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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



(Mark One)

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



For the quarterly period ended March 31, 2004



OR



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



For the transition period from
 to



Commission File Number: 33-98490

Commission File Number: 333-103873



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STAR GAS PARTNERS, L.P.

STAR GAS FINANCE COMPANY

(Exact name of registrants as specified in its charters)



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



2187 Atlantic
Street, Stamford, Connecticut 06902

(Address of principal executive office)



(203) 328-7310

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



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



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



|                         |  |                           |  |           
|------------------------ |  | ------------------------- |  | ----------
|Star Gas Partners, L.P.  |  | Common Units              |  | 32,165,528
|Star Gas Partners, L.P.  |  | Senior Subordinated Units |  | 3,242,696 
|Star Gas Partners, L.P.  |  | Junior Subordinated Units |  | 345,364   
|Star Gas Partners, L.P.  |  | General Partner Units     |  | 325,729   
|Star Gas Finance Company |  | Common Shares             |  | 100       



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES



INDEX TO FORM 10-Q



|                                                                                                                               |  |      
|------------------------------------------------------------------------------------------------------------------------------ |  | -----
|                                                                                                                               |  | Page 
|Part I    Financial Information                                                                                                |  |      
|                                                                                                                               | 
|Item 1  Condensed Consolidated Financial Statements                                                                           |  |      
|                                                                                                                               | 
|Condensed Consolidated Balance Sheets as of September 30, 2003 and March 31, 2004                                              |  | 3    
|                                                                                                                               | 
|Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2003 and March 31, 2004           |  | 4    
|                                                                                                                               | 
|Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2003 and March 31, 2004 |  | 5    
|                                                                                                                               | 
|Condensed Consolidated Statement of Partners Capital for the six months ended March 31, 2004                                  |  | 6    
|                                                                                                                               | 
|Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2003 and March 31, 2004                     |  | 7    
|                                                                                                                               | 
|Notes to Condensed Consolidated Financial Statements                                                                           |  | 8-16 
|                                                                                                                               | 
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 17-25
|                                                                                                                               | 
|Item 3  Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 26   
|                                                                                                                               | 
|Item 4  Controls and Procedures                                                                                               |  | 26   
|                                                                                                                               | 
|Part II    Other Information:                                                                                                  |  |      
|                                                                                                                               | 
|Item 6  Exhibits and Reports on Form 8-K                                                                                      |  | 27   
|                                                                                                                               | 
|Signatures                                                                                                                     |  | 28   



-2-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                 |  |                |         |   |                |   |           |  
|---------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | - | --------- | -
|(in thousands)                                                   |  | Sept. 30, 2003 |         |   | March 31, 2004 |  
|ASSETS                                                           |  |                |         |   |                |   |           |  
|Current assets                                                   |  |                |         |   |                |   |           |  
|Cash and cash equivalents                                        |  | $              | 10,044  |   |                | $ | 25,677    |  
|Receivables, net of allowance of $7,542 and $9,344, respectively |  |                | 100,511 |   |                |   | 218,743   |  
|Inventories                                                      |  |                | 38,561  |   |                |   | 55,911    |  
|Prepaid expenses and other current assets                        |  |                | 51,470  |   |                |   | 46,200    |  
|Net current assets of discontinued operations                    |  |                | 10,523  |   |                |   |          |  
|                                                                 |  |                |         |   |                |   |           |  
|Total current assets                                             |  |                | 211,109 |   |                |   | 346,531   |  
|                                                                 |  |                |         |   |                |   |           |  
|Property and equipment, net                                      |  |                | 261,867 |   |                |   | 254,082   |  
|Long-term portion of accounts receivables                        |  |                | 7,145   |   |                |   | 7,114     |  
|Goodwill                                                         |  |                | 272,740 |   |                |   | 273,350   |  
|Intangibles, net                                                 |  |                | 201,468 |   |                |   | 187,255   |  
|Deferred charges and other assets, net                           |  |                | 14,414  |   |                |   | 17,982    |  
|Net long-term assets of discontinued operations                  |  |                | 6,867   |   |                |   |          |  
|                                                                 |  |                |         |   |                |   |           |  
|Total Assets                                                     |  | $              | 975,610 |   |                | $ | 1,086,314 |  
|                                                                 |  |                |         |   |                |   |           |  
|                                                                 |  |               
|LIABILITIES AND PARTNERS CAPITAL                                |  |                |         |   |                |   |           |  
|Current liabilities                                              |  |                |         |   |                |   |           |  
|Accounts payable                                                 |  | $              | 27,140  |   |                | $ | 32,440    |  
|Working capital facility borrowings                              |  |                | 12,000  |   |                |   | 85,100    |  
|Current maturities of long-term debt                             |  |                | 22,847  |   |                |   | 22,586    |  
|Accrued expenses                                                 |  |                | 82,356  |   |                |   | 81,764    |  
|Unearned service contract revenue                                |  |                | 32,036  |   |                |   | 33,427    |  
|Customer credit balances                                         |  |                | 74,716  |   |                |   | 26,772    |  
|Net current liabilities of discontinued operations               |  |                | 7,569   |   |                |   |          |  
|                                                                 |  |                |         |   |                |   |           |  
|Total current liabilities                                        |  |                | 258,664 |   |                |   | 282,089   |  
|                                                                 |  |                |         |   |                |   |           |  
|Long-term debt                                                   |  |                | 499,341 |   |                |   | 488,496   |  
|Other long-term liabilities                                      |  |                | 27,829  |   |                |   | 27,442    |  
|                                                                 |  |               
|Partners capital (deficit)                                      |  |                |         |   |                |   |           |  
|Common unitholders                                               |  |                | 210,636 |   |                |   | 298,486   |  
|Subordinated unitholders                                         |  |                | (57     | ) |                |   | 6,006     |  
|General partner                                                  |  |                | (3,082  | ) |                |   | (2,523    | )
|Accumulated other comprehensive loss                             |  |                | (17,721 | ) |                |   | (13,682   | )
|                                                                 |  |                |         |   |                |   |           |  
|Total Partners capital                                          |  |                | 189,776 |   |                |   | 288,287   |  
|                                                                 |  |                |         |   |                |   |           |  
|Total Liabilities and Partners Capital                          |  | $              | 975,610 |   |                | $ | 1,086,314 |  
|                                                                 |  |                |         |   |                |   |           |  



See accompanying notes
to condensed consolidated financial statements.



-3-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|(in thousands, except per unit data)                                                                                                                 |  | Three Months Ended March 31, |         |   | Six Months Ended March 31, |  
|                                                                                                                                                     |  | 2003                         |         |   | 2004                       |   |         | 2003 |  |   | 2004      |  
|Sales:                                                                                                                                               |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Product                                                                                                                                              |  | $                            | 583,587 |   |                            | $ | 572,921 |      |  | $ | 904,650   |   |  | $ | 928,942   |  
|Installations, service and appliances                                                                                                                |  |                              | 45,117  |   |                            |   | 52,468  |      |  |   | 95,385    |   |  |   | 114,464   |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Total sales                                                                                                                                          |  |                              | 628,704 |   |                            |   | 625,389 |      |  |   | 1,000,035 |   |  |   | 1,043,406 |  
|Cost and expenses:                                                                                                                                   |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Cost of product                                                                                                                                      |  |                              | 371,635 |   |                            |   | 353,056 |      |  |   | 561,101   |   |  |   | 572,627   |  
|Cost of installations, service and appliances                                                                                                        |  |                              | 52,181  |   |                            |   | 57,109  |      |  |   | 106,201   |   |  |   | 117,815   |  
|Delivery and branch expenses                                                                                                                         |  |                              | 86,644  |   |                            |   | 96,662  |      |  |   | 161,158   |   |  |   | 180,655   |  
|Depreciation and amortization expenses                                                                                                               |  |                              | 12,788  |   |                            |   | 14,597  |      |  |   | 25,512    |   |  |   | 29,022    |  
|General and administrative expenses                                                                                                                  |  |                              | 11,748  |   |                            |   | 10,592  |      |  |   | 21,905    |   |  |   | 18,695    |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Operating income                                                                                                                                     |  |                              | 93,708  |   |                            |   | 93,373  |      |  |   | 124,158   |   |  |   | 124,592   |  
|Interest expense                                                                                                                                     |  |                              | (11,393 | ) |                            |   | (12,729 | )    |  |   | (20,343   | ) |  |   | (24,381   | )
|Interest income                                                                                                                                      |  |                              | 856     |   |                            |   | 801     |      |  |   | 1,517     |   |  |   | 1,634     |  
|Amortization of debt issuance costs                                                                                                                  |  |                              | (554    | ) |                            |   | (774    | )    |  |   | (991      | ) |  |   | (2,043    | )
|Loss on redemption of debt                                                                                                                           |  |                              | (181    | ) |                            |   |        |      |  |   | (181      | ) |  |   |          |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Income from continuing operations before income taxes                                                                                                |  |                              | 82,436  |   |                            |   | 80,671  |      |  |   | 104,160   |   |  |   | 99,802    |  
|Income tax expense                                                                                                                                   |  |                              | 1,460   |   |                            |   | 744     |      |  |   | 2,135     |   |  |   | 1,150     |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Income from continuing operations                                                                                                                    |  |                              | 80,976  |   |                            |   | 79,927  |      |  |   | 102,025   |   |  |   | 98,652    |  
|Income from discontinued operations before gain on sale of TG&E segment and cumulative effect of change in accounting principle, net of
income taxes |  |                              | 2,187   |   |                            |   | 496     |      |  |   | 1,078     |   |  |   | 1,083     |  
|Gain on sale of TG&E segment, net of income taxes                                                                                                    |  |                              |        |   |                            |   | 230     |      |  |   |          |   |  |   | 230       |  
|Cumulative effect of change in accounting principle for adoption of SFAS No. 142 for discontinued operations                                         |  |                              |        |   |                            |   |        |      |  |   | (3,901    | ) |  |   |          |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Net income                                                                                                                                           |  | $                            | 83,163  |   |                            | $ | 80,653  |      |  | $ | 99,202    |   |  | $ | 99,965    |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|General Partners interest in net income                                                                                                             |  | $                            | 832     |   |                            | $ | 739     |      |  | $ | 992       |   |  | $ | 933       |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Limited Partners interest in net income                                                                                                             |  | $                            | 82,331  |   |                            | $ | 79,914  |      |  | $ | 98,210    |   |  | $ | 99,032    |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Net income per Limited Partner unit:                                                                                                                 |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Basic                                                                                                                                                |  | $                            | 2.54    |   |                            | $ | 2.27    |      |  | $ | 3.03      |   |  | $ | 2.86      |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Diluted                                                                                                                                              |  | $                            | 2.53    |   |                            | $ | 2.27    |      |  | $ | 3.02      |   |  | $ | 2.86      |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Basic weighted average number of Limited Partner units outstanding                                                                                   |  |                              | 32,453  |   |                            |   | 35,158  |      |  |   | 32,452    |   |  |   | 34,655    |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  
|Diluted number of Limited Partner units                                                                                                              |  |                              | 32,561  |   |                            |   | 35,158  |      |  |   | 32,560    |   |  |   | 34,655    |  
|                                                                                                                                                     |  |                              |         |   |                            |   |         |      |  |   |           |   |  |   |           |  



See accompanying notes
to condensed consolidated financial statements.



-4-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



|                                                     |  |                              |        |   |                            |   |        |      |  |   |        |   |  |   |        
|---------------------------------------------------- |  | ---------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | -------
|(in thousands)                                       |  | Three Months Ended March 31, |        |   | Six Months Ended March 31,
|                                                     |  | 2003                         |        |   | 2004                       |   |        | 2003 |  |   | 2004  
|Net income                                           |  | $                            | 83,163 |   |                            | $ | 80,653 |      |  | $ | 99,202 |   |  | $ | 99,965 
|Other comprehensive income:                          |  |                              |        |   |                            |   |        |      |  |   |        |   |  |   |        
|Net unrealized gain (loss) on derivative instruments |  |                              | (6,468 | ) |                            |   | (5,445 | )    |  |   | (5,988 | ) |  |   | 4,039  
|                                                     |  |                              |        |   |                            |   |        |      |  |   |        |   |  |   |        
|Comprehensive income                                 |  | $                            | 76,695 |   |                            | $ | 75,208 |      |  | $ | 93,214 |   |  | $ | 104,004
|                                                     |  |                              |        |   |                            |   |        |      |  |   |        |   |  |   |        



Reconciliation of Accumulated Other
Comprehensive Income (Loss)



|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  
|-------------------------------- |  | ----------------------- | ------- | - | ---------------------- | - | ------ | ----- |  | - | ------- | -
|(in thousands)                   |  | PensionPlan Obligations |         |   | Derivative Instruments |   |        | Total | 
|Balance as of September 30, 2002 |  | $                       | (15,745 | ) |                        | $ | 4,918  |       |  | $ | (10,827 | )
|Reclassification to earnings     |  |                         |        |   |                        |   | (7,685 | )     |  |   | (7,685  | )
|Gain on derivative instruments   |  |                         |        |   |                        |   | 1,697  |       |  |   | 1,697   |  
|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  
|Other comprehensive loss         |  |                         |        |   |                        |   | (5,988 | )     |  |   | (5,988  | )
|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  
|Balance as of March 31, 2003     |  | $                       | (15,745 | ) |                        | $ | (1,070 | )     |  | $ | (16,815 | )
|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  
|Balance as of September 30, 2003 |  | $                       | (17,214 | ) |                        | $ | (507   | )     |  | $ | (17,721 | )
|Reclassification to earnings     |  |                         |        |   |                        |   | (8,165 | )     |  |   | (8,165  | )
|Gain on derivative instruments   |  |                         |        |   |                        |   | 12,204 |       |  |   | 12,204  |  
|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  
|Other comprehensive income       |  |                         |        |   |                        |   | 4,039  |       |  |   | 4,039   |  
|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  
|Balance as of March 31, 2004     |  | $                       | (17,214 | ) |                        | $ | 3,532  |       |  | $ | (13,682 | )
|                                 |  |                         |         |   |                        |   |        |       |  |   |         |  





See accompanying notes to condensed consolidated financial statements.



-5-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS CAPITAL



|                                        |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |                |  |   |                                         |   |  |                        |         |   |  |   |         |  
|--------------------------------------- |  | --------------- |  | -------- |  | ------- |  | -------------- |  | ------ | ------- | - | ---------- | - | ------ | -------------- |  | - | --------------------------------------- | - |  | ---------------------- | ------- | - |  | - | ------- | -
|                                        |  | Number of Units |  |          |  |         |  |                |  |        |         |   |            |   |        |                | 
|(in thousands, except per unit amounts) |  | Common          |  | Sr. Sub. |  | Jr. Sub |  | GeneralPartner |  | Common |         |   | JuniorSub. |   |        | GeneralPartner |  |   | Accum. OtherComprehensive Income (Loss) |   |  | Total PartnersCapital |        
|Balance as of September 30, 2003        |  | 30,671          |  | 3,142    |  | 345     |  | 326            |  | $      | 210,636 |   |            | $ | (1,628 | )              |  | $ | (3,082                                  | ) |  | $                      | (17,721 | ) |  | $ | 189,776 |  
|Issuance of units                       |  | 1,495           |  | 101      |  |         |  |                |  |        | 34,996  |   |            |   |        |                |  |   |                                         |   |  |                        |         |   |  |   | 34,996  |  
|Net income                              |  |                 |  |          |  |         |  |                |  |        | 88,936  |   |            |   | 984    |                |  |   | 933                                     |   |  |                        |         |   |  |   | 99,965  |  
|Other comprehensive income, net         |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |                |  |   |                                         |   |  |                        | 4,039   |   |  |   | 4,039   |  
|Unit compensation expense               |  |                 |  |          |  |         |  |                |  |        | 48      |   |            |   |        |                |  |   |                                         |   |  |                        |         |   |  |   | 84      |  
|Distributions ($1.15 per unit)          |  |                 |  |          |  |         |  |                |  |        | (36,130 | ) |            |   | (398   | )              |  |   | (374                                    | ) |  |                        |         |   |  |   | (40,573 | )
|                                        |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |                |  |   |                                         |   |  |                        |         |   |  |   |         |  
|Balance as of March 31, 2004            |  | 32,166          |  | 3,243    |  | 345     |  | 326            |  | $      | 298,486 |   |            |   | (1,042 | )              |  | $ | (2,523                                  | ) |  | $                      | (13,682 | ) |  | $ | 288,287 |  
|                                        |  |                 |  |          |  |         |  |                |  |        |         |   |            |   |        |                |  |   |                                         |   |  |                        |         |   |  |   |         |  



See
accompanying notes to condensed consolidated financial statements.



-6-



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STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                  |  |                            |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                  |  | Six Months Ended March 31, |         
|(in thousands)                                                                                                    |  | 2003                       |          |   | 2004 |  
|Cash flows provided by (used in) operating activities:                                                            |  |                            |          |   |      |   |          |  
|Net income                                                                                                        |  | $                          | 99,202   |   |      | $ | 99,965   |  
|Deduct: Income from discontinued operations                                                                       |  |                            | (1,078   | ) |      |   | (1,083   | )
|Gain on sale of discontinued operations                                                                           |  |                            |         |   |      |   | (230     | )
|Add: Cumulative effect of change in accounting principle for adoption of SFAS No. 142 for discontinued operations |  |                            | 3,901    |   |      |   |         |  
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Income from continuing operations                                                                                 |  |                            | 102,025  |   |      |   | 98,652   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities:                       |  |                            |          |   |      |   |          |  
|Depreciation and amortization                                                                                     |  |                            | 25,512   |   |      |   | 29,022   |  
|Amortization of debt issuance cost                                                                                |  |                            | 991      |   |      |   | 2,043    |  
|Unit compensation expense                                                                                         |  |                            | 1,023    |   |      |   | 84       |  
|Loss on redemption of debt                                                                                        |  |                            | 181      |   |      |   |         |  
|Provision for losses on accounts receivable                                                                       |  |                            | 2,452    |   |      |   | 3,703    |  
|Loss (gain) on sales of fixed assets, net                                                                         |  |                            | 54       |   |      |   | (149     | )
|Changes in operating assets and liabilities:                                                                      |  |                            |          |   |      |   |          |  
|Increase in receivables                                                                                           |  |                            | (164,507 | ) |      |   | (120,239 | )
|Increase in inventories                                                                                           |  |                            | (12,716  | ) |      |   | (17,270  | )
|Decrease (increase) in other assets                                                                               |  |                            | (5,802   | ) |      |   | 5,021    |  
|Increase in accounts payable                                                                                      |  |                            | 16,146   |   |      |   | 5,502    |  
|Decrease in other current and long-term liabilities                                                               |  |                            | (47,469  | ) |      |   | (48,948  | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash used in continuing operating activities                                                                  |  |                            | (82,110  | ) |      |   | (42,579  | )
|                                                                                                                  |  |                           
|Cash flows provided by (used in) investing activities:                                                            |  |                            |          |   |      |   |          |  
|Capital expenditures                                                                                              |  |                            | (7,894   | ) |      |   | (3,900   | )
|Proceeds from sales of fixed assets                                                                               |  |                            | 338      |   |      |   | 1,000    |  
|Cash proceeds from disposition of TG&E segment                                                                    |  |                            |         |   |      |   | 12,795   |  
|Acquisitions                                                                                                      |  |                            | (1,837   | ) |      |   | (4,232   | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                                               |  |                            | (9,393   | ) |      |   | 5,663    |  
|                                                                                                                  |  |                           
|Cash flows provided by (used in) financing activities:                                                            |  |                            |          |   |      |   |          |  
|Working capital facility borrowings                                                                               |  |                            | 179,000  |   |      |   | 130,500  |  
|Working capital facility repayments                                                                               |  |                            | (66,400  | ) |      |   | (57,400  | )
|Acquisition facility repayments                                                                                   |  |                            | (32,600  | ) |      |   | (44,200  | )
|Proceeds from the issuance of debt                                                                                |  |                            | 196,932  |   |      |   | 38,646   |  
|Repayment of debt                                                                                                 |  |                            | (137,226 | ) |      |   | (5,345   | )
|Distributions                                                                                                     |  |                            | (34,892  | ) |      |   | (40,573  | )
|Proceeds from the issuance of common units, net                                                                   |  |                            |         |   |      |   | 34,996   |  
|Increase in deferred charges                                                                                      |  |                            | (7,713   | ) |      |   | (5,565   | )
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Net cash provided by financing activities                                                                         |  |                            | 97,101   |   |      |   | 51,059   |  
|                                                                                                                  |  |                           
|Net cash provided by discontinued operations                                                                      |  |                            | 2,373    |   |      |   | 1,490    |  
|                                                                                                                  |  |                           
|Net increase in cash                                                                                              |  |                            | 7,971    |   |      |   | 15,633   |  
|Cash and cash equivalents at beginning of period                                                                  |  |                            | 61,007   |   |      |   | 10,044   |  
|                                                                                                                  |  |                            |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                        |  | $                          | 68,978   |   |      | $ | 25,677   |  
|                                                                                                                  |  |                            |          |   |      |   |          |  



See accompanying notes
to condensed consolidated financial statements.



-7-



---

STAR GAS PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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



Star Gas Partners, L.P. (Star Gas or the Partnership) is a diversified home energy distributor and services provider, specializing
in heating oil and propane. Star Gas is a master limited partnership, which at March 31, 2004 had outstanding 32.2 million common units (NYSE: SGU representing an 89.1% limited partner interest) and 3.2 million senior subordinated units
(NYSE: SGH representing a 9.0% limited partner interest). Additional Partnership interests include 0.3 million junior subordinated units (representing a 1.0% limited partner interest) and 0.3 million general partner units (representing a
0.9% general partner interest).



The Partnership is organized
as follows:



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



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



| |  | The Partnerships propane operations (the propane segment) are conducted through Star Gas Propane and its direct and indirect subsidiaries. Star Gas Propane
primarily markets and distributes propane gas and related products to approximately 340,000 customers in the Midwest, Northeast, Florida and Georgia.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Partnerships heating oil operations (the heating oil segment) are conducted through Petro Holdings, Inc. (Petro) and its direct and indirect
subsidiaries. Petro is a Minnesota corporation that is an indirect wholly-owned subsidiary of Star Gas Propane. Petro is a retail distributor of home heating oil and serves approximately 534,000 customers in the Northeast and Mid-Atlantic.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



-8-



---

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



Basis of Presentation



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



The
financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial
condition and results for the interim periods. The results of operations for the three and six month periods ended March 31, 2003 and March 31, 2004 are not necessarily indicative of the results to be expected for the full year. These statements
have been prepared on a basis substantially consistent with the accounting principles applied in the Partnerships Annual Report on Form 10-K for the year ended September 30, 2003.



These interim financial statements of the Partnership have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission and should be read in conjunction with the Partnerships Annual Report on Form 10-K for the year
ended September 30, 2003.



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



Inventories



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



|                                 |  |               |        |                |   |       
|-------------------------------- |  | ------------- | ------ | -------------- | - | ------
|                                 |  | Sept. 30,2003 |        | March. 31,2004
|Propane gas                      |  | $             | 8,288  |                | $ | 5,971 
|Propane appliances and equipment |  |               | 5,153  |                |   | 5,116 
|Heating oil and other fuels      |  |               | 12,268 |                |   | 31,816
|Fuel oil parts and equipment     |  |               | 12,852 |                |   | 13,008
|                                 |  |               |        |                |   |       
|                                 |  | $             | 38,561 |                | $ | 55,911
|                                 |  |               |        |                |   |       



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



|                               |  |               |         |                |   |        
|------------------------------ |  | ------------- | ------- | -------------- | - | -------
|                               |  | Sept. 30,2003 |         | March. 31,2004
|Property, plant and equipment  |  | $             | 374,212 |                | $ | 379,240
|Less: accumulated depreciation |  |               | 112,345 |                |   | 125,158
|                               |  |               |         |                |   |        
|Property and equipment, net    |  | $             | 261,867 |                | $ | 254,082
|                               |  |               |         |                |   |        



Reclassifications



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



Derivatives and
Hedging



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



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



-9-



---

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



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



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



Goodwill and Other Intangible Assets



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



The Partnership adopted the
applicable provisions of SFAS No. 142 on October 1, 2002, and recorded a non-cash charge of $3.9 million to reduce the carrying value of its then TG&E segments goodwill in its first quarter of fiscal 2003. This charge was reflected as a
cumulative effect of change in accounting principle in the Partnerships condensed consolidated statement of operations for the six month period ended March 31, 2003. The Partnership performs its annual impairment review during its fourth
fiscal quarter.



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



In January 2004, Star Gas and its wholly owned subsidiary, Star Gas Finance Company, jointly issued $35.0 million of 10 1⁄4% Senior Notes, due 2013 in
a private placement. These notes were issued at a premium to par for total net proceeds of $38.1 million. In February 2004, Star Gas issued 1.495 million common units (including a 15% over-allotment option) for total net proceeds of $35.0 million.
The net proceeds of these two offerings resulted in net cash received of $73.1 million. As of March 31, 2004, the net proceeds from the offerings were used to repay a portion of outstanding indebtedness ($13.0 million of the propane segments
revolving acquisition facility, $33.0 million of the heating oil segments revolving acquisition facility, $5.1 million of the propane segments 8.04% First Mortgage Notes that were due on March 15, 2004, $1.5 million of the heating oil
segments working capital facility and $0.2 million of propanes working capital facility) and approximately $7.2 million were used for general partnership purposes. The Partnership has also designated $13.1 million of the net proceeds to
repay existing long-term debt as it becomes due in fiscal 2004.



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



-10-



---

4) Discontinued Operations



The TG&E segment (TG&E) was the partnerships energy reseller that marketed natural gas and electricity to
residential households in deregulated energy markets in New York, New Jersey, Florida and Maryland and served approximately 65,000 residential customers. TG&Es operations were conducted through Total Gas & Electric, Inc.
(TG&E), a Florida corporation, that was an indirect wholly-owned subsidiary of Petro. On March 31, 2004, the partnership sold the stock and business of TG&E in an all-cash transaction to a private party. The Partnership received
proceeds of approximately $12.8 million from the sale of TG&E. This amount is subject to adjustments, primarily for post closing increases in bad debts and for gross customer losses over an agreed amount. The amount of net working capital paid
at closing by the buyer is also subject to verification. These adjustments have been estimated and are included in the $12.8 million of proceeds and the $0.2 million gain calculation. The sale of TG&E was effective March 31, 2004.



Income from discontinued operations for the three and six month periods ended March 31, 2003
and March 31, 2004 are as follows (in thousands):



|                                                                                                                                                     |  |                              |        |                            |   |        |  |   |        |   |  |   |       
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | ------ |  | - | ------ | - |  | - | ------
|                                                                                                                                                     |  | Three Months Ended March 31, |        | Six Months Ended March 31,
|                                                                                                                                                     |  | 2003                         |        | 2004                       |   | 2003   |  |   | 2004  
|Sales                                                                                                                                                |  | $                            | 40,116 |                            | $ | 36,568 |  | $ | 53,765 |   |  | $ | 52,413
|Cost of sales                                                                                                                                        |  |                              | 35,445 |                            |   | 33,112 |  |   | 47,306 |   |  |   | 46,867
|Depreciation and amortization                                                                                                                        |  |                              | 97     |                            |   | 138    |  |   | 221    |   |  |   | 258   
|General and administrative expenses                                                                                                                  |  |                              | 2,286  |                            |   | 2,747  |  |   | 4,978  |   |  |   | 4,055 
|                                                                                                                                                     |  |                              |        |                            |   |        |  |   |        |   |  |   |       
|Operating income                                                                                                                                     |  |                              | 2,288  |                            |   | 571    |  |   | 1,260  |   |  |   | 1,233 
|Net interest expense                                                                                                                                 |  |                              | 101    |                            |   | 75     |  |   | 182    |   |  |   | 150   
|                                                                                                                                                     |  |                              |        |                            |   |        |  |   |        |   |  |   |       
|Income from discontinued operations before gain on sale of TG&E segment and cumulative effect of change in accounting principle, net of
income taxes |  |                              | 2,187  |                            |   | 496    |  |   | 1,078  |   |  |   | 1,083 
|Gain on sale of TG&E segment, net of taxes                                                                                                           |  |                              |       |                            |   | 230    |  |   |       |   |  |   | 230   
|Cumulative effect of change in accounting principle for adoption of SFAS No. 142                                                                     |  |                              |       |                            |   |       |  |   | (3,901 | ) |  |   |      
|                                                                                                                                                     |  |                              |        |                            |   |        |  |   |        |   |  |   |       
|Income from discontinued operations                                                                                                                  |  | $                            | 2,187  |                            | $ | 726    |  | $ | (2,823 | ) |  | $ | 1,313 
|                                                                                                                                                     |  |                              |        |                            |   |        |  |   |        |   |  |   |       



5) Segment Reporting



The Partnership has two reportable operating segments: retail
distribution of heating oil and retail distribution of propane gas. The administrative expenses for the public master limited partnership, Star Gas Partners, have not been allocated to the segments. Management has chosen to organize the enterprise
under these two segments in order to leverage the expertise it has in each industry, allow each segment to continue to strengthen its core competencies and provide a clear means for evaluation of operating results.



The heating oil segment is primarily engaged in the retail distribution of home heating oil,
related equipment services and equipment sales to residential and commercial customers. It operates primarily in the Northeast and Mid-Atlantic states. Home heating oil is principally used by the Partnerships residential and commercial
customers to heat their homes and buildings, and as a result, weather conditions have a significant impact on the demand for home heating oil.



The propane segment is primarily engaged in the retail distribution of propane and related supplies and equipment to residential, commercial, industrial, agricultural and
motor fuel customers, in the Midwest, Northeast, Florida and Georgia. Propane is used primarily for space heating, water heating and cooking by the Partnerships residential and commercial customers and as a result, weather conditions also have
a significant impact on the demand for propane.



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



-11-



---

5) Segment Reporting (continued)



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



|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|-------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | ---- | ------- | - | ---------------- |  | - | ------- | - | ----------- | - | ------- |  | ---------------- | ------- |  | ------- | ------- |  | - | ------ | - |  | - | -------
|(in thousands)                                                                               |  | Three Months Ended March 31,
|                                                                                             |  | 2003                         |         | 2004
|                                                                                             |  | Heating Oil                  |         |      | Propane |   | Partners &Others |  |   | Consol. |   | Heating Oil |   | Propane |  | Partners &Others |         |  | Consol.
|Statements of Operations                                                                     |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|Sales                                                                                        |  | $                            | 511,069 |      |         | $ | 117,635          |  | $ |        |   |             | $ | 628,704 |  | $                | 481,768 |  | $       | 143,621 |  | $ |       |   |  | $ | 625,389
|Cost of sales                                                                                |  |                              | 359,468 |      |         |   | 64,348           |  |   |        |   |             |   | 423,816 |  |                  | 327,826 |  |         | 82,339  |  |   |       |   |  |   | 410,165
|Delivery and branch expenses                                                                 |  |                              | 66,506  |      |         |   | 20,138           |  |   |        |   |             |   | 86,644  |  |                  | 72,010  |  |         | 24,652  |  |   |       |   |  |   | 96,662 
|Depreciation & amortization expenses                                                         |  |                              | 8,604   |      |         |   | 4,184            |  |   |        |   |             |   | 12,788  |  |                  | 9,522   |  |         | 5,075   |  |   |       |   |  |   | 14,597 
|General and administrative expenses                                                          |  |                              | 5,039   |      |         |   | 2,695            |  |   | 4,014   |   |             |   | 11,748  |  |                  | 4,232   |  |         | 2,548   |  |   | 3,812  |   |  |   | 10,592 
|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|Operating income (loss)                                                                      |  |                              | 71,452  |      |         |   | 26,270           |  |   | (4,014  | ) |             |   | 93,708  |  |                  | 68,178  |  |         | 29,007  |  |   | (3,812 | ) |  |   | 93,373 
|Net interest expense                                                                         |  |                              | 5,671   |      |         |   | 2,878            |  |   | 1,988   |   |             |   | 10,537  |  |                  | 7,465   |  |         | 2,570   |  |   | 1,893  |   |  |   | 11,928 
|Amortization of debt issuance costs                                                          |  |                              | 429     |      |         |   | 49               |  |   | 76      |   |             |   | 554     |  |                  | 553     |  |         | 42      |  |   | 179    |   |  |   | 774    
|Loss (gain) redemption of debt                                                               |  |                              | (212    | )    |         |   | 393              |  |   |        |   |             |   | 181     |  |                  |        |  |         |        |  |   |       |   |  |   |       
|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|Income (loss) from continuing operations before taxes                                        |  |                              | 65,564  |      |         |   | 22,950           |  |   | (6,078  | ) |             |   | 82,436  |  |                  | 60,160  |  |         | 26,395  |  |   | (5,884 | ) |  |   | 80,671 
|Income tax expense                                                                           |  |                              | 1,385   |      |         |   | 75               |  |   |        |   |             |   | 1,460   |  |                  | 669     |  |         | 75      |  |   |       |   |  |   | 744    
|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|Income (loss) from continuing operations                                                     |  |                              | 64,179  |      |         |   | 22,875           |  |   | (6,078  | ) |             |   | 80,976  |  |                  | 59,491  |  |         | 26,320  |  |   | (5,884 | ) |  |   | 79,927 
|Income from discontinued operations before gain on sale of TG&E segment, net of income taxes |  |                              |        |      |         |   |                 |  |   | 2,187   |   |             |   | 2,187   |  |                  |        |  |         |        |  |   | 496    |   |  |   | 496    
|Gain on sale of TG&E segment, net of income taxes                                            |  |                              |        |      |         |   |                 |  |   |        |   |             |   |        |  |                  |        |  |         |        |  |   | 230    |   |  |   | 230    
|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|Net income (loss)                                                                            |  | $                            | 64,179  |      |         | $ | 22,875           |  | $ | (3,891  | ) |             | $ | 83,163  |  | $                | 59,491  |  | $       | 26,320  |  | $ | (5,158 | ) |  | $ | 80,653 
|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        
|Capital expenditures                                                                         |  | $                            | 2,278   |      |         | $ | 1,119            |  | $ |        |   |             | $ | 3,397   |  | $                | 831     |  | $       | 491     |  | $ |       |   |  | $ | 1,322  
|                                                                                             |  |                              |         |      |         |   |                  |  |   |         |   |             |   |         |  |                  |         |  |         |         |  |   |        |   |  |   |        



|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------- | - | ---------------- |  | - | ------- | - |  | ----------- | --------- | ------- |  | ---------------- | ------- |  | ------- | ------- |  | - | ------- | - |  | - | ---------
|(in thousands)                                                                                                                                       |  | Six Months Ended March 31,
|                                                                                                                                                     |  | 2003                       |         |   | 2004   
|                                                                                                                                                     |  | HeatingOil                 |         |   | Propane |   | Partners &Others |  |   | Consol. |   |  | Heating Oil |           | Propane |  | Partners &Others |         |  | Consol.
|Statements of Operations                                                                                                                             |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|Sales                                                                                                                                                |  | $                          | 806,055 |   |         | $ | 193,980          |  | $ |        |   |  | $           | 1,000,035 |         |  | $                | 797,838 |  | $       | 245,568 |  | $ |        |   |  | $ | 1,043,406
|Cost of sales                                                                                                                                        |  |                            | 566,386 |   |         |   | 100,916          |  |   |        |   |  |             | 667,302   |         |  |                  | 553,719 |  |         | 136,723 |  |   |        |   |  |   | 690,442  
|Delivery and branch expenses                                                                                                                         |  |                            | 122,080 |   |         |   | 39,078           |  |   |        |   |  |             | 161,158   |         |  |                  | 132,688 |  |         | 47,967  |  |   |        |   |  |   | 180,655  
|Depreciation & amortization expenses                                                                                                                 |  |                            | 17,171  |   |         |   | 8,341            |  |   |        |   |  |             | 25,512    |         |  |                  | 19,039  |  |         | 9,983   |  |   |        |   |  |   | 29,022   
|General and administrative expenses                                                                                                                  |  |                            | 9,420   |   |         |   | 4,915            |  |   | 7,570   |   |  |             | 21,905    |         |  |                  | 7,805   |  |         | 4,950   |  |   | 5,940   |   |  |   | 18,695   
|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|Operating income (loss)                                                                                                                              |  |                            | 90,998  |   |         |   | 40,730           |  |   | (7,570  | ) |  |             | 124,158   |         |  |                  | 84,587  |  |         | 45,945  |  |   | (5,940  | ) |  |   | 124,592  
|Net interest expense                                                                                                                                 |  |                            | 10,665  |   |         |   | 6,177            |  |   | 1,984   |   |  |             | 18,826    |         |  |                  | 13,641  |  |         | 4,994   |  |   | 4,112   |   |  |   | 22,747   
|Amortization of debt issuance costs                                                                                                                  |  |                            | 814     |   |         |   | 101              |  |   | 76      |   |  |             | 991       |         |  |                  | 1,615   |  |         | 83      |  |   | 345     |   |  |   | 2,043    
|Loss (gain) redemption of debt                                                                                                                       |  |                            | (212    | ) |         |   | 393              |  |   |        |   |  |             | 181       |         |  |                  |        |  |         |        |  |   |        |   |  |   |         
|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|Income (loss) from continuing operations before taxes                                                                                                |  |                            | 79,731  |   |         |   | 34,059           |  |   | (9,630  | ) |  |             | 104,160   |         |  |                  | 69,331  |  |         | 40,868  |  |   | (10,397 | ) |  |   | 99,802   
|Income tax expense                                                                                                                                   |  |                            | 1,985   |   |         |   | 150              |  |   |        |   |  |             | 2,135     |         |  |                  | 1,000   |  |         | 150     |  |   |        |   |  |   | 1,150    
|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|Income (loss) from continuing operations                                                                                                             |  |                            | 77,746  |   |         |   | 33,909           |  |   | (9,630  | ) |  |             | 102,025   |         |  |                  | 68,331  |  |         | 40,718  |  |   | (10,397 | ) |  |   | 98,652   
|Income from discontinued operations before gain on sale of TG&E segment and cumulative effect of change in accounting principle, net of
income taxes |  |                            |        |   |         |   |                 |  |   | 1,078   |   |  |             | 1,078     |         |  |                  |        |  |         |        |  |   | 1,083   |   |  |   | 1,083    
|Gain on sale of TG&E segment, net of income taxes                                                                                                    |  |                            |        |   |         |   |                 |  |   |        |   |  |             |          |         |  |                  |        |  |         |        |  |   | 230     |   |  |   | 230      
|Cumulative effect of change in accounting principle                                                                                                  |  |                            |        |   |         |   |                 |  |   | (3,901  | ) |  |             | (3,901    | )       |  |                  |        |  |         |        |  |   |        |   |  |   |         
|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|Net income (loss)                                                                                                                                    |  | $                          | 77,746  |   |         | $ | 33,909           |  | $ | (12,453 | ) |  | $           | 99,202    |         |  | $                | 68,331  |  | $       | 40,718  |  | $ | (9,084  | ) |  | $ | 99,965   
|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          
|Capital expenditures                                                                                                                                 |  | $                          | 4,935   |   |         | $ | 2,959            |  | $ |        |   |  | $           | 7,894     |         |  | $                | 1,684   |  | $       | 2,216   |  | $ |        |   |  | $ | 3,900    
|                                                                                                                                                     |  |                            |         |   |         |   |                  |  |   |         |   |  |             |           |         |  |                  |         |  |         |         |  |   |         |   |  |   |          



-12-



---

5) Segment Reporting  (continued)



|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|-------------------------------------------------- |  | ------------------ | ------- | -------------- | ------- | - | ------- | -------------------- |  | - | -------- | - | ---------- | - | ------- | ------- | - | -------------------- | - |  | ------- | ------- |  | - | -------- | - |  | - | ---------
|                                                   |  | September 30, 2003 |         | March 31, 2004
|(in thousands)                                     |  | HeatingOil         |         |                | Propane |   |         | Partners &Others (1) |  |   | Consol.  |   | HeatingOil |   |         | Propane |   | Partners &Others (1) |   |  | Consol.
|Balance Sheets                                     |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|ASSETS                                             |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Current assets:                                    |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Cash and cash equivalents                          |  | $                  | 4,244   |                |         | $ | 5,788   |                      |  | $ | 12       |   |            | $ | 10,044  |         | $ | 15,477               |   |  | $       | 10,123  |  | $ | 77       |   |  | $ | 25,677   
|Receivables, net                                   |  |                    | 84,814  |                |         |   | 15,697  |                      |  |   |         |   |            |   | 100,511 |         |   | 183,905              |   |  |         | 34,838  |  |   |         |   |  |   | 218,743  
|Inventories                                        |  |                    | 24,146  |                |         |   | 14,415  |                      |  |   |         |   |            |   | 38,561  |         |   | 43,402               |   |  |         | 12,509  |  |   |         |   |  |   | 55,911   
|Prepaid expenses and other current assets          |  |                    | 48,168  |                |         |   | 3,736   |                      |  |   | (434     | ) |            |   | 51,470  |         |   | 42,418               |   |  |         | 4,397   |  |   | (615     | ) |  |   | 46,200   
|Net current assets of discontinued operations      |  |                    | 10,523  |                |         |   |        |                      |  |   |         |   |            |   | 10,523  |         |   |                     |   |  |         |        |  |   |         |   |  |   |         
|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Total current assets                               |  |                    | 171,895 |                |         |   | 39,636  |                      |  |   | (422     | ) |            |   | 211,109 |         |   | 285,202              |   |  |         | 61,867  |  |   | (538     | ) |  |   | 346,531  
|Property and equipment, net                        |  |                    | 75,715  |                |         |   | 186,152 |                      |  |   |         |   |            |   | 261,867 |         |   | 69,206               |   |  |         | 184,876 |  |   |         |   |  |   | 254,082  
|Long-term portion of accounts receivable           |  |                    | 6,108   |                |         |   | 1,037   |                      |  |   |         |   |            |   | 7,145   |         |   | 6,125                |   |  |         | 989     |  |   |         |   |  |   | 7,114    
|Investment in subsidiaries                         |  |                    |        |                |         |   | 103,604 |                      |  |   | (103,604 | ) |            |   |        |         |   |                     |   |  |         | 151,095 |  |   | (151,095 | ) |  |   |         
|Goodwill                                           |  |                    | 232,602 |                |         |   | 40,138  |                      |  |   |         |   |            |   | 272,740 |         |   | 233,074              |   |  |         | 40,276  |  |   |         |   |  |   | 273,350  
|Intangibles, net                                   |  |                    | 123,415 |                |         |   | 78,053  |                      |  |   |         |   |            |   | 201,468 |         |   | 113,433              |   |  |         | 73,822  |  |   |         |   |  |   | 187,255  
|Deferred charges & other assets, net               |  |                    | 5,403   |                |         |   | 2,738   |                      |  |   | 6,273    |   |            |   | 14,414  |         |   | 8,143                |   |  |         | 3,143   |  |   | 6,696    |   |  |   | 17,982   
|Net long-term assets of discontinued operations    |  |                    | 6,867   |                |         |   |        |                      |  |   |         |   |            |   | 6,867   |         |   |                     |   |  |         |        |  |   |         |   |  |   |         
|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Total Assets                                       |  | $                  | 622,005 |                |         | $ | 451,358 |                      |  | $ | (97,753  | ) |            | $ | 975,610 |         | $ | 715,183              |   |  | $       | 516,068 |  | $ | (144,937 | ) |  | $ | 1,086,314
|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|                                                   |  |                    |         |                |         |   |         |                     
|LIABILITIES AND PARTNERS CAPITAL                  |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Current Liabilities:                               |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Accounts payable                                   |  | $                  | 19,428  |                |         | $ | 7,712   |                      |  | $ |         |   |            | $ | 27,140  |         | $ | 23,240               |   |  | $       | 9,200   |  | $ |         |   |  | $ | 32,440   
|Working capital facility borrowings                |  |                    | 6,000   |                |         |   | 6,000   |                      |  |   |         |   |            |   | 12,000  |         |   | 78,000               |   |  |         | 7,100   |  |   |         |   |  |   | 85,100   
|Current maturities of long-term debt               |  |                    | 12,597  |                |         |   | 10,250  |                      |  |   |         |   |            |   | 22,847  |         |   | 12,336               |   |  |         | 10,250  |  |   |         |   |  |   | 22,586   
|Accrued expenses and other current liabilities     |  |                    | 60,582  |                |         |   | 9,222   |                      |  |   | 12,552   |   |            |   | 82,356  |         |   | 57,488               |   |  |         | 9,901   |  |   | 14,375   |   |  |   | 81,764   
|Due to affiliates                                  |  |                    | (2,385  | )              |         |   | (7,600  | )                    |  |   | 9,985    |   |            |   |        |         |   | (1,436               | ) |  |         | 14,178  |  |   | (12,742  | ) |  |   |         
|Unearned service contract revenue                  |  |                    | 31,023  |                |         |   | 1,013   |                      |  |   |         |   |            |   | 32,036  |         |   | 32,539               |   |  |         | 888     |  |   |         |   |  |   | 33,427   
|Customer credit balances                           |  |                    | 49,258  |                |         |   | 25,458  |                      |  |   |         |   |            |   | 74,716  |         |   | 18,764               |   |  |         | 8,008   |  |   |         |   |  |   | 26,772   
|Net current liabilities of discontinued operations |  |                    | 7,569   |                |         |   |        |                      |  |   |         |   |            |   | 7,569   |         |   |                     |   |  |         |        |  |   |         |   |  |   |         
|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Total current liabilities                          |  |                    | 184,072 |                |         |   | 52,055  |                      |  |   | 22,537   |   |            |   | 258,664 |         |   | 220,931              |   |  |         | 59,525  |  |   | 1,633    |   |  |   | 282,089  
|Long-term debt                                     |  |                    | 191,380 |                |         |   | 110,850 |                      |  |   | 197,111  |   |            |   | 499,341 |         |   | 158,128              |   |  |         | 94,525  |  |   | 235,843  |   |  |   | 488,496  
|Due to affiliate                                   |  |                    | 116,417 |                |         |   |        |                      |  |   | (116,417 | ) |            |   |        |         |   | 158,684              |   |  |         |        |  |   | (158,684 | ) |  |   |         
|Other long-term liabilities                        |  |                    | 26,532  |                |         |   | 1,297   |                      |  |   |         |   |            |   | 27,829  |         |   | 26,345               |   |  |         | 1,097   |  |   |         |   |  |   | 27,442   
|Partners Capital:                                 |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Equity Capital                                     |  |                    | 103,604 |                |         |   | 287,156 |                      |  |   | (200,984 | ) |            |   | 189,776 |         |   | 151,095              |   |  |         | 360,921 |  |   | (223,729 | ) |  |   | 288,287  
|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          
|Total Liabilities and Partners Capital            |  | $                  | 622,005 |                |         | $ | 451,358 |                      |  | $ | (97,753  | ) |            | $ | 975,610 |         | $ | 715,183              |   |  | $       | 516,068 |  | $ | (144,937 | ) |  | $ | 1,086,314
|                                                   |  |                    |         |                |         |   |         |                      |  |   |          |   |            |   |         |         |   |                      |   |  |         |         |  |   |          |   |  |   |          



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



13



---

6) Goodwill and Other Intangible Assets



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



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



Upon adoption of SFAS No. 142 in the first fiscal quarter of 2003, the Partnership recorded a non-cash charge of
approximately $3.9 million to reduce the carrying value of its goodwill for its then TG&E segment. This charge is reflected as a cumulative effect of change in accounting principle in the Partnerships condensed consolidated statement
of operations for the six month period ended March 31, 2003. In calculating the impairment charge, the fair value of the reporting units was estimated using a discounted cash flow methodology.



A summary of the Partnerships goodwill at September 30, 2003 and March
31, 2004, by business segment is as follows (in thousands):



|                                 |  |             |         |         |   |        |  |   |        
|-------------------------------- |  | ----------- | ------- | ------- | - | ------ |  | - | -------
|                                 |  | Heating Oil |         | Propane |   | Total 
|Balance as of September 30, 2003 |  | $           | 232,602 |         | $ | 40,138 |  | $ | 272,740
|Fiscal 2004 acquisitions         |  |             | 472     |         |   | 138    |  |   | 610    
|                                 |  |             |         |         |   |        |  |   |        
|Balance as of March 31, 2004     |  | $           | 233,074 |         | $ | 40,276 |  | $ | 273,350
|                                 |  |             |         |         |   |        |  |   |        



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



|                         |  |                     |         |                    |   |         |  |                     |         |                    |   |         |  |   |         |  |   |        
|------------------------ |  | ------------------- | ------- | ------------------ | - | ------- |  | ------------------- | ------- | ------------------ | - | ------- |  | - | ------- |  | - | -------
|                         |  | September 30, 2003  |         | March 31, 2004    
|                         |  | GrossCarryingAmount |         | Accum.Amortization |   | Net     |  | GrossCarryingAmount |         | Accum.Amortization |   | Net    
|Customer lists           |  | $                   | 289,323 |                    | $ | 92,877  |  | $                   | 196,446 |                    | $ | 290,133 |  | $ | 106,868 |  | $ | 183,265
|Covenants not to compete |  |                     | 12,959  |                    |   | 7,937   |  |                     | 5,022   |                    |   | 12,959  |  |   | 8,969   |  |   | 3,990  
|                         |  |                     |         |                    |   |         |  |                     |         |                    |   |         |  |   |         |  |   |        
|                         |  | $                   | 302,282 |                    | $ | 100,814 |  | $                   | 201,468 |                    | $ | 303,092 |  | $ | 115,837 |  | $ | 187,255
|                         |  |                     |         |                    |   |         |  |                     |         |                    |   |         |  |   |         |  |   |        



Amortization expense
for intangible assets was $13.1 million for the six months ended March 31, 2003 compared to $15.0 million for the six months ended March 31, 2004. Total estimated annual amortization expense related to intangible assets subject to amortization, for
the year ended September 30, 2004 and the four succeeding fiscal years ended September 30, is as follows (in thousands):



|     |  |   |       
|---- |  | - | ------
|2004 |  | $ | 30,143
|2005 |  | $ | 29,864
|2006 |  | $ | 28,779
|2007 |  | $ | 28,128
|2008 |  | $ | 26,188



7) Employee Pension Plan



|                                        |  |                             |      |   |                           |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | Three MonthsEnded March 31, |      |   | Six Months EndedMarch 31, |  
|(in thousands)                          |  | 2003                        |      |   | 2004                      |   |        | 2003 |  |   | 2004   |  
|Components of Net Periodic Benefit Cost |  |                             |      |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Service cost                            |  | $                           |     |   |                           | $ |       |      |  | $ |       |   |  | $ |       |  
|Interest cost                           |  |                             | 952  |   |                           |   | 898    |      |  |   | 1,905  |   |  |   | 1,796  |  
|Expected return on plan assets          |  |                             | (885 | ) |                           |   | (1,042 | )    |  |   | (1,772 | ) |  |   | (2,085 | )
|Net amortization                        |  |                             | 322  |   |                           |   | 372    |      |  |   | 644    |   |  |   | 743    |  
|Effect of settlement                    |  |                             | 1    |   |                           |   | 5      |      |  |   | 3      |   |  |   | 5      |  
|                                        |  |                             |      |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost               |  | $                           | 390  |   |                           | $ | 233    |      |  | $ | 780    |   |  | $ | 459    |  
|                                        |  |                             |      |   |                           |   |        |      |  |   |        |   |  |   |        |  



As of March 31, 2004,
the heating oil segment made contributions of $0.1 million to its pension plans. The heating oil segment presently expects to contribute an additional $0.5 million to its plans in each of the next two fiscal quarters to fund its pension obligations
for fiscal 2004.



-14-



---

8) Acquisitions



During the six month period ended March 31, 2003, the Partnership acquired two retail propane dealers. The aggregate consideration for these acquisitions
accounted for by the purchase method of accounting was approximately $1.8 million. For the remainder of fiscal 2003, the Partnership acquired an additional three retail heating oil dealers and five propane dealers.



During the six month period ended March 31, 2004, the Partnership acquired
two retail propane dealers and one retail heating oil dealer. The aggregate consideration for the acquisitions accounted for by the purchase method of accounting was approximately $4.2 million.



The following table indicates the allocation of the aggregate purchase price
paid for these acquisitions and the respective periods of amortization assigned for the six month periods ended March 31, 2003 and March 31, 2004:



|                        |  |      |       |   |      |   |              |  |               
|----------------------- |  | ---- | ----- | - | ---- | - | ------------ |  | --------------
|(in thousands)          |  | 2003 |       |   | 2004 |   | Useful Lives
|Land                    |  | $    | 1,325 |   |      | $ | 180          |  |              
|Buildings               |  |      |      |   |      |   | 126          |  | 30 years      
|Furniture and equipment |  |      |      |   |      |   | 22           |  | 10 years      
|Fleet                   |  |      |      |   |      |   | 319          |  | 1    30 years
|Tanks and equipment     |  |      | 425   |   |      |   | 2,095        |  | 5    30 years
|Customer lists          |  |      |      |   |      |   | 810          |  | 7    15 years
|Restrictive covenants   |  |      | 107   |   |      |   |             |  | 5 years       
|Goodwill                |  |      |      |   |      |   | 610          |  |              
|Working capital         |  |      | (20   | ) |      |   | 70           |  |              
|                        |  |      |       |   |      |   |              |  |               
|Total                   |  | $    | 1,837 |   |      | $ | 4,232        |  |               
|                        |  |      |       |   |      |   |              |  |               



The acquisitions were
accounted for under the purchase method of accounting. Purchase prices have been allocated to the acquired assets and liabilities based on their respective fair market values on the dates of acquisition. The purchase prices in excess of the fair
values of net assets acquired are classified as goodwill in the Condensed Consolidated Balance Sheets. The weighted average useful lives assigned to customer lists acquired in fiscal 2004 is 7 years.



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



|                                            |  |                            |           |      |   |          
|------------------------------------------- |  | -------------------------- | --------- | ---- | - | ---------
|                                            |  | Six Months Ended March 31,
|                                            |  | 2003                       |           | 2004
|Sales                                       |  | $                          | 1,169,913 |      | $ | 1,045,852
|                                            |  |                            |           |      |   |          
|Net income                                  |  | $                          | 110,793   |      | $ | 100,246  
|General Partners interest in net income    |  |                            | 1,034     |      |   | 936      
|                                            |  |                            |           |      |   |          
|Limited Partners interest in net income    |  | $                          | 109,759   |      | $ | 99,310   
|                                            |  |                            |           |      |   |          
|Basic net income per limited partner unit   |  | $                          | 3.38      |      | $ | 2.87     
|                                            |  |                            |           |      |   |          
|Diluted net income per limited partner unit |  | $                          | 3.37      |      | $ | 2.87     
|                                            |  |                            |           |      |   |          



9) Supplemental Disclosure of Cash
Flow Information



|                                                                                   |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                   |  | Six Months Ended March 31 , |       
|(in thousands)                                                                     |  | 2003                        |        |   | 2004 |  
|Cash paid during the period for:                                                   |  |                             |        |   |      |   |        |  
|Income taxes                                                                       |  | $                           | 705    |   |      | $ | 689    |  
|Interest                                                                           |  | $                           | 20,030 |   |      | $ | 22,498 |  
|Non-cash financing activities:                                                     |  |                             |        |   |      |   |        |  
|Decrease in long-term debt for interest rate swaps                                 |  | $                           | (1,219 | ) |      | $ | (293   | )
|Increase in long-term debt for amortization of debt discount and debt premium, net |  | $                           | 27     |   |      | $ | 86     |  
|Decrease in other assets                                                           |  | $                           | 1,192  |   |      | $ | 207    |  





-15-



---

10) Earnings Per Limited Partner Unit



|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | -------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|(in thousands, except per unit data)                                                                                                                                           |  | Three Months EndedMarch 31, |        | Six Months Ended March 31,
|                                                                                                                                                                               |  | 2003                        |        | 2004                       |   | 2003   |  | 2004
|Income from continuing operations per Limited Partner unit:                                                                                                                    |  |                             |        |                            |   |        |  |      |        |  |   |       
|Basic                                                                                                                                                                          |  | $                           | 2.47   |                            | $ | 2.25   |  | $    | 3.11   |  | $ | 2.82  
|Diluted                                                                                                                                                                        |  | $                           | 2.46   |                            | $ | 2.25   |  | $    | 3.10   |  | $ | 2.82  
|                                                                                                                                                                               |  |                             |        |                           
|Income from discontinued operations before gain on sale of TG&E segment and cumulative effect of change in accounting principle, net of
income taxes per Limited Partner unit: |  |                             |        |                            |   |        |  |      |        |  |   |       
|Basic                                                                                                                                                                          |  | $                           | 0.07   |                            | $ | 0.01   |  | $    | 0.03   |  | $ | 0.03  
|Diluted                                                                                                                                                                        |  | $                           | 0.07   |                            | $ | 0.01   |  | $    | 0.03   |  | $ | 0.03  
|                                                                                                                                                                               |  |                             |        |                           
|Gain on sale of TG&E segment, net of income taxes per Limited Partner unit:                                                                                                    |  |                             |        |                            |   |        |  |      |        |  |   |       
|Basic                                                                                                                                                                          |  | $                           |       |                            | $ | 0.01   |  | $    |       |  | $ | 0.01  
|Diluted                                                                                                                                                                        |  | $                           |       |                            | $ | 0.01   |  | $    |       |  | $ | 0.01  
|                                                                                                                                                                               |  |                             |        |                           
|Cumulative effect of change in accounting principle for adoption of SFAS No. 142 for discontinued operations per Limited Partner
unit:                                         |  |                             |        |                            |   |        |  |      |        |  |   |       
|Basic                                                                                                                                                                          |  | $                           |       |                            | $ |       |  | $    | (0.12  |  | $ |      
|Diluted                                                                                                                                                                        |  | $                           |       |                            | $ |       |  | $    | (0.12  |  | $ |      
|                                                                                                                                                                               |  |                             |        |                           
|Net income per Limited Partner unit:                                                                                                                                           |  |                             |        |                            |   |        |  |      |        |  |   |       
|Basic                                                                                                                                                                          |  | $                           | 2.54   |                            | $ | 2.27   |  | $    | 3.03   |  | $ | 2.86  
|Diluted                                                                                                                                                                        |  | $                           | 2.53   |                            | $ | 2.27   |  | $    | 3.02   |  | $ | 2.86  
|Basic Earnings Per Unit:                                                                                                                                                       |  |                             |        |                            |   |        |  |      |        |  |   |       
|Net income                                                                                                                                                                     |  | $                           | 83,163 |                            | $ | 80,653 |  | $    | 99,202 |  | $ | 99,965
|Less: General Partners interest in net income                                                                                                                                 |  |                             | 832    |                            |   | 739    |  |      | 992    |  |   | 933   
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Limited Partners interest in net income                                                                                                                                       |  | $                           | 82,331 |                            | $ | 79,914 |  | $    | 98,210 |  | $ | 99,032
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|                                                                                                                                                                               |  |                             |        |                           
|Common Units                                                                                                                                                                   |  |                             | 28,970 |                            |   | 31,591 |  |      | 28,970 |  |   | 31,128
|Senior Subordinated Units                                                                                                                                                      |  |                             | 3,138  |                            |   | 3,222  |  |      | 3,137  |  |   | 3,181 
|Junior Subordinated Units                                                                                                                                                      |  |                             | 345    |                            |   | 345    |  |      | 345    |  |   | 345   
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Weighted average number of Limited Partner units outstanding                                                                                                                   |  |                             | 32,453 |                            |   | 35,158 |  |      | 32,452 |  |   | 34,655
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|                                                                                                                                                                               |  |                             |        |                           
|Basic earnings per unit                                                                                                                                                        |  | $                           | 2.54   |                            | $ | 2.27   |  | $    | 3.03   |  | $ | 2.86  
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Diluted Earnings Per Unit:                                                                                                                                                     |  |                             |        |                            |   |        |  |      |        |  |   |       
|Effect of diluted securities                                                                                                                                                   |  | $                           |       |                            | $ |       |  | $    |       |  | $ |      
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Limited Partners interest in net income                                                                                                                                       |  | $                           | 82,331 |                            | $ | 79,914 |  | $    | 98,210 |  | $ | 99,032
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Weighted average number of Limited Partner units outstanding                                                                                                                   |  |                             | 32,453 |                            |   | 35,158 |  |      | 32,452 |  |   | 34,655
|Senior subordinated units anticipated to be issued under employee incentive plan                                                                                               |  |                             | 108    |                            |   |       |  |      | 108    |  |   |      
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Diluted number of Limited Partner units                                                                                                                                        |  |                             | 32,561 |                            |   | 35,158 |  |      | 32,560 |  |   | 34,655
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       
|Diluted earnings per unit                                                                                                                                                      |  | $                           | 2.53   |                            | $ | 2.27   |  | $    | 3.02   |  | $ | 2.86  
|                                                                                                                                                                               |  |                             |        |                            |   |        |  |      |        |  |   |       



11) Subsequent Events



Cash Distributions  On April 29, 2004, the
Partnership announced that it would pay a cash distribution of $0.575 per Common Unit and $0.575 per Senior Subordinated Unit, Junior Subordinated Unit and General Partner Interest for the quarter ended March 31, 2004. The distribution will be paid
on May 14, 2004, to unitholders of record on May 10, 2004.



-16-



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Item 2.



STAR GAS PARTNERS, L.P. AND SUBSIDIARIES



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



Statement Regarding Forward-Looking Disclosure



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



Overview



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



The primary use for heating oil and propane is for space heating
in residential and commercial applications. As a result, weather conditions have a significant impact on financial performance and should be considered when analyzing changes in financial performance. The Partnership has purchased weather insurance
to partially mitigate the risk of weather conditions. In addition, gross margins can vary according to customer mix. For example, sales to residential customers generate higher profit margins than sales to other customer groups, such as agricultural
customers. Accordingly, a change in customer mix can affect gross margins without necessarily impacting total sales. The customer mix was not a significant factor in either the current quarter to quarter comparison or for the current six months to
six months comparison.



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



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



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



-17-



---

THREE MONTHS ENDED MARCH 31, 2004

COMPARED TO THREE MONTHS ENDED MARCH 31, 2003



Volume



For the three months ended
March 31, 2004, retail volume of home heating oil and propane increased 3.1 million gallons, or 0.9%, to 352.5 million gallons, as compared to 349.4 million gallons for the three months ended March 31, 2003. This increase was due to a 13.8 million
gallon increase in the propane segment largely offset by a 10.7 million gallon decrease in the heating oil segment. The increase in volume reflects the impact of an additional 40.4 million gallons provided by acquisitions partially offset by the
impact of warmer temperatures and net customer losses, largely in the home heating oil segments lower margin commercial business. The Partnership estimates that it has approximately 3% fewer customers, after adjusting for acquisitions, at
March 31, 2004 than it had at March 31, 2003. The Partnership also believes that a shift in the delivery pattern at the heating oil segment, designed to increase efficiency reduced volume for the current quarter by an estimated 7.5 million gallons.
Typical delivery patterns would have resulted in these gallons being delivered in the three months ended March 31, 2004. Temperatures in the Partnerships areas of operations for the three months ended March 31, 2004 were an average of 2.4%
warmer than in the prior years comparable quarter and approximately 6.0% colder than normal as reported by the National Oceanic Atmosphere Administration (NOAA).



The above activity is summarized as follows:



|                                           |  |              |  
|------------------------------------------ |  | ------------ | -
|                                           |  | (inmillions) |  
|Volume  three months ended March 31, 2003 |  | 349.4        |  
|Impact of warmer temperatures              |  | (5.1         | )
|Impact of acquisitions                     |  | 40.4         |  
|Lower commercial volume                    |  | (11.0        | )
|Delivery scheduling                        |  | (7.5         | )
|Net customer losses and other              |  | (13.7        | )
|                                           |  |              |  
|Volume  three months ended March 31, 2004 |  | 352.5        |  
|                                           |  |              |  



Sales



For the three months ended March 31, 2004, sales decreased $3.3 million, or 0.5%, to $625.4
million, as compared to $628.7 million for the three months ended March 31, 2003. This decrease was due to $29.3 million lower home heating oil sales largely offset by $26.0 million higher propane segment sales. Sales remained relatively flat as the
per gallon selling prices for the current quarter were slightly down from the prior year per gallon selling prices. Sales of rationally related products, including heating and air conditioning equipment installation and service and water softeners
increased $4.3 million in the heating oil segment and by $3.1 million in the propane segment from the prior years comparable period due to acquisitions, increased installation activity and from increases in rates charged to customers for
service contracts and increases in billable service.



Cost of Product



For the three months ended March 31, 2004, cost of product decreased
$18.6 million, or 5.0%, to $353.1 million, as compared to $371.6 million for the three months ended March 31, 2003. This decrease was due to $35.2 million of lower cost of product at the home heating oil segment partially offset by $16.6 million
higher cost of product at the propane segment. Cost of product decreased due to slightly lower supply cost which was offset to a much lesser extent by the additional cost of product related to the increase in volume. While selling prices and supply
cost both decreased on a per gallon basis, the decrease in selling prices was less than the decrease in supply cost, which results in higher per gallon margins of approximately 1.5 cents.



Cost of Installations, Service and Appliances



For the three months ended March 31, 2004, cost of installations, service and appliances increased $4.9 million, or 9.4%, to $57.1 million,
as compared to $52.2 million for the three months ended March 31, 2003. This increase was due to an additional $3.5 million in the heating oil segment and by $1.4 million in the propane segment from the prior years comparable period largely
due to the increase in sales of these products.



Delivery and Branch
Expenses



For the three months ended March 31, 2004, delivery and branch
expenses increased $10.0 million, or 11.6%, to $96.7 million, as compared to $86.6 million for the three months ended March 31, 2003. This increase was due to an additional $5.5 million of delivery and branch expenses at the heating oil segment and
a $4.5 million increase in delivery and branch expenses for the propane segment. The increase in delivery and branch expenses was largely due to additional operating cost associated with



-18-



---

acquisitions, increased customer service expense of $0.9 million at the heating oil segment resulting largely from the
start-up of the new outsourced call center and for the impact of operating expense and wage increases. Delivery and branch expenses increased approximately $2.4 million from the comparable prior year quarter due to the impact of operating expense
and wage increases and by $8.9 million for acquisitions. This $8.9 million is largely for the establishment of base operations in new markets as well as for the variable cost of delivering the additional gallons provided by acquisitions. Delivery
and branch expenses also increased due to a sales reorganization undertaken in the heating oil segment which resulted in the elimination of 43 sales positions. Reorganization costs, consisting principally of severance costs, totaled $0.9 million.
This reorganization represents an expansion of the segments centralized sales center as the segment moves away from a one to one selling model. These increases in delivery and branch expenses were partially reduced by cost reductions relating
to lower volume delivered due to warmer temperatures and net customer losses experienced in fiscal 2004.



The heating oil segments business process redesign project was substantially completed during fiscal 2003. As part of this redesign, a transition to outsourcing in the area of customer call center management has
been undertaken as both a customer satisfaction and a cost reduction strategy. The Partnership believes outsourcing customer inquiries will improve customer responsiveness and eliminate redundancy by leveraging the technology and expertise available
from third party service organizations. In addition, an outsourcing partner has greater flexibility to manage extreme seasonal volume. Start up challenges associated with the transition to a third party customer call center impacted the customer
base in the first six months of fiscal 2004 and have required unanticipated training and support which will be ongoing through fiscal 2004. This will reduce the savings otherwise anticipated to be realized from the business redesign project in
fiscal 2004.



Depreciation and Amortization Expenses



For the three months ended March 31, 2004, depreciation and amortization expenses increased
$1.8 million, or 14.1%, to $14.6 million, as compared to $12.8 million for the three months ended March 31, 2003. This increase was primarily due to a larger depreciable base of assets as a result of the impact of acquisitions and for increased
depreciation resulting from the technology investment made by the heating oil segment as part of its business process redesign project.



General and Administrative Expenses



For the three months ended March 31, 2004, general and administrative expenses decreased $1.2 million, or 9.8%, to $10.6 million, as compared to $11.7 million for the
three months ended March 31, 2003. The heating oil segments business process redesign project was substantially completed during fiscal 2003 and the Partnership did not incur any expense for this project for the quarter ended March 31, 2004.
General and administrative expenses for the three months ended March 31, 2003 included $1.3 million of expense for this project. While the heating oil segments business design project was substantially completed in fiscal 2003, continued
efforts toward organizational improvement continue. Additional organizational and management changes are being actively studied.



Interest Expense



For the three months ended March 31, 2004, interest expense increased $1.3 million, or 11.7%, to $12.7 million, as compared to $11.4 million for the three months ended March 31, 2003. This increase was largely due to
a higher average balance of long-term debt outstanding during the three months ended March 31, 2004 compared to the three month period ended March 31, 2003 and for additional interest related to the higher interest rate on the Partnerships
$235.0 million debt offerings largely completed in fiscal 2003 versus the debt repaid with the proceeds from these offerings. This increase in long-term debt outstanding was largely for the funding of acquisitions.



Amortization of Debt Issuance Costs



For the three months ended March 31, 2004, amortization of debt issuance costs increased
$0.2 million, or 39.7%, to $0.8 million, as compared to $0.6 million for the three months ended March 31, 2003. This increase was largely due to the amortization of debt issuance costs for the Partnerships $235.0 million debt offerings and for
the amortization of bank fees incurred in connection with the heating oil segments bank credit facility.



Loss on Redemption of Debt



For the
three months ended March 31, 2003, the Partnership recorded a $0.2 million expense largely consisting of the unamortized deferred debt issuance cost associated with long-term debt repaid partially offset by the gain on extinguishments applicable to
the portion of the related debt that was repaid.



Income Tax Expense



For the three months ended March 31, 2004, income tax expense decreased
$0.7 million to $0.7 million, as compared to $1.5 million for the three months ended March 31, 2003. This decrease was due to lower expected state income taxes for fiscal 2004.





-19-



---

Income from Continuing Operations



For the three months ended March 31, 2004, income from continuing operations decreased $1.0 million or 1.3%, to $79.9 million, as compared
to $81.0 million for the three months ended March 31, 2003. This decrease was due to a $4.7 million decrease in income from continuing operations at the heating oil segment largely offset by $3.4 million higher income from continuing operations at
the propane segment and a slightly less loss of $0.2 million at the Partnership level. The decrease in income from continuing operations was primarily due to the impact of warmer temperatures and net customer losses largely offset by the impact of
acquisitions, increased revenues from installations, service and appliances sales and from increased per gallon margins.



Income From Discontinued Operations



For the three months ended March 31, 2004, income from discontinued operations decreased $1.7 million, or 77.3%, to $0.5 million, as compared to $2.2 million for the
three months ended March 31, 2003. This decrease was largely due to lower natural gas margins and higher direct marketing expenses to obtain new customers. This income relates to the operating results from the TG&E business that was sold on
March 31, 2004.



Gain on Sale of TG&E Segment



For the three months ended March 31, 2004, the Partnership recorded a $0.2 million gain on
the sale of TG&E. The Partnership received net proceeds after expenses of $12.8 million from this sale.



Net Income



For the three months ended
March 31, 2004, net income decreased $2.5 million, or 3.0%, to $80.7 million, as compared to $83.2 million for the three months ended March 31, 2003. The decrease was due to a $4.7 million decrease in the net income at the heating oil segment and a
$1.2 million increase in the net loss at the Partnership level partially offset by a $3.4 million increase in net income at the propane segment. The decrease in net income was primarily due to the lower income from continuing operations further
decreased by higher interest expense and lower income from discontinued operations.



SIX MONTHS ENDED MARCH 31, 2004

COMPARED TO SIX MONTHS ENDED MARCH 31, 2003



Volume



For the six months ended March 31, 2004, retail volume of home heating oil and propane increased 11.3 million gallons, or 2.0%, to 582.6
million gallons, as compared to 571.3 million gallons for the six months ended March 31, 2003. This increase was due to a 22.1 million gallon increase in the propane segment partially offset by a 10.8 million gallon decrease in the heating oil
segment. The increase in volume reflects the impact of an additional 67.0 million gallons provided by acquisitions partially offset by the impact of warmer temperatures and net customer losses, largely in the home heating oil segments lower
margin commercial business. The Partnership estimates that it has approximately 3% fewer customers, after adjusting for acquisitions, at March 31, 2004 than it had at March 31, 2003. Temperatures in the Partnerships areas of operations for the
six months ended March 31, 2004 were an average of 5.2% warmer than in the prior years comparable six months and approximately 2.0% colder than normal as reported by the National Oceanic Atmosphere Administration (NOAA).



The above activity is summarized as follows:



|                                         |  |               |  
|---------------------------------------- |  | ------------- | -
|                                         |  | (in millions) |  
|Volume  six months ended March 31, 2003 |  | 571.3         |  
|Impact of warmer temperatures            |  | (27.1         | )
|Impact of acquisitions                   |  | 67.0          |  
|Lower commercial volume                  |  | (15.7         | )
|Delivery scheduling                      |  | 2.6           |  
|Net customer losses and other            |  | (15.5         | )
|                                         |  |               |  
|Volume  six months ended March 31, 2004 |  | 582.6         |  
|                                         |  |               |  



Sales



For the six months ended March 31, 2004, sales increased $43.4 million, or 4.3%, to $1,043.4
million, as compared to $1,000.0 million for the six months ended March 31, 2003. This increase was due to $51.6 million higher propane segment sales partially offset by $8.2 million lower home heating oil sales. Sales increased largely as a result
of higher selling prices and from the additional volume sold. Selling prices increased versus the prior years comparable period in response to higher supply costs. Sales of rationally related products, including heating and air conditioning
equipment installation and service and water softeners increased $12.0 million in the heating oil segment and by $7.1 million in the propane segment from the prior years comparable period due to acquisitions, increased installation activity
and from increases in rates charged to customers for service contracts and increases in billable service.



-20-



---

Cost of Product



For the six months ended March 31, 2004, cost of product increased $11.5 million, or 2.1%, to $572.6 million, as compared to $561.1 million for the six months ended March
31, 2003. This increase was due to $32.5 million of higher cost of product at the propane segment partially offset by $21.0 million lower cost of product at the heating oil segment. Cost of product increased largely due to higher supply cost and
from the cost of product related to the increased volume. While selling prices and supply cost both increased on a per gallon basis, the increase in selling prices was greater than the increase in supply cost, which results in higher per gallon
margins of approximately 1.0 cents.



Cost of Installations, Service and
Appliances



For the six months ended March 31, 2004, cost of
installations, service and appliances increased $11.6 million, or 10.9%, to $117.8 million, as compared to $106.2 million for the six months ended March 31, 2003. This increase was due to an additional $8.3 million in the heating oil segment and by
$3.3 million in the propane segment from the prior years comparable period largely due to the increase in sales of these products.



Delivery and Branch Expenses



For the six months ended March 31, 2004, delivery and branch expenses increased $19.5 million, or 12.1%, to $180.7 million, as compared to $161.2 million for the six
months ended March 31, 2003. This increase was due to an additional $10.6 million of delivery and branch expenses at the heating oil segment and a $8.9 million increase in delivery and branch expenses for the propane segment. The increase in
delivery and branch expenses was largely due to additional operating cost associated with acquisitions, increased customer service expense of $2.1 million at the heating oil segment resulting largely from the start-up of the new outsourced call
center and for the impact of operating expense and wage increases. Delivery and branch expenses increased approximately $4.5 million from the comparable prior year six months due to the impact of operating expense and wage increases and by $16.6
million for acquisitions. This $16.6 million is largely for the establishment of base operations in new markets as well as for the variable cost of delivering the additional gallons provided by acquisitions. These increases in delivery and branch
expenses were partially reduced by cost reductions relating to lower volume delivered due to warmer temperature and net customer losses experienced in fiscal 2004.



The heating oil segments business process redesign project was substantially completed during fiscal 2003. As part of this redesign, a
transition to outsourcing in the area of customer call center management has been undertaken as both a customer satisfaction and a cost reduction strategy. The Partnership believes outsourcing customer inquiries will improve customer responsiveness
and eliminate redundancy by leveraging the technology and expertise available from third party service organizations. In addition, an outsourcing partner has greater flexibility to manage extreme seasonal volume. Start up challenges associated with
the transition to a third party customer call center impacted the customer base in the first six months of fiscal 2004 and have required unanticipated training and support which will be ongoing through fiscal 2004. This will reduce the savings
otherwise anticipated to be realized from the business redesign project in fiscal 2004.



Depreciation and Amortization Expenses



For the six months
ended March 31, 2004, depreciation and amortization expenses increased $3.5 million, or 13.8%, to $29.0 million, as compared to $25.5 million for the six months ended March 31, 2003. This increase was primarily due to a larger depreciable base of
assets as a result of the impact of acquisitions and for increased depreciation resulting from the technology investment made by the heating oil segment as part of its business process redesign project.



General and Administrative Expenses



For the six months ended March 31, 2004, general and administrative expenses decreased $3.2
million, or 14.7%, to $18.7 million, as compared to $21.9 million for the six months ended March 31, 2003. The heating oil segments business process redesign project was substantially completed during fiscal 2003 and the Partnership did not
incur any expense for this project for the six months ended March 31, 2004. General and administrative expenses for the six months ended March 31, 2003 included $2.4 million of expense for this project. General and administrative expenses also
decreased due to a $0.9 million decrease in the accrual for compensation earned for unit appreciation rights and restricted stock awards previously granted. The accrual was lower as the Partnership recorded a lower accrual for units to be issued
under the Director and Employee Unit Incentive Plan as the Partnership doesnt currently expect to achieve the specified objectives for this plan in fiscal 2004.



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Interest Expense



For the six months ended March 31, 2004, interest expense increased $4.0 million, or 19.8%, to $24.4 million, as compared to $20.3 million for the six months ended March
31, 2003. This increase was largely due to a higher average balance of long-term debt outstanding during the six months ended March 31, 2004 compared to the six month period ended March 31, 2003 and for additional interest related to the higher
interest rate on the Partnerships $235.0 million debt offerings largely completed in fiscal 2003 versus the debt repaid with the proceeds from these offerings. This increase in long-term debt outstanding was largely for the funding of
acquisitions.



Amortization of Debt Issuance Costs



For the six months ended March 31, 2004, amortization of debt issuance costs increased $1.1
million, or 106.2%, to $2.0 million, as compared to $1.0 million for the six months ended March 31, 2003. This increase was largely due to the amortization of debt issuance costs for the Partnerships $235.0 million debt offerings and for the
amortization of bank fees incurred in connection with the heating oil segments bank credit facility.



Income Tax Expense



For the six months
ended March 31, 2004, income tax expense decreased $1.0 million, or 46.1%, to $1.2 million, as compared to $2.1 million for the six months ended March 31, 2003. This decrease was due to lower expected state income taxes for fiscal 2004.



Income From Continuing Operations



For the six months ended March 31, 2004, income from continuing operations decreased $3.4
million, or 3.3%, to $98.7 million, as compared to $102.0 million for the six months ended March 31, 2003. This decrease was due to a $9.4 million decrease in income from continuing operations at the heating oil segment and a $0.8 million larger
loss at the Partnership level partially offset by $6.8 million higher income from continuing operations at the propane segment. The decrease in income from continuing operations was primarily due to the impact of warmer temperatures and net customer
losses partially offset by the impact of acquisitions, increased revenues from installations, service and appliance sales and from increased per gallon margins.



Income From Discontinued Operations



For the six months ended March 31, 2004, income from discontinued operations remained flat at $1.1 million for both periods. This income relates to the operating results
from the TG&E business that was sold on March 31, 2004.



Gain On Sale of
TG&E Segment



For the six months ended March 31, 2004, the Partnership
recorded a $0.2 million gain on the sale of TG&E. The Partnership receives net proceeds after expenses of $12.8 million from this sale.



Cumulative Effect of Change in Accounting Principle



For the six months ended March 31, 2003, the Partnership recorded a $3.9 million decrease in net income arising from the adoption of Statement No. 142 to reflect the
impairment of its goodwill for TG&E.



Net Income



For the six months ended March 31, 2004, net income increased $0.8 million, or 0.8%, to
$100.0 million, as compared to $99.2 million for the six months ended March 31, 2003. The increase was due to a $6.8 million increase in net income at the propane segment and a $3.4 million lower net loss at the partnership level largely offset by a
$9.4 million decrease in the net income at the heating oil segment. The increase in net income was primarily due to the impact in fiscal 2003 of the $3.9 million decrease in net income at the TG&E segment for the adoption of SFAS No. 142
partially offset by the decrease in income from continuing operations and for increased interest expense.



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Liquidity and Capital Resources



The ability of Star Gas to satisfy its obligations will depend on its future performance, which will be subject to prevailing economic,
financial, business, and weather conditions, and other factors, most of which are beyond its control. Future capital requirements of Star Gas are expected to be provided by cash flows from operating activities and cash on hand at March 31, 2004. To
the extent future capital requirements exceed cash flows from operating activities:



| | a) |  | working capital will be financed by the Partnerships working capital lines of credit and repaid from subsequent seasonal reductions in inventory and accounts receivable;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Cash Flows



Operating Activities. The net cash used in operations of $42.6 million for the first
six months of fiscal 2004 consisted of income from continuing operations of $98.7 million, noncash charges of $34.7 million, primarily made up of depreciation and amortization of $31.1 million, which were offset by an increase in operating assets
and liabilities of $175.9 million. The increase in operating assets and liabilities of $175.9 million was less than the $214.3 million for the six months ended March 31, 2003 largely due to a lower increase in accounts receivables. Despite sales
increasing from $1,000.0 million in the first six months of fiscal 2003 to $1,043.4 million for the first six months of fiscal 2004, the increase in accounts receivable was $44.3 million less than the increase in the first six months in fiscal 2003
as collections increased from $833.1 million in the first six months of fiscal 2003 to $919.5 million for the first six months of fiscal 2004. This increase in collections was partially offset by cash payments for cost of product and cost of
installations, service and appliances which increased from $663.9 million in the first six months of fiscal 2003 to $702.2 million in the first six months of fiscal 2004.



Investing Activities. Star Gas completed three acquisitions during the six months ended March 31, 2004, investing $4.2 million. This
expenditure for acquisitions is reflected in the cash provided by investing activities of $5.7 million along with $3.9 million invested for capital expenditures and the $12.8 million of proceeds received from the sale of TG&E. The $3.9 million
for capital expenditures is comprised of $2.1 million of capital additions needed to sustain operations at current levels and $1.8 million for capital expenditures incurred in connection with the heating oil segments business process redesign
program and for customer tanks and other capital expenditures to support growth of operations. The capital expenditures made for the business process redesign program were largely for the purchase of technology to increase the efficiency and quality
of services provided to its customers. Investing activities also includes proceeds from the sale of fixed assets of $1.0 million.



Financing Activities. During the six months ended March 31, 2004, increased bank working capital borrowings of $73.1 million, $38.6 million of proceeds from the
issuance of senior notes and $35.0 million of net proceeds from the issuance of equity provided cash of $146.7 million. Cash distributions paid to Unitholders of $40.6 million, acquisition facility and debt repayments of $49.5 million and other
financing activities, which were largely for fees incurred in connection with the renewal of the home heating oil segments bank credit facilities and from issuance of the senior notes of $5.6 million reduced the net cash provided by financing
activities to $51.1 million.



As a result of the above activity and the $1.5
million of cash provided by discontinued operations, cash increased by $15.6 million to $25.7 million as of March 31, 2004.



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



For the six months ended March 31, 2004, EBITDA increased $4.1 million, or 2.8% to $153.6 million as compared to $149.5 million for the six
months ended March 31, 2003. This increase was due to a $7.2 million increase in the propane segment EBITDA and a $1.6 million increase in the EBITDA at the Partnership level partially offset by a $4.8 million reduction in EBITDA at the heating oil
segment. The increase in EBITDA was largely due to the results of acquisitions, increased revenues from installations, service and appliance sales and from increased per gallon margins partially offset by the impact of warmer weather and net
customer losses.



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



|                                            |  |                            |          |   |      |   |          |  
|------------------------------------------- |  | -------------------------- | -------- | - | ---- | - | -------- | -
|                                            |  | Six Months Ended March 31, |         
|                                            |  | 2003                       |          |   | 2004 |  
|Income from continuing operations           |  | $                          | 102,025  |   |      | $ | 98,652   |  
|Plus:                                       |  |                            |          |   |      |   |          |  
|Income tax expense                          |  |                            | 2,135    |   |      |   | 1,150    |  
|Amortization of debt issuance costs         |  |                            | 991      |   |      |   | 2,043    |  
|Interest expense, net                       |  |                            | 18,826   |   |      |   | 22,747   |  
|Depreciation and amortization               |  |                            | 25,512   |   |      |   | 29,022   |  
|                                            |  |                            |          |   |      |   |          |  
|EBITDA                                      |  |                            | 149,489  |   |      |   | 153,614  |  
|Add/(subtract)                              |  |                            |          |   |      |   |          |  
|Loss on redemption of debt                  |  |                            | 181      |   |      |   |         |  
|Income tax expense                          |  |                            | (2,135   | ) |      |   | (1,150   | )
|Interest expense, net                       |  |                            | (18,826  | ) |      |   | (22,747  | )
|Unit compensation expense                   |  |                            | 1,023    |   |      |   | 84       |  
|Provision for losses on accounts receivable |  |                            | 2,452    |   |      |   | 3,703    |  
|Loss (gain) on sales of fixed assets, net   |  |                            | 54       |   |      |   | (149     | )
|Change in operating assets and liabilities  |  |                            | (214,348 | ) |      |   | (175,934 | )
|                                            |  |                            |          |   |      |   |          |  
|Net cash used in operating activities       |  | $                          | (82,110  | ) |      | $ | (42,579  | )
|                                            |  |                            |          |   |      |   |          |  



Financing and Sources of Liquidity



The Partnerships heating oil segment has a bank credit facility,
which includes a working capital facility, providing for up to $150.0 million of borrowings to be used for working capital purposes, an acquisition facility, providing for up to $50.0 million of borrowings to be used for acquisitions and for certain
capital improvements and a $35.0 million letter of credit facility primarily for insurance purposes. The working capital facility and letter of credit facility will expire on June 30, 2006. The acquisition facility will convert to a term loan for
any outstanding borrowings on June 30, 2006, which balance will be payable in eight equal quarterly principal payments. At March 31, 2004, $78.0 million of working capital borrowings were outstanding.



The Partnerships propane segment has a bank credit facility, which consists of a $25.0
million acquisition facility, a $25.0 million growth capital facility that can be used to fund maintenance and growth capital expenditures and a $24.0 million working capital facility. The working capital facility expires on September 30, 2006.
Borrowings under the acquisition and growth capital facilities will revolve until September 30, 2006, after which time any outstanding loans thereunder, will amortize in quarterly principal payments with a final payment due on September 30, 2008. At
March 31, 2004, $1.4 million of acquisition facility borrowings, $2.0 million of Growth Capital Facility borrowings and $7.1 million of working capital borrowings were outstanding.



The Partnerships bank credit facilities and debt agreements contain several financial tests and covenants restricting the various
segments and Partnerships ability to pay distributions, incur debt and engage in certain other business transactions. In general these tests are based upon achieving certain debt to cash flow ratios and cash flow to interest expense ratios. In
addition, amounts borrowed under the working capital facility are subject to a requirement to maintain a zero balance for at least forty-five consecutive days. Failure to comply with the various restrictive and affirmative covenants of the
Partnerships various bank and note facility agreements could negatively impact the Partnerships ability to incur additional debt and/or pay distributions and could cause certain debt to become currently payable.



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As of March 31, 2004, the Partnership was in compliance with all debt covenants.



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



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



The Partnership had $511.1 million of debt outstanding as of March 31, 2004 (amount does not include working capital borrowings of $85.1 million), with significant
maturities occurring over the next five years. The following summarizes the Partnerships long-term debt maturities during the twelve months ended March 31,



|           |  |               
|---------- |  | --------------
|2005       |  | $22.6 million 
|2006       |  | $33.9 million 
|2007       |  | $70.7 million 
|2008       |  | $40.4 million 
|2009       |  | $17.3 million 
|Thereafter |  | $326.2 million



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



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



The Partnership utilizes weather insurance in order to assist the Partnership in maintaining the stability of its cash flows. The Partnership purchased a base of $12.5
million of weather insurance coverage for each year from 2004  2007. The amount of insurance proceeds that can be realized under these policies is calculated by multiplying the degree day deviation from an agreed upon cumulative degree day
strike price by $35,000. The calculation period for the weather insurance coverage is from November first to the end of February and is measured based upon a weighting of certain New England and Mid-Atlantic weather stations. Due to the close to
normal weather conditions experienced for the current policy period, the Partnership did not receive any benefit from the weather insurance for the six months ended March 31, 2004.



For the remainder of fiscal 2004, the Partnership anticipates paying interest of approximately $20.8 million and anticipates growth and
maintenance capital additions of approximately $4.5 million. In addition, the Partnership plans to pay distributions on its units to the extent there is sufficient available cash in accordance with the partnership agreement. The Partnership plans to
fund acquisitions made through a combination of debt and equity. Based on its current cash position, bank credit availability and anticipated net cash to be generated from operating activities, the Partnership expects to be able to meet all of its
obligations for fiscal 2004.



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Item 3.



Quantitative and Qualitative Disclosures About Market Risk



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



At March 31, 2004, the Partnership had outstanding borrowings totaling $596.2 million, of which approximately $88.5 million is subject to
variable interest rates under its Bank Credit Facilities. In the event that interest rates associated with these facilities were to increase 100 basis points, the impact on future cash flows would be a decrease of approximately $0.9 million
annually.



The Partnership also selectively uses derivative financial
instruments to manage its exposure to market risk related to changes in the current and future market price of home heating oil and propane. The Partnership does not hold derivatives for trading purposes. The value of market sensitive derivative
instruments is subject to change as a result of movements in market prices. Consistent with the nature of hedging activity, associated unrealized gains and losses would be offset by corresponding decreases or increases in the purchase price the
Partnership would pay for the product being hedged. Sensitivity analysis is a technique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product at March 31, 2004, the
potential gain on the Partnerships hedging activity would be to increase the fair value of these outstanding derivatives by $1.8 million to a fair value of $7.2 million; and conversely a hypothetical ten percent decrease in the cost of product
would decrease the fair value of these outstanding derivatives by $1.8 million to a fair value of $3.6 million.



Item 4.



Controls and Procedures



(a) Evaluation of disclosure controls
and procedures.



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



(b) Change in Internal Control over Financial Reporting.



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





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PART II OTHER INFORMATION



Item 6.



|Exhibits |  | and Reports on Form 8-K
|-------- |  | -----------------------



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



|      |  |                                                                 
|----- |  | ----------------------------------------------------------------
|10.37 |  | Agreement to sell the stock and business of Total Gas & Electric
|      | 
|31.1  |  | Rule 13a-14(a) Certification.                                   
|      | 
|31.2  |  | Rule 13a-14(a) Certification.                                   
|      | 
|32.1  |  | Section 906 Certification.                                      
|      | 
|32.2  |  | Section 906 Certification.                                      



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



1/7/04  On January 7, 2004, Star Gas Partners, L.P., a Delaware partnership (the Partnership), filed the balance sheets of Star Gas LLC,
a Delaware limited liability company and the sole general partner of the Partnership.



1/29/04  On January 29, 2004, Star Gas Partners, L.P., issued a press release describing its financial results for its first fiscal quarter ended December 31, 2003.



2/2/04  This Form 8-K consists of a copy of the underwriting agreement
dated as of February 2, 2004, for a firm commitment public offering of up to 1,300,000 common units (plus a 15% over-allotment option) of the registrant that were previously registered pursuant to a shelf registration statement on Form S-3 (SEC File
No. 333-100976), together with an opinion of counsel relating thereto.



3/15/04  This Form 8-K consists of a copy of the Star Gas Partners, L.P., press release, dated March 15, 2004, announcing that it had reached an agreement to sell the stock and business of Total Gas & Electric
(TG&E) in an all-cash transaction to a private party.



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SIGNATURE



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



Star Gas Partners, L.P.

(Registrant)

By: Star Gas LLC as General Partner



|                            |  |                               |  |               
|--------------------------- |  | ----------------------------- |  | --------------
|Signature                   |  | Title                         |  | Date          
|/s/    Ami Trauber          |  | Chief Financial Officer       |  | April 29, 2004
|Ami Trauber                 |  | Star Gas LLC                  |  |               
|                            |  | (Principal Financial Officer) |  |               
|                            |  |                              
|/s/    James J. Bottiglieri |  | Vice President                |  | April 29, 2004
|James J. Bottiglieri        |  | Star Gas LLC                  |  |               



Star Gas Finance Company

(Registrant)



|                            |  |                               |  |               
|--------------------------- |  | ----------------------------- |  | --------------
|Signature                   |  | Title                         |  | Date          
|/s/    Ami Trauber          |  | Chief Financial Officer       |  | April 29, 2004
|Ami Trauber                 |  | (Principal Financial Officer) |  |               
|                            |  |                              
|/s/    James J. Bottiglieri |  | Vice President                |  | April 29, 2004
|James J. Bottiglieri        |  |                               |  |               



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