<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549


                                   FORM 10-Q

                                   (Mark One)

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

                  For the quarterly period ended June 30, 1999
                                                 -------------

                                       OR

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

             For the transition period from _________ to _________

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


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

             (Exact name of registrant as specified in its charter)



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

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

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


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


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

                                 Yes   X    No
                                     -----


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

Star Gas Partners, L.P.  13,251,667  Common Units
                          2,476,797  Senior Subordinated Units
                            345,364  Junior Subordinated Units
                            325,729  General Partner Units
<PAGE>

                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q




<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>                                                                     <C>
Part I   Financial Information:

         Item 1 - Condensed Financial Statements

              Condensed Consolidated Balance Sheets as of
               September 30, 1998 and June 30, 1999                         3

              Condensed Consolidated Statements of Operations for the
               Three months ended June 30, 1998 and June 30, 1999
               Nine months ended June 30, 1998 and June 30, 1999            4

              Condensed Consolidated Statements of Cash Flows for the
               nine months ended June 30, 1998 and June 30, 1999            5

              Condensed Consolidated Statement of Partners' Capital
               for the nine months ended June 30, 1999                      6

              Notes to Condensed Consolidated Financial Statements       7-23

         Item 2 - Management's Discussion and Analysis of Financial
                  Conditions and Results of Operations                  24-31

         Item 3 - Quantitative and Qualitative Disclosures About
                  Market Risk                                              31

Part II  Other Information:

         Item 6 - Exhibits and Reports on Form 8-K                         32

         Signature                                                         33
</TABLE>

                                       2
<PAGE>

                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                June 30,
                                                                September 30,     1999
                                                                    1998       (unaudited)
                                                                -------------  -----------
<S>                                                             <C>            <C>
Assets
Current assets:
 Cash and cash equivalents                                         $  1,115      $ 20,849
 Receivables, net of allowance of $252 and $1,759 respectively        5,279        49,588
 Inventories                                                         10,608        14,868
 Prepaid expenses and other current assets                              945         9,260
                                                                   --------      --------
      Total current assets                                           17,947        94,565
                                                                   --------      --------

Property and equipment, net                                         110,262       148,358

Intangibles and other assets, net                                    51,398       318,793
                                                                   --------      --------
      Total assets                                                 $179,607      $561,716
                                                                   ========      ========
Liabilities and Partners' Capital
Current liabilities:
 Accounts payable                                                  $  3,097      $ 10,389
 Bank credit facility borrowings                                      4,770         1,400
 Current maturities of long-term debt                                   692         2,331
 Accrued expenses                                                     3,315        37,882
 Unearned service contract revenue                                        -        12,990
 Customer credit balances                                             6,038        23,690
                                                                   --------      --------
      Total current liabilities                                      17,912        88,682
                                                                   --------      --------

Long-term debt                                                      104,308       265,407
Other long-term liabilities                                              40         7,247
Deferred income taxes                                                     -        34,632

Partners' Capital:
 Common unitholders                                                  58,686       156,697
 Subordinated unitholders                                            (1,446)       10,164
 General partner                                                        107        (1,113)
                                                                   --------      --------
      Total Partners' Capital                                        57,347       165,748
                                                                   --------      --------

      Total Liabilities and Partners' Capital                      $179,607      $561,716
                                                                   ========      ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>

                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

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



<TABLE>
<CAPTION>
                                                               Three Months Ended         Nine Months Ended
                                                                     June 30,                   June 30,
                                                             ----------------------      ---------------------
                                                               1998          1999          1998         1999
                                                             --------      --------      --------     --------
<S>                                                          <C>           <C>           <C>          <C>
Sales:
 Product                                                      $14,347      $ 59,022      $89,437      $135,925
 Installation, service and appliances                           1,896        20,070        6,534        25,505
                                                              -------      --------      -------      --------
       Total sales                                             16,243        79,092       95,971       161,430

Costs and expenses:
 Cost of product                                                6,005        28,642       41,784        58,471
 Cost of installation, service and appliances                     513        24,021        1,942        26,651
 Delivery and branch                                            8,538        32,122       28,280        54,447
 Depreciation and amortization                                  2,868         8,458        8,509        14,489
 General and administrative                                     1,602         4,070        4,420         7,226
 Net (loss) on sales of assets                                    (28)           (5)        (213)          (96)
                                                              -------      --------      -------      --------
       Operating income (loss)                                 (3,311)      (18,226)      10,823            50
Interest expense, net                                           1,873         5,221        5,834         9,760
Amortization of debt issuance costs                                45           128          135           218
                                                              -------      --------      -------      --------
       Income (loss) before income taxes                       (5,229)      (23,575)       4,854        (9,928)
Income tax expense (benefit)                                        6        (5,362)          19        (5,324)
                                                              -------      --------      -------      --------
       Net income (loss)                                      $(5,235)     $(18,213)     $ 4,835      $ (4,604)
                                                              =======      ========      =======      ========
       General Partner's interest in net income (loss)        $  (105)     $   (364)     $    97      $    (92)
                                                              -------      --------      -------      --------
Limited Partners' interest in net income (loss)               $(5,130)     $(17,849)     $ 4,738      $ (4,512)
                                                              =======      ========      =======      ========
Basic and diluted net income per Limited Partner unit        $ (0.82)     $  (1.11)     $  0.79      $  (0.46)
                                                              =======      ========      =======      ========
Basic and diluted weighted average number of Limited
 Partner units outstanding                                      6,228        16,011        5,965         9,717
                                                              =======      ========      =======      ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                          Nine Months Ended June 30,
                                                         ---------------------------
                                                             1998            1999
                                                         ---------------------------
<S>                                                      <C>              <C>
Cash flows from operating activities:
Net income (loss)                                            $  4,835      $  (4,604)
Adjustments to reconcile net income to net cash
 provided by operating activities:
Depreciation and amortization                                   8,509         14,489
Amortization of debt issuance cost                                135            218
Provision for losses on accounts receivable                       240            168
Loss on sales of assets                                           213             96
Deferred tax benefit                                                -         (5,368)
Other                                                               -             (7)
Changes in operating assets and liabilities:
  Decrease in receivables                                         579         26,277
  Decrease (increase) in inventories                             (874)         9,195
  Decrease  (increase) in other assets                             85         (4,444)
  Decrease in accounts payable                                   (584)        (4,377)
  Increase (decrease) in other current and long-term
   liabilities                                                   (375)         2,313
                                                             --------      ---------
       Net cash provided by operating activities               12,763         33,956
                                                             --------      ---------

Cash flows from investing activities:
Capital expenditures                                           (3,825)        (4,936)
Proceeds from sales of fixed assets                               245            137
Cash acquired in acquisition                                    1,825         18,760
Acquisitions                                                   (5,259)        (2,581)
                                                             --------      ---------
       Net cash provided by (used in) investing
        activities                                             (7,014)        11,380
                                                             --------      ---------

Cash flows from financing activities:
Credit facility borrowings                                     13,280         11,850
Credit facility repayments                                    (12,330)       (15,220)
Acquisition facility borrowings                                21,000              -
Acquisition facility repayments                               (21,000)        (7,000)
Distributions                                                  (9,949)       (12,005)
Increase in deferred charges                                     (177)          (927)
Proceeds from issuance of Common Units, net                    16,089        118,824
Repayment of debt, net                                        (23,000)      (197,053)
Redemption of preferred stock                                       -        (11,746)
Proceeds from issuance of debt                                 11,000         87,552
Other                                                               -            123
                                                             --------      ---------
       Net cash used in financing activities                   (5,087)       (25,602)
                                                             --------      ---------

       Net increase in cash                                       662         19,734
Cash at beginning of period                                       889          1,115
                                                             --------      ---------
Cash at end of period                                        $  1,551      $  20,849
                                                             ========      =========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
  Interest                                                   $  3,959      $  10,616
                                                             ========      =========

Non-cash investing activities:
  Acquisitions                                               $(26,467)     $       -
  Redemption of preferred stock                              $      -      $  (6,858)
  Assumption of note payable                                 $ 23,000      $       -
Non-cash financing activities:
  Issuance of Common Units                                   $  3,399      $   6,858
  Additional General Partner interest                        $     68      $       -
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>

                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

             CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
                                 (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                             Number of Units
                                ------------------------------------------
                                                   Senior  Junior  General                        Senior   Junior    General
                                 Common    Sub.     Sub.    Sub.   Partner   Common      Sub.      Sub.     Sub.     Partner
                                 -------  -------  ------  ------  -------  ---------  --------  --------  -------  ---------
<S>                              <C>      <C>      <C>     <C>     <C>      <C>        <C>       <C>       <C>      <C>
Balance as of
  September 30, 1998              3,859    2,396        -       -        -  $ 58,686   $(1,446)  $     -   $   -     $   107

Exchange of ownership in
  connection with the Star
  Gas / Petro Transaction                 (2,396)   2,477     345      326    (8,958)   (2,754)   11,903      797       (988)

Issuance of Units in
  equity offering (including
   exercise of overallotment)     8,950                                      118,824

Issuance of Units in
  redemption of Petro's
  12 7/8% Preferred Stock           401                                        5,399

Issuance of Units in
  redemption of Petro's
  Junior Preferred Stock            103                                        1,459

Net loss                                                                      (5,977)    4,200    (2,404)    (331)       (92)

Distributions
  ($1.675 per common unit)                                                   (11,865)                                   (140)

Other                               (61)                                        (871)                199
                               ----------------------------------------------------------------------------------------------
Balance as of
  June 30, 1999                  13,252        -    2,477     345      326  $156,697   $     -   $ 9,698    $ 466    $(1,113)
                               ==============================================================================================
<CAPTION>
                                 Partners'
                                  Capital
                                 ---------
<S>                              <C>
Balance  as of
  September 30, 1998             $ 57,347

Exchange of ownership in
  connection with the Star
  Gas / Petro Transaction               -

Issuance of Units in
  equity offering (including
   exercise of overallotment)     118,824

Issuance of Units in
  redemption of Petro's
  12 7/8% Preferred Stock           5,399

Issuance of Units in
  redemption of Petro's
  Junior Preferred Stock            1,459

Net loss                           (4,604)

Distributions
  ($1.675 per common unit)        (12,005)

Other                                (672)
                                 --------
Balance as of
  June 30, 1999                  $165,748
                                 ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       6
<PAGE>

                    STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1)  Partnership Organization

     Star Gas Partners, L.P. ("Star Gas Partners" or "the "Partnership") is a
     leading distributor of propane and home heating oil in the United States.
     Star Gas Propane, L.P., ("Star Gas Propane") a subsidiary of the
     Partnership, markets and distributes propane gas and related appliances to
     approximately 168,000 retail and wholesale customers in the Midwest and
     Northeast.  Petro Holdings, Inc. ("Petro"), a subsidiary of Star Gas
     Propane, is the nation's largest distributor of home heating oil and serves
     approximately 335,000 customers in the Northeast and Mid-Atlantic region of
     the United States.  Petro was acquired by the Partnership in a four part
     transaction as described in footnote 2.

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

2)  Acquisition of Petro

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

     Acquisition of Petro
     --------------------

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

     As a result of the merger:

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

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

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

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

     (a) Holders of Petro common stock, consisting of Irik P. Sevin, Audrey L.
     Sevin, Hanseatic Corp. and Hanseatic Americas Inc., who are referred to as
     the "LLC Owners," formed Star Gas LLC, to which they contributed their
     outstanding shares of Petro common stock in exchange for all of the limited
     liability company interests in Star Gas LLC. Star Gas LLC contributed those
     shares to Star Gas Partners in exchange for general partner units (325,729
     general partner units). In addition, the LLC Owners contributed their
     remaining shares of Petro common stock to Star Gas Partners in exchange for
     junior subordinated units (345,364 junior subordinated units).

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

                                       7
<PAGE>

2)  Acquisition of Petroleum Heat and Power Co., Inc. (continued)

     Financings and Refinancings
     ---------------------------

     Star Gas Partners offered and sold to the public 9.0 million common units
     in an equity offering (including 230,000 overallotment common units), the
     net proceeds of which were approximately $118.8 million. Petro offered and
     sold, in a private placement, $90.0 million of senior secured notes, the
     net proceeds of which were approximately $87.6 million. Star Gas Partners
     and Petro Holdings (a legal entity created as a result of the Star Gas /
     Petro Transaction to be the parent company of all the former Petro
     entities) guaranteed the notes.

     All of the net proceeds of the equity offering, together with the $87.6
     million of net proceeds from the debt offering and $5.4 million of Petro's
     cash were used:

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

     .  to repurchase Petro's 1989 preferred stock; and

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

     New General Partner
     -------------------

     Since Star Gas Corporation is a wholly-owned subsidiary of Petro, which
     became a subsidiary of the Partnership in the transaction, it was no longer
     able to serve as Star Gas Partners' general partner. Star Gas Partners' new
     general partner is Star Gas LLC, which is owned by the LLC Owners. Star Gas
     LLC's sole business activity is being the general partner.  Also,
     simultaneous to this change was the transfer of all Star Gas Corporation
     employees to Star Gas Propane.

     Amendment of Partnership Agreement
     ----------------------------------

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

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

                                       8
<PAGE>

3)  Summary of Significant Accounting Policies

     Basis of Presentation

     The unaudited condensed consolidated financial statements reflect all
     adjustments which are, in the opinion of management, necessary for a fair
     statement of the interim periods presented.  The Consolidated Financial
     Statements for the period October 1, 1997 through June 30, 1998 include the
     accounts of Star Gas Partners, L.P., Star Gas Propane and its corporate
     subsidiary, Stellar Propane Service Corp.  Beginning March 26, 1999, the
     Condensed Consolidated Financial Statements also include the accounts of
     Petro Holdings and its Subsidiaries, a wholly owned subsidiary of the
     Partnership resulting from the Star Gas / Petro Transaction.  All material
     intercompany items and transactions have been eliminated in consolidation.

     Use of Estimates

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

     Revenue Recognition

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

     The propane and heating oil industry are seasonal in nature because both
     are primarily used for heating in residential and commercial buildings.
     Therefore, the results of operations for the period ended June 30, 1998 and
     June 30, 1999 are not necessarily indicative of the results to be expected
     for a full year.

     Comprehensive Income

     The Partnership's comprehensive income consists of net income and other
     comprehensive income, the sole component of which is the minimum pension
     liability adjustment from its wholly-owned subsidiary Petro.  There were no
     minimum pension liability adjustments at June 30, 1999.

     Net Income (loss) per Limited Partner Unit

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

     Cash Equivalents

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

                                       9
<PAGE>

3)  Summary of Significant Accounting Policies - (continued)

     Inventories

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

     Property, Plant, and Equipment

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

     Intangible Assets

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

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

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

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

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

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

     Advertising Expenses

     Advertising costs are expensed as they are incurred.

     Customer Credit Balances

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

     Environmental Costs

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

                                       10
<PAGE>

3)  Summary of Significant Accounting Policies - (continued)

     Income Taxes

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

     The Partnership's corporate subsidiaries file a consolidated Federal income
     tax return.  Deferred tax assets and liabilities are recognized for the
     future tax consequences attributable to differences between the financial
     statement carrying amount of assets and liabilities and their respective
     tax bases and operating loss carryforwards.  Deferred tax assets and
     liabilities are measured using enacted tax rates expected to apply to
     taxable income in the years in which those temporary differences are
     expected to be recovered or settled. As a result of the Star Gas / Petro
     Transaction,  the Partnership's heating oil subsidiary Petro, recorded a
     $40 million deferred income tax liability, which primarily reflects a
     difference in the basis between book and tax for the intangible assets
     acquired from Petro.  At June 30, 1999 this amount was partially offset by
     the $5.4 million deferred tax asset generated by Petro's net operating loss
     carryforwards.

     Accounting Changes

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting
     for Derivative Instruments and Hedging Activities." SFAS No. 133
     establishes accounting and reporting standards for derivative instruments,
     including certain derivative instruments embedded in other contracts, and
     for hedging activities. In June 1999, FASB amended the effective date for
     SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
     June 15, 2000.  The Partnership is assessing the impact and disclosure
     requirements of SFAS No. 133.

4)  Quarterly Distribution of Available Cash

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

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

                                       11
<PAGE>

4)  Quarterly Distribution of Available Cash - (continued)

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

     .  First, to the common units until each has received $0.575, plus any
     arrearages from prior quarters.

     .  Second, to the senior subordinated units until each has received $0.575.

     .  Third, to the junior subordinated units and general partner units until
     each has received $0.575.

     .  Finally, after each has received $0.575, available cash will be
     distributed proportionately to all units until target levels are met.

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

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

     In accordance with the merger agreement, distributions will not be made on
     the senior subordinated units, junior subordinated units, or general
     partner units until February 2000 at the earliest.


5)  Segment Reporting

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

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

     The heating oil segment is primarily engaged in the retail distribution of
     home heating oil, related equipment services, and equipment sales to
     residential and commercial customers.  It operates from twenty-four
     branches / depots and thirteen satellites primarily in the Northeast United
     States. Home heating oil is principally used by the Partnership's
     residential and commercial customers to heat their homes and buildings, and
     as a result, weather conditions also have a significant impact on the
     demand for home heating oil.

                                       12
<PAGE>

5)  Segment Reporting - (continued)

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



<TABLE>
<CAPTION>
(in thousands)                                                     Three Months Ended
                                                 -------------------------------------------------------
                                                                            June 30, 1999
                                                                 ---------------------------------------
                                                June 30, 1998    Heating
Statement of Operations                            Propane         Oil        Propane      Consolidated
-----------------------                         --------------  ---------  --------------  -------------
<S>                                             <C>             <C>        <C>             <C>
Sales:
  Product                                             $14,347   $ 45,404        $ 13,618       $ 59,022
  Installation, service,
    and appliance                                       1,896     18,056           2,014         20,070
                                                      -------   --------        --------       --------
         Total sales                                   16,243     63,460          15,632         79,092

Costs and expenses:
  Cost of product                                       6,005     23,455           5,187         28,642
  Cost of installation, service,
    and appliances                                        513     23,316             705         24,021
  Delivery and branch                                   8,538     22,583           9,539         32,122
  Depreciation and
    amortization                                        2,868      5,423           3,035          8,458
  General and administrative                            1,602      2,439           1,631          4,070
  Net (loss) on sales of assets                           (28)         2              (7)            (5)
                                                      -------   --------        --------       --------
         Operating income (loss)                       (3,311)   (13,754)        ( 4,472)       (18,226)
Interest expense, net                                   1,873      3,261           1,960          5,221
Amortization of debt issuance
 costs                                                     45         83              45            128
                                                      -------   --------        --------       --------
         Income (loss) before
           income taxes                                (5,229)   (17,098)         (6,477)       (23,575)
Income tax expense (benefit)                                6     (5,368)              6         (5,362)
                                                      -------   --------        --------       --------
          Net income (loss)                           $(5,235)  $(11,730)       $ (6,483)      $(18,213)
                                                      =======   ========        ========       ========

Capital expenditures                                  $   797   $  1,121        $  1,464       $  2,585
                                                      =======   ========        ========       ========
<CAPTION>
(in thousands)                                               Nine Months Ended
                                          --------------------------------------------------------
                                                                      June 30, 1999
                                                          ----------------------------------------
                                          June 30, 1998   Heating
Statement of Operations                      Propane        Oil        Propane      Consolidated
-----------------------                   -------------  ---------  --------------  -------------
<S>                                       <C>            <C>        <C>             <C>
Sales:
  Product                                      $89,437   $ 53,312         $82,613       $135,925
  Installation, service,
    and appliance                                6,534     18,281           7,224         25,505
                                               -------   --------         -------       --------
         Total sales                            95,971     71,593          89,837        161,430

Costs and expenses:
  Cost of product                               41,784     27,152          31,319         58,471
  Cost of installation, service,
    and appliances                               1,942     24,290           2,361         26,651
  Delivery and branch                           28,280     23,726          30,721         54,447
  Depreciation and
    amortization                                 8,509      5,423           9,066         14,489
  General and administrative                     4,420      2,589           4,637          7,226
  Net (loss) on sales of assets                   (213)         2             (98)           (96)
                                               -------   --------         -------       --------
         Operating income (loss)                10,823    (11,585)         11,635             50
Interest expense, net                            5,834      3,486           6,274          9,760
Amortization of debt issuance
 costs                                             135         83             135            218
                                               -------   --------         -------       --------
         Income (loss) before
           income taxes                          4,854    (15,154)          5,226         (9,928)
Income tax expense (benefit)                        19     (5,343)             19         (5,324)
                                               -------   --------         -------       --------
          Net income (loss)                    $ 4,835   $ (9,811)        $ 5,207       $ (4,604)
                                               =======   ========         =======       ========

Capital expenditures                           $ 3,825   $  1,121         $ 3,815       $  4,936
                                               =======   ========         =======       ========
</TABLE>






<TABLE>
<CAPTION>
(in thousands)                                                                                June 30, 1999
                                                                                  -------------------------------------
                                                              September 30, 1998  Heating                       (1)
Balance Sheet                                                      Propane          Oil        Propane     Consolidated
-------------                                                 ------------------  --------  -------------  ------------
<S>                                                           <C>                 <C>       <C>            <C>
Assets
Current assets:
  Cash and cash equivalents                                        $  1,115       $ 20,541       $    308      $ 20,849
  Receivables                                                         5,279         43,957          5,631        49,588
  Inventories                                                        10,608         10,863          4,005        14,868
  Prepaid expenses and other current assets                             945          9,147          1,335         9,260
                                                                   --------       --------       --------      --------
         Total current assets                                        17,947         84,508         11,279        94,565

Property and equipment, net                                         110,262         40,091        108,267       148,358
Investment in Petro Holdings                                              -              -        107,476             -
Intangibles and other assets, net                                    51,398        269,513         49,280       318,793
                                                                   --------       --------       --------      --------
         Total assets                                              $179,607       $394,112       $276,302      $561,716
                                                                   ========       ========       ========      ========

Liabilities and Partners' Capital
Current Liabilities:
  Accounts payable                                                 $  3,097       $  8,143       $  2,246      $ 10,389
  Bank credit facility borrowings                                     4,770              -          1,400         1,400
  Current maturities of long-term debt                                  692          2,331              -         2,331
  Accrued expenses                                                    3,315         32,924          5,307        37,882
  Unearned service contract revenue                                       -         12,990              -        12,990
  Customer credit balances                                            6,038         20,970          2,720        23,690
                                                                   --------       --------       --------      --------
         Total current liabilities                                   17,912         77,358         11,673        88,682

Long-term debt                                                      104,308        167,407         98,000       265,407
Other long-term liabilities                                              40          7,239              8         7,247
Deferred income taxes                                                     -         34,632              -        34,632

Partners' Capital                                                    57,347        107,476        166,621       165,748
                                                                   --------       --------       --------      --------
         Total Liabilities and Partners' Capital                   $179,607       $394,112       $276,302      $561,716
                                                                   ========       ========       ========      ========
</TABLE>

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

                                       13
<PAGE>

6)   Inventories

     The components of inventory were as follows:


     (in thousands)                     September 30, 1998      June 30, 1999
                                        ------------------    -----------------
     Propane gas                              $ 8,807               $ 2,031
     Propane appliances and equipment           1,801                 1,974
     Fuel oil                                       -                 4,333
     Fuel oil parts and equipment                   -                 6,530
                                              -------               -------
                                              $10,608               $14,868
                                              =======               =======

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

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

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

     Concentration of Revenue with Guaranteed Maximum Price Customers

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

                                       14
<PAGE>

6)  Inventories - (continued)

     In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
     contracts are classified as a hedge when the item to be hedged exposes the
     company to price risk and the futures contract reduces that risk exposure.
     Future contracts that relate to transactions that are expected to occur are
     accounted for as a hedge when the significant characteristics and expected
     terms of the anticipated transactions are identified and it is probable
     that the anticipated transaction will occur.  If a transaction does not
     meet the criteria to qualify as a hedge, it is considered to be
     speculative.  Any gains or losses associated with futures contracts which
     are classified as speculative are recognized in the current period.  If a
     futures contract that has been accounted for as a hedge is closed or
     matures before the date of the anticipated transaction, the accumulated
     change in value of the contract is carried forward and included in the
     measurement of the related transaction.  Option contracts are accounted for
     in the same manner as futures contracts.  At June 30, 1999 the heating oil
     segment had futures contracts to buy 50.7 million gallons of home heating
     oil with a notional and fair market value totaling $25.6 million and $26.0
     million respectively;  the propane segment had options to buy 5.0 million
     gallons of propane with a notional and fair market value totaling $1.6
     million and $1.8 million respectively.

     At June 30, 1999 the heating oil segment also had 1.0 million gallons of
     heating oil forward purchase contracts which expire at various times with
     no contract expiring later than September 1999; the propane segment did not
     have any forward purchase contracts.  At June 30, 1999, the unrealized
     gains on the heating oil segment and propane segment hedging activity was
     approximately $0.5 million and $0.2 million respectively.  The heating oil
     segment's hedging activity is designed to help it achieve its planned
     margins and represents approximately 25% of the expected total home heating
     oil volume sold in a twelve month period.  The propane segment's hedging
     activity is also designed to help it achieve its planned margins and
     represents approximately 5% of the expected total propane volume sold in a
     twelve month period.

     The carrying amount of all hedging financial instruments at June 30, 1999
     was $0.3 million and was included in Prepaid Expenses on the Condensed
     Consolidated Balance Sheet.  The risk that counterparties to such
     instruments may be unable to perform is minimized by limiting the
     counterparties to major oil companies and major financial institutions,
     including the New York Mercantile Exchange.  The Partnership does not
     expect any losses due to such counterparty default.

7)  Property, Plant and Equipment

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

<TABLE>
<CAPTION>
(in thousands)
                                           September 30, 1998        June 30, 1999     Estimated Useful Lives
                                           ------------------        -------------     ----------------------
<S>                                        <C>                       <C>               <C>
Land                                           $  4,635                  $  8,227
Buildings and leasehold
  improvements                                   10,313                    20,583           4 - 30 years
Fleet and other equipment                        16,918                    33,437           3 - 30 years
Tanks and equipment                             102,493                   106,594           8 - 30 years
Furniture and fixtures                            2,833                    13,695           5 - 12 years
                                               --------                  --------
  Total                                         137,192                   182,536
Less accumulated depreciation                    26,930                    34,178
                                               --------                  --------
  Total                                        $110,262                  $148,358
                                               ========                  ========
</TABLE>

                                       15
<PAGE>

8)  Intangibles and Other Assets

The components of intangibles and other assets were as follows at the indicated
dates:

<TABLE>
<CAPTION>
(in thousands)                                September 30,
                                                  1998                   June 30, 1999               Useful Lives
                                             ---------------  ------------------------------------  --------------
                                               (Propane)      (Propane)   (Heating Oil)    Total
<S>                                          <C>              <C>         <C>            <C>        <C>
Goodwill                                          $25,690       $25,690       $175,615    $201,305       25 years
Covenants not to compete                            2,341         2,361              -       2,361        5 years
Customer lists                                     34,028        34,599         94,633     129,232  10 - 15 years
Deferred charges                                    2,907         3,104          2,742       5,846   6 - 14 years
                                                  -------       -------       --------    --------
  Total intangibles                                64,966        65,754        272,990     338,744
Less accumulated amortization                      13,568        16,564          4,159      20,723
                                                  -------       -------       --------    --------
  Net intangibles                                  51,398        49,190        268,831     318,021
Other assets                                            -            90            682         772
                                                  -------       -------       --------    --------
  Intangibles and other assets                    $51,398       $49,280       $269,513    $318,793
                                                  =======       =======       ========    ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  (in thousands)
<S>                                                                              <C>
Consideration given for the exchange of Petro shares                                     $  20,822

Fair market value of Petro's assets and liabilities as of March 26, 1999:
     Current assets                                                                       (107,102)
     Property, plant and equipment (1)                                                     (40,109)
     Value of Petro's investment in the Partnership                                        (21,864)
     Current liabilities                                                                    79,792
     Long-term debt                                                                        276,568
     Deferred income taxes                                                                  40,000
     Other liabilities                                                                       7,251
     Preferred stock                                                                        12,978
     Junior preferred stock                                                                  1,459
                                                                                         ---------
     Sub-total                                                                             248,973
                                                                                         ---------

Total value assigned to intangibles and other assets                                     $ 269,795
                                                                                         =========
Consisting of:
     Customer lists                                                                      $  94,000
     Goodwill                                                                              175,080
     Other assets                                                                              715
                                                                                         ---------
     Total                                                                               $ 269,795
                                                                                         =========
</TABLE>

(1)  Includes fair market value adjustment of $13.4 million.

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

                                       16
<PAGE>

9)  Acquisitions

     During the nine months ended June 30, 1999, the Partnership acquired one
     unaffiliated retail propane dealer with an aggregate cost of $1.2 million,
     and Petro in a four part transaction as described in footnote number 2.
     Since the Star Gas / Petro Transaction, the Partnership has also acquired
     two unaffiliated heating oil dealers with an aggregate cost of $1.4
     million.

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

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

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

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

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

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

     The issuance of such partnership interests was approved by the Audit
     Committee of this General Partner and the Executive Committee of Petro.

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

                                       17
<PAGE>

9)  Acquisitions - (continued)

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

     (in thousands)                              Nine Months Ended June 30,
                                               ------------------------------
                                                    1998            1999
                                               --------------  --------------
     Sales                                           $510,033        $457,106
                                                     ========        ========

     Net income                                      $ 25,732        $ 33,272
                                                     ========        ========
     General Partner's interest in net income
                                                     $    515        $    665
     Limited Partners' interest in net income        ========        ========

     Basic and Diluted net income per limited
      partner unit                                   $ 25,217        $ 32,607
                                                     ========        ========

                                                     $   1.57        $   2.03
                                                     ========        ========


10)  Long-Term Debt and Working Capital Borrowings

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

     (in thousands)                            September 30,      June 30,
                                                    1998            1999
                                               -------------     ----------
     Star Gas Propane:
     8.04% First Mortgage Notes (a)                $ 85,000       $ 85,000
     7.17% First Mortgage Notes (a)                  11,000         11,000
     Acquisition Facility Borrowings (b)              9,000          2,000
     Working Capital Facility Borrowings (b)          4,770          1,400

     Petro:
     7.92% Senior Notes (c)                               -         90,000
     9.0% Senior Notes (d)                                -         62,697
     10.25% Senior and Subordinated Notes (e)             -          4,280
     Acquisition Facility Borrowings (f)                  -              -
     Acquisition Notes Payable (g)                        -          9,739
     Subordinated Debentures (h)                          -          3,022
                                                   --------       --------
                                                    109,770        269,138
     Less current maturities                           (692)        (2,331)
     Less bank credit facility borrowings            (4,770)        (1,400)
                                                   --------       --------
               Total                               $104,308       $265,407
                                                   ========       ========

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

                                       18
<PAGE>

10)  Long-Term Debt and Working Capital Borrowings - (continued)

     (b)  The Star Gas Propane Bank Credit Facilities consist of a $25.0 million
     Acquisition Facility and a $12.0 million Working Capital Facility.  At June
     30, 1999 $2.0 million and $1.4 million was borrowed under the Acquisition
     Facility and Working Capital Facility respectively.  The agreement
     governing the Bank Credit Facilities contains covenants and default
     provisions generally similar to those contained in the First Mortgage Note
     Agreements.  The Bank Credit Facilities bear interest at a rate based upon,
     at the Partnership's option, either the London Interbank Offered Rate plus
     a margin or a Base Rate (each as defined in the Bank Credit Facilities).
     The Partnership is required to pay a fee for unused commitments which
     amounted to $0.1 million for fiscal 1996, $0.2 million for fiscal 1997 and
     $0.1 million for fiscal 1998.  For fiscal 1998, the weighted average
     interest rate on borrowings under these facilities was 7.46%.

     The Working Capital Facility will expire June 30, 2001, but may be extended
     annually thereafter with the consent of the banks.  Borrowings under the
     Acquisition Facility will revolve until September 30, 2000, after which
     time any outstanding loans thereunder, will amortize quarterly in equal
     principal payments with a final payment due on September 30, 2003.
     However, there must be no amount outstanding under the Working Capital
     Facility for at least 30 consecutive days during each fiscal year.

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

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

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

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

                                       19
<PAGE>

10)  Long-Term Debt and Working Capital Borrowings - (continued)

     (f)  The Petro Bank Facilities consist of three separate facilities; a $40
     million working capital facility, a $10 million insurance letter of credit
     facility and a $50 million acquisition facility.  At June 30, 1999 no
     amount was outstanding under the working capital facility, $9.5 million of
     the insurance letter of credit was used, and $9.2 million of the
     acquisition facility was outstanding in the form of letter of credits (see
     footnote g below).  The working capital facility and letter of credit
     facility will expire on June 30, 2001.  The acquisition facility will
     convert to a term loan on June 30, 2001 which will be payable in eight
     equal quarterly principal payments.  Amounts borrowed under the working
     capital facility are subject to a requirement to maintain a zero balance
     for 90 consecutive days during the period from April 1 to September 30 of
     each year.  In addition, each facility will bear an interest rate that is
     based on either the London Interbank Offer Rate or another base rate plus a
     set percentage.  The bank facilities agreement contains covenants and
     default provisions generally similar to those contained in the note
     agreement for the senior secured notes.

     (g)  These Petro notes were issued in connection with the purchase of fuel
     oil dealers and other notes payable and are due in monthly, quarterly, and
     annual installments.  Interest is at various rates ranging from 8% to 15%
     per annum, maturing at various dates through 2004.  Approximately $9.2
     million of letter of credits issued under the Petro Bank Acquisition
     Facility are issued to support these notes.

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

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

                                              (in thousands)
                    1999                          $    146
                    2000                            12,914
                    2001                            20,796
                    2002                            25,575
                    2003                            54,136
                    Thereafter                     155,571
                                                  --------
                                                  $269,138
                                                  ========

     As of June 30, 1999, the Partnership was in compliance with all borrowing
     covenants, as amended.

11)  Employee Benefit Plans

     Propane Segment

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

     Heating Oil Segment

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

                                       20
<PAGE>

11)  Employee Benefit Plans - (continued)

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

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


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

Reconciliation of Fair Value of Plan Assets
-------------------------------------------
Fair value of plan assets at beginning of year                          $20,367                $22,292
Actual return on plan assets                                              2,780                  2,561
Employer contributions                                                    2,458                    615
Benefit payments                                                         (1,384)                (1,547)
Settlements                                                              (1,929)                (2,883)
                                                              -----------------    -------------------
Fair value of plan assets at end of year                                $22,292                $21,038
                                                              =================    ===================
<CAPTION>
                                                                  Twelve Months Ended December 31,
                                                                 ----------------------------------------
Funded Status                                                           1997                  1998
-------------                                                    ------------------     -----------------
<S>                                                              <C>                    <C>
Benefit obligation                                                         $29,258               $27,377
Fair value of plan assets                                                   22,292                21,038
Unrecognized transition (asset) obligation                                     (52)                  (39)
Unrecognized prior service cost                                                  -                     -
Unrecognized net actuarial (gain) loss                                       5,807                 4,776
                                                                 -----------------      ----------------
Prepaid (accrued) benefit cost prior to additional liability                (1,211)               (1,602)
Amount included in comprehensive income                                      4,646                 4,737
                                                                 -----------------      ----------------
Prepaid (accrued) benefit cost                                             $(5,857)              $(6,339)
                                                                 =================      ================

Weighted-Average Assumptions Used in the Measurement of the
 Company's Benefit Obligation as of December 31,
-----------------------------------------------------------
Discount rate                                                                  6.5%                  6.5%
Expected return on plan assets                                                 8.5%                  8.5%
Rate of compensation increase                                                  N/A                   N/A
</TABLE>

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

                                       21
<PAGE>

12)  Unit Option Plan

     On December 20, 1995, the Partnership adopted a Unit Option Plan (the
     "Unit Option Plan"), which currently authorizes the issuance of options
     (the "Unit Options") and Unit Appreciation Rights ("UARS") covering up to
     300,000 Subordinated Units to certain officers and employees of the
     Partnership.  A total of 40,000 options were granted to key executives in
     December 1995.  The Unit Options have the following characteristics:  1) an
     exercise price of $22 per unit, which is an estimate of the fair market
     value of the Subordinated Units at the time of grant, 2) vest over a five
     year period, 3) are exercisable after the subordination period has elapsed,
     and 4) expire on the tenth anniversary of the date of grant.  No UARS have
     been granted pursuant to the plan.

     As prescribed by SFAS No. 123, compensation expense is recognized by the
     Partnership for the unit option plan awards to executives who are not
     employees of the Partnership.  The amount recorded is calculated by
     comparing the fair value of the options granted on the grant date based on
     the Black-Scholes model to the market price of the Partnership's units on
     that date and amortizing such difference over the vesting period.  The
     amounts recorded in fiscal years 1996, 1997 and 1998 were not significant.

13)  Lease Commitments

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

     Propane Segment

     The future minimum rental commitments at September 30, 1998 under leases
     having an initial or remaining non-cancelable term of one year or more are
     as follows:

                               (in thousands)
     1999                          $  939
     2000                             808
     2001                             751
     2002                             638
     2003                             285
     Thereafter                       379
                                   ------
     Total minimum lease payments  $3,800
                                   ======

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

     Heating Oil segment

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

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

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

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

                                       22
<PAGE>

14)  Commitments and Contingencies

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

15)  Related Party Transactions

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

16)  Subsequent Events

     Cash Distribution

     On July 23, 1999 the Partnership announced that it would pay a cash
     distribution of $0.575 per common unit for the three months ended June 30,
     1999.  The distribution is payable on August 13, 1999 to holders of record
     as of August 3, 1999.

     Acquisitions

     On August 4, 1999 the Partnership acquired McBride Propane in Flint,
     Michigan with annual propane gallons of 2.8 million.

     On August 10, 1999 the Partnership signed a purchase agreement to acquire a
     retail propane distributor located in its midwest operating area with sales
     of 7.0 million gallons of propane annually. The consummation of this
     transaction is subject to finalization of due diligence, financing and
     other normal closing conditions.

                                       23
<PAGE>

                     STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

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


Overview

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

The results of operations for the three and nine month periods ended June 30,
1999 include the Petro acquisition from March 26, 1999.  Refer to footnote 2 of
the condensed consolidated financial statements for a description of the Star
Gas / Petro Transaction.

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

Also, the propane and heating oil industries are seasonal in nature with peak
activity occurring during the winter months.  Since Petro was acquired after the
heating season, the results for the three and nine months ended June 30, 1999
included anticipated third fiscal quarter losses but do not include the profits
from the heating season.  Accordingly, results of operations for the periods
presented are not indicative of the results to be expected for a full year.


THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
--------------------------------------------


Volume

For the three months ended June 30, 1999, retail volume of propane and home
heating oil increased 44.7 million gallons to 56.9 million gallons, as compared
to 12.2 million gallons for the three months ended June 30, 1998. This increase
was due to 43.8 million gallons provided by the March 26, 1999 acquisition of
Petro, the heating oil segment, and a 0.9 million gallon increase in the propane
segment.  The 0.9 million gallon increase in the propane segment was due to the
additional volume provided by propane acquisitions and internal growth.  In the
Partnership's propane operating areas, temperatures were 3.8% warmer than in the
prior year's comparable quarter and 20.5% warmer than normal.

For the three months ended June 30, 1999, wholesale propane volume decreased 3.1
million gallons, or 50.3%, to 3.1 million gallons, as compared to 6.3 million
gallons for the three months ended June 30, 1998. This decrease was due to the
lower summertime pre-season buying demand.


Sales

For the three months ended June 30, 1999, sales increased $62.8 million, or
386.9%, to $79.1 million, as compared to $16.2 million for the three months
ended June 30, 1998.  This increase was due to $63.5 million provided by the
home heating oil segment partially offset by a $0.6 million reduction in the
propane segment.  Sales decreased in the propane segment due to lower wholesale
volumes and lower selling prices, partially offset by the increased retail
volume.

                                       24
<PAGE>

Cost of Product

For the three months ended June 30, 1999, cost of product increased $22.6
million, or 377.0%, to $28.6 million, as compared to $6.0 million for the three
months ended June 30, 1998.  Cost of product relating to heating oil sales
accounted for $23.5 million of this increase.  In the propane segment, cost of
product decreased by $0.8 million, as the impact of higher retail volume sales
was largely offset by lower propane supply cost and less wholesale volume.
While both propane selling prices and propane supply costs declined on a per
gallon basis, the decline in selling prices were greater than the decline in
supply costs, which resulted in a decrease in per gallon margins.


Cost of Installation, Service and Appliances

For the three months ended June 30, 1999, cost of installation, service and
appliances increased $23.5 million to $24.0 million, as compared to $0.5 million
for the three months ended June 30, 1998.  This increase was almost entirely due
to the inclusion of $23.3 million of expenses relating to the heating oil
segment's cost of installation and service.


Delivery and Branch Expenses

For the three months ended June 30, 1999, delivery and branch expenses increased
$23.6 million, or 276.2%, to $32.1 million, as compared to $8.5 million for the
three months ended June 30, 1998.  Delivery and branch expenses at the heating
oil segment accounted for $22.6 million of this change.  The $1.0 million
increase in operating expenses for the propane segment was due to additional
operating cost of acquired propane companies and marketing expenses relating to
the propane segment's tank set program, which has increased same store
residential volume by approximately 4.0%.


Depreciation and Amortization Expenses

For the three months ended June 30, 1999, depreciation and amortization expenses
increased $5.6 million, or 194.9%, to $8.5 million, as compared to $2.9 million
for the three months ended June 30, 1998.  This increase was largely due to $5.4
million of depreciation and amortization expenses for the heating oil segment
with the difference attributable to the impact of propane acquisitions and other
fixed asset additions.


General and Administrative Expenses

For the three months ended June 30, 1999, general and administrative expenses
increased $2.5 million, or 154.1%, to $4.1 million, as compared to $1.6 million
for the three months ended June 30, 1998.  The increase was primarily due to the
inclusion of $2.4 million of the heating oil segment's general and
administrative expenses.


Interest Expense, net

For the three months ended June 30, 1999, net interest expense increased $3.3
million, or 178.7%, to $5.2 million, as compared to $1.9 million for the three
months ended June 30, 1998.  This change was primarily due to $3.3 million of
interest expense incurred by the heating oil segment.

                                       25
<PAGE>

Income Tax Expense (Benefit)

For the three months ended June 30, 1999, the income tax benefit was $5.4
million, as compared to an income tax expense of $0.01 million for the three
months ended June 30, 1998.  This change was due to the heating oil segment's
corporate net operating loss carryforwards, which generated $5.4 million in
deferred tax benefits offsetting in part the deferred tax liability.


Net Loss

For the three months ended June 30, 1999, net loss increased $13.0 million to a
loss of $18.2 million, as compared to a net loss of $5.2 million for the three
months ended June 30, 1998.  The anticipated increase in the net loss was
largely the result of the inclusion of the heating oil segment's seasonally
related loss of $11.8 million and $1.2 million less net income in the propane
segment due to lower wholesale volumes, an increase in marketing expenses and
lower per gallon propane margins.


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

Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) decreased $9.3 million, to a loss of $9.8
million, as compared to a loss of $0.4 million for the three months ended June
30, 1998.  This change was due to the seasonally related EBITDA loss of $8.3
million incurred by the heating oil segment.  In addition, the EBITDA loss in
the propane division increased by $1.0 million due to lower wholesale volume,
additional marketing expenses, and lower per gallon propane margins associated
with the propane division's successful tank set program.  EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations), but provides additional information for
evaluating the Partnership's ability to make the Minimum Quarterly Distribution.
The definition of "EBITDA" set forth above may be different from that used by
other companies.

                                       26
<PAGE>

NINE MONTHS ENDED JUNE 30, 1999
COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
-------------------------------------------


Volume

For the nine months ended June 30, 1999, retail volume of propane and heating
oil increased 52.0 million gallons, or 61.3%, to 136.8 million gallons, as
compared to 84.8 million gallons for the nine months ended June 30, 1998.  This
increase was due to 51.9 million gallons of additional volume provided by the
heating oil segment from March 26, 1999 to June 30, 1999.  For the period,
retail propane was 84.9 million gallons, 0.1 million gallons less than the prior
year's comparable period.  While retail propane volume increased by 6.6 million
gallons due to acquisitions, internal growth and slightly colder temperatures,
these positive influences were offset by a 6.5 million decrease in agricultural
volume.  The abnormal weather conditions during the first fiscal quarter
resulted in a very dry fall harvest, which caused propane demand for crop drying
to be at its lowest level since 1991.  In the Partnership's propane operating
areas, temperatures for the nine months ending June 30, 1999, were 1.4% colder
than in the prior year's comparable period and 10.8% warmer than normal.

For the nine months ended June 30 1999, wholesale propane volume decreased by
2.0 million gallons, or 8.9%, to 20.2 million gallons, as compared to 22.1
million gallons for the nine months ended June 30, 1998.  This decrease was due
to the lower summertime pre-season buying demand.


Sales

For the nine months ended June 30, 1999, sales increased $65.5 million, or
68.2%, to $161.4 million, as compared to $96.0 million for the nine months ended
June 30, 1998.  This increase was attributable to $71.6 million of additional
sales provided by the heating oil segment, which were partially offset by a $6.1
million decline in the propane segment.  Propane sales declined due to lower
agricultural sales and lower selling prices in response to a decline in propane
supply costs.  This decline was partially offset by additional propane sales
attributable to propane acquisitions, colder temperatures and propane segment
internal growth.


Cost of Product

For the nine months ended June 30, 1999, cost of product increased $16.7
million, or 39.9%, to $58.5 million, as compared to $41.8 million for the nine
months ended June 30, 1998.  This increase was due to $27.2 million of costs
attributable to the heating oil segment, partially offset by lower propane
supply cost of $10.5 million.  While both propane selling prices and propane
supply costs declined on a per gallon basis, the decline in selling prices was
less than the decline in supply costs, which resulted in an increase in per
gallon margins across all propane market segments.


Cost of Installation, Service and Appliances

For the nine months ended June 30, 1999, cost of installation, service and
appliances increased $24.7 million, to $26.7 million, as compared to $1.9
million for the nine months ended June 30, 1998.  This increase was primarily
due to $24.3 million of costs relating to the heating oil segment.


Delivery and Branch Expenses

For the nine months ended June 30, 1999, delivery and branch expenses increased
$26.2 million, or 92.5%, to $54.4 million, as compared to $28.3 million for the
nine months ended June 30, 1998.  This increase was primarily due to the
inclusion of $23.7 million of heating oil operating costs.  In addition, propane
operating expenses increased by $1.4 million due to $0.6 million of costs
associated with the segment's marketing initiatives and normal expense increases
of 2.8% or $0.8 million.

                                       27
<PAGE>

Depreciation and Amortization

For the nine months ended June 30, 1999, depreciation and amortization expenses
increased $6.0 million, or 70.3%, to $14.5 million, as compared to $8.5 million
for the nine months ended June 30, 1998.  This increase was primarily due to
$5.4 million of heating oil segment depreciation and amortization with the
remainder attributable to the impact of propane acquisitions and other fixed
asset additions.


General and Administrative Expenses

For the nine months ended June 30, 1999, general and administrative expenses
increased $2.8 million, or 63.5%, to $7.2 million, as compared to $4.4 million
for the nine months ended June 30, 1998.  This increase was primarily due to the
inclusion of $2.6 million of heating oil general and administrative expenses.


Interest Expense, net

For the nine months ended June 30, 1999, net interest expense increased $3.9
million, or 67.3%, to $9.8 million, as compared to $5.8 million for the nine
months ended June 30, 1998.  This change was primarily due to $3.5 million of
interest expense at the heating oil segment and an increase in borrowings
associated with propane acquisitions.


Income Tax Expense (Benefit)

For the nine months ended June 30, 1999, the income tax benefit was $5.3 million
as compared to an income tax expense of $0.02 million for the nine months ended
June 30, 1998. This change was due to the heating oil segment's corporate net
operating loss carryforwards, which generated $5.4 million in deferred tax
benefits offsetting in part the deferred tax liability.



Net Income

For the nine months ended June 30, 1999, the net loss was $4.6 million, as
compared to net income of $4.8 million for the nine months ended June 30, 1998.
This change was due to the $9.8 million seasonal related net loss from the
heating oil segment, partially offset by $0.4 million of additional net income
from the propane segment primarily due to acquisitions.


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

Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) decreased $4.9 million, or 25.1%, to $14.6
million for the nine months ended June 30, 1999, as compared to $19.3 million
for the prior year's comparable period.  This decrease was due to the seasonally
related EBITDA loss of $6.2 million incurred by the heating oil segment,
partially offset by $1.3 million of additional propane segment EBITDA.  This
increase in the propane segment was attributable to the impact of acquisitions,
1.4% colder weather conditions and higher per gallon propane gross profit
margins.  EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.  The definition of "EBITDA" set forth above may
be different from that used by other companies.

                                       28
<PAGE>

Liquidity and Capital Resources

As discussed in footnote 2 of the financial statements, an integral element of
the Star Gas / Petro Transaction was the Partnership's March 1999 sale of 9.0
million common units (including 230,000 overallotment common units exercised in
April 1999).  The net proceeds from the offering, net of underwriter's
discounts, commissions and offering expenses was $118.8 million. These funds,
along with the net proceeds from Petro's $87.6 million concurrent private debt
placement, totaled $206.4 million.  To effect the Star Gas / Petro Transaction,
these funds were used to repay $193.9 million of Petro's debt, to redeem $11.7
million of Petro's preferred stock, and to pay $0.6 million in transactional
fees.

For the nine months ended June 30, 1999, net cash provided by operating
activities was $34.0 million.  This amount combined with $18.8 million of cash
acquired from Petro in the acquisition, and $0.1 million of proceeds from the
sale of fixed assets totaled $52.9 million.  Such funds were utilized for
capital expenditures of $4.9 million, acquisitions of $2.6 million, net credit
facility repayments of $3.4 million, acquisition facility repayments of $7.0
million, non-Star Gas / Petro Transaction related debt repayments of $3.3
million, and Partnership distributions of $12.0 million.  As a result of the
above activity, the Partnership's cash increased by $19.7 million.

The Partnership's cash requirements for the remainder of fiscal 1999 include
maintenance capital expenditures of approximately $1.5 million.  In addition,
the Partnership plans to pay cash distributions of $7.6 million and conclude its
Year 2000 compliance expenditures of $0.2 million.  Based on its current cash
position, bank credit availability and net cash from operating activities, the
Partnership expects to be able to meet all of these obligations for fiscal 1999,
as well as all of its other current obligations as they become due.  The
Partnership also plans to continue with the acquisition approach of its business
strategy by pursuing strategic acquisitions, and to prudently fund such
acquisitions through a combination of internally generated cash, debt and
equity.

                                       29
<PAGE>

Year 2000

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

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

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

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

The Partnership has assessed a total cost of approximately $885,000 to make its
computer systems Year 2000 compliant and to upgrade its internal messaging
system.  Through June 30, 1999 the Partnership has incurred approximately
$645,000 in Year 2000 compliance related expenses for applications and hardware,
and it expects to incur the remaining $240,000 through the summer of 1999 for
additional applications and hardware.

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

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

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

                                       30
<PAGE>

Accounting Principles Not Yet Adopted

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for all fiscal
quarters for all fiscal years beginning after June 15, 2000.  SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities and measure the instruments at fair value. The
accounting for changes in fair value of a derivative depends upon the intended
use of such derivative.  The Partnership is still evaluating the effects of SFAS
No. 133.

Statement Regarding Forward-Looking Disclosure

This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act which represent
the Partnership's expectations or beliefs concerning future events that involve
risks and uncertainties, including those associated with the effect of weather
conditions on the Partnership's financial performance, the price and supply of
propane and / or heating oil, and the ability of the Partnership to obtain new
accounts and retain existing accounts.  All statements other than statements of
historical facts included in this Report including, without limitation, the
statements under "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and elsewhere herein, are forward-looking statements.
Although the Partnership believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct.


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

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

At June 30, 1999, the Partnership had outstanding borrowings of approximately
$3.4 million 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 less than $0.1 million annually.

The Partnership also selectively uses derivative financial instruments to manage
its exposure to market risk related to changes in the current and commodity
market price of home heating oil for its heating oil segment.  The Partnership
does not hold derivatives for trading purposes.  The value of market sensitive
derivative instruments is subject to change as a result of movements in market
prices.  Consistent with the nature of hedging activity, associated unrealized
gains and losses would be offset by corresponding decreases or increases in the
purchase price the Partnership would pay for the home heating oil being hedged.
Sensitivity analysis is a technique used to evaluate the impact of hypothetical
market value changes. Based on a hypothetical ten percent increase in the cost
of home heating oil at June 30, 1999, the potential unrealized gain on the
Company's hedging activity would be increased by $2.6 million to a gain of $3.1
million; and conversely a hypothetical ten percent decrease would decrease the
unrealized gain by $2.6 to a loss of $2.2 million.

                                       31
<PAGE>

                           PART II OTHER INFORMATION
                           -------------------------


Item 6.  Exhibits and Reports on Form 8-K
         --------------------------------

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

         (27)    Financial Data Schedule

         10.1    Seventh amendment dated June 18, 1999 to the Credit Agreement
                 dated December 13, 1995, between Star Gas Propane, L.P. and
                 BankBoston, N.A. and NationsBank, N.A.

                                       32
<PAGE>

                                   SIGNATURE
                                   ---------



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


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


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

/s/  George Leibowitz            Chief Financial Officer         August 11, 1999
     ----------------            Star Gas LLC
     George Leibowitz            (Principal Financial Officer)


/s/  James J. Bottiglieri        Vice President                  August 11, 1999
     ---------------------       Star Gas LLC
     James J. Bottiglieri

                                       33