---



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 June 30, 2004



OR



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



For the transition period from
 to



Commission File Number: 33-98490



Commission File Number: 333-103873



STAR GAS PARTNERS, L.P.

STAR GAS
FINANCE COMPANY

(Exact name of registrants as specified in its charters)



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



2187 Atlantic
Street, Stamford, Connecticut         06902

(Address of principal executive office)



(203) 328-7310

(Registrants telephone number, including area code)





---

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



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



Yes x    No ̈



Indicate by check mark whether the registrants are accelerated filers (as defined in Rule
12b-2 of the Act).



Yes x    No ̈



At July 23, 2004, the registrants had units and shares of each issuers classes of common stock outstanding as follows:



|                         |  |                           |  |           
|------------------------ |  | ------------------------- |  | ----------
|Star Gas Partners, L.P.  |  | Common Units              |  | 32,165,528
|Star Gas Partners, L.P.  |  | Senior Subordinated Units |  | 3,245,196 
|Star Gas Partners, L.P.  |  | Junior Subordinated Units |  | 345,364   
|Star Gas Partners, L.P.  |  | General Partner Units     |  | 325,729   
|Star Gas Finance Company |  | Common Shares             |  | 100       



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

INDEX TO FORM 10-Q



|        |  |                                                                                                                               |  |      
|------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | -----
|        |  |                                                                                                                               |  | Page 
|        |  |                                                                                                                              
|Part I  |  | Financial Information                                                                                                         |  |      
|        |  |                                                                                                                              
|        |  | Item 1  Condensed Consolidated Financial Statements                                                                          |  |      
|        |  |                                                                                                                              
|        |  | Condensed Consolidated Balance Sheets as of September 30, 2003 and June 30, 2004                                              |  | 3    
|        |  |                                                                                                                              
|        |  | Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2003 and June 30, 2004           |  | 4    
|        |  |                                                                                                                              
|        |  | Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2003 and June 30, 2004 |  | 5    
|        |  |                                                                                                                              
|        |  | Condensed Consolidated Statement of Partners Capital for the nine months ended June 30, 2004                                 |  | 6    
|        |  |                                                                                                                              
|        |  | Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and June 30, 2004                     |  | 7    
|        |  |                                                                                                                              
|        |  | Notes to Condensed Consolidated Financial Statements                                                                          |  | 8-17 
|        |  |                                                                                                                              
|        |  | Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 18-27
|        |  |                                                                                                                              
|        |  | Item 3  Quantitative and Qualitative Disclosures About Market Risk                                                           |  | 28   
|        |  |                                                                                                                              
|        |  | Item 4  Controls and Procedures                                                                                              |  | 28   
|        |  |                                                                                                                              
|Part II |  | Other Information:                                                                                                            |  |      
|        |  |                                                                                                                              
|        |  | Item 6  Exhibits and Reports on Form 8-K                                                                                     |  | 29   
|        |  |                                                                                                                              
|        |  | Signatures                                                                                                                    |  | 30   



-2-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                  |  |               |         |   |              |   |         |  
|----------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|(in thousands)                                                    |  | Sept. 30,2003 |         |   | June 30,2004 |  
|ASSETS                                                            |  |               |         |   |              |   |         |  
|Current assets                                                    |  |               |         |   |              |   |         |  
|Cash and cash equivalents                                         |  | $             | 10,044  |   |              | $ | 19,328  |  
|Receivables, net of allowance of $7,542 and $10,597, respectively |  |               | 100,511 |   |              |   | 130,458 |  
|Inventories                                                       |  |               | 38,561  |   |              |   | 43,738  |  
|Prepaid expenses and other current assets                         |  |               | 51,470  |   |              |   | 40,257  |  
|Net current assets of discontinued operations                     |  |               | 10,523  |   |              |   |        |  
|                                                                  |  |               |         |   |              |   |         |  
|Total current assets                                              |  |               | 211,109 |   |              |   | 233,781 |  
|                                                                  |  |               |         |   |              |   |         |  
|Property and equipment, net                                       |  |               | 261,867 |   |              |   | 250,351 |  
|Long-term portion of accounts receivables                         |  |               | 7,145   |   |              |   | 6,684   |  
|Goodwill                                                          |  |               | 272,740 |   |              |   | 274,097 |  
|Intangibles, net                                                  |  |               | 201,468 |   |              |   | 183,153 |  
|Deferred charges and other assets, net                            |  |               | 14,414  |   |              |   | 16,817  |  
|Net long-term assets of discontinued operations                   |  |               | 6,867   |   |              |   |        |  
|                                                                  |  |               |         |   |              |   |         |  
|Total Assets                                                      |  | $             | 975,610 |   |              | $ | 964,883 |  
|                                                                  |  |               |         |   |              |   |         |  
|LIABILITIES AND PARTNERS CAPITAL                                 |  |               |         |   |              |   |         |  
|Current liabilities                                               |  |               |         |   |              |   |         |  
|Accounts payable                                                  |  | $             | 27,140  |   |              | $ | 25,495  |  
|Working capital facility borrowings                               |  |               | 12,000  |   |              |   | 29,650  |  
|Current maturities of long-term debt                              |  |               | 22,847  |   |              |   | 24,536  |  
|Accrued expenses                                                  |  |               | 82,356  |   |              |   | 82,432  |  
|Unearned service contract revenue                                 |  |               | 32,036  |   |              |   | 33,528  |  
|Customer credit balances                                          |  |               | 74,716  |   |              |   | 29,875  |  
|Net current liabilities of discontinued operations                |  |               | 7,569   |   |              |   |        |  
|                                                                  |  |               |         |   |              |   |         |  
|Total current liabilities                                         |  |               | 258,664 |   |              |   | 225,516 |  
|                                                                  |  |               |         |   |              |   |         |  
|Long-term debt                                                    |  |               | 499,341 |   |              |   | 485,202 |  
|Other long-term liabilities                                       |  |               | 27,829  |   |              |   | 27,072  |  
|Partners capital (deficit)                                       |  |               |         |   |              |   |         |  
|Common unitholders                                                |  |               | 210,636 |   |              |   | 242,213 |  
|Subordinated unitholders                                          |  |               | (57     | ) |              |   | (373    | )
|General partner                                                   |  |               | (3,082  | ) |              |   | (3,116  | )
|Accumulated other comprehensive loss                              |  |               | (17,721 | ) |              |   | (11,631 | )
|                                                                  |  |               |         |   |              |   |         |  
|Total Partners capital                                           |  |               | 189,776 |   |              |   | 227,093 |  
|                                                                  |  |               |         |   |              |   |         |  
|Total Liabilities and Partners Capital                           |  | $             | 975,610 |   |              | $ | 964,883 |  
|                                                                  |  |               |         |   |              |   |         |  



See
accompanying notes to condensed consolidated financial statements.



-3-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                                                            |  | Three Months Ended June 30, |         |   | Nine Months Ended June 30, |  
|(in thousands, except per unit data)                                                                                                                        |  | 2003                        |         |   | 2004                       |   |         | 2003 |  |   | 2004      |  
|Sales:                                                                                                                                                      |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Product                                                                                                                                                     |  | $                           | 171,129 |   |                            | $ | 178,023 |      |  | $ | 1,075,779 |   |  | $ | 1,106,965 |  
|Installations, service and appliances                                                                                                                       |  |                             | 45,736  |   |                            |   | 51,132  |      |  |   | 141,121   |   |  |   | 165,596   |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Total sales                                                                                                                                                 |  |                             | 216,865 |   |                            |   | 229,155 |      |  |   | 1,216,900 |   |  |   | 1,272,561 |  
|Cost and expenses:                                                                                                                                          |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Cost of product                                                                                                                                             |  |                             | 102,209 |   |                            |   | 114,953 |      |  |   | 663,310   |   |  |   | 687,580   |  
|Cost of installations, service and appliances                                                                                                               |  |                             | 46,888  |   |                            |   | 49,621  |      |  |   | 153,089   |   |  |   | 167,436   |  
|Delivery and branch expenses                                                                                                                                |  |                             | 66,030  |   |                            |   | 73,953  |      |  |   | 227,188   |   |  |   | 254,608   |  
|Depreciation and amortization expenses                                                                                                                      |  |                             | 13,086  |   |                            |   | 14,214  |      |  |   | 38,598    |   |  |   | 43,236    |  
|General and administrative expenses                                                                                                                         |  |                             | 14,350  |   |                            |   | 6,407   |      |  |   | 36,255    |   |  |   | 25,102    |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Operating income (loss)                                                                                                                                     |  |                             | (25,698 | ) |                            |   | (29,993 | )    |  |   | 98,460    |   |  |   | 94,599    |  
|Interest expense                                                                                                                                            |  |                             | (12,415 | ) |                            |   | (12,455 | )    |  |   | (32,758   | ) |  |   | (36,836   | )
|Interest income                                                                                                                                             |  |                             | 1,533   |   |                            |   | 1,083   |      |  |   | 3,050     |   |  |   | 2,717     |  
|Amortization of debt issuance costs                                                                                                                         |  |                             | (606    | ) |                            |   | (794    | )    |  |   | (1,597    | ) |  |   | (2,837    | )
|Loss on redemption of debt                                                                                                                                  |  |                             |        |   |                            |   |        |      |  |   | (181      | ) |  |   |          |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Income (loss) from continuing operations before income taxes                                                                                                |  |                             | (37,186 | ) |                            |   | (42,159 | )    |  |   | 66,974    |   |  |   | 57,643    |  
|Income tax expense                                                                                                                                          |  |                             | 100     |   |                            |   | 75      |      |  |   | 2,235     |   |  |   | 1,225     |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Income (loss) from continuing operations                                                                                                                    |  |                             | (37,286 | ) |                            |   | (42,234 | )    |  |   | 64,739    |   |  |   | 56,418    |  
|Income (loss) from discontinued operations before loss on sale of TG&E segment and cumulative effect of change in accounting principle,
net of income taxes |  |                             | (566    | ) |                            |   | (50     | )    |  |   | 512       |   |  |   | 1,033     |  
|Loss on sale of TG&E segment, net of income taxes                                                                                                           |  |                             |        |   |                            |   | (247    | )    |  |   |          |   |  |   | (17       | )
|Cumulative effect of change in accounting principle for adoption of SFAS No. 142 for discontinued operations                                                |  |                             |        |   |                            |   |        |      |  |   | (3,901    | ) |  |   |          |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Net income (loss)                                                                                                                                           |  | $                           | (37,852 | ) |                            | $ | (42,531 | )    |  | $ | 61,350    |   |  | $ | 57,434    |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|General Partners interest in net income (loss)                                                                                                             |  | $                           | (378    | ) |                            | $ | (405    | )    |  | $ | 614       |   |  | $ | 528       |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Limited Partners interest in net income (loss)                                                                                                             |  | $                           | (37,474 | ) |                            | $ | (42,126 | )    |  | $ | 60,736    |   |  | $ | 56,906    |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Basic and diluted income (loss) per Limited Partner unit:                                                                                                   |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Income from continuing operations                                                                                                                           |  | $                           | (1.14   | ) |                            | $ | (1.17   | )    |  | $ | 1.97      |   |  | $ | 1.60      |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Net income (loss)                                                                                                                                           |  | $                           | (1.15   | ) |                            | $ | (1.18   | )    |  | $ | 1.87      |   |  | $ | 1.62      |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Basic weighted average number of Limited Partner units outstanding                                                                                          |  |                             | 32,457  |   |                            |   | 35,756  |      |  |   | 32,453    |   |  |   | 35,021    |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Diluted number of Limited Partner units                                                                                                                     |  |                             | 32,457  |   |                            |   | 35,756  |      |  |   | 32,561    |   |  |   | 35,021    |  
|                                                                                                                                                            |  |                             |         |   |                            |   |         |      |  |   |           |   |  |   |           |  



See
accompanying notes to condensed consolidated financial statements.



-4-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



|                                                     |  |                            |         |   |                           |   |         |      |  |   |        |   |  |   |       
|---------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------
|                                                     |  | Three Months EndedJune 30, |         |   | Nine Months EndedJune 30,
|(in thousands)                                       |  | 2003                       |         |   | 2004                      |   |         | 2003 |  |   | 2004  
|Net income (loss)                                    |  | $                          | (37,852 | ) |                           | $ | (42,531 | )    |  | $ | 61,350 |   |  | $ | 57,434
|Other comprehensive income (loss):                   |  |                            |         |   |                           |   |         |      |  |   |        |   |  |   |       
|Net unrealized gain (loss) on derivative instruments |  |                            | 2,587   |   |                           |   | 2,051   |      |  |   | (3,401 | ) |  |   | 6,090 
|                                                     |  |                            |         |   |                           |   |         |      |  |   |        |   |  |   |       
|Comprehensive income (loss)                          |  | $                          | (35,265 | ) |                           | $ | (40,480 | )    |  | $ | 57,949 |   |  | $ | 63,524
|                                                     |  |                            |         |   |                           |   |         |      |  |   |        |   |  |   |       



Reconciliation of Accumulated Other
Comprehensive Income (Loss)



|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  
|-------------------------------- |  | ----------------------- | ------- | - | ---------------------- | - | ------- | ----- |  | - | ------- | -
|(in thousands)                   |  | PensionPlan Obligations |         |   | Derivative Instruments |   |         | Total | 
|Balance as of September 30, 2002 |  | $                       | (15,745 | ) |                        | $ | 4,918   |       |  | $ | (10,827 | )
|Reclassification to earnings     |  |                         |        |   |                        |   | (8,110  | )     |  |   | (8,110  | )
|Gain on derivative instruments   |  |                         |        |   |                        |   | 4,709   |       |  |   | 4,709   |  
|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  
|Other comprehensive loss         |  |                         |        |   |                        |   | (3,401  | )     |  |   | (3,401  | )
|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  
|Balance as of June 30, 2003      |  | $                       | (15,745 | ) |                        | $ | 1,517   |       |  | $ | (14,228 | )
|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  
|Balance as of September 30, 2003 |  | $                       | (17,214 | ) |                        | $ | (507    | )     |  | $ | (17,721 | )
|Reclassification to earnings     |  |                         |        |   |                        |   | (10,342 | )     |  |   | (10,342 | )
|Gain on derivative instruments   |  |                         |        |   |                        |   | 16,432  |       |  |   | 16,432  |  
|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  
|Other comprehensive income       |  |                         |        |   |                        |   | 6,090   |       |  |   | 6,090   |  
|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  
|Balance as of June 30, 2004      |  | $                       | (17,214 | ) |                        | $ | 5,583   |       |  | $ | (11,631 | )
|                                 |  |                         |         |   |                        |   |         |       |  |   |         |  



See
accompanying notes to condensed consolidated financial statements.



-5-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS CAPITAL



|                                        |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |            |  |   |                |   |  |                                        |        |   |                       |   |         |   |  |   |         |  
|--------------------------------------- |  | --------------- |  | -------- |  | ------- |  | -------------- |  | ------ | ------- | - | ---------- | - | ------ | ---------- |  | - | -------------- | - |  | -------------------------------------- | ------ | - | --------------------- | - | ------- | - |  | - | ------- | -
|                                        |  | Number of Units |  |          |  |         |  |                |  |        |         |   |            |   |        |            |  |   |                |  
|(in thousands, except per unit amounts) |  | Common          |  | Sr. Sub. |  | Jr. Sub |  | GeneralPartner |  | Common |         |   | SeniorSub. |   |        | JuniorSub. |  |   | GeneralPartner |   |  | Accum. OtherComprehensiveIncome (Loss) |        |   | TotalPartnersCapital |  
|Balance as of September 30, 2003        |  | 30,671          |  | 3,142    |  | 345     |  | 326            |  | $      | 210,636 |   |            | $ | 1,571  |            |  | $ | (1,628         | ) |  | $                                      | (3,082 | ) |                       | $ | (17,721 | ) |  | $ | 189,776 |  
|Issuance of units                       |  | 1,495           |  | 103      |  |         |  |                |  |        | 34,996  |   |            |   |        |            |  |   |                |   |  |                                        |        |   |                       |   |         |   |  |   | 34,996  |  
|Net income                              |  |                 |  |          |  |         |  |                |  |        | 51,142  |   |            |   | 5,202  |            |  |   | 562            |   |  |                                        | 528    |   |                       |   |         |   |  |   | 57,434  |  
|Other comprehensive income, net         |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |            |  |   |                |   |  |                                        |        |   |                       |   | 6,090   |   |  |   | 6,090   |  
|Unit compensation expense               |  |                 |  |          |  |         |  |                |  |        | 66      |   |            |   | 55     |            |  |   |                |   |  |                                        |        |   |                       |   |         |   |  |   | 121     |  
|Distributions ($1.725 per unit)         |  |                 |  |          |  |         |  |                |  |        | (54,627 | ) |            |   | (5,539 | )          |  |   | (596           | ) |  |                                        | (562   | ) |                       |   |         |   |  |   | (61,324 | )
|                                        |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |            |  |   |                |   |  |                                        |        |   |                       |   |         |   |  |   |         |  
|Balance as of June 30, 2004             |  | 32,166          |  | 3,245    |  | 345     |  | 326            |  | $      | 242,213 |   |            | $ | 1,289  |            |  | $ | (1,662         | ) |  | $                                      | (3,116 | ) |                       | $ | (11,631 | ) |  | $ | 227,093 |  
|                                        |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |            |  |   |                |   |  |                                        |        |   |                       |   |         |   |  |   |         |  



See
accompanying notes to condensed consolidated financial statements.



-6-



---

STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                  |  |                            |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ---- | - | -------- | -
|(in thousands)                                                                                                    |  | Nine Months Ended June 30, |         
|                                                                                                                  |  | 2003                       |          |   | 2004 |  
|Cash flows provided by (used in) operating activities:                                                            |  |                            |          |   |      |   |          |  
|Net income                                                                                                        |  | $                          | 61,350   |   |      | $ | 57,434   |  
|Deduct: Income from discontinued operations                                                                       |  |                            | (512     | ) |      |   | (1,033   | )
|Loss on sale of discontinued operations                                                                           |  |                            |         |   |      |   | 17       |  
|Add: Cumulative effect of change in accounting principle for adoption of SFAS No. 142 for discontinued operations |  |                            | 3,901    |   |      |   |         |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities:                       |  |                            |          |   |      |   |          |  
|Depreciation and amortization                                                                                     |  |                            | 38,598   |   |      |   | 43,236   |  
|Amortization of debt issuance cost                                                                                |  |                            | 1,597    |   |      |   | 2,837    |  
|Unit compensation expense                                                                                         |  |                            | 1,876    |   |      |   | 121      |  
|Loss on redemption of debt                                                                                        |  |                            | 181      |   |      |   |         |  
|Provision for losses on accounts receivable                                                                       |  |                            | 5,193    |   |      |   | 7,027    |  
|Loss (gain) on sales of fixed assets, net                                                                         |  |                            | 128      |   |      |   | (198     | )
|Changes in operating assets and liabilities:                                                                      |  |                            |          |   |      |   |          |  
|Increase in receivables                                                                                           |  |                            | (62,187  | ) |      |   | (35,125  | )
|Decrease (increase) in inventories                                                                                |  |                            | 3,954    |   |      |   | (5,006   | )
|Decrease in other assets                                                                                          |  |                            | 212      |   |      |   | 6,336    |  
|Increase (decrease) in accounts payable                                                                           |  |                            | 1,704    |   |      |   | (1,443   | )
|Decrease in other current and long-term liabilities                                                               |  |                            | (32,914  | ) |      |   | (38,480  | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash provided by continuing operating activities                                                              |  |                            | 23,081   |   |      |   | 35,723   |  
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Cash flows provided by (used in) investing activities:                                                            |  |                            |          |   |      |   |          |  
|Capital expenditures                                                                                              |  |                            | (14,350  | ) |      |   | (6,767   | )
|Proceeds from sales of fixed assets                                                                               |  |                            | 799      |   |      |   | 1,236    |  
|Cash proceeds from disposition of TG&E segment                                                                    |  |                            |         |   |      |   | 12,795   |  
|Acquisitions                                                                                                      |  |                            | (43,191  | ) |      |   | (8,546   | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash used in investing activities                                                                             |  |                            | (56,742  | ) |      |   | (1,282   | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Cash flows provided by (used in) financing activities:                                                            |  |                            |          |   |      |   |          |  
|Working capital facility borrowings                                                                               |  |                            | 165,700  |   |      |   | 150,650  |  
|Working capital facility repayments                                                                               |  |                            | (165,700 | ) |      |   | (133,000 | )
|Acquisition facility borrowings                                                                                   |  |                            | 52,500   |   |      |   | 8,550    |  
|Acquisition facility repayments                                                                                   |  |                            | (52,600  | ) |      |   | (46,000  | )
|Proceeds from the issuance of debt                                                                                |  |                            | 197,333  |   |      |   | 38,646   |  
|Repayment of debt                                                                                                 |  |                            | (150,238 | ) |      |   | (13,414  | )
|Distributions                                                                                                     |  |                            | (53,742  | ) |      |   | (61,324  | )
|Proceeds from the issuance of common units, net                                                                   |  |                            |         |   |      |   | 34,996   |  
|Increase in deferred charges and other                                                                            |  |                            | (8,038   | ) |      |   | (5,751   | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash used in financing activities                                                                             |  |                            | (14,785  | ) |      |   | (26,647  | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash provided by discontinued operations                                                                      |  |                            | 2,236    |   |      |   | 1,490    |  
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net increase (decrease) in cash                                                                                   |  |                            | (46,210  | ) |      |   | 9,284    |  
|Cash and cash equivalents at beginning of period                                                                  |  |                            | 61,007   |   |      |   | 10,044   |  
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                        |  | $                          | 14,797   |   |      | $ | 19,328   |  
|                                                                                                                  |  |                            |          |   |      |   |          |  



See
accompanying notes to condensed consolidated financial statements.



-7-



---

STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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



Star Gas Partners, L.P. (Star Gas or the Partnership) is a diversified home energy distributor and services provider, specializing
in heating oil and propane. Star Gas is a master limited partnership, which at June 30, 2004 had outstanding 32.2 million common units (NYSE: SGU representing an 89.1% limited partner interest) and 3.2 million senior subordinated units
(NYSE: SGH representing a 9.0% limited partner interest). Additional Partnership interests include 0.3 million junior subordinated units (representing a 1.0% limited partner interest) and 0.3 million general partner units (representing a
0.9% general partner interest).



At June 30, 2004, the
Partnership was organized as follows:



| |  | Star Gas Propane, L.P. (Star Gas Propane) is the Partnerships operating subsidiary and, together with its direct and indirect subsidiaries, accounts for
substantially all of the Partnerships assets, sales and earnings. Both the Partnership and Star Gas Propane are Delaware limited partnerships that were formed in October 1995 in connection with the Partnerships initial public offering.
The Partnership is the sole limited partner of Star Gas Propane with a 99% limited partnership interest.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The general partner of both the Partnership and Star Gas Propane is Star Gas LLC, a Delaware limited liability company. The Board of Directors of Star Gas LLC is appointed by its
members. For information concerning the members of Star Gas LLC and its Board of Directors see Item 10, Directors and Executive Officers of the Registrant in the Partnerships annual report on Form 10-K for fiscal year ended
September 30, 2003. Star Gas LLC owns an approximate 1% general partner interest in the Partnership and also owns an approximate 1% general partner interest in Star Gas Propane.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Partnerships propane operations (the propane segment) are conducted through Star Gas Propane and its direct and indirect subsidiaries. Star Gas Propane
primarily markets and distributes propane gas and related products to approximately 336,000 customers in the Midwest, Northeast, Florida and Georgia.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Partnerships heating oil operations (the heating oil segment) are conducted through Petro Holdings, Inc. (Petro) and its direct and indirect
subsidiaries. Petro is a Minnesota corporation that is an indirect wholly-owned subsidiary of Star Gas Propane. Petro is a retail distributor of home heating oil and serves approximately 524,000 customers in the Northeast and Mid-Atlantic.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Star Gas Finance Company is a direct wholly-owned subsidiary of the Partnership. Star Gas Finance Company serves as the co-issuer, jointly and severally with the Partnership, of the
Partnerships $235 million 101⁄4% Senior Notes which are due in 2013. The Partnership is dependent on distributions from its subsidiaries to service the Partnerships debt obligations. The distributions from the Partnerships
subsidiaries are not guaranteed and are subject to certain loan restrictions. Star Gas Finance Company has nominal assets and conducts no business operations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-8-



---

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



Basis of Presentation



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



The
financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial
condition and results for the interim periods. The results of operations for the three and nine month periods ended June 30, 2003 and June 30, 2004 are not necessarily indicative of the results to be expected for the full year. These statements have
been prepared on a basis substantially consistent with the accounting principles applied in the Partnerships Annual Report on Form 10-K for the year ended September 30, 2003.



These interim financial statements of the Partnership have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission and should be read in conjunction with the Partnerships Annual Report on Form 10-K for the year
ended September 30, 2003 and Form 8-K filed on July 7, 2004, which revised items 6, 7 and 8 to give effect to the sale of the Partnerships natural gas and electricity subsidiary on March 31, 2004.



The Partnerships natural gas and electricity operations segment was
sold on March 31, 2004. These operations were conducted through Total Gas & Electric, Inc. (TG&E), a Florida corporation. As a result of the sale of the TG&E segment, the Partnership has restated its prior year results to
include the results of the TG&E segment and the loss on the disposition as a component of discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



Inventories



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



|                                 |  |               |        |              |   |       
|-------------------------------- |  | ------------- | ------ | ------------ | - | ------
|                                 |  | Sept. 30,2003 |        | June 30,2004
|Propane gas                      |  | $             | 8,288  |              | $ | 4,912 
|Propane appliances and equipment |  |               | 4,057  |              |   | 3,809 
|Heating oil and other fuels      |  |               | 12,268 |              |   | 20,721
|Fuel oil parts and equipment     |  |               | 13,948 |              |   | 14,296
|                                 |  |               |        |              |   |       
|                                 |  | $             | 38,561 |              | $ | 43,738
|                                 |  |               |        |              |   |       



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



|                               |  |               |         |              |   |        
|------------------------------ |  | ------------- | ------- | ------------ | - | -------
|                               |  | Sept. 30,2003 |         | June 30,2004
|Property, plant and equipment  |  | $             | 374,212 |              | $ | 381,394
|Less: accumulated depreciation |  |               | 112,345 |              |   | 131,043
|                               |  |               |         |              |   |        
|Property and equipment, net    |  | $             | 261,867 |              | $ | 250,351
|                               |  |               |         |              |   |        



Reclassifications



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



Derivatives and
Hedging



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



Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset or
liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk are recorded in earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow
hedge are recorded in accumulated other comprehensive income, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of a derivatives change in fair value is immediately recognized
in earnings.



-9-



---

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



All derivative instruments are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Partnership
designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability (cash flow hedge). The Partnership formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Partnership
also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Partnership discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective hedge, the Partnership continues to carry the derivative on the balance sheet at its fair value, and recognizes changes in the fair value of the derivative through current-period earnings.



For the three and nine months ended June 30, 2004, the change
in accumulated other comprehensive income (loss) is principally attributable to the increase in fair value of existing and new cash flow hedges offset in part by the reclassification to earnings of accumulated gains on cash flow hedges that settled
during the period.



Goodwill and Other Intangible Assets



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



The Partnership adopted the
applicable provisions of SFAS No. 142 on October 1, 2002, and recorded a non-cash charge of $3.9 million to reduce the carrying value of its then TG&E segments goodwill in its first quarter of fiscal 2003. This charge was reflected as a
cumulative effect of change in accounting principle for discontinued operations in the Partnerships condensed consolidated statement of operations for the nine month period ended June 30, 2003. The Partnership performs its annual impairment
review during its fourth fiscal quarter.



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



In January 2004, Star Gas and its wholly owned subsidiary, Star Gas Finance Company, jointly issued $35.0 million of 10 1⁄4% Senior Notes, due 2013 in
a private placement. These notes were issued at a premium to par for total net proceeds of $38.1 million. In February 2004, Star Gas issued 1.495 million common units (including a 15% over-allotment option) for total net proceeds of $35.0 million.
The net proceeds of these two offerings resulted in net cash received of $73.1 million. As of June 30, 2004, the net proceeds from the offerings were used to repay a portion of outstanding indebtedness ($13.0 million of the propane segments
revolving acquisition facility, $33.0 million of the heating oil segments revolving acquisition facility, $5.1 million of the propane segments 8.04% First Mortgage Notes that were due on March 15, 2004, $1.5 million of the heating oil
segments working capital facility and $0.2 million of propanes working capital facility) and approximately $7.2 million were used for general partnership purposes. The Partnership has also designated $13.1 million of the net proceeds to
repay existing long-term debt as it becomes due in fiscal 2004.



In September 2003, the heating oil segment entered into an interest rate swap agreement designed to hedge $55.0 million in underlying fixed rate senior note obligations, in order to reduce overall interest expense. The swap agreements would
have expired August 1, 2006, and required the counterparties to pay an amount based on the stated fixed interest rate (annual rate 8.05%) pursuant to the senior notes for an aggregate $2.2 million due every six months on August 1 and February 1. In
exchange, the heating oil segment was required to make semi-annual floating interest rate payments on the first of August and February based on an annual interest rate equal to the 6 month LIBOR interest rate plus 5.52% applied to the same notional
amount of $55.0 million. The swap agreements were recognized as fair value hedges. Amounts to be paid or received under the interest rate swap agreements were accrued and recognized over the life of the agreements as an adjustment to interest
expense. On March 11, 2004, Petro and the counterparty signed mutual termination agreements relating to its interest rate swap transactions. Petro terminated these obligations and liabilities in advance of its scheduled termination date, August 1,
2006, and received $0.5 million. This amount was reflected as a basis adjustment to the fair values of the related debt and is being amortized using the effective yield over the remaining lives of the swap agreements as a reduction of interest
expense.



-10-



---

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



The TG&E segment (TG&E) was the partnerships energy reseller that marketed natural gas and electricity to residential households
in deregulated energy markets in New York, New Jersey, Florida and Maryland and served approximately 65,000 residential customers. TG&Es operations were conducted through Total Gas & Electric, Inc. (TG&E), a Florida
corporation, that was an indirect wholly-owned subsidiary of Petro. On March 31, 2004, the Partnership sold the stock and business of TG&E in an all-cash transaction to a private party. The Partnership received proceeds of approximately $12.8
million from the sale of TG&E. This amount is subject to adjustments, primarily for post closing increases in bad debts and for gross customer losses over an agreed amount. The amount of net working capital paid at closing by the buyer is also
subject to verification. These adjustments have been estimated and are included in the $12.8 million of proceeds and the $17 thousand loss calculation. As a result of the sale of the TG&E segment and in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Partnership has restated its three month and nine month results ended June 30, 2003, to include the results of the TG&E segment as a component of discontinued
operations. Income (loss) from discontinued operations does not include allocations of interest expense from the Partnership.



Income (loss) from discontinued operations for the three and nine month periods ended June 30, 2003 and June 30, 2004 are as follows (in thousands):



|                                                                                                                                                            |  |                             |        |   |                            |   |      |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                                            |  | Three Months Ended June 30, |        |   | Nine Months Ended June 30, |  
|                                                                                                                                                            |  | 2003                        |        |   | 2004                       |   |      | 2003 |  |   | 2004   |  
|Sales                                                                                                                                                       |  | $                           | 18,355 |   |                            | $ |     |      |  | $ | 72,120 |   |  | $ | 52,413 |  
|Cost of sales                                                                                                                                               |  |                             | 17,314 |   |                            |   |     |      |  |   | 64,620 |   |  |   | 46,867 |  
|Depreciation and amortization                                                                                                                               |  |                             | 162    |   |                            |   |     |      |  |   | 383    |   |  |   | 258    |  
|General and administrative expenses                                                                                                                         |  |                             | 1,613  |   |                            |   | 200  |      |  |   | 6,591  |   |  |   | 4,255  |  
|                                                                                                                                                            |  |                             |        |   |                            |   |      |      |  |   |        |   |  |   |        |  
|Operating income (loss)                                                                                                                                     |  |                             | (734   | ) |                            |   | (200 | )    |  |   | 526    |   |  |   | 1,033  |  
|Net interest expense (income)                                                                                                                               |  |                             | (168   | ) |                            |   | (150 | )    |  |   | 14     |   |  |   |       |  
|                                                                                                                                                            |  |                             |        |   |                            |   |      |      |  |   |        |   |  |   |        |  
|Income (loss) from discontinued operations before loss on sale of TG&E segment and cumulative effect of change in accounting principle,
net of income taxes |  |                             | (566   | ) |                            |   | (50  | )    |  |   | 512    |   |  |   | 1,033  |  
|Loss on sale of TG&E segment, net of taxes                                                                                                                  |  |                             |       |   |                            |   | (247 | )    |  |   |       |   |  |   | (17    | )
|Cumulative effect of change in accounting principle for adoption of SFAS No. 142                                                                            |  |                             |       |   |                            |   |     |      |  |   | (3,901 | ) |  |   |       |  
|                                                                                                                                                            |  |                             |        |   |                            |   |      |      |  |   |        |   |  |   |        |  
|Income (loss) from discontinued operations                                                                                                                  |  | $                           | (566   | ) |                            | $ | (297 | )    |  | $ | (3,389 | ) |  | $ | 1,016  |  
|                                                                                                                                                            |  |                             |        |   |                            |   |      |      |  |   |        |   |  |   |        |  



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



The Partnership has two reportable operating segments: retail distribution of heating oil and retail distribution of propane gas. The administrative
expenses for the public master limited partnership, Star Gas Partners, have not been allocated to the segments. 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 provide a clear means for evaluation of operating results.



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 primarily in the Northeast and Mid-Atlantic states. Home heating oil is principally used by the Partnerships residential and commercial customers to heat their homes and buildings, and as a result, weather
conditions have a significant impact on the demand for home heating oil.



The 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, in the Midwest,
Northeast, Florida and Georgia. 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 also have a significant impact on the demand
for propane.



The public master limited partnership includes
the office of the Chief Executive Officer and certain other executive officers. It has the responsibility for financing, maintaining investor relations, investor reporting for the Partnership and providing strategic direction to the heating oil and
propane segments.



-11-



---

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



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



|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------- | - | ------- | ---------------- |  | - | ------- | - |  | ----------- | --------- | - | ------- | - | ------- | ---------------- |  | - | ------- | - |  | - | ------- | - |  | - | --------- | -
|                                                                                                                                                     |  | Three Months Ended June 30, |        
|                                                                                                                                                     |  | 2003                        |         |   | 2004    |  
|(in thousands)                                                                                                                                       |  | Heating Oil                 |         |   | Propane |   |         | Partners& Others |  |   | Consol. |   |  | Heating Oil |           |   | Propane |   |         | Partners& Others |  |   | Consol. |  
|Statements of Operations                                                                                                                             |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Sales                                                                                                                                                |  | $                           | 178,697 |   |         | $ | 38,168  |                  |  | $ |        |   |  | $           | 216,865   |   |         | $ | 179,342 |                  |  | $ | 49,813  |   |  | $ |        |   |  | $ | 229,155   |  
|Cost of sales                                                                                                                                        |  |                             | 130,882 |   |         |   | 18,215  |                  |  |   |        |   |  |             | 149,097   |   |         |   | 137,782 |                  |  |   | 26,792  |   |  |   |        |   |  |   | 164,574   |  
|Delivery and branch expenses                                                                                                                         |  |                             | 48,464  |   |         |   | 17,566  |                  |  |   |        |   |  |             | 66,030    |   |         |   | 51,555  |                  |  |   | 22,398  |   |  |   |        |   |  |   | 73,953    |  
|Depreciation & amortization expenses                                                                                                                 |  |                             | 8,896   |   |         |   | 4,190   |                  |  |   |        |   |  |             | 13,086    |   |         |   | 9,174   |                  |  |   | 5,040   |   |  |   |        |   |  |   | 14,214    |  
|General and administrative expenses                                                                                                                  |  |                             | 5,942   |   |         |   | 2,719   |                  |  |   | 5,689   |   |  |             | 14,350    |   |         |   | 4,025   |                  |  |   | 2,770   |   |  |   | (388    | ) |  |   | 6,407     |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Operating income (loss)                                                                                                                              |  |                             | (15,487 | ) |         |   | (4,522  | )                |  |   | (5,689  | ) |  |             | (25,698   | ) |         |   | (23,194 | )                |  |   | (7,187  | ) |  |   | 388     |   |  |   | (29,993   | )
|Net interest expense                                                                                                                                 |  |                             | 5,952   |   |         |   | 2,361   |                  |  |   | 2,569   |   |  |             | 10,882    |   |         |   | 7,202   |                  |  |   | 2,625   |   |  |   | 1,545   |   |  |   | 11,372    |  
|Amortization of debt issuance costs                                                                                                                  |  |                             | 421     |   |         |   | 45      |                  |  |   | 140     |   |  |             | 606       |   |         |   | 564     |                  |  |   | 41      |   |  |   | 189     |   |  |   | 794       |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Loss from continuing operations before taxes                                                                                                         |  |                             | (21,860 | ) |         |   | (6,928  | )                |  |   | (8,398  | ) |  |             | (37,186   | ) |         |   | (30,960 | )                |  |   | (9,853  | ) |  |   | (1,346  | ) |  |   | (42,159   | )
|Income tax expense                                                                                                                                   |  |                             | 25      |   |         |   | 75      |                  |  |   |        |   |  |             | 100       |   |         |   |        |                  |  |   | 75      |   |  |   |        |   |  |   | 75        |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Loss from continuing operations                                                                                                                      |  |                             | (21,885 | ) |         |   | (7,003  | )                |  |   | (8,398  | ) |  |             | (37,286   | ) |         |   | (30,960 | )                |  |   | (9,928  | ) |  |   | (1,346  | ) |  |   | (42,234   | )
|Loss from discontinued net of income taxes                                                                                                           |  |                             |        |   |         |   |        |                  |  |   | (566    | ) |  |             | (566      | ) |         |   |        |                  |  |   |        |   |  |   | (50     | ) |  |   | (50       | )
|Loss on sale of TG&E segment, net of income taxes                                                                                                    |  |                             |        |   |         |   |        |                  |  |   |        |   |  |             |          |   |         |   |        |                  |  |   |        |   |  |   | (247    | ) |  |   | (247      | )
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Net loss                                                                                                                                             |  | $                           | (21,885 | ) |         | $ | (7,003  | )                |  | $ | (8,964  | ) |  | $           | (37,852   | ) |         | $ | (30,960 | )                |  | $ | (9,928  | ) |  | $ | (1,643  | ) |  | $ | (42,531   | )
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Capital expenditures                                                                                                                                 |  | $                           | 5,268   |   |         | $ | 1,188   |                  |  | $ |        |   |  | $           | 6,456     |   |         | $ | 1,098   |                  |  | $ | 1,769   |   |  | $ |        |   |  | $ | 2,867     |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|                                                                                                                                                     | 
|                                                                                                                                                     |  | Nine Months Ended June 30,  |        
|                                                                                                                                                     |  | 2003                        |         |   | 2004    |  
|(in thousands)                                                                                                                                       |  | Heating Oil                 |         |   | Propane |   |         | Partners& Others |  |   | Consol. |   |  | Heating Oil |           |   | Propane |   |         | Partners& Others |  |   | Consol. |  
|Statements of Operations                                                                                                                             |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Sales                                                                                                                                                |  | $                           | 984,752 |   |         | $ | 232,148 |                  |  | $ |        |   |  | $           | 1,216,900 |   |         | $ | 977,180 |                  |  | $ | 295,381 |   |  | $ |        |   |  | $ | 1,272,561 |  
|Cost of sales                                                                                                                                        |  |                             | 697,268 |   |         |   | 119,131 |                  |  |   |        |   |  |             | 816,399   |   |         |   | 691,501 |                  |  |   | 163,515 |   |  |   |        |   |  |   | 855,016   |  
|Delivery and branch expenses                                                                                                                         |  |                             | 170,544 |   |         |   | 56,644  |                  |  |   |        |   |  |             | 227,188   |   |         |   | 184,243 |                  |  |   | 70,365  |   |  |   |        |   |  |   | 254,608   |  
|Depreciation & amortization expenses                                                                                                                 |  |                             | 26,067  |   |         |   | 12,531  |                  |  |   |        |   |  |             | 38,598    |   |         |   | 28,213  |                  |  |   | 15,023  |   |  |   |        |   |  |   | 43,236    |  
|General and administrative expenses                                                                                                                  |  |                             | 15,362  |   |         |   | 7,634   |                  |  |   | 13,259  |   |  |             | 36,255    |   |         |   | 11,830  |                  |  |   | 7,720   |   |  |   | 5,552   |   |  |   | 25,102    |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Operating income (loss)                                                                                                                              |  |                             | 75,511  |   |         |   | 36,208  |                  |  |   | (13,259 | ) |  |             | 98,460    |   |         |   | 61,393  |                  |  |   | 38,758  |   |  |   | (5,552  | ) |  |   | 94,599    |  
|Net interest expense                                                                                                                                 |  |                             | 16,617  |   |         |   | 8,538   |                  |  |   | 4,553   |   |  |             | 29,708    |   |         |   | 20,843  |                  |  |   | 7,619   |   |  |   | 5,657   |   |  |   | 34,119    |  
|Amortization of debt issuance costs                                                                                                                  |  |                             | 1,235   |   |         |   | 146     |                  |  |   | 216     |   |  |             | 1,597     |   |         |   | 2,179   |                  |  |   | 124     |   |  |   | 534     |   |  |   | 2,837     |  
|Loss (gain) redemption of debt                                                                                                                       |  |                             | (212    | ) |         |   | 393     |                  |  |   |        |   |  |             | 181       |   |         |   |        |                  |  |   |        |   |  |   |        |   |  |   |          |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Income (loss) from continuing operations before taxes                                                                                                |  |                             | 57,871  |   |         |   | 27,131  |                  |  |   | (18,028 | ) |  |             | 66,974    |   |         |   | 38,371  |                  |  |   | 31,015  |   |  |   | (11,743 | ) |  |   | 57,643    |  
|Income tax expense                                                                                                                                   |  |                             | 2,010   |   |         |   | 225     |                  |  |   |        |   |  |             | 2,235     |   |         |   | 1,000   |                  |  |   | 225     |   |  |   |        |   |  |   | 1,225     |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Income (loss) from continuing operations                                                                                                             |  |                             | 55,861  |   |         |   | 26,906  |                  |  |   | (18,028 | ) |  |             | 64,739    |   |         |   | 37,371  |                  |  |   | 30,790  |   |  |   | (11,743 | ) |  |   | 56,418    |  
|Income from discontinued operations before loss on sale of TG&E segment and cumulative effect of change in accounting principle, net of income taxes |  |                             |        |   |         |   |        |                  |  |   | 512     |   |  |             | 512       |   |         |   |        |                  |  |   |        |   |  |   | 1,033   |   |  |   | 1,033     |  
|Loss on sale of TG&E segment, net of income taxes                                                                                                    |  |                             |        |   |         |   |        |                  |  |   |        |   |  |             |          |   |         |   |        |                  |  |   |        |   |  |   | (17     | ) |  |   | (17       | )
|Cumulative effect of change in accounting principle                                                                                                  |  |                             |        |   |         |   |        |                  |  |   | (3,901  | ) |  |             | (3,901    | ) |         |   |        |                  |  |   |        |   |  |   |        |   |  |   |          |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Net income (loss)                                                                                                                                    |  | $                           | 55,861  |   |         | $ | 26,906  |                  |  | $ | (21,417 | ) |  | $           | 61,350    |   |         | $ | 37,371  |                  |  | $ | 30,790  |   |  | $ | (10,727 | ) |  | $ | 57,434    |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  
|Capital expenditures                                                                                                                                 |  | $                           | 10,203  |   |         | $ | 4,147   |                  |  | $ |        |   |  | $           | 14,350    |   |         | $ | 2,782   |                  |  | $ | 3,985   |   |  | $ |        |   |  | $ | 6,767     |  
|                                                                                                                                                     |  |                             |         |   |         |   |         |                  |  |   |         |   |  |             |           |   |         |   |         |                  |  |   |         |   |  |   |         |   |  |   |           |  



-12-



---

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



|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|-------------------------------------------------- |  | ------------------ | ------- | ------------- | ------- | - | ------- | --------------------- |  | - | -------- | - | ----------- | - | ------- |  | - | -------------------- |  | - | ------- | - |  | - | -------- | - |  | - | -------
|                                                   |  | September 30, 2003 |         | June 30, 2004
|(in thousands) Balance
Sheets                      |  | Heating Oil        |         |               | Propane |   |         | Partners & Others (1) |  |   | Consol.  |   | Heating Oil |   | Propane |  |   | Partners &Others (1) |  |   | Consol.
|ASSETS                                             |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Current assets:                                    |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Cash and cash equivalents                          |  | $                  | 4,244   |               |         | $ | 5,788   |                       |  | $ | 12       |   |             | $ | 10,044  |  | $ | 4,142                |  | $ | 15,107  |   |  | $ | 79       |   |  | $ | 19,328 
|Receivables, net                                   |  |                    | 84,814  |               |         |   | 15,697  |                       |  |   |         |   |             |   | 100,511 |  |   | 111,827              |  |   | 18,631  |   |  |   |         |   |  |   | 130,458
|Inventories                                        |  |                    | 24,146  |               |         |   | 14,415  |                       |  |   |         |   |             |   | 38,561  |  |   | 32,305               |  |   | 11,433  |   |  |   |         |   |  |   | 43,738 
|Prepaid expenses and other current assets          |  |                    | 48,168  |               |         |   | 3,736   |                       |  |   | (434     | ) |             |   | 51,470  |  |   | 38,937               |  |   | 1,683   |   |  |   | (363     | ) |  |   | 40,257 
|Net current assets of discontinued operations      |  |                    | 10,523  |               |         |   |        |                       |  |   |         |   |             |   | 10,523  |  |   |                     |  |   |        |   |  |   |         |   |  |   |       
|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Total current assets                               |  |                    | 171,895 |               |         |   | 39,636  |                       |  |   | (422     | ) |             |   | 211,109 |  |   | 187,211              |  |   | 46,854  |   |  |   | (284     | ) |  |   | 233,781
|Property and equipment, net                        |  |                    | 75,715  |               |         |   | 186,152 |                       |  |   |         |   |             |   | 261,867 |  |   | 66,784               |  |   | 183,567 |   |  |   |         |   |  |   | 250,351
|Long-term portion of accounts receivable           |  |                    | 6,108   |               |         |   | 1,037   |                       |  |   |         |   |             |   | 7,145   |  |   | 5,824                |  |   | 860     |   |  |   |         |   |  |   | 6,684  
|Investment in subsidiaries                         |  |                    |        |               |         |   | 103,604 |                       |  |   | (103,604 | ) |             |   |        |  |   |                     |  |   | 109,228 |   |  |   | (109,228 | ) |  |   |       
|Goodwill                                           |  |                    | 232,602 |               |         |   | 40,138  |                       |  |   |         |   |             |   | 272,740 |  |   | 233,480              |  |   | 40,617  |   |  |   |         |   |  |   | 274,097
|Intangibles, net                                   |  |                    | 123,415 |               |         |   | 78,053  |                       |  |   |         |   |             |   | 201,468 |  |   | 108,708              |  |   | 74,445  |   |  |   |         |   |  |   | 183,153
|Deferred charges & other assets, net               |  |                    | 5,403   |               |         |   | 2,738   |                       |  |   | 6,273    |   |             |   | 14,414  |  |   | 7,667                |  |   | 2,641   |   |  |   | 6,509    |   |  |   | 16,817 
|Net long-term assets of discontinued operations    |  |                    | 6,867   |               |         |   |        |                       |  |   |         |   |             |   | 6,867   |  |   |                     |  |   |        |   |  |   |         |   |  |   |       
|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Total Assets                                       |  | $                  | 622,005 |               |         | $ | 451,358 |                       |  | $ | (97,753  | ) |             | $ | 975,610 |  | $ | 609,674              |  | $ | 458,212 |   |  | $ | (103,003 | ) |  | $ | 964,883
|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|LIABILITIES AND PARTNERS CAPITAL                  |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Current Liabilities:                               |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Accounts payable                                   |  | $                  | 19,428  |               |         | $ | 7,712   |                       |  | $ |         |   |             | $ | 27,140  |  | $ | 19,076               |  | $ | 6,419   |   |  | $ |         |   |  | $ | 25,495 
|Working capital facility borrowings                |  |                    | 6,000   |               |         |   | 6,000   |                       |  |   |         |   |             |   | 12,000  |  |   | 13,000               |  |   | 16,650  |   |  |   |         |   |  |   | 29,650 
|Current maturities of long-term debt               |  |                    | 12,597  |               |         |   | 10,250  |                       |  |   |         |   |             |   | 22,847  |  |   | 14,286               |  |   | 10,250  |   |  |   |         |   |  |   | 24,536 
|Accrued expenses and other current liabilities     |  |                    | 60,582  |               |         |   | 9,222   |                       |  |   | 12,552   |   |             |   | 82,356  |  |   | 56,863               |  |   | 8,036   |   |  |   | 17,533   |   |  |   | 82,432 
|Due to affiliates                                  |  |                    | (2,385  | )             |         |   | (7,600  | )                     |  |   | 9,985    |   |             |   |        |  |   | 6,292                |  |   | (10,638 | ) |  |   | 4,346    |   |  |   |       
|Unearned service contract revenue                  |  |                    | 31,023  |               |         |   | 1,013   |                       |  |   |         |   |             |   | 32,036  |  |   | 32,733               |  |   | 795     |   |  |   |         |   |  |   | 33,528 
|Customer credit balances                           |  |                    | 49,258  |               |         |   | 25,458  |                       |  |   |         |   |             |   | 74,716  |  |   | 22,324               |  |   | 7,551   |   |  |   |         |   |  |   | 29,875 
|Net current liabilities of discontinued operations |  |                    | 7,569   |               |         |   |        |                       |  |   |         |   |             |   | 7,569   |  |   |                     |  |   |        |   |  |   |         |   |  |   |       
|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Total current liabilities                          |  |                    | 184,072 |               |         |   | 52,055  |                       |  |   | 22,537   |   |             |   | 258,664 |  |   | 164,574              |  |   | 39,063  |   |  |   | 21,879   |   |  |   | 225,516
|Long-term debt                                     |  |                    | 191,380 |               |         |   | 110,850 |                       |  |   | 197,111  |   |             |   | 499,341 |  |   | 151,109              |  |   | 98,275  |   |  |   | 235,818  |   |  |   | 485,202
|Due to affiliate                                   |  |                    | 116,417 |               |         |   |        |                       |  |   | (116,417 | ) |             |   |        |  |   | 158,684              |  |   | 23,500  |   |  |   | (182,184 | ) |  |   |       
|Other long-term liabilities                        |  |                    | 26,532  |               |         |   | 1,297   |                       |  |   |         |   |             |   | 27,829  |  |   | 26,079               |  |   | 993     |   |  |   |         |   |  |   | 27,072 
|Partners Capital:                                 |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Equity Capital                                     |  |                    | 103,604 |               |         |   | 287,156 |                       |  |   | (200,984 | ) |             |   | 189,776 |  |   | 109,228              |  |   | 296,381 |   |  |   | (178,516 | ) |  |   | 227,093
|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        
|Total Liabilities and Partners Capital            |  | $                  | 622,005 |               |         | $ | 451,358 |                       |  | $ | (97,753  | ) |             | $ | 975,610 |  | $ | 609,674              |  | $ | 458,212 |   |  | $ | (103,003 | ) |  | $ | 964,883
|                                                   |  |                    |         |               |         |   |         |                       |  |   |          |   |             |   |         |  |   |                      |  |   |         |   |  |   |          |   |  |   |        



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



-13-



---

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



On October 1, 2002, Star Gas adopted SFAS No. 142, which required the Partnership to discontinue amortizing goodwill. SFAS No. 142 also requires that
goodwill be reviewed for impairment upon adoption of SFAS No. 142 and annually thereafter. The Partnership will perform its annual impairment review during the fourth fiscal quarter of each year, which commenced in the fiscal fourth quarter of 2003.



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



Upon adoption of SFAS No. 142 in the first fiscal quarter of 2003, the Partnership recorded a non-cash charge of approximately $3.9 million to reduce the
carrying value of its goodwill for its discontinued TG&E segment. This charge is reflected as a cumulative effect of change in accounting principle in the Partnerships condensed consolidated statement of operations for the nine month
period ended June 30, 2003. In calculating the impairment charge, the fair value of the reporting units was estimated using a discounted cash flow methodology.



A summary of the Partnerships goodwill at September 30, 2003 and June 30, 2004, by business segment is as follows (in thousands):



|                                 |  |             |         |         |   |        |  |   |        
|-------------------------------- |  | ----------- | ------- | ------- | - | ------ |  | - | -------
|                                 |  | Heating Oil |         | Propane |   | Total 
|Balance as of September 30, 2003 |  | $           | 232,602 |         | $ | 40,138 |  | $ | 272,740
|Fiscal 2004 acquisitions         |  |             | 878     |         |   | 479    |  |   | 1,357  
|                                 |  |             |         |         |   |        |  |   |        
|Balance as of June 30, 2004      |  | $           | 233,480 |         | $ | 40,617 |  | $ | 274,097
|                                 |  |             |         |         |   |        |  |   |        



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



|                         |  |                     |         |                    |   |         |  |                     |         |                    |   |         |  |   |         |  |   |        
|------------------------ |  | ------------------- | ------- | ------------------ | - | ------- |  | ------------------- | ------- | ------------------ | - | ------- |  | - | ------- |  | - | -------
|                         |  | September 30, 2003  |         | June 30, 2004     
|                         |  | GrossCarryingAmount |         | Accum.Amortization |   | Net     |  | GrossCarryingAmount |         | Accum.Amortization |   | Net    
|Customer lists           |  | $                   | 289,323 |                    | $ | 92,877  |  | $                   | 196,446 |                    | $ | 292,553 |  | $ | 113,915 |  | $ | 178,638
|Covenants not to compete |  |                     | 12,959  |                    |   | 7,937   |  |                     | 5,022   |                    |   | 14,009  |  |   | 9,494   |  |   | 4,515  
|                         |  |                     |         |                    |   |         |  |                     |         |                    |   |         |  |   |         |  |   |        
|                         |  | $                   | 302,282 |                    | $ | 100,814 |  | $                   | 201,468 |                    | $ | 306,562 |  | $ | 123,409 |  | $ | 183,153
|                         |  |                     |         |                    |   |         |  |                     |         |                    |   |         |  |   |         |  |   |        



Amortization expense
for intangible assets was $19.8 million for the nine months ended June 30, 2003 compared to $22.6 million for the nine months ended June 30, 2004. Total estimated annual amortization expense related to intangible assets subject to amortization, for
the year ended September 30, 2004 and the four succeeding fiscal years ended September 30, is as follows (in thousands):



|     |  |   |       
|---- |  | - | ------
|2004 |  | $ | 30,282
|2005 |  | $ | 30,208
|2006 |  | $ | 29,123
|2007 |  | $ | 28,472
|2008 |  | $ | 26,532



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



|                                        |  |                            |      |   |                           |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | -------------------------- | ---- | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | Three Months EndedJune 30, |      |   | Nine Months EndedJune 30, |  
|(in thousands)                          |  | 2003                       |      |   | 2004                      |   |        | 2003 |  |   | 2004   |  
|Components of Net Periodic Benefit Cost |  |                            |      |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Service cost                            |  | $                          |     |   |                           | $ |       |      |  | $ |       |   |  | $ |       |  
|Interest cost                           |  |                            | 952  |   |                           |   | 898    |      |  |   | 2,857  |   |  |   | 2,694  |  
|Expected return on plan assets          |  |                            | (885 | ) |                           |   | (1,042 | )    |  |   | (2,657 | ) |  |   | (3,127 | )
|Net amortization                        |  |                            | 322  |   |                           |   | 371    |      |  |   | 966    |   |  |   | 1,114  |  
|Effect of settlement                    |  |                            | 1    |   |                           |   | 111    |      |  |   | 4      |   |  |   | 116    |  
|                                        |  |                            |      |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost               |  | $                          | 390  |   |                           | $ | 338    |      |  | $ | 1,170  |   |  | $ | 797    |  
|                                        |  |                            |      |   |                           |   |        |      |  |   |        |   |  |   |        |  



As of June 30, 2004,
the heating oil segment made contributions of $0.6 million to its pension plans. The heating oil segment presently expects to contribute an additional $0.5 million to its plans in the next fiscal quarter to fund its pension obligations for fiscal
2004.



-14-



---

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



During the nine month period ended June 30, 2003, the Partnership acquired five retail propane dealers and two retail heating oil dealers. The aggregate
consideration for these acquisitions accounted for by the purchase method of accounting was approximately $43.2 million. For the remainder of fiscal 2003, the Partnership acquired one additional retail heating oil dealers and two propane dealers.



During the nine month period ended June 30, 2004, the
Partnership acquired three retail propane dealers and three retail heating oil dealers. The aggregate consideration for the acquisitions accounted for by the purchase method of accounting was approximately $8.5 million.



The following table indicates the allocation of the aggregate purchase price
paid for these acquisitions and the respective periods of amortization assigned for the nine month periods ended June 30, 2003 and June 30, 2004:



|                        |  |      |        |      |   |              |  |            
|----------------------- |  | ---- | ------ | ---- | - | ------------ |  | -----------
|(in thousands)          |  | 2003 |        | 2004 |   | Useful Lives
|Land                    |  | $    | 1,825  |      | $ | 530          |  | -          
|Buildings               |  |      | 4,700  |      |   | 126          |  | 30 years   
|Furniture and equipment |  |      | 949    |      |   | 39           |  | 10 years   
|Fleet                   |  |      | 4,999  |      |   | 752          |  | 1 -30 years
|Tanks and equipment     |  |      | 2,206  |      |   | 1,334        |  | 5 -30 years
|Customer lists          |  |      | 14,772 |      |   | 3,230        |  | 7 -15 years
|Restrictive covenants   |  |      | 106    |      |   | 1,050        |  | 5 years    
|Goodwill                |  |      | 13,273 |      |   | 1,357        |  | -          
|Working capital         |  |      | 361    |      |   | 128          |  | -          
|                        |  |      |        |      |   |              |  |            
|Total                   |  | $    | 43,191 |      | $ | 8,546        |  |            
|                        |  |      |        |      |   |              |  |            



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 are classified as goodwill in the Condensed Consolidated Balance Sheets. The weighted average useful lives assigned to customer lists acquired in fiscal 2004 are approximately 11 years.



Sales and net income have been included in the Condensed Consolidated
Statements of Operations from the respective dates of acquisition. The following unaudited pro forma information presents the results of operations of the Partnership, including the thirteen acquisitions completed since October 1, 2002, as if the
acquisitions had taken place on October 1, 2002. This pro forma information is presented for informational purposes; it is not indicative of future operating performance (in thousands, except per unit data).



|                                            |  |                           |           |      |   |          
|------------------------------------------- |  | ------------------------- | --------- | ---- | - | ---------
|                                            |  | Nine Months EndedJune 30,
|                                            |  | 2003                      |           | 2004
|Sales                                       |  | $                         | 1,439,992 |      | $ | 1,283,908
|                                            |  |                           |           |      |   |          
|Net income                                  |  | $                         | 73,828    |      | $ | 59,358   
|General Partners interest in net income    |  |                           | 739       |      |   | 546      
|                                            |  |                           |           |      |   |          
|Limited Partners interest in net income    |  | $                         | 73,089    |      | $ | 58,812   
|                                            |  |                           |           |      |   |          
|Basic net income per limited partner unit   |  | $                         | 2.04      |      | $ | 1.64     
|                                            |  |                           |           |      |   |          
|Diluted net income per limited partner unit |  | $                         | 2.04      |      | $ | 1.64     
|                                            |  |                           |           |      |   |          

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



|                                                                                   |  |                           |        |   |      |   |        |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                   |  | Nine Months EndedJune 30, |       
|(in thousands)                                                                     |  | 2003                      |        |   | 2004 |  
|Cash paid during the period for:                                                   |  |                           |        |   |      |   |        |  
|Income taxes                                                                       |  | $                         | 1,125  |   |      | $ | 1,163  |  
|Interest                                                                           |  | $                         | 28,192 |   |      | $ | 26,959 |  
|Non-cash financing activities:                                                     |  |                           |        |   |      |   |        |  
|Decrease in long-term debt for interest rate swaps                                 |  | $                         | (1,219 | ) |      | $ | (293   | )
|Increase in long-term debt for amortization of debt discount and debt premium, net |  | $                         | 102    |   |      | $ | 61     |  
|Decrease in other assets                                                           |  | $                         | 1,117  |   |      | $ | 232    |  



-15-



---

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



|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------
|(in thousands, except per unit data)                                                                                                                                                  |  | Three Months EndedJune 30, |         |   | Nine Months Ended June 30,
|                                                                                                                                                                                      |  | 2003                       |         |   | 2004                       |   |         | 2003 |  |   | 2004  
|Income (loss) from continuing operations per Limited Partner unit:                                                                                                                    |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Basic                                                                                                                                                                                 |  | $                          | (1.14   | ) |                            | $ | (1.17   | )    |  | $ | 1.97   |   |  | $ | 1.60  
|Diluted                                                                                                                                                                               |  | $                          | (1.14   | ) |                            | $ | (1.17   | )    |  | $ | 1.97   |   |  | $ | 1.60  
|Income (loss) from discontinued operations before loss on sale of TG&E segment and cumulative effect of change in accounting principle,
net of income taxes per Limited Partner unit: |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Basic                                                                                                                                                                                 |  | $                          | (0.02   | ) |                            | $ |        |      |  | $ | 0.02   |   |  | $ | 0.03  
|Diluted                                                                                                                                                                               |  | $                          | (0.02   | ) |                            | $ |        |      |  | $ | 0.02   |   |  | $ | 0.03  
|Loss on sale of TG&E segment per Limited Partner unit:                                                                                                                                |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Basic                                                                                                                                                                                 |  | $                          |        |   |                            | $ | (0.01   | )    |  | $ |       |   |  | $ |      
|Diluted                                                                                                                                                                               |  | $                          |        |   |                            | $ | (0.01   | )    |  | $ |       |   |  | $ |      
|Cumulative effect of change in accounting principle for adoption of SFAS No. 142 for discontinued operations per Limited Partner
unit:                                                |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Basic                                                                                                                                                                                 |  | $                          |        |   |                            | $ |        |      |  | $ | (0.12  | ) |  | $ |      
|Diluted                                                                                                                                                                               |  | $                          |        |   |                            | $ |        |      |  | $ | (0.12  | ) |  | $ |      
|Net income (loss) per Limited Partner unit:                                                                                                                                           |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Basic                                                                                                                                                                                 |  | $                          | (1.15   | ) |                            | $ | (1.18   | )    |  | $ | 1.87   |   |  | $ | 1.62  
|Diluted                                                                                                                                                                               |  | $                          | (1.15   | ) |                            | $ | (1.18   | )    |  | $ | 1.87   |   |  | $ | 1.62  
|Basic Earnings Per Unit:                                                                                                                                                              |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Net income (loss)                                                                                                                                                                     |  | $                          | (37,852 | ) |                            | $ | (42,531 | )    |  | $ | 61,350 |   |  | $ | 57,434
|Less: General Partners interest in net income (loss)                                                                                                                                 |  |                            | (378    | ) |                            |   | (405    | )    |  |   | 614    |   |  |   | 528   
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Limited Partners interest in net income (loss)                                                                                                                                       |  | $                          | (37,474 | ) |                            | $ | (42,126 | )    |  | $ | 60,736 |   |  | $ | 56,906
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Common Units                                                                                                                                                                          |  |                            | 28,970  |   |                            |   | 32,166  |      |  |   | 28,970 |   |  |   | 31,473
|Senior Subordinated Units                                                                                                                                                             |  |                            | 3,142   |   |                            |   | 3,245   |      |  |   | 3,138  |   |  |   | 3,203 
|Junior Subordinated Units                                                                                                                                                             |  |                            | 345     |   |                            |   | 345     |      |  |   | 345    |   |  |   | 345   
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Weighted average number of Limited Partner units outstanding                                                                                                                          |  |                            | 32,457  |   |                            |   | 35,756  |      |  |   | 32,453 |   |  |   | 35,021
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Basic earnings per unit                                                                                                                                                               |  | $                          | (1.15   | ) |                            | $ | (1.18   | )    |  | $ | 1.87   |   |  | $ | 1.62  
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Diluted Earnings Per Unit:                                                                                                                                                            |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Effect of diluted securities                                                                                                                                                          |  | $                          |        |   |                            | $ |        |      |  | $ |       |   |  | $ |      
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Limited Partners interest in net income (loss)                                                                                                                                       |  | $                          | (37,474 | ) |                            | $ | (42,126 | )    |  | $ | 60,736 |   |  | $ | 56,906
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Weighted average number of Limited Partner units outstanding                                                                                                                          |  |                            | 32,457  |   |                            |   | 35,756  |      |  |   | 32,453 |   |  |   | 35,021
|Senior subordinated units anticipated to be issued under employee incentive plan                                                                                                      |  |                            |        |   |                            |   |        |      |  |   | 108    |   |  |   |      
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Diluted number of Limited Partner units                                                                                                                                               |  |                            | 32,457  |   |                            |   | 35,756  |      |  |   | 32,561 |   |  |   | 35,021
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       
|Diluted earnings per unit                                                                                                                                                             |  | $                          | (1.15   | ) |                            | $ | (1.18   | )    |  | $ | 1.87   |   |  | $ | 1.62  
|                                                                                                                                                                                      |  |                            |         |   |                            |   |         |      |  |   |        |   |  |   |       



-16-



---

|11) | Subsequent Events
|--- | -----------------



Cash Distributions - On July 29, 2004, the Partnership announced that it would pay a cash distribution of $0.575 per Common Unit for the quarter
ended June 30, 2004. The distribution will be paid on August 13, 2004 to unitholders of record on August 9, 2004. The Partnership also announced that it would not pay a distribution on the Senior Subordinated units, Junior Subordinated units and
General Partner units for the quarter ended June 30, 2004. The Partnership believes that it is prudent to preserve its capital and not pay a distribution on all classes of subordinated units, including General Partner units due to several factors.
First, the Partnership continues to experience high wholesale supply costs. The Partnership believes that it may not be able to pass all these increases on to its customers through retail sales prices. If wholesale prices remain at current levels,
per gallon gross profit margins will be reduced and results will be adversely impacted. Second, the benefits realized to date from the heating oil divisions business process improvement program were less than expected. Third, to the extent
available, cash provided from not paying the subordination distributions including General Partner interest can be reinvested into the Partnership.



Sale of 10 1⁄4% Senior Notes  In July 2004, the Partnership and its wholly owned subsidiary, Star Gas Finance Company, jointly issued
$30.0 million of 10 1⁄4% Senior Notes, due 2013 in a private placement. These notes were issued at a premium to par for total gross proceeds of $31.9 million. The net proceeds from the offering will be used to repay existing revolving credit
facilities.



-17-



---

Item 2.



STAR GAS PARTNERS, L.P.
AND SUBSIDIARIES



MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



Statement Regarding Forward-Looking Disclosure



This Report includes forward-looking statements which represent the Partnerships expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect of weather conditions on the Partnerships financial performance, the price and supply of home heating oil and propane and the ability of the Partnership to obtain new
accounts and retain existing accounts and the realization of savings from the business process redesign project. All statements other than statements of historical facts included in this Report including, without limitation, the statements under
Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere herein, are forward-looking statements. Although the Partnership believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnerships expectations (Cautionary
Statements) are disclosed in this Report, including without limitation and in conjunction with the forward-looking statements included in this Report. All subsequent written and oral forward-looking statements attributable to the Partnership
or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.



Overview



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



The primary use for heating oil and propane is for space 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. The Partnership has purchased weather insurance to partially mitigate the risk of weather conditions. In addition, gross margins can 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. The customer mix was not a significant factor in
either the current quarter-to-quarter comparison or the nine months-to-nine months comparison.



The Partnership completed the sale of its TG&E operations in March 2004. The following discussion reflects the historical results for the TG&E segment as discontinued operations.



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



The following is a discussion of the historical conditions and results for operations of Star Gas Partners, L.P. its subsidiaries, which should be read in conjunction
with the historical Financial and Operating Data and Notes thereto included elsewhere in this quarterly report on Form 10-Q.



-18-



---

THREE MONTHS ENDED JUNE 30, 2004

COMPARED TO THREE MONTHS ENDED JUNE 30, 2003



Volume



For the three months ended June
30, 2004, retail volume of home heating oil and propane increased 2.1 million gallons, or 2.0%, to 103.7 million gallons, as compared to 101.6 million gallons for the three months ended June 30, 2003. This growth was due to a 5.1 million gallon
increase in the propane segment, largely offset by a 3.0 million gallon decrease in the heating oil segment. The increase in volume reflects the impact of an additional 11.3 million gallons provided by acquisitions, partially offset by the impact of
warmer temperatures and net customer losses in both the home heating oil and propane segments. The Partnership estimates that it had approximately 4% fewer customers, after adjusting for acquisitions, at June 30, 2004 than it had at June 30, 2003.
Net customer losses are a result of various factors including price, credit and service. Temperatures in the Partnerships areas of operations for the three months ended June 30, 2004 were an average of 27.5% warmer than in the prior
years comparable quarter and approximately 15.7% warmer than normal as reported by the National Oceanic Atmosphere Administration. During the three months ended June 30, 2004 the Partnership delivered an additional 17.7 million gallons due to
a change in delivery scheduling.



The above activity is summarized as follows:



|                                          |  |               |  
|----------------------------------------- |  | ------------- | -
|                                          |  | (in millions) |  
|Volume  three months ended June 30, 2003 |  | 101.6         |  
|Impact of warmer temperatures             |  | (23.5         | )
|Impact of acquisitions                    |  | 11.3          |  
|Delivery scheduling and other             |  | 17.7          |  
|Net customer losses                       |  | (3.4          | )
|                                          |  |               |  
|Volume  three months ended June 30, 2004 |  | 103.7         |  
|                                          |  |               |  



Sales



For the three months ended June 30, 2004, sales increased $12.3 million, or 5.7%, to $229.2
million, as compared to $216.9 million for the three months ended June 30, 2003. This increase was due to additional sales of $11.6 million in the propane segment and $0.6 million in the heating oil segment. Product sales in the propane division
increased by $9.6 million, as $11.6 million of additional sales from acquisitions, and the impact of higher selling prices totaling $1.5 million, were partially offset by the effects of warmer weather and customer losses totaling $3.5 million.
Product sales in the heating oil division declined by $2.6 million as additional sales provided by acquisitions of approximately $10.9 million and higher selling prices worth $2.1 million were more than offset by the impact of warmer weather,
customer losses and other volume changes totaling $15.6 million. Sales of rationally related products increased by $5.4 million due to acquisitions at both the heating oil and propane segments as well as increased installation activity, and
increases in rates charged to customers for service contracts and billable service at the heating oil division.



Cost of Product



For the three months ended June 30, 2004, cost of product increased $12.7 million, or 12.5%, to $115.0 million, as compared to $102.2 million for the three months ended June 30, 2003. Increases of $5.6 million at the
home heating oil segment and $7.1 million at the propane segment were due to higher wholesale supply costs and the impact of acquisitions, partially offset by the decline in volume in the base business as noted above. Selling prices did not increase
as rapidly as the increase in supply cost, which resulted in lower per gallon margins. In addition, the per gallon gross profit margin for the three months ended June 30, 2004 was reduced, as the Partnership acquired businesses with a lower per
gallon gross profit margin than the base business. During the three months ended June 30, 2004, the Partnership experienced higher wholesale supply costs due to uncertainties in the global crude oil markets. The Partnership continues to experience
high wholesale supply costs and believes that it may not be able to pass all these increases on to its customers through retail sales prices. If wholesale supply costs remain at current levels, per gallon gross profit margins will be reduced and
results will be adversely impacted.



Cost of Installations, Service and
Appliances



For the three months ended June 30, 2004, the cost of
installations, service and appliances increased $2.7 million, or 5.8%, to $49.6 million, as compared to $46.9 million for the three months ended June 30, 2003. These increases at the heating oil division of $1.3 million and at the propane division
of $1.4 million, were largely due to acquisitions.



-19-



---

Delivery and Branch Expenses



For the three months ended June 30, 2004, delivery and branch expenses increased $7.9 million, or 12.0%, to $74.0 million, as compared to
$66.0 million for the three months ended June 30, 2003. Since June 30, 2003, the Partnership has expanded its base of operations and increased the level of fixed operating costs through several acquisitions in eastern Pennsylvania and Vermont. As a
result, operating costs associated with acquisitions were largely responsible for increases of $4.0 million at the propane segment and $1.8 million at the heating oil segment. In addition, delivery and branch expenses increased approximately $2.0
million from the prior years comparable quarter due to operating and wage increases and higher bad debt expense for past due and terminated accounts. The heating oil segment did realize some savings from the business process redesign program
during the three months ended June 30, 2004, but they were not as great as expected.



Depreciation and Amortization Expenses



For the three months
ended June 30, 2004, depreciation and amortization expenses increased $1.1 million, or 8.6%, to $14.2 million, as compared to $13.1 million for the three months ended June 30, 2003. This increase was primarily due to a larger depreciable base of
assets as a result of acquisitions at both the heating oil and propane segments and increased depreciation resulting from the technology investments made by the heating oil segment as part of its business process redesign project.



General and Administrative Expenses



For the three months ended June 30, 2004, general and administrative expenses declined $7.9
million, or 55.4%, to $6.4 million, as compared to $14.4 million for the three months ended June 30, 2003. At the Partnership level, general and administrative expenses declined $6.1 million and at the heating oil segment, these costs were lower by
$1.9 million. The decrease in expenses at the Partnership level was due to a $5.1 million reduction in the accrual for compensation earned for unit appreciation rights on the Partnerships senior subordinated units and lower restricted stock
awards of $0.8 million. It is anticipated that the specified objective under the Employee and Director Incentive Unit Plan will not be achieved in fiscal 2004 and a provision for this expense will not be required. Included in general and
administrative expenses for the three months ended June 30, 2003 were $1.6 million of costs relating to the business process redesign project at the heating oil segment. While this project was substantially completed during fiscal 2003, efforts
toward operational improvement continue.



Interest Expense



For the three months ended June 30, 2004, interest expense was $12.5 million, virtually
unchanged from the three months ended June 30, 2003.



Amortization of Debt
Issuance Costs



For the three months ended June 30, 2004, amortization of
debt issuance costs increased $0.2 million, or 31.0%, to $0.8 million, as compared to $0.6 million for the three months ended June 30, 2003. This increase was largely due to the amortization of debt issuance costs relating to the Partnerships
$235.0 million Senior Notes and for the amortization of bank fees incurred in connection with the heating oil segments bank credit facility.



Income Tax Expense



For the three months ended June 30, 2004, income tax expense was $0.1 million, unchanged from the three months ended June 30, 2003.



Loss from Continuing Operations



For the three months ended June 30, 2004, loss from continuing operations increased $4.9 million or 13.3%, to $42.2 million, as compared to $37.2 million for the three
months ended June 30, 2003. This change was due to a $9.0 million increase in loss at the heating oil segment, and a $2.9 million increase in loss at the propane segment, partially offset by a decrease in loss of $7.1 million at the Partnership
level. The increase in loss from continuing operations was primarily due to the impact of warmer temperatures, other volume variances, including net customer losses, the additional costs attributable to operating a larger business during a non
heating quarter (including acquisition financing costs) and lower per gallon margins. These factors were offset in part by lower general and administrative expenses at the Partnership level.



-20-



---

Loss From Discontinued Operations



On March 31, 2004, the Partnership sold its natural gas and electric subsidiary, TG&E. For the three months ended June 30, 2003,
TG&E reported a loss of $0.6 million.



Loss on Sale of TG&E Segment



During the three months ended June 30, 2004, the Partnership revised its
calculation of the gain/loss from the TG&E sale and recorded a loss of $0.3 million.



Net Loss



For the three months ended
June 30, 2004, the net loss increased $4.7 million, or 12.4%, to $42.5 million, as compared to $37.9 million for the three months ended June 30, 2003. The change was due to a $4.9 million increase in net loss from continuing operations reduced by
the decline in loss from discontinued operations of $0.5 million.



NINE
MONTHS ENDED JUNE 30, 2004

COMPARED TO NINE MONTHS ENDED JUNE 30, 2003



Volume



For the nine months ended June 30, 2004, retail volume of home heating oil and propane increased 13.4 million gallons, or 2.0%, to 686.3 million gallons, as compared to
672.9 million gallons for the nine months ended June 30, 2003. This increase was due to a 27.2 million gallon increase in the propane segment partially offset by a 13.9 million gallon decrease in the heating oil segment. The increase in volume
reflects the impact of an additional 78.2 gallons provided by acquisitions, partially offset by the impact of warmer temperatures and net customer losses in both the home heating oil and propane segments. The Partnership estimates that it had
approximately 4% fewer customers, after adjusting for acquisitions, at June 30, 2004, than it had at June 30, 2003. Net customer losses are a result of various factors including price, credit and service. Temperatures in the Partnerships areas
of operations for the nine months ended June 30, 2004 were an average of 7.9% warmer than in the prior years comparable nine months and approximately 0.1% warmer than normal as reported by the National Oceanic Atmosphere Administration. During
the nine months ended June 30, 2004, the Partnership delivered an additional 9.1 million gallons due to a change in delivery scheduling.



The above activity is summarized as follows:



|                                         |  |               |  
|---------------------------------------- |  | ------------- | -
|                                         |  | (in millions) |  
|Volume  nine months ended June 30, 2003 |  | 672.9         |  
|Impact of warmer temperatures            |  | (52.1         | )
|Impact of acquisitions                   |  | 78.2          |  
|Delivery scheduling                      |  | 9.1           |  
|Net customer losses                      |  | (21.8         | )
|                                         |  |               |  
|Volume  nine months ended June 30, 2004 |  | 686.3         |  
|                                         |  |               |  



Sales



For the nine months ended June 30, 2004, sales increased $55.7 million, or 4.6%, to $1,272.6
million, as compared to $1,216.9 million for the nine months ended June 30, 2003. This increase was due to $63.2 million higher propane segment sales, partially offset by $7.6 million in lower home heating oil sales. Product sales in the propane
segment increased by $54.1 million, as $64.1 million of additional sales from acquisitions and the impact of higher selling prices totaling $13.6 million offset the effects of warmer weather and customer losses, totaling $23.6 million. Product sales
in the heating oil segment declined by $23.7 million, as the effects of warmer weather and customer losses totaling $91.1 million exceeded the $60.0 million increase from acquisitions and $7.4 million in additional sales from higher selling prices.
Selling prices rose versus the prior years comparable period in response to higher wholesale supply costs. Sales of rationally related products, including heating and air conditioning equipment installation and service increased $16.2 million
in the heating oil segment due to acquisitions of $7.4 million and the impact of the business process improvement program which enabled the heating oil segment to increase rates charged for both service contracts and billable service by
approximately $8.8 million. At the propane division, sales of rationally related products increased $9.1 million due largely to acquisitions.



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Cost of Product



For the nine months ended June 30, 2004, cost of product increased $24.3 million, or 3.7%, to $687.6 million, as compared to $663.3 million for the nine months ended June
30, 2003. This increase was attributable to acquisitions and to higher wholesale supply costs at both the heating oil and propane segments reduced in part by the impact of warmer weather, and customer losses and other volume changes. Cost of product
was also impacted by an increase in sales of other petroleum products such as gasoline and diesel fuels. While selling prices and wholesale supply cost both increased on a per gallon basis, the increase in selling prices exceeded the increase in
supply cost, which resulted in an increase in per gallon margins of 1.6 cents in the base business. However, since October 1, 2003, the Partnership has acquired businesses with a lower per gallon gross profit margin than in the base business. As a
result, overall per gallon margins for the nine months ended June 30, 2004 were similar to the prior years nine month period. During the nine months ended June 30, 2004, the Partnership experienced higher wholesale supply costs due to
uncertainties in the global crude oil markets. The Partnership continues to experience high wholesale supply costs and believes that it may not be able to pass all these increases on to its customers through retail sales prices. If wholesale supply
costs remain at current levels, per gallon gross profit margins will be reduced and results will be adversely impacted.



Cost of Installations, Service and Appliances



For the nine months ended June 30, 2004, cost of installations, service and appliances increased $14.3 million, or 9.4%, to $167.4 million, as compared to $153.1 million
for the nine months ended June 30, 2003. Increases of $9.6 million were experienced at the heating oil segment and $4.9 million at the propane segment, largely due to acquisitions.



Delivery and Branch Expenses



For the nine months ended June 30, 2004, delivery and branch expenses increased $27.4 million, or 12.1%, to $254.6 million, as compared to $227.2 million for the nine
months ended June 30, 2003. This increase was due to an additional $13.7 million of delivery and branch expenses at the heating oil segment and a $13.7 million increase in delivery and branch expenses for the propane segment. The increase in
delivery and branch expenses was largely due to additional operating costs associated with acquisitions at the heating oil and propane segments of $9.7 million and $13.2 million, respectively. In addition, delivery and branch expenses also increased
due to reorganization costs at the heating oil segment, consisting principally of severance costs totaling $0.9 million. In addition, delivery and branch expenses increased approximately $6.5 million from the prior years comparable nine month
period due to operating and wage increases. These increases in delivery and branch expenses were partially reduced by cost reductions relating to lower volume delivered due to warmer temperatures and net customer losses experienced in fiscal 2004.
During fiscal 2003, the heating oil division substantially completed the business process redesign program. As part of this redesign, a transition to outsourcing in the area of customer call center management was undertaken as both a customer
satisfaction and a cost reduction strategy. The Partnership believes outsourcing customer inquiries will improve customer responsiveness and eliminate redundancy by leveraging the technology and expertise available from third party service
organizations. An outsourcing partner also has greater flexibility to manage extreme seasonal volume. Start-up challenges associated with the transition to the third party customer call center impacted the customer base in the first nine months of
fiscal 2004 and have required unanticipated training and support. In addition, the anticipated savings from the business redesign project for the nine months ended June 30, 2004 were less than expected.



Depreciation and Amortization Expenses



For the nine months ended June 30, 2004, depreciation and amortization expenses increased
$4.6 million, or 12.0%, to $43.2 million, as compared to $38.6 million for the nine months ended June 30, 2003. This increase was primarily due to a larger depreciable base of assets as a result of the impact of acquisitions and to increased
depreciation resulting from the technology investment made by the heating oil segment as part of its business process redesign project.



General and Administrative Expenses



For the nine months ended June 30, 2004, general and administrative expenses declined $11.2 million, or 30.8%, to $25.1 million, as compared to $36.3 million for the nine
months ended June 30, 2003. General and administrative expenses declined at the Partnership level, due to a $5.1 million reduction in the accrual for compensation earned for unit appreciation rights on the Partnerships senior subordinated
units previously recorded and lower restricted stock awards of $1.8 million. It is anticipated that the specified objectives under the Employee and Director Incentive Unit Plan, will not be achieved and a provision for the expense will not be
required. Bonus compensation expense was also lower by $1.1 million at the Partnership level for the nine months ended June 30, 2004, as compared to the nine months ended June 30, 2003. Included in general administrative expenses for the nine months
ended June 30, 2003 are $3.5 million of expenses for the heating oil segments business process redesign project. While this project was substantially completed during fiscal 2003, efforts toward operational improvement continue.



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Interest Expense



For the nine months ended June 30, 2004, interest expense increased $4.1 million, or 12.4%, to $36.8 million, as compared to $32.8 million for the nine months ended June
30, 2003. This increase was largely due to a higher average balance of long-term debt outstanding during the nine months ended June 30, 2004 as compared to the nine month period ended June 30, 2003. This increase in long-term debt outstanding was
largely for the funding of acquisitions.



Amortization of Debt Issuance
Costs



For the nine months ended June 30, 2004, amortization of debt
issuance costs increased $1.2 million, or 77.6%, to $2.8 million, as compared to $1.6 million for the nine months ended June 30, 2003. This increase was largely due to the amortization of debt issuance costs for the Partnerships $235.0 million
Senior Notes offerings and for the amortization of bank fees incurred in connection with the heating oil segments bank credit facility.



Income Tax Expense



For the nine months ended June 30, 2004, income tax expense decreased $1.0 million, or 45.2%, to $1.2 million, as compared to $2.2 million for the nine months ended June 30, 2003. This decrease was due to lower state
income taxes for fiscal 2004.



Income From Continuing Operations



For the nine months ended June 30, 2004, income from continuing
operations decreased $8.3 million, or 12.9%, to $56.4 million, as compared to $64.7 million for the nine months ended June 30, 2003. This decline was due to an $18.5 million decrease in income at the heating oil segment, partially offset by a $3.9
million an increase in income at the propane segment and $6.3 million lower losses at the Partnership level. Income from continuing operations declined as the effects of warmer temperatures, other volume changes, including customer losses and
operating and wage increases were partially offset by the positive impacts of acquisitions (net of financing costs), improved per gallon gross profit margins on the base business and lower compensation expenses in the form of UARs, restricted
stock awards, and cash.



Income From Discontinued Operations



For the nine months ended June 30, 2004, income from discontinued operations increased
$0.5 million. This income relates to the operating results from the TG&E business that was sold on March 31, 2004.



Loss On Sale of TG&E Segment



For the nine months ended June 30, 2004, the Partnership recorded a $17 thousand loss on the sale of TG&E. At March 31, 2004, it was estimated that the sale of
TG&E would result in a gain of $0.2 million.



Cumulative Effect of
Change in Accounting Principle



For the nine months ended June 30, 2003,
the Partnership recorded a $3.9 million charge arising from the adoption of Statement No. 142 to reflect the impairment of its goodwill for TG&E.



Net Income



For the nine months ended June 30, 2004, net income decreased $3.9 million, or 6.4%, to $57.4 million, as compared to $61.4 million for the nine months ended June 30, 2003. The change was due to an $8.3 million
decrease in income from continuing operations offset by a $0.5 million increase in income from discontinued operations. Net income was also impacted by the adoption of SFAS No 142, which resulted in a charge of $3.9 million in the nine months ended
June 30, 2003.



Liquidity and Capital Resources



The ability of Star Gas to satisfy its obligations will depend on its future performance,
which will be subject to prevailing economic, financial, business, and weather conditions, and other factors, most of which are beyond its control. Future capital requirements of Star Gas are expected to be provided by cash flows from operating
activities and cash on hand at June 30, 2004. To the extent future capital requirements exceed cash flows from operating activities:



| | a) | working capital will be financed by the Partnerships working capital lines of credit and cash on hand at June 30, 2004 and repaid from subsequent seasonal reductions in
inventory and accounts receivable;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | growth capital expenditures, mainly for customer tanks, will be financed in fiscal 2004 by the use of the Partnerships credit facilities; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | c) | acquisition capital expenditures will be financed by the revolving acquisition lines of credit, long-term debt, the issuance of additional common units or a combination thereof.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-23-



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Cash Flows



Operating Activities.



The net cash provided by operating activities of $35.7 million for the first nine months of fiscal 2004 consisted of income from continuing operations of $56.4 million and non-cash charges of $53.0 million (primarily
depreciation and amortization of $43.2 million), offset by an increase in operating assets and liabilities of $73.7 million. The increase in operating assets and liabilities of $73.7 million was less than the $89.2 million for the nine months ended
June 30, 2003 largely due to a lower increase in accounts receivables. Despite sales increasing from $1,216.9 million in the first nine months of fiscal 2003 to $1,272.6 million for the first nine months of fiscal 2004, the increase in accounts
receivable was $27.1 million less than the increase in the first nine months in fiscal 2003 as collections increased during fiscal 2004. Fiscal 2003 saw an unusually high rise in receivables due to weather and pricing conditions.



Investing Activities.



During the nine months ended June 30, 2004, the Partnership completed six acquisitions, investing $8.5 million, and spent $6.8 million for
capital expenditures comprised of $3.1 million incurred to sustain operations at current levels and $3.7 million to support growth of operations. Investing activities also includes $12.8 million from the sale of TG&E and $1.2 million from the
sale of excess fixed assets. As a result, cash flows used in investing activities were $1.2 million.



Financing Activities. Cash flows used in financing activities were $26.6 million for the nine months ended June 30, 2004. During this period, $91.3 million of cash was provided from increased working capital
borrowings of $17.7 million, the sale of $38.6 million in senior notes and the issuance of $35.0 million in common units. Also during this same period, $117.9 million of cash was used to pay unit distributions of $61.3 million, $50.8 million went to
repay the acquisition facility and other long-term debt, and $5.8 million in fees were paid relating to the renewal of the home heating oil segments bank credit facilities and debt related financing costs. As a result, net cash used in
financing activities amounted to $26.6 million.



As a result of the above
activity and the $1.5 million of cash provided by discontinued operations, cash increased by $10.0 million to $19.3 million as of June 30, 2004.



Earnings before interest, taxes, depreciation and amortization from continuing operations (EBITDA)



For the nine months ended June 30, 2004, EBITDA increased $0.9 million, or 0.7% to $137.8 million, as compared to $136.9 million for the
nine months ended June 30, 2003. This increase was due to a $5.4 million increase at the propane segment and a $7.7 million increase at the Partnership level, partially offset by a $12.2 million reduction at the heating oil segment. EBITDA was
positively impacted by acquisitions, lower process improvement expenses at the heating oil segment, increased per gallon margins in the base business, lower unit appreciation rights, stock and executive cash compensation expense and increased
service revenues at the heating oil segment. The effect of these factors was partially offset by the impact of warmer weather and other volume changes, including net customer losses, and inflation.



The Partnership uses EBITDA as a measure of liquidity and EBITDA is included in this report
because the Partnership believes that it provides investors and industry analysts with additional information to evaluate the Partnerships ability to pay quarterly distributions. EBITDA is not a recognized term under generally accepted
accounting principles (GAAP) and should not be considered as an alternative to net income/(loss) or net cash provided by operating activities determined in accordance with GAAP. Because EBITDA as determined by the Partnership excludes
some, but not all of the items that affect net income/(loss), it may not be comparable to EBITDA or similarly titled measures used by other companies. The following table sets forth (i) the calculation of EBITDA and (ii) a reconciliation of EBITDA,
as so calculated, to cash provided by operating activities (amounts in thousands):



|                                                     |  |                            |         |   |      |   |         |  
|---------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                     |  | Nine Months Ended June 30, |        
|                                                     |  | 2003                       |         |   | 2004 |  
|Income from continuing operations                    |  | $                          | 64,739  |   |      | $ | 56,418  |  
|Plus:                                                |  |                            |         |   |      |   |         |  
|Income tax expense                                   |  |                            | 2,235   |   |      |   | 1,225   |  
|Amortization of debt issuance costs                  |  |                            | 1,597   |   |      |   | 2,837   |  
|Interest expense, net                                |  |                            | 29,708  |   |      |   | 34,119  |  
|Depreciation and amortization                        |  |                            | 38,598  |   |      |   | 43,236  |  
|                                                     |  |                            |         |   |      |   |         |  
|EBITDA                                               |  |                            | 136,877 |   |      |   | 137,835 |  
|Add/(subtract)                                       |  |                            |         |   |      |   |         |  
|Loss on redemption of debt                           |  |                            | 181     |   |      |   |        |  
|Income tax expense                                   |  |                            | (2,235  | ) |      |   | (1,225  | )
|Interest expense, net                                |  |                            | (29,708 | ) |      |   | (34,119 | )
|Unit compensation expense                            |  |                            | 1,876   |   |      |   | 121     |  
|Provision for losses on accounts receivable          |  |                            | 5,193   |   |      |   | 7,027   |  
|Loss (gain) on sales of fixed assets, net            |  |                            | 128     |   |      |   | (198    | )
|Change in operating assets and liabilities           |  |                            | (89,231 | ) |      |   | (73,718 | )
|                                                     |  |                            |         |   |      |   |         |  
|Net cash provided by continuing operating activities |  | $                          | 23,081  |   |      | $ | 35,723  |  
|                                                     |  |                            |         |   |      |   |         |  



-24-



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Financing and Sources of Liquidity



The Partnerships heating oil segment has a bank credit facility, which includes a working capital facility, that provides up to $150.0
million of borrowings to be used for working capital purposes, an acquisition facility, providing for up to $50.0 million of borrowings to be used for acquisitions and for certain capital improvements, and a $35.0 million letter of credit facility
primarily for insurance purposes. The working capital facility and letter of credit facility will expire on June 30, 2006. The acquisition facility will convert to a term loan for any outstanding borrowings on June 30, 2006, which balance will be
payable in eight equal quarterly principal payments. At June 30, 2004, $13.0 million of working capital borrowings were outstanding and $3.0 million was borrowed under the acquisition facility.



The Partnerships propane segment has a bank credit facility, which consists of a $25.0
million acquisition facility, a $25.0 million growth capital facility that can be used to fund maintenance and growth capital expenditures and a $24.0 million working capital facility. The working capital facility expires on September 30, 2006.
Borrowings under the acquisition and growth capital facilities will revolve until September 30, 2006, after which time any outstanding loans thereunder, will amortize in quarterly principal payments with a final payment due on September 30, 2008. At
June 30, 2004, $3.7 million of acquisition facility borrowings, $3.5 million of Growth Capital Facility borrowings and $16.7 million of working capital borrowings were outstanding.



The Partnerships bank credit facilities and debt agreements contain several financial tests and covenants restricting the various
segments and Partnerships ability to pay distributions, incur debt and engage in certain other business transactions. In general these tests are based upon achieving certain debt to cash flow ratios and cash flow to interest expense ratios.
Amounts borrowed under the working capital facility at the propane segment are subject to a requirement to maintain a zero balance for at least thirty consecutive days. Amounts borrowed under the working capital facility at the heating oil segment
are subject to a zero balance for at least forty-five days. For fiscal 2004, the propane segment has met this requirement and the heating oil segment is in the process of meeting this requirement. Failure to comply with the various restrictive and
affirmative covenants of the Partnerships various bank and note facility agreements could negatively impact the Partnerships ability to incur additional debt and/or pay distributions and could cause certain debt to become currently
payable. As of June 30, 2004, the Partnership was in compliance with all debt covenants.



On January 22, 2004, the Partnership and its wholly owned subsidiary, Star Gas Finance Company, jointly issued $35.0 million face value senior notes due on February 15, 2013. These notes accrue interest at an annual
rate of 10.25% and require semi-annual interest payments on February 15 and August 15 of each year commencing on February 15, 2004. These notes are redeemable at the option of the Partnership, in whole or in part, from time to time by payment of a
premium as defined. These notes were priced at 110.5% for total gross proceeds of $38.6 million. The Partnership also incurred $0.5 million of fees and expenses in connection with the issuance of these notes, resulting in net proceeds of $38.1
million. The net proceeds from the offering were largely used to repay indebtedness.



In February 2004, the Partnership received net proceeds after expenses of $35.0 million from a publicly underwritten equity offering for the sale of 1,495,000 common units. The net proceeds from this underwriting were largely used to repay
indebtedness.



The Partnership had $509.7 million of debt outstanding as of
June 30, 2004 (not including working capital borrowings of $29.7 million), with significant maturities occurring over the next five years. The following summarizes the Partnerships long-term debt maturities during the twelve months ended June
30.



|           |  |                
|---------- |  | ---------------
|2005       |  | $  24.5 million
|2006       |  | $  23.9 million
|2007       |  | $  95.2 million
|2008       |  | $  20.7 million
|2009       |  | $  19.2 million
|Thereafter |  | $326.2 million 



The Partnerships heating oil
segments bank credit facilities allow for repayment up to $22.5 million of existing senior debt and the Partnerships propane segments bank credit facilities allow for the refinancing of up to $25.0 million of existing senior debt.
The refinancing capabilities are subject to capacity and other restrictions. Funding for debt maturities other than for what can be refinanced with bank facilities will otherwise largely be dependent upon new debt or equity issuances.



-25-



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In general, the Partnership distributes to its partners on a quarterly basis all of its Available Cash in the manner
described below. Available Cash is defined for any of the Partnerships fiscal quarters as all cash on hand at the end of that quarter, less the amount of cash reserves that are necessary or appropriate in the reasonable discretion of the
general partner to (i) provide for the proper conduct of the business; (ii) comply with applicable law, any of its debt instruments or other agreements; or (iii) provide funds for distributions to the common unitholders and the senior subordinated
unitholders during the next four quarters, in some circumstances.



The
Partnership utilizes weather insurance in order to assist the Partnership in maintaining the stability of its cash flows. The Partnership purchased a base of $12.5 million of weather insurance coverage for each fiscal year from 2005  2009. For
fiscal 2005, the Partnership has purchased an additional $7.5 million of weather insurance for a total of $20.0 million. The amount of insurance proceeds that can be realized under these policies is calculated by multiplying the degree day deviation
from an agreed upon cumulative degree day strike price by $35,000. The calculation period for the weather insurance coverage is from November first to the end of February and is measured based upon a weighting of certain New England and Mid-Atlantic
weather stations. Due to the close to normal weather conditions experienced for the current policy period, the Partnership did not receive any benefit from the weather insurance for the nine months ended June 30, 2004.



In July 2004, the Partnership and its wholly owned subsidiary, Star Gas Finance Company,
jointly issued $30.0 million face value senior notes due on February 15, 2013. These notes accrued interest at an annual rate of 10.25% and require semi-annual interest payments on February 15 and August 15 of each year commencing on February 15,
2004. These notes are redeemable at the option of the Partnership, in whole or in part, from time to time by payment of a premium as defined. These notes were priced at 106.3% for total gross proceeds of $31.9 million. The Partnership also incurred
$0.7 million of fees and expenses in connection with the issuance of these notes resulting in net proceeds of $31.2 million. The net proceeds from the offering were largely used to repay indebtedness.



For the remainder of fiscal 2004, the Partnership anticipates paying interest of
approximately $12.6 million and anticipates growth and maintenance capital additions of approximately $2.5 million. In addition, the Partnership announced on July 29, 2004, that it will pay a cash distribution of $0.575 per common unit or
approximately $18.5 million during the 2004 fiscal fourth quarter. The Partnership also announced that it would not pay a distribution on the Senior Subordinated units, Junior Subordinated units and General Partners units, which lowered total
distributions by $2.3 million. The Partnership plans to fund acquisitions through a combination of debt and equity. Based on its current cash position, bank credit availability and anticipated net cash to be generated from operating activities, the
Partnership expects to be able to meet all of its obligations for fiscal 2004.



Critical Accounting Policies and Estimates



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



Goodwill and Other
Intangible Assets



The FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets in June 2001. SFAS No. 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives, such as customer lists, continue to be amortized over their respective estimated useful lives.



SFAS No. 142 was adopted on October 1, 2002. The Partnership calculates amortization using the straight-line method over periods ranging from 7 to 15 years for intangible
assets with definite useful lives. Star Gas uses amortization methods and determines asset values based on its best estimates using reasonable and supportable assumptions and projections. Star Gas assesses the useful lives of intangible assets based
on the estimated period over which Star Gas will receive benefit from such intangible assets such as historical evidence regarding customer churn rate. In some cases, the estimated useful lives are based on contractual terms. At June 30, 2004, the
Partnership had $183.2 million of net intangible assets subject to amortization. If circumstances required a change in estimated useful lives of the assets, it could have a material effect on results of operations. For example, if lives were
shortened by one year, the Partnership estimates that amortization for these assets for the three and nine month periods ended June 30, 2004 would have increased by approximately $0.8 million and $2.5 million, respectively.



-26-



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Critical Accounting Policies and Estimates  (continued)



SFAS No. 142 also requires the Partnerships goodwill to be assessed annually for
impairment. These assessments involve managements estimates of future cash flows, market trends and other factors. If goodwill is determined to be impaired, a loss is recorded in accordance with SFAS No. 142. At June 30, 2004, the Partnership
had $274.1 million of goodwill. Intangible assets with finite lives must be assessed for impairment whenever changes in circumstances indicate that the assets may be impaired. Similar to goodwill, the assessment for impairment requires estimates of
future cash flows related to the intangible asset. To the extent the carrying value of the assets exceeds it future cash flows, an impairment loss is recorded based on the fair value of the asset.



Depreciation of Property, Plant and Equipment



Depreciation is calculated using the straight-line method based on the estimated useful
lives of the assets ranging from 3 to 30 years. Net property, plant and equipment was $250.4 million for the Partnership at June 30, 2004. If circumstances required a change in estimated useful lives of the assets, it could have a material effect on
results of operations. For example, if lives were shortened by one year, the Partnership estimates that depreciation for the three and nine month periods ended June 30, 2004 would have increased by approximately $0.7 million and $2.2 million,
respectively.



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



SFAS No. 87, Employers Accounting
for Pensions requires the Partnership to make assumptions as to the expected long-term rate of return that could be achieved on defined benefit plan assets and discount rates to determine the present value of the plans pension
obligations. The Partnership evaluates these critical assumptions at least annually.



The discount rate enables the Partnership to state expected future cash flows at a present value on the measurement date. The rate is required to represent the market rate for high-quality fixed income investments. A lower discount rate
increases the present value of benefit obligations and increases pension expense. A 25 basis point decrease in the discount rate used for fiscal 2003 would have increased pension expense by approximately $0.1 million and would have increased the
minimum pension liability by another $1.8 million. The Partnership assumed a discount rate of 6.00% as of September 30, 2003.



The Partnership considers the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets to determine its
expected long-term rate of return on pension plan assets. The expected long-term rate of return on assets is developed with input from the Partnerships actuarial firm. The long-term rate of return assumption used for determining net periodic
pension expense for fiscals 2002 and 2003 was 8.50 percent. As of September 30, 2003, this assumption was reduced to 8.25 percent for determining fiscal 2004 net periodic pension expense. A further 25 basis point decrease in the expected return on
assets would have increased pension expense in fiscal 2003 by approximately $0.1 million.



Over the life of the plans, both gains and losses have been recognized by the plans in the calculation of annual pension expense. As of September 30, 2003, $17.2 million of unrecognized losses remain to be recognized
by the plans. These losses may result in increases in future pension expense as they are recognized.



Insurance Reserves



The
Partnerships heating oil segment has in the past and is currently self-insuring a portion of workers compensation, auto and general liability claims. In February 2003, the propane segment also began self-insuring a portion of its
workers compensation claims. The Partnership establishes reserves based upon expectations as to what its ultimate liability will be for these claims using developmental factors based upon historical claim experience. The Partnership
continually evaluates the potential for changes in loss estimates with the support of qualified actuaries. As of September 30, 2003, the heating oil segment had approximately $29.4 million of insurance reserves and the propane segment had $1.1
million of insurance reserves. The ultimate settlement of these claims could differ materially from the assumptions used to calculate the reserves which could have a material effect on results of operations.



-27-



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Item 3.



Quantitative and
Qualitative Disclosures About Market Risk



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



At June 30, 2004, the Partnership had outstanding
borrowings totaling $539.4 million, of which approximately $40.0 million is subject to variable interest rates under its Bank Credit Facilities. In the event that interest rates associated with these facilities were to increase 100 basis points, the
impact on future cash flows would be a decrease of approximately $0.4 million annually.



The Partnership also selectively uses derivative financial instruments to manage its exposure to market risk related to changes in the current and future market price of home heating oil and propane. The Partnership does not hold
derivatives for trading purposes. The value of market sensitive derivative instruments is subject to change as a result of movements in market prices. Consistent with the nature of hedging activity, associated unrealized gains and losses would be
offset by corresponding decreases or increases in the purchase price the Partnership would pay for the product being hedged. Sensitivity analysis is a technique used to evaluate the impact of hypothetical market value changes. Based on a
hypothetical ten percent increase in the cost of product at June 30, 2004, the potential gain on the Partnerships hedging activity would be to increase the fair value of these outstanding derivatives by $4.3 million to a fair value of $10.9
million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair value of these outstanding derivatives by $4.2 million to a fair value of $2.4 million.



Item 4.



Controls and
Procedures



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



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



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



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



-28-



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PART II OTHER INFORMATION



Item 6.



Exhibits and Reports on Form 8-K



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



|     |  |                              
|---- |  | -----------------------------
|31.1 |  | Rule 13a-14(a) Certification.
|     | 
|31.2 |  | Rule 13a-14(a) Certification.
|     | 
|32.1 |  | Section 906 Certification.   
|     | 
|32.2 |  | Section 906 Certification.   



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



4/29/04 - On April 29, 2004, Star Gas Partners, L.P., issued a press release describing its financial results for its second fiscal quarter ended March
31, 2004.



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---

SIGNATURE



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



|                                   
|-----------------------------------
|Star Gas Partners, L.P.            
|(Registrant)                       
|By: Star Gas LLC as General Partner



|                              |  |                                                                                   |  |              
|----------------------------- |  | --------------------------------------------------------------------------------- |  | -------------
|Signature                     |  | Title                                                                             |  | Date         
|                              |  |                                                                                  
|/s/    Ami
TrauberAmi
Trauber |  | Chief Financial Officer Star Gas LLC (Principal Financial and Accounting Officer) |  | July 29, 2004



|                        
|------------------------
|Star Gas Finance Company
|(Registrant)            



|                              |  |                                                                      |  |              
|----------------------------- |  | -------------------------------------------------------------------- |  | -------------
|Signature                     |  | Title                                                                |  | Date         
|                              |  |                                                                     
|/s/    Ami
TrauberAmi
Trauber |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | July 29, 2004



-30-