946  $  7,228    $ 11,174     $  6,874   $--      $  6,874
 
<CAPTION>
                                 YEAR ENDED DECEMBER 31, 1997
                                ------------------------------
                                  HOME
                                HEATING    ***
                                  OIL     PROP.   CONSOLIDATED
                                --------  -----   ------------
<S>                             <C>       <C>     <C>
Net sales.....................  $548,141   $--      $548,141
Gross profit..................   168,393    --       168,393
Operating expenses............   140,023    --       140,023
Depreciation & amortization...    30,311    --        30,311
Operating income (loss).......    (1,941)   --        (1,941)
Assets........................   247,846    --       247,846
Capital expenditures..........  $  6,980   $--      $  6,980
</TABLE>
 
------------------------
 
*   In 1995 the Propane segment had equity income, which is presented in the
    Statement of Operations as non-operating income, of approximately $0.7
    million representing the Company's share of income of Star Gas Partners,
    L.P.
 
**  In 1996 the Propane segment had equity income, which is presented in the
    Statement of Operations as non-operating income, of approximately $2.3
    million representing the Company's share of income of Star Gas Partners,
    L.P.
 
*** In 1997 the Propane segment had an equity loss, which is presented in the
    Statement of Operations as non-operating loss, of approximately $0.2 million
    representing the Company's share of loss of Star Gas Partners, L.P.
 
                                       F-23
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(18) EARNINGS PER SHARE
 
<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                ----------------------------------
<S>                                                                             <C>         <C>         <C>
                                                                                   1995        1996        1997
                                                                                ----------  ----------  ----------
Basic Earnings Per Share:
Net loss......................................................................  $  (23,479) $  (28,315) $  (22,899)
Less:Preferred stock dividends................................................      (3,263)     (2,389)     (4,644)
                                                                                ----------  ----------  ----------
  Loss available to common stockholders (Numerator)...........................  $  (26,742) $  (30,704) $  (27,543)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Class A Common Stock..........................................................      22,711      22,983      23,441
Class B Common Stock..........................................................          15          12          11
Class C Common Stock                                                                 2,598       2,598       2,598
  Weighted average number of shares outstanding (Denominator).................      25,324      25,593      26,050
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Basic losses per share........................................................  $    (1.06) $    (1.20) $    (1.06)
 
Diluted Earnings Per Share:
Effect of dilutive securities.................................................  $   --      $   --      $   --
                                                                                ----------  ----------  ----------
Loss available to common stockholders (Numerator).............................  $  (26,742) $  (30,704) $  (27,543)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Effect of dilutive securities.................................................      --          --          --
                                                                                ----------  ----------  ----------
Weighted average number of shares outstanding (Denominator)...................      25,324      25,593      26,050
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Diluted losses per share......................................................  $    (1.06) $    (1.20) $    (1.06)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
</TABLE>
 
Certain potentially dilutive securities issued (i.e. options) are not considered
in the above calculation due to the fact that they would be anti-dilutive.
 
                                      F-24
<PAGE>
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(19) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
 
    The seasonal nature of the Company's business results in the sale by the
Company of approximately 50% of its volume of home heating oil in the first
quarter and 30% of its volume of home heating oil in the fourth quarter of each
year. The Company generally realizes net income in both of these quarters and
net losses during the warmer quarters ending June and September.
 
<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                       ----------------------------------------------------------
<S>                                                    <C>         <C>         <C>         <C>         <C>
                                                        3/31/96     6/30/96     9/30/96     12/31/96     TOTAL
                                                       ----------  ----------  ----------  ----------  ----------
Net sales............................................  $  279,655  $   91,345  $   51,060  $  186,101  $  608,161
Gross profit.........................................  $  100,838  $   21,952  $    6,206  $   51,777  $  180,773
Income (loss) before taxes, equity interest and
  extraordinary item.................................  $   42,490  $  (24,259) $  (38,777) $   (3,138) $  (23,684)
Net income (loss)....................................  $   39,041  $  (26,152) $  (40,593) $     (611) $  (28,315)
Preferred dividends..................................      (1,194)     --          (1,195)     --          (2,389)
                                                       ----------  ----------  ----------  ----------  ----------
Net income (loss) available to common stockholders...  $   37,847  $  (26,152) $  (41,788) $     (611) $  (30,704)
                                                       ----------  ----------  ----------  ----------  ----------
                                                       ----------  ----------  ----------  ----------  ----------
Basic and Diluted earnings (losses) per common share
  before extraordinary item:
Class A and C Common Stock...........................  $     1.74  $    (1.02) $    (1.63) $    (0.02) $    (0.95)
Extraordinary (loss) per common share:
Class A and C Common Stock...........................       (0.25)     --          --          --           (0.25)
Basic and Diluted earnings (losses) per common share:
Class A and C Common Stock...........................  $     1.49  $    (1.02) $    (1.63) $    (0.02) $    (1.20)
Weighted average number of common shares outstanding:
Class A Common Stock.................................      22,862      22,933      23,021      23,116      22,983
Class B Common Stock.................................          13          13          12          11          12
Class C Common Stock.................................       2,598       2,598       2,598       2,598       2,598
</TABLE>
 
<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                        ---------------------------------------------------------
<S>                                                     <C>         <C>         <C>        <C>         <C>
                                                         3/31/97     6/30/97     9/30/97    12/31/97     TOTAL
                                                        ----------  ----------  ---------  ----------  ----------
Net sales.............................................  $  248,095  $   87,972  $  50,788  $  161,286  $  548,141
Gross profit..........................................  $   84,590  $   23,414  $   7,582  $   52,807  $  168,393
Income (loss) before taxes, equity interest and
  extraordinary item..................................  $   31,285  $  (25,550) $ (37,959) $   10,060  $  (22,164)
Net income (loss).....................................  $   33,388  $  (27,454) $ (40,316) $   11,483  $  (22,899)
Preferred dividends...................................        (896)       (921)    (1,861)       (966)     (4,644)
                                                        ----------  ----------  ---------  ----------  ----------
    Net income (loss) available to common
      stockholders....................................  $   32,492  $  (28,375) $ (42,177) $   10,517  $  (27,543)
                                                        ----------  ----------  ---------  ----------  ----------
                                                        ----------  ----------  ---------  ----------  ----------
Basic and Diluted earnings (losses) per common share
  before extraordinary item:
    Class A and C Common Stock........................  $     1.26  $    (1.09) $   (1.61) $     0.40  $    (1.06)
 
Extraordinary (loss) per common share:
    Class A and C Common Stock........................      --          --         --          --          --
Basic and Diluted earnings (losses) per common share:
    Class A and C Common Stock........................  $     1.26  $    (1.09) $   (1.61) $     0.40  $    (1.06)
  Weighted average number of common shares
    outstanding:
    Class A Common Stock..............................      23,150      23,326     23,538      23,751      23,441
    Class B Common Stock..............................          11          11         11          11          11
    Class C Common Stock..............................       2,598       2,598      2,598       2,598       2,598
</TABLE>
 
                                      F-25
<PAGE>
                                                                     SCHEDULE II
 
              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                               ADDITIONS
                                                                         ----------------------
                                                              BALANCE     CHARGED
                                                                AT       TO COSTS     CHARGE          OTHER         BALANCE
                                                             BEGINNING      AND      TO OTHER      CHANGES ADD       AT END
YEAR                         DESCRIPTION                      OF YEAR    EXPENSES     ACCOUNT      / (DEDUCT)       OF YEAR
---------  -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
<S>        <C>                                              <C>          <C>        <C>            <C>             <C>
           Customer lists.................................   $ 209,113   $  20,527                  $  (4,307)(3)   $225,333
           Deferred charges...............................      34,003       6,142                     (1,022)(3)     39,123
                                                            -----------  ---------                 -----------     ----------
                                                             $ 243,116   $  26,669                  $     (29)      $264,456
                                                            -----------  ---------                 -----------     ----------
                                                            -----------  ---------                 -----------     ----------
                                                                                                    $  (3,323)(2)
           Allowance for doubtful.........................                                               (250)(3)
                                                                                                   -----------
           accounts.......................................   $   1,769   $   1,856   $     917(1)   $  (3,573)      $    969
           -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
           -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
1996       Accumulated amortization:
           Customer lists.................................   $ 225,333   $  18,611                  $  (4,104)(4)   $239,840
           Deferred charges...............................      39,123       4,760                       (237)(4)     43,646
                                                            -----------  ---------                 -----------     ----------
                                                             $ 264,456   $  23,371                  $  (4,341)      $283,486
                                                            -----------  ---------                 -----------     ----------
                                                            -----------  ---------                 -----------     ----------
           Allowance for doubtful accounts................   $     969   $   1,882   $   1,099(1)   $  (2,862)(2)   $  1,088
           -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
           -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
1997       Accumulated amortization:
           Customer lists.................................   $ 239,840   $  17,903                  $ (18,292)(5)   $239,451
           Deferred charges...............................      43,646       4,639                     (1,886)(5)     46,399
                                                            -----------  ---------                 -----------     ----------
                                                             $ 283,486   $  22,542                  $ (20,178)      $285,850
                                                            -----------  ---------                 -----------     ----------
                                                            -----------  ---------                 -----------     ----------
           Allowance for doubtful accounts................   $   1,088   $   1,853   $   1,195(1)    $ (3,156)(2)   $    980
           -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
           -----------------------------------------------  -----------  ---------  -----------    -----------     ----------
</TABLE>
 
------------------------
 
(1) Recoveries
 
(2) Bad debts written off
 
(3) Valuation and qualifying accounts conveyed to Star Gas Partners, L.P. and
    the disposition of the New Hampshire branch location
 
(4) Valuation and qualifying accounts conveyed through the disposition of the
    Springfield Massachusetts branch location
 
(5) Valuation and qualifying accounts conveyed through the disposition of the
    Hartford Connecticut branch location
 
                                      F-26