UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1998   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 1-9358

                       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 Identification No.)
 incorporation or organization)


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 (ss. 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 1, 1999 was approximately $16,532,645.

As of March 1, 1999 there were 23,854,751 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>

                                     PART I

                                ITEM 1. BUSINESS

Petroleum Heat and Power Co., Inc. ("Petro" or the "Company") is the largest
retail distributor of home heating oil in the United States, with total sales of
$408 million for the year ended December 31, 1998. Petro serves approximately
340,000 customers in the Northeast and Mid-Atlantic states, including the
metropolitan areas of Boston, New York City, Baltimore, Providence, and
Washington, D.C.

Home heating oil is a primary source of home heat in the Northeast. The
Northeast accounts for approximately two-thirds of the demand for home heating
oil in the United States and, during 1997, approximately 6.9 million homes, or
approximately 36% of all homes in the Northeast, were heated by oil. The home
heating oil distribution business is highly fragmented and characterized by
numerous local fuel oil distributors, most of which have fewer than 20 employees
and operate within a 25-mile radius from their distribution facility. According
to the United States Bureau of Census, there were approximately 3,400
independently owned and operated home heating oil distributors in the Northeast
at the end of 1995.

OPERATIONS

In addition to selling home heating oil, Petro installs and repairs heating
equipment. To a limited extent, the Company also markets other petroleum
products, including diesel fuel and gasoline, to commercial customers. For the
year-ended December 31, 1998, approximately 83% of its total sales were from
sales of home heating oil; approximately 13% were from the installation and
repair of heating equipment, and approximately 4% were from the sale of other
petroleum products, including diesel fuel and gasoline, to commercial customers.

Petro provides home heating equipment repair service 24 hours a day, seven days
a week, 52 weeks a year, generally within four hours of request, and regularly
provides various service incentives to obtain and retain customers. 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 it believes helps to build customer awareness and
brand identity.

As a result of a major strategic study, in 1996 the Company began to implement
an operational restructuring program designed to take advantage of its size
within the home heating oil industry. This program involves regionalization into
three profit centers which allows it to operate more efficiently. In addition,
this program enables the Company to access developments in communication and
computer technology that are in use by other large distribution businesses, but
are generally not used by other retail heating oil companies. This program is
designed to reduce operating costs, improve customer service and establish a
brand image among heating oil consumers.

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 approximately 110,000 Long Island and New York
City home heating oil customers, including sales, customer service, credit and
accounting. The Company is also operating under the single brand name of "Petro"
throughout this area, rather than the many acquired brand names previously used.
Since the creation of this customer service center, eight full-function branches
were consolidated into four strategically located delivery and service depots to
help serve 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 support
the Company's business operations.


                                       2
<PAGE>

CUSTOMERS

The Company currently serves approximately 340,000 customers in the following 26
markets:

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
Southern Fairfield        (Centered in Reading)         Newport
  County                 Bucks County                   Maryland/Virginia/D.C.
                          (Centered in Southampton)     Baltimore (Metropolitan)
                         Lebanon County                 Washington, D.C.
                          (Centered in Palmyra)          (Metropolitan)
                                                        Arlington

Approximately 85% of the Company's 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 credit problems.

Our home heating oil business' net attrition of existing customers has been
approximately 5% to 6% per year over the five years through 1997. This rate
represents the net of our annual gross customer loss rate of approximately 15%
to 16% offset by customer gains of approximately 10% per year. In 1998 net
attrition approximated 3.4%, representing gains of approximately 11.4% and gross
losses of 14.8%. Gross customer losses are the result of various factors,
including customer relocation, price, natural gas conversions and credit
problems. Customer gains are a result of our marketing and service programs and
other incentives. While our home heating oil business often loses customers when
they move from their homes, we are able to retain a majority of these homes by
obtaining the new home purchaser as a customer.

In addition, approximately 90% of Petro 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 its customers are on
a 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.


                                       3
<PAGE>

SUPPLIERS AND SUPPLY ARRANGEMENTS

Petro obtains fuel oil in either barge or truckload quantities, and has
contracts with over 80 terminals for the right to temporarily store its heating
oil at facilities not owned by the Company. 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 12 different
suppliers, the majority of which have significant domestic sources for their
product, and many of which have been suppliers for over 10 years. Petro's
current suppliers are: Amerada Hess Corporation; Citgo Petroleum Corp.; Coastal
New York; Global Petroleum Corp.; Koch Refining Company, L.P.; TransMontaigne
Product Service East, Inc.; Motiva Enterprises LLC; Mieco, Inc.; Mobil Oil
Corporation; Sprague Energy; Sun Oil Company; and Tosco Refining Co. Typically
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 its price
to most customers, is based upon market prices at the time of delivery.

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

INSULATION FROM OIL PRICE VOLATILITY

Although the price of crude oil can be volatile, historically this has not
materially affected the Company's performance 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 margin 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 were unable to increase its gross margin or reduce operating expenses,
the effect of the decrease in volume would be to reduce net income.

Approximately 25% of the Company's home heating oil 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. This
practice permits the Company to purchase oil at a fixed price in advance of its
obligations to supply such oil. 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 margins for those customers whose oil was not purchased in
advance would be unaffected or higher than expected.


                                       4
<PAGE>

COMPETITION

The home heating oil industry is highly competitive. Petro competes with heating
oil distributors offering a broad range of services and prices, from full
service distributors, like the Company, to those offering delivery only.
Long-standing customer relationships are typical in the 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. This tends to build customer loyalty. As a
result of the factors noted above, among others, it may be difficult to acquire
new retail customers (other than through acquisitions). In addition, in certain
instances, homeowners have formed buying cooperatives that seek to purchase fuel
oil from distributors at a price lower than individual customers are otherwise
able to obtain.

Petro also competes for retail customers with suppliers of alternative energy
products, principally 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 home heating
oil customer base annually converts from home heating oil to natural gas.

EMPLOYEES

As of December 31, 1998, the Company had 2,047 employees, of whom 532 were
office, clerical and customer service personnel, 617 were heating equipment
repairmen, 529 were oil truck drivers and mechanics, 196 were management and
staff and 173 were employed in sales. Approximately 400 of those employees are
seasonal and are rehired annually to support the requirements of the heating
season. Approximately 900 employees are represented by 16 different local
chapters of labor unions.

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

GOVERNMENT REGULATIONS

The Company is subject to various federal, state and local environmental, health
and safety laws and regulations. Generally, these laws impose limitations on the
discharge of pollutants and establish standards for the handling of solid and
hazardous wastes. These laws include the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Clean Air Act, the Occupational Safety and Health Act, the
Emergency Planning and Community Right to Know Act, the Clean Water Act and
comparable state statues. CERCLA, also known as the "Superfund" law, imposes
joint and several liability without regard to fault or the legality of the
original conduct on certain classes of persons that are considered to have
contributed to the release or threatened release of a hazardous substance into
the environment. Such laws and regulations could result in civil or criminal
penalties in cases of non-compliance or impose liability for remediation costs.
To date, the Company has not been named as a party to any litigation in which
the Company is alleged to have violated or otherwise incurred liability under
any of the foregoing laws and regulations.

In connection with acquisitions that involve the purchase of real estate, the
Company conducts a due diligence investigation to attempt to determine whether
any substance has been sold from, or stored on, any such real estate prior to
its purchase.

Such due diligence includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
performing site assessments in which Company employees, and, in certain cases,
independent environmental consulting firms we hire review historical records and
data bases and conduct physical investigations of the property to look for
evidence of hazardous substances, compliance violations and the existence of
underground storage tanks.


                                       5
<PAGE>

Future developments, such as stricter environmental, health or safety laws and
regulations thereunder, could affect the Company's operations. It is not
anticipated that Petro's compliance with or liabilities under environmental,
health and safety laws and regulations, including CERCLA, will have a material
adverse effect on operation. To the extent that the Company does not know of any
environmental liabilities or environmental, health or safety laws or regulations
will be made more stringent, there can be no assurance that the results of
operations will not be materially and adversely affected.

LITIGATION

The Company's operations are subject to all operating hazards and risks normally
incidental to handling, storing and transporting and otherwise providing for use
by consumers of combustible liquids such as home heating oil. As a result, at
any given time the Company is a defendant in various legal proceedings and
litigation arising in the ordinary course of business. Petro maintains insurance
policies with insurers in such amounts and with such coverages and deductibles
as it believes to be reasonable and prudent. However, there can be no assurance
that such insurance will be adequate to protect the Company from all material
expenses related to potential future claims for personal and property damage or
that such levels of insurance will be available in the future at economical
prices.

WEATHER CONDITIONS

Weather conditions have a significant impact on the demand for #2 fuel oil
because the Company's customers depend on #2 fuel oil principally for heating
purposes. During the peak heating season of October through March, sales of home
heating oil represent approximately 75% to 80% of the Company's annual home
heating oil volume. Actual weather conditions can vary substantially from year
to year, significantly affecting financial performance. Furthermore, warmer than
normal temperatures in one or more regions in which the Company operates can
significantly decrease the total volume it sells and the gross margin realized
on those sales and, consequently, the results of operations. In fiscal 1998,
temperatures were significantly warmer than normal for the areas in which the
Company sold home heating oil. The Company's operating income before
depreciation, amortization and provision for supplemental benefits during fiscal
1998 was adversely affected due to this abnormally warm weather. The Company
cannot predict if or when a similar weather phenomenon will affect the markets
it serves. There can be no assurance that average temperatures in future years
will not be above historical averages. 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):

                Average                  Average                     Average
    Year      Temperature     Year     Temperature      Year       Temperature
   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        1998....       45.9

Source:  National Oceanic and Atmospheric Administration


Petro / Star Gas Transaction


                                       6
<PAGE>

The Company, through its wholly owned subsidiary Star Gas Corporation ("Star
Gas"), has a 40.5% equity interest in Star Gas, L.P. (the "Partnership") and is
its general partner. On October 23, 1998, the Partnership and Petro jointly
announced that they have signed a definitive merger agreement pursuant to which
Petro would be acquired by the Partnership and would become a wholly-owned
subsidiary of the Partnership ("the Star Gas/Petro transaction"). It is
anticipated that this acquisition will be accounted for using the purchase
method of accounting. This transaction would be effected through Petro
shareholders exchanging their approximate 26.5 million shares of Petro Common
Stock for an approximate 3.2 million limited partnership units and General
Partnership units of the Partnership which will be subordinated to the existing
Common Units of the Partnership.

Of the 3.2 million subordinated Partnership units anticipated to be distributed
to Petro shareholders, 2.5 million will be Senior Subordinated Units and 0.7
million will be Junior Subordinated Units and General Partnership Units. The
Senior Subordinated Units will be publicly registered and tradable (they have
been approved for listing on the New York Stock Exchange) and will be
subordinated in distributions to the Partnership's Common Units. The Junior
Subordinated Units and General Partnership Units will not be registered nor
publicly tradable and will be subordinated to both the Common Units and the
Senior Subordinated Units. The Senior Subordinated Units will be exchanged with
holders of Petro's Class A and Class C Common Stock, other then shares held by
Audrey Sevin, Irik Sevin, and two corporations controlled by Wolfgang Traber,
whose shares will be exchanged for Junior Subordinated Units and General
Partnership Units.

Pursuant to the partnership subordination provision, distributions on the
Partnership's Senior Subordinated Units may be made only after distributions of
Available Cash on Common Units meet the Minimum Quarterly Distribution ("MQD")
requirement. Distributions on the Partnership's Junior Subordinated Units and
General Partner Units may be made only after distributions of Available Cash on
Common Units and Senior Subordinated Units meet the MQD requirement. The
Subordination Period will generally extend until the Partnership earns and pays
its MQD for three years. As a condition of the Star Gas/Petro transaction, the
Partnership agreement will be amended so that no distribution will be paid on
the Senior Subordinated Units, Junior Subordinated Units, or the General Partner
Units except to the extent Available Cash is earned from operations beginning
with the quarter ending December 31, 1999. The first possible distribution is in
February 2000.

Like many other publicly traded master limited partnerships, the partnership
agreement contains a provision which provides the General Partner with incentive
distributions in excess of certain targeted amounts. This provision will be
modified so that should there be any such incentive distributions, they will be
made pro rata to the holders of Senior Subordinated Units, Junior Subordinated
Units, and General Partner Units. In connection with the Star Gas/Petro
transaction, the Senior Subordinated Units, Junior Subordinated Units and
General Partnership Units can earn, pro rata, 0.3 million additional Senior
Subordinated Units each year that Petro meets certain financial goals to a
maximum of 0.9 million additional Senior Subordinated Units.

In connection with the Star Gas/Petro transaction, the Partnership intends to
raise approximately $130 million through a public offering of Common Units and
Petro plans to raise $90 million through a private offering of debt securities.
The net proceeds from these offerings will be used primarily to redeem
approximately $240 million (prior to discounts) in Petro public and private debt
and preferred stock. Any such offering will be made only by means of a
prospectus or in transactions not requiring registration under securities laws.

In October 1998, Petro completed an exchange offer with the holders of its 10
1/8% notes, 9 3/8% debentures, and 12 1/4% debentures and entered into
individually negotiated agreements with the holders of its 12 7/8% preferred
stock. In the debt exchange offer and preferred stock agreements, the holders of
approximately 98.5% in aggregate principal amount and liquidation preference of
Petro's public debt and preferred stock exchanged those securities for a like
principal amount and liquidation preference of new securities, the terms of
which are in all material respects the same as the terms of the old securities,
except that (1) the new debt securities are senior to the old debt securities,
and (2) the terms of the new debt securities and the new preferred stock (i)
give Petro the right to redeem these securities at the closing of the Star Gas /
Petro transaction but not later than April 1, 1999 at; 103.5% of face value for
the new 12 1/4% debentures; 100% of face value for the new 10 1/8% notes; 100%
of face value for the new 9 3/8% debentures; and $23.00 per share for the new 12
7/8% preferred stock; and (ii) eliminate substantially all covenants from the
indentures under which the old debt securities were 


                                       7
<PAGE>

issued. The tendering holders of the old 12 7/8% preferred stock have also
granted Petro an irrevocable proxy to vote all their shares of preferred stock
in favor of the acquisition proposal at the special meeting.

In the debt exchange offer, Petro issued an aggregate 0.8 million shares of
junior convertible preferred stock (convertible to Petro Class A Common Stock on
a share for share basis) to the tendering holders. At the completion of the
transaction, those shares will be exchanged into an aggregate 0.1 million
Partnership Common Units in the merger. Holders of these shares have also
granted Petro an irrevocable proxy or have agreed to vote these shares in favor
of the acquisition proposal.

Petro currently has a 40.5% equity interest in the Partnership representing its
2.4 million Subordinated Units and a 2.0% interest in the Partnership or the
equivalent of 0.1 million units. As part of the Transaction, these units will be
contributed to the Partnership by Petro in exchange for one hundred and three
thousand Common Units and approximately 2.0 million Senior Subordinated Units.
The Common Units will be exchanged by Petro with the holders of Petro Junior
Convertible Preferred Stock and the Senior Subordinated Units ultimately be
exchanged with a portion of the holders of Petro's Common Stock. After
completion of the Star Gas/Petro transaction, the Petro shareholders will own
approximately 20% of the Partnership's equity through Subordinated Units and
General Partnership Units. The holders of the Partnership's Common Units
(including an estimated 9.1 million Common Units that will be sold in the
Partnership's $130 million public offering) will own an approximate aggregate
80% equity interest in the Partnership following the completion of the
transaction. The General Partner of the Partnership will be a newly organized
Delaware limited liability company that will be owned by certain officers and
directors of Petro consisting of Irik Sevin, Audrey Sevin and two entities
affiliated with Wolfgang Traber.

PROPANE BUSINESS

Star Gas is the eighth largest retail propane distributor in the United States.
It is primarily engaged in the retail distribution of propane and related
supplies and equipment to residential, commercial, industrial, agricultural and
motor fuel customers. Star Gas serves approximately 166,000 propane customers
from 55 branch locations and 32 satellite storage facilities in the Midwest and
19 branch locations and 14 satellite storage facilities in the Northeast. In
addition to its retail business, Star Gas also serves approximately 30 wholesale
customers from its facilities in southern Indiana.

For the fiscal year ended September 30, 1998, Star Gas had sales of $111.7
million and sold 98.9 million gallons of retail propane. Approximately 80% of
its sales (by volume of gallons sold) were to retail customers and approximately
20% were to wholesale customers. Its retail sales have historically had a
greater margin, more stable customer base and less price sensitivity than its
wholesale business.

Star Gas obtains propane from over 30 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
1998, none of its Northeast suppliers accounted for more than 10% of the volume
purchased.


                                       8
<PAGE>

Star Gas typically supplies its Midwest retail and wholesale operations by a
combination of (1) spot purchases from Mont. Belvieu, Texas, which are
transported by pipeline to its 21 million gallon underground storage facility in
Seymour, Indiana, and then delivered to the Midwest branches and (2) 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 market based contracts.

The propane 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 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 believes that the ten largest
multi-state marketers, including Star Gas, account for approximately 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 retail distribution branches competes with five or more
marketers or distributors.

                               ITEM 2. PROPERTIES

The Company provides services to its customers from 24 branches/depots and 13
satellites, 10 of which are owned and 27 of which are leased, in 26 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.


                                       9
<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 1997 and 1998 were as follows:

                         1997                                 1998
                         ----                                 ----
Quarter        High      Low   Dividend             High       Low    Dividend
-------        ----      ---   --------             ----       ---    --------

1st         $ 6 3/4   $ 3 3/8  $.075             $ 3        $ 1 7/16   $.00
                                                              
2nd           3 7/8     2 1/2   .075               2  3/16    1 7/16    .00

3rd           3 1/2     2 5/8   .075               2  7/16    1 1/4     .00

4th           3 1/2     2 1/8   .075               1 29/32     22/32    .00

The last sale price of the Class A Common Stock on March 1, 1999 was $ 29/32 per
share. As of March 1, 1999 the Company had 235 shareholders of record of its
Class A Common Stock.

Class B Common Stock

As of March 1, 1999 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 1, 1999 was 24.

As with its Class A Common Stock, the Company suspended its regularly scheduled
quarterly Class C Common Stock dividend.

Dividend Policy

In 1998 the Company did not declare any quarterly dividends on its Class A and
Class C Common Stock. On February 24, 1998 the Company announced that it
suspended its regularly scheduled quarterly common stock dividend. 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. 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, $31.6 million was available for the
payment of dividends on all classes of Common Stock at December 31, 1998. 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. However, the Company's bank credit 


                                       10
<PAGE>

agreement currently prohibits the payment of any common dividends.


                                       11
<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 operating income before depreciation, amortization and provision for
supplemental benefits 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,
                                                             -----------------------
                                                     (in thousands, except per share data)
                                           1994         1995         1996         1997         1998
                                        ---------    ---------    ---------    ---------    ---------
<S>                                     <C>          <C>          <C>          <C>          <C>      
Income Statement Data:
Net sales                               $ 546,677    $ 609,507    $ 608,161    $ 548,141    $ 408,019

Costs and expenses
  Cost of sales                           362,981      387,825      427,388      379,748      265,526
  Operating expenses                      128,310      164,929      143,069      140,023      117,391
  Amortization of customer lists           19,748       20,527       18,611       17,903       16,669
  Depreciation of plant and equipment       6,469       12,374        6,574        7,204        6,969
  Amortization of deferred charges          4,989        4,248        2,888        3,175        2,899
  Provision for supplemental benefit          373        1,407          873          565          358
                                        ---------    ---------    ---------    ---------    ---------
    Operating income (loss)                23,807       18,197        8,758         (477)      (1,793)

Interest expense-net                       23,766       38,792       32,412       31,668       30,732
Amortization of debt issuance cost          1,188        1,894        1,872        1,464        1,404
Other income (expense)-net                    109          218        1,842       11,445          112
                                        ---------    ---------    ---------    ---------    ---------
  Loss before income taxes,
   equity interest in Star Gas,
   and extraordinary item                  (1,038)     (22,271)     (23,684)     (22,164)     (33,817)
Income taxes                                  600          500          500          500          400
                                        ---------    ---------    ---------    ---------    ---------
  Loss before equity interest in
   Star Gas and extraordinary item         (1,638)     (22,771)     (24,184)     (22,664)     (34,217)

  Share of income (loss) of Star Gas       (1,973)         728        2,283         (235)      (1,120)
                                        ---------    ---------    ---------    ---------    ---------
  Loss before extraordinary item           (3,611)     (22,043)     (21,901)     (22,899)     (35,337)
Extraordinary item-loss on
  early extinguishment of debt               (654)      (1,436)      (6,414)          --           --
                                        ---------    ---------    ---------    ---------    ---------
Net loss                                $  (4,265)   $ (23,479)   $ (28,315)   $ (22,899)   $ (35,337)
                                        =========    =========    =========    =========    =========

Net loss applicable to Common Stock     $  (7,776)   $ (26,742)   $ (30,704)   $ (27,543)   $ (40,394)

Basic and Diluted earnings (losses)
 per common share:
  Class A Common Stock                  $    (.37)   $   (1.06)   $   (1.20)   $   (1.06)   $   (1.52)
  Class B Common Stock                       1.10           --           --           --           --
  Class C Common Stock                       (.37)       (1.06)       (1.20)       (1.06)       (1.52)



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


Weighted average number of
 common shares outstanding:
  Class A Common Stock                     19,195       22,711       22,983       23,441       23,962
  Class B Common Stock                        152           15           12           11           11
  Class C Common Stock                      2,550        2,598        2,598        2,598        2,598
</TABLE>


                                       12
<PAGE>

<TABLE>
<CAPTION>
                                           1994         1995         1996         1997         1998
                                           ----         ----         ----         ----         ----
<S>                                     <C>          <C>          <C>          <C>          <C>      
Balance Sheet Data:
Cash                                    $  15,474    $  78,285    $   3,257    $   2,390    $   2,004
Working capital                            28,344       65,408       18,093       12,436       (8,977)
Total assets                              397,174      357,241      275,025      247,846      199,531
Long-term debt                            309,945      294,429      291,337      288,957      278,731
Redeemable preferred stock
 (long-term portion)                       36,632       12,500        8,333       32,489       28,578
Stockholders' deficiency                  (66,176)    (100,903)    (145,733)    (177,033)    (215,825)

Summary Cash Flow Data:
Net Cash provided by (used in)
  operating activities                  $  31,449    $  (1,707)   $  (3,852)   $  18,644    $  19,284
Net Cash provided by (used in)
  investing activities                    (31,672)      16,613      (26,193)        (980)           1
Net Cash provided by (used in)
  financing activities                     11,083       47,905      (44,983)     (18,531)     (19,671)

Other Data:
Operating income before depreciation,
 amortization, and provision for
 supplemental benefits (1)              $  55,386    $  56,753    $  37,704    $  28,370    $  25,102
Gallons of home heating oil
  and retail propane sold                 456,719      503,610      456,141      410,291      324,667
</TABLE>

----------
(1)   Operating income before depreciation, amortization, and provision for
      supplemental benefits 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 it
      is a principal basis upon which the Company assesses its financial
      performance. It should be noted that the definition set forth above may
      include different items than what other companies may use.


                                       13
<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. The Company acquired
the customer lists and equipment of thirteen unaffiliated fuel oil dealers in
1996 and eleven in 1997; no acquisitions were made in 1998.

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. For 1997
and 1998 in the metro New York region, 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 financial results in any of the Company's regions.

1998 Compared to 1997

In analyzing the Company's 1998 results to 1997 results, certain significant
factors should be considered. We believe that 1998 was among the warmest years
in the twentieth century with temperatures 17.7% above normal and 16.0% higher
than 1997. Largely as a result of this weather, home heating oil volume declined
85.6 million gallons and sales were $140.1 million below 1997 levels. However,
operating loss increased by only $1.3 million as the Company was able to offset,
to a certain extent, the effects of this weather through increased heating oil
margins and through sizeable reductions in operating expenses relating to its
operational restructuring and corporate overhead reduction programs.

Volume. Home heating oil volume decreased 20.9% to 324.7 million gallons for the
twelve months ended December 31, 1998, as compared to 410.3 million gallons for
the twelve months ended December 31, 1997. This decline was largely due to 16.0%
warmer weather for 1998, believed to be caused by the effects of the climatic
phenomenon known as "El Nino." In addition, volume was negatively impacted by
16.9 million gallons from the Company's Hartford, CT operation, which was sold
in November 1997, and by net account attrition and delivery scheduling.
Partially offsetting these factors was the acquisition by the Company of eleven
individually insignificant heating oil companies during 1997, the full effects
of which were not realized until 1998.

Net sales. Net sales decreased 25.6% to $408.0 million for the twelve months
ended December 31, 1998, as compared to $548.1 million for the twelve months
ended December 31, 1997. This decline reflects the impact of decreased volume as
well as the impact of lower selling prices associated with lower wholesale
costs.


                                       14
<PAGE>

Cost of sales. Cost of sales decreased 30.1% to $265.5 million for the twelve
months ended December 31, 1998, as compared to $379.7 million for the twelve
months ended December 31, 1997, due to the decline in volume and lower wholesale
costs mentioned above. Cost of sales declined more than net sales as the Company
was able to increase home heating oil margins by 3.3 cents per gallon in 1998 as
compared to 1997. Also contributing to the decline in cost of sales was a
decline in service expense, which cost is included in cost of sales. The service
expense decline was a result of both the Company's improved operating efficiency
and the warmer weather.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 14.8% to $87.3 million for the twelve months
ended December 31, 1998, as compared to $102.4 million for the twelve months
ended December 31, 1997. This $15.1 million decline was due both to reductions
in certain expenses resulting from the Company's operational restructuring
programs, and to the Company's ability to reduce overhead costs in response to a
decline in volume. Also contributing to this decline were significant reductions
in corporate staff and other expenses which were part of a cost reduction
program begun in December 1997.

Direct delivery expenses. Direct delivery expenses decreased 18.0% to $24.6
million for the twelve months ended December 31, 1998, as compared to $30.0
million for the twelve months ended December 31, 1997, reflecting the Company's
ability to reduce costs both in response to a weather-related decline in volume
and, to a lesser extent, through its productivity improvements.

Restructuring charges. Restructuring charges of $0.5 million for the twelve
months ended December 31, 1998 represent the continuation in the first quarter
of 1998 of corporate staff reductions. Charges for the twelve months ended
December 31, 1997, which total $2.9 million, represent costs associated with the
Company's regionalization and consolidation program in the New York/Long Island
and Mid Atlantic regions, as well as corporate staff reductions made in the
fourth quarter of 1997.

Corporate identity expenses. Corporate identity expenses decreased to $0.2
million for the twelve months ended December 31, 1998, as compared to $4.1
million for the twelve months ended December 31, 1997. These expenses represent
costs associated with the Company's brand identity program, implemented in the
Company's New York and Mid Atlantic regions primarily during 1997, with
completion of the Mid Atlantic region in 1998. These costs include the cost of
repainting all delivery and service vehicles to reflect the Company's new
identity.

Star Gas transaction expenses. Star Gas transaction expenses of $4.8 million for
the twelve months ended December 31, 1998 represent costs incurred, consisting
primarily of legal, printing, advisory, and professional charges relating to the
Company's previously announced merger with Star Gas Partners. It is expected
that the Company will incur a total of $7.5 to $8.5 million of costs associated
with this transaction, the remainder of which will be incurred in 1999.

Amortization of customer lists. Amortization of customer lists decreased 6.9% to
$16.7 million for the twelve months ended December 31, 1998, as compared to
$17.9 million for the twelve months ended December 31, 1997, reflecting the
impact of certain customer lists becoming fully amortized which were not offset
by the full year amortization for the 1997 acquisitions.

Depreciation and amortization of plant and equipment. Depreciation and
amortization of plant and equipment decreased 3.3% to $7.0 million for the
twelve months ended December 31, 1998, as compared to $7.2 million for the
twelve months ended December 31, 1997, as the impact of certain assets becoming
fully depreciated exceeded the impact of the Company's recent fixed asset
additions.

Amortization of deferred charges. Amortization of deferred charges decreased
8.7% to $2.9 million for the twelve months ended December 31, 1998, as compared
to $3.2 million for the twelve months ended December 31, 1997, reflecting the
impact of certain deferred charges becoming fully amortized.


                                       15
<PAGE>

Operating loss. Operating loss increased 275.9% to a loss of $1.8 million for
the twelve months ended December 31, 1998, as compared to a loss of $0.5 million
for the twelve months ended December 31, 1997. This decline was attributable to
the weather-related decline in volume for the period, partially offset by the
Company's reductions in operating expenses and improvements in home heating oil
margins.

Net interest expense. Net interest expense decreased 3.0% to $30.7 million for
the twelve months ended December 31, 1998, as compared to $31.7 million for the
twelve months ended December 31, 1997. This was due to a slight decline in
average borrowings outstanding.

Other. Other income decreased to $0.1 million for the twelve months ended
December 31, 1998, as compared to $11.4 million for the twelve months ended
December 31, 1997, as the 1997 results include the gain on the sale of the
Company's Hartford, CT operations in November 1997.

Equity in loss of Star Gas Partnership. Equity in the loss of Star Gas
Partnership increased 376.6% to a loss of $1.1 million for the twelve months
ended December 31, 1998, as compared to a loss of $0.2 million for the twelve
months ended December 31, 1997. This decline was largely due to the impact of
warm weather on Star Gas Partner's operations.

Net loss. Net loss increased 54.3% to a loss of $35.3 million for the twelve
months ended December 31, 1998, as compared to a loss of $22.9 million for the
twelve months ended December 31, 1997. This increase was attributable to the
weather-related decline in volume for the period, partially offset by the
Company's reductions in operating expenses and improvements in home heating oil
margins. In addition, 1997 was favorably impacted by the $11.3 million gain for
the November 1997 sale of the Company's Hartford, CT operations.

Operating income before depreciation, amortization, and provision for
supplemental benefits.* Operating income before depreciation, amortization, and
provision for supplemental benefits declined 11.5% to $25.1 million for the
twelve months ended December 31, 1998, as compared to $28.4 million for the
twelve months ended December 31, 1997. This $3.3 million decline was far less
than the 85.6 million gallon decline in volume for the same period, which was
primarily attributable to an increase in the Company's heating oil margins and
to sizable reductions in operating expenses related to the Company's operational
restructuring programs and its ability to contain costs in response to warm
weather.


*     Operating income before depreciation, amortization, and provision for
      supplemental benefits 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 it
      is a principal basis upon which the Company assesses its financial
      performance. It should be noted that the definition set forth above may
      include different items than what other companies may use.


                                       16
<PAGE>

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% warmer weather 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.

Cost of sales. Cost of sales decreased 11.1% to $379.7 million for the twelve
months ended December 31, 1997, as compared to $427.4 million for the twelve
months ended December 31, 1996 due to the decreased volume described above. Cost
of sales decreased more than net sales due to an increase of 1.7 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 restructuring 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.

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 increased
9.9% to $3.2 


                                       17
<PAGE>

million for the twelve months ended December 31, 1997, as compared to $2.9
million for the twelve months ended December 31, 1996, as the impact of the
amortization associated with the Company's recent acquisitions exceeded the
impact of certain deferred charges becoming fully amortized.

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 $0.5
million for the twelve months ended December 31, 1997, as compared to operating
income of $8.8 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 decreased 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.

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 Partner's 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.

Operating income before depreciation, amortization, and provision for
supplemental benefits. Operating income before depreciation, amortization, and
provision for supplemental benefits 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.


                                       18
<PAGE>

Liquidity and Financial Condition

Net cash provided by operating activities of $19.3 million combined with the
$1.3 million net proceeds from the sale of Star Gas Partners Common Units
amounted to $20.6 million. These funds were utilized in investing activities for
the purchase of fixed assets of $4.6 million; and in financing activities to
repay senior notes payable of $1.1 million, repay subordinated notes of $1.1
million, repay net working capital borrowings of $3.0 million, pay cash
dividends of $7.0 million, increase the cash collateral account maintained with
the Company's lenders to secure certain letter-of-credit obligations of $2.4
million, redeem preferred stock of $4.2 million, and for other financing
activities of $2.8 million, which is comprised mainly of the redemption of $2.3
million of Notes Payables issued in connection with the purchase of fuel oil
dealers. These financing activities were partially offset by cash provided from
the Star Gas distributions of $4.4 million, the proceeds from the sale of fixed
assets of $0.2 million, and proceeds from dividend reinvestments of $0.6
million. As a result of the above activities, the Company's cash balance
decreased by $0.4 million since December 31, 1997.

In July 1998, the Company renewed its $47.0 million working capital revolving
credit facility which will expire in June 1999. In consideration for the
extension of this facility to June 1999, the Company agreed to, amongst other
things, pay no common cash dividends and not make any acquisitions of other
companies. As the Company's current capital constraints already imposes a limit
to such activity, the impact of these prohibitions is minimal. At December 31,
1998 no amount was outstanding under this credit facility.

As part of the Star Gas / Petro Transaction, the Company plans to enter into a
bank facilities agreement for approximately $100.0 million in senior secured
facilities with a group of commercial banks. The bank facilities will consist of
three separate tranches, a $40 million working capital facility, a $10 million
letter of credit facility, and a $50 million acquisition facility. The working
capital facility and letter of credit facility would expire on June 30, 2001.
The acquisition facility would convert into a term loan on June 30, 2001 which
would be payable in eight equal quarterly principal payments.

As part of the Star Gas / Petro Transaction, the Company plans to sell
approximately $90.0 million of Senior Secured Notes, the net proceeds of which
will be used for the restructuring of the Company's debt and redemption of the
preferred stock.

The Company has no material commitments for capital expenditures. Based on the
Company's expectation of securing a working capital facility, the Company's
working capital position, and the expected net cash to be provided by operating
activities, the Company expects to be able to meet all of its obligations in
1999.


                                       19
<PAGE>

Year 2000

The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define a specific year. Absent corrective actions, a
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions to various activities and
operations.

The Company conducted a comprehensive review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and has developed a
plan to address this issue. The scope of this review included the assessment of
the Company's information technology environment as well as the compliance
attainment efforts of the Company's major service providers. Most key suppliers
and business partners have been contacted with regard to their Year 2000 state
of readiness such as the Company's software developer, significant suppliers,
payroll provider, and banking partners, and the Company has obtained reasonable
comfort that this issue is being adequately addressed.

In addition, the Company has engaged a prominent information technology
consulting firm ("IT Firm") to advise and ensure that it maintains a focused
strategy to successfully address the Year 2000 issue on a timely basis. This IT
Firm will contribute an added layer of comfort for Year 2000 compliance, based
on their independent assessment derived from continuous exposure analyses which
are designed to assess the costs and efforts needed to maintain and/or repair
the Company's critical business systems.

The Company's main applications and operating systems have a combination of
compliant and non-compliant systems. The primary computer platform which
supports much of the Company's operations was designed to be Year 2000
compliant, and the Company has obtained a compliance warranty attesting to this
fact. However, the Company has identified potential problem areas and assessed a
total cost of approximately $350,000 to make the entire system Year 2000
compliant, which includes the IT Firm's consulting fees. The Company's state of
readiness to make each identified area Year 2000 compliant is at the
implementation stage.

Through December 31, 1998 the Company has incurred approximately $50,000 in Year
2000 compliance expenses for applications and hardware, and it expects to incur
an additional $300,000 through the summer of 1999 for additional applications
and hardware, as well as the IT Firm's consulting fees.

Furthermore, the Company has also accelerated the planned replacement of its
internal messaging system in order to gain company-wide Year 2000 messaging
compatibility. Through December 31, 1998 the Company has incurred approximately
$30,000 of expenses for this project, and expects to incur an additional
$220,000 by the summer of 1999 to complete the project.

If the Company fails to be Year 2000 compliant, a worst case scenario would be
system failures and miscalculations that could adversely affect operations.
However, because the primary computer platform which currently supports much of
the Company's operations is already Year 2000 compliant and continues to show
positive test results like those of other existing and newly installed Year 2000
compliant systems being tested, the Company would experience only minor
operational disruptions even in such worst case scenario. Business contingency
plans designed to mitigate the Company's worst case scenario and potential
disruptions to business operations include continued substantive pre-testing of
existing and newly installed Year 2000 compliant systems. This coupled with the
Company's existing effort to relieve information technology systems from
non-critical, non-Year 2000 projects, while simultaneously planning the
availability of all information technology personnel before, during, and after
the Year 2000 changeover is designed to mitigate the effects of potential
business disruptions.

Notwithstanding the substantive work involved in making all its systems Year
2000 compliant, the Company could still potentially experience disruptions to
some aspects of its various activities and operations, including those resulting
from non-compliant systems utilized by unrelated third party governmental and
business entities.


                                       20
<PAGE>

Noncompliance with The NASDAQ Stock Market Minimum Bid Price Requirement

The Company received notification from The NASDAQ Stock Market ("NASDAQ") that
its Class A Common Stock was not in compliance pursuant to the newly enacted
NASD Market Place Rules regarding the minimum bid price requirement. The Company
responded to NASDAQ outlining its position as to why NASDAQ should not take any
action to delist Petro's Class A Common Stock from its National Market System
("NMS"). Among the reasons given for not delisting the stock was the possibility
of the Star Gas / Petro Transaction. The original NASDAQ Hearing Panel granted a
very limited exception to the continued listing requirements based upon the
Company's written request. The Company responded by requesting a full oral
hearing on this matter as provided for under the NASD Market Place Rules.

The full oral hearing took place in November of 1998 before a NASDAQ Listing
Qualification Panel (the "Panel") resulting in a January 1999 initial
determination to not delist the Company from the NMS, so long as the Company met
certain conditions. In March of 1999, the Panel determined that the Company did
not seem likely to regain compliance with the requirements for continued listing
on the NMS within a reasonable period of time. However, in light of the
Company's intention to voluntarily delist from NASDAQ upon completion of the
Star Gas / Petro transaction, the Panel has allowed continued NMS listing until
the earlier of the closing of the transaction or April 9, 1999.

A delisting could have a material adverse effect on the liquidity, trading, and
price for the Class A Common Stock.

Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate risk primarily through its working
capital revolving credit facility and market risk through its futures contracts.
The Company uses its working capital revolving credit facility to meet its
working capital needs. At December 31, 1998 no amount was outstanding under the
working capital revolving credit facility.

The Company selectively uses derivative financial instruments to manage its
exposure to market risk related to changes in the current and commodity market
price of #2 home heating oil. The Company does not hold derivatives for trading
purposes. The value of market sensitive derivative instruments is subject to
change as a result of movements in market prices. Consistent with the nature of
hedging activity, associated unrealized gains and losses would be offset by
corresponding decreases or increases in the purchase price the Company would pay
for the #2 home heating oil being hedged. Sensitivity analysis is a technique
used to evaluate the impact of hypothetical market value changes. Based on a
hypothetical ten percent increase in the cost of # 2 home heating oil at
December 31, 1998, the potential unrealized losses on the Company's hedging
activity would be reduced by $1.9 million; and conversely a hypothetical ten
percent decrease would increase the unrealized losses by the same amount.

Accounting Changes

In June 1998 the FASB issued SFAS No. 133 - "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company is assessing the disclosure requirements of
SFAS No. 133.


                                       21
<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.


                                       22
<PAGE>

                                    PART III

          ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with respect to the directors and executive officers of the Company
as of December 31, 1998 is set forth below:

Name                      Age Office
----                      --- ------

Irik P. Sevin             51  Chairman of the Board, Chief Executive Officer, 
                                and Director
William G. Powers, Jr.    45  President and Chief Operating Officer
C. Justin McCarthy        54  Senior Vice President - Operations
Audrey L. Sevin           72  Secretary and Director
George Leibowitz          61  Treasurer
James J. Bottiglieri      42  Vice President and Controller
Angelo Catania            49  Vice President and General Manager - Mid Atlantic 
                                Region
Vincent De Palma          41  Vice President and General Manager - New York 
                                Region
John D. Ryan              45  Vice President - Sales and Marketing
Matthew J. Ryan           41  Vice President - Supply
Peter B. Terenzio, Jr.    42  Vice President - Human Resources and Risk 
                              Management
Paul Biddelman(1)         52  Director
Phillip Ean Cohen(1)(2)   50  Director
Thomas J. Edelman         47  Director
Stephen Russell           57  Director
Wolfgang Traber(2)        54  Director

(1)   Member of the Audit Committee
(2)   Member of the Compensation Committee

See Item 12 for information concerning a shareholder's agreement governing the
election of directors.

      Irik P. Sevin has been a director of Petro since its organization in
October 1983 and Chairman of the Board of Petro since January 1993. Mr. Sevin
has been President of Petro, Inc. (a predecessor of Petro) since November 1979
and was President of Petro from 1983 through January 1997. Mr. Sevin has also
been the Chairman of the Board of Directors of Star Gas Corporation since
December 1993. Mr. Sevin was an associate in the investment banking division of
Kuhn Loeb & Co. and then Lehman Brothers Kuhn Loeb Incorporated from February
1975 to December 1978.

      William G. Powers, Jr. has been President of Petro since December 1997.
Mr. Powers was President of Star Gas Corporation from December 1993 through
November 1997, and has been a Director of Star Gas Corporation since December
1997. Prior to joining Star Gas Corporation, he was employed by Petro from 1984
to 1993 where he served in various capacities, including Regional Operations
Manager and Vice President of Acquisitions. He has participated in over 90
acquisitions for Petro. From 1977 to 1983, he was employed by The Augsbury
Corporation, a company engaged in the wholesale and retail distribution of fuel
oil and gasoline throughout New York and New England and served as Vice
President of Marketing and Operations.

      C. Justin McCarthy has been Senior Vice President--Operations of Petro,
Inc. since January 1979 and of the Company since its organization in October
1983. Prior to joining the Company, Mr. McCarthy was General Manager of the New
York City operations for Whaleco Fuel Oil Company from 1976 to 1979 and was
General Manager of the Long Island Division of Meenan Oil Co., Inc. from 1973 to
1976.

      Audrey L. Sevin has been a director and Secretary of Petro since its
organization in October 1983. Mrs. Sevin has also been a director of Star Gas
Corporation since December 1993 and the Secretary of Star Gas Corporation since
June 1994. Mrs. Sevin was a director, executive officer and principal
shareholder of A. W. Fuel Co., Inc. from 1952 until its purchase by Petro Inc.
in May 1981.

      George Leibowitz has been Treasurer of Petro since April 1997. From
November 1992 to March 1997 he was Senior Vice President--Finance and Corporate
Development of Petro. From


                                       23
<PAGE>

1985 to 1992, Mr. Leibowitz was the Chief Financial Officer of Slomin's Inc., a
retail heating oil dealer. From 1984 to 1985, Mr. Leibowitz was the President of
Lawrence Energy Corp., a consulting and oil trading company. From 1971 to 1984,
Mr. Leibowitz was Vice President--Finance and Treasurer of Meenan Oil Co., Inc.
Mr. Leibowitz is a Certified Public Accountant.

      James J. Bottiglieri has been Controller of Petro since 1994. He was
Assistant Controller of Petro from 1985 to 1994 and was elected Vice President
in December 1992. From 1978 to 1984, Mr. Bottiglieri was employed by a
predecessor firm of KPMG Peat Marwick LLP, a public accounting firm. Mr.
Bottiglieri has been a Certified Public Accountant since 1980.

      Angelo Catania has been Vice President and General Manager of the
Mid-Atlantic Region since February 1998 and Vice President--Acquisitions of the
Company from March 1996 to January 1998. From 1990 to 1996 he was the Company's
Regional Operations Manager and Co-Director of Acquisitions. From 1984 to 1990
he was Chief Financial Officer and Vice President--Operations of Acme Oil Co.,
Inc., a retail heating oil dealer. From 1974 to 1984, Mr. Catania was Corporate
Controller and Assistant Secretary of Meenan Oil Co., Inc., a retail heating oil
dealer.

      Vincent De Palma has been Vice President and General Manager--New York
Region of the Company since March 1997. Prior thereto he was a divisional vice
president and General Manager of the Long Island Region since April 1996. Prior
to joining Petro, Mr. De Palma was a Principal with McKinsey & Company, Inc.,
which he joined in 1984. From 1979 until 1982, Mr. De Palma held various
engineering positions with Exxon, USA.

      John D. Ryan has been Vice President - Sales and Marketing since February
1998 and Vice President of Sales since August of 1996. From 1991 through 1996 he
held various positions within the Petro organization including Branch Manager,
Regional Marketing Manager, and Director of Sales. From 1985 through 1991 he
held various Marketing, Sales, and Operations Management positions with Meenan
Oil Co., Inc., a retail heating oil dealer. From 1977 through 1985 Mr. Ryan held
various Marketing and Sales Management positions within the resale marketing
division of the Mobil Corporation.

      Matthew J. Ryan has been Vice President--Supply of the Company since
December 1992. He was Manager of Supply and Distribution of the Company from
1990 to 1992 and has been employed by the Company since 1987. From 1974 to 1987,
Mr. Ryan was employed by Whaleco Fuel Corp., a subsidiary of the Company which
was acquired in 1987.

      Peter B. Terenzio, Jr. joined the Company in June 1995 as Vice
President--Human Resources and in December 1997 was given the added
responsibility of overseeing risk management. Prior to joining the Company, Mr.
Terenzio spent one year as the Vice President--Human Resources for Linens 'N
Things and 11 years in various operational and human resources positions for
Filene's Basement, including Senior Vice President, Human Resources and
Distribution from 1990 to 1994.

      Paul Biddelman has been a director of Star Gas Corporation since October
1995. He also served in that capacity from December 1993 through June 1995. Mr.
Biddelman has been a director of Petro since October 1994. Mr. Biddelman has
been President of Hanseatic Corporation since December 1997. From April 1992
through December 1997, he was Treasurer of Hanseatic Corporation. Mr. Biddelman
joined Hanseatic from Clements Taee Biddelman Incorporated, a merchant banking
firm which he co-founded in 1991. From 1982 through 1990, he was a Managing
Director in Corporate Finance at Drexel Burnham Lambert Incorporated. Mr.
Biddelman also worked in corporate finance at Kuhn, Loeb & Co. from 1975 to
1979, and at Oppenheimer & Co. from 1979 to 1982. Mr. Biddelman is a director of
Celadon Group, Inc., Electronic Retailing Systems International, Inc.,
Institution Technologies, Inc., Natural Gas Vehicle Systems, Inc. and Premier
Parks, Inc.

      Phillip Ean Cohen has been a director of Petro, Inc., a wholly-owned
subsidiary of the Company, since January 1979 and of the Company since its
organization in October 1983. Since 1985, Mr. Cohen has been Chairman of Morgan
Schiff & Co., Inc., an investment banking firm.

      Thomas J. Edelman has been a Director of Petro since its organization in
October 1983. Mr. Edelman has also been a Director of Star Gas Corporation since
October 1995. He also served in that capacity from December 1993 through June
1995. Mr. Edelman has been the 


                                       24
<PAGE>

Chairman and Chief Executive Office of Patina Oil & Gas Corporation since its
formation in 1996. Mr. Edelman also serves as Chairman of Range Resources
Corporation (formerly Lomak Petroleum, Inc.). He co-founded Snyder Oil
Corporation and was its President and a Director from 1981 through early 1997.
Prior to 1981, he was a Vice President of The First Boston Corporation. From
1975 through 1980, Mr. Edelman was with Lehman Brothers Kuhn Loeb Incorporated.
Mr. Edelman also serves as a Director of Paradise Music & Entertainment, Inc.,
and as a Trustee of The Hotchkiss School.

      Stephen Russell has been a director of Petro since July 1996. He has been
Chairman of the Board and Chief Executive Officer of Celadon Group Inc., an
international transportation company, since its inception in July 1986. Mr.
Russell has been a member of the Board of Advisors of the Johnson Graduate
School of Management, Cornell University since 1983.

      Wolfgang Traber has been a director of Petro since its organization in
October 1983. Mr. Traber has also been a director of Star Gas Corporation since
October 1995. He also served in that capacity from December 1993 through June
1995. Mr. Traber is Chairman of the Board of Hanseatic Corporation, a private
investment corporation in New York, New York. Mr. Traber is a director of Deltec
Asset Management Corporation, Blue Ridge Real Estate Company and M.M. Warburg &
Co.

      Audrey L. Sevin is the mother of Irik P. Sevin. There are no other
familial relationships between any of the directors and executive officers.

      In January 1999, Vincent De Palma, Vice President and General Manager--New
York Region resigned from the Company and was replaced by John D. Ryan, Vice
President - Sales and Marketing. While Mr. Ryan immediately assumed the position
of Vice President and General Manager--New York Region, no immediate replacement
for the Vice President - Sales and Marketing position was determined.


                                       25
<PAGE>

                        ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth the cash compensation paid by the Company and its
subsidiaries for services during fiscal 1996, 1997 and 1998 to each of the
Company's five most highly compensated executive officers:

<TABLE>
<CAPTION>
                                                         SUMMARY COMPENSATION TABLE

                                                                                              Long Term
                                                 Annual Compensation                         Compensation
                                                 -------------------                         ------------
                                                                          Other        Restricted
         Name and                                                         Annual         Stock                        All Other
    Principal Position         Year     Salary           Bonus        Compensation       Awards       Options       Compensation
    ------------------         ----     ------           -----        ------------       ------       -------       ------------
<S>                            <C>   <C>              <C>              <C>              <C>          <C>            <C>        
Irik P. Sevin                  1998  $ 500,000(1)     $   --           $   --           $   --           --         $  9,600(2)
 Chairman and                  1997    387,500(1)         --               --               --           --            9,600(2)
 Chief Executive Officer       1996    350,000          339,000            --               --           --             --

William G. Powers              1998    250,000            --               --               --        200,000(3)       9,600(2)
 President and                 1997     20,833          450,000(4)         --               --           --             --
 Chief Operating Officer       

C. Justin McCarthy             1998    243,768            --           116,664(5)           --           --            9,600(2)
 Senior Vice President         1997    243,768            --           116,664(5)           --           --            9,600(2)
 Operations                    1996    230,000           89,597         48,610(5)           --         35,000(6)      13,391(7)

George Leibowitz               1998    374,104(5)         --               --               --           --            9,600(2)
 Treasurer                     1997    309,961(5)         --               --               --           --            9,600(2)
                               1996    225,000            --               --               --           --             --

Vincent De Palma               1998    235,000            --               --               --           --            9,600(2)
 Vice President and            1997    235,000           84,500            --               --           --            9,292(2)
 General Manager               1996    166,500          109,871(8)      80,512(9)       171,875(10)    15,000(11)       --
 New York Region               
</TABLE>

(1)   This amount includes $150,000 for 1998 and $37,500 for 1997 of
      compensation paid by the Star Gas Partnership (See "Certain Relationships
      and Related Transactions - Compensation to Mr. Sevin from the Partnership"
      section of this document).
(2)   This amount represents the Company's contributions under its defined
      contribution retirement plan.
(3)   These options are exercisable to purchase shares of Class A Common Stock
      of the Company. 50,000 options vested immediately, and each year beginning
      on June 1, 1999 and ending on June 1, 2001, 50,000 options vest.
(4)   This amount represents a signing bonus of $450,000 in connection with the
      appointment of Mr. Powers as President and Chief Operating Officer
      effective as of December 1, 1997. Mr. Power's current annual salary is
      $250,000 with a 40% bonus potential. Amounts do not include Mr. Power's
      compensation while he was an officer of Star Gas.
(5)   This amount represents payments made pursuant to an employment contract
      (See "Employment Contracts" section of this document).
(6)   These options were exercisable to purchase shares of Class A Common Stock
      of the Company with a vesting period of 20% each year beginning March 21,
      1997. In December 1998 all such options were forfeited.
(7)   Other compensation consists of amounts paid in lieu of contributions under
      the Company's 401(k) plan in which Mr. McCarthy did not participate.
(8)   This amount includes a signing bonus of $35,000.
(9)   This amounts represent reimbursement by the Company for moving expenses in
      connection with Mr. De Palma's relocation to Long Island, New York at the
      Company's request, and the additional reimbursement to offset the tax
      effects of such payments.
(10)  In accordance to the employment agreement granting Mr. De Palma 25,000
      restricted shares of the Company's Class A Common Stock, (See "Employment
      Contracts" section of this document) 20% of such shares vest on each
      anniversary date after April 15, 1996. The market price of the Company's
      Class A Common Stock on April 15, 1996 was $6.875 per share. As of
      December 31, 1998, 10,000 restricted shares had vested, and the aggregate
      value of all 25,000 restricted shares using the December 31, 1998 closing
      price of $0.75 per share, was $18,750.
(11)  These options were exercisable to purchase shares of Class A Common Stock
      of the Company with a vesting period of 20% each year beginning April 15,
      1997. In December 1998 all such options were forfeited.


                                       26
<PAGE>

The following table presents the value of unexercised options held by the named
executives at December 31, 1998:

                 Aggregated Option Exercises in Last Fiscal Year
                        and Fiscal Year End Option Values

                          Number of Unexercised                 Value of
                       Options at December 31, 1998      In the Money Options at
Name                 Exercisable (E) /Unexercisable (U)   December 31, 1998 (1)
----                 ----------------------------------   ---------------------

Irik P. Sevin
Class A Common Stock    100,000 (E) /         0 (U)

William G. Powers
Class A Common Stock     50,000 (E) /   150,000 (U)

(1)   Values are calculated by deducting the exercise price from the fair market
      value of the stock at December 31, 1998.

                       Options Granted In Last Fiscal Year

<TABLE>
<CAPTION>
                                                                                                      Potential Realizable
                                                                                                        Value at Assumed
                                           % of Total                                                    Annual Rates of
                                             Options                     Market                            Stock Price
                                           Granted to     Exercise      Price On                          Appreciation
                            Options         Employees      Price        the Date       Expiration        for Option Term
Name                      Granted (#)        in 1998      ($ Share)     of Grant          Date           5%           10%
----                      -----------        -------      ---------     --------          ----           --           ---
<S>                        <C>               <C>           <C>           <C>             <C>          <C>          <C>     
William G. Powers          200,000(1)        100.0%        $1.8125       $1.8125         5/31/08      $227,980     $577,740
</TABLE>

(1)   These options were issued in May 1998. 50,000 of these options are
      immediately exercisable and on each June 1st, 50,000 of the remaining
      option become exercisable.

Pension Plans

The Company maintained various retirement plans for substantially all non-union
employees. The executive officers of the Company were eligible to participate in
a qualified defined benefit pension plan (the "Pension Plan") which the Company
maintained for its non-union employees until December 31, 1996, at which time
the benefits covered under the plans were frozen.

The Pension Plan covered non-union employees who completed one year of service.
The Pension Plan generally provided to each participant who retires at age 65 an
annual benefit equal to 1.25% of the participant's average annual compensation
(defined as the average of such participant's highest five consecutive years
earnings out of the prior 10 years before retirement) multiplied by the number
of such participant's benefit years of service. A participant who has attained
age 55 and has completed five years of service may retire early and receive an
actuarial reduced benefit.

For the purposes of the Pension Plan, the following are the benefit years of
service and the covered compensation for the calendar year ended December 31,
1996, the year that the plans were frozen, for each individual named in the
preceding compensation table:


                                       27
<PAGE>

                                           Benefit     Covered
      Name                                  Years   Compensation
      ----                                 -------  ------------
      Irik P. Sevin                           18    $150,000
      William G. Powers                      9.5     150,000
      C. Justin McCarthy                      18     150,000
      George Leibowitz                         4     150,000

The following table shows estimated annual benefits which are not offset by
Social Security or any other reductions, payable in the form of a straight life
annuity under the Pension Plan to participants in the specified covered
compensation and benefit years of service classifications who retire having
reached their normal retirement dates.

                              PENSION PLAN TABLE

                                 Years of Service
                                 ----------------
 Remuneration     10        15        20        25        30       35
                  --        --        --        --        --       --
$  100,000     $12,500   $18,750   $25,000   $31,250   $37,500   $43,750
   200,000*     25,000    37,500    50,000    62,500    75,000    87,500
   300,000*     37,500    56,250    75,000    93,750   112,500   131,250**
   400,000*     50,000    75,000   100,000   125,000** 150,000** 175,000**
   500,000*     62,500    93,750   125,000** 156,250** 187,500** 218,750**

*   Exceeds Maximum Covered Compensation considered under the Plan of $150,000.
**  Exceeds Maximum Benefit Payable under the Plan of $120,000.

The Company also maintained a non-qualified supplemental retirement plan (the
"Supplemental Retirement Plan") which benefited 15 employees and retirees,
including Irik P. Sevin, William G. Powers, C. Justin McCarthy, and George
Leibowitz.

Effective December 31, 1996, the Company froze the benefits provided by the
Pension Plan and the Supplemental Retirement Plan. Under the Pension Plan, as
frozen, the projected normal retirement pension benefits of Messrs. Sevin,
Powers, McCarthy, and Leibowitz are $5,150, $1,500, $3,265, and $638,
respectively. Under the Supplemental Retirement Plan, as frozen, Mr. Sevin's
normal retirement benefit would not increase, Mr. Powers' normal retirement
benefit would be increased by $125 per month, Mr. McCarthy's normal retirement
benefit would be increased by $1,764 per month, and Mr. Leibowitz's normal
retirement benefit would be increased by $507 per month.

Effective December 31, 1996, the Company adopted a defined contribution
retirement savings plan, in which the Company's executive officers are eligible
to participate. Under this plan, for the calendar year ended December 31, 1998
the Company contributed $9,600 each for Messrs. Sevin, Powers, McCarthy,
Leibowitz, and De Palma.

Meetings and Compensation of Directors

During fiscal 1998, the Board of Directors met six times. Messrs. Sevin,
Biddelman, Cohen, Russell, and Traber, and Mrs. Sevin attended all meetings; Mr.
Edelman attended all meetings except two. The Company pays each of its directors
other than Irik P. Sevin and Stephen Russell an annual fee of $12,000. Mr. Sevin
does not receive director fees and Mr. Russell due to his participation on the
Board's Executive Committee receives $24,000 annually. Directors are elected
annually and serve until the next annual meeting of Shareholders or until their
successors are elected and qualified. The Shareholders' Agreement governs
matters relating to the nomination of and voting for directors by the
Shareholders who are party thereto. Though the Company does not pay any other
direct or indirect compensation to directors in their capacity as such, it has
entered into certain transactions with certain of the directors. See "Certain
Transactions."


                                       28
<PAGE>

Committees of the Board of Directors

The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The members of each committee are appointed by the Board of Directors
for a term beginning after the first regular meeting of the Board of Directors
following the Annual Meeting of Shareholders and until their respective
successors are elected.

Audit Committee. The duties of the Audit Committee are to (i) recommend to the
full Board the auditing firm to be selected each year as the Company's
independent auditors, (ii) consult with the persons so chosen to be the
independent auditors with regard to the plan of audit, (iii) review, in
consultation with the independent auditors, their report of audit, or proposed
report of audit, and the accompanying management letter, if any, (iv) consult
with the independent auditors (periodically, as appropriate, out of the presence
of management) with regard to the adequacy of the internal accounting and
control procedures, (v) review the Company's financial condition and results of
operations with management and the independent auditors and (vi) review any
non-audit services and special engagements to be performed by the independent
auditors and consider the effect of such performance on the auditors'
independence.

The members of the Audit Committee are Phillip Ean Cohen and Paul Biddelman.
Members of the Audit Committee may not be employees of the Company. The Audit
Committee met in January, March, and December of 1998. Both members of the Audit
Committee were present at all meetings.

Compensation Committee. The duties of the Compensation Committee are (i) to
determine the annual salary, bonus and other benefits, direct and indirect, of
any and all named executive officers (as defined under Regulation S-K
promulgated by the Securities and Exchange Commission), (ii) prepare an annual
Report of the Compensation Committee for inclusion in the Company's Proxy
Statement in accordance with the requirements of Schedule 14A of the Securities
Exchange Act of 1934, as amended, (iii) to review and recommend to the full
Board any and all matters related to benefit plans covering the foregoing
officers and any other employees in the event such matters are appropriate for
stockholder approval, and (iv) to administer the Company's 1994 Stock Option
Plan as the Option Committee thereunder.

The members of the Compensation Committee are Wolfgang Traber and Phillip Ean
Cohen. The Compensation Committee met in March of 1998. Both members of the
Compensation Committee were present at the meeting.

Compensation Committee Interlocks and Insider Participation

Messrs. Wolfgang Traber and Phillip Ean Cohen, both of whom are directors of the
Company, served as the members of the Compensation Committee during 1998.

Employment Contracts

Agreement with Justin McCarthy. In July 1995, the Company entered into an
agreement with Mr. McCarthy which provides that if his employment is terminated
before August 1, 1996 for any reason he will receive a severance payment of
$350,000. The agreement also stipulates that if he is employed by the Company on
August 1, 1996: (i) the Company will make 36 monthly payments aggregating
$350,000 in addition to salary and bonus otherwise payable, and during such
period, he will continue to receive certain benefits (or their cash equivalent)
regardless whether he is employed by the Company, and (ii) commencing on such
date (or such later date as his employment is terminated), he will receive
monthly payments of $25,000 until such payments equal the balance in his
Supplemental Retirement Account (the "Account"), which shall equal $175,000,
$410,000, $645,000 and $1,000,000 if he is employed on August 1, 1996, 1997,
1998 and 1999, respectively; provided, that if he is employed until August 1,
1999 and his aggregate salary and bonuses for the prior three years exceed $1
million, the Account will be increased by the amount of such excess. Such
payments shall continue for so long as he is recovering payments from the
Account. Beginning August 1, 1996, for so long as he is employed, the Account
will accrue 5% per annum simple interest. If a change in control (as defined)
occurs after such monthly payments have commenced, the remaining balance of the
Account will become payable 


                                       29
<PAGE>

promptly. If his employment is terminated prior to August 1, 1999 for any of the
following reasons, he will receive a single payment of $1 million in addition to
the payments described in clause (i) but in lieu of payments described in clause
(ii) above: death, permanent disability, termination of employment for any
reason within six months after a change in control or termination by the Company
without cause (as defined). In consideration of the foregoing, he will not
compete against the Company for the longer of two years after termination or the
number of months he receives supplemental retirement payments.

Agreement with George Leibowitz. In November 1992, the Company entered into an
employment agreement with Mr. Leibowitz. The agreement, as amended, had an
indefinite term, and was terminable by either party on 30 days' notice. During
the term of this agreement, Mr. Leibowitz received a base salary of $200,000,
subject to discretionary increases and bonuses. Simultaneously with the
execution of such employment agreement, the Company issued to Mr. Leibowitz an
option to purchase 25,000 shares of the Company's Class A Common Stock at $11
per share. On June 30, 1993, the Company issued Mr. Leibowitz an identical
option to purchase 25,000 shares of Class A Common Stock at $11 per share. 20%
percent of the options become exercisable on each of the first five anniversary
dates of the date of each grant. The Company has entered into a new employment
agreement with Mr. Leibowitz, effective April 1, 1997, which terminates the
prior employment agreement and provides (i) for an indefinite period of no less
than one year of 1/2 time employment at an annual salary of $112,750 and (ii)
payment of $18,750 per month for a period of 36 months.

Agreement with Vincent De Palma. In February 1996, the Company entered into an
employment agreement with Mr. De Palma which provided for a base annual salary
of $235,000, and an annual target bonus of 45%, subject to increase or decrease
depending on the achievement of certain management objectives and the
performance of the Company. Under the agreement Mr. De Palma's 1996 bonus was
guaranteed for the full target percentage, prorated based on his employment
tenure; and his 1997 bonus was guaranteed at a minimum of 80% of the target
percentage. The employment agreement also provided for an incentive signing
bonus of $35,000; reimbursement of relocation expenses; 15,000 options to
purchase the Company's Class A Common Stock at $6.875 per share, the then market
price, which are to vest 20% on each anniversary date of employment; and 25,000
shares of restricted Class A Common Stock, which are to vest at no cost to Mr.
De Palma also at a rate of 20% on each anniversary date of employment.


                                       30
<PAGE>

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

Ownership of Equity Securities in the Company

     The table below sets forth as of February 5, 1999 the number of shares
beneficially owned by each director and each of the five most highly compensated
executive officers of the Company, each beneficial owner of, or institutional
investment manager exercising investment discretion with respect to, 5% or more
of the outstanding shares of capital stock, and all directors and officers as a
group, and the respective percentage ownership of the outstanding Class A Common
Stock and Class C Common Stock held by each such holder and group:

<TABLE>
<CAPTION>
                                                                                                          Percent
                                              Number of Shares (1)                 Percent of Total       of Total
                                              --------------------                 ----------------        Voting
Name                                          Class A         Class C           Class A       Class C     Power(2)
----                                          -------         -------           -------       -------     --------
<S>                                         <C>             <C>                  <C>          <C>          <C>   
Wolfgang Traber (3)                         1,834,951(4)      606,472(5)          7.69%        23.35%      15.85%
Paul Biddelman (3)                          1,837,337(4)      597,434(5)          7.70         23.00       15.68
Hubertus Langen (6)                           731,473         606,472(5)          3.07         23.35       13.64
Audrey L. Sevin (7)                         1,876,862         477,716             7.87         18.39       13.35
Richard O'Connell (8)                       1,018,745         302,461             4.27         11.64        8.11
Irik P. Sevin (7)(9)                          720,226         201,641             3.01          7.76        5.48
Barcel Corporation (10)                       616,853         151,231             2.59          5.82        4.27
Thomas J. Edelman (7)                         653,312(11)     129,019             2.74          4.97        3.90
Phillip Ean Cohen (7)                         679,262         113,423             2.85          4.37        3.64
Frank Russell Company (12)                  1,643,400            --               6.89           --         3.30
Schneider Capital Management (13)           1,372,000            --               5.75           --         2.75
William G. Powers (7)(14)                      50,000            --                (15)          --          (15)
Stephen Russell (7)(14)                         8,333            --                (15)          --          (15)
George Leibowitz (7)                             --              --                 --           --           --
C. Justin McCarthy (7)                           --              --                 --           --           --
All officers and directors as a
group (15 persons) (16)                     5,885,507       1,528,271            24.51%        58.84%      42.35%
</TABLE>

(1)   For purposes of this table, a person or group is deemed to have
      "beneficial ownership" of any shares which such person has the right to
      acquire within 60 days after February 5, 1999. For purposes of calculating
      the percentage of outstanding shares held by each person named above, any
      shares which such person has the right to acquire within 60 days after
      February 5, 1999 are deemed to be outstanding, but not for the purpose of
      calculating the percentage ownership of any other person.
(2)   Total voting power means the total voting power of all shares of Class A
      Common Stock and Class C Common Stock. This column reflects the percentage
      of total voting power represented by all shares of Class A Common Stock
      and Class C Common Stock held by the named persons.
(3)   The address of such person is 450 Park Avenue, New York, NY 10022.
(4)   Includes 1,834,951 shares held by Hanseatic Americas LDC, a Bahamian
      limited duration company in which the sole managing member is Hansabel
      Partners, LLC, a Delaware limited liability company in which the sole
      managing member is Hanseatic Corporation, a New York corporation
      ("Hanseatic"). Messrs. Traber and Biddelman are executive officers of
      Hanseatic and Mr. Traber holds in excess of a majority of the shares of
      capital stock of Hanseatic.
(5)   Includes 298,717 shares owned by each of Hanseatic and Tortosa
      Vermogensverwaltungsgesellschaft mbH ("Tortosa"), a German corporation
      owned and controlled by Mr. Langen, and as to which Hanseatic and Tortosa
      each hold shared voting power.
(6)   The address of such person is Heinrich-Vogl-Strasse 17, 81479, Munich,
      Germany.
(7)   The address of such person is c/o the Company at P.O. Box 1457, Stamford,
      CT 06904.
(8)   The address of such person is 31 rue de Bellechasse, 75007, Paris, France.
(9)   Includes options to purchase 100,000 shares of Class A Common Stock.
(10)  The address of this company is c/o Trust Dept., Lloyds Bank International,
      King & George Streets, Nassau, Bahamas.
(11)  Includes 76,000 shares of Class A Common Stock owned by Mr. Edelman's wife
      and trusts for the benefit of his minor children.
(12)  The address of this company is 909 A Street, Tacoma, WA 98402. The Frank
      Russell Company is the parent company of a number of funds that hold
      Petroleum Heat and Power Co., Inc. Class A Common Stock.
(13)  The address of this company is 460 E. Swedesford Road, Suite 1080, Wayne,
      Pennsylvania 19087-1801. Schneider Capital Management has dispositive
      power over these shares.
(14)  Represents options to purchase shares of Class A Common Stock.
(15)  Indicates less than 1%.
(16)  Includes 2,503 shares of Class A Common Stock respectively held by five
      officers who are not among the five most highly compensated executive
      officers of the Company.


                                       31
<PAGE>

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors, executive officers and holders of more than 10% of the
Company's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. The Company believes that during the
fiscal year ended December 31, 1997, its officers, directors and holders of more
than 10% of the Company's Common Stock complied with all Section 16(a) filing
requirements.

Based upon the Shareholders' Agreement (defined below), all or some of the
beneficial owners listed above may be deemed a "group" within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

Messrs. Paul Biddelman, Phillip Ean Cohen, Thomas J. Edelman, Stephen Russell,
Irik P. Sevin, Wolfgang Traber and Mrs. Audrey L. Sevin are directors of the
Company, and Messrs. Irik P. Sevin, William G. Powers, C. Justin McCarthy,
George Leibowitz, Vincent De Palma, and Mrs. Audrey Sevin are officers of the
Company.

Shareholders' Agreement

Certain Shareholders of the Company have entered into a Shareholders' Agreement
(the "Shareholders' Agreement") which provides that they will vote their shares
to elect as directors of the Company up to five persons designated by a group
consisting of Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman, Phillip Ean
Cohen and Margot Gordon (the "Sevin Group") and three persons designated by
certain other Shareholders party to the agreement (the "Traber Group"). Each
group may designate its directors by action of the holders of a majority of the
Common Stock held by that group. The by-laws of the Company provide for the
election of not less than six and not more than 20 directors. The Board of
Directors has fixed the number of directors at seven. Of the present directors,
Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman, Phillip Ean Cohen and Paul
Biddelman have been designated by the Sevin Group and Wolfgang Traber and
Stephen Russell have been designated by the Traber Group. All such obligations
to vote for directors shall lapse if Irik P. Sevin and/or Audrey L. Sevin no
longer own, directly or indirectly, and/or have sole voting power over at least
51% of the shares of Class C Common Stock held by all members of the Sevin
Group.

The Shareholders' Agreement provides that the consideration per share which may
be received by a holder of Class C Common Stock upon a sale of shares of Class C
Common Stock may not exceed the average of the last reported sales prices per
share of the Class A Common Stock for the 90 trading days preceding the date of
such sale as reported on the Nasdaq National Market, and that any premium above
such consideration will inure to the benefit of the Company. In addition, the
Shareholders' Agreement provides that such provisions may not be modified
without the consent of the holders of 80% of the issued and outstanding shares
of Class A Common Stock. The Restated Articles of Incorporation of the Company
provide that any transfer of a share of Class C Common Stock (i) to any person
who is not a signatory to the Shareholders' Agreement or (ii) to any person
after the date on which the Shareholders' Agreement is for any reason no longer
in effect will automatically result in the conversion of such share into a share
of Class A Common Stock.

The Shareholders' Agreement (and the Company's Restated and Amended Articles of
Incorporation) provides that certain actions may not be taken without the
affirmative vote of a super-majority of 80% of the entire Board of Directors
(irrespective of vacancies) including at least one director who has been
designated by the Traber Group. These matters include (i) engaging in any
business other than the fuel oil distribution business, (ii) the merger or
consolidation of the Company with a non-subsidiary corporation, (iii) investment
of Company funds other than in specified securities, (iv) the sale, lease,
transfer or other disposition of a significant portion of the Company's assets
in any fiscal year other than the sale of petroleum products in the ordinary
course of business and those investments described in clause (iii) above, (v)
the liquidation, dissolution or winding up of the business of the Company, (vi)
payment of any compensation to directors, (vii) the incurrence of more than a
specified level of long-term debt, (viii) any issuance or repurchase of
securities or any right or option to purchase Common Stock or any security
convertible into capital stock, except in connection with the Company's dividend
policy and (ix) the making of, or any commitment for, any capital expenditures
or purchase of assets at more than specified levels. Action by Shareholders on
matters involving the sale of all or substantially all the Company's assets, the


                                       32
<PAGE>

Company's merger or consolidation (except the merger of a subsidiary into the
Company), the liquidation or dissolution of the Company, or any amendment to the
articles of incorporation does not require a super-majority vote of the
directors; however, the parties to the Shareholders' Agreement have agreed to
vote all of their Class C Common Stock against any proposal for such items
unless approved by a vote of at least 85% of the Class C Common Stock.


                                       33
<PAGE>

            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Certain Relationships and Related Transactions

Set forth below is information concerning certain transactions between the
Company and its Chairman and Chief Executive Officer and its other directors and
affiliates.

Sevin Note. In October 1986, Irik P. Sevin purchased 161,313 shares of Class A
Common Stock and 40,328 shares of Class C Common Stock (after giving retroactive
effect to the exchange of Class C Common Stock for Class A Common Stock in July
1992) of the Company for $1,280,000 (the fair market value of such shares
established by the Pricing Committee pursuant to the Shareholders' Agreement).
Mr. Sevin paid for such shares by issuing a note (the "Sevin Note") to the
Company in the amount of the purchase price. Mr. Sevin has agreed not to sell or
otherwise transfer to a third party any of such shares until the Sevin Note is
paid in full. The Sevin Note was amended annually to defer the payment of
interest and to increase the amount of principal by the amount of interest
deferred each year. As of December 31, 1995, the principal amount due on the
Sevin Note would have been $1,751,468. In December 1995, Mr. Sevin agreed to pay
the principal amount thereof in five equal annual installments of $328,012
together with interest at the LIBOR rate in effect for each month plus 0.75%.
Payment may be made in cash or shares of Class A Common Stock valued at the
greater of $6.3479 per share or the Current Market Price thereof (as defined).
Mr. Sevin paid the first four installments in December 1995, 1996, 1997, and
1998 by delivering 59,078, 61,251, 61,689 and 58,268 shares, respectively, to
the Company for cancellation, thereby reducing the balance due under the Sevin
Note to $328,008. In connection with the agreement to repay the Sevin Note,
certain rights of Mr. Sevin to cause the Company to repurchase such shares at
$6.3479 per share, and to grant him an option to purchase a like number of
shares upon any such repurchase, were terminated.

Indemnification Agreements with Directors. The Company has entered into
Indemnification Agreements with each of its directors. The Agreements generally
provide that the Company will indemnify the directors against certain
liabilities arising out of legal actions brought or threatened against them for
their conduct on behalf of the Company to the fullest extent permitted by
applicable law. The Agreements contain provisions implementing the director's
rights thereunder with respect to, among other things: (i) indemnification of
expenses to a party who is wholly or partly successful, (ii) indemnification of
expenses of a witness, (iii) advancement of expenses, (iv) procedure for
determination of entitlement to indemnification, (v) certain presumptions, (vi)
remedies of an indemnitee, (vii) subrogation, (viii) establishment of a trust
and the funding thereof by the Company, upon the indemnitee's request, in the
event of Change in Control or Potential Change in Control (as defined therein),
and (ix) contribution in the event indemnification may be unavailable.

Star Gas Transaction. As of December 31, 1998, the Company, through its wholly
owned subsidiary Star Gas Corporation ("Star Gas"), has a 40.5% equity interest
in Star Gas, L.P. (the "Partnership") and is its general partner. On October 23,
1998, the Partnership and Petro jointly announced that they have signed a
definitive merger agreement pursuant to which Petro would be acquired by the
Partnership and would become a wholly-owned subsidiary of the Partnership ("the
Star Gas/Petro transaction"). It is anticipated that this acquisition will be
accounted for using the purchase method of accounting. This transaction would be
effected through Petro shareholders exchanging their approximate 26.5 million
shares of Petro Common Stock for an approximate 3.2 million limited partnership
units and General Partnership units of the Partnership which will be
subordinated to the existing Common Units of the Partnership.

Of the 3.2 million subordinated Partnership units anticipated to be distributed
to Petro shareholders, 2.5 million will be Senior Subordinated Units and 0.7
million will be Junior Subordinated Units and General Partnership Units. The
Senior Subordinated Units will be publicly registered and tradable (they are
expected to be listed on the New York Stock Exchange) and will be subordinated
in distributions to the Partnership's Common Units. The Junior Subordinated
Units and General Partnership Units will not be registered nor publicly tradable
and will be subordinated to both the Common Units and the Senior Subordinated
Units. The Senior Subordinated Units will be exchanged with holders of Petro's
Class A and Class C Common Stock, other then shares held by Audrey Sevin, Irik
Sevin, and two corporations controlled by Wolfgang Traber, whose shares will be
exchanged for Junior Subordinated Units and General Partnership Units.


                                       34
<PAGE>

Pursuant to the partnership subordination provision, distributions on the
Partnership's Senior Subordinated Units may be made only after distributions of
Available Cash on Common Units meet the Minimum Quarterly Distribution ("MQD")
requirement. Distributions on the Partnership's Junior Subordinated Units and
General Partner Units may be made only after distributions of Available Cash on
Common Units and Senior Subordinated Units meet the MQD requirement. The
Subordination Period will generally extend until the Partnership earns and pays
its MQD for three years. As a condition of the Star Gas/Petro transaction, the
Partnership agreement will be amended so that no distribution will be paid on
the Senior Subordinated Units, Junior Subordinated Units, or the General Partner
Units except to the extent Available Cash is earned from operations beginning
with the quarter ending December 31, 1999. The first possible distribution is
February 2000.

Like many other publicly traded master limited partnerships, the Partnership
contains a provision which provides the General Partner with incentive
distributions in excess of certain targeted amounts. This provision will be
modified so that should there be any such incentive distributions, they will be
made pro rata to the holders of Senior Subordinated Units, Junior Subordinated
Units, and General Partner Units. In connection with the Star Gas/Petro
transaction, the Senior Subordinated Units, Junior Subordinated Units and
General Partnership Units can earn, pro rata, 0.3 million additional Senior
Subordinated Units each year that Petro meets certain financial goals to a
maximum of 0.9 million additional Senior Subordinated Units.

Petro currently has a 40.5% equity interest in the Partnership. Prior to the
transaction, Petro owns 2.4 million Subordinated Units and a 2.0% interest in
the Partnership or the equivalent of 0.1 million units. As part of the
Transaction, these units will be contributed to the Partnership by Petro in
exchange for forty-two thousand Common Units and approximately 1.7 million
Senior Subordinated Units. The Common Units will be exchanged by Petro with the
holders of Petro Junior Convertible Preferred Stock and the Senior Subordinated
Units ultimately be exchanged with a portion of the holders of Petro's Common
Stock. After completion of the Star Gas/Petro transaction, the Petro
shareholders will own approximately 20% of the Partnership's equity through
Subordinated Units and General Partnership Units. The holders of the
Partnership's Common Units (including an estimated 9.1 million Common Units that
will be sold in the Partnership's $130 million public offering) will own an
approximate aggregate 80% equity interest in the Partnership following the
completion of the transaction. The General Partner of the Partnership will be a
newly organized Delaware limited liability company that will be owned by certain
officers and directors of Petro consisting of Irik Sevin, Audrey Sevin and two
entities affiliated with Wolfgang Traber.

Paul Biddelman, Thomas Edelman, Audrey L. Sevin, Irik P. Sevin and Wolfgang
Traber are directors of both the Company and of the general partner of the
Partnership.

Compensation to Mr. Sevin from the Partnership. In an attempt to recognize Mr.
Sevin's potential to assist the Partnership in its own growth through
acquisitions, as of October 1997 the Partnership entered into an arrangement
with Mr. Sevin pursuant to which he will receive compensation at the rate of
$150,000 per annum plus potential incentives based upon performance. This
arrangement replaces that part of the continuing reimbursement agreement between
the Company and the Partnership which covers Mr. Sevin's services so as to more
closely relate the amounts paid by the Partnership to the services rendered on
its behalf by Mr. Sevin. In addition, the Company has continued to be reimbursed
for all direct and indirect expenses incurred in connection with certain
administrative services performed for the Partnership.

Review of Transactions between the Company and its Affiliates. The Company's
Board of Directors reviews, at least once each year, the terms of all material
transactions and arrangements between the Company and its affiliates.


                                       35
<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, 1997 and 1998

              Consolidated Statements of Operations, years ended
               December 31, 1996, 1997 and 1998

              Consolidated Statements of Changes in Stockholders' Equity
               (Deficiency) years ended December 31, 1996, 1997 and 1998

              Consolidated Statements of Cash Flows, years ended
               December 31, 1996, 1997 and 1998

              Notes to Consolidated Financial Statements

      2.    The following financial schedule is submitted herewith:

            Schedule II - Valuation and Qualifying Accounts - Years Ended
            December 31, 1996, 1997 and 1998

            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.


                                       36
<PAGE>

(a)   Exhibits

Exhibit
  No.       Description of Exhibit
-------     ----------------------

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)

4.10 -    Certificate of Designation setting forth resolution creating a series
          of preferred stock designated as 1998 Junior Convertible Preferred
          Stock. (8)

4.11 -    Certificate of Designation setting forth resolution creating a series
          of preferred stock designated as Series C Exchangeable Preferred
          Stock. (8)

4.12 -    Fourth Amendment to Indenture with respect to the 10 1/8% Subordinated
          Notes due 2003. (8)

4.13 -    Second Amendment to Indenture with respect to 9 3/8% Subordinated
          Debenture due 2006. (8)

4.14 -    Second Amendment to Indenture with respect to the 12 1/4% Subordinated
          Debenture due 2005. (8)

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)


                                       37
<PAGE>

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)

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)

10.28 -   Fifth Amendment dated as of July 15, 1998 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)

11.0 -    Computation of Per Share Earnings.(10)

21.0 -    Subsidiaries of Registrant.(10)

23.1 -    Consent of KPMG LLP (10)

27.0 -    Financial Data Schedule (10)


(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.


                                       38
<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 25, 1999

                                             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 25, 1999
------------------------ Chief Executive Officer,
    Irik P. Sevin        Chief Financial and
                         Accounting Officer
                         and Director



    Audrey L. Sevin      Secretary and Director             March 25, 1999
------------------------
    Audrey L. Sevin


    Paul Biddelman       Director                           March 25, 1999
------------------------
    Paul Biddelman


    Phillip Ean Cohen    Director                           March 25, 1999
------------------------
    Phillip Ean Cohen


    Thomas J. Edelman    Director                           March 25, 1999
------------------------
    Thomas J. Edelman


    Stephen Russell      Director                           March 25, 1999
------------------------
    Stephen Russell


    Wolfgang Traber      Director                           March 25, 1999
------------------------
    Wolfgang Traber


                                       39
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

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

   Independent Auditors' Report                                              F-2

   Consolidated Balance Sheets, December 31, 1997 and 1998                   F-3

   Consolidated Statements of Operations, Years ended
      December 31, 1996, 1997 and 1998                                       F-4

   Consolidated Statements of Changes in Stockholders'
     Equity (Deficiency),
       Years ended December 31, 1996, 1997 and 1998                          F-5

   Consolidated Statements of Cash Flows, Years ended
      December 31, 1996, 1997 and 1998                                       F-6

   Notes to Consolidated Financial Statements                                F-7

   Schedule for the years ended December 31, 1996, 1997 and 1998:

      II - Valuation and Qualifying Accounts                                F-28

      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, 1997 and
1998, 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, 1998. 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, 1997 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 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, present fairly, in all
material respects, the information set forth therein.

                                                     KPMG LLP

Stamford, Connecticut
February 16, 1999


                                       F-2
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets

(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                ----------------------
                                                                   1997         1998
                                                                ---------    ---------
<S>                                                             <C>          <C>      
Assets

Current assets:
 Cash                                                           $   2,390    $   2,004
 Restricted cash                                                       --        4,900
 Accounts receivable (net of allowance of $980 and $944)           78,987       56,845
 Inventories                                                       16,285       17,534
 Prepaid expenses                                                   6,203        5,978
 Notes receivable and other current assets                          1,259        1,045
                                                                ---------    ---------
  Total current assets                                            105,124       88,306
                                                                ---------    ---------
Property, plant and equipment - net                                30,615       28,124

Intangible assets (net of accumulated amortization
 of $285,850 and $306,822)
  Customer lists                                                   69,265       52,596
  Deferred charges                                                 24,924       21,849
                                                                ---------    ---------
                                                                   94,189       74,445
                                                                ---------    ---------
Investment in and advances to the Star Gas Partnership             27,499       20,755
Deferred gain on Star Gas Transaction                             (19,964)     (19,964)
                                                                ---------    ---------
                                                                    7,535          791
                                                                ---------    ---------
Restricted cash                                                     9,350        6,900
Other assets                                                        1,033          965
                                                                ---------    ---------
                                                                $ 247,846    $ 199,531
                                                                =========    =========
Liabilities and Stockholders' Equity (Deficiency)

Current liabilities:
 Working capital borrowings                                     $   3,000    $      --
 Current debt                                                       2,391        8,021
 Current maturities of redeemable preferred stock                   4,167        4,167
 Accounts payable                                                  14,759       10,129
 Customer credit balances                                          20,767       27,884
 Unearned service contract revenue                                 15,321       15,430
 Accrued expenses and other liabilities                            32,283       31,652
                                                                ---------    ---------
  Total current liabilities                                        92,688       97,283
                                                                ---------    ---------
Supplemental benefits and other long-term liabilities               5,043        4,984
Pension plan obligation                                             5,702        5,780
Notes payable and other long-term debt                             16,507        8,381
Senior notes payable                                               63,100       62,050
Senior subordinated and subordinated notes payable                209,350      208,300

Redeemable and exchangeable preferred stock                        32,489       28,578

Common stock redeemable at option of stockholder (83 Class A
 and 21 Class C shares and 41 Class A and 10 Class C shares)          656          328
Note receivable from stockholder                                     (656)        (328)

Stockholders' equity (deficiency):
 Preferred stock-no par value; 1,000 shares authorized,
  0 and 787 shares issued and outstanding                              --           --
 Class A common stock-par value $.10 per share; 60,000 shares
  authorized, 23,606 and 23,865 shares issued and outstanding       2,361        2,387
 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, 2,577 and 2,587 shares issued and outstanding           258          259
 Additional paid-in capital                                        81,358       83,024
 Deficit                                                         (256,365)    (296,759)
 Accumulated other comprehensive income                            (4,646)      (4,737)
                                                                ---------    ---------
     Total stockholders' equity (deficiency)                     (177,033)    (215,825)
                                                                ---------    ---------
                                                                $ 247,846    $ 199,531
                                                                =========    =========
</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,
                                                 -----------------------------------
                                                    1996         1997         1998 
                                                 ---------    ---------    ---------
<S>                                              <C>          <C>          <C>      
Net sales                                        $ 608,161    $ 548,141    $ 408,019

Costs and expenses
  Cost of sales                                    427,388      379,748      265,526
  Selling, general and administrative expenses     105,601      102,377       87,268
  Direct delivery expense                           33,102       30,006       24,613
  Restructuring charges                              1,150        2,850          535
  Corporate identity expenses                        2,659        4,136          152
  Star Gas transaction expenses                         --           --        4,823
  Pension curtailment expense                          557          654           --
  Amortization of customer lists                    18,611       17,903       16,669
  Depreciation of plant and equipment                6,574        7,204        6,969
  Amortization of deferred charges                   2,888        3,175        2,899
  Provision for supplemental benefits                  873          565          358
                                                 ---------    ---------    ---------
    Operating income (loss)                          8,758         (477)      (1,793)

Other income (expense):
  Interest expense                                 (34,669)     (33,813)     (33,037)
  Amortization of debt issuance cost                (1,872)      (1,464)      (1,404)
  Interest income                                    2,257        2,145        2,305
  Other                                              1,842       11,445          112
                                                 ---------    ---------    ---------
  Loss before income taxes, equity interest
    and extraordinary item                         (23,684)     (22,164)     (33,817)
Income taxes                                           500          500          400
                                                 ---------    ---------    ---------
  Loss before equity interest
    and extraordinary item                         (24,184)     (22,664)     (34,217)
                                                 ---------    ---------    ---------

Share of income (loss) of Star Gas
  Partnership                                        2,283         (235)      (1,120)
                                                 ---------    ---------    ---------
  Loss before extraordinary item                   (21,901)     (22,899)     (35,337)
                                                 ---------    ---------    ---------
Extraordinary item-loss on early
   extinguishment of debt                           (6,414)          --           --
                                                 ---------    ---------    ---------
  Net loss                                       $ (28,315)   $ (22,899)   $ (35,337)
                                                 =========    =========    =========

Preferred Stock dividends                           (2,389)      (4,644)      (5,057)
                                                 ---------    ---------    ---------
  Net loss applicable to common stock            $ (30,704)   $ (27,543)   $ (40,394)
                                                 =========    =========    =========

Basic and Diluted losses per common
 share before extraordinary item:
  Class A and C Common Stock                     $   (0.95)   $   (1.06)   $   (1.52)

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

Basic and Diluted losses per common share:
  Class A and C Common Stock                     $   (1.20)   $   (1.06)   $   (1.52)
</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, 1996, 1997 and 1998

                                 (In thousands)

<TABLE>
<CAPTION>
                                               Common Stock
                        ---------------------------------------------------------
                             Class A              Class B            Class C                                Accumulated
                        ---------------------------------------------------------  Additional                  Other
                        No. of               No. of              No. of              Paid-In               Comprehensive
                        Shares     Amount    Shares     Amount   Shares    Amount    Capital     Deficit       Income       Total
                        ------     ------    ------     ------   ------    ------    -------     -------       ------       -----
                       ------------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>          <C>         <C>   <C>        <C>     <C>       <C>            <C>        <C>       
Balance at 12/31/95     22,653     $2,266       14          $1    2,558      $256    $76,418   $(174,972)     $(4,872)   $(100,903)

Net loss                                                                                         (28,315)                  (28,315)

Other comprehensive
 income:
  Minimum pension
   liability adj.                                                                                              (1,193)      (1,193)
                                                                                                                         ----------
Comprehensive income                                                                                                       (29,508)

Cash dividends
 declared and paid
 (See notes 7 & 8)                                                                               (13,880)                  (13,880)
Cash div. payable
 (See notes 7 & 8)                                                                                (3,857)                   (3,857)
Class A Common Stock
 issued under the
 Div. Reinvest. Plan       302         30                                              2,034                                 2,064
Other                      (24)        (2)      (3)         --        9         1        352                                   351
                       ------------------------------------------------------------------------------------------------------------
Balance at 12/31/96     22,931      2,294       11           1    2,567       257     78,804    (221,024)      (6,065)    (145,733)

Net loss                                                                                         (22,899)                  (22,899)

Other comprehensive
 income:
  Minimum pension
   liability adj.                                                                                               1,419        1,419
                                                                                                                         ----------
Comprehensive income                                                                                                       (21,480)

Cash dividends
 declared and paid
 (See notes 7 & 8)                                                                               (10,479)                  (10,479)

Cash div. payable
 (See notes 7 & 8)                                                                                (1,963)                   (1,963)
Class A Common Stock
 issued under the
 Div. Reinvest. Plan       691         69                                              2,331                                 2,400
Other                      (16)        (2)                           10         1        223                                   222
                       ------------------------------------------------------------------------------------------------------------
Balance at 12/31/97     23,606      2,361       11           1    2,577       258     81,358    (256,365)      (4,646)    (177,033)

Net loss                                                                                         (35,337)                  (35,337)

Other comprehensive
 income:
  Minimum pension
   liability adj.                                                                                                 (91)         (91)
                                                                                                                         ----------
Comprehensive income                                                                                                       (35,428)

Cash dividends
 declared and paid
 (See notes 7 & 8)                                                                                (5,057)                   (5,057)
Class A Common Stock
 issued under the
 Div. Reinvest. Plan       271         27                                                583                                   610
Jr. Convertible
 preferred stock
 issued in connection
 with exchange offer                                                                   1,216                                 1,216
Other                      (12)        (1)                           10         1       (133)                                 (133)
                       ------------------------------------------------------------------------------------------------------------
Balance at 12/31/98     23,865     $2,387       11          $1    2,587      $259    $83,024   $(296,759)     $(4,737)   $(215,825)
                       ============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F - 5
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
(In thousands)                                                          Years Ended December 31,
                                                                    --------------------------------
                                                                      1996        1997        1998 
                                                                    --------    --------    --------
<S>                                                                 <C>         <C>         <C>      
Cash flows from (used in) operating activities:
Net loss                                                            $(28,315)   $(22,899)   $(35,337)
Adjustments to reconcile net loss to
 net cash provided by (used in) operating activities:
  Amortization of customer lists                                      18,611      17,903      16,669
  Depreciation of plant and equipment                                  6,574       7,204       6,969
  Amortization of deferred charges                                     2,888       3,175       2,899
  Amortization of debt issuance costs                                  1,872       1,464       1,404
  Share of (income)loss of Star Gas                                   (2,283)        235       1,120
  Provision for losses on accounts receivable                          1,882       1,853       1,419
  Provision for supplemental benefits                                    873         565         358
  Loss on early extinguishment of debt                                 6,414          --          --
  Gain on sale of business                                            (1,781)    (11,284)         --
  Other                                                                  105        (186)       (126)

  Change in Operating Assets and Liabilities, net of
   effects of acquisitions and dispositions:
    Decrease in accounts receivable                                      117      12,522      20,723
    Decrease (increase) in inventory                                  (1,671)      5,799      (1,249)
    Decrease (increase) in other current assets                         (575)        845         439
    Decrease (increase) in other assets                                  (86)       (123)         68
    Decrease in accounts payable                                      (3,836)     (4,229)     (4,630)
    Increase (decrease) in customer credit balances                   (2,142)      3,299       7,117
    Increase (decrease) in unearned service contract revenue            (147)        (67)        109
    Increase (decrease) in accrued expenses                           (2,352)      2,568       1,332
                                                                    --------    --------    --------
 Net cash provided by (used in) operating activities                  (3,852)     18,644      19,284
                                                                    --------    --------    --------
Cash flows from (used in) investing activities:
 Minimum quarterly distributions from Star Gas Partnership             4,313       5,507       4,367
 Acquisitions                                                        (28,493)    (16,252)         --
 Capital expenditures                                                 (6,874)     (6,980)     (4,584)
 Proceeds from sale of business                                        4,073      15,571          --
 Net proceeds from sales of fixed assets                                 788       1,174         218
                                                                    --------    --------    --------
  Net cash provided by (used in) investing activities                (26,193)       (980)          1
                                                                    --------    --------    --------

Cash flows from (used in) financing activities:
 Net proceeds from sale of Star Gas Partnership units                     --          --       1,271
 Net proceeds from issuance of common stock                            2,064       2,400         610
 Net proceeds from issuance of preferred stock                            --      28,323          --
 Repayment of senior notes payable                                    (1,050)     (1,050)     (1,050)
 Repurchase of subordinated notes                                    (49,612)     (1,050)     (1,050)
 Redemption of preferred stock                                        (4,167)     (4,167)     (4,167)
 Repurchase of common stock                                              (39)         --          --
 Credit facility borrowings                                           51,000      16,000       5,000
 Credit facility repayments                                          (29,000)    (35,000)     (8,000)
 Net decrease (increase) in restricted cash                            3,000      (6,350)     (2,450)
 Cash dividends paid                                                 (17,702)    (14,336)     (7,020)
 Other                                                                   523      (3,301)     (2,815)
                                                                    --------    --------    --------
  Net cash provided by (used in) financing activities                (44,983)    (18,531)    (19,671)
                                                                    --------    --------    --------
 Net (decrease) in cash                                              (75,028)       (867)       (386)
 Cash at beginning of year                                            78,285       3,257       2,390
                                                                    --------    --------    --------
 Cash at end of year                                                $  3,257    $  2,390    $  2,004
                                                                    ========    ========    ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
 Interest                                                           $ 37,007    $ 33,879    $ 33,304
 Income taxes                                                            215         140         162
Noncash investing and financing activities:
 Issuance of notes payable                                                --          --          --
 Acquisitions                                                             --     (26,467)         --
 Asset conveyance to Star Gas Partnership                                 --      26,467          --
 Star Gas Partnership units received pursuant to asset conveyance         --      (3,467)         --
 Increase in tax liability from asset conveyance                          --       3,467          --
 Issuance of junior preferred stock pursuant to subordinated
  bond and cumulative redeemable preferred stock exchange                 --          --       1,216
 Increase in deferred charges                                             --          --      (1,216)
</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-six major markets in the
Northeast, including the metropolitan areas of Boston, New York City, Baltimore,
Providence, and Washington DC serving approximately three hundred and forty
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 twenty-four branches / depots and
thirteen 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.

In addition, the Company through its wholly owned subsidiary Star Gas
Corporation ("Star Gas"), has a 40.5% equity interest in Star Gas, L.P. (the
"Partnership") which is being accounted for by the equity method. Additionally,
Star Gas is the general partner of the Partnership. The Partnership is primarily
engaged in the retail distribution of propane and related equipment and supplies
to residential, commercial, industrial, agricultural and motor fuel customers.
The Partnership believes that it is the eighth largest retail propane
distributor in the United States, serving approximately one hundred and
sixty-six thousand customers from fifty-five branch locations and thirty-two
satellite storage facilities in the Midwest and nineteen branch locations and
fourteen satellite storage facilities in the Northeast. The Partnership also
serves approximately thirty wholesale customers from its wholesale operation in
southern Indiana (see note 2 and 3).

Comprehensive Income

The Company's comprehensive income consists of net income and other
comprehensive income, the sole component of which is the minimum pension
liability adjustment.

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.

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.


                                       F-7
<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 (Continued)

Equity Accounting for Star Gas Investment

The Company has accounted for its investment in the Partnership using the equity
method of accounting since the Partnership's initial public offering in December
1995 (see note 2 and 3). The Company believes that the equity method is
appropriate due to the Partnership Agreement which places significant
restrictions on the General Partner's authority to make Partnership decisions
such as possessing or assigning specific partnership property, admitting a new
partner, or transferring its interest as General Partner. The Partnership
Agreement also allows for the removal of the General Partner by a 2/3 vote of
the common unitholders. In addition, Petro has no voting rights, except to the
extent that the Company holds Common Units, which are minimal.

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:

                                      December 31,
                                 ---------------------
                                    1997        1998
                                    ----        ----
Fuel oil                         $   9,246   $  11,158
Parts and equipment                  7,039       6,376
                                 =========   =========
                                 $  16,285   $  17,534
                                 =========   =========

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.

Deferred charges include goodwill and payments related to covenants not to
compete. The covenants are amortized using the straight-line method over the
terms of the related contracts 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.

Advertising Expenses

Advertising costs are expensed as they are incurred. Advertising expenses were
$2,947, $3,294 and $2,503 for 1996, 1997 and 1998 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.


                                       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

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.

For the year ended December 31, 1997 the Company purchased put options to hedge
the risk associated with a decrease in heating oil prices in situations where
forward purchase contracts and futures contracts had been entered into to match
capped-price customer commitments. The cost of acquiring these options was
recognized in cost of goods sold over the life of each option agreement. For the
year ended December 31, 1998 the Company did not purchase similar put options.

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, 1997 and
1998 the Company had futures contracts to buy #2 home heating oil with notional
amounts totaling $11,925 and $17,406, and futures contracts to sell #2 home
heating oil with notional amounts totaling $5,061 and $0 respectively.

At December 31, 1997 the Company had put options outstanding with an aggregate
notional value of $14,438 to hedge the risk associated with approximately 50% of
the 33.8 million gallons of heating oil forward purchase contracts and 20.6
million gallons under futures contracts, that expired at various times with no
contract expiring later than April 1998. At December 31, 1998 the Company did
not have similar put options, but did have 15.7 million gallons of heating oil
forward purchase contracts and 38.8 million gallons of futures contracts, which
expire at various times with no contract expiring later than May 1999. The
unrealized losses on the Company's hedging activity was ($2.7) million and
($6.0) million at December 31, 1997 and 1998 respectively. This hedging activity
is designed to help the Company achieve its planned margins and represents
approximately 23% and 24% of the expected total #2 oil volume for the
corresponding 1997 and 1998 period.

The carrying amount of all hedging financial instruments at December 31, 1997
and 1998 was $488 and $3,009 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, including the New York
Mercantile Exchange. The Company does not expect any losses due to such
counterparty default.

Corporate Identity Expenses

Corporate identity expenses represent the costs associated with the Company's
brand identity program, implemented first in Long Island in 1996 and in the
Company's Metro New York and Mid Atlantic regions in 1997. These expenses
include the cost of repainting all delivery and service vehicles to reflect the
Company's new identity, and are expensed as they are incurred.


                                       F-9
<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)

Star Gas Transaction Expenses

Star Gas transaction expenses represent costs incurred in association with the
Company's previously announced business combination with the Partnership (see
note 3). These expenses include legal, printing, advisory, and other
professional charges incurred to accomplish this business combination, and are
expensed as they are incurred. The Company estimates that it will incur a total
of $7.5 million to $8.5 million of costs associated with this transaction. If
this transaction is successfully completed, the Partnership will reimburse the
Company approximately $7.0 million for these expenses.

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.

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". When the
impact of converting dilutive securities are antidilutive, the computation
treats such conversions as having no effect and presents basic and diluted
earnings per share as the same amount during periods with losses (see note 17).

Accounting Changes

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. The Company
adopted SFAS No. 130 and has made the appropriate disclosures.

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 adopted SFAS No. 131 and in accordance with the Statement has disclosed
its only reportable segment.

In February 1998 the FASB issued SFAS No. 132 - "Employer's Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 attempts to
standardize the disclosure requirements for pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted SFAS No. 132 and has made the appropriate
disclosures.

In June 1998 the FASB issued SFAS No. 133 - "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company is assessing the impact and disclosure
requirements of SFAS No. 133.


                                      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

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 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 (the "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, 1998, 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.

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 one hundred and forty-eight thousand 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 twenty-four thousand common units and in January 1998 sold
sixty-three thousand common units.


                                      F-11
<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)

As a result of the Partnership's secondary public offering in December 1997 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, is being amortized to income over twenty-five years.
As of December 31, 1998 Petro has, through Star Gas, a 40.5% equity interest in
the Partnership and Star Gas is its general partner.

(3) Star Gas / Petro Transaction

On October 23, 1998, the Partnership and Petro jointly announced that they have
signed a definitive merger agreement pursuant to which Petro would be acquired
by the Partnership and would become a wholly-owned subsidiary of the Partnership
("the Star Gas/Petro transaction"). It is anticipated that this acquisition will
be accounted for using the purchase method of accounting. This transaction would
be effected through Petro shareholders exchanging their approximate 26.5 million
shares of Petro Common Stock for an approximate 3.2 million limited partnership
units and General Partnership units of the Partnership which will be
subordinated to the existing Common Units of the Partnership.

Of the 3.2 million subordinated Partnership units anticipated to be distributed
to Petro shareholders, 2.5 million will be Senior Subordinated Units and 0.7
million will be Junior Subordinated Units and General Partnership Units. The
Senior Subordinated Units will be publicly registered and tradable (they are
expected to be listed on the New York Stock Exchange) and will be subordinated
in distributions to the Partnership's Common Units. The Junior Subordinated
Units and General Partnership Units will not be registered nor publicly tradable
and will be subordinated to both the Common Units and the Senior Subordinated
Units. The Senior Subordinated Units will be exchanged with holders of Petro's
Class A and Class C Common Stock, other then shares held by Audrey Sevin, Irik
Sevin, and two corporations controlled by Wolfgang Traber, whose shares will be
exchanged for Junior Subordinated Units and General Partnership Units.

Pursuant to the partnership subordination provision, distributions on the
Partnership's Senior Subordinated Units may be made only after distributions of
Available Cash on Common Units meet the Minimum Quarterly Distribution ("MQD")
requirement. Distributions on the Partnership's Junior Subordinated Units and
General Partner Units may be made only after distributions of Available Cash on
Common Units and Senior Subordinated Units meet the MQD requirement. The
Subordination Period will generally extend until the Partnership earns and pays
its MQD for three years. As a condition of the Star Gas/Petro transaction, the
Partnership agreement will be amended so that no distribution will be paid on
the Senior Subordinated Units, Junior Subordinated Units, or the General Partner
Units except to the extent Available Cash is earned from operations beginning
with the quarter ending December 31, 1999. The first possible distribution is
February 2000.

Like many other publicly traded master limited partnerships, the Partnership
contains a provision which provides the General Partner with incentive
distributions in excess of certain targeted amounts. This provision will be
modified so that should there be any such incentive distributions, they will be
made pro rata to the holders of Senior Subordinated Units, Junior Subordinated
Units, and General Partner Units. In connection with the Star Gas/Petro
transaction, the Senior Subordinated Units, Junior Subordinated Units and
General Partnership Units can earn, pro rata, 0.3 million additional Senior
Subordinated Units each year that Petro meets certain financial goals to a
maximum of 0.9 million additional Senior Subordinated Units.


                                      F-12
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(3) Star Gas / Petro Transaction (Continued)

In connection with the Star Gas/Petro transaction, the Partnership intends to
raise approximately $170 million through a public offering of Common Units and
$90 million through a private offering of debt securities. The net proceeds from
these offerings will be used primarily to redeem approximately $240 million in
Petro public and private debt and preferred stock. Any such offering will be
made only by means of a prospectus or in transactions not requiring registration
under securities laws.

In October 1998, Petro completed an exchange offer with the holders of its 10
1/8% notes, 9 3/8% debentures, and 12 1/4% debentures and entered into
individually negotiated agreements with the holders of its 12 7/8% preferred
stock. In the debt exchange offer and preferred stock agreements, the holders of
approximately 98.5% in aggregate principal amount and liquidation preference of
Petro's public debt and preferred stock exchanged those securities for a like
principal amount and liquidation preference of new securities, the terms of
which are in all material respects the same as the terms of the old securities,
except that (1) the new debt securities are senior to the old debt securities,
and (2) the terms of the new debt securities and the new preferred stock (i)
give Petro the right to redeem these securities at the closing of the Star Gas /
Petro transaction but not later than April 1, 1999 at; 103.5% of face value for
the new 12 1/4% debentures; 100% of face value for the new 10 1/8% notes; 100%
of face value for the new 9 3/8% debentures; and $23.00 per share for the new 12
7/8% preferred stock; and (ii) eliminate substantially all covenants from the
indentures under which the old debt securities were issued. The tendering
holders of the old 12 7/8% preferred stock have also granted Petro an
irrevocable proxy to vote all their shares of preferred stock in favor of the
acquisition proposal at the special meeting.

In the debt exchange offer, Petro issued an aggregate 0.8 million shares of
junior convertible preferred stock (convertible to Petro Class A Common Stock on
a share for share basis) to the tendering holders. At the completion of the
transaction, those shares will be exchanged into an aggregate 0.1 million
Partnership Common Units in the merger. Holders of these shares have also
granted Petro an irrevocable proxy or have agreed to vote these shares in favor
of the acquisition proposal.

Petro currently has a 40.5% equity interest in the Partnership representing its
2.4 million Subordinated Units and a 2.0% interest in the Partnership or the
equivalent of 0.1 million units. As part of the Transaction, these units will be
contributed to the Partnership by Petro in exchange for one hundred and three
thousand Common Units and approximately 2.0 million Senior Subordinated Units.
The Common Units will be exchanged by Petro with the holders of Petro Junior
Convertible Preferred Stock and the Senior Subordinated Units ultimately be
exchanged with a portion of the holders of Petro's Common Stock. After
completion of the Star Gas/Petro transaction, the Petro shareholders will own
approximately 20% of the Partnership's equity through Subordinated Units and
General Partnership Units. The holders of the Partnership's Common Units
(including an estimated 8.9 million Common Units that will be sold in the
Partnership's $170 million public offering) will own an approximate aggregate
80% equity interest in the Partnership following the completion of the
transaction. The General Partner of the Partnership will be a newly organized
Delaware limited liability company that will be owned by certain officers and
directors of Petro consisting of Irik Sevin, Audrey Sevin and two entities
affiliated with Wolfgang Traber.

The completion of the Star Gas/Petro Transaction is subject to the receipt of
regulatory approvals, the approval of Star's non-affiliated Common unitholders
and non-affiliated Petro shareholders and other necessary partnership and
corporate approvals, as well as the successful completion of the debt and equity
offerings.


                                      F-13
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(4) Property, Plant and Equipment

The components of property, plant and equipment and their estimated useful lives
were as follows at the indicated dates:

                                       December           
                                  -----------------      Estimated
                                    1997      1998      Useful Lives
                                  --------  -------    --------------
Land                              $  2,088    2,088
Buildings                            5,641    6,672       20-45 years
Fleet and other equipment           38,065   38,811         3-7 years
Tanks and equipment                  1,460    1,932        8-20 years
Furniture and fixtures              18,678   19,757         5-7 years
Leasehold improvements               7,465    7,719    Term of leases
                                  --------  -------
                                    73,397   76,979

Less accumulated depreciation       42,782   48,855
                                  --------  -------
                                  $ 30,615  $28,124
                                  ========  =======

(5) 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,
                                                                          -----------------
                                                                            1997      1998
                                                                            ----      ----
<S>                                                                       <C>       <C>    
Notes payable to banks under credit facility (a)                          $ 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 15% per annum,
 maturing at various dates through the year 2004                           16,798    14,302
                                                                          -------   -------
                                                                           19,798    14,302

Less current maturities, including working capital borrowings               3,291     5,921
                                                                          -------   -------
                                                                          $16,507   $ 8,381
                                                                          =======   =======
</TABLE>

a)    Pursuant to the July 1998 extension of the Credit Agreement 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 weekly. 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 29, 1999. The Company
      pays a facility fee of 0.5% on the unused portion of this facility. At
      December 31, 1998, no amount was outstanding under the working capital
      revolving credit facility.

      The Credit Agreement also includes a $14.1 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 June 30, 1998 and June 29, 1999 that 83.3% and 100% respectively,
      of the facility outstanding be cash collateralized. As of December 31,
      1998 $11.8 million (83.3%) of this facility has been cash collateralized
      in accordance with the agreement.

      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 Loan Rate or the
      Alternate Base Rate, plus 50 to 125 basis points on Alternate Base Rate
      Loans and 175 to 250 basis points on Eurodollar Loans, based upon the
      Interest Coverage Ratio (as defined in the Credit Agreement). Eurodollar
      Loan 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 1997 and 1998 was 7.75% and 7.62% respectively.

      The fees for the Credit Agreement acquisition letters of credit range from
      225 to 300 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.


                                      F-14
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(5)   Notes Payable and Other Long-Term Debt - (Continued)

      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 amongst other
      things, in paying common cash dividends and making acquisitions of other
      companies, as well as not 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, and limits the total
      amount of capital expenditures to $4.0 million per four consecutive
      quarters. 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 its receivables which at December 31, 1998 was
      $56,845.

      The Company expects to renew or replace the working capital revolving
      credit facility prior to June 29, 1999. Based on this expected renewal and
      the Company's working capital position and expected net cash to be
      provided by operating activities, the Company expects to be able to meet
      all of its obligations in 1999.

Aggregate annual maturities including working capital borrowings, but excluding
the requisite $2.5 million acquisition letter of credit facility cash
collateralization due in June 1999 are as follows as of December 31, 1998:

Years Ending
December 31,
------------
    1999          $ 5,921
    2000          $ 8,141
    2001               60
    2002               60
    2003               60
Thereafter             60
                  -------
                  $14,302
                  =======

(6)   Senior, Senior Subordinated, and Subordinated Notes Payable

Senior, Senior Subordinated, and Subordinated Notes Payable at the dates
indicated, consisted of:

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                     -------------------
                                                                       1997       1998
                                                                       ----       ----
<S>                                                                  <C>        <C>     
10.90%  Senior Notes (a)                                             $ 60,000   $ 60,000
14.10%  Senior Subordinated and Senior Notes (b)                        8,300      6,200
10 1/8% Senior Subordinated and Subordinated Notes (c)                 50,000     50,000
9 3/8%  Senior Subordinated and Subordinated Debentures (d)            75,000     75,000
12 1/4% Senior Subordinated and Subordinated Debentures (e)            81,250     81,250
                                                                     --------   --------

Total Senior, Senior Subordinated, and Subordinated Notes Payable     274,550    272,450

  Less short-term Senior Subordinated Notes (b)                         1,050      1,050
  Less short-term Senior Notes (b)                                      1,050      1,050
  Less long-term Senior Notes (a)(b)                                   63,100     62,050
                                                                     --------   --------

Total long-term Senior Subordinated and Subordinated Notes Payable   $209,350   $208,300
                                                                     ========   ========
</TABLE>

In October 1998, Petro completed an exchange offer with the holders of its 10
1/8% notes, 9 3/8% debentures, and 12 1/4% debentures. In the debt exchange
offer the holders of approximately 98.5% in aggregate principal amount of
Petro's public debt exchanged those securities for a like principal amount of
new securities, the terms of which are in all material respects the same as the
terms of the old securities, except that (1) the new debt securities are senior
to the old debt securities, and (2) the terms of the new debt securities (i)
give Petro the right to redeem these securities at the closing of the Star Gas /
Petro transaction but not later than April 1, 1999 at; 103.5% of face value for
the new 12 1/4% debentures; 100% of face value for the new 10 1/8% notes; and
100% of face value for the new 9 3/8% debentures; and (ii) eliminate
substantially all covenants from the indentures under which the old debt
securities were issued.


                                      F-15
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(6)   Senior, Senior Subordinated, and Subordinated Notes Payable - (Continued)

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 6d) $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 were lowered to 10.9%. The debt instruments were not
      considered to be substantially different since the cash flow effect on a
      present value basis was less than 10 percent. Accordingly, the
      modification was not accounted for as an extinguishment of debt. 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 6d) $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 8) 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.

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,
1997 and 1998, the unamortized balances relating to notes still outstanding
amounted to approximately $8.4 million and $7.0 million respectively, and such
balances are included in Deferred Charges and Pension Costs on the Consolidated
Balance Sheet.


                                      F-16
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(6)   Senior, Senior Subordinated, and Subordinated Notes Payable - (Continued)

Aggregate annual maturities including sinking fund payments at December 31, 1998
are as follows:

Years Ended
December 31,
------------
   1999         $  2,100
   2000           17,100
   2001           17,000
   2002           30,000
   2003           50,000
Thereafter       156,250
                --------
                $272,450
                ========

The Company has substantial repayment obligations on indebtedness that become
due beginning in the year 2000. If the proposed Star Gas / Petro Transaction
(see note 3) is completed, these obligations are expected to be refinanced on or
before their maturities. In the event that such transaction does not occur, the
Company will explore alternatives including the repayment or refinancing of such
maturities. If such alternatives cannot be effected, it could have a material
adverse affect on the Company.

Total accrued interest on notes payable, and senior and subordinated notes which
were included in accrued expenses and other liabilities were $10,664 and $10,160
at December 31, 1997 and 1998 respectively.

(7)   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:

                                       Years Ended December 31,
                                     ----------------------------
Cash dividends declared                 1996       1997     1998
                                        ----       ----     ----
  Class A                            $  13,789  $   7,019  $   --
  Class C                                1,559        779      --
Cash dividends declared per share
  Class A                            $     .60  $     .30  $   --
  Class C                                  .60        .30      --

Under the Company's most restrictive dividend limitation imposed by certain debt
covenants, $31.6 million was available at December 31, 1998 for the payment of
dividends on all classes of Capital Stock. Under these covenants 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. Notwithstanding these covenants, the Company is however currently
restricted from paying common stock dividends under its bank credit agreement.

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,
three hundred and two thousand, six hundred and ninety-one thousand, and two
hundred and seventy-one thousand additional Class A Common Shares were issued in
1996, 1997, and 1998 respectively.


                                      F-17
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(8)   Preferred Stock, Redeemable Preferred Stock 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, 1997 and 1998, eighty-three thousand shares and
forty-two thousand shares respectively were outstanding of which forty-two
thousand 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. These shares are callable at
twenty-three dollars per share at the closing of the Star Gas / Petro
transaction but not later than April 1, 1999 otherwise, 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 Exchangeable Debentures due 2009. At December 31, 1997 and 1998
$30.0 million of Exchangeable Preferred Stock was outstanding.

In August and September of 1998 the Company issued seven hundred and
eighty-seven thousand of no par value preferred stock ("Junior Convertible
Preferred Stock") in connection with the Star Gas / Petro transaction. These
shares were issued in addition to other consideration, for the early redemption
rights of its 9 3/8% Subordinated Debentures, 10 1/8% Subordinated Notes, 12
1/4% Subordinated Debentures and 12 7/8% Exchangeable Preferred Stock (see note
3). The Company issued such holders three and thirty-seven one-hundredths shares
of Junior Convertible Preferred Stock for each thousand dollars in principal
amount or liquidation preference of such securities. Each share of Junior
Convertible Preferred Stock will be exchangeable into thirteen one-hundredths of
a Partnership Common Unit at the conclusion of the Star Gas/Petro transaction
representing a maximum of approximately one hundred and three Common Units.
Should the transaction not be consummated, the Junior Convertible Preferred
Stock will be convertible into a like number of Class A Common Stock (see note
3).

Preferred dividends of $2,389, $4,644 and $5,057 were declared on all classes of
preferred stock in 1996, 1997, and 1998 respectively.

Aggregate annual maturities of Redeemable Preferred Stock and Exchangeable
Preferred Stock are as follows as of December 31, 1998:

Years Ended
December 31
-----------
    1999         $ 4,167
    2000              --
    2001              --
    2002              --
    2003              --
Thereafter        30,000
                 -------
                 $34,167
                 =======


                                      F-18
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(9)   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 of expenses in 1996 and 1997 respectively, for pension
curtailment costs relating to the amortization of certain previously
unrecognized pension expenses.

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, 1996, 1997 and 1998 was $4,350, $4,036 and $4,428
respectively, net of amortization of the pension obligation acquired.

The following tables provide a reconciliation of the changes in the plans'
benefit obligations, fair value of assets, and a statement of the funded status
at the indicated dates:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                 --------------------
Reconciliation of Benefit Obligations                              1997        1998
                                                                   ----        ----
<S>                                                              <C>         <C>     
Benefit obligations at beginning of year                         $ 29,323    $ 29,258
Service cost                                                          116          --
Interest cost                                                       1,895       1,930
Actuarial (gain) loss                                                 977         (63)
Benefit payments                                                   (1,384)     (1,547)
Settlements                                                        (1,669)     (2,201)
                                                                 --------    --------
Benefit obligation at end of year                                $ 29,258    $ 27,377
                                                                 ========    ========

Reconciliation of Fair Value of Plan Assets
Fair value of plan assets at beginning of year                   $ 20,367    $ 22,292
Actual return on plan assets                                        2,780       2,561
Employer contributions                                              2,458         615
Benefit payments                                                   (1,384)     (1,547)
Settlements                                                        (1,929)     (2,883)
                                                                 --------    --------
Fair value of plan assets at end of year                         $ 22,292    $ 21,038
                                                                 ========    ========

<CAPTION>
Funded Status                                               1996         1997         1998
                                                            ----         ----         ----
<S>                                                       <C>          <C>          <C>     
Benefit obligation                                        $ 29,323     $ 29,258     $ 27,377
Fair value of plan assets                                   20,367       22,292       21,038
Unrecognized transition (asset) obligation                     (65)         (52)         (39)
Unrecognized prior service cost                                453           --           --
Unrecognized net actuarial (gain) loss                       6,812        5,807        4,776
                                                          --------     --------     --------
Prepaid (accrued) benefit cost prior to additional
 liability                                                  (1,756)      (1,211)      (1,602)
Amount included in comprehensive income                      6,065        4,646        4,737
                                                          --------     --------     --------
Prepaid (accrued) benefit cost                            $ (7,821)    $ (5,857)    $ (6,339)
                                                          ========     ========     ========

Components of Net Periodic Benefit Cost

Service cost                                              $  1,630     $    116     $     --
Interest cost                                                1,974        1,895        1,930
Expected return on plan assets                               1,573        1,787        1,846
Amortization of unrecognized transition (asset)
 obligation                                                     60          (13)         (13)
Amortization of prior service cost                              76           49           --
Recognized net (gains) losses                                  678          369          160
Settlement (gain) loss                                          --          344          572
Curtailment (gain) loss                                        557          404           --
                                                          --------     --------     --------
Net periodic benefit cost after curtailments
 and settlements                                          $  3,402     $  1,377     $    803
                                                          ========     ========     ========

Weighted-Average Assumptions Used in the Measurement of
the Company's Benefit Obligation as of December 31,

Discount rate                                                  6.5%         6.5%         6.5%
Expected return on plan assets                                 8.5%         8.5%         8.5%
Rate of compensation increase                                  4.0%         N/A          N/A
</TABLE>


                                      F-19
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(9)   Pension Plans - (Continued)

In addition, the Company made contributions to union-administered pension plans
during the years ended December 31, 1996, 1997 and 1998 of $2,996, $2,508, and
$1,991 respectively.

The Company recorded an additional minimum pension liability for underfunded
plans of $4,698 as of December 31, 1998, 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 $4,737 as of December 31, 1998.

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 $1,082 at December 31,
1997 and 1998 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, 1997 and
1998 were $1,204, and $1,005 respectively and are included in supplemental
benefits and other long-term liabilities on the balance sheets at those dates.

(10)  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, 1998 for all operating
leases having an initial or remaining noncancelable term of one year or more are
as follows:

Years Ending   Operating
  December      Leases
------------   ---------
       1999    $  4,333
       2000       3,763
       2001       3,194
       2002       3,437
       2003       3,292
 Thereafter      19,056
               --------
               $ 37,075
               ========
              
Rental expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was $6,461, $7,475, and $6,621 respectively.


                                      F-20
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(11)  Income Taxes

Income tax expense was comprised of the following for the indicated periods:

                   Years Ended December 31,
                 ---------------------------
                  1996       1997       1998
                  ----       ----       ----
Current:
Federal          $   -      $   -      $   -
State              500        500        400
                   ---        ---        ---
                 $ 500      $ 500      $ 400
                  ====       ====       ====

The sources of deferred income tax expense (benefit) and the tax effects of each
were as follows:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                       -----------------------------
                                                                         1996       1997       1998
                                                                       -------    -------    -------
<S>                                                                    <C>        <C>        <C>     
Excess of book over tax (tax over book) depreciation                   $   (81)   $  (227)   $  (432)
Excess of book over tax amortization expense                            (2,051)    (2,490)    (2,727)
Excess of book over tax vacation expense                                  (180)      (107)       (12)
Excess of book over tax restructuring expense                             (206)      (618)       254
(Excess of book over tax) tax over book bad debt expense                   (41)        37         12
(Excess of book over tax) tax over book supplemental benefit expense       (14)        14         20
 Equity in income (loss) of Star Gas Partnership                         2,597      1,037     (1,048)
 Other, net                                                               (228)         5        197
 Recognition of tax benefit of net operating loss to the
   extent of current and previous recognized temporary differences      (9,114)    (4,491)    (8,130)
 Change in valuation allowance                                           9,318      6,840     11,866
                                                                       -------    -------    -------
                                                                       $    --    $    --    $    --
                                                                       =======    =======    =======
</TABLE>

The components of the net deferred tax assets and the related valuation
allowance for 1997 and 1998 using current rates were as follows:

                                                     Years Ended December 31,
                                                     -----------------------
                                                         1997        1998
                                                       --------    --------
Net operating loss carryforwards                       $ 39,690    $ 47,820
Excess of tax over book depreciation                     (4,814)     (4,382)
Excess of book over tax amortization                      6,114       8,841
Excess of book over tax vacation expense                  1,600       1,612
Excess of book over tax restructuring expense               824         570
Excess of book over tax bad debt expense                    333         321
Excess of book over tax supplemental benefit expense        666         646
Equity in loss (income) of Star Gas Partnership          (2,775)     (1,727)
Other, net                                                  360         163
                                                       --------    --------
                                                         41,998      53,864
Valuation allowance                                     (41,998)    (53,864)
                                                       --------    --------
                                                       $     --    $     --
                                                       ========    ========

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, 1998, the Company had the following income tax loss
carryforwards for Federal Income Tax reporting purposes:

Expiration
   Date
   ----
2005         $ 26,651
2006           15,012
2007            1,367
2008            8,400
2009            1,662
2010           23,356
2011           26,554
2012           13,948
2018           23,695
             --------
             $140,645
             ========


                                      F-21
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(12)  Related Party Transactions

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
sixty-one thousand Class A Common Shares representing $411 of value, sixty-two
thousand Class A Common Shares representing $392 of value, and fifty-eight
thousand Class A Common Shares representing $370 of value in December 1996, 1997
and 1998 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
$984, $656, and $328 at December 31, 1996, 1997, and 1998 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.

(13)  Restructuring Charges

Late in 1995 the Company completed a study 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 and reported such expenses
in restructuring charges. This cost was comprised of $0.5 million in termination
benefit arrangements for the twenty-three servicemen and drivers, twenty-eight
credit and customer service personnel, and eight sales, general, and
administrative personnel displaced by the program; and $0.7 million for
continuing lease obligations for an unused, non-cancelable, non-strategic
facility.

In 1997 the Company continued with its restructuring program and combined its
three New York City branches into one new central depot that specializes in
delivery, installation, maintenance, and service functions, and like the Long
Island depots, is 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, and reported
such expenses in restructuring charges. This cost was comprised of $2.0 million
in termination benefit arrangements for twenty-three servicemen and drivers, ten
credit and customer service personnel, and twenty-two sales, general, and
administrative personnel displaced by the program; and $0.9 million for
continuing lease obligations for three unused, non-cancelable, non-strategic
facilities. The Company continued its restructuring and cost reduction
initiative in the first quarter of 1998, incurring $0.5 million in termination
benefit arrangements with four sales, general, and administrative personnel.

The total unpaid amounts included in accrued expenses and other liabilities are
$2.4 million and $1.7 million respectively at December 31, 1997 and 1998. These
amounts predominately represent continuing lease obligations as all the
termination benefit arrangements have been paid.


                                      F-22
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(13)  Restructuring Charges - (Continued)

This liability is expected to be paid and relieved as follows:

Year Ended
December 31,
------------
1999        $  500
2000           300
2001           100
2002           100
2003           200
Thereafter     500
            ------
            $1,700
            ======

(14)  Stock Options

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 vested upon issuance are non-transferable and expire on
March 31, 2004.

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 does 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
1997 and 1998 would have been increased by approximately nineteen thousand
dollars, or $0.0007 per share, and one hundred twenty-eight thousand dollars, or
$0.0048 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 proforma
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 for options granted prior to 1998, and calculated as a period expense for
those granted in 1998. 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. The fair value of the options granted during
1998 was $1.27 per option on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%,
volatility of 52%, risk-free interest rate of 5.83%, assumed forfeiture rate of
50%, and an expected life of 10 years.


                                      F-23
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(14)  Stock Options - (Continued)

Information relating to stock options during 1996, 1997 and 1998 are summarized
as follows:

<TABLE>
<CAPTION>
                                                              Number of Shares    Weighted-Average
                                         Range of           --------------------   Exercise Price
                                      Exercise Prices       Class A      Class C      Per Share         Total
                                      ---------------       -------      -------      ---------         -----
<S>                                  <C>                      <C>            <C>         <C>           <C>    
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 / Forfeited                  $ 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                              $ 3.00 to $ 3.13            40           --           3.05            122
Exercised                                   --                   --           --             --             --
Expired / Forfeited                  $ 4.10 to $ 8.77         1,097           79           7.16          8,410
                                     -------------------------------------------------------------------------
Shares under option at
 December 31, 1997                   $ 3.00 to $11.25           444           18           8.41          3,889

Granted                              $ 1.81 to $ 1.81           200           --           1.81            362
Exercised                                   --                   --           --             --             --
Expired / Forfeited                  $ 3.13 to $11.25           319           18           8.78          2,964
                                     -------------------------------------------------------------------------
Shares under option at
 December 31, 1998                   $ 1.81 to $ 8.50           325           --         $ 3.96        $ 1,287
                                     =========================================================================

Shares exercisable from              $ 1.81 to $ 3.00           225           --         $ 1.94         $  437
Shares exercisable                   $ 8.50                     100           --           8.50            850
                                     -------------------------------------------------------------------------
Total shares exercisable
 at December 31, 1998                $ 1.81 to $ 8.50           325           --         $ 3.96        $ 1,287
                                     =========================================================================
</TABLE>

The weighted average life of the shares exercisable from $1.81 to $3.00 is 8.8
years, and the weighted average life of the shares exercisable at $8.50 is 5.3
years.

                                      F-24

<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(15)  Acquisitions

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;
and approximately 90% of this consideration was for customer lists, goodwill,
and covenants not to compete.

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;
and approximately 90% of this consideration was for customer lists, goodwill,
and covenants not to compete.

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.

The Company did not make any acquisitions nor sell any branches in 1998.

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,
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>
                                                                  1996         1997
                                                                  ----         ----
<S>                                                            <C>          <C>      
Net sales                                                      $ 607,240    $ 538,988

Loss before extraordinary item                                 $ (23,029)   $ (22,397)

Net loss                                                       $ (29,443)   $ (22,397)
Preferred stock dividends                                         (2,389)      (4,644)
                                                               ---------    ---------
 Net loss applicable to common stockholders (Numerator)        $ (31,832)   $ (27,041)
                                                               =========    =========
Class A Common Stock                                              22,983       23,441
Class B Common Stock                                                  12           11
Class C Common Stock                                               2,598        2,598
                                                               ---------    ---------
 Weighted average number of shares outstanding (Denominator)      25,593       26,050
                                                               =========    =========

Basic and Diluted losses per common share
 before extraordinary item:
  Class A and C Common Stock                                   $   (0.99)   $   (1.04)

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

Basic and Diluted losses per common share:
  Class A and C Common Stock                                   $   (1.24)   $   (1.04)
</TABLE>

(16)  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-25
<PAGE>

               PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
                      (In thousands, except per share data)

(17)  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, 1997    At December 31, 1998
                                       --------------------    --------------------
                                       Carrying   Estimated    Carrying    Estimated
                                        Amount    Fair Value    Amount    Fair Value
                                        ------    ----------    ------    ----------
<S>                                    <C>         <C>         <C>         <C>     
Long-term debt                         $ 16,798    $ 15,853    $ 14,302    $ 13,488
Senior Subordinated and
 Subordinated notes payable             210,400     197,883     209,350     198,394
Senior notes payable                     64,150      64,343      63,100      61,408
Preferred stock                          36,656      39,722      32,745      33,894
</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.

(18)  Earnings Per Share

                                                          December 31,
                                                 ------------------------------
                                                   1996       1997       1998
                                                   ----       ----       ----
Basic Earnings Per Share:
Net loss                                         $(28,315)  $(22,899)  $(35,337)
Less: Preferred stock dividends                    (2,389)    (4,644)    (5,057)
                                                 --------   --------   --------
 Loss available to common stockholders
 (Numerator)                                     $(30,704)  $(27,543)  $(40,394)
                                                 ========   ========   ========
Class A Common Stock                               22,983     23,441     23,962
Class B Common Stock                                   12         11         11
Class C Common Stock                                2,598      2,598      2,598
                                                 --------   --------   --------
 Weighted average number of shares outstanding
 (Denominator)                                     25,593     26,050     26,571
                                                 ========   ========   ========
Basic losses per share                           $  (1.20)  $  (1.06)  $  (1.52)
                                                 ========   ========   ========
Diluted Earnings Per Share:
Effect of dilutive securities                    $     --   $     --   $     --
                                                 --------   --------   --------
 Loss available to common stockholders
 (Numerator)                                     $(30,704)  $(27,543)  $(40,394)
                                                 ========   ========   ========
Effect of dilutive securities                          --         --         --
                                                 --------   --------   --------
 Weighted average number of shares outstanding
 (Denominator)                                     25,593     26,050     26,571
                                                 ========   ========   ========
Diluted losses per share                         $  (1.20)  $  (1.06)  $  (1.52)
                                                 ========   ========   ========

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-26
<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
                                                  ------------------------------------------------------------
                                                    3/31/97           6/30/97          9/30/97        12/31/97           Total
                                                    -------           -------          -------        --------           -----
<S>                                               <C>              <C>              <C>             <C>              <C>       
Net sales                                         $ 248,095        $   87,972       $   50,788      $  161,286       $  548,141

Income (loss) before income taxes and
 equity interest                                  $  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 earnings (losses) per common share:
   Class A and C Common Stock                     $    1.26        $    (1.09)      $    (1.61)     $     0.40       $    (1.06)

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

<CAPTION>
                                                                       Three Months Ended
                                                  ------------------------------------------------------------
                                                    3/31/98           6/30/98          9/30/98        12/31/98            Total
                                                    -------           -------          -------        --------            -----
<S>                                               <C>              <C>              <C>             <C>              <C>       
Net sales                                         $ 183,139        $   66,227       $   42,113      $  116,540       $  408,019

Income (loss) before income taxes and
 equity interest                                  $  24,761        $  (20,897)      $  (31,860)     $   (5,821)      $  (33,817)

Net income (loss)                                 $  26,978        $  (22,974)      $  (34,215)     $   (5,126)      $  (35,337)
Preferred dividends                                  (1,563)             (965)          (1,562)           (967)          (5,057)
                                                  ---------        ----------       ----------      ----------       ----------
 Net income (loss) available to common
  stockholders                                    $  25,415        $  (23,939)      $  (35,777)     $   (6,093)      $  (40,394)
                                                  =========        ==========       ==========      ==========       ==========
Basic earnings (losses) per common share:
   Class A and C Common Stock                     $     .96        $     (.90)      $    (1.35)     $     (.23)      $    (1.52)

Diluted earnings (losses) per common share:
   Class A and C Common Stock                     $     .95        $     (.90)      $    (1.35)     $     (.23)      $    (1.52)

Basic weighted average number of common 
 shares outstanding:
  Class A Common Stock                               23,955            23,962           23,965          23,965           23,962
  Class B Common Stock                                   11                11               11              11               11
  Class C Common Stock                                2,598             2,598            2,598           2,598            2,598
                                                                                                                    
Diluted weighted average number of common                                                                           
 shares outstanding:                                                                                                
  Class A Common Stock                               24,155            23,962*          23,965*         23,965*          23,962*
  Class B Common Stock                                   11                11               11              11               11
  Class C Common Stock                                2,598             2,598            2,598           2,598            2,598
</TABLE>

*     0 shares included for the effects of stock grants and convertible
      securities due to the loss in the period.


                                      F-27
<PAGE>

                                                                     SCHEDULE II

              PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
                  Years Ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                                  Additions
                                                  ---------
                                     Balance       Charged
                                        at         to Costs        Other             Balance
                                    Beginning        and        Changes Add           at End
Year           Description           of Year       Expenses      /(Deduct)            of Year
----           -----------           -------       --------      ---------            -------
<S>                                 <C>            <C>           <C>        <C>      <C>      
1996 Accumulated amortization:
     Customer lists                 $ 225,333      $ 18,611      $  (4,104) (1)      $ 239,840
     Deferred charges                  39,123         4,760           (237) (1)         43,646
                                    ---------      --------      ---------           ---------
                                    $ 264,456      $ 23,371      $  (4,341)          $ 283,486
                                    =========      ========      =========           =========
     Allowance for doubtful
     accounts                       $     969      $  1,882      $  (1,763) (2)      $   1,088
                                    =========      ========      =========           =========

1997 Accumulated amortization:
     Customer lists                 $ 239,840      $ 17,903      $ (18,292) (3)      $ 239,451
     Deferred charges                  43,646         4,639         (1,886) (3)         46,399
                                    ---------      --------      ---------           ---------
                                    $ 283,486      $ 22,542      $ (20,178)          $ 285,850
                                    =========      ========      =========           =========
     Allowance for doubtful
     accounts                       $   1,088      $  1,853      $  (1,961) (2)      $     980
                                    =========      ========      =========           =========

1998 Accumulated amortization:
     Customer lists                 $ 239,451      $ 16,669      $      --           $ 256,120
     Deferred charges                  46,399         4,303             --              50,702
                                    ---------      --------      ---------           ---------
                                    $ 285,850      $ 20,972      $      --           $ 306,822
                                    =========      ========      =========           =========
     Allowance for doubtful
     accounts                       $     980      $  1,419      $  (1,455) (2)      $     944
                                    =========      ========      =========           =========
</TABLE>

(1)   Valuation and qualifying accounts conveyed through the disposition of the
         Springfield Massachusetts branch location

(2)   Bad debts written off net of any recoveries

(3)   Valuation and qualifying accounts conveyed through the disposition of the
         Hartford Connecticut branch location


                                      F-28