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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended December 31, 2004



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: 001-14129

Commission File Number: 333-103873



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STAR GAS PARTNERS, L.P.

STAR GAS FINANCE COMPANY

(Exact name
of registrants as specified in its charters)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware Delaware                                              |  | 06-1437793 75-3094991               
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



2187 Atlantic
Street, Stamford, Connecticut 06902

(Address of principal executive office)



(203) 328-7310

(Registrants telephone number, including area code)





(Former name, former address and former fiscal year, if changed since last
report)



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Indicate by check mark whether the registrants (1) have 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 (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the
Act).    Yes  x    No ̈



At February 2, 2005, the registrants had units and shares of each issuers classes of
common stock outstanding as follows:



|                         |  |                           |  |           
|------------------------ |  | ------------------------- |  | ----------
|Star Gas Partners, L.P.  |  | Common Units              |  | 32,165,528
|Star Gas Partners, L.P.  |  | Senior Subordinated Units |  | 3,245,233 
|Star Gas Partners, L.P.  |  | Junior Subordinated Units |  | 345,364   
|Star Gas Partners, L.P.  |  | General Partner Units     |  | 325,729   
|Star Gas Finance Company |  | Common Shares             |  | 100       



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

INDEX TO FORM 10-Q



|        |  |                                                                                                |  |                                                                                                                              |  |     
|------- |  | ---------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                |  |                                                                                                                              |  | Page
|Part I  |  | Financial Information                                                                          |  |                                                                                                                             
|        |  |                                                                                               
|        |  | Item 1  Condensed Consolidated Financial Statements                                           |  |                                                                                                                             
|        |  |                                                                                                | 
|        |  |                                                                                                |  | Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2004                                         |  | 3   
|        |  |                                                                                                | 
|        |  |                                                                                                |  | Condensed Consolidated Statements of Operations for the three months ended December 31, 2003 and December 31, 2004           |  | 4   
|        |  |                                                                                                | 
|        |  |                                                                                                |  | Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2003 and December 31, 2004 |  | 5   
|        |  |                                                                                                | 
|        |  |                                                                                                |  | Condensed Consolidated Statement of Partners Capital for the three months ended December 31, 2004                           |  | 6   
|        |  |                                                                                                | 
|        |  |                                                                                                |  | Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2003 and December 31, 2004           |  | 7   
|        |  |                                                                                                | 
|        |  |                                                                                                |  | Notes to Condensed Consolidated Financial Statements                                                                         |  | 8-16
|        |  |                                                                                               
|        |  | Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17-33                                                                                                                       
|        |  |                                                                                               
|        |  | Item 3  Quantitative and Qualitative Disclosures About Market Risk                            |  | 34                                                                                                                          
|        |  |                                                                                               
|        |  | Item 4  Controls and Procedures                                                               |  | 34                                                                                                                          
|        |  |                                                                                               
|Part II |  | Other Information:                                                                             |  |                                                                                                                             
|        |  |                                                                                               
|        |  | Item 6  Exhibits and Reports on Form 8-K                                                      |  | 35                                                                                                                          
|        |  |                                                                                               
|        |  | Signatures                                                                                     |  | 36                                                                                                                          



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                 |  |               |         |   |              |   |         |  
|---------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|(in thousands)                                                   |  | Sept. 30,2004 |         |   | Dec. 31,2004 |  
|ASSETS                                                           |  |               |         |   |              |   |         |  
|Current assets                                                   |  |               |         |   |              |   |         |  
|Cash and cash equivalents                                        |  | $             | 4,692   |   |              | $ | 112,428 |  
|Receivables, net of allowance of $5,622 and $4,779, respectively |  |               | 84,005  |   |              |   | 151,704 |  
|Inventories                                                      |  |               | 34,213  |   |              |   | 70,255  |  
|Prepaid expenses and other current assets                        |  |               | 60,973  |   |              |   | 59,243  |  
|Current assets of discontinued operations                        |  |               | 50,288  |   |              |   |        |  
|                                                                 |  |               |         |   |              |   |         |  
|Total current assets                                             |  |               | 234,171 |   |              |   | 393,630 |  
|                                                                 |  |               |         |   |              |   |         |  
|Property and equipment, net                                      |  |               | 63,701  |   |              |   | 60,564  |  
|Long-term portion of accounts receivables                        |  |               | 5,458   |   |              |   | 6,412   |  
|Goodwill                                                         |  |               | 233,522 |   |              |   | 233,522 |  
|Intangibles, net                                                 |  |               | 103,925 |   |              |   | 98,469  |  
|Deferred charges and other assets, net                           |  |               | 13,885  |   |              |   | 16,983  |  
|Long-term assets of discontinued operations                      |  |               | 306,314 |   |              |   |        |  
|                                                                 |  |               |         |   |              |   |         |  
|Total Assets                                                     |  | $             | 960,976 |   |              | $ | 809,580 |  
|                                                                 |  |               |         |   |              |   |         |  
|LIABILITIES AND PARTNERS CAPITAL                                |  |               |         |   |              |   |         |  
|Current liabilities                                              |  |               |         |   |              |   |         |  
|Accounts payable                                                 |  | $             | 25,010  |   |              | $ | 20,004  |  
|Working capital facility borrowings                              |  |               | 8,000   |   |              |   | 119,000 |  
|Current maturities of long-term debt                             |  |               | 24,418  |   |              |   | 1,262   |  
|Accrued expenses                                                 |  |               | 65,491  |   |              |   | 71,782  |  
|Unearned service contract revenue                                |  |               | 35,361  |   |              |   | 41,966  |  
|Customer credit balances                                         |  |               | 53,927  |   |              |   | 44,051  |  
|Current liabilities of discontinued operations                   |  |               | 50,676  |   |              |   |        |  
|                                                                 |  |               |         |   |              |   |         |  
|Total current liabilities                                        |  |               | 262,883 |   |              |   | 298,065 |  
|                                                                 |  |               |         |   |              |   |         |  
|Long-term debt                                                   |  |               | 503,668 |   |              |   | 268,582 |  
|Other long-term liabilities                                      |  |               | 24,654  |   |              |   | 23,766  |  
|                                                                 |  |              
|Partners capital (deficit)                                      |  |               |         |   |              |   |         |  
|Common unitholders                                               |  |               | 167,367 |   |              |   | 233,749 |  
|Subordinated unitholders                                         |  |               | (6,768  | ) |              |   | 640     |  
|General partner                                                  |  |               | (3,702  | ) |              |   | (3,030  | )
|Accumulated other comprehensive income (loss)                    |  |               | 12,874  |   |              |   | (12,192 | )
|                                                                 |  |               |         |   |              |   |         |  
|Total Partners capital                                          |  |               | 169,771 |   |              |   | 219,167 |  
|                                                                 |  |               |         |   |              |   |         |  
|Total Liabilities and Partners Capital                          |  | $             | 960,976 |   |              | $ | 809,580 |  
|                                                                 |  |               |         |   |              |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                               |  |                                |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|(in thousands, except per unit data)                                                           |  | Three Months EndedDecember 31, |        
|                                                                                               |  | 2003                           |         |   | 2004 |  
|Sales:                                                                                         |  |                                |         |   |      |   |         |  
|Product                                                                                        |  | $                              | 264,205 |   |      | $ | 297,119 |  
|Installations, service and appliances                                                          |  |                                | 51,865  |   |      |   | 53,575  |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Total sales                                                                                    |  |                                | 316,070 |   |      |   | 350,694 |  
|Cost and expenses:                                                                             |  |                                |         |   |      |   |         |  
|Cost of product                                                                                |  |                                | 168,687 |   |      |   | 222,903 |  
|Cost of installations, service and appliances                                                  |  |                                | 57,206  |   |      |   | 58,375  |  
|Delivery and branch expenses                                                                   |  |                                | 60,678  |   |      |   | 65,480  |  
|Depreciation and amortization expenses                                                         |  |                                | 9,517   |   |      |   | 9,122   |  
|General and administrative expenses                                                            |  |                                | 5,701   |   |      |   | 15,842  |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Operating income (loss)                                                                        |  |                                | 14,281  |   |      |   | (21,028 | )
|                                                                                               |  |                               
|Interest expense                                                                               |  |                                | (9,301  | ) |      |   | (10,875 | )
|Interest income                                                                                |  |                                | 831     |   |      |   | 383     |  
|Amortization of debt issuance costs                                                            |  |                                | (1,228  | ) |      |   | (715    | )
|Loss on redemption of debt                                                                     |  |                                |        |   |      |   | (42,082 | )
|                                                                                               |  |                                |         |   |      |   |         |  
|Income (loss) from continuing operations before income taxes                                   |  |                                | 4,583   |   |      |   | (74,317 | )
|Income tax expense                                                                             |  |                                | 331     |   |      |   | 331     |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Income (loss) from continuing operations                                                       |  |                                | 4,252   |   |      |   | (74,648 | )
|                                                                                               |  |                               
|Income (loss) from discontinued operations before gain on sale of segment, net of income taxes |  |                                | 15,060  |   |      |   | (4,552  | )
|Gain on sale of propane segment, net of income taxes of $3,000                                 |  |                                |        |   |      |   | 153,644 |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Net income                                                                                     |  | $                              | 19,312  |   |      | $ | 74,444  |  
|                                                                                               |  |                                |         |   |      |   |         |  
|General Partners interest in net income                                                       |  | $                              | 194     |   |      | $ | 672     |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Limited Partners interest in net income                                                       |  | $                              | 19,118  |   |      | $ | 73,772  |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Basic and Diluted Income (Loss) per Limited Partner Unit:                                      |  |                                |         |   |      |   |         |  
|Continuing operations                                                                          |  | $                              | 0.12    |   |      | $ | (2.07   | )
|Discontinued operations                                                                        |  |                                | 0.44    |   |      |   | (0.13   | )
|Gain on sale of discontinued operations                                                        |  |                                |        |   |      |   | 4.26    |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Net income                                                                                     |  | $                              | 0.56    |   |      | $ | 2.06    |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Weighted average number of Limited Partner units outstanding:                                  |  |                                |         |   |      |   |         |  
|Basic                                                                                          |  |                                | 34,158  |   |      |   | 35,756  |  
|                                                                                               |  |                                |         |   |      |   |         |  
|Diluted                                                                                        |  |                                | 34,158  |   |      |   | 35,756  |  
|                                                                                               |  |                                |         |   |      |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



|                                                      |  |                                |        |      |   |         |  
|----------------------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------- | -
|(in thousands)                                        |  | Three Months EndedDecember 31, |       
|                                                      |  | 2003                           |        | 2004 |  
|Net income                                            |  | $                              | 19,312 |      | $ | 74,444  |  
|                                                      |  |                               
|Other comprehensive income (loss):                    |  |                                |        |      |   |         |  
|Unrealized gain (loss) on derivative instruments      |  |                                | 9,484  |      |   | (23,429 | )
|Other comprehensive loss from discontinued operations |  |                                |       |      |   | (1,637  | )
|                                                      |  |                                |        |      |   |         |  
|Other comprehensive income (loss)                     |  |                                | 9,484  |      |   | (25,066 | )
|                                                      |  |                               
|Comprehensive income                                  |  | $                              | 28,796 |      | $ | 49,378  |  
|                                                      |  |                                |        |      |   |         |  



Reconciliation of Accumulated Other
Comprehensive Income (Loss)



|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  
|------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------- | ----- |  | - | ------- | -
|(in thousands)                                          |  | PensionPlanObligations |         |   | Derivative Instruments |   |         | Total | 
|Balance as of September 30, 2003                        |  | $                      | (17,214 | ) |                        | $ | (507    | )     |  | $ | (17,721 | )
|                                                        |  |                        |        
|Reclassification to earnings                            |  |                        |        |   |                        |   | (117    | )     |  |   | (117    | )
|Unrealized gain on derivative instruments               |  |                        |        |   |                        |   | 8,778   |       |  |   | 8,778   |  
|Other comprehensive income from discontinued operations |  |                        |        |   |                        |   | 823     |       |  |   | 823     |  
|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  
|Other comprehensive income                              |  |                        |        |   |                        |   | 9,484   |       |  |   | 9,484   |  
|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  
|Balance as of December 31, 2003                         |  | $                      | (17,214 | ) |                        | $ | 8,977   |       |  | $ | (8,237  | )
|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  
|Balance as of September 30, 2004                        |  | $                      | (16,055 | ) |                        | $ | 28,929  |       |  | $ | 12,874  |  
|                                                        |  |                        |        
|Reclassification to earnings                            |  |                        |        |   |                        |   | (15,845 | )     |  |   | (15,845 | )
|Unrealized loss on derivative instruments               |  |                        |        |   |                        |   | (7,584  | )     |  |   | (7,584  | )
|Other comprehensive loss from discontinued operations   |  |                        |        |   |                        |   | (1,637  | )     |  |   | (1,637  | )
|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  
|Other comprehensive loss                                |  |                        |        |   |                        |   | (25,066 | )     |  |   | (25,066 | )
|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  
|Balance as of December 31, 2004                         |  | $                      | (16,055 | ) |                        | $ | 3,863   |       |  | $ | (12,192 | )
|                                                        |  |                        |         |   |                        |   |         |       |  |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS CAPITAL



|                                        |  |        |  |          |  |         |  |                |  |        |         |            |   |        |            |  |   |                |   |  |                                        |        |   |                  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------ |  | -------- |  | ------- |  | -------------- |  | ------ | ------- | ---------- | - | ------ | ---------- |  | - | -------------- | - |  | -------------------------------------- | ------ | - | ---------------- | - | ------- | - |  | - | ------- | -
|(in thousands, except per unit amounts) |  | Common |  | Sr. Sub. |  | Jr. Sub |  | GeneralPartner |  | Common |         | SeniorSub. |   |        | JuniorSub. |  |   | GeneralPartner |   |  | Accum. OtherComprehensiveIncome (Loss) |        |   | PartnersCapital |  
|Balance as of September 30, 2004        |  | 32,166 |  | 3,245    |  | 345     |  | 326            |  | $      | 167,367 |            | $ | (4,489 | )          |  | $ | (2,279         | ) |  | $                                      | (3,702 | ) |                  | $ | 12,874  |   |  | $ | 169,771 |  
|Net income                              |  |        |  |          |  |         |  |                |  |        | 66,364  |            |   | 6,695  |            |  |   | 713            |   |  |                                        | 672    |   |                  |   |         |   |  |   | 74,444  |  
|Other comprehensive loss, net           |  |        |  |          |  |         |  |                |  |        |         |            |   |        |            |  |   |                |   |  |                                        |        |   |                  |   | (25,066 | ) |  |   | (25,066 | )
|Unit compensation expense               |  |        |  |          |  |         |  |                |  |        | 18      |            |   |        |            |  |   |                |   |  |                                        |        |   |                  |   |         |   |  |   | 18      |  
|                                        |  |        |  |          |  |         |  |                |  |        |         |            |   |        |            |  |   |                |   |  |                                        |        |   |                  |   |         |   |  |   |         |  
|Balance as of December 31, 2004         |  | 32,166 |  | 3,245    |  | 345     |  | 326            |  | $      | 233,749 |            | $ | 2,206  |            |  | $ | (1,566         | ) |  | $                                      | (3,030 | ) |                  | $ | (12,192 | ) |  | $ | 219,167 |  
|                                        |  |        |  |          |  |         |  |                |  |        |         |            |   |        |            |  |   |                |   |  |                                        |        |   |                  |   |         |   |  |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                                                                   |  |                                |         |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | -------- | -
|(in thousands)                                                                                     |  | Three Months EndedDecember 31, |        
|                                                                                                   |  | 2003                           |         |   | 2004 |  
|Cash flows provided by (used in) operating activities:                                             |  |                                |         |   |      |   |          |  
|Net income                                                                                         |  | $                              | 19,312  |   |      | $ | 74,444   |  
|Deduct: (Income) loss from discontinued operations  propane segment                               |  |                                | (14,398 | ) |      |   | 4,552    |  
|Deduct: (Income) from discontinued operations  TG&E segment                                       |  |                                | (662    | ) |      |   |         |  
|Deduct: (Gain) on sale of discontinued operations                                                  |  |                                |        |   |      |   | (153,644 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                |         |   |      |   |          |  
|Depreciation and amortization                                                                      |  |                                | 9,517   |   |      |   | 9,122    |  
|Amortization of debt issuance cost                                                                 |  |                                | 1,228   |   |      |   | 715      |  
|Unit compensation expense                                                                          |  |                                | 52      |   |      |   | 18       |  
|Provision for losses on accounts receivable                                                        |  |                                | 1,543   |   |      |   | 1,721    |  
|Gain on sales of fixed assets, net                                                                 |  |                                | (136    | ) |      |   | (73      | )
|Loss on redemption of debt                                                                         |  |                                |        |   |      |   | 42,082   |  
|Changes in operating assets and liabilities:                                                       |  |                                |         |   |      |   |          |  
|Increase in receivables                                                                            |  |                                | (67,231 | ) |      |   | (70,374  | )
|Increase in inventories                                                                            |  |                                | (16,928 | ) |      |   | (36,042  | )
|Decrease (increase) in other assets                                                                |  |                                | 18,761  |   |      |   | (23,596  | )
|Increase (decrease) in accounts payable                                                            |  |                                | 9,950   |   |      |   | (5,006   | )
|Increase (decrease) in other current and long-term liabilities                                     |  |                                | 1,467   |   |      |   | 4,186    |  
|                                                                                                   |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                                | (37,525 | ) |      |   | (151,895 | )
|                                                                                                   |  |                                |         |   |      |   |          |  
|Cash flows provided by (used in) investing activities:                                             |  |                                |         |   |      |   |          |  
|Capital expenditures                                                                               |  |                                | (853    | ) |      |   | (806     | )
|Cash proceeds from disposition of propane segment                                                  |  |                                |        |   |      |   | 464,041  |  
|Proceeds from sales of fixed assets                                                                |  |                                | 396     |   |      |   | 470      |  
|                                                                                                   |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                |  |                                | (457    | ) |      |   | 463,705  |  
|                                                                                                   |  |                                |         |   |      |   |          |  
|Cash flows provided by (used in) financing activities:                                             |  |                                |         |   |      |   |          |  
|Working capital facility borrowings                                                                |  |                                | 59,000  |   |      |   | 230,000  |  
|Working capital facility repayments                                                                |  |                                |        |   |      |   | (119,000 | )
|Repayment of debt                                                                                  |  |                                | (67     | ) |      |   | (258,318 | )
|Debt repayment costs                                                                               |  |                                |        |   |      |   | (37,689  | )
|Distributions                                                                                      |  |                                | (19,826 | ) |      |   |         |  
|Increase in deferred charges                                                                       |  |                                | (4,532  | ) |      |   | (7,701   | )
|                                                                                                   |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                |  |                                | 34,575  |   |      |   | (192,708 | )
|                                                                                                   |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) discontinued operations:                                            |  |                                |         |   |      |   |          |  
|Propane segment                                                                                    |  |                                | 3,746   |   |      |   | (11,366  | )
|TG&E segment                                                                                       |  |                                | 23      |   |      |   |         |  
|                                                                                                   |  |                               
|Net increase in cash                                                                               |  |                                | 362     |   |      |   | 107,736  |  
|                                                                                                   |  |                                |         |   |      |   |          |  
|Cash at beginning of period                                                                        |  |                                | 4,256   |   |      |   | 4,692    |  
|                                                                                                   |  |                                |         |   |      |   |          |  
|Cash at end of period                                                                              |  | $                              | 4,618   |   |      | $ | 112,428  |  
|                                                                                                   |  |                                |         |   |      |   |          |  



See accompanying notes to condensed
consolidated financial statements.



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##### Table of Contents

STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|1) | Partnership Organization
|-- | ------------------------



Star Gas Partners, L.P. (Star Gas or the Partnership) is a distributor of home heating oil and related products and services. Star
Gas is a master limited partnership, which at December 31, 2004 had outstanding 32.2 million common units (NYSE: SGU representing an 89.1% limited partner interest in Star Gas Partners) and 3.2 million senior subordinated units (NYSE:
SGH representing a 9.0% limited partner interest in Star Gas Partners) outstanding. Additional Partnership interests include 0.3 million junior subordinated units (representing a 1.0% limited partner interest) and 0.3 million general
partner units (representing a 0.9% general partner interest). On December 17, 2004, the Partnership completed the sale of all of its interest in its propane segment. As a result, the propane segment has been classified as discontinued operations
(see Note 4).



At December 31, 2004, the Partnership is
organized as follows:



| |  |  | The general partner of the Partnership is Star Gas LLC, a Delaware limited liability company. The Board of Directors of Star Gas LLC is appointed by its members. For information
concerning the members of Star Gas LLC and its Board of Directors see Item 10, Directors and Executive Officers of the Registrant in the Partnerships annual report on Form 10-K for fiscal year ended September 30, 2004. Star Gas LLC
owns an approximate 1% general partner interest in the Partnership.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Partnerships heating oil operations (the heating oil segment) are conducted through Petro Holdings, Inc. (Petro) and its direct and indirect
subsidiaries. Petro is a Minnesota corporation that is a wholly owned subsidiary of Star/Petro, Inc., which is a 99.99% subsidiary of the Partnership. The remaining .01% equity interest in Star/Petro, Inc. is owned by Star Gas LLC. Petro is a retail
distributor of home heating oil and serves approximately 515,000 customers in the Northeast and Mid-Atlantic.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Star Gas Finance Company is a direct wholly-owned subsidiary of the Partnership. Star Gas Finance Company serves as the co-issuer, jointly and severally with the Partnership, of the
Partnerships $265 million 101⁄4% Senior Notes, which are due in 2013. The Partnership is dependent on distributions from its subsidiaries to service the Partnerships debt obligations. The distributions from the Partnerships
subsidiaries are not guaranteed and are subject to certain loan restrictions. Star Gas Finance Company has nominal assets and conducts no business operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|2) | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Basis of Presentation



The Condensed Consolidated Financial Statements include the accounts of Star Gas Partners, L.P., and its subsidiaries. All material intercompany items and
transactions have been eliminated in consolidation.



The
financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial
condition and results for the interim periods. The results of operations for the three month periods ended December 31, 2003 and December 31, 2004 are not necessarily indicative of the results to be expected for the full year.



These interim financial statements of the Partnership have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission and should be read in conjunction with the
Partnerships Annual Report on Form 10-K for the year ended September 30, 2004.



The Partnership completed the sale of its propane segment on December 17, 2004 and its TG&E segment on March 31, 2004. As a result of the sale of TG&E and the propane segments, the Partnership has restated its
prior year results to include the results of the TG&E and propane segments as components of discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



Inventories



Inventories are stated at the lower of cost or market and are computed on a
first-in, first-out basis. At the dates indicated, the components of inventory were as follows (in thousands):



|                             |  |               |        |              |   |       
|---------------------------- |  | ------------- | ------ | ------------ | - | ------
|                             |  | Sept. 30,2004 |        | Dec. 31,2004
|Heating oil and other fuels  |  | $             | 21,661 |              | $ | 57,749
|Fuel oil parts and equipment |  |               | 12,552 |              |   | 12,506
|                             |  |               |        |              |   |       
|                             |  | $             | 34,213 |              | $ | 70,255
|                             |  |               |        |              |   |       



Property, plant and
equipment, consists of the following (in thousands):



|                               |  |               |         |              |   |        
|------------------------------ |  | ------------- | ------- | ------------ | - | -------
|                               |  | Sept. 30,2004 |         | Dec. 31,2004
|Property, plant and equipment  |  | $             | 122,503 |              | $ | 122,651
|Less: accumulated depreciation |  |               | 58,802  |              |   | 62,087 
|                               |  |               |         |              |   |        
|Property and equipment, net    |  | $             | 63,701  |              | $ | 60,564 
|                               |  |               |         |              |   |        



Reclassifications



Certain prior year amounts have been reclassified to
conform to the current year presentation.



Derivatives and
Hedging



The Partnership uses derivative financial
instruments to manage the majority of its exposure to market risk related to changes in the current and future market price of home heating oil purchased for resale to fixed or maximum sales price customers. It is the Partnerships objective to
hedge the cash flow variability associated with forecasted purchases of its inventory held for resale through the use of derivative instruments when appropriate. To a lesser extent, the Partnership may hedge the fair value of inventory on hand or
firm commitments to purchase inventory. To meet these objectives, it is the Partnerships policy to enter into various types of derivative instruments to (i) manage the variability of cash flows resulting from the price risk associated with
forecasted purchases of home heating oil and (ii) hedge the downside price risk of firm purchase commitments and in some cases physical inventory on hand.



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|2) | Summary of Significant Accounting Policies  (continued)
|-- | --------------------------------------------------------



All derivative instruments are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Partnership
designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability (cash flow hedge). The Partnership documents the relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions.
This process includes linking derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Partnership also assesses, both
at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items.



Changes in the fair value of a derivative that is highly effective and that
is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk are recorded in earnings. Changes in the fair
value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in accumulated other comprehensive income, until earnings are affected by the variability in cash flows of the designated hedged
item. The ineffective portion of a derivatives change in fair value is immediately recognized.



When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Partnership
discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective hedge, the Partnership continues to carry the derivative on the balance sheet at its
fair value, and recognizes changes in the fair value of the derivative through current-period earnings.



For the three months ended December 31, 2004, the change in accumulated other comprehensive income (loss) is principally attributable to the decrease in
fair value of existing cash flow hedges and the reclassification to earnings of accumulated gains on cash flow hedges that settled during the period.



Goodwill and Other Intangible Assets



SFAS No. 142, Goodwill and Other Intangible Assets requires that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires intangible assets with definite useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



|3) | Long-term Debt
|-- | --------------



On December 17, 2004, the Partnership and its subsidiaries executed the following transactions:



| |  |  | The Partnership sold the propane segment to Inergy Propane LLC (Inergy) for a purchase price of $475 million subject to certain adjustments, including a working capital
adjustment. $311 million of the net proceeds from the sale of the propane segment were used to repurchase $182 million of the senior secured notes, including accrued interest and prepayment premiums, of the heating oil segment, $114 million of the
first mortgage notes, including accrued interest and prepayment premiums, of the propane segment, and $15 million was used to repay the outstanding balance and accrued interest of the propane segments working capital facility. At December 31,
2004, the Partnership recognized a loss of approximately $39 million on the early redemption of this debt.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The heating oil segment executed a new $260 million revolving credit facility agreement with a group of lenders led by JPMorgan Chase Bank, N.A.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



The new revolving credit facility provides the heating oil segment with the
ability to borrow up to $260 million for working capital purposes (subject to certain borrowing base limitations), including the issuance of up to $75 million in letters of credit. The facility expires in December 2009. This facility replaced the
existing credit facilities entered into in December 2003, which totaled $235 million. The former credit facilities consisted of a working capital facility, a letter of credit facility, and an acquisition facility. Obligations under the new revolving
credit facility are secured by liens on substantially all of the assets of the heating oil segment, accounts receivable, inventory, general intangibles, real property, fixtures and equipment. Obligations under the new revolving credit facility are
guaranteed by the heating oil segments subsidiaries and by the Partnership.



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|3) | Long-term Debt (continued)
|-- | ---------------------------



The new revolving credit facility imposes certain restrictions on the heating oil segment, including restrictions on its ability to incur additional
indebtedness, to pay distributions, make investments, grant liens, sell assets and engage in certain other activities. In addition, the facility imposes certain restrictions on the use of proceeds from the sale of the propane segment. The revolving
credit facility also requires the heating oil segment to maintain certain financial ratios, and contains borrowing conditions and customary events of default, including nonpayment of principal or interest, violation of covenants, inaccuracy of
representations and warranties, cross-defaults to other indebtedness, bankruptcy and other insolvency events. The occurrence of an event of default or an acceleration under the revolving credit facility would result in the heating oil segments
inability to obtain further borrowings under that facility, which could adversely affect its results of operations. An acceleration under the revolving credit facility would result in a default under the Partnerships other funded debt.



The heating oil segment borrowed an initial $119 million
under the new revolving credit facility on December 17, 2004, which it used to repay amounts outstanding under the heating oil segments existing credit facilities. The heating oil segment recognized a loss of approximately $3 million as a
result of the early redemption of this debt. At December 31, 2004, the heating oil segment had $119 million outstanding under this credit facility.



In December 2004, the Partnership completed the sale of its propane segment. Pursuant to the terms of the indenture relating to the Partnerships
101⁄4% Senior Notes due 2013 (MLP Notes), the Partnership will be obligated, within 360 days of the sale, to apply the net proceeds of the sale of the propane segment either to reduce indebtedness of the Partnership or of a restricted
subsidiary, or to make an investment in assets or capital expenditures useful to the Partnerships or any subsidiarys business. To the extent any net proceeds that are not so applied exceed $10 million (excess proceeds), the
indenture requires the Partnership to make an offer to all holders of MLP Notes to purchase for cash that number of MLP Notes that may be purchased with excess proceeds at a purchase price equal to 100% of the principal amount of the MLP Notes plus
accrued and unpaid interest to the date of purchase. Accordingly, the Partnership cannot predict the size of any offer, if any, to purchase MLP Notes and whether or to what extent holders of MLP Notes will accept the offer to purchase if an offer is
made.



|4) | Discontinued Operations
|-- | -----------------------



On December 17, 2004, the Partnership completed the sale of all of its interests in its propane segment to Inergy for a cash purchase price of
approximately $475 million, subject to certain adjustments, including a working capital adjustment. The propane segment was the Partnerships principal distributor of propane and related supplies and equipment to residential, industrial,
agricultural and motor fuel customers. Closing and other settlement costs totaled approximately $14 million and approximately $311 million was used to repay outstanding debt of the propane segment and the heating oil segment (see note 3). The
remainder of the proceeds were contributed to the heating oil segment (Petro Holdings, Inc.) as a capital contribution. In accordance with the purchase agreement, the effective date of the disposition was November 30, 2004. At December 31, 2004, the
Partnership recognized a gain on the sale of the propane segment totaling approximately $153.6 million, which includes estimates on certain contractual post closing adjustments including a working capital adjustment.



On March 31, 2004, the Partnership sold the stock and business of its
natural gas and electricity segment (TG&E) to a private party for a purchase price of approximately $12.5 million, subject to certain post closing adjustments. TG&E was the Partnerships energy reseller that marketed natural
gas and electricity to approximately 65,000 residential customers in deregulated markets in New York, New Jersey, Florida and Maryland. The Partnership recognized a loss of approximately $0.5 million as of September 30, 2004 as a result of this
transaction.



As a result of the sale of the propane segment,
the Partnership has restated its Statement of Operations, in accordance with SFAS 144, for the three month period ending December 31, 2003.



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|4) | Discontinued Operations  (continued)
|-- | -------------------------------------



The components of discontinued operations of the propane segment and TG&E for the three month periods ended December 31, 2003 and December 31, 2004
are as follows (in thousands):



|                                    |  |                                      |        |                                      |   |         |  |      |         |         |   |   |       |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------------------------ | ------ | ------------------------------------ | - | ------- |  | ---- | ------- | ------- | - | - | ----- | - | ------ | - |  | - | ------ | -
|                                    |  | Three Months Ended December 31, 2003 |        | Three Months Ended December 31, 2004 |  
|                                    |  | TG&E                                 |        | Propane                              |   | Total   |  | TG&E |         | Propane |   |   | Total |  
|Sales                               |  | $                                    | 15,845 |                                      | $ | 101,947 |  | $    | 117,792 |         | $ |  |       | $ | 58,722 |   |  | $ | 58,722 |  
|Cost of sales                       |  |                                      | 13,755 |                                      |   | 54,384  |  |      | 68,139  |         |   |  |       |   | 38,442 |   |  |   | 38,442 |  
|Delivery and branch                 |  |                                      |       |                                      |   | 23,315  |  |      | 23,315  |         |   |  |       |   | 17,796 |   |  |   | 17,796 |  
|Depreciation & amortization         |  |                                      | 120    |                                      |   | 4,908   |  |      | 5,028   |         |   |  |       |   | 3,481  |   |  |   | 3,481  |  
|G & A expenses                      |  |                                      | 1,308  |                                      |   | 2,402   |  |      | 3,710   |         |   |  |       |   | 2,096  |   |  |   | 2,096  |  
|                                    |  |                                      |        |                                      |   |         |  |      |         |         |   |   |       |   |        |   |  |   |        |  
|Operating income (loss)             |  |                                      | 662    |                                      |   | 16,938  |  |      | 17,600  |         |   |  |       |   | (3,093 | ) |  |   | (3,093 | )
|Net interest expense                |  |                                      |       |                                      |   | 2,424   |  |      | 2,424   |         |   |  |       |   | 1,384  |   |  |   | 1,384  |  
|Amortization of debt issuance costs |  |                                      |       |                                      |   | 41      |  |      | 41      |         |   |  |       |   | 27     |   |  |   | 27     |  
|                                    |  |                                      |        |                                      |   |         |  |      |         |         |   |   |       |   |        |   |  |   |        |  
|Income (loss) before income taxes   |  |                                      | 662    |                                      |   | 14,473  |  |      | 15,135  |         |   |  |       |   | (4,504 | ) |  |   | (4,504 | )
|Income tax expense                  |  |                                      |       |                                      |   | 75      |  |      | 75      |         |   |  |       |   | 48     |   |  |   | 48     |  
|                                    |  |                                      |        |                                      |   |         |  |      |         |         |   |   |       |   |        |   |  |   |        |  
|Net income (loss)                   |  | $                                    | 662    |                                      | $ | 14,398  |  | $    | 15,060  |         | $ |  |       | $ | (4,552 | ) |  | $ | (4,552 | )
|                                    |  |                                      |        |                                      |   |         |  |      |         |         |   |   |       |   |        |   |  |   |        |  



|5) | Segment Reporting
|-- | -----------------



As of December 31, 2004, the Partnership has one reportable operating segment: retail distribution of heating oil. The administrative expenses for the
public master limited partnership, Star Gas Partners, have not been allocated to the segment.



The heating oil segment is engaged in the retail distribution of home heating oil, related equipment services and equipment sales to residential and commercial customers. It operates primarily in the Northeast and
Mid-Atlantic states. Home heating oil is principally used by the Partnership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 home heating
oil.



The public master limited partnership includes the
office of the Chief Executive Officer and has the responsibility for maintaining investor relations and investor reporting for the Partnership.



The following are the condensed statements of operations and balance sheets for each segment as of and for the periods indicated. There were no
inter-segment sales.



|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | ---------------- | - | ------ | ------- |  | ---------- | ------- |  | ---------------- | ------- | - | ------- | - | ------- | - |  | - | ------- | -
|(in thousands)                                                                    |  | For the Three Months Ended December 31, |        
|                                                                                  |  | 2003                                    |         | 2004             |  
|Statements of Operations                                                          |  | Heating Oil                             |         | Partners& Others |   |        | Consol. |  | HeatingOil |         |  | Partners& Others |         |   | Consol. |  
|Sales                                                                             |  | $                                       | 316,070 |                  | $ |       |         |  | $          | 316,070 |  | $                | 350,694 |   |         | $ |        |   |  | $ | 350,694 |  
|Cost of sales                                                                     |  |                                         | 225,893 |                  |   |       |         |  |            | 225,893 |  |                  | 281,278 |   |         |   |        |   |  |   | 281,278 |  
|Delivery and branch                                                               |  |                                         | 60,678  |                  |   |       |         |  |            | 60,678  |  |                  | 65,480  |   |         |   |        |   |  |   | 65,480  |  
|Depreciation & amortization                                                       |  |                                         | 9,517   |                  |   |       |         |  |            | 9,517   |  |                  | 9,122   |   |         |   |        |   |  |   | 9,122   |  
|General & administrative expenses                                                 |  |                                         | 3,573   |                  |   | 2,128  |         |  |            | 5,701   |  |                  | 6,856   |   |         |   | 8,986   |   |  |   | 15,842  |  
|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  
|Operating income (loss)                                                           |  |                                         | 16,409  |                  |   | (2,128 | )       |  |            | 14,281  |  |                  | (12,042 | ) |         |   | (8,986  | ) |  |   | (21,028 | )
|Net interest expense                                                              |  |                                         | 6,251   |                  |   | 2,219  |         |  |            | 8,470   |  |                  | 7,871   |   |         |   | 2,621   |   |  |   | 10,492  |  
|Amortization of debt issuance costs                                               |  |                                         | 1,062   |                  |   | 166    |         |  |            | 1,228   |  |                  | 509     |   |         |   | 206     |   |  |   | 715     |  
|Loss on redemption of debt                                                        |  |                                         |        |                  |   |       |         |  |            |        |  |                  | 24,192  |   |         |   | 17,890  |   |  |   | 42,082  |  
|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes                      |  |                                         | 9,096   |                  |   | (4,513 | )       |  |            | 4,583   |  |                  | (44,614 | ) |         |   | (29,703 | ) |  |   | (74,317 | )
|Income tax expense                                                                |  |                                         | 331     |                  |   |       |         |  |            | 331     |  |                  | 331     |   |         |   |        |   |  |   | 331     |  
|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  
|Income (loss) from continuing operations                                          |  |                                         | 8,765   |                  |   | (4,513 | )       |  |            | 4,252   |  |                  | (44,945 | ) |         |   | (29,703 | ) |  |   | (74,648 | )
|Income (loss) from discontinued operations before gain on sale of propane segment |  |                                         |        |                  |   | 15,060 |         |  |            | 15,060  |  |                  |        |   |         |   | (4,552  | ) |  |   | (4,552  | )
|Gain on sale of propane segment, net of income taxes                              |  |                                         |        |                  |   |       |         |  |            |        |  |                  |        |   |         |   | 153,644 |   |  |   | 153,644 |  
|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  
|Net income (loss)                                                                 |  | $                                       | 8,765   |                  | $ | 10,547 |         |  | $          | 19,312  |  | $                | (44,945 | ) |         | $ | 119,389 |   |  | $ | 74,444  |  
|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  
|Capital expenditures                                                              |  | $                                       | 853     |                  | $ |       |         |  | $          | 853     |  | $                | 806     |   |         | $ |        |   |  | $ | 806     |  
|                                                                                  |  |                                         |         |                  |   |        |         |  |            |         |  |                  |         |   |         |   |         |   |  |   |         |  



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##### Table of Contents

|5) | Segment Reporting (continued)
|-- | ------------------------------



|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|-------------------------------------------------- |  | ------------------ | ------- | -------------------- | - | -------- | ------- |  | ---------- | ------- |  | -------------------- | ------- | - | ------- | - | -------- | - |  | - | -------
|(in thousands)                                     |  | September 30, 2004 |         | December 31, 2004   
|Balance Sheets                                     |  | HeatingOil         |         | Partners &Others (1) |   |          | Consol. |  | HeatingOil |         |  | Partners &Others (1) |         |   | Consol.
|ASSETS                                             |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Current assets:                                    |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Cash and cash equivalents                          |  | $                  | 4,561   |                      | $ | 131      |         |  | $          | 4,692   |  | $                    | 111,353 |   |         | $ | 1,075    |   |  | $ | 112,428
|Receivables, net                                   |  |                    | 84,005  |                      |   |         |         |  |            | 84,005  |  |                      | 151,704 |   |         |   |         |   |  |   | 151,704
|Inventories                                        |  |                    | 34,213  |                      |   |         |         |  |            | 34,213  |  |                      | 70,255  |   |         |   |         |   |  |   | 70,255 
|Prepaid expenses and other current assets          |  |                    | 61,549  |                      |   | (576     | )       |  |            | 60,973  |  |                      | 56,791  |   |         |   | 2,452    |   |  |   | 59,243 
|Net current assets of discontinued operations      |  |                    |        |                      |   | 50,288   |         |  |            | 50,288  |  |                      |        |   |         |   |         |   |  |   |       
|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Total current assets                               |  |                    | 184,328 |                      |   | 49,843   |         |  |            | 234,171 |  |                      | 390,103 |   |         |   | 3,527    |   |  |   | 393,630
|                                                   |  |                    |         |                      |   |         
|Property and equipment, net                        |  |                    | 63,701  |                      |   |         |         |  |            | 63,701  |  |                      | 60,564  |   |         |   |         |   |  |   | 60,564 
|Long-term portion of accts. rec.                   |  |                    | 5,458   |                      |   |         |         |  |            | 5,458   |  |                      | 6,412   |   |         |   |         |   |  |   | 6,412  
|Goodwill                                           |  |                    | 233,522 |                      |   |         |         |  |            | 233,522 |  |                      | 233,522 |   |         |   |         |   |  |   | 233,522
|Intangibles, net                                   |  |                    | 103,925 |                      |   |         |         |  |            | 103,925 |  |                      | 98,469  |   |         |   |         |   |  |   | 98,469 
|Deferred charges & other assets, net               |  |                    | 6,933   |                      |   | 6,952    |         |  |            | 13,885  |  |                      | 10,236  |   |         |   | 6,747    |   |  |   | 16,983 
|Net long-term assets of discontinued operations    |  |                    |        |                      |   | 306,314  |         |  |            | 306,314 |  |                      |        |   |         |   |         |   |  |   |       
|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Total Assets                                       |  | $                  | 597,867 |                      | $ | 363,109  |         |  | $          | 960,976 |  | $                    | 799,306 |   |         | $ | 10,274   |   |  | $ | 809,580
|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|LIABILITIES AND PARTNERS CAPITAL                  |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|                                                   |  |                    |         |                      |   |         
|Current Liabilities:                               |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Accounts payable                                   |  | $                  | 25,058  |                      | $ | (48      | )       |  | $          | 25,010  |  | $                    | 20,004  |   |         | $ |         |   |  | $ | 20,004 
|Working capital facility borrowings                |  |                    | 8,000   |                      |   |         |         |  |            | 8,000   |  |                      | 119,000 |   |         |   |         |   |  |   | 119,000
|Current maturities of long-term debt               |  |                    | 14,168  |                      |   | 10,250   |         |  |            | 24,418  |  |                      | 1,262   |   |         |   |         |   |  |   | 1,262  
|Accrued expenses and other current liabilities     |  |                    | 56,272  |                      |   | 9,219    |         |  |            | 65,491  |  |                      | 50,487  |   |         |   | 21,295   |   |  |   | 71,782 
|Due to affiliates                                  |  |                    | 1,329   |                      |   | (1,329   | )       |  |            |        |  |                      | (10,742 | ) |         |   | 10,742   |   |  |   |       
|Unearned service contract revenue                  |  |                    | 35,361  |                      |   |         |         |  |            | 35,361  |  |                      | 41,966  |   |         |   |         |   |  |   | 41,966 
|Customer credit balances                           |  |                    | 53,927  |                      |   |         |         |  |            | 53,927  |  |                      | 44,051  |   |         |   |         |   |  |   | 44,051 
|Net current liabilities of discontinued operations |  |                    |        |                      |   | 50,676   |         |  |            | 50,676  |  |                      |        |   |         |   |         |   |  |   |       
|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Total current liabilities                          |  |                    | 194,115 |                      |   | 68,768   |         |  |            | 262,883 |  |                      | 266,028 |   |         |   | 32,037   |   |  |   | 298,065
|                                                   |  |                    |         |                      |   |         
|Long-term debt                                     |  |                    | 148,045 |                      |   | 355,623  |         |  |            | 503,668 |  |                      | 882     |   |         |   | 267,700  |   |  |   | 268,582
|Due to affiliate                                   |  |                    | 165,684 |                      |   | (165,684 | )       |  |            |        |  |                      | 165,684 |   |         |   | (165,684 | ) |  |   |       
|Other long-term liabilities                        |  |                    | 24,654  |                      |   |         |         |  |            | 24,654  |  |                      | 23,766  |   |         |   |         |   |  |   | 23,766 
|Partners Capital:                                 |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Equity Capital                                     |  |                    | 65,369  |                      |   | 104,402  |         |  |            | 169,771 |  |                      | 342,946 |   |         |   | (123,779 | ) |  |   | 219,167
|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        
|Total Liabilities and Partners Capital            |  | $                  | 597,867 |                      | $ | 363,109  |         |  | $          | 960,976 |  | $                    | 799,306 |   |         | $ | 10,274   |   |  | $ | 809,580
|                                                   |  |                    |         |                      |   |          |         |  |            |         |  |                      |         |   |         |   |          |   |  |   |        

---

|(1) | The Partner and Other amounts include the balance sheet of the Public Master Limited Partnership, Star Gas Finance Company, as well as the necessary consolidation entries to
eliminate the investment in Petro Holdings.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|6) | Goodwill and Other Intangible Assets
|-- | ------------------------------------



Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. If goodwill of a
reporting unit is determined to be impaired, the amount of impairment is measured based on the excess of the net book value of the goodwill over the implied fair value of the goodwill. The Partnerships reporting units are consistent with the
operating segments identified in Note 5  Segment Reporting.



Intangible assets subject to amortization consist of the following (in thousands):



|                         |  |                     |         |                    |   |        |  |                     |         |                    |   |         |  |   |        |  |   |       
|------------------------ |  | ------------------- | ------- | ------------------ | - | ------ |  | ------------------- | ------- | ------------------ | - | ------- |  | - | ------ |  | - | ------
|                         |  | September 30, 2004  |         | December 31, 2004 
|                         |  | GrossCarryingAmount |         | Accum.Amortization |   | Net    |  | GrossCarryingAmount |         | Accum.Amortization |   | Net    
|Customer lists           |  | $                   | 189,559 |                    | $ | 86,332 |  | $                   | 103,227 |                    | $ | 189,559 |  | $ | 91,565 |  | $ | 97,994
|Covenants not to compete |  |                     | 4,736   |                    |   | 4,038  |  |                     | 698     |                    |   | 4,755   |  |   | 4,280  |  |   | 475   
|                         |  |                     |         |                    |   |        |  |                     |         |                    |   |         |  |   |        |  |   |       
|                         |  | $                   | 194,295 |                    | $ | 90,370 |  | $                   | 103,925 |                    | $ | 194,314 |  | $ | 95,845 |  | $ | 98,469
|                         |  |                     |         |                    |   |        |  |                     |         |                    |   |         |  |   |        |  |   |       



Amortization expense
for intangible assets was $5.4 million for the three months ended December 31, 2003 compared to $5.5 million for the three months ended December 31, 2004. Total estimated annual amortization expense related to intangible assets subject to
amortization, for the year ended September 30, 2004 and the four succeeding fiscal years ended September 30, is as follows (in thousands):



|     |  |                                    |       
|---- |  | ---------------------------------- | ------
|     |  | EstimatedAnnualAmortizationExpense
|2005 |  | $                                  | 21,581
|2006 |  | $                                  | 20,960
|2007 |  | $                                  | 20,341
|2008 |  | $                                  | 18,558
|2009 |  | $                                  | 11,709



|7) | Employee Pension Plan
|-- | ---------------------



|                                        |  |                                |        |   |      |   |        |  
|--------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|(in thousands)                          |  | Three Months EndedDecember 31, |       
|                                        |  | 2003                           |        |   | 2004 |  
|Components of Net Periodic Benefit Cost |  |                                |        |   |      |   |        |  
|Service cost                            |  | $                              |       |   |      | $ |       |  
|Interest cost                           |  |                                | 898    |   |      |   | 876    |  
|Expected return on plan assets          |  |                                | (1,043 | ) |      |   | (1,020 | )
|Net amortization                        |  |                                | 371    |   |      |   | 359    |  
|                                        |  |                                |        |   |      |   |        |  
|Net periodic benefit cost               |  | $                              | 226    |   |      | $ | 215    |  
|                                        |  |                                |        |   |      |   |        |  



The heating oil
segment presently expects to contribute approximately $0.1 million to its plans during fiscal 2005 to fund its pension obligations.



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##### Table of Contents

|8) | Acquisitions
|-- | ------------



During fiscal 2004, the Partnership acquired three retail heating oil dealers.



Sales and net income have been included in the Condensed Consolidated Statements of Operations from the respective effective
dates of acquisition. The following unaudited pro forma information presents the results of operations of the Partnership, including the three acquisitions, as if the acquisitions had taken place on October 1, 2003. This pro forma information is
presented for informational purposes; it is not indicative of future operating performance (in thousands, except per unit data).



|                                            |  |                                  |        
|------------------------------------------- |  | -------------------------------- | -------
|                                            |  | Three Months Ended Dec. 31, 2003
|Sales                                       |  | $                                | 317,982
|                                            |  |                                  |        
|Net income                                  |  | $                                | 19,492 
|General Partners interest in net income    |  |                                  | 176    
|                                            |  |                                  |        
|Limited Partners interest in net income    |  | $                                | 19,316 
|                                            |  |                                  |        
|Basic net income per limited partner unit   |  | $                                | 0.54   
|                                            |  |                                  |        
|Diluted net income per limited partner unit |  | $                                | 0.54   
|                                            |  |                                  |        



|9) | Supplemental Disclosure of Cash Flow Information
|-- | ------------------------------------------------



|                                                             |  |                                |       |   |      |   |       |  
|------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | - | ----- | -
|(in thousands)                                               |  | Three Months EndedDecember 31, |      
|                                                             |  | 2003                           |       |   | 2004 |  
|Cash paid during the period for:                             |  |                                |       |   |      |   |       |  
|Income taxes                                                 |  | $                              | 605   |   |      | $ | 741   |  
|Interest                                                     |  | $                              | 9,472 |   |      | $ | 7,297 |  
|                                                             |  |                               
|Non-cash financing activities:                               |  |                                |       |   |      |   |       |  
|Decrease in long-term debt for interest rate swaps           |  | $                              | (582  | ) |      | $ | (77   | )
|                                                             |  |                               
|Increase in long-term debt for amortization of debt discount |  | $                              | 77    |   |      | $ | 77    |  
|Decrease in other assets                                     |  | $                              | 505   |   |      | $ |      |  



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|10) | Earnings Per Limited Partner Unit
|--- | ---------------------------------



|                                                                                                                           |  |                                |        |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------ | -
|(in thousands, except per unit data)                                                                                       |  | Three Months EndedDecember 31, |       
|                                                                                                                           |  | 2003                           |        | 2004 |  
|Income (loss) from continuing operations per Limited Partner unit:                                                         |  |                                |        |      |   |        |  
|Basic                                                                                                                      |  | $                              | 0.12   |      | $ | (2.07  | )
|Diluted                                                                                                                    |  | $                              | 0.12   |      | $ | (2.07  | )
|                                                                                                                           |  |                               
|Income (loss) from discontinued operations, before gain on sale of segments, net of income taxes per Limited Partner unit: |  |                                |        |      |   |        |  
|Basic                                                                                                                      |  | $                              | 0.44   |      | $ | (0.13  | )
|Diluted                                                                                                                    |  | $                              | 0.44   |      | $ | (0.13  | )
|                                                                                                                           |  |                               
|Gain on sale of propane segment, net of income taxes per Limited Partner unit:                                             |  |                                |        |      |   |        |  
|Basic                                                                                                                      |  | $                              |       |      | $ | 4.26   |  
|Diluted                                                                                                                    |  | $                              |       |      | $ | 4.26   |  
|                                                                                                                           |  |                               
|Net income per Limited Partner unit:                                                                                       |  |                                |        |      |   |        |  
|Basic                                                                                                                      |  | $                              | 0.56   |      | $ | 2.06   |  
|Diluted                                                                                                                    |  | $                              | 0.56   |      | $ | 2.06   |  
|                                                                                                                           |  |                               
|Basic Earnings Per Unit:                                                                                                   |  |                                |        |      |   |        |  
|Net income                                                                                                                 |  | $                              | 19,312 |      | $ | 74,444 |  
|Less: General Partners interest in net income                                                                             |  |                                | 194    |      |   | 672    |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Limited Partners interest in net income                                                                                   |  | $                              | 19,118 |      | $ | 73,772 |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Common Units                                                                                                               |  |                                | 30,671 |      |   | 32,166 |  
|Senior Subordinated Units                                                                                                  |  |                                | 3,142  |      |   | 3,245  |  
|Junior Subordinated Units                                                                                                  |  |                                | 345    |      |   | 345    |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Weighted average number of Limited Partner units outstanding                                                               |  |                                | 34,158 |      |   | 35,756 |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Basic earnings per unit                                                                                                    |  | $                              | 0.56   |      | $ | 2.06   |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Diluted Earnings Per Unit:                                                                                                 |  |                                |        |      |   |        |  
|Effect of diluted securities                                                                                               |  | $                              |       |      | $ |       |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Limited Partners interest in net income                                                                                   |  | $                              | 19,118 |      | $ | 73,772 |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Weighted average number of Limited Partner units outstanding                                                               |  |                                | 34,158 |      |   | 35,756 |  
|                                                                                                                           |  |                                |        |      |   |        |  
|Diluted earnings per unit                                                                                                  |  | $                              | 0.56   |      | $ | 2.06   |  
|                                                                                                                           |  |                                |        |      |   |        |  



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##### Table of Contents

Item 2.



MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



Statement Regarding Forward-Looking Disclosure



This Report
includes forward-looking statements which represent the Partnerships expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of weather conditions on the
Partnerships financial performance, the price and supply of home heating oil, the consumption patterns of the Partnerships customers, the Partnerships ability to obtain satisfactory gross profit margins, the ability of the
Partnership to obtain new accounts and retain existing accounts, the impact of the business process redesign project at the heating oil segment, and the ability of the Partnership to address issues related to such project. All statements other than
statements of historical facts included in this Report including, without limitation, the statements under Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere herein, are
forward-looking statements. Although the Partnership 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 Partnerships expectations (Cautionary Statements) are disclosed in this Report, and in the Partnerships Annual Report on Form 10-K for the year ended September 30, 2004
including without limitation and in conjunction with the forward-looking statements included in this Report. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.



Results of
Operations



Overview



In analyzing the Partnerships financial results, the following matters should be
considered.



In December 2004, the Partnership completed the sale of its
propane business to a subsidiary of Inergy, L.P., for a purchase price of $475 million, subject to certain adjustments. The Partnership recognized a $153.6 million gain from the sale of the propane segment. $311 million of the net proceeds from the
sale of the propane segment were used to repurchase the senior secured notes and first mortgage notes of the heating oil segment and propane segment, to pay prepayment premiums, expenses and accrued interest and to repay amounts outstanding under
the propane segments working capital facilities.



In accordance with the
terms of the indenture relating to the Partnerships 10 1⁄4% Senior Notes (MLP Notes), the Partnership is obligated, within 360 days of the sale, to apply the remaining net proceeds of the sale of the propane segment either to
reduce indebtedness (and reduce any related commitment) of the Partnership or of a restricted subsidiary, or to make an investment in assets or capital expenditures useful to the Partnerships or any subsidiarys business. To the extent
any net proceeds that are not so applied exceed $10 million (excess proceeds), the indenture requires the Partnership to make an offer to all holders of MLP Notes to purchase for cash that number of MLP Notes that may be purchased with
excess proceeds at a purchase price equal to 100% of the principal amount of the MLP Notes plus accrued and unpaid interest to the date of purchase. The Partnership cannot determine the amount of excess proceeds that will result from the sale of the
propane segment. Accordingly, the Partnership cannot predict the size of any offer, if any, to purchase the MLP Notes and whether or to what extent holders of the MLP Notes will accept the offer to purchase if an offer is made.



In December 2004, the heating oil segment signed a new $260 million revolving credit facility
agreement with a group of lenders led by JP Morgan Chase Bank, as administrative agent. The revolving credit facility provides the heating oil segment with the ability to borrow up to $260 million for working capital purposes (subject to certain
borrowing base limitations), including the issuance of up to $75 million in letters of credit. Obligations under the revolving credit facility are secured by liens on substantially all of the assets of the heating oil segment, including accounts
receivable, inventory, general intangibles, real property, fixtures and equipment. Obligations under the revolving credit facility are guaranteed by the heating oil segments subsidiaries and by the Partnership.



The Partnerships fiscal year ends on September 30. All references to quarters and years
respectively in this document are to fiscal quarters and years unless otherwise noted. The seasonal nature of the Partnerships business historically has resulted in the sale of approximately 30% of its home heating oil volume in the first
fiscal quarter (October through December) and 45% of its home heating oil volume in the second fiscal quarter (January through March), the peak heating season, because home heating oil is primarily used for space heating in residential and
commercial buildings. The Partnership historically has realized net income in both of these quarters and net losses during the quarters ending June and September. In addition, sales volume typically fluctuates from period to period in response to
variations in weather, wholesale energy prices and other factors. Gross profit is affected not only by weather patterns, but also by changes in customer mix. For example, sales to residential customers historically generate higher margins than sales
to other customer groups, such as commercial or industrial customers. Changes in the wholesale price of home heating oil caused by changes in supply or market conditions can impact gross profit. In addition, gross profit margins vary by geographic
region. Accordingly, gross profit margins could vary significantly from year to year or quarter to quarter in a period of identical sales volumes.



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##### Table of Contents

For the quarter ended December 31, 2004, the average wholesale price of home heating oil as measured by the closing price
on the New York Mercantile Exchange increased 65% to $1.42 per gallon from $.86 per gallon for the same quarter of last year. The unprecedented rise in the wholesale price of heating oil has adversely impacted the heating oil segments margins
and in its ability to attract new customers and retain existing customers. In addition, the Partnership believes that customers are using less home heating oil than in prior periods given similar temperatures, due to the significant increase in the
price of home heating oil.



Prior to the 2004 winter heating season, the
heating oil segment attempted to develop a competitive advantage in customer service and, as part of that effort, centralized its heating equipment service and oil dispatch functions and engaged a centralized call center to fulfill its telephone
requirements for a majority of its home heating oil customers. The Partnership experienced difficulties in advancing this initiative during fiscal 2004, which adversely impacted the customer base and the Partnerships costs.



As a result of the above and the factors set forth in the next paragraph, the Partnership
believes that the heating oil segment experienced annual net customer attrition of approximately 6.5% in fiscal 2004, excluding the impact of acquisitions. The 6.5% net customer attrition rate in fiscal 2004 was higher than the level experienced in
fiscal 2003 and higher than in the preceeding several years. For fiscal 2003, before the full implementation of the business process improvement program and before the increase in the wholesale price of home heating oil, the Partnership experienced
annual net customer attrition of 1.3%.



The heating oil segment has continued
to lose accounts in the first quarter of fiscal 2005. For the three months ended December 31, 2004, the heating oil segment lost approximately 3,300 accounts (net), or 0.7% of its home heating oil customer base as compared to the three months ended
December 31, 2003 (a period after the implementation of the initiative), in which the heating oil segment lost approximately 3,000 accounts (net), or 0.6% of its home heating oil customer base, and as compared to the three months ended December 31,
2002 (a period prior to the implementation of the initiative) in which the heating oil segment gained 3,700 accounts (net), or 0.8% of its home heating oil customer base. For the twelve months ended December 31, 2004, the heating oil segment
experienced annual net customer attrition of approximately 6.5%. The Partnership believes that net customer attrition for the three months ended December 31, 2004 resulted from (i) a combination of the premium service/premium price strategy of the
heating oil segment during a period when customer price sensitivity increased with high energy prices; (ii) the lag effect of net customer attrition related to service and delivery problems from prior fiscal years; (iii) the heating oil
segments telephone handling skills not being sufficiently developed to the level associated with other premium service providers ; and (iv) tightened credit standards.



The Partnership believes it has identified the problems associated with its centralization efforts and is taking steps to address these
issues. However, the Partnership expects that high net attrition rates will continue through the 2004-2005 winter heating season and perhaps beyond for the reasons described above. The Partnership notes that even to the extent that the rate of
attrition can be halted, the current reduced customer base will adversely impact net income for fiscal 2005 and beyond. The Partnership continues to explore approaches to reduce the rate of net customer attrition.



Virtually all of the quantitative factors measuring the effectiveness of the call center and
field operations  such as customer satisfaction scores, telephone waiting times and abandonment rates at the call center, oil delivery run-outs and heating equipment repair and maintenance response times  have improved meaningfully
during the first fiscal quarter of 2005, as compared to the first fiscal quarter of 2004. Nonetheless, the Partnership believes that customer sensitivity at the call center will require additional training. Most importantly, net customer attrition
is also being addressed by a more market responsive pricing strategy that involves segmenting customers by price plan preferences, years of service and differing geographic competitive market conditions. The Partnership cannot give any assurance,
however, as to whether and to what extent these and other initiatives it is undertaking will be effective, and if so, at what time.



-18-



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##### Table of Contents

The following is a discussion of the results of operations of the Partnership and its subsidiaries, and should be read in
conjunction with the historical Financial and Operating Data and Notes thereto included elsewhere in this Report. The Partnership completed the sale of its TG&E segment in March 2004 and the sale of its propane segment in December 2004. The
following discussion reflects the historical results for the TG&E segment and propane segment as discontinued operations.



Three Months Ended December 31, 2004

Compared to December 31, 2003



Statements
of Operations by Segment



|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---------------- | - | ------ | ------- |  | - | ---------- | - |  | ---------------- | ------- | - | ------- | - | ------- | - |  | - | ------- | -
|(in thousands)                                                                                         |  | Three Months Ended December 31, |        
|                                                                                                       |  | 2003                            |         |   | 2004             |  
|Statements of Operations                                                                               |  | HeatingOil                      |         |   | Partners& Others |   |        | Consol. |  |   | HeatingOil |   |  | Partners& Others |         |   | Consol. |  
|Sales:                                                                                                 |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Product                                                                                                |  | $                               | 264,205 |   |                  | $ |        |         |  | $ | 264,205    |   |  | $                | 297,119 |   |         | $ |         |   |  | $ | 297,119 |  
|Installations, service and appliances                                                                  |  |                                 | 51,865  |   |                  |   |        |         |  |   | 51,865     |   |  |                  | 53,575  |   |         |   |         |   |  |   | 53,575  |  
|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Total sales                                                                                            |  |                                 | 316,070 |   |                  |   |        |         |  |   | 316,070    |   |  |                  | 350,694 |   |         |   |         |   |  |   | 350,694 |  
|Cost and expenses:                                                                                     |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Cost of product                                                                                        |  |                                 | 168,687 |   |                  |   |        |         |  |   | 168,687    |   |  |                  | 222,903 |   |         |   |         |   |  |   | 222,903 |  
|Cost of installations, service and appliances                                                          |  |                                 | 57,206  |   |                  |   |        |         |  |   | 57,206     |   |  |                  | 58,375  |   |         |   |         |   |  |   | 58,375  |  
|Delivery and branch expenses                                                                           |  |                                 | 60,678  |   |                  |   |        |         |  |   | 60,678     |   |  |                  | 65,480  |   |         |   |         |   |  |   | 65,480  |  
|Depreciation & amortization expenses                                                                   |  |                                 | 9,517   |   |                  |   |        |         |  |   | 9,517      |   |  |                  | 9,122   |   |         |   |         |   |  |   | 9,122   |  
|General and administrative expenses                                                                    |  |                                 | 3,573   |   |                  |   | 2,128  |         |  |   | 5,701      |   |  |                  | 6,856   |   |         |   | 8,986   |   |  |   | 15,842  |  
|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Operating income (loss)                                                                                |  |                                 | 16,409  |   |                  |   | (2,128 | )       |  |   | 14,281     |   |  |                  | (12,042 | ) |         |   | (8,986  | ) |  |   | (21,028 | )
|Interest expense - net                                                                                 |  |                                 | (6,251  | ) |                  |   | (2,219 | )       |  |   | (8,470     | ) |  |                  | (7,871  | ) |         |   | (2,621  | ) |  |   | (10,492 | )
|Amortization of debt issuance costs                                                                    |  |                                 | (1,062  | ) |                  |   | (166   | )       |  |   | (1,228     | ) |  |                  | (509    | ) |         |   | (206    | ) |  |   | (715    | )
|Loss on redemption of debt                                                                             |  |                                 |        |   |                  |   |       |         |  |   |           |   |  |                  | (24,192 | ) |         |   | (17,890 | ) |  |   | (42,082 | )
|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes                                           |  |                                 | 9,096   |   |                  |   | (4,513 | )       |  |   | 4,583      |   |  |                  | (44,614 | ) |         |   | (29,703 | ) |  |   | (74,317 | )
|Income tax expense                                                                                     |  |                                 | 331     |   |                  |   |       |         |  |   | 331        |   |  |                  | 331     |   |         |   |        |   |  |   | 331     |  
|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Income (loss) from continuing operations                                                               |  |                                 | 8,765   |   |                  |   | (4,513 | )       |  |   | 4,252      |   |  |                  | (44,945 | ) |         |   | (29,703 | ) |  |   | (74,648 | )
|Income (loss) from discontinued operations before gain on sale of propane segment, net of income taxes |  |                                 |         |   |                  |   | 15,060 |         |  |   | 15,060     |   |  |                  |        |   |         |   | (4,552  | ) |  |   | (4,552  | )
|Gain on sale of propane segment, net of income taxes                                                   |  |                                 |        |   |                  |   |       |         |  |   |           |   |  |                  |        |   |         |   | 153,644 |   |  |   | 153,644 |  
|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  
|Net income (loss)                                                                                      |  | $                               | 8,765   |   |                  | $ | 10,547 |         |  | $ | 19,312     |   |  | $                | (44,945 | ) |         | $ | 119,389 |   |  | $ | 74,444  |  
|                                                                                                       |  |                                 |         |   |                  |   |        |         |  |   |            |   |  |                  |         |   |         |   |         |   |  |   |         |  



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Volume



For the three months ended December 31, 2004, retail volume of home heating oil declined by 24.9 million gallons, or 14.9%, to 142.3 million gallons, as compared to 167.2
million gallons for the three months ended December 31, 2003. Volume of other petroleum products declined by 3.4 million gallons or 14.6% to 20.0 million gallons for the three months ended December 31, 2004, as compared to 23.4 million gallons for
the three months ended December 31, 2003. An analysis of the change in the retail volume of home heating oil, which is based on managements estimates, sampling and other mathematical calculations, is found below:



|                                              |  |                     |  
|--------------------------------------------- |  | ------------------- | -
|(in millions of gallons)                      |  | Heating Oil Segment |  
|Volume  Three Months Ended December 31, 2003 |  | 167.2               |  
|Impact of warmer temperatures (a)             |  | (1.7                | )
|Impact of acquisitions                        |  | 1.0                 |  
|Net customer attrition                        |  | (10.5               | )
|Conservation                                  |  | (6.0                | )
|Delivery scheduling                           |  | (4.6                | )
|Other                                         |  | (3.1                | )
|                                              |  |                     |  
|Change                                        |  | (24.9               | )
|                                              |  |                     |  
|Volume  Three Months Ended December 31, 2004 |  | 142.3               |  
|                                              |  |                     |  

---

|(a) | Represents actual reported temperatures adjusted to capture the lag effect of colder temperatures experienced in the last week of December 2004, as compared to the last week of
December 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Partnership believes that this 24.9 million
gallon home heating oil decline at the heating oil segment was due to net customer attrition, which occurred in fiscal 2004 and the first fiscal quarter of 2005, conservation, delivery scheduling, the lag effect of colder temperatures experienced
late in December 2004 and other factors partially offset by acquisitions. Net customer attrition is the difference between gross customer losses and customers added through internal marketing efforts. Customers added through acquisitions do not
impact the calculation of net customer attrition. The Partnership believes that for both fiscal 2004 and the twelve months ended December 31, 2004, the heating oil segment experienced net customer attrition of approximately 6.5%. Temperatures in the
heating oil segments geographic areas of operations were approximately 2.0% colder in the three months ended December 31, 2004 than in the three months ended December 31, 2003 and approximately 2.0% warmer than normal, as reported by the
National Oceanic Atmospheric Administration (NOAA). While temperatures were slightly colder than the prior year, the Partnership believes that the quarterly volume comparison was not significantly impacted by the colder weather. The
majority of the colder weather was experienced during the last week of December 2004 and impacted only those customers who received a delivery during that week. Due to the significant increase in the price per gallon of home heating oil, the
Partnership believes that customers are using less home heating oil given similar temperatures. Preliminary indications based on internal studies suggest that the Partnerships customers are reducing their consumption by approximately 3.6%. The
Partnership cannot determine if conservation is a permanent or temporary phenomenon. The Partnership also estimates that during the three months ended December 31, 2004, home heating oil volume was adversely impacted by 4.6 million gallons, as the
heating oil segment attempted to deliver budget volume in the preceding quarter that exceeded deliveries under historic patterns during that period.



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Product Sales



For the three months ended December 31, 2004, product sales increased $32.9 million, or 12.5%, to $297.1 million, as compared to $264.2 million for the three months ended
December 31, 2003 due to an increase in selling prices which more than offset a decline in product sales due to the lower home heating oil volume sold. Selling prices were higher due to the increase in wholesale supply costs.



Sales, Installation, Service and Appliances



For the three months ended December 31, 2004, installation, service and appliance sales
increased $1.7 million, or 3.3%, to $53.6 million as compared to $51.9 million for the three months ended December 31, 2003 due to measures taken in the last several years to increase service revenues.



Cost of Product



For the three months ended December 31, 2004, cost of product increased $54.2 million, or 32.1%, to $222.9 million, as compared to $168.7
million for the three months ended December 31, 2003. This is the result of an increase in the heating oil segments average wholesale product cost of $0.46 per gallon, or 52.0%, to an average of $1.34 per gallon for the three months ended
December 31, 2004, from an average of $0.88 for the three months ended December 31, 2003. As of September 30, 2004, the wholesale cost of home heating oil had increased by 78 % to $ 1.39 per gallon from $0.78 as of September 30, 2003, as measured by
the closing price on the New York Mercantile Exchange. During the three months ended December 31, 2004, the closing price of home heating oil on the New York Mercantile Exchange increased to a high of $1.59 per gallon on October 22, 2004. As of
December 31, 2004, the wholesale cost of home heating oil was $1.23, which represents a 35% increase over the heating oil price per gallon of $0.91 on December 31, 2003, as measured by the closing price on the New York Mercantile Exchange.



In an effort to reduce net customer attrition, the heating oil segment delayed
increasing its selling price to customers whose price plan agreements expired during the July to September 2004 time period. This decision negatively impacted gross profit by an estimated $1.7 million for the three months ended December 31, 2004.



For the three months ended December 31, 2004, cost of product at the heating
oil segment was adversely impacted by $2.9 million due to a delay in hedging the price of product for certain residential protected price customers due to cash constraints under the heating oil segments previous credit agreement. Cost of
product was also adversely impacted by $0.8 million associated with not hedging the price of product for certain residential price protected customers that were incorrectly coded as variable customers until December 2004. Home heating oil per gallon
margins for the three months ended December 31, 2004 declined by 5.2 cents per gallon, as compared to the three months ended December 31, 2003 due to an increase in the percentage of volume sold to lower margin residential price protected customers,
the delay in increasing the selling price to customers whose price plan expired during the July to September 2004 time period and the aforementioned issues concerning price protected customers. For the three months ended December 31, 2004, the
increase in product cost exceeded the increase in product sales by $21.3 million, as compared to the three months ended December 31, 2003, due to the decline in home heating oil volume and lower home heating oil per gallon margins.



The home heating oil segments customer base is comprised of three types of customers,
residential variable, residential protected price and commercial/industrial. The selling price for a residential variable customer is established by the Partnerships pricing committee from time to time based on market conditions and generally
has the highest per gallon gross profit margin. A residential protected price heating oil customer enters into an agreement to purchase home heating oil at a fixed or maximum price per gallon over a 12-month period. Due to the greater price
sensitivity of residential protected price customers, the per gallon margins realized from that customer segment generally are less than variable priced residential customers. Commercial/industrial customers are characterized as large volume users
and contribute the lowest per gallon margin.



During periods of rising heating
oil prices, as recently experienced a number of residential consumers have migrated to price protection plans. At the heating oil segment, the percentage of home heating oil volume sold to residential protected price customers increased to 49% of
total home heating oil volume sales for the three months ended December 31, 2004, as compared to 41% for the three months ended December 31, 2003. Accordingly, the percentage of home heating oil volume sold to residential variable customers
decreased to 35% for the three months ended December 31, 2004, as compared to 43% for the three months ended December 31, 2003. For the three months ended December 31, 2004, sales to commercial/industrial customers represented 16% of total home
heating oil volume sales, unchanged from the three months ended December 31, 2003. Rising energy costs have increased consumer interest in price protection. The Partnership is exploring more market responsive pricing strategies including customer
segmentation by years of service and differing geographic competitive market conditions to meet this increased consumer sensitivity. However, if wholesale supply costs remain volatile and/or at historically high levels, per gallon profit margins and
results could continue to be adversely impacted.



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Cost of Installations, Service and Appliances



For the three months ended December 31, 2004, costs of installations, service and appliances increased $1.2 million, or 2.0%, to $58.4
million, as compared to $57.2 million for the three months ended December 31, 2003. This change was primarily due to wage and other cost increases.



Delivery and Branch Expenses



For the three months ended December 31, 2004, delivery and branch expenses increased $4.8 million, or 7.9%, to $65.5 million, as compared to $60.7 million for the three
months ended December 31, 2003. This increase was due to higher marketing expenses of $1.7 million, additional costs to operate the centralized call center of $0.8 million and an estimated $1.9 million due to operating and wage increases. Prior to
the 2004 winter heating season, the heating oil segment attempted to develop a competitive advantage in customer service, and as part of that effort centralized its heating service equipment dispatch and engaged a centralized call center to respond
to telephone inquiries. While virtually all of the quantitative factors measuring the effectiveness of the call center and field operations  such as telephone waiting times and abandonment rates at the call center, oil delivery run-outs and
heating equipment repair and maintenance response times  have improved meaningfully during the first fiscal quarter of 2005 as compared to the first fiscal quarter of 2004, the savings from this initiative were less than expected and the costs
to operate under this centralized format were greater than originally estimated.



Depreciation and Amortization



For the three months ended
December 31, 2004, depreciation and amortization expenses declined by $0.4 million, or 4.2%, to $9.1 million, as compared to $9.5 million for the three months ended December 31, 2003.



General and Administrative Expenses



For the three months ended December 31, 2004, general and administrative expenses increased by $10.1 million, or 177.9%, to $15.8 million, as compared to $5.7 million for
the three months ended December 31, 2003. At the Partnership level, general and administrative expenses increased by $6.9 million from $2.1 million in the three months ended December 31, 2003, to $9.0 million in the three months ended December 31,
2004, as a $2.3 million reduction in compensation expense associated with unit appreciation rights was more than offset by $7.5 million in bridge financing fees and $1.5 million of legal expenses incurred relating to inquiries from the New York
Stock Exchange and the Securities and Exchange Commission, by several purported class action lawsuits as well as legal and professional fees associated with exploring several refinancing alternatives. At the heating oil segment, general and
administrative expenses increased by $3.3 million, or 91.9%, to $6.9 million for the three months ended December 31, 2004, from $3.6 million for the three months ended December 31, 2003. This increase was attributable to $2.9 million of expenses and
fees associated with certain bank amendments and waivers obtained during the three months ended December 31, 2004.



Operating Income (Loss)



For the three months ended December 31, 2004, operating income decreased $35.3 million to a loss of $21.0 million, as compared to $14.3 million in operating income for the three months ended December 31, 2003. This
decline was due to lower sales volume, a decrease in home heating oil margins of 5.2 cents per gallon, $11.9 million in bridge facility, legal and bank amendment fees and an increase in operating expenses. Operating expenses increased due to higher
marketing expenses of $1.7 million, additional expenses to operate the call center of $0.8 million and an estimated $1.9 million in operating and wage increases.



Loss on Redemption of Debt



For the three months ended December 31, 2004, the Partnership recorded a $42.1 million loss on the early redemption of certain notes at the heating oil and propane
segments. The loss consists of cash premiums paid of $37.0 million for early redemption, the write-off of previously capitalized net deferred financing costs of $6.1 million and legal expenses of $0.7 million, reduced in part by a $1.7 million basis
adjustment to the carrying value of long-term debt.



Interest Expense



For the three months ended December 31, 2004, interest expense increased
$1.6 million, or 16.9%, to $10.9 million, as compared to $9.3 million for the three months ended December 31, 2003. This increase was due to a higher principal amount of long-term debt outstanding and an increase in the Partnerships weighted
average interest rate during the three months ended December 31, 2004, as compared to the three months ended December 31, 2003.



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Amortization of Debt Issuance Costs



For the three months ended December 31, 2004, amortization of debt issuance costs decreased $0.5 million, or 41.7%, to $0.7 million, as
compared to $1.2 million for the three months ended December 31, 2003. During the three months ended December 31, 2003, certain deferred financing costs were written off.



Income Tax Expense



Income tax expense for the three months ended December 31, 2004 was $0.3 million and represents certain state income taxes. Income tax expense for the three months ended
December 31, 2004 was unchanged from the three months ended December 31, 2003.



Income (Loss) From Continuing Operations



For the three months
ended December 31, 2004, income (loss) from continuing operations decreased $78.9 million, to a loss of $74.6 million, as compared to income of $4.3 million for the three months ended December 31, 2003. This decline was due to a $42.1 million loss
on redemption of debt, the impact of lower volume, a 5.2 cent per gallon reduction in home heating oil gross profit margins, expenses attributable to the bridge facility, bank amendments and legal expenses totaling $11.9 million, operating and wage
increases and an increase in interest expense.



Income (Loss) From
Discontinued Operations



For the three months ended December 31, 2004,
income from discontinued operations decreased $19.6 million. Income from the discontinued propane segment, which was sold on December 17, 2004, decreased $19.0 million to a loss of $4.6 million for the three months ended December 31, 2004, as
compared to income of $14.4 million for the three months ended December 31, 2003. For the month of December 2003, the propane segment realized net income of $11.5 million. For the two months ended November 30, 2004, the propane segment had a loss of
$4.6 million, as compared to income of $2.9 million for the two months ended November 30, 2003. This $7.5 million decrease at the discontinued propane segment was due to lower volume sales, a decrease in per gallon margins and higher operating
expenses. The discontinued TG&E segment, which was sold on March 31, 2004, generated $0.7 million in income for the three months ended December 31, 2003.



Gain On Sale of the Propane Segment



For the three months ended December 31, 2004, the Partnership recorded a $153.6 million gain on the sale of the propane segment, which is net of income taxes of $3.0
million.



Net Income



For the three months ended December 31, 2004, net income increased $55.1 million, to $74.4
million, as compared to $19.3 million in net income for the three months ended December 31, 2003, as the $153.6 million gain on the sale of the propane segment was reduced by lower income from continuing operations of $78.9 million and a $19.6
million decrease in income from discontinued operations.



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Earnings From Continuing Operations Before Interest, Taxes, Depreciation and Amortization (EBITDA)



For the three months ended December 31, 2004, EBITDA declined $77.8 million, to an EBITDA
loss of $54.0 million as compared to $23.8 million for the three months ended December 31, 2003. This decrease was due to the recording of a $42.1 million loss on the redemption of debt, lower sales volume resulting from net customer attrition,
conservation and other factors, a decrease in home heating oil per gallon margins of 5.2 cents, bridge facility, bank amendment fees and legal fees totaling $11.9 million and higher operating expenses. EBITDA should not be considered as an
alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating the Partnerships
ability to make the Minimum Quarterly Distribution. EBITDA for the Partnership is calculated for the three months ended December 31 as follows.



|                                            |  |                                 |         |   |      |   |          |     
|------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | ----
|                                            |  | Three Months Ended December 31, |        
|(in thousands)                              |  | 2003                            |         |   | 2004 |  
|Income (loss) from continuing operations    |  | $                               | 4,252   |   |      | $ | (74,648  | )   
|Plus:                                       |  |                                 |         |   |      |   |          |     
|Income tax expense                          |  |                                 | 331     |   |      |   | 331      |     
|Amortization of debt issuance costs         |  |                                 | 1,228   |   |      |   | 715      |     
|Interest expense, net                       |  |                                 | 8,470   |   |      |   | 10,492   |     
|Depreciation and amortization               |  |                                 | 9,517   |   |      |   | 9,122    |     
|                                            |  |                                 |         |   |      |   |          |     
|EBITDA                                      |  |                                 | 23,798  |   |      |   | (53,988  | )(a)
|Add/(subtract)                              |  |                                 |         |   |      |   |          |     
|Income tax expense                          |  |                                 | (331    | ) |      |   | (331     | )   
|Interest expense, net                       |  |                                 | (8,470  | ) |      |   | (10,492  | )   
|Unit compensation expense                   |  |                                 | 52      |   |      |   | 18       |     
|Provision for losses on accounts receivable |  |                                 | 1,543   |   |      |   | 1,721    |     
|Loss on redemption of debt                  |  |                                 |        |   |      |   | 42,082   |     
|Gain on sales of fixed assets, net          |  |                                 | (136    | ) |      |   | (73      | )   
|Change in operating assets and liabilities  |  |                                 | (53,981 | ) |      |   | (130,832 | )   
|                                            |  |                                 |         |   |      |   |          |     
|Net cash used in operating activities       |  | $                               | (37,525 | ) |      | $ | (151,895 | )   
|                                            |  |                                 |         |   |      |   |          |     

---

|(a) | Includes one-time expenses of $42.1 million related to early debt redemption.
|--- | -----------------------------------------------------------------------------



Liquidity and Capital Resources



The ability of the Partnership to satisfy its obligations will depend on its future performance, which will be subject to prevailing economic, financial, business and
weather conditions, the ability to pass on the full impact of high heating oil prices to customers, the effects of higher customer attrition, conservation and other factors, most of which are beyond its control. Future capital requirements of the
Partnership are expected to be provided by cash flows from operating activities and cash on hand at December 31, 2004. To the extent future capital requirements exceed cash flows from operating activities, the Partnership anticipates that:



| | a) | working capital will be financed by the Partnerships revolving credit facility as discussed below and repaid from subsequent seasonal reductions in inventory and accounts
receivable;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | maintenance and growth capital expenditures will be financed in fiscal 2005 with internally generated cash flows; and
| | -- | ---------------------------------------------------------------------------------------------------------------------



| | c) | proceeds from the sale of the propane segment will be utilized.
| | -- | ---------------------------------------------------------------



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Operating Activities



Net cash used in operating activities of $151.9 million for the three months ended December 31, 2004 consisted of net income of $74.4 million, non cash charges of $11.6
million, a $4.6 million loss from discontinued operations, a $42.1 million loss on the redemption of certain debt, a gain on the sale of the propane segment of $153.6 million and an increase in operating assets of $130.8 million. For the three
months ended December 31, 2003, net cash used in operating activities was $37.5 million.



Investing Activities



During the three
months ended December 31, 2004, the Partnership completed the sale of the propane segment. The net proceeds, after deducting expenses, were approximately $464.0 million. During the three months ended December 31, 2004, the heating oil segment spent
$0.8 million for capital expenditures and received proceeds from the sale of certain assets of $0.5 million. As a result, cash flow provided by investing activities was $463.7 million. During the three months ended December 31, 2003, the heating oil
segment received $0.4 million from the sale of certain assets and spent $0.9 million for capital expenditures.



Financing Activities



Cash flows used
in financing activities were $192.7 million for the three months ended December 31, 2004. During this period, $230.0 million of cash was provided from borrowings under the heating oil segments new revolving credit facility, which were used to
repay $119.0 million borrowed under the heating oil segments previous credit agreement. Also during the three months ended December 31, 2004, the Partnership repaid $258.3 million in long-term debt, paid $37.7 million in debt prepayment
premiums and expenses and paid $7.7 million in fees and expenses related to refinancing the heating oil segments bank credit facilities.



As a result of the above activity and $11.4 million of cash used by discontinued operations, cash increased by $107.7 million, to $112.4 million as of December 31, 2004.



Financing and Sources of Liquidity



The Partnership had $269.8 million of debt outstanding as of December 31, 2004 (which amount
does not include working capital borrowings of $119 million). The following summarizes the Partnerships long-term debt maturities occurring over the next five years as of December 31, 2004:



|           |  |               |      
|---------- |  | ------------- | -----
|           |  | (in millions)
|2005       |  | $             | 1.3  
|2006       |  | $             | 0.8  
|2007       |  | $             | 0.1  
|2008       |  | $             |     
|2009       |  | $             |     
|Thereafter |  | $             | 267.7



On December 17, 2004, the
Partnerships heating oil segment entered into a $260 million revolving credit facility with a group of lenders led by JP Morgan Chase Bank. The revolving credit facility provides the heating oil segment with the ability to borrow up to $260
million for working capital purposes (subject to certain borrowing base limitations) including the issuance of up to $75 million in letters of credit. Obligations under the revolving credit facility are secured by liens on substantially all of the
assets of the heating oil segment, accounts receivable, inventory, general intangibles, real property, fixtures and equipment. Under the terms of the revolving credit facility, the heating oil segment must maintain at all times either availability
(as defined) of $25.0 million or a fixed charge coverage ratio (as defined) of 1.1 to 1.0. As of December 31, 2004, availability was $31.1 million and the fixed charge coverage ratio was 0.9x to 1.0.



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In December 2004, the Partnership completed the sale of its propane segment. Pursuant to the terms of the indenture
relating to the Partnerships 10 1⁄4% Senior Notes due 2013 (MLP Notes), the Partnership will be obligated, within 360 days of the sale, to apply the net proceeds of the sale of the propane segment either to reduce indebtedness
of the Partnership or of a restricted subsidiary, or to make an investment in assets or capital expenditures useful to the Partnerships or any subsidiarys business. To the extent any net proceeds that are not so applied exceed $10
million (excess proceeds), the indenture requires the Partnership to make an offer to all holders of MLP Notes to purchase for cash that number of MLP Notes that may be purchased with excess proceeds at a purchase price equal to 100% of
the principal amount of the MLP Notes plus accrued and unpaid interest to the date of purchase. Accordingly, the Partnership cannot predict the size of any offer, if any, to purchase MLP Notes and whether or to what extent holders of MLP Notes will
accept the offer to purchase if an offer is made.



After repayment of certain
debt and transaction expenses and estimated taxes to be paid of $3.0 million, the estimated net proceeds from the propane segment sale were approximately $153.5 million. As of the closing of the propane sale and application of the proceeds, the
amount of net proceeds not applied in excess of $10 million was $143.5 million. As of December 31, 2004, the heating oil segment utilized $40.0 million of the proceeds to invest in working capital assets, which reduces the amount available to
repurchase MLP Notes to $103.5 million. The Partnership expects it may utilize a portion of the remaining proceeds to meet future working capital needs. As of December 31, 2004, the Partnership had cash of $112.4 million.



For the remainder of fiscal 2005, the Partnership anticipates paying interest of $30.4
million and anticipates maintenance capital expenditures of $2.7 million. Long-term debt repayments for the remainder of fiscal 2005 are $1.2 million, excluding any repayments resulting from any required offer to repay the MLP Notes, discussed
above. The Partnership continues to be challenged by the relatively high wholesale supply costs and believes that per gallon margins are likely to be adversely impacted. Likewise, the higher wholesale supply cost has added to the Partnerships
difficulties in both attracting new and retaining existing customers. Customer attrition continues to negatively impact operations. If wholesale supply costs remain at current levels, future sales to customers could also be reduced due to
conservation.



In general, the Partnership distributes to its partners on a
quarterly basis, all of its Available Cash in the manner described in Note 5 (Quarterly Distribution of Available Cash) of the Partnerships Annual Report on Form 10-K. Available Cash is defined for any of the Partnerships fiscal
quarters, as all cash on hand at the end of that quarter, less the amount of cash reserves that are necessary or appropriate in the reasonable discretion of the general partner to (i) provide for the proper conduct of the business; (ii) comply with
applicable law, any of its debt instruments or other agreements; or (iii) provide funds for distributions to the common unitholders and the senior subordinated unitholders during the next four quarters, in some circumstances. On October 18, 2004,
the Partnership announced that it would not pay a distribution on the common units. The Partnership had previously announced the suspension of distributions on the senior subordinated units on July 29, 2004. It is unlikely that regular distributions
on the common units or senior subordinated units will be resumed in the foreseeable future. While the Partnership hopes to position itself to pay some regular distribution on its common units in future years, of which there can be no assurance, it
is considerably less likely that regular distributions will ever resume on the senior subordinated units because of their subordination terms.



The Partnership believes that the purchase of weather insurance could be an important element in the Partnerships ability to maintain the stability of its cash
flows. The Partnership has purchased a base of $12.5 million of weather insurance coverage for each year from 2005  2007 and purchased an additional $7.5 million of weather insurance coverage for fiscal 2005. The amount of insurance proceeds
that could be realized under these policies is calculated by multiplying a fixed dollar amount by the degree-day deviation from an agreed upon cumulative degree-day strike price, since temperatures to date have exceeded the degree day strike price.
The Partnership does not expect to collect any proceeds under its weather insurance policies for fiscal 2005.



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##### Table of Contents

Risk Factors



An investment in the Partnership involves a high degree of risk. Investors should carefully review the following risk factors concerning the Partnership.



The Partnerships heating oil segment recently had liquidity issues that raised
questions concerning the Partnerships ability to continue as a going concern.



The Partnerships heating oil segment recently had liquidity issues relating to the heating oil segments inability to comply with the borrowing conditions under its former credit agreement that raised
questions concerning the Partnerships ability to continue as a going concern. The report of the Partnerships independent registered public accounting firm on the Partnerships consolidated financial statements as of September 30,
2004 and 2003, and for the three years ended September 30, 2004, included an explanatory paragraph with respect to these liquidity issues. The Partnership believes that the refinancing of the heating oil segments indebtedness, which occurred
as of December 17, 2004 in connection with the closing of the heating oil segments new revolving credit facility and the sale of the Partnerships propane segment, satisfactorily addressed these liquidity issues at least in the
short-term. However, there can be no assurance that the Partnership will not experience liquidity issues in the future.



The Sale of the Propane Segment May Adversely Affect the Partnerships Future Operating Results



On December 17, 2004, the Partnership completed the sale of its propane segment for a purchase price of approximately $475 million, subject
to certain adjustments. For the fiscal year ended September 30, 2004, the propane segment accounted for $349 million of the Partnerships sales and $29 million of the Partnerships operating income. For more information on the results of
operations of the propane segment, see Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations. The loss of the propane segments operating income could adversely affect the
Partnerships future operating results.



The Partnerships
substantial debt and other financial obligations could impair its financial condition and its ability to fulfill its debt obligations.



The Partnership had total debt of approximately $269.8 million as of December 31, 2004 (which amount does not include working capital borrowings of $119 million). The
Partnerships substantial indebtedness and other financial obligations could:



| |  |  | impair its ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | result in higher interest expense in the event of increases in interest rates since some of its debt is, and will continue to be, at variable rates of interest;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | have a material adverse effect on it if the Partnership fails to comply with financial and affirmative and restrictive covenants in its debt agreements and an event of default
occurs as a result of a failure that is not cured or waived;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require it to dedicate a substantial portion of its cash flow to payments on its indebtedness and other financial obligations, thereby reducing the availability of its cash flow to
fund working capital and capital expenditures;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit its flexibility in planning for, or reacting to, changes in its business and the industry in which the Partnership operates; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | place it at a competitive disadvantage compared to its competitors that have proportionately less debt.
| | - |  | -------------------------------------------------------------------------------------------------------



If the Partnership is unable to meet its debt service obligations and other financial obligations, it could be forced to restructure or
refinance its indebtedness and other financial transactions, seek additional equity capital or sell its assets. The Partnership may then be unable to obtain such financing or capital or sell its assets on satisfactory terms, if at all.



Since weather conditions may adversely affect the demand for home heating oil, the
Partnerships financial condition is vulnerable to warm winters.



Weather conditions have a significant impact on the demand for home heating oil because the Partnerships customers depend on this product principally for space heating purposes. As a result, weather conditions may materially adversely
impact the Partnerships operating results and financial condition. During the peak heating season of October through March, sales of home heating oil historically have represented approximately 75% to 80% of the Partnerships annual home
heating oil volume. Actual weather conditions can vary substantially from year to year, significantly affecting the Partnerships financial performance. Furthermore, warmer than normal temperatures in one or more regions in which the
Partnership operates can significantly decrease the total volume the Partnership sells and the gross profit realized on those sales and, consequently, the Partnerships results of operations. For example, in fiscal 2000 and especially fiscal
2002, temperatures were significantly warmer than normal for the areas in which the Partnership sells home heating oil, which adversely affected the amount of EBITDA that it generated during these periods. In fiscal year 2002, temperatures in the
Partnerships areas of operation were an average of 18.4% warmer than in fiscal year 2001 and 18.0% warmer than normal. The Partnership has purchased weather insurance to help minimize the adverse effect of weather volatility on its cash flows,
of which there can be no assurance.



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The Partnerships operating results will be adversely affected if the heating oil segment experiences significant
customer losses that are not offset or reduced by customer gains.



The
heating oil segments net attrition rate of home heating oil customers for years 2002, 2003 and 2004 was approximately 4.2%, 1.3% and 6.5%, respectively. This rate represents the net of its annual customer loss rate. Customer losses are the
result of various factors, including:



| |  |  | customer relocations;
| | - |  | ---------------------



| |  |  | supplier changes based primarily on price competition, particularly during periods of high energy costs and quality of service issues, including those related to the heating oil
segments centralized call center and service dispatch;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | natural gas conversions; and
| | - |  | ----------------------------



| |  |  | credit problems.
| | - |  | ----------------



The continuing unprecedented rise in the price of heating oil has intensified price competition, which has adversely impacted the heating oil segments margins and added to the heating oil segments
difficulties in reducing net customer attrition. The heating oil segment believes its net customer attrition rate has risen not only because of increased price competition related to the rise in oil prices but also because of operational problems.
Prior to the 2004 winter heating season, the heating oil segment attempted to develop a competitive advantage in customer service, and as part of that effort, centralized its heating equipment service dispatch and engaged a centralized call center
to fulfill its telephone requirements for a majority of its heating oil customers. The Partnership experienced difficulties in advancing this initiative during fiscal 2004, which adversely impacted the customer base and the Partnerships costs.



The Partnership believes that it has identified the problems associated with
its centralization efforts and is taking steps to address these issues. The Partnership expects that high net attrition rates will continue through the 2004-2005 winter heating season and perhaps beyond. The Partnership notes that even to the extent
that the rate of attrition can be halted, the current reduced customer base will adversely impact net income for fiscal 2005 and beyond. The Partnership continues to explore approaches to reduce the rate of net customer attrition.



The heating oil segment has continued to lose accounts in the first quarter of fiscal 2005.
For the three months ended December 31, 2004, the heating oil segment lost approximately 3,300 accounts (net), or 0.7% of its heating oil customer base, as compared to the three months ended December 31, 2003 (a period after the implementation of
the initiative), in which the heating oil segment lost approximately 3,000 accounts (net), or 0.6% of its heating oil customer base, and as compared to the three months ended December 31, 2002 (a period prior to the implementation of the initiative)
in which the heating oil segment gained 3,700 accounts (net), or 0.8% of its heating oil customer base. For the twelve months ended December 31, 2004, the heating oil segment experienced annual net customer attrition of approximately 6.5%. The
Partnership believes that net customer attrition for the three months ended December 31, 2004 resulted from (i) a combination of the premium service/premium price strategy of the heating oil segment during a period when customer price sensitivity
increased with high energy prices; (ii) the lag effect of net customer attrition related to service and delivery problems from prior fiscal years; (iii) the heating oil segments telephone handling skills not being sufficiently developed to the
level associated with other premium service providers; and (iv) tightened credit standards.



The heating oil segment may not be able to achieve net gains of customers and may continue to experience customer attrition in the future.



Sudden and sharp oil price increases that cannot be passed on to customers may adversely affect the Partnerships operating results.



The retail home heating oil industry is a margin-based
business in which gross profits depend on the excess of retail sales prices over supply costs. Consequently, the Partnerships profitability is sensitive to changes in the wholesale price of home heating oil caused by changes in supply or other
market conditions. Many of these factors are beyond the Partnerships control and thus, when there are sudden and sharp increases in the wholesale cost of home heating oil, the Partnership may not be able to pass on these increases to its
customers through retail sales prices. As of September 30, 2004, the wholesale cost of home heating oil, as measured by the closing price of the New York Mercantile Exchange had increased by 38% to $1.39 per gallon from $1.01 per gallon as of June
30, 2004. This represents a 78% increase over the heating oil price per gallon of $0.78 per gallon on September 30, 2003. Per gallon heating oil prices subsequently increased to a high of $1.59 per gallon on October 22, 2004, before retreating to
$1.23 per gallon as of December 10, 2004. For the quarter ended December 31, 2004, the average wholesale price of home heating oil as measured by the closing price on the New York Mercantile Exchange had increased by 65% to $1.42 per gallon from
$0.86 per gallon for the same quarter of last year. When heating oil prices increased, in the fourth quarter of fiscal 2004 the heating oil segments retail sales prices did not increase as rapidly as the increase in heating oil prices, which
resulted in lower per gallon margins. In addition, the timing of cost pass-throughs can significantly affect margins. Wholesale price increases could reduce the Partnerships gross profits and could, if continuing over an extended period of
time, reduce demand by encouraging conservation or conversion to alternative energy sources.



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A significant portion of the Partnerships home heating oil volume is sold to price-protected customers and its
operating results could be adversely affected by changes in the cost of supply that the Partnership cannot pass on to these customers or otherwise protect against.



A significant portion of its home heating oil volume is sold to individual customers under an agreement pre-establishing the maximum sales
price or a fixed price of home heating oil over a 12-month period. The maximum price at which home heating oil is sold to these price-protected customers is generally renegotiated prior to the heating season of each year based on current market
conditions. The Partnership currently enters into forward purchase contracts, futures contracts and option contracts for a substantial majority of the heating oil the Partnership sells to these price-protected customers in advance and at a fixed
cost. Should events occur after a price protected sales price is established that increase the cost of home heating oil above the amount anticipated, margins for the price-protected customers whose heating oil was not purchased in advance would be
lower than expected, while those customers whose heating oil was purchased in advance would be unaffected. Conversely, should events occur during this period that decrease the cost of heating oil below the amount anticipated, margins for the
price-protected customers whose heating oil was purchased in advance could be lower than expected, while margins for those customers whose heating oil was not purchased in advance would be unaffected or higher than expected. For the twelve months
ended December 31, 2004, approximately 46% of its retail home heating oil volume sales were under a price-protected plan.



If the Partnership does not make acquisitions on economically acceptable terms, its future financial performance will be limited.



The home heating oil industry is not a growth industry because of increased competition from
alternative energy sources. A significant portion of the Partnerships growth in the past decade has been directly tied to its acquisition programs. Accordingly, its future financial performance will be impacted by its ability to continue to
make acquisitions at attractive prices. The Partnership cannot be assured that it will be able to identify attractive acquisition candidates in the future or that the Partnership will be able to acquire businesses on economically acceptable terms if
at all. In particular the financial resources available to the Partnership are likely to be limited. Factors that may adversely affect the home heating oil segments operating and financial results, such as warm weather patterns, may further
limit the Partnerships access to capital and adversely affect its ability to make acquisitions. Any acquisition may involve risks, including:



| |  |  | an increase in its indebtedness;
| | - |  | --------------------------------



| |  |  | the inability to integrate the operations of the acquired business;
| | - |  | -------------------------------------------------------------------



| |  |  | the inability to successfully expand its operations into new territories;
| | - |  | -------------------------------------------------------------------------



| |  |  | the diversion of managements attention from other business concerns; and
| | - |  | -------------------------------------------------------------------------



| |  |  | an excess of customer loss or loss of key employees from the acquired business.
| | - |  | -------------------------------------------------------------------------------



In addition, acquisitions may be dilutive to earnings and distributions to the unitholders and any additional debt incurred to finance
acquisitions may affect the Partnerships ability to make distributions to the unitholders.



Because of the highly competitive nature of the retail home heating oil segment, the Partnership may not be able to retain existing customers or acquire new customers, which would have an adverse impact on its
operating results and financial condition.



If the home heating oil
segment is unable to compete effectively, the Partnership may lose existing customers or fail to acquire new customers, which would have a material adverse effect on its results of operations and financial condition.



The Partnerships home heating oil segment competes with heating oil distributors
offering a broad range of services and prices, from full service distributors, like the heating oil segment, to those offering delivery only. Competition with other companies in the home heating oil industry is based primarily on customer service
and price with some of the heating oil segments competitors historically offering lower prices than this segment. Long-standing customer relationships are typical in the industry. It is customary for companies to deliver home heating oil to
their customers based upon weather conditions and historical consumption patterns, without the customer making an affirmative purchase decision. Most companies provide home heating equipment repair service on a 24-hour-per-day basis. In some cases,
homeowners have formed buying cooperatives to purchase fuel oil from distributors at a price lower than individual customers are otherwise able to obtain. As a result of these factors, it may be difficult for the heating oil segment to acquire new
customers.



The continuing unprecedented rise in the price of heating oil has
intensified price competition, which has adversely impacted the heating oil segments margins and added to the heating oil segments difficulties in reducing customer attrition. The heating oil segment believes its attrition rate has risen
not only because of increased price competition related to the rise in oil prices, but also because of operational problems. Prior to the 2004 winter heating season, the heating oil segment attempted to develop a competitive advantage in customer
service, and as part of that effort, centralized its heating equipment service dispatch and engaged a centralized call center to fulfill its telephone requirements. The Partnership experienced difficulties in advancing this initiative during fiscal
2004, which adversely impacted the customer base and the Partnerships costs.



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The Partnership believes that it has identified the problems associated with its centralization efforts and is taking
steps to address these issues. The Partnership expects that high net attrition rates will continue through the 2004-2005 winter heating season and perhaps beyond. The Partnership notes that even to the extent that the rate of attrition can be
halted, the current reduced customer base will adversely impact net income for fiscal 2005 and beyond. The Partnership continues to explore approaches to reduce the rate of net customer attrition.



The Partnership can make no assurances that it will be able to compete successfully on the
basis of these factors. If a competitor attempts to increase market share by reducing prices, the Partnerships operating results and financial condition could be materially and adversely affected. The home heating oil segment also competes for
customers with suppliers of alternative energy products, principally natural gas. In addition, competition from alternative energy sources has been increasing as a result of reduced regulation of many utilities, including natural gas and
electricity. The Partnership could face additional price competition from alternative heating sources such as electricity and natural gas as a result of deregulation in those industries. Over the past five years, conversions by the heating oil
segments customers from heating oil to other sources have averaged approximately 1% per year of the homes it serves.



Energy efficiency and new technology may reduce the demand for our products and adversely affect our operating results.



Increased conservation and technological advances, including installation of improved
insulation and the development of more efficient furnaces and other heating devices, have adversely affected the demand for the Partnerships products by retail customers. Future conservation measures or technological advances in heating,
conservation, energy generation or other devices might reduce demand and adversely affect our operating results.



The Partnership is subject to operating and litigation risks that could adversely affect its operating results whether or not covered by insurance.



The Partnerships operations are subject to all operating hazards and risks normally
incidental to handling, storing, transporting and otherwise providing customers with flammable liquids such home heating oil. As a result, the Partnership may be a defendant in various legal proceedings and litigation arising in the ordinary course
of business. The Partnership maintains insurance policies with insurers in amounts and with coverages and deductibles it believes are reasonable. However, there can be no assurance that this insurance will be adequate to protect the Partnership from
all material expenses related to potential future claims for remediation costs and personal and property damage or that these levels of insurance will be available in the future at economical prices.



The Partnership is the subject of a number of class action lawsuits alleging violation of
the federal securities laws, which if decided adversely to it could have a material adverse effect on the Partnerships financial condition.



On or about October 21, 2004, a purported class action lawsuit on behalf of a purported class of unitholders was filed against the Partnership and various subsidiaries
and officers and directors in the United States District Court of the District of Connecticut (Carter v. Star Gas Partners, L.P., et al, No 3:04-cv-01766-IBA, et. al, subsequently, 16 additional class action complaints, alleging the same or
substantially similar claims, were filed in the same district court: (1) Feit v. Star Gas, et al, Civil Action No. 04-1832 (filed on 10/29/2004), (2) Lila Gold v. Star Gas, et al, Civil Action No. 04-1791 (filed on 10/22/2004), (3)
Jagerman v. Star Gas, et al, Civil Action No. 04-1855 (filed on 11/3/2004), (4) McCole, et al v. Star Gas, et al, Civil Action No. 04-1859 (filed on 11/3/2004), (5) Prokop v. Star Gas, et al, Civil Action No. 04-1785 (filed on
10/22/2004), (6) Seigle v. Star Gas, et al, Civil Action No. 04-1803 (filed on 10/25/3004), (7) Strunk v. Star Gas, et al, Civil Action No. 04-1815 (filed on 10/27/2004), (8) Harriette S. & Charles L. Tabas Foundation v. Star
Gas, et al, Civil Action No. 04-1857 (filed on 11/3/2004), (9) Weiss v. Star Gas, et al, Civil Action No. 04-1807 (filed on 10/26/2004), (10) White v. Star Gas, et al, Civil Action No. 04-1837 (filed on 10/9/2004), (11) Wood v.
Star Gas, et al, Civil Action No. 04-1856 (filed on 11/3/2004) (12) Yopp v. Star Gas, et al, Civil Action No. 04-1865 (filed on 11/3/2004), (13) Kiser v. Star Gas, et al, Civil Action No. 04-1884 (filed on 11/9/2004), (14)
Lederman v. Star Gas, et al, Civil Action No. 04-1873 (filed on 11/5/2004), (15) Dinkes v. Star Gas, et al, Civil Action No.04-1979 (filed 11/22/04) and (16) Gould v. Star Gas, et al, Civil Action No. 04-2133 (filed on 12/17/2004)
(including the Carter Complaint, collectively referred to herein as the Class Action Complaints).



The Class Action plaintiffs generally allege that the Partnership violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Securities and Exchange Commission Rule 10b-5 promulgated
thereunder, by purportedly failing to disclose, among other things: (1) problems with the restructuring of Star Gass dispatch system and customer attrition related thereto; (2) that Star Gass heating oil divisions business process
improvement program was not generating the benefits allegedly claimed; (3) that Star Gas was struggling to maintain its profit margins in its heating oil division; (4) that Star Gass second quarter 2004 profit margins were not representative
of its ability to pass on heating oil price increases; and (5) that Star Gas was facing an inability to pay its debts and that, as a result, its credit rating and ability to obtain future financing was in jeopardy. The Class Action plaintiffs seek
an unspecified amount of compensatory damages including interest against the defendants jointly and severally and an award of reasonable costs and expenses. The Partnership will defend against the Class Actions vigorously. However, the Partnership
is unable to predict the outcome of these lawsuits at this time.



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In the event that one or more of the above actions were decided adversely to the Partnership, it could have a material
effect on the Partnerships results of operations, financial condition or liquidity.



The Partnerships results of operations and financial condition may be adversely affected by governmental regulation and associated environmental and regulatory costs.



The home heating oil business is subject to a wide range of federal and state laws and
regulations related to environmental and other regulated matters. The heating oil segment has implemented environmental programs and policies designed to avoid potential liability and costs under applicable environmental laws. It is possible,
however, that the heating oil segment will have increased costs due to stricter pollution control requirements or liabilities resulting from noncompliance with operating or other regulatory permits. New environmental regulations might adversely
impact the heating oil segments operations, including underground storage and transportation of home heating oil. It is possible that material costs and liabilities will be incurred, including those relating to claims for damages to property
and persons.



In the Partnerships acquisition of Meenan, the
Partnership assumed all of Meenans environmental liabilities.



In
the Partnerships acquisition of Meenan Oil Company, or Meenan, in August 2001, the Partnership assumed all of Meenans environmental liabilities, including those related to the cleanup of contaminated properties, in
consideration of a reduction of the purchase price of $2.7 million. Subsequent to closing, the Partnership established an additional reserve of $2.3 million to cover potential costs associated with remediating known environmental liabilities,
bringing the total reserve to $5.0 million. To date, remediation expenses against this reserve have totaled $2.8 million. While the Partnership believes this reserve will be adequate, it is possible that the extent of the contamination at issue or
the expense of addressing it could exceed the Partnerships estimates and thus the costs of remediating these known liabilities could materially exceed the amounts reserved.



Conflicts of interest have arisen and could arise in the future as a result of relationships between the general partner and its
affiliates on the one hand, and the Partnership and its limited partners, on the other hand.



Conflicts of interest have arisen and could arise in the future as a result of relationships between the general partner and its affiliates on the one hand, and the Partnership and its limited partners, on the other
hand. As a result of these conflicts the general partner may favor its own interests and those of its affiliates over the interests of the unitholders. The nature of these conflicts is ongoing and includes the following considerations:



| |  |  | Except for Irik P. Sevin, who is subject to a non-competition agreement, the general partners affiliates are not prohibited from engaging in other business or activities,
including direct competition with the Partnership.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings and reserves, each of which can impact the amount of cash
available for distribution to unitholders, if any, of the Partnership and available to pay principal and interest on debt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The general partner controls the enforcement of obligations owed to the Partnership by the general partner.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | The general partner decides whether to retain separate counsel, accountants or others to perform services for the Partnership.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | In some instances the general partner may borrow funds in order to permit the payment of distributions to the unitholders of the Partnership.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



The risk of terrorism and political unrest in the Middle East may adversely affect the
economy and the price and availability of home heating oil.



Terrorist
attacks, such as the attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001, and political unrest in the Middle East may adversely impact the price and availability of home heating oil, the Partnerships
results of operations, its ability to raise capital and its future growth. The impact that the foregoing may have on the Partnerships industry in general, and on the Partnership in particular, is not known at this time. An act of terror could
result in disruptions of crude oil supplies and markets, the source of home heating oil, and its facilities could be direct or indirect targets. Instability in the financial markets as a result of terrorism could also affect the Partnerships
ability to raise capital. Terrorist activity could likely lead to increased volatility in prices for home heating oil. Insurance carriers are routinely excluding coverage for terrorist activities from their normal policies, but are required to offer
such coverage as a result of new federal legislation. The Partnership has opted to purchase this coverage with respect to its property and casualty insurance programs. This additional coverage has resulted in additional insurance premiums.



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Cash Distributions are Not Guaranteed and May Fluctuate with the Partnerships Performance and Reserve
Requirements



Because Distributions on the common and subordinated units
and partnership securities are dependent on the amount of cash generated, distributions may fluctuate based on the Partnerships performance. The actual amount of cash that is available will depend upon numerous factors, including:



| |  |  | profitability of operations;
| | - |  | ----------------------------



| |  |  | required principal and interest payments on debt;
| | - |  | -------------------------------------------------



| |  |  | cost of acquisitions;
| | - |  | ---------------------



| |  |  | issuance of debt and equity securities;
| | - |  | ---------------------------------------



| |  |  | fluctuations in working capital;
| | - |  | --------------------------------



| |  |  | capital expenditures;
| | - |  | ---------------------



| |  |  | adjustments in reserves;
| | - |  | ------------------------



| |  |  | prevailing economic conditions; and
| | - |  | -----------------------------------



| |  |  | financial, business and other factors.
| | - |  | --------------------------------------



Some of these factors are beyond the control of the general partner.



The partnership agreement gives the general partner discretion in establishing reserves for the proper conduct of the Partnerships business. These reserves will
also affect the amount of cash available for distribution. The general partner may establish reserves for distributions on the senior subordinated units only if those reserves will not prevent the Partnership from distributing the full minimum
quarterly distribution, plus any arrearages, on the common units for the following four quarters.



On October 18, 2004, the Partnership announced that it would not pay a distribution on the common units as a result of the requirements of its bank lenders. The Partnership had previously announced the suspension of
distributions on the senior subordinated units on July 29, 2004. It is unlikely that regular distributions on the common units or senior subordinated units will be resumed in the foreseeable future. While the Partnership hopes to position itself to
pay some regular distribution on its common units in future years, of which there can be no assurance, it is considerably less likely that regular distributions will ever resume on the senior subordinated units because of their subordination terms.



Contractual Obligations and Off-Balance Sheet Arrangements



It is not the Partnerships business practice to enter into off-balance sheet
arrangements with third parties.



Long-term contractual obligations, except for
our long-term debt obligations, are not recorded in our Consolidated Balance Sheet. Non-cancelable purchase obligations are obligations the Partnership incurs during the normal course of business, based on projected needs.



The table below summarizes the payment schedule of contractual obligations in thousands
December 31, 2004.



|                               |  |                      |         |                 |   |          |  |          |        |                  |   |        |  |   |        
|------------------------------ |  | -------------------- | ------- | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ------ |  | - | -------
|                               |  | Payments Due by Year
|                               |  | Total                |         | Less Than1 Year |   | 1-3Years |  | 3-5Years |        | More Than5 Years
|Long-term debt obligations(a)  |  | $                    | 268,582 |                 | $ |         |  | $        | 882    |                  | $ |       |  | $ | 267,700
|Operating lease obligations(b) |  |                      | 43,377  |                 |   | 9,228    |  |          | 12,995 |                  |   | 8,410  |  |   | 12,744 
|Purchase obligations(c)        |  |                      | 18,604  |                 |   | 9,543    |  |          | 7,053  |                  |   | 2,008  |  |   |       
|                               |  |                      |         |                 |   |          |  |          |        |                  |   |        |  |   |        
|                               |  | $                    | 330,563 |                 | $ | 18,771   |  | $        | 20,930 |                  | $ | 10,418 |  | $ | 280,444
|                               |  |                      |         |                 |   |          |  |          |        |                  |   |        |  |   |        

---

|(a) | Excludes current maturities of long-term debt of $1.3 million which are classified within
current liabilities.
|--- | --------------------------------------------------------------------------------------------------------------

|(b) | The Partnership has entered into various operating leases for office space, trucks, vans and
other equipment from third parties with lease terms running from one day to 16 years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Reflects non-cancelable commitments.
|--- | ------------------------------------



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Critical Accounting Policies and Estimates



The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to establish
accounting policies and make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the Consolidated Financial Statements. Star Gas evaluates its policies and estimates on an on-going basis. The
Partnerships Consolidated Financial Statements may differ based upon different estimates and assumptions. Star Gas believes the following are its critical accounting policies:



Goodwill and Other Intangible Assets



The Partnership calculates amortization using the straight-line method over periods ranging from 7 to 15 years for intangible assets with definite useful lives. Star Gas
uses amortization methods and determines asset values based on its best estimates using reasonable and supportable assumptions and projections. Star Gas assesses the useful lives of intangible assets based on the estimated period over which Star Gas
will receive benefit from such intangible assets as historical evidence regarding customer churn rate. In some cases, the estimated useful lives are based on contractual terms. At December 31, 2004, the Partnership had $98.5 million of net tangible
assets subject to amortization. If circumstances required a change in estimated useful lives of the assets, it could have a material effect on results of operations. For example, if lives were shortened by one year, the Partnership estimates that
amortization for these assets for the three months ended December 31, 2004 would have increased by approximately $0.7 million.



SFAS No. 142 requires the Partnerships goodwill to be assessed at least annually for impairment. These assessments involve managements estimates of future
cash flows, market trends and other factors to determine the fair value of the reporting unit, which includes the goodwill to be assessed. If the carrying amount of goodwill exceeds its implied fair value and is determined to be impaired, an
impairment charge is recorded. At December 31, 2004, the Partnership had $233.5 million of goodwill. Intangible assets with finite lives must be assessed for impairment whenever changes in circumstances indicated that the assets may be impaired.
Similar to goodwill, the assessment for impairment requires estimates of future cash flows related to the intangible asset. To the extent the carrying value of the assets exceeds it future cash flows, an impairment loss is recorded based on the fair
value of the asset.



Depreciation of Property, Plant and Equipment



Depreciation is calculated using the straight-line method based on the
estimated useful lives of the assets ranging from 1 to 30 years. Net property, plant and equipment was $60.6 million for the Partnership at December 31, 2004. If circumstances required a change in estimated useful lives of the assets, it could have
a material effect on results of operations. For example, if lives were shortened by one year, the Partnership estimates that depreciation for the three month period ended December 31, 2004 would have increased by approximately $1.0 million.



Assumptions Used in the Measurement of the Partnerships Defined
Benefit Obligations



SFAS No. 132, Employers Accounting for
Pensions requires the Partnership to make assumptions as to the expected long-term rate of return that could be achieved on defined benefit plan assets and discount rates to determine the present value of the plans pension obligations.
The Partnership evaluates these critical assumptions at least annually.



The
discount rate enables the Partnership to state expected future cash flows at a present value on the measurement date. The rate is required to represent the market rate for high-quality fixed income investments. A lower discount rate increases the
present value of benefit obligations and increases pension expense. A 25 basis point decrease in the discount rate used for fiscal 2004 would have increased pension expense by approximately $0.1 million and would have increased the minimum pension
liability by another $1.8 million. The Partnership assumed a discount rate of 6.00% as of September 30, 2004.



The Partnership considers the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets to determine its expected long-term rate of return on pension plan
assets. The expected long-term rate of return on assets is developed with input from the Partnerships actuarial firm. The long-term rate of return assumption used for determining net periodic pension expense for fiscals 2004 and 2005 was 8.25
percent. A 25 basis point decrease in the expected return on assets would have increased pension expense in fiscal 2004 by approximately $0.1 million.



Over the life of the plans, both gains and losses have been recognized by the plans in the calculation of annual pension expense. As of September 30, 2004, $15.4 million
of unrecognized losses remain to be recognized by the plans. These losses may result in increases in future pension expense as they are recognized.



Allowance for Doubtful Accounts



The Partnership periodically reviews past due customer accounts receivable balances. After giving consideration to economic conditions, overdue status and other
factors, the Partnership establishes an allowance for doubtful accounts at the heating oil segment, which it deems sufficient to cover future potential losses. As a result, actual losses could differ from managements estimates; however, based
on historical experience, the Partnership does not expect its estimate of uncollectible accounts to vary significantly from actual losses.



Insurance Reserves



The Partnerships heating oil segment has in the past and is currently self-insuring a portion of workers compensation, auto and general liability claims. The Partnership establishes reserves based upon
expectations as to what its ultimate liability will be for these claims using developmental factors based upon historical claim experience. The Partnership continually evaluates the potential for changes in loss estimates with the support of
qualified actuaries. As of December 31, 2004, the heating oil segment had approximately $31.1 million of insurance reserves. The ultimate settlement of these claims could differ materially from the assumptions used to calculate the reserves, which
could have a material effect on results of operations.



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Item 3.



Quantitative and
Qualitative Disclosures About Market Risk



The Partnership is exposed to
interest rate risk primarily through its Bank Credit Facility due to the fact that they are subject to variable interest rates. The Partnership utilizes these borrowings to meet its working capital needs and also to fund the short-term needs of its
acquisition program.



At December 31, 2004, the Partnership had outstanding
borrowings totaling $388.8 million, of which approximately $119.0 million is subject to variable interest rates under its Bank Credit Facilities. In the event that interest rates associated with these facilities were to increase 100 basis points,
the impact on future cash flows would be a decrease of approximately $1.2 million annually.



The Partnership also selectively uses derivative financial instruments to manage its exposure to market risk related to changes in the current and future market price of home heating oil. The Partnership 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 Partnership would pay for the product 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 product at December 31, 2004, the potential gain on the Partnerships hedging activity would be to increase the fair value of these outstanding derivatives by $11.6 million to a fair value of
$15.1 million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair value of these outstanding derivatives by $9.0 million to a fair value of $(5.5) million.



Item 4.



Controls and Procedures



|(a) | Evaluation of disclosure controls and procedures.
|--- | -------------------------------------------------



The General Partners principal executive officer and its principal financial officer, evaluated the effectiveness of the Partnerships
disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, such principal executive officer and principal financial officer concluded that, the Partnerships disclosure controls and
procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Partnership in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. The General Partner and the Partnership believe that a controls system, no matter how well designed and
operated, can not provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been
detected.



|(b) | Change in Internal Control over Financial Reporting.
|--- | ----------------------------------------------------



No change in the Partnerships internal control over financial reporting occurred during the Partnerships most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect the Partnerships internal control over financial reporting.



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##### Table of Contents

PART II OTHER INFORMATION



Item 6.



Exhibits and Reports on Form 8-K



|(a) | Exhibits Included Within:
|--- | -------------------------



| | 10.35 | Credit agreement dated as of December 17, 2004
| | ----- | ----------------------------------------------

| | 31.1 | Rule 13a-14(a) Certification.
| | ---- | -----------------------------

| | 31.2 | Rule 13a-14(a) Certification.
| | ---- | -----------------------------

| | 32.1 | Section 906 Certification.
| | ---- | --------------------------

| | 32.2 | Section 906 Certification.
| | ---- | --------------------------



(b) Reports on Form 8-K:



October 5, 2004 - Star Gas Partners, L.P., a Delaware limited partnership (the Partnership) announced that Mr. Joseph Massoud has resigned as a director of the general partner of the Partnership, effective as of October 1, 2004.



October 18, 2004 - Star Gas Partners, L.P., a Delaware
limited partnership (the Partnership) issued a press to announce the suspension of the Partnerships common unit distribution and other financial and operating information.



November 5, 2004 - Petroleum Heat and Power Co., Inc., a Minnesota
corporation (the Heating Oil Segment or Petro), which is an indirect subsidiary of Star Gas Partners, L.P., a Delaware limited partnership (the Partnership), entered into a Letter Amendment and Waiver (the
Amendment), with respect to that certain Credit Agreement, dated as of December 22, 2003, as amended (the Credit Agreement) among Petro and the various financial institutions as are or may become parties thereto
(collectively, the Lenders), Wachovia Bank, National Association, as Agent for the Lenders and as issuer of certain letters of credit, LaSalle Bank National Association, as issuer of certain letters of credit, Fleet National Bank, as
Syndication Agent, and J.P. Morgan Chase Bank and LaSalle Bank, National Association, as Co-Documentation Agents.



November 19, 2004 - Star Gas Partners, L.P., a Delaware limited partnership (the Partnership or Star), today announced that the
board of directors of its general partner, Star Gas LLC, has approved a strategic transaction and restructuring plan designed to de-leverage the Partnerships balance sheet in an effort to significantly improve its financial condition. The plan
will result in the Partnership focusing on its home heating oil business.



The Partnership has signed an agreement to sell its propane distribution and services segment, held largely through Star Gas Propane, L.P., to Inergy Propane LLC (Inergy), the operating subsidiary of
Inergy, L.P., (NASDAQ: NRGY), for $475 million. In addition, the Partnership announced that it has given notice to holders of the secured notes of Petro Holdings, Inc. and of Petroleum Heat and Power Co., Inc. (collectively, Petro) of
its election to optionally prepay the secured notes, representing an aggregate payment, including principal, interest and estimated premium, of approximately $182 million. As described below, the Partnership also intends to give notice of optional
prepayment of the secured notes of its propane segment involving an aggregate payment including principal, interest and estimated premium, of approximately $114 million. The aggregate amount payable with regard to both sets of secured notes is
approximately $296 million.



December 14, 2004 - Star Gas
Partners, L.P., a Delaware partnership (the Partnership), issued a press release announcing its financial results for its fiscal fourth quarter and full year ending September 30, 2004.



December 23, 2004 - On December 17, 2004 (the Closing Date),
Petroleum Heat and Power Co., Inc., a Minnesota corporation (Petro or the heating oil segment), which is an indirect subsidiary of Star Gas Partners, L.P., a Delaware limited partnership (the Partnership or
Star), signed a new $260 million revolving credit facility agreement with a group of lenders led by JP Morgan Chase Bank, as administrative agent.



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##### Table of Contents

SIGNATURE



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized:



Star Gas Partners, L.P.

(Registrant)

By: Star Gas LLC as General Partner



|                           |  |                                                                    |  |                 
|-------------------------- |  | ------------------------------------------------------------------ |  | ----------------
|Signature                  |  | Title                                                              |  | Date            
|                           |  |                                                                   
|/s/ Ami TrauberAmi Trauber |  | Chief Financial Officer Star Gas LLC (Principal Financial Officer) |  | February 9, 2005



Star Gas Finance Company

(Registrant)



|                           |  |                                                       |  |                 
|-------------------------- |  | ----------------------------------------------------- |  | ----------------
|Signature                  |  | Title                                                 |  | Date            
|                           |  |                                                      
|/s/ Ami TrauberAmi Trauber |  | Chief Financial Officer (Principal Financial Officer) |  | February 9, 2005



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