<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549


                                   FORM 10-Q

                                   (Mark One)

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

                 For the quarterly period ended March 31, 1999
                                                --------------

                                       OR

       [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]

             For the transition period from         to 
                                           ---------  -----------

                       Commission File Number:   33-98490
                                                 --------
                                        

                            STAR GAS PARTNERS, L.P.
                            -----------------------

             (Exact name of registrant as specified in its charter)



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

2187 Atlantic Street, Stamford, Connecticut        06902
----------------------------------------------------------------------------
(Address of principal executive office)            (Zip Code)

(203) 328-7300
----------------------------------------------------------------------------
(Registrant's telephone number, including area code)

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes   X    No
                                     ----     -----
                                        

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1999:

Star Gas Partners, L.P.  13,251,667  Common Units
                          2,476,797  Senior Subordinated Units
                            345,366  Junior Subordinated Units
                            325,729  General Partner Units
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
                                        
                               INDEX TO FORM 10-Q
                                        


                                                                    PAGE
                                                                    ----

Part I     Financial Information:

           Item 1 - Condensed Financial Statements
 
              Condensed Consolidated Balance Sheets as of
                September 30, 1998 and March 31, 1999                       3
 
              Condensed Consolidated Statements of Operations for the
                Three months ended March 31, 1998 and March 31, 1999
                Six months ended March 31, 1998 and March 31, 1999          4
 
              Condensed Consolidated Statements of Cash Flows for the
                six months ended March 31, 1998 and March 31, 1999          5
 
              Condensed Consolidated Statement of Partners' Capital for
                the six months ended March 31, 1999                         6
 
              Notes to Condensed Consolidated Financial Statements       7-23
 
           Item 2 - Management's Discussion and Analysis of Financial
               Conditions and Results of Operations                     24-31
 
           Item 3 - Quantitative and Qualitative Disclosures 
               About Market Risk                                           31
 
 
Part II    Other Information:
 
           Item 4 - Submission of Matters to a Vote of Security 
               Holders                                                     32
 
           Item 6 - Exhibits and Reports on Form 8-K                       33
 
           Signature                                                       34
 

                                       2
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
                                        
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                           March 31,
                                                                       September 30,          1999
                                                                            1998          (unaudited)
                                                                            ----           ---------
<S>                                                                    <C>                 <C>
Assets                                                                                   
Current assets:                                                                          
 Cash and cash equivalents                                                 $  1,115          $ 11,738
 Receivables, net of allowance of $252 and  $1,716 respectively               5,279            81,476
 Inventories                                                                 10,608            16,313
 Prepaid expenses and other current assets                                      945             5,452
                                                                           --------          --------
      Total current assets                                                   17,947           114,979
                                                                           --------          --------
                                                                                         
Property and equipment, net                                                 110,262           148,421
                                                                                         
Intangibles and other assets, net                                            51,398           318,510
                                                                           --------          --------
      Total assets                                                         $179,607          $581,910
                                                                           ========          ========
Liabilities and Partners' Capital                                                        
Current liabilities:                                                                     
 Accounts payable                                                          $  3,097          $ 13,602
 Bank credit facility borrowings                                              4,770                 -
 Current maturities of long-term debt                                           692             3,510
 Accrued expenses                                                             3,315            27,810
 Unearned service contract revenue                                                -            13,020
 Customer credit balances                                                     6,038            15,759
                                                                           --------          --------
      Total current liabilities                                              17,912            73,701
                                                                           --------          --------
                                                                                         
Long-term debt                                                              104,308           272,242
Other long-term liabilities                                                      40             7,286
Deferred income taxes                                                             -            40,000
                                                                                         
Partners' Capital:                                                                       
 Common unitholders                                                          58,686           176,308
 Subordinated unitholders                                                    (1,446)           13,122
 General partner                                                                107              (749)
                                                                           --------          --------
      Total Partners' Capital                                                57,347           188,681
                                                                           --------          --------
                                                                                         
      Total Liabilities and Partners' Capital                              $179,607          $581,910
                                                                           ========          ========
</TABLE>



See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)
                                  (unaudited)
                                        


<TABLE>
<CAPTION>
                                                    Three Months  Ended       Six Months Ended
                                                        March 31,                March 31,
                                                ------------------------  ----------------------
                                                    1998       1999          1998         1999
                                                -----------  -----------  -----------  ---------
<S>                                              <C>         <C>          <C>          <C>
Sales:                                                        
                                                              
 Product                                           $35,946     $49,754      $75,090      $76,903
 Installation, service and appliances                1,938       2,347        4,638        5,435
                                                   -------     -------      -------      -------
       Total sales                                  37,884      52,101       79,728       82,338
                                                              
Costs and expenses:                                           
 Cost of product                                    15,024      18,877       35,779       29,829
 Cost of installation, service and appliances          534       1,604        1,429        2,630
 Delivery and branch                                 9,590      12,030       19,743       22,325
 Depreciation and amortization                       2,861       3,023        5,641        6,031
 General and administrative                          1,449       1,727        2,818        3,156
 Net (loss) on sales of assets                        (136)        (87)        (184)         (91)
                                                   -------     -------      -------      -------
       Operating income                              8,290      14,753       14,134       18,276
Interest expense, net                                1,875       2,361        3,961        4,539
Amortization of debt issuance costs                     45          45           90           90
                                                   -------     -------      -------      -------
       Income before income taxes                    6,370      12,347       10,083       13,647
Income tax expense                                       7          32           13           38
                                                   -------     -------      -------      -------
       Net income                                  $ 6,363     $12,315      $10,070      $13,609
                                                   =======     =======      =======      =======
       General Partner's interest in net income    $   127     $   246      $   201      $   272
                                                    ------     -------      -------      -------
                                                   
Limited Partners' interest in net income           $ 6,236     $12,069      $ 9,869      $13,337
                                                    ======     =======      =======      =======
                                                   
Basic and diluted net income per Limited           $  1.00     $  1.75      $  1.69      $  2.03
 Partner Unit                                       ======     =======      =======      =======
                                                   
Basic and diluted weighted average number of       
 Limited Partner units outstanding                   6,228       6,894       5,834         6,571
                                                    ======     =======      =======      =======
</TABLE>




See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)
                                        
                                                          Six Months Ended
                                                             March 31,
                                                    -------------------------
                                                         1998        1999
                                                    ------------ ------------
Cash flows from operating activities:               
Net income                                             $ 10,070     $  13,609
Adjustments to reconcile net income to net cash     
  provided by operating activities:                 
Depreciation and amortization                             5,641         6,031
Amortization of debt issuance cost                           90            90
Provision for losses on accounts receivable                 126            69
Loss on sales of assets                                     184            91
Changes in operating assets and liabilities:        
  Increase in receivables                                (3,964)       (5,512)
  Decrease in inventories                                 3,244         7,726
  Decrease  in other assets                                 174           130
  Decrease in accounts payable                             (673)       (1,164)
  Decrease in other current and long-term liabilities    (3,024)      (13,929)
                                                       --------     ---------
       Net cash provided by operating activities         11,868         7,141
                                                       --------     ---------
                                                    
Cash flows from investing activities:               
Capital expenditures                                     (3,028)       (2,351)
Proceeds from sales of fixed assets                         159            85
Cash acquired in acquisition                              1,825        18,760
Acquisitions                                               (922)            -
                                                       --------     ---------
       Net cash used in investing activities             (1,966)       16,494
                                                       --------     ---------
                                                    
Cash flows from financing activities:               
Credit facility borrowings                               11,060        10,450
Credit facility repayments                              (11,060)      (15,220)
Acquisition facility borrowings                          21,000             -
Acquisition facility repayments                         (21,000)       (3,500)
Distributions                                            (6,453)       (4,386)
Increase in deferred charges                               (177)          (96)
Proceeds from issuance of Common Units, net              16,089       116,124
Repayment of debt, net                                  (23,000)     (192,316)
Redemption of preferred stock                                 -       (11,746)
Proceeds from issuance of debt                           11,000        87,678
                                                       --------     ---------
       Net cash used in financing activities             (2,541)      (13,012)
                                                       --------     ---------
                                                    
       Net increase in cash                               7,361        10,623
Cash at beginning of period                                 889         1,115
                                                       --------     ---------
Cash at end of period                                  $  8,250     $  11,738
                                                       ========     =========
 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
  Interest                                             $  4,014     $   4,451
                                                       ========     =========
                                                       
Non-cash investing activities:                         
  Acquisitions                                         $(26,467)    $     -
  Redemption of preferred stock                        $    -       $  (6,858)
  Assumption of note payable                           $ 23,000     $     -
Non-cash financing activities:                         
  Issuance of Common Units                             $  3,399     $   6,858
  Additional General Partner interest                  $     68     $     -

See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

             CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
                                 (in thousands)
                                  (unaudited)
                                        
<TABLE>
<CAPTION>
                                         Number of Units
                              -----------------------------------------
                                                Senior  Junior  General                       Senior   Junior  General   Partners'
                              Common    Sub.     Sub.    Sub.   Partner   Common      Sub.     Sub.     Sub.   Partner    Capital
                              -------  -------  ------  ------  -------  ---------  --------  -------  ------  --------  ----------
                              ------------------------------------------------------------------------------------------------------
<S>                           <C>      <C>      <C>     <C>     <C>      <C>        <C>       <C>      <C>     <C>       <C>
Balance  as of
  September 30, 1998           3,859    2,396        -       -        -  $ 58,686   $(1,446)  $        $   -     $ 107    $ 57,347
                                                                                              -
 
Exchange of ownership in
  connection with the Star                                                 (8,958)
  Gas / Petro Transaction              (2,396)   2,477     345      326              (2,754)   11,903     797     (988)          -
 
Issuance of Units in                                                      116,124
  equity offering              8,720                                                                                       116,124
 
Issuance of Units in
  redemption of Petro's
  12 7/8% Preferred Stock        401                                        5,399                                            5,399
 
Issuance of Units in
  redemption of Petro's
  Junior Preferred Stock
                                 103                                        1,459                                            1,459
 
Net income                                                                  8,715     4,200       368      54      272      13,609
 
Distributions
  ($1.10 per unit)                                                         (4,246)                                (140)     (4,386)
 
Other                            (61)                                        (871)                                            (871)
                              ------------------------------------------------------------------------------------------------------
Balance as of
  March 31, 1999              13,022        -    2,477     345      326  $176,308   $     -   $12,271    $851    $(749)   $188,681
                              ======================================================================================================
</TABLE>



See accompanying notes to condensed consolidated financial statements.

                                       6
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                                        
1)  Partnership Organization

    Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") is a
    leading distributor of propane and home heating oil in the United States.
    Star Gas Propane, L.P., ("Star Gas Propane") a subsidiary of the
    Partnership, markets and distributes propane gas and related appliances to
    approximately 166,000 retail and wholesale customers in the Midwest and
    Northeast.  Petroleum Heat and Power Co., Inc. ("Petro"), a subsidiary of
    Star Gas Propane, is the nation's largest distributor of home heating oil
    and serves approximately 340,000 customers in the Northeast and Mid-
    Atlantic region of the United States.  Petro was merged into the
    Partnership in a four part transaction as described in footnote 2.

    Prior to March 26, 1999, Petro had a 40.5% equity interest in the
    Partnership and was its general partner.

2)  Acquisition of Petroleum Heat and Power Co., Inc.
  
    On March 26, 1999, the Partnership acquired Petro in a four part
    transaction ("Star Gas / Petro Transaction"), which closed concurrently.
    This acquisition was accounted for under the purchase method of accounting
    and is described below.

    Acquisition of Petro
    --------------------
    On October 22, 1998, Petro, Star Gas Partners, and Star Gas Propane
    executed a merger agreement.  On February 3, 1999 the parties entered into
    an amended and restated merger agreement to reflect changes in the
    transaction (the "Merger Agreement"). Under the terms of the Merger
    Agreement, a newly formed subsidiary of Star Gas Propane was merged with
    Petro, with Petro surviving the merger as a wholly-owned indirect
    subsidiary of Star Gas Propane.

    As a result of the merger:

    .  each outstanding share of Petro Class A common stock, par value $0.10 per
       share, and Petro Class C common stock, par value $0.10 per share, other
       than shares that were exchanged (the "Exchange"), was converted into
       0.11758 senior subordinated units (2,476,797 senior subordinated units
       issued in total);

    .  each outstanding share of Petro junior convertible preferred stock was
       converted into 0.13064 common units (102,848 total common units); and

    .  each outstanding share of Petro Series C exchangeable preferred stock due
       2009 was converted into the right to receive $10.69 in cash per share
       plus accrued and unpaid dividends except for an aggregate of 505,000
       shares of Series C preferred stock that were converted into an aggregate
       of 400,531 common units, plus accrued and unpaid dividends on the
       preferred., and may in the future issue an additional 175,000 Senior
       Subordinated Units.

     The Exchange occurred immediately prior to the merger and was comprised of
     the following elements.

     (a) Holders of Petro common stock, consisting of Irik P. Sevin, Audrey L.
     Sevin, Hanseatic Corp. and Hanseatic Americas Inc., who are referred to as
     the "LLC Owners," formed Star Gas LLC, to which they contributed their
     outstanding shares of Petro common stock in exchange for all of the limited
     liability company interests in Star Gas LLC. Star Gas LLC contributed those
     shares to Star Gas Partners in exchange for general partner units (325,729
     general partner units). In addition, the LLC Owners contributed their
     remaining shares of Petro common stock to Star Gas Partners in exchange for
     junior subordinated units (345,366 junior subordinated units).

     (b) Other Petro common stockholders who are affiliates of Petro contributed
     shares of Petro common stock to Star Gas Partners in exchange for Star Gas
     Partners senior subordinated units.

                                       7
<PAGE>
 
2)   Acquisition of Petroleum Heat and Power Co., Inc. (continued)

     Financings and Refinancings
     ---------------------------
     Star Gas Partners offered and sold to the public 8.7 million common units
     in an equity offering, the net proceeds of which were approximately $116.1
     million. Petro offered and sold, in a private placement, $90.0 million of
     senior secured notes, the net proceeds of which were approximately $87.7
     million. Star Gas Partners and Petro Holdings (a legal entity created as a
     result of the Star Gas / Petro Transaction to be the parent company of all
     the former Petro entities) guaranteed the notes.

     All of the net proceeds of the equity offering, together with the $87.7
     million of net proceeds from the debt offering and $5.4 million of Petro's
     cash were used:

     .  to redeem $80.2 million principal amount of Petro's 12 1/4% Senior
        Subordinated Debentures due 2005, $48.7 million principal amount of
        Petro's 10 1/8% Senior Subordinated Notes due 2003, $74.3 million
        principal amount of Petro's 9 3/8% Senior Subordinated Debentures due
        2006 and the $17.4 million of Petro's 12 7/8% preferred stock at an
        aggregate redemption price of $201.3 million;

     .  to repurchase Petro's 1989 preferred stock; and

     .  to pay for a portion of the expenses of the transaction.
 

     New General Partner
     -------------------
     Since Star Gas Corporation is a wholly-owned subsidiary of Petro, which
     became a subsidiary of the Partnership in the transaction, it was no longer
     able to serve as Star Gas Partners' general partner. Star Gas Partners' new
     general partner is Star Gas LLC, which is owned by the LLC Owners. Star Gas
     LLC's business activities are limited to those related to being the general
     partner.  Also, simultaneous to this change was the transfer of all Star
     Gas Corporation employees to the Operating Partnership.

     Amendment of Partnership Agreement
     ----------------------------------
     In order to complete the transaction, Star Gas Partners amended its
     partnership agreement and Star Gas Propane's partnership agreement which
     were in effect before the transaction. The amendments, among other matters,
     increased the Minimum Quarterly Distribution ("MQD") from $0.55 to $0.575
     per unit.  The increase in the MQD raised the threshold needed to end the
     subordination period.

     In connection with the Star Gas/Petro transaction, the Senior Subordinated
     Units, Junior Subordinated Units and General Partnership Units can earn,
     pro rata, 303,000 additional Senior Subordinated Units each year that Petro
     meets certain financial goals to a maximum of 909,000 additional Senior
     Subordinated Units.

                                       8
<PAGE>
 
3)   Summary of Significant Accounting Policies

     Basis of Presentation

     The unaudited condensed consolidated financial statements reflect all
     adjustments which are, in the opinion of management, necessary for a fair
     statement of the interim periods presented.  The Consolidated Financial
     Statements for the period October 1, 1997 through March 31, 1998 include
     the accounts of Star Gas Partners, L.P., Star Gas Propane and its corporate
     subsidiary, Stellar Propane Service Corp.  Beginning March 26, 1999 the
     Condensed Consolidated Financial Statements also include the accounts of
     Petro Holdings and its Subsidiaries, a wholly owned subsidiary of the
     Partnership resulting from the Star Gas / Petro Transaction.  All material
     intercompany items and transactions have been eliminated in consolidation.

     Use of Estimates

     The preparation of financial statements in accordance with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements, and the reported amounts of revenue and expenses
     during the reporting period.  Actual results could differ from those
     estimates.

     Revenue Recognition

     Sales of propane, heating oil, and equipment are recognized at the time of
     delivery of the product to the customer or at the time of sale, service, or
     installation. Revenue from repairs and maintenance service is recognized
     upon completion of the service.  Payments received from customers for
     heating oil equipment service contracts are deferred and amortized into
     income over the terms of the respective service contracts, on a straight
     line basis, which generally do not exceed one year.

     The propane and heating oil industry are seasonal in nature because both
     are primarily used for heating in residential and commercial buildings.
     Therefore, the results of operations for the period ended March 31, 1998
     and March 31, 1999 are not necessarily indicative of the results to be
     expected for a full year.

     Comprehensive Income

     The Partnership's comprehensive income consists of net income and other
     comprehensive income, the sole component of which is the minimum pension
     liability adjustment from its wholly-owned subsidiary Petro.  There were no
     minimum pension liability adjustments at March 31, 1998 and March 31, 1999.

     Net Income (loss) per Limited Partner Unit

     Net income (loss) per Limited Partner Unit is computed by dividing net
     income (loss), after deducting the General Partner's interest, by the
     weighted average number of Common Units, Senior Subordinated Units, and
     Junior Subordinated Units outstanding.

     Cash Equivalents
 
     The Partnership considers all highly liquid investments with a maturity of
     three months or less, when purchased, to be cash equivalents.

                                       9
<PAGE>
 
3)   Summary of Significant Accounting Policies - (continued)

     Inventories
 
     Inventories are stated at the lower of cost or market and are computed on a
     first-in, first-out basis.

     Property, Plant, and Equipment

     Property, plant, and equipment are stated at cost.  Depreciation is
     computed over the estimated useful lives of the depreciable assets using
     the straight-line method.

     Intangible Assets

     Intangible assets include goodwill, covenants not to compete, customer
     lists and deferred charges.

     Goodwill is the excess of cost over the fair value of net assets in the
     acquisition of a company.  Both the propane and heating oil segments
     amortize goodwill using the straight-line method over a twenty-five year
     period.

     Covenants not to compete are non-compete agreements established with the
     owners of an acquired company. Covenants not to compete are amortized over
     the respective lives of the covenants, which are generally five years.

     Customer lists are the names and delivery addresses of the acquired
     company's patrons.  Based on the historical retention experience of these
     lists, the propane segment amortizes customer lists on a straight-line
     method over fifteen years, and the heating oil segment amortizes customer
     lists on a straight-line method over ten years.

     Deferred charges represent the cost associated with the issuance of debt
     instruments.  Both the propane and heating oil segments amortize deferred
     charges using the interest method over the lives of the related debt
     instrument.

     It is the Partnership's policy to review intangible assets for impairment
     whenever events or changes in circumstances indicate that the carrying
     amount of such assets may not be recoverable.  The Partnership determines
     that the carrying values of intangible assets are recoverable over their
     remaining estimated lives through undiscounted future cash flow analysis.
     If such a review should indicate that the carrying amount of the intangible
     assets is not recoverable, it is the Partnership's policy to reduce the
     carrying amount of such assets to fair value.

     Advertising Expenses

     Advertising costs are expensed as they are incurred.

     Customer Credit Balances

     Customer credit balances represent pre-payments received from customers
     pursuant to a budget payment plan (whereby customers pay their estimated
     annual propane / heating oil charges on a fixed monthly basis) and the
     payments made have exceeded the charges for deliveries.

     Environmental Costs

     The Partnership expenses, on a current basis, costs associated with
     managing hazardous substances and pollution in ongoing operations. The
     Partnership also accrues for costs associated with the remediation of
     environmental pollution when it becomes probable that a liability has been
     incurred and the amount can be reasonably estimated.

                                       10
<PAGE>
 
3)   Summary of Significant Accounting Policies - (continued)

     Income Taxes

     The Partnership is a master limited partnership.  As a result, for Federal
     income tax purposes, earnings or losses are allocated directly to the
     individual partners.  Except for the Partnership's corporate subsidiaries,
     no recognition has been given to Federal income taxes in the accompanying
     financial statements of the Partnership.  While the Partner's corporate
     subsidiaries will generate non-qualifying Master Limited Partnership
     revenue, dividends from the corporate subsidiaries to the Partnership are
     included in the determination of Master Limited Partnership income.  In
     addition, a portion of the dividends received by the Partnership from the
     corporate subsidiaries will be taxable to the limited partners.  Net
     earnings for financial statement purposes may differ significantly from
     taxable income reportable to unitholders as a result of differences between
     the tax basis and financial reporting basis of assets and liabilities and
     due to the taxable income allocation requirements of the Partnership
     agreement.

     The Partnership's corporate subsidiaries file a consolidated Federal Income
     Tax return with its heating oil subsidiaries. Deferred tax assets and
     liabilities are recognized for the future tax consequences attributable to
     differences between the financial statement carrying amount of assets and
     liabilities and their respective tax bases and operating loss
     carryforwards.  Deferred tax assets and liabilities are measured using
     enacted tax rates expected to apply to taxable income in the years in which
     those temporary differences are expected to be recovered or settled. As a
     result of the Star Gas / Petro Transaction,  the Partnership recorded a $40
     million deferred income tax liability, which primarily reflects a
     difference in the basis between book and tax for the intangible assets
     acquired from Petro.

     Accounting Changes

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

4)   Quarterly Distribution of Available Cash

     In general, the Partnership distributes to its partners on a quarterly
     basis all "Available Cash."  Available Cash generally means, with respect
     to any fiscal quarter, all cash on hand at the end of such quarter less the
     amount of cash reserves that are necessary or appropriate in the reasonable
     discretion of the General Partner to (1) provide for the proper conduct of
     the Partnership's business, (2) comply with applicable law or any of its
     debt instruments or other agreements or (3) in certain circumstances
     provide funds for distributions to the Common Unitholders and the Senior
     Subordinated Unitholders during the next four quarters. The General Partner
     may not establish cash reserves for distributions to the Senior
     Subordinated Units unless the General Partner has determined that in its
     judgment the establishment of reserves will not prevent the Partnership
     from distributing the Minimum Quarterly Distribution on all Common Units
     and any Common Unit Arrearages thereon with respect to the next four
     quarters.  Certain restrictions on distributions on Senior Subordinated
     Units, Junior Subordinated Units and General Partner Units could result in
     cash that would otherwise be Available Cash being reserved for other
     purposes.  Cash distributions will be characterized as distributions from
     either Operating Surplus or Capital Surplus.

     The Senior Subordinated Units, the Junior Subordinated Units, and General
     Partner Units are each a separate class of interest in Star Gas Partners,
     and the rights of holders of those interests to participate in
     distributions differ from the rights of the holders of Common Unit.

                                       11
<PAGE>
 
4)   Quarterly Distribution of Available Cash - (continued)

     Subsequent to the Star Gas / Petro Transaction, the Partnership intends to
     distribute to the extent there is sufficient available cash, at least a
     minimum quarterly distribution of $0.575 per unit, or $2.30 per unit on a
     yearly basis.  In general, available cash will be distributed per quarter
     based on the following priorities:

       .  First, to the common units until each has received $0.575, plus any
          arrearages from prior quarters.
       .  Second, to the senior subordinated units until each has received
          $0.575.
       .  Third, to the junior subordinated units and general partner units
          until each has received $0.575.
       .  Finally, after each has received $0.575, available cash will be
          distributed proportionately to all units until target levels are met.

     If distributions of available cash exceed target levels greater than
     $0.604, the Senior Subordinated Units, Junior Subordinated Units and
     General Partner Units will receive incentive distributions.

     The subordination period will end once the Partnership has met the
     financial tests stipulated in the partnership agreement, but it generally
     cannot end before October 1, 2002.  However, if the general partner is
     removed under some circumstances, the subordination period will end.  When
     the subordination period ends, all senior subordinated units and junior
     subordinated units will convert into Class B common units on a one-for-one
     basis, and each common unit will be redesignated as a Class A common unit.
     The main difference between the Class A common units and Class B common
     units is that the Class B common units will continue to have the right to
     receive incentive distributions and additional units.


5)   Segment Reporting

     In accordance with SFAS No. 131, "Disclosures about Segments of an
     Enterprise and Related Information," the Partnership as a result of the
     Star Gas / Petro Transaction (see footnote 2), has two reportable segments,
     propane and heating oil.  Management has chosen to organize the enterprise
     under these two segments in order to leverage the expertise it has in each
     industry, allow each segment to continue to strengthen its core
     competencies, and facilitate a clear means for evaluation.

     The propane segment is primarily engaged in the retail distribution of
     propane and related supplies and equipment to residential, commercial,
     industrial, agricultural and motor fuel customers, operating from fifty-
     five branches in the Midwest and nineteen branches in the Northeast.
     Propane is used primarily for space heating, water heating and cooking by
     the Partnership's residential and commercial customers and as a result,
     weather conditions have a significant impact on the demand for propane.

     The heating oil segment is primarily engaged in the retail distribution of
     home heating oil, related equipment services, and equipment sales to
     residential and commercial customers.  It operates from twenty-four
     branches / depots and thirteen satellites primarily in the Northeast United
     States. 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 also have a significant impact on the
     demand for home heating oil.

                                       12
<PAGE>
 
5)   Segment Reporting - (continued)

     The following are the statement of operations and balance sheets for each
     segment as of the periods indicated.  The heating oil segment was
     consolidated with the propane segment beginning March 26, 1999, subsequent
     to the closing of the Star Gas / Petro Transaction.

<TABLE> 
<CAPTION> 
 
(in thousands)                                                Six Months Ended    Six Months Ended March 31, 1999
                                                                                 ---------------------------------
                                                               March 31, 1998    Heating
 Statement of Operations                                           Propane         Oil     Propane   Consolidated 
------------------------                                           -------    -  -------  ---------  ------------- 
<S>                                                           <C>                <C>      <C>        <C>
Sales:                                                       
  Product                                                        $75,090        $7,908   $68,995        $76,903
  Installation, service, and appliance                             4,638           225     5,210          5,435
                                                                 -------        ------   -------        -------
         Total sales                                              79,728         8,133    74,205         82,338
                                                                
Costs and expenses:                                             
  Cost of product                                                 35,779         3,697    26,132         29,829
  Cost of installation, service, and appliances                    1,429           974     1,656          2,630
  Delivery and branch                                             19,743         1,143    21,182         22,325
  Depreciation and amortization                                    5,731             -     6,031          6,031
  General and administrative                                       2,818           150     3,006          3,156
  Net (loss) on sales of assets                                     (184)            -       (91)           (91)
                                                                 -------        ------   -------        -------
         Operating income                                         14,044         2,169    16,107         18,276
Interest expense, net                                              3,961           225     4,314          4,539
Amortization of debt issuance costs                                    -             -        90             90
                                                                 -------        ------   -------        -------
         Income before income taxes                               10,083         1,944    11,703         13,647
Income tax expense                                                    13            25        13             38
                                                                 -------        ------   -------        -------
          Net income                                             $10,070        $1,919   $11,690        $13,609
                                                                 =======        ======   =======        =======
                                                                 
Capital expenditures                                             $ 3,028       $    -    $ 2,351        $ 2,351
                                                                 =======       =======   =======        =======
                                                             
                                                             
(in thousands)                                                                              March 31, 1999
                                                                                ----------------------------------
                                                            September 30, 1998   Heating                 (1)
Balance Sheet                                                     Propane          Oil     Propane   Consolidated
-------------                                                     -------        -------   -------   ------------
Assets                                                       
Current assets:                                              
  Cash and cash equivalents                                      $  1,115       $ 10,095  $  1,643      $ 11,738
  Receivables                                                       5,279         71,314    10,162        81,476
  Inventories                                                      10,608         13,431     2,882        16,313
  Prepaid expenses and other current assets                           945          5,468       846         5,452
                                                                 --------       --------  --------      --------
         Total current assets                                      17,947        100,308    15,533       114,979
                                                                                          
Property and equipment, net                                       110,262         40,109   108,312       148,421
Investment in Petro Holdings                                            -              -   124,891             -
Intangibles and other assets, net                                  51,398        269,042    49,468       318,510
                                                                 --------       --------  --------      --------
         Total assets                                            $179,607       $409,459  $298,204      $581,910
                                                                 ========       ========  ========      ========
                                                                                          
Liabilities and Partners' Capital                                                         
Current Liabilities:                                                                      
  Accounts payable                                               $  3,097       $ 11,669  $  1,933      $ 13,602
  Bank credit facility borrowings                                   4,770              -         -             -
  Current maturities of long-term debt                                692          2,241     1,269         3,510
  Accrued expenses                                                  3,315         24,518     3,292        27,810
  Unearned service contract revenue                                     -         13,020         -        13,020
  Customer credit balances                                          6,038         13,857     1,902        15,759
                                                                 --------       --------  --------      --------
         Total current liabilities                                 17,912         65,305     8,396        73,701
                                                                                          
Long-term debt                                                    104,308        172,011   100,231       272,242
Other long-term liabilities                                            40          7,252        34         7,286
Deferred income taxes                                                   -         40,000         -        40,000
                                                                                          
Partners' Capital                                                  57,347        124,891   189,543       188,681
                                                                 --------       --------  --------      --------
         Total Liabilities and Partners' Capital                 $179,607       $409,459  $298,204      $581,910
                                                                 ========       ========  ========      ========
</TABLE>

     (1)  The consolidated amounts include the necessary entries to eliminate
the Investment in Petro Holdings.

                                       13
<PAGE>
 
6)   Inventories
 
     The components of inventory were as follows:
<TABLE>
<CAPTION>
(in thousands)                       September 30, 1998     March 31, 1999
                                     ------------------   ------------------
<S>                                  <C>                  <C>
Propane gas                               $ 8,807              $ 1,182
Propane appliances and equipment            1,801                1,700
Fuel oil                                        -                6,962
Fuel oil parts and equipment                    -                6,469
                                          -------              -------
                                          $10,608              $16,313
                                          =======              =======
</TABLE>

     Substantially all of the Partnership's propane supplies for the Northeast
     retail operations are purchased under supply contracts. Certain of the
     supply contracts provide for minimum and maximum amounts of propane to be
     purchased thereunder, and provide for pricing in accordance with posted
     prices at the time of delivery or include a pricing formula that typically
     is based on current market prices. Historically, spot purchases from Mont
     Belvieu sources accounted for approximately one-third of the Partnership's
     total volume of propane purchases. In addition, the three single largest
     suppliers in the aggregate account for less than half of total propane
     purchases.

     The Partnership obtains home heating oil in either barge or truckload
     quantities, and has contracts with over 80 terminals for the right to
     temporarily store its heating oil at facilities not owned by the
     Partnership.  Purchases are made pursuant to supply contracts or on the
     spot market. The Partnership has market price based contracts for
     substantially all its petroleum requirements with 12 different suppliers,
     the majority of which have significant domestic sources for their product,
     and many of which have been suppliers for over 10 years.  Typically supply
     contracts have terms of 12 months. All of the supply contracts provide for
     maximum and in some cases minimum quantities, and in most cases the price
     is based upon the market price at the time of delivery.

     The Partnership may enter into forward contracts with Mont Belvieu
     suppliers or refineries which call for a fixed price for the product to be
     purchased based on current market conditions, with delivery occurring at a
     later date. In most cases the Partnership has entered into similar
     agreements to sell this product to customers for a fixed price based on
     market conditions.  In the event that the Partnership enters into these
     types of contracts without a subsequent sale, it is exposed to some market
     risk.  Currently, the Partnership does not have any contracts that if
     market conditions were to change, would have a material affect on its
     financial statements.

     Concentration of Revenue with Guaranteed Maximum Price Customers

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

                                       14
<PAGE>
 
6)   Inventories - (continued)

     In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
     contracts are classified as a hedge when the item to be hedged exposes the
     company to price risk and the futures contract reduces that risk exposure.
     Future contracts that relate to transactions that are expected to occur are
     accounted for as a hedge when the significant characteristics and expected
     terms of the anticipated transactions are identified and it is probable
     that the anticipated transaction will occur.  If a transaction does not
     meet the criteria to qualify as a hedge, it is considered to be
     speculative.  Any gains or losses associated with futures contracts which
     are classified as speculative are recognized in the current period.  If a
     futures contract that has been accounted for as a hedge is closed or
     matures before the date of the anticipated transaction, the accumulated
     change in value of the contract is carried forward and included in the
     measurement of the related transaction.  Option contracts are accounted for
     in the same manner as futures contracts.  At March 31, 1999 the heating oil
     segment had futures contracts to buy 5.2 million gallons of #2 home heating
     oil with a notional and fair market value totaling $2.3 million
     respectively.

     At March 31, 1999 the heating oil segment also had 3.3 million gallons of
     heating oil forward purchase contracts which expire at various times with
     no contract expiring later than September 1999.   The unrealized losses on
     the heating oil segment's hedging activity was less than $0.1 million at
     March 31, 1999.  This hedging activity is designed to help the heating oil
     segment achieve its planned margins and represents approximately 25% of the
     expected total home heating volume sold in a twelve month period.

     The carrying amount of all hedging financial instruments at March 31, 1999
     was $42,000 and were included in Prepaid Expenses on the Condensed
     Consolidated Balance Sheet.  The risk that counterparties to such
     instruments may be unable to perform is minimized by limiting the
     counterparties to major oil companies and major financial institutions,
     including the New York Mercantile Exchange.  The Partnership does not
     expect any losses due to such counterparty default.

7)   Property, Plant and Equipment

     The components of property, plant, and equipment and their estimated useful
     lives were as follows:
<TABLE>
<CAPTION>
 
(in thousands)
                              September 30, 1998   March 31, 1999   Estimated Useful Lives
                              ------------------   --------------   ----------------------
<S>                           <C>                  <C>              <C>
Land                               $  4,635            $ 12,049
Buildings and leasehold
  improvements                       10,313              16,631         4 - 30 years
Fleet and other equipment            16,918              33,088         3 - 30 years
Tanks and equipment                 102,493             105,044         8 - 30 years
Furniture and fixtures                2,833              12,477         5 - 12 years
                                   --------            --------
  Total                             137,192             179,289
Less accumulated depreciation        26,930              30,868
                                   --------            --------
  Total                            $110,262            $148,421
                                   ========            ========
</TABLE>

                                       15
<PAGE>
 
8)  Intangibles and Other Assets

    The components of intangibles and other assets were as follows at the
    indicated dates:
<TABLE>
<CAPTION>
 
(in thousands)                 September 30, 1998               March 31, 1999               Useful Lives
                               ------------------   -------------------------------------    ------------
                                  (Propane)          (Propane)   (Heating Oil)    Total
<S>                             <C>                  <C>         <C>            <C>             <C>
Goodwill                             $25,690           $25,690       $172,005    $197,695         25 years
Covenants not to compete               2,341             2,341              -       2,341          5 years
Customer lists                        34,028            34,028         94,000     128,028    10 - 15 years
Deferred charges                       2,907             2,873          2,322       5,195     6 - 14 years
                                     -------           -------       --------    --------
  Total intangibles                   64,966            64,932        268,327     333,259
Less accumulated amortization         13,568            15,564              -      15,564
                                     -------           -------       --------    --------
  Net intangibles                     51,398            49,368        268,327     317,695
Other assets                               -               100            715         815
                                     -------           -------       --------    --------
  Intangibles and other assets       $51,398           $49,468       $269,042    $318,510
                                     =======           =======       ========    ========
</TABLE>

The table below summarizes the allocation by Star Gas Partners of the excess of
purchase price over book value related to the acquisition of Petro.  The
allocation of the purchase price is based on the results of an appraisal of
property, plant and equipment, customer lists and the March 26, 1999 recorded
values for tangible assets and liabilities.

The allocation is as follows:                 

<TABLE>
<CAPTION> 
                                                                                      (in thousands)
<S>                                                                                  <C>
Consideration given for the exchange of Petro shares                                     $  20,822
 
Fair market value of Petro's assets and liabilities as of March 26, 1999:
     Current assets                                                                       (107,102)
     Property, plant and equipment (1)                                                     (40,109)
     Value of Petro's investment in Star Gas                                               (21,864)
     Current liabilities                                                                    76,717
     Long-term debt                                                                        276,568
     Deferred income taxes                                                                  40,000
     Other liabilities                                                                       7,251
     Preferred stock                                                                        12,978
     Junior preferred stock                                                                  1,459
                                                                                         ---------
           Sub-total                                                                       245,898
                                                                                         ---------
 
Total value assigned to intangibles and other assets                                     $ 266,720
                                                                                         =========
Consisting of:
     Customer lists                                                                      $ 94,000
     Goodwill                                                                             172,005
     Other assets                                                                             715
                                                                                         --------
           Sub-total                                                                      266,720
     Deferred debt issuance cost (2)                                                        2,322
                                                                                         --------
Total heating oil intangibles                                                            $269,042
                                                                                         ========
</TABLE>

(1)  Includes fair market value adjustment of $13.4 million.
(2)  Incurred in connection with Petro's issuance of $90.0 million senior
     secured notes.

The fair market value for property, plant and equipment, excluding real estate,
was established using the replacement cost approach method.  The market approach
was used in valuing the real estate.  The value assigned to customer lists was
derived using a discounted cash flow analysis.  The cash attributable to the
customer lists were discounted back at an equity risk adjusted cost of capital
to the net present value.  Any excess was attributable to goodwill.

                                       16
<PAGE>
 
9)   Acquisitions
 
     During fiscal 1998, the Partnership acquired seven unaffiliated retail
     propane dealers with an aggregate cost of $35.6 million. The acquisitions
     were accounted for under the purchase method of accounting. Since these
     acquisitions were completed after the heating season, the Partnership could
     not fully determine the impact of customer losses on the useful life of the
     customer lists acquired. As a result, the Partnership assigned a useful
     life of 15 years to these acquired customer lists, and has continued to
     monitor customer losses from these acquisitions in order to make any
     necessary adjustments.

     The following table indicates the allocation of the aggregate purchase
     prices paid for these acquisitions and the respective periods of
     amortization assigned.

     (in thousands)                                 Useful Lives
     Land                               $   492                    -
     Buildings                            1,381             30 years
     Furniture and equipment                153             10 years
     Fleet                                1,613         5 - 30 years
     Tanks and equipment                 14,829         5 - 30 years
     Customer lists                       5,231             15 years
     Restrictive covenants                  300              5 years
     Goodwill                            11,503             25 years
     Deferred charges                        56              6 years
                                        -------
         Total                          $35,558
                                        =======

     The most significant transaction was the acquisition of the Pearl Gas Co.,
     "Pearl".  In October 1997, pursuant to a purchase agreement, the General
     Partner purchased 240 shares of Common Stock ($100 par value) of Pearl,
     representing all of its issued and outstanding capital stock.  The purchase
     price was $23.0 million and included working capital of $1.9 million and
     $0.4 of transaction expenses.  Funding for this purchase was provided by a
     $23.0 million bank acquisition facility.

     The General Partner then contributed to the Partnership all of the assets
     it obtained in the stock purchase of Pearl Gas in exchange for a 2.7%
     interest in the Partnership and the assumption of all liabilities
     associated with the Pearl stock including the $23.0 million of bank debt.
     Subsequent to the acquisition, Pearl was merged into the General Partner as
     part of a tax-free liquidation. The General Partner purchased the
     outstanding shares of Common Stock of Pearl and subsequently conveyed the
     assets obtained in connection with this purchase, primarily to accommodate
     the prior owners desire to sell stock as opposed to assets and to complete
     the transaction using the most tax advantaged method possible.

     The aggregate value of the interests transferred to Star Gas from the
     Partnership was $3.5 million representing a .00027 General Partner interest
     and 147,727 Common Units in the Partnership.  This amount was intended to
     compensate Star Gas for additional significant income tax liabilities which
     would be reflected in the consolidated federal income tax return of the
     General Partner's parent corporation, Petro, and was based upon an average
     of the of the Partnership's Common Units.

     The issuance of such partnership interests was approved by the Audit
     Committee of Star Gas and the Executive Committee of Petro.

     The acquisitions were accounted for under the purchase method of
     accounting.  Purchase prices have been allocated to the acquired assets and
     liabilities based on their respective fair market values on the dates of
     acquisition.  The purchase prices in excess of the fair values of net
     assets acquired were classified as intangibles in the Condensed
     Consolidated Balance Sheets. Sales and net income have been included in the
     Condensed Consolidated Statements of Operations from the respective dates
     of acquisition.

                                       17
<PAGE>
 
9)   Acquisitions - (continued)

     The following unaudited pro forma information presents the results of
     operations of the Partnership and the acquisitions previously described,
     including the acquisition of Petro as described in footnote 2 as if the
     acquisitions had taken place on October 1, 1997.

(in thousands)                                    Six Months Ended March 31,
                                                  --------------------------
                                                     1998            1999
                                                     ----            ----

Sales                                              $425,229        $376,422
                                                   ========        ========
                                                   
Net income                                         $ 46,099        $ 56,703
                                                   ========        ========
General Partner's interest in net income           
                                                   $    916        $  1,126
Limited Partners' interest in net income           ========        ========
                                                   
                                                   $ 45,183        $ 55,577
Basic and Diluted net income per limited partner   ========        ========
 unit                                              
                                                   $   2.81        $   3.46
                                                   ========        ========



10)  Long-Term Debt and Working Capital Borrowings

     Long-term debt consisted of the following at the indicated dates:

     (in thousands)                          September 30,      March 31,
                                                 1998             1999
                                          ------------------  ------------
 
Star Gas:
8.04% First Mortgage Notes (a)                      $ 85,000      $ 85,000
7.17% First Mortgage Notes (a)                        11,000        11,000
Acquisition Facility Borrowings - Star Gas (b)         9,000         5,500
 
Petro:
7.92% Senior Notes (c)                                  -           90,000
9.0% Senior Notes (d)                                   -           62,697
10.25% Senior and Subordinated Notes (e)                -            4,280
Acquisition Facility Borrowings - Petro (f)             -            1,600
Acquisition Notes Payable (g)                           -           12,653
Subordinated Debentures (h)                             -            3,022
                                                    --------      --------
          Total                                      105,000       275,752
Less current maturities                                 (692)       (3,510)
                                                    --------      --------
          Total                                     $104,308      $272,242
                                                    ========      ========

     (a)  In December 1995, the General Partner issued $85.0 million of first
     mortgage notes (the "First Mortgage Notes") with an annual interest rate of
     8.04%.  These notes were assumed as part of the Star Gas Conveyance by the
     Operating Partnership.  In January 1998, the Operating Partnership issued
     an additional $11.0 of First Mortgage Notes with an annual interest rate of
     7.17%.  The Operating Partnership's obligations under the First Mortgage
     Note Agreements are secured, on an equal basis with the Operating
     Partnership's obligations under the Bank Credit Facilities, by a mortgage
     on substantially all of the real property and liens on substantially all of
     the operating facilities, equipment and other assets of the Operating
     Partnership.  The First Mortgage Notes will mature September 15, 2010, and
     will require semiannual prepayments, without premium on the principal
     thereof, beginning on March 15, 2001.  Interest on the Notes is payable
     semiannually on March 15 and September 15.  For the year ended September
     30, 1998, the Partnership incurred interest expense in the amount of $7.4
     million on the First Mortgage Notes.  The First Mortgage Note Agreements
     contain various restrictive and affirmative covenants applicable to Star
     Gas Propane, including restrictions on the incurrence of additional
     indebtedness and restrictions on certain investments, guarantees, loans,
     sales of assets and other transactions.

                                       18
<PAGE>
 
10)  Long-Term Debt and Working Capital Borrowings - (continued)

     (b)  The Star Gas Bank Credit Facilities consist of a $25.0 million
     Acquisition Facility and a $12.0 million Working Capital Facility.  The
     agreement governing the Bank Credit Facilities contains covenants and
     default provisions generally similar to those contained in the First
     Mortgage Note Agreements.  As of September 30, 1998, there were also $4.8
     million outstanding in borrowings under the Working Capital Facility.  The
     Bank Credit Facilities bear interest at a rate based upon, at the
     Partnership's option, either the London Interbank Offered Rate plus a
     margin or a Base Rate (each as defined in the Bank Credit Facilities).  The
     Partnership is required to pay a fee for unused commitments which amounted
     to $0.1 million for fiscal 1996, $0.2 million for fiscal 1997 and $0.1
     million for fiscal 1998.  For fiscal 1998, the weighted average interest
     rate on borrowings under these facilities was 7.46%.

     The Working Capital Facility will expire June 30, 2000, but may be extended
     annually thereafter with the consent of the banks.  Borrowings under the
     Acquisition Facility will revolve until June 30, 1999, after which time any
     outstanding loans thereunder, will amortize quarterly in equal principal
     payments with a final payment due on September 30, 2002.  However, there
     must be no amount outstanding under the Working Capital Facility for at
     least 30 consecutive days during each fiscal year.

     (c)  Petro issued $90.0 million of 7.92% Senior Secured Notes in six
     separate series in a private placement to institutional investors as part
     of the Star Gas / Petro Transaction.  The Senior Secured Notes are
     guaranteed by Star Gas Partners and are secured equally and ratably with
     Petro's existing senior debt and bank credit facilities by Petro's cash,
     accounts receivable, notes receivable, inventory and customer list.  Each
     series of Senior Secured Notes will mature between April 1, 2003 and April
     1, 2014.  Only interest on each series is due semiannually.  On the last
     interest payment date for each series, the outstanding principal amount is
     due and payable in full.

     The note agreements for the senior secured notes contain various negative
     and affirmative covenants, including restrictions on payment of dividends
     or other distributions by Star Gas Partners on any partnership interest if
     the ratio of consolidated pro forma operating cash flow to consolidated pro
     forma interest expense, do not meet the requirements in the agreement for
     the period of the four most recent fiscal quarters ending on or prior to
     the date of the dividend or distribution or an event of default would
     exist.

     (d)  The Petro 9.0% Senior Secured Notes which pay interest semiannually
     were issued under agreements that are substantially identical to the
     agreements under which the $90.0 million of Senior Secured Notes were
     issued, including negative and affirmative covenants.  The 9.0% Senior
     Notes are guaranteed by Star Gas Partners.  The notes have various sinking
     fund payments of which the largest are $15.5 million due on October 1,
     2000, $15.4 million due on October 1, 2001 and a final maturity payment of
     $30.3 million due on October 1, 2002.  All such notes are redeemable at the
     option of the Partnership, in whole or in part upon payment of a premium as
     defined in the note agreement.  The holders of these notes have the right
     to extend each maturity of the note for a one year period at an annual rate
     of 10.9%.

     (e)  The Petro 10.25% Senior and Subordinated Notes which pay interest
     quarterly also were issued under agreements that are substantially
     identical to the agreements under which the $90.0 million and 9.0% Senior
     Notes were issued.  These notes are also guaranteed by Star Gas Partners.
     Petro is required to repay $2.2 million on January 15, 2000 and to make a
     final maturity payment of $2.1 million on January 15, 2001.  No premium is
     payable in connection with these required payments. The holders of these
     notes have the right to extend each maturity of the note for a one year
     period at an annual rate of 14.1%.

                                       19
<PAGE>
 
10)  Long-Term Debt and Working Capital Borrowings - (continued)

     (f)  The Petro Bank Facilities consist of three separate facilities; a $40
     million working capital facility, a $10 million insurance letter of credit
     facility and a $50 million acquisition facility.  The working capital
     facility and letter of credit facility will expire on June 30, 2001.  The
     acquisition facility will convert to a term loan on June 30, 2001 which
     will be payable in eight equal quarterly principal payments.  Amounts
     borrowed under the working capital facility are subject to a requirement to
     maintain a zero balance for 90 consecutive days during the period from
     April 1 to September 30 of each year.  In addition, each facility will bear
     an interest rate that is based on either the London Interbank Offer Rate or
     another base rate plus a set percentage.  The bank facilities agreement
     contains covenants and default provisions generally similar to those
     contained in the note agreement for the senior secured notes.

     (g)  These Petro notes were issued in connection with the purchase of fuel
     oil dealers and other notes payable and are due in monthly, quarterly, and
     annual installments.  Interest is at various rates ranging from 8% to 15%
     per annum, maturing at various dates through 2004.  Approximately $12.3
     million of letter of credits issued under the Petro Bank Acquisition
     Facility are issued to support these notes.

     (h)  Petro also has outstanding $1.3 million of 10 1/8% Subordinated
     Debentures due 2003, $0.7 million of 9 3/8% Subordinated Notes due 2006 and
     $1.1 million of 12 1/4% Subordinated Notes due 2005.  In October 1998, the
     indentures under which the 10 1/8%, 9 3/8% and 12 1/4% subordinated notes
     were issued were amended to eliminate substantially all of the covenants
     provided by the indentures.

     As of March 31, 1999, the maturities during fiscal years ending September
     30 are set forth in the following table:

                                           (in thousands)
            1999                            $    629
            2000                              13,060
            2001                              22,272
            2002                              28,901
            2003                              55,319
            Thereafter                       155,571
                                            --------
                                            $275,752
                                            ========

     As of March 31, 1999, the Partnership was in compliance with all borrowing
     covenants, as amended.
 
11)  Employee Benefit Plans

     Propane Segment
     The propane segment has a 401(k) plan which covers certain eligible non-
     union and union employees. Subject to IRS limitations, the 401(k) plan
     provides for each employee to contribute from 1.0% to 15.0% of
     compensation. The propane segment contributes to non-union participants a
     matching amount up to a maximum of 3.0% of compensation. Aggregate matching
     contributions made to the 401(k) plan during fiscal 1997 and 1998 were $0.4
     million and $0.3 million, respectively. The propane segment also makes
     monthly contributions on behalf of its union employees to a union sponsored
     defined benefit plan. The amount charged to expense was $0.4 million for
     both fiscal 1997 and 1998.

     Heating Oil Segment
     Effective December 31, 1996, the heating oil segment consolidated all of
     its defined contribution pension plans and froze the benefits for nonunion
     personnel covered under defined benefit pension plans.  In 1997, the
     heating oil segment froze the benefits of its New York City union defined
     benefit pension plan as a result of operation consolidations.

                                       20
<PAGE>
 
11)  Employee Benefit Plans - (continued)

     The defined benefit and defined contribution plans covered substantially
     all of the heating oil segment's nonunion employees.  Benefits under the
     frozen defined benefit plans were generally based on years of service and
     each employee's compensation.  Benefits under the consolidated defined
     contribution plan are based on an employee's compensation.  For the heating
     oil segment, pension expense under all non-union plans for the twelve
     months ended December 31, 1997 and 1998 was $4.0 million and $4.4 million
     respectively.

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

<TABLE>
<CAPTION>
(in thousands)                                           Twelve Months Ended December 31,
                                                         --------------------------------
Reconciliation of Benefit Obligations                          1997         1998
--------------------------------------                         ----         ----
<S>                                                          <C>           <C>
Benefit obligations at beginning of year                        $29,323      $29,258
Service cost                                                        116            -
Interest cost                                                     1,895        1,930
Actuarial (gain) loss                                               977          (63)
Benefit payments                                                 (1,384)      (1,547)
Settlements                                                      (1,669)      (2,201)
                                                           ------------  -----------
Benefit obligation at end of year                               $29,258      $27,377
                                                           ============  ===========
                                                         
Reconciliation of Fair Value of Plan Assets              
-------------------------------------------              
Fair value of plan assets at beginning of year                  $20,367      $22,292
Actual return on plan assets                                     2,780         2,561
Employer contributions                                           2,458           615
Benefit payments                                                (1,384)       (1,547)
Settlements                                                     (1,929)       (2,883)
                                                           -----------    ----------     
Fair value of plan assets at end of year                       $22,292       $21,038
                                                           ===========    ==========
                                                                                
                                                         Twelve Months Ended December 31,
                                                         --------------------------------
Funded Status                                                  1997         1998
-------------                                                  ----         ----
Benefit obligation                                             $29,258       $27,377
Fair value of plan assets                                       22,292        21,038
Unrecognized transition (asset) obligation                         (52)          (39)
Unrecognized prior service cost                                      -             -
Unrecognized net actuarial (gain) loss                           5,807         4,776
                                                                
Prepaid (accrued) benefit cost prior to additional liability    (1,211)       (1,602)
Amount included in comprehensive income                          4,646         4,737
                                                         -------------     --------------
Prepaid (accrued) benefit cost                                 $(5,857)      $(6,339)
                                                         =============     ==============
 
Weighted-Average Assumptions Used in the Measurement of the
Company's Benefit Obligation as of December 31,
-----------------------------------------------------------
Discount rate                                                      6.5%          6.5%
Expected return on plan assets                                     8.5%          8.5%
Rate of compensation increase                                       N/A           N/A
</TABLE>


     In addition, the heating oil segment made contributions to union-
     administered pension plans during the twelve months ended December 31, 1997
     and 1998 of $2.5 million, and $2.0 million respectively.

                                       21
<PAGE>
 
12)  Unit Option Plan

     On December 20, 1995, the Partnership adopted a Unit Option Plan (the
     "Unit Option Plan"), which currently authorizes the issuance of options
     (the "Unit Options") and Unit Appreciation Rights ("UARS") covering up to
     300,000 Subordinated Units to certain officers and employees of the
     Partnership.  A total of 40,000 options were granted to key executives in
     December 1995.  The Unit Options have the following characteristics:  1) an
     exercise price of $22 per unit, which is an estimate of the fair market
     value of the Subordinated Units at the time of grant, 2) vest over a five
     year period, 3) are exercisable after the subordination period has elapsed,
     and 4) expire on the tenth anniversary of the date of grant.  No UARS have
     been granted pursuant to the plan.
 
     As prescribed by SFAS No. 123, compensation expense is recognized by the
     Partnership for the unit option plan awards to executives who are not
     employees of the Partnership.  The amount recorded is calculated by
     comparing the fair value of the options granted on the grant date based on
     the Black-Scholes model to the market price of the Partnership's units on
     that date and amortizing such difference over the vesting period.  The
     amounts recorded in fiscal years 1996, 1997 and 1998 were not significant.

13)  Lease Commitments

     The Partnership has entered into certain operating leases for office
     space, trucks and other equipment.

     Propane Segment
     The future minimum rental commitments at September 30, 1998 under leases
     having an initial or remaining non-cancelable term of one year or more are
     as follows:
                                               (in thousands)
         1999                                    $  939
         2000                                       808
         2001                                       751
         2002                                       638
         2003                                       285
         Thereafter                                 379
                                                 ------
         Total minimum lease payments            $3,800
                                                 ======

     Propane segment rent expense was $1.3 million and $1.2 million for the
     years ended 1997 and 1998 respectively.

     Heating Oil segment
     The heating oil segment leases office space and other equipment under
     noncancelable operating leases which expire at various times through 2017.
     Certain of the real property leases contain renewal options and require the
     heating oil segment to pay property taxes.

     The future minimum rental commitments at December 31, 1998 for all heating
     oil segment operating leases having an initial or remaining noncancelable
     term of one year or more are as follows:

                                              (in thousands)
          1999                                   $ 4,333
          2000                                     3,763
          2001                                     3,194
          2002                                     3,437
          2003                                     3,292
          Thereafter                              19,056
                                                 -------
          Total minimum lease payments           $37,075
                                                 =======

     Heating oil segment rental expense under operating leases for the twelve
     months ended December 31, 1997 and 1998 was $7.5 million, and $6.6 million
     respectively.

                                       22
<PAGE>
 
14)  Commitments and Contingencies

     In the ordinary course of business, the Partnership is threatened with, or
     is named in, various lawsuits. The Partnership is not a party to any
     litigation which individually or in the aggregate could reasonably be
     expected to have a material adverse effect on the Partnership.

15)  Related Party Transactions

     Prior to March 26, 1999 the Partnership was managed by the Star Gas
     Corporation, a wholly owned subsidiary of Petro.  Pursuant to the
     Partnership Agreement that was in effect at the time, Star Gas Corporation
     was entitled to reimbursement for all direct and indirect expenses incurred
     or payments it made on behalf of the Partnership, and all other necessary
     or appropriate expenses allocable to the Partnership or otherwise
     reasonably incurred by Star Gas Corporation in connection with operating
     the Partnership's business.  Indirect expenses were allocated to the
     Partnership on a basis consistent with the type of expense incurred.  For
     example, services performed by employees of Star Gas Corporation on behalf
     of the Partnership were reimbursed on the basis of hours worked and rent
     expense was reimbursed on the proportion of the square footage leased by
     the Partnership.  For the fiscal years ended September 30, 1997 and 1998,
     the Partnership reimbursed Star Gas Corporation and Petro $17.1 million and
     $19.6 million, respectively, representing salary, payroll tax and other
     compensation paid to the employees of the Star Gas Corporation, including
     $0.2 million and $0.1 million, respectively, paid to Petro for certain
     corporate functions such as finance and compliance.  In addition, the
     Partnership reimbursed Petro $0.9 million and $0.8 million for the fiscal
     years ended September 30,  1997 and 1998, respectively, relating to the
     Partnership's share of the costs incurred by Petro in conducting the
     operations of a certain shared branch location which included managerial
     services.  As a result of the Star Gas / Petro Transaction, a newly formed
     subsidiary of Star Gas Propane was merged with Petro, with Petro surviving
     the merger as a wholly-owned indirect subsidiary of Star Gas Propane.

16)  Subsequent Events

     Cash Distribution
     On April 23, 1999 the Partnership announced that it would pay a cash
     distribution of $0.575 per common unit for the three months ended March 31,
     1999.  The distribution is payable on May 14, 1999 to holders of record as
     of May 4, 1999.

     Over-Allotment of Common Units
     In connection with the Star Gas / Petro Transaction, on April 26, 1999 the
     Underwriters exercised a 230,000 over-allotment of common units and the
     Partnership received $3.1 million in proceeds.

                                       23
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
                           AND RESULTS OF OPERATIONS
                                        

Overview

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

The results of operations for the three and six month periods ended March 31,
1999 include the Petro acquisition from March 26, 1999. Refer to footnote 2 of
the condensed consolidated financial statements for a description of this
transaction.

Propane and heating oil's primary use is for heating in residential and
commercial applications.  As a result, weather conditions have a significant
impact on financial performance and should be considered when analyzing changes
in financial performance.  In addition, gross margins vary according to customer
mix.  For example, sales to residential customers generate higher profit margins
than sales to other customer groups, such as agricultural customers.
Accordingly, a change in customer mix can affect gross margins without
necessarily impacting total sales.

Lastly, the propane and heating oil industries are seasonal in nature with peak
activity occurring during the winter months.  Accordingly, results of operations
for the periods presented are not necessarily indicative of the results to be
expected for a full year.


THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------


Volume

For the three months ended March 31, 1999, retail volume of propane and home
heating oil increased 16.4 million gallons, or 48.3%, to 50.5 million gallons,
as compared to 34.0 million gallons for the three months ended March 31, 1998.
This increase was due to 8.0 million gallons provided by the March 26, 1999
acquisition of Petro, the heating oil segment, and an 8.4 million gallon
increase in the propane segment.  The 8.4 million gallon increase in the propane
segment was largely due to the impact of colder temperatures, as well as the
additional volume provided by propane acquisitions, internal growth and the
volume attributable to certain customers who delayed their first winter delivery
to the second fiscal quarter.  In the Partnership's propane operating areas,
temperatures were 18.7% colder than in the prior year's comparable quarter and
6.2% warmer than normal.

For the three months ended March 31, 1999, wholesale propane volume increased
4.5 million gallons, or 70.7%, to 10.8 million gallons, as compared to 6.3
million gallons for the three months ended March 31, 1998.  This increase was
primarily due to the impact of colder temperatures.


Sales

For the three months ended March 31, 1999, sales increased $14.2 million, or
37.5%, to $52.1 million, as compared to $37.9 million for the three months ended
March 31, 1998.  This increase was due to $8.1 million provided by the home
heating oil segment and a $6.1 million increase in the propane segment.  Sales
rose in the propane segment due to the aforementioned increases in retail and
wholesale propane volume, which were partially offset by lower selling prices.
Selling prices declined versus the prior year's comparable period in response to
lower propane supply costs.

                                       24
<PAGE>
 
Cost of Product

For the three months ended March 31, 1999, cost of product increased $3.9
million, or 25.6%, to $18.9 million, as compared to $15.0 million for the three
months ended March 31, 1998.  Cost of product relating to heating oil sales
accounted for $3.7 million of this increase.  In the propane segment, cost of
product increased by $0.2 million, as the impact of higher volume sales was
largely offset by lower propane supply costs.


Cost of Installation, Service and Appliances

For the three months ended March 31, 1999, cost of installation, service and
appliances increased $1.1 million to $1.6 million, as compared to $0.5 million
for the three months ended March 31, 1998.  This increase was almost entirely
due to the inclusion of approximately $1.0 million of expenses relating to the
heating oil segment's cost of installation and service.


Delivery and Branch Expenses

For the three months ended March 31, 1999, delivery and branch expenses
increased $2.4 million, or 25.4%, to $12.0 million, as compared to $9.6 million
for the three months ended March 31, 1998.  Delivery and branch expenses at the
heating oil segment accounted for $1.1 million of this change.  While retail
volume increased 24.7% in the propane segment, operating expenses increased only
12.9%, or $1.3 million, due to economies of scale associated with acquisitions
and internal growth.


Depreciation and Amortization Expenses

For the three months ended March 31, 1999, depreciation and amortization
expenses increased $0.2 million, or 5.7%, to $3.0 million, as compared to $2.9
million for the three months ended March 31, 1998.  This increase was largely
due to the impact of propane acquisitions and other fixed asset additions.


General and Administrative Expenses

For the three months ended March 31, 1999, general and administrative expenses
increased $0.3 million, or 19.2%, to $1.7 million, as compared to $1.4 million
for the three months ended March 31, 1998.  The increase was primarily due to
the inclusion of $0.2 million of the heating oil segment's general and
administrative expenses.


Interest Expense, net

For the three months ended March 31, 1999, net interest expense increased $0.5
million, or 25.9%, to $2.4 million, as compared to $1.9 million for the three
months ended March 31, 1998.  This change was primarily due to an increase in
long-term debt used to finance propane acquisitions and $0.2 million of interest
expense incurred by the heating oil segment.

                                       25
<PAGE>
 
Net Income

For the three months ended March 31, 1999, net income increased $6.0 million, or
93.5%, to $12.3 million, as compared to $6.4 million for the three months ended
March 31, 1998.  The increase in net income was attributable to the impact of
colder temperatures, propane acquisitions and $1.9 million of net income
provided by the heating oil segment.

Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA)

Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) increased $6.6 million, or 58.3%, to $17.9
million, as compared to $11.3 million for the three months ended March 31, 1998.
This increase was due to the impact of colder temperatures as well as the
additional EBITDA provided by propane acquisitions, propane internal growth and
$2.2 million of EBITDA generated by the heating oil segment.  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.
The definition of "EBITDA" set forth above may be different from that used by
other companies.

                                       26
<PAGE>
 
SIX MONTHS ENDED MARCH 31, 1999
COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
-------------------------------------------


Volume

For the six months ended March 31, 1999, retail volume of propane and heating
oil increased 7.3 million gallons, or 10.0%, to 79.9 million gallons, as
compared to 72.6 million gallons for the six months ended March 31, 1998.  This
increase was due to 8.0 million gallons of additional volume provided by the
heating oil segment from March 26, 1999 to March 31, 1999, which was reduced by
a slight decline in retail volume of 0.8 million gallons in the propane segment.
While retail propane volume was favorably impacted by acquisitions, colder
temperatures and internal growth, which led to a 6.2 million gallon increase in
volume, a 7.0 million gallon reduction in agriculture sales more than offset
these benefits.  The abnormal weather conditions during the first fiscal quarter
resulted in a very dry fall harvest, which caused propane demand for crop drying
to be at its lowest level since 1991.   In the Partnership's propane operating
areas, temperatures for the six months ending March 31, 1999, were 2.2% colder
than in the prior year's comparable period and 9.3% warmer than normal.

For the six months ended March 31, 1999, wholesale propane volume increased by
1.2 million gallons, or 7.3%, to 17.0 million gallons, as compared to 15.9
million gallons for the six months ended March 31, 1998.  This increase was due
to colder temperatures.


Sales

For the six months ended March 31, 1999, sales increased $2.6 million, or 3.3%,
to $82.3 million, as compared to $79.7 million for the six months ended March
31, 1998.  This increase was attributable to the $8.1 million additional sales
provided by the heating oil segment, which were partially offset by a $5.5
million decline in propane sales.  Propane sales declined due to lower
agricultural sales and lower selling prices in response to lower propane supply
costs.  This decline was partially offset by additional propane sales
attributable to propane acquisitions, colder temperatures and propane segment
internal growth.


Cost of Product

For the six months ended March 31, 1999, cost of product decreased $6.0 million,
or 16.6%, to $29.8 million, as compared to $35.8 million for the six months
ended March 31, 1998.  This decrease was due to lower propane supply costs of
$9.7 million, partially offset by $3.7 million of costs attributable to the
heating oil segment.  While both propane selling prices and propane supply costs
declined on a per gallon basis, the decline in selling prices was less than the
decline in supply costs, which resulted in an increase in per gallon margins
across all propane market segments.


Cost of Installation, Service and Appliances

For the six months ended March 31, 1999, cost of installation, service and
appliances increased $1.2 million, or 84.0%, to $2.6 million, as compared to
$1.4 million for the six months ended March 31, 1998.  This increase was
primarily due to $1.0 million of costs relating to the heating oil segment.


Delivery and Branch Expenses

For the six months ended March 31, 1999, delivery and branch expenses increased
$2.6 million, or 13.1%, to $22.3 million, as compared to $19.7 million for the
six months ended March 31, 1998.  This increase was due to the inclusion of $1.1
million of heating oil operating costs, $0.8 million of additional operating
costs of acquired propane companies and $0.7 million of additional propane
segment costs associated with wage increases and internal growth.

                                       27
<PAGE>
 
Depreciation and Amortization

For the six months ended March 31, 1999, depreciation and amortization expenses
increased $0.4 million, or 6.9%, to $6.0 million, as compared to $5.6 million
for the six months ended March 31, 1998, primarily due to the impact of propane
acquisitions and other fixed asset additions.


General and Administrative Expenses

For the six months ended March 31, 1999, general and administrative expenses
increased $0.3 million, or 12.0%, to $3.2 million, as compared to $2.8 million
for the six months ended March 31, 1998.  This increase was primarily due to the
inclusion of $0.2 million of heating oil general and administrative expenses.


Interest Expense, net

For the six months ended March 31, 1999, net interest expense increased $0.6
million, or 14.6%, to $4.5 million, as compared to $4.0 million for the six
months ended March 31, 1998.  This change was primarily due to an increase in
long-term debt associated with propane acquisitions and $0.2 million of interest
expense associated with the heating oil segment.


Net Income

For the six months ended March 31, 1999, net income increased $3.5 million, or
35.1%, to $13.6 million, as compared to $10.1 million for the six months ended
March 31, 1998.  This increase was due to colder temperatures, propane
acquisitions, propane internal growth and $1.9 million of net income provided by
the heating oil segment.


Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA)

Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) increased $4.4 million, or 22.2%, to $24.4
million for the six months ended March 31, 1999, as compared to $20.0 million
for the prior year's comparable period.  This increase was due to the impact of
acquisitions, colder weather conditions, higher per gallon propane gross profit
margins and the $2.2 million of EBITDA generated by the heating oil segment.
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.  The definition of "EBITDA" set forth above may be
different from that used by other companies.

                                       28
<PAGE>
 
Liquidity and Capital Resources

As discussed in footnote 2 of the financial statements, an integral element of
the Star Gas / Petro Transaction was the Partnership's March 1999 sale of 8.7
million common units. The net proceeds from this offering, net of underwriter's
discounts, commissions and offering expenses was $116.1 million. These funds,
along with the net proceeds from Petro's $87.7 million concurrent private debt
placement, totaled $203.8 million.  To effect the Star Gas / Petro Transaction,
these funds were used to repay $192.3 million of Petro's debt and to redeem
$11.7 million of Petro's preferred stock.

For the six months ended March 31, 1999, net cash provided by operating
activities was $7.1 million, which includes $10.1 million of accrued interest
and preferred dividend payments for Petro, in connection with the Star Gas /
Petro Transaction. The net cash provided by operating activities, combined with
$18.8 million of cash acquired from Petro in the acquisition, and $0.1 million
of proceeds from the sale of fixed assets totaled $26.0 million.  Such funds
were utilized for capital expenditures of $2.4 million, net credit facility
repayments of $4.8 million, acquisition facility repayments of $3.5 million and
Partnership distributions of $4.4 million.  As a result of the above activity,
the Partnership's cash increased by $10.6 million.

The Partnership's cash requirements for the remainder of fiscal 1999 include
maintenance capital expenditures of approximately $2.0 million.  In addition,
the Partnership plans to pay cash distributions of $15.2 million and conclude
its Year 2000 compliance expenditures of $0.6 million.  Based on its current
cash position, bank credit availability and net cash from operating activities,
the Partnership expects to be able to meet all of these obligations for fiscal
1999, as well as all of its other current obligations as they become due.

                                       29
<PAGE>
 
Year 2000

The Year 2000 issue is the result of computer programs using only the last two
digits to indicate the year.  If uncorrected, such computer programs will not be
able to interpret dates correctly beyond the year 1999 and, in some cases prior
to that time (as some computer experts believe), which could cause computer
system failures or other computer errors disrupting business operations.
Recognizing the potentially severe consequences of the failure to be Year 2000
compliant, the Partnership's management has developed and implemented a
Partnership-wide program to identify and remedy the Year 2000 issues.

The scope of the Partnership's Year 2000 readiness program includes the review
and evaluation of the Partnership's information technology (IT) such as hardware
and software utilized in the operation of the Partnership's business.

If needed modifications and conversions are not made on a timely basis, the Year
2000 issue could cause interruption in delivering product to customers or
prevent the Partnership from fulfilling their service needs.  The Partnership is
currently using internal and external resources to identify and correct systems
that are not Year 2000 compliant.

Since the Partnership does not internally develop software for its own use,
software developed externally is being evaluated for Year 2000 compliance.  This
software is being upgraded or replaced if it is determined that it is not
compliant.  As part of this program, the Partnership's systems are being
evaluated for meeting current and future business needs and the Partnership is
using this process as an opportunity to upgrade and enhance its information
systems.  The Partnership anticipates completing such upgrades and replacements
as needed by September 1999.  The Partnership expects that most of these costs
will be capitalized, as they are principally related to adding new hardware and
software applications and functionality.  Other costs will continue to be
expensed as incurred.  The Partnership's state of readiness to make each
identified area Year 2000 compliant is at the implementation stage.

The Partnership has assessed a total cost of approximately $750,000 to make its
computer systems Year 2000 compliant. Through March 31, 1999 the Company has
incurred approximately $404,000 in Year 2000 compliance expenses for
applications and hardware, and it expects to incur the remaining $346,000
through the summer of 1999 for additional applications and hardware.

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

The Partnership's current estimates of the amount of time and costs necessary to
remediate and test its computer systems are based on the facts and circumstances
existing at this time.  The estimates were made using assumptions of future
events including the continued availability of existing resources, Year 2000
modification plans, implementation success by third-parties and other factors.
New developments may occur that could affect the Partnership's estimates of the
amount of time and costs necessary to modify and test its IT and non-IT systems
for Year 2000 compliance.

Notwithstanding the substantive work involved in making all its systems Year
2000 compliant, the Partnership could still potentially experience disruptions
to some aspects of its various activities and operations.  The Partnership is
developing contingency plans, primarily instituting manual backup systems, in
the event that it experiences Year 2000 related disruptions.

In addition the Partnership has anticipated the possibility that not all of its
vendors, suppliers and other third parties will have taken the necessary steps
to adequately address their Year 2000 issues on a timely basis.  In order to
minimize the impact on the Partnership of non-compliance, the Partnership has
been contacting all key suppliers to evaluate their Year 2000 readiness.  The
Partnership is preparing contingency plans for those suppliers whose non-
compliance could have a material effect on the Partnership's business
activities.

                                       30
<PAGE>
 
Accounting Principles Not Yet Adopted

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for fiscal
years beginning after June 15, 1999.  SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities and
measure the instruments at fair value. The accounting for changes in fair value
of a derivative depends upon the intended use of such derivative.  The
Partnership is still evaluating the effects of SFAS No. 133.

Statement Regarding Forward-Looking Disclosure

This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act which represent
the 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
propane and / or heating oil, and the ability of the Partnership to obtain new
accounts and retain existing accounts.  All statements other than statements of
historical facts included in this Report including, without limitation, the
statements under "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and 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.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk
         ----------------------------------------------------------

The Partnership is exposed to interest rate risk primarily through its Bank
Credit facilities.  The Partnership utilizes these borrowings to meet its
working capital needs and also to fund the short-term needs of its acquisition
program.

At March 31, 1999, the Partnership had outstanding borrowings of approximately
$7.1 million under its Acquisition Facilities, and no amount under its Letter of
Credit Facility or its Working Capital 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 less than $0.1 million annually.

The Partnership also selectively uses derivative financial instruments to manage
its exposure to market risk related to changes in the current and commodity
market price of home heating oil for its heating oil segment.  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 home heating oil being hedged.
Sensitivity analysis is a technique used to evaluate the impact of hypothetical
market value changes. Based on a hypothetical ten percent increase in the cost
of home heating oil at March 31, 1999, the potential unrealized loss on the
Company's hedging activity would be reduced by $380,000 to a gain of $354,000;
and conversely a hypothetical ten percent decrease would increase the unrealized
losses by $380,000 to a loss of $406,000.

                                       31
<PAGE>
 
                           PART II OTHER INFORMATION
                           -------------------------


Item 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------

(a)      Special Meeting of Shareholders March 16, 1999.

(c)      Proposals


         1.  Acquisition of Petroleum Heat and Power Co., Inc. through a merger
             and an exchange of equity.

          For            Against         Withheld       Abstain
          ---            -------         --------       -------
 
        2,034,331        152,096              -          40,060
 


          2.  Amend the partnership agreement to facilitate the transaction.

          For            Against         Withheld       Abstain
          ---            -------         --------       -------
 
        2,027,673        152,103              -          46,711



          3.  Election of a new general partner.

          For            Against         Withheld       Abstain
          ---            -------         --------       -------
 
        2,011,536         162,791             -          52,160

                                       32
<PAGE>
 
Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------


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


         (27) Financial data Schedule



(b)      Reports on Form 8-K
         -------------------


         Registrant filed a report on Form 8-K on February 18, 1999, to report
         under Item 5., "Other Events," certain historical financial statements
         of Petro, in order to permit the registrant to incorporate Petro's
         Financial Statements in future SEC filings .

         Registrant filed a report on Form 8-K on April 12, 1999, to report
         under Item 7., "Financial Statements and Exhibits," the December 31,
         1998 financial statements of Petro, the business acquired; to report
         the December 31, 1998 Star Gas Partners, L.P. and Subsidiaries,
         condensed consolidated pro forma financial information which gives
         effect to the acquisition of Petro, by Star Gas Partners, L.P.; and to
         report as an exhibit the March 25, 1999 amendment to the Restated
         Agreement and plan of Merger dated as of February 3, 1999.

                                       33
<PAGE>
 
                                   SIGNATURE
                                   ---------



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



Star Gas Partners, L.P.
By:  Star Gas LLC (General Partner)



Signature                        Title                         Date
---------                        -----                         ----
 

/s/  George Leibowitz            Chief Financial Officer       May 13, 1999
     ----------------                                                    
     George Leibowitz            Star Gas LLC
                                 (Principal Financial Officer)

/s/  James J. Bottiglieri        Vice President                May 13, 1999
     ---------------------                                               
     James J. Bottiglieri        Star Gas LLC
 

                                       34