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

                                   FORM 10-K

                                   (Mark One)

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

                  For the Fiscal year ended September 30, 1996
                                            ------------------
                                       OR
         [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]

             For the transition period from           to          
                                            ---------    ---------
                       Commission File Number:   33-98490
                                                ---------
                            STAR GAS PARTNERS, L.P.
                            -----------------------

             (Exact name of registrant as specified in its charter)


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

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

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

       Securities registered pursuant to Section 12(b) of the Act:  None
          Securities registered pursuant to Section 12(g) of the Act:

                                  Common Units
                 --------------------------------------------
                                (Title of class)


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

Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ X ]

The aggregate market value of Star Gas Partners, L.P. Common Units held by non-
affiliates of Star Gas Partners, L.P. on November 13, 1996 was approximately
$64,328,000.  At November 13, 1996 there were outstanding 2,875,000 Common Units
and 2,396,078 Subordinated Units, each representing limited partner interests.

Documents Incorporated by Reference:  None
<PAGE>
 
                            STAR GAS PARTNERS, L.P.

                          1996 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS


                                     PART I

<TABLE>
<CAPTION>
                                                                 Page
<S>         <C>                                                  <C>
Item  1.    Business                                                3
Item  2.    Properties                                             11
Item  3.    Legal Proceedings                                      11
Item  4.    Submission of Matters to a Vote of Security Holders    11

                                    PART II

Item  5.    Market for the Registrant's Units and
            Related Unitholder Matters                             12
Item  6.    Selected Historical and Pro Forma Financial           
            and Operating Data                                     13
Item  7.    Management's Discussion and Analysis of               
            Financial Condition and Results of Operations          14
Item  8.    Financial Statements and Supplementary Data            22
Item  9.    Changes in and Disagreements with Accountants on      
            Accounting and Financial Disclosure                    22 

                                    PART III

Item 10.    Directors and Executive Officers of the Registrant     22
Item 11.    Executive Compensation                                 26
Item 12.    Security Ownership of Certain Beneficial Owners    
            and Management                                         28
Item 13.    Certain Relationships and Related Transactions         30
                                                               
                                    PART IV                    
                                                               
Item 14.  Exhibits, Financial Statement Schedules, and         
           Reports on Form 8-K                                     31
 
</TABLE> 
                                       2
<PAGE>
 
                                     PART I
                                ITEM 1. BUSINESS


Business of Star Gas Partners, L.P.

          Star Gas Partners, L.P. (the "Partnership" or the "MLP"), is a
publicly traded Delaware limited partnership, and was formed on October 16,
1995.  The Partnership's activities are conducted through its subsidiary Star
Gas Propane, L.P. (the "Operating Partnership" or the "OLP").  The MLP, with a
99% limited partner interest, is the sole limited partner of the Operating
Partnership.  The Operating Partnership accounts for nearly all of the MLP's
consolidated assets, sales and operating income.

Business of Star Gas Propane, L.P.

  The Operating Partnership, a Delaware limited partnership, was formed on
October 16, 1995, to acquire, own and operate the propane business and assets
and related liabilities of Star Gas Corporation (the "Company", "Star Gas", the
"General Partner") and the propane operations and assets and liabilities of Star
Gas' parent corporation, Petroleum Heat and Power Co., Inc. ("Petro"), a
Minnesota corporation, (collectively hereinafter referred to as the "Star Gas
Group" or the "Predecessor Company").  The Company has retained a 1% general
partner interest in the MLP and also holds a 1.0101% general partner interest in
the Operating Partnership, representing a 2% general partner interest in the
Partnership on a combined basis.  The General Partner conducts, directs and
manages all activities of the Partnership and the Operating Partnership and is
reimbursed on a monthly basis for all direct and indirect expenses it incurs on
their behalf including the cost of employee wages.

General

  The Partnership is primarily engaged in the retail distribution of propane and
related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers. The Partnership believes that it is the
ninth largest retail propane distributor in the United States, serving
approximately 153,000 customers from 49 branch locations and 21 satellite
storage facilities in the Midwest and 18 branch locations and 13 satellite
storage facilities in the Northeast. The Partnership also serves approximately
70 wholesale customers from its wholesale operation in southern Indiana.

Formation

  In December 1993, Petro, the nation's largest home heating oil distributor,
acquired a 29.5% equity interest in Star Gas.  In December 1994, Petro exercised
its option to purchase the remaining equity. Immediately after Petro's initial
investment, new management was installed and significant restructuring efforts
were commenced in order to improve Star Gas' performance.  As part of this
program in December 1993, Star Gas sold its underperforming Texas propane
operations and in November 1994 its propane operations in southern Georgia, as
well as its unrelated common carrier trucking business in August 1994.  In
addition, Star Gas undertook a corporate reorganization which involved a
substantial reduction in personnel, the relocation of its corporate headquarters
to Stamford, Connecticut, the implementation of new pricing policies, budgeting
techniques and safety and training programs, and the centralization of certain
management reporting functions.  As a result of this restructuring, Star Gas now

                                       3
<PAGE>
 
Formation (continued)

consists of 49 branches in the Midwest and 18 branches in the Northeast. These
branches have historically been its most profitable.

  In December 1995, (i) Petro conveyed all of its propane assets and related
liabilities to Star Gas and (ii) Star Gas and its subsidiaries conveyed
substantially all of their assets (other than $83.6 million in cash and certain
non-operating assets) to the Operating Partnership (the "Star Gas Conveyance")
in exchange for general and limited partner interests in the Operating
Partnership and the assumption by the Operating Partnership of substantially all
of the liabilities of Star Gas and its subsidiaries (excluding certain income
tax liabilities and certain long-term obligations of Star Gas that were assumed
by Petro).  Immediately after the Star Gas Conveyance, Star Gas and its
subsidiaries conveyed their limited partner interests in the Operating
Partnership to Star Gas Partners in exchange for an aggregate of 2.4 million
Subordinated Units of limited partner interest in Star Gas Partners.

Recent Events

  On August 1, 1996, the Partnership announced that it has retained Morgan
Stanley & Co., Incorporated to assist it in the development and consideration of
strategic alternatives designed to maximize value for its unitholders.
Alternatives to be investigated may include, but will not be limited to, the
sale or merger of Star Gas.

Industry Background

  Propane is extracted from natural gas or oil wellhead gas at processing plants
or separated from crude oil during the refining process. Propane is normally
transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution.  When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Propane is clean-burning, producing negligible amounts of
pollutants when consumed.  According to the National Propane Gas Association,
the domestic retail market for propane is approximately 9.4 billion gallons
annually, with limited growth for retail demand for the product.  Based upon
information contained in the Energy Information Administration's Annual Energy
Review-1995, propane accounts for approximately 3.7% of household energy
consumption in the United States.

Business Strategy

  The Partnership's business strategy is to maximize cash flow and profitability
through internal growth, controlling operating costs and acquisitions.  The
Partnership's focus is on acquiring smaller to medium-sized local and regional
independent propane distributors, particularly those with a relatively large
percentage of residential customers, which generate higher margins than other
types of customers.

  In order to facilitate the Partnership's acquisition strategy, the Operating
Partnership has entered into Bank Credit Facilities which consist of a $25.0
million Acquisition Facility and a $12.0 million Working Capital Facility. In
addition to borrowings under the Bank Credit Facilities, the Partnership may
fund future acquisitions from internal cash flow or from the issuance of
additional Partnership units.

                                       4
<PAGE>
 
Marketing And Operations

  As of September 30, 1996, the Partnership distributed propane to approximately
153,000 retail customers in 13 states from 67 branch locations. The
Partnership's operations are conducted under several leading trademarks and
trade names, including: Star Gas(R), Star Gas Service/TM/, Silgas Inc./TM/, Blue
Flame(R), Maingas/TM/ and Arrow Gas/TM/.  (The Partnership does not have the
right to use the trademark Star Gas/ /in the State of New York nor does the
Partnership have the right to use the Blue Flame/ /trademark in certain limited
areas outside of the Partnership's current area of operations).  The marketing
areas served by the Partnership are generally rural but also include suburban
areas where natural gas is generally not available.  The Partnership's retail
operations are located primarily in the Northeast and Midwest regions of the
United States:
<TABLE>
<CAPTION>
 
NORTHEAST                               MIDWEST
---------                               -------            
<S>                    <C>              <C>              <C>
 
Connecticut            New York         Indiana          Kentucky
Stamford               Poughkeepsie     Akron            Glencoe
Hartford               Washingtonville  Batesville       Prospect
                                        Bedford          Shelbyville
Maine                  Pennsylvania     Bluffton         Williamstown
Fairfield              Hazelton         Coal City
Fryeburg               Wind Gap         College Corner   Michigan
Skowhegan                               Columbia City    Hillsdale
Wells                  Rhode Island     Decatur
Windham                Davisville       Ferdinand        Ohio
                                        Greencastle      Defiance
Massachusetts                           Jeffersonville   Deshler
Belchertown                             Linton           Fairfield
Rochdale                                Madison          Ft. Recovery
Westfield                               New Salisbury    Hebron
Swansea                                 N. Manchester    Ironton
                                        N. Vernon        Lancaster
New Hampshire                           N. Webster       Lewisburg
(from Fryeburg, ME)                     Portland         Lynchburg
                                        Remington        Macon
New Jersey                              Richmond         Milford
Maple Shade                             Salem            Mt. Orab
Tuckahoe                                Seymour          Northstar
                                        Sulphur Springs  Ripley
                                        Versailles       Sabina
                                        Warren           Waverly
                                        Waterloo         West Union
                                        Winamac
                                                         West Virginia
                                                         (from Ironton, OH)
</TABLE>

  The distribution of propane at the retail level generally involves large
numbers of small deliveries averaging 100-150 gallons each to residential,
commercial, industrial, agricultural and motor fuel users. Homeowners or
residential customers  use propane  primarily for  space  heating, water
heating,

                                       5
<PAGE>
 
Marketing And Operations (continued)

clothes drying and cooking.  Commercial customers such as motels, restaurants,
retail stores  and laundromats, generally  use propane for the  same purposes as
residential customers.  Industrial users, such as manufacturers, use propane as
a heating and energy source in manufacturing and drying processes.  In addition,
propane is used to dry crops, cure tobacco and as a fuel source for certain
motor vehicles.

  During the fiscal year ended September 30, 1996, approximately 71% of the
Partnership's sales (by volume of gallons sold) were to retail customers (of
which approximately 56%, 22%, 13%, and 9% were sales to residential customers,
industrial/commercial customers, agricultural customers and motor fuel
customers, respectively) and  approximately 29% were to wholesale customers.
Sales to residential customers in fiscal year 1996 accounted for 65% of the
Partnership's gross profit on propane sales, reflecting the higher-margin nature
of this segment of the market.

  From its branch locations, the Partnership also sells, installs and services
equipment related to its propane distribution business, including heating and
cooking appliances and, at some locations, rents water softeners.  Typical
branch locations consist of an office, appliance showroom, warehouse and service
facilities, with one or more 12,000 to 30,000 gallon bulk storage tanks on or
near the premises. Satellite facilities typically contain only storage tanks.

  Retail deliveries of propane are usually made to customers by means of the
Partnership's fleet of 242 bobtail and rack trucks.  Propane is pumped from the
bobtail truck, which generally holds 2,000 to 3,000 gallons, into a stationary
storage tank on the customer's premises.  The Partnership generally owns these
storage tanks.  The capacity of these tanks ranges from approximately 24 gallons
to approximately 1,000 gallons.  The Partnership also delivers propane to retail
customers in portable cylinders, which typically are picked up and replenished
at the Partnership distribution locations, then returned to the retail customer.
To a limited extent, the Partnership also delivers propane to certain end users
of propane in larger trucks known as transports (which have an average capacity
of approximately 9,000 gallons).  End users receiving transport deliveries
include industrial customers, large-scale heating accounts, such as local gas
utilities which use propane as a supplemental fuel to meet peak demand
requirements, and large agricultural accounts which use propane for crop drying
and space heating.  "See Item 2--Properties".

  A majority of the Partnership's residential customers receive their propane
supply pursuant to an automatic delivery system which eliminates the customer's
need to make an affirmative purchase decision.  The Partnership delivers propane
to its customers an average of approximately six times during the year,
depending upon weather conditions and historical consumption patterns. In
addition, the Partnership provides emergency service seven days a week, 52 weeks
a year. Management believes its propane customer base to be relatively stable.
In excess of 95% of the Partnership's retail propane customers lease their tanks
from the Partnership.  In most states, certain fire safety regulations restrict
the refilling of a leased tank solely to the propane supplier that owns the
tank. The inconvenience associated with switching tanks greatly reduces a
propane customer's tendency to change distributors.

  Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane.  The Partnership generally purchases propane in the contract and spot
markets, primarily  from natural  gas  processors and  major oil companies, on a

                                       6
<PAGE>
 
Marketing and Operations (continued)

short-term basis, therefore, its supply costs fluctuate with market price
fluctuations. Should wholesale propane prices decline in the future, the
Partnership's margins on its retail propane distribution business should
increase in the short-term because retail prices tend to change less rapidly
than wholesale prices. Should the wholesale cost of propane increase, for
similar reasons retail margins and profitability would likely be reduced at
least for the short-term until retail prices can be increased.

  The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings.  Approximately 70% - 75% of the
Partnership's retail propane volume is sold during the peak heating season from
October through March, as many customers use propane for heating purposes.
Consequently, sales and operating profits are concentrated in the first and
second fiscal quarters (October through March).  To the extent necessary, the
Partnership will reserve cash flows from the first and second quarters for
distribution to holders of Common Units in the third and fourth fiscal quarters.
In addition, sales volume traditionally fluctuates from year to year in response
to variations in weather, prices and other factors.  The Partnership believes
that the broad geographic distribution of its operations helps to minimize
exposure to regional weather or economic patterns.

Supply

  The Partnership obtains propane from approximately 25 sources, all of which
are domestic or Canadian oil companies, including Amoco Canada Marketing
Corporation; Ashland Inc.; Enron Gas Liquids, Inc.; Marathon Company; Markwest
Hydrocarbons Partners, Ltd.; Amerigas Propane, L.P.; Shell Oil Company; Shell
Canada Limited; Sea-3 Inc.; Sun Company Inc.; Texaco Natural Gas Liquids (a
division of Texaco Natural Gas Inc.); and Warren Gas Liquids, Inc.  Supplies
from these sources have traditionally been readily available, although no
assurance can be given that supplies of propane will be readily available in the
future.

  Substantially all of the Partnership's propane supply for its Northeast retail
operations are purchased under annual or longer term supply contracts, which
generally provide for pricing in accordance with posted prices at the time of
delivery.  Certain of the contracts provide for minimum and maximum amounts of
propane to be purchased.  During the year ended September 30, 1996, none of the
Partnership's Northeast suppliers accounted for more than 10% of the
Partnership's volumes.

  The Partnership typically supplies its Midwest retail and wholesale operations
by a combination of (i) spot purchases from suppliers at Mont. Belvieu, Texas,
which are transported by pipeline to the Partnership's 21 million gallon
underground storage facility in Seymour, Indiana ("the Seymour Facility"), and
then delivered to the Midwest branches and (ii) purchases from a number of
Midwest refineries which are transported by truck to the branches either
directly or via the Seymour Facility. Most of the refinery purchases are
purchased under contract.

  The Seymour Facility is located on the TEPPCO Partners, L.P. pipeline system.
The pipeline is connected to the Mont. Belvieu storage facilities and is one of
the largest conduits of supply for the U.S. propane industry.  The Seymour
Facility allows the Partnership to buy and store large quantities of propane
during periods of low demand, which generally occur during the summer months.

                                       7
<PAGE>
 
Supply (continued)

The General Partner believes that this ability allows the Partnership to achieve
cost savings to an extent generally not available to the Partnership's
competitors in its Midwest markets.

  For fiscal 1996, 35% of the Midwest volume was purchased on the spot market
from various Mont. Belvieu sources, and 18% was purchased from three refineries
in Illinois and Indiana owned by Amoco Canada Marketing Corp.  Ten other
refineries provided the remaining required supplies.  The Partnership believes
that its diversification of suppliers will enable it to purchase all of its
supply needs at market prices if supplies are interrupted from any of the
sources, without a material disruption of its operations.

  Propane is generally transported from refineries, pipeline terminals and
storage facilities (including the Partnership's Seymour Facility), and coastal
terminals to the Partnership's branch location bulk plants by a combination of
the Partnership's own highway transport fleet, common carriers, owner-operators
and railroad tank cars.  Branches and their related satellites typically have
one or more 12,000 to 30,000 gallon storage tanks.

Competition

  The Partnership's business is highly competitive. However, long-standing
customer relationships are typical of the retail propane industry.  Retail
propane customers generally lease their storage tanks from their suppliers.  The
lease terms and, in most states, certain fire safety regulations restrict the
refilling of a leased tank solely to the propane supplier that owns the tank.
The inconvenience of switching tanks minimizes a customer's tendency to switch
among suppliers of propane.

  The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices.  The Partnership believes that its superior service capabilities and
customer responsiveness differentiate it from many of its competitors.  Branch
operations offer emergency service twenty-four hours per day, seven days per
week.

  Propane competes primarily with electricity, natural gas and fuel oil as an
energy source on the basis of price, availability and portability.  Propane is
generally less expensive to use than electricity for space heating, water
heating, clothes drying and cooking and competes effectively in those parts of
the country where propane is cheaper than electricity on an equivalent British
Thermal Unit basis. Propane is generally more expensive than natural gas, but
serves as an alternative to natural gas in rural and suburban areas where
natural gas is unavailable or portability of product is required. The expansion
of natural gas into traditional propane markets has historically been inhibited
by the capital costs required to expand distribution and pipeline systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in the areas affected, the Partnership believes that new
opportunities for propane sales arise as more geographically remote areas are
developed. Although propane is similar to fuel oil in space heating and water
heating applications as well as in market demand and price, propane and fuel oil
have generally developed their own distinct geographic markets.  Because
furnaces and appliances that burn propane will not operate on fuel oil, a
conversion from one fuel to the other requires the installation of new
equipment.

                                       8
<PAGE>
 
Competition (continued)

  In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business.  Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service multi-state
propane marketers, smaller local independent marketers  and farm cooperatives.
Based on industry publications, the Partnership believes that the ten largest
multi-state marketers, including the Partnership, account for less than 35% of
the total retail sales of propane in the United States, and that no single
marketer has a greater than 10% share of the total retail market in the United
States. Most of the Partnership's branches compete with five or more marketers
or distributors.  The principal factors influencing competition among propane
marketers are price and service.  Each retail distribution outlet operates in
its own competitive environment as retail marketers locate in close proximity to
customers to lower the cost of providing service.  The typical retail
distribution outlet has an effective marketing radius of approximately 35 miles.

Employees

  The Partnership has no employees, except for certain employees of its
corporate subsidiary, Stellar Propane Service Corporation and is managed by the
General Partner pursuant to the Partnership Agreement.  As of September 30,
1996, Star Gas had 617 employees providing full time services to the Operating
Partnership of which 50 were employed by the corporate office in Stamford,
Connecticut and 567 were located in branch offices of which 201 were
administrative, 264 were engaged in transportation and storage and 102 were
engaged in field servicing.  Approximately 75 of Star Gas' employees are
represented by six different local chapters of labor unions.

  Management believes that its relations with both its union and non-union
employees are satisfactory.

Government Regulations

  The Partnership is subject to various federal, state and local environmental,
health and safety laws and regulations.  Generally, these laws impose
limitations on the discharge of pollutants and establish standards for the
handling of solid and hazardous wastes.  These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right to Know Act,
the Clean Water Act and comparable state statues.  CERCLA, also known as the
"Superfund" law, imposes joint and several liability without regard to fault or
the legality of the original conduct on certain classes of persons that are
considered to have contributed to the release or threatened release of a
hazardous substance into the environment.  Propane is not a hazardous substance
within the meaning of CERCLA.  Such laws and regulations could result in civil
or criminal penalties in cases of non-compliance or impose liability for
remediation costs.  To date, the Partnership has not been named as a party to
any litigation in which the Partnership is alleged to have violated or otherwise
incurred liability under any of the foregoing laws and regulations.

  In connection with all acquisitions of retail propane businesses that involve
the purchase of real estate, the Partnership conducts a due diligence
investigation to attempt to determine whether any substance other than propane
has been sold from, or stored, on any such real estate prior to its purchase.

                                       9
<PAGE>
 
Government Regulations (continued)

  Such due diligence includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
visual inspections of the properties, whereby the General Partner's employees,
and in certain cases, independent  environmental consulting  firms hired by the
General Partner, look for evidence of hazardous substances or the existence of
underground storage tanks.

  National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which the Partnership operates.  In some states these laws are
administered by state agencies, and in others they are administered on a
municipal level.  With respect to the transportation of propane by truck, the
Partnership is subject to regulations promulgated under the Federal Motor
Carrier Safety Act.  These regulations cover the transportation of hazardous
materials and are administered by the United States Department of
Transportation.  The Partnership conducts ongoing training programs to help
ensure that its operations are in compliance with applicable regulations.  The
Partnership maintains various permits that are necessary to operate some of its
facilities, some of which may be material to its operations.  Management
believes that the procedures currently in effect at all of its facilities for
the handling, storage and distribution of propane are consistent with industry
standards and are in compliance in all material respects with applicable laws
and regulations.

  Future developments, such as stricter environmental, health or safety laws and
regulations thereunder, could affect Partnership operations. It is not
anticipated that the Partnership's compliance with or liabilities under
environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on the Partnership.  To the extent that there are
any environmental liabilities unknown to the Partnership or environmental,
health or safety laws or regulations are made more stringent, there can be no
assurance that the Partnership's results of operations will not be materially
and adversely affected.

Trademarks And Tradenames

  The Partnership utilizes a variety of trademarks and tradenames which it owns,
including Star Gas/(R)/, Silgas Inc./TM/, Blue Flame/(R)/,Maingas/TM/ and Arrow 
Gas/TM/. The Partnership regards its trademarks, tradenames and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products. (The Partnership does not have the right
to use the trademark Star Gas/TM/in the State of New York nor does the
Partnership have the right to use the Blue Flame/TM/trademark in certain limited
areas outside of the Partnership's current area of operations).

                                       10
<PAGE>
 
                               ITEM 2. PROPERTIES

  As of September 30, 1996, the Partnership owned 55 of its 67 branch locations
and 25 of its 33 satellite storage facilities and leased the balance.  In
addition, the Partnership owns the Seymour Facility, in which it stores propane
for itself and third parties.  The Partnership leases its corporate headquarters
in Stamford, Connecticut, as well as office and training facilities in the
Midwest.

  The transportation of propane requires specialized equipment. The trucks
utilized for this purpose carry specialized steel tanks that maintain the
propane in a liquefied state. As of September 30, 1996, the Partnership had a
fleet of 25 tractors, 44 transport trailers, 242 bobtail and rack trucks and 256
other service and pick-up trucks, the majority of which are owned.  The
Partnership owns 24 and leases 22 automobiles.  As of September 30, 1996, the
Partnership owned approximately 194 bulk storage tanks with typical capacities
of 12,000 to 30,000 gallons, approximately 193,000 stationary customer storage
tanks with typical capacities of 24 to 1,000 gallons and approximately 32,000
portable propane cylinders with typical capacities of 5 to 24 gallons.  The
obligations of the Partnership under its borrowings are secured by liens and
mortgages on all real and personal property of the Partnership.


                     ITEM 3. LEGAL PROCEEDINGS - LITIGATION

  Propane is a flammable, combustible gas.  Serious personal injury and property
damage can occur in connection with its transportation, storage or use.  The
Partnership, in the ordinary course of business, is threatened with or is named
as a defendant in various lawsuits which, among other items, seek actual and
punitive damages for product liability, personal injury and property damage.
The Partnership maintains liability insurance policies with insurers in such
amounts and with such coverages and deductibles as the General Partner believes
is reasonable and prudent.  However, there can be no assurance that such
insurance will be adequate to protect the Partnership from material expenses
related to such personal injury or property damage or that such levels of
insurance will continue to be available in the future at economical prices.


          ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  No matters were submitted to a vote of the security holders of the Partnership
during the fiscal year ended September 30, 1996.

                                       11
<PAGE>
 
                                    PART II

           ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED MATTERS

  The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the Nasdaq National Market under the
symbol SGASZ.  The Common Units began trading on December 20, 1995, at an
initial public offering price of $22.00 per Common Unit.  The following table
sets forth the high and low sales prices for the Common Units on the Nasdaq
National Market and the cash distribution declared per Common Unit for the
periods indicated.

<TABLE>
<CAPTION>
 
                  Common Unit Price Range    Distributions
                           1996            Declared Per Unit
                  -----------------------  -----------------
Fiscal Quarter       High         Low            1996
----------------  -----------------------  -----------------
 
<S>               <C>                      <C>
First Quarter          22.50       $22.00
 
Second Quarter         22.50       $21.13
 
Third Quarter          22.00       $19.75        $0.6225/(a)/
 
Fourth Quarter         24.75       $20.50        $0.5500
 
</TABLE>
     (a) This distribution amounted to $0.6225 per unit and represented a pro
         rata distribution of $0.0725 per unit for the period December 20, 1995
         to December 31, 1995 and a quarterly distribution of $0.55 per unit for
         the three months ended March 31, 1996.

   As of September 30, 1996, there were approximately 104 holders of record of
the Partnership's Common Units.  There is no established public trading market
for the Partnership's 2,396,073 subordinated units, representing limited partner
interests ("Subordinated Units") which are all held by Star Gas Corporation.
The Partnership makes quarterly distributions to its partners in an aggregate
amount equal to its Available Cash (as defined) for such quarter.  Available
Cash generally means, with respect to any fiscal quarter of the Partnership, all
cash on hand at the end of such quarter, plus all additional cash on hand as of
the date of determination resulting from borrowings subsequent to the end of
such quarter, less the amount of cash reserves required under certain lending
arrangements and certain discretionary reserves established by the General
Partners for future cash requirements.  These reserves are retained to provide
for the proper conduct of the Partnership's business, the payment of debt
principal and interest and to provide funds for distribution during the next
four quarters.  The full definition of Available Cash is set forth in the
Agreement of Limited Partnership of the Partnership.  The information concerning
restrictions on distributions required by Item 5 is incorporated herein by
reference to Note 10 to the Partnership's Consolidated Financial Statements
which begin on page F-1 of this Report.  Distributions of Available Cash to the
Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the subordination period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
subordination period.

                                       12
<PAGE>
 
     ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

  The following table sets forth selected historical and pro forma and other
data of the Partnership and the Star Gas Group and should be read in conjunction
with the more detailed financial statements included elsewhere in this report.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

  The Selected Pro Forma Financial Data is derived from the pro forma financial
information of the Partnership and should be read in conjunction therewith.  See
Item 14, Note 14 - of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
 
 
 
                                                                Partnership/Star Gas Group--Historical
                                                  -----------------------------------------------------------------   Partnership 
                                                                                                                      ProForma (b)  
                                                                        Year Ended September 30,                       Year Ended   
                                                  -----------------------------------------------------------------   September 30, 
                                                             1992         1993         1994       1995      1996(a)      1996    
                                                           --------     --------     --------   --------   --------  -------------  
Statement of Operations Data:                                          (In thousands, except per Unit data)           (unaudited)
  <S>                                             <C>              <C>             <C>        <C>        <C>          <C>

   Sales.......................................    $124,113        $143,216         $128,040   $104,550   $119,634     $119,634
   Gross profit................................      65,902          69,861           69,487     54,890     61,077       61,077
   Depreciation and amortization...............      13,750          16,703           13,039     10,073      9,808        9,870
   Operating income (loss).....................       7,474         (30,313)/(d)/      9,393      2,555      9,802        9,866
   Interest expense (net)......................      16,043          16,479           10,497      8,549      7,124        6,713
   Net income (loss)/(c)/......................      (7,282)        (47,049)/(d)/     (1,404)    (6,169)     2,593        3,128
   Net income per Unit/(e)/....................           -               -                -          -          -     $    .58
Balance Sheet Data (end of period):
   Current assets..............................    $ 23,284        $ 20,637         $ 17,374   $ 14,266   $ 17,842     $ 17,842
   Total assets................................     195,480         157,847          147,608    155,393    156,913      156,913
   Long-term debt..............................     123,488         123,992           70,163      1,389     85,000       85,000
   Due to Petro................................           -           4,723            8,809     86,002          -            -
   Predecessor's equity
   (deficiency)/Partners'Capital...............      42,804          (2,825)          44,328     44,305     61,398       61,398
Other Data:
   EBITDA/(c)(f)/..............................    $ 20,991        $ 19,652         $ 21,946   $ 13,541   $ 19,870     $ 19,996
   Retail propane gallons sold.................      92,289         114,405          110,069     89,133     96,294       96,294
----------------------
</TABLE>
(a) Reflects the results of operations of the Predecessor company for the period
    October 1, 1995 through December 20, 1995 and the results of Star Gas
    Partners, L.P. from December 20, 1995 through September 30, 1996. The
    operating results for the year September 30, 1996 were combined to
    facilitate an analysis of the fundamental operating data. For the actual
    results of the Partnership from December 20, 1995 through September 30,
    1996, see Item 14, Page F-4.

(b) For a description of the assumptions used in preparing the Summary Selected
    Pro Forma Financial and Operating Data, see Item 14, Note 14 - of Notes to
    Consolidated Financial Statements.

(c) The decline in operating income, net income and EBITDA during the fiscal
    year 1995 was primarily due to the significantly warmer than normal weather
    conditions during the 1995 heating season. See Item 7 - Management's
    Discussion and Analysis of Financial Condition and Results of Operations.

(d) Includes a loss of approximately $33.0 million in respect of a charge for
    the impairment of long-lived assets.

(e) Net income per Unit is computed by dividing the limited partners' interest
    in net income by the limited partners' weighted average number of units
    outstanding.

(f) EBITDA is defined as operating income plus depreciation, amortization, less
    net gain (loss) on sale of businesses and other non-cash charges (including
    the impairment of long-lived assets). EBITDA should not be considered as an
    alternative to net income (as an indicator of operating performance) or as
    an alternative to cash flow (as a measure of liquidity or ability to service
    debt obligations), but provides additional information for evaluating the
    Partnership's ability to make the Minimum Quarterly Distribution.

                                       13
<PAGE>
 
                                    ITEM 7.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview

   In analyzing the historical financial results of the Star Gas Corporation and
the financial results of the Partnership, the following matters, should be
considered.

   Following Petro's initial investment in Star Gas in December 1993, new
management initiated significant restructuring efforts in order to focus and
expand its operations in its most profitable geographic markets, the Midwest and
Northeast.  These activities included Star Gas' divestiture of its Texas propane
operations in August 1994, the sale of its southern Georgia operations in
November 1994, and the completion of seven acquisitions totaling 5.7 million
gallons annually in its core Midwest and Northeast markets

   Gross profit margins vary according to the customer mix.  For example, sales
to certain customer groups, such as residential or commercial, generate higher
gross profit margins than sales to other customer groups, such as agricultural
customers.  Accordingly, a change in customer mix can affect gross profit
without necessarily impacting total sales.

   Because propane's primary use is for heating in residential and commercial
buildings, weather conditions have a significant impact on the financial
performance of the Partnership.  Management believes that despite year-to-year
fluctuations, average temperatures have been relatively stable over time.
Nevertheless, as reflected by the unusually warm weather in fiscal 1995, actual
yearly weather conditions can vary substantially from historical averages.
Accordingly, in analyzing changes in financial performance, the weather
conditions in which the Partnership/Star Gas Group operated in any given period
should be considered.

   The following discussion reflects the results of operations and operating
data of the Predecessor Company for the years ended September 30, 1994 and 1995
and is compared to the combined results of the Predecessor Company for the
period October 1, 1995 through December 20, 1995, and the results of Star Gas
Partners, L.P. from December 20, 1995 through September 30, 1996.  The operating
results of the Predecessor Company and Star Gas Partners for the year ended
September 30, 1996 were combined to facilitate an analysis of the fundamental
operating data.

                                       14
<PAGE>
 
FISCAL YEAR ENDED SEPTEMBER 30, 1996
------------------------------------
COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995
------------------------------------------------

Volume

   For the year ended September 30, 1996, retail propane volume increased 8.0%
or 7.2 million gallons to 96.3 million gallons, as compared to 89.1 million
gallons for the year ended September 30, 1995.  Excluding the divested southern
Georgia operations, which contributed 1.9 million gallons in fiscal 1995, retail
propane volume increased 10.4% or 9.1 million gallons.  Propane sold to
residential and commercial customers increased 17.9% or 11.5 million gallons,
due to colder temperatures, acquisitions and internal account growth. Based on
degree days in areas in which the Partnership operates, fiscal 1996 was 6.5%
colder than normal and 19.5% colder than fiscal 1995.  While the residential and
commercial market segments were favorably impacted by the colder temperatures,
sales to agricultural customers, who use propane predominately in the grain
drying process, declined by approximately 2.5 million gallons primarily due to
the unusually dry crop harvest during the first fiscal quarter.  For fiscal
1996, propane sold to wholesale customers was 39.0 million gallons, virtually
unchanged from the fiscal 1995 level.

Sales

   Sales increased 14.4% or $15.0 million, to $119.6 million for fiscal 1996, as
compared to $104.6 million for fiscal 1995.  Excluding the results attributable
to the southern Georgia operations, which contributed $2.1 million of sales in
fiscal 1995, sales rose $17.1 million or 16.7% due to increased volume and
higher retail and wholesale selling prices.

Cost of Sales

   Cost of sales increased 17.9% or $8.9 million to $58.6 million for fiscal
1996, as compared to $49.7 million for fiscal 1995.  While cost of sales
declined by $1.0 million due to the disposition of the southern Georgia assets,
cost of sales in the core Midwest and Northeast operations increased by $9.9
million due to the increase in volume and higher per gallon wholesale propane
costs.  During the first quarter of fiscal 1996, the partnership was able to
lower its cost of sales through the utilization of its underground storage
facility, however, this benefit was offset during the second fiscal quarter by a
rapid spike in wholesale propane costs.

Gross Profit

   Gross profit increased 11.3% or $6.2 million, to $61.1 million for fiscal
1996 as compared to $54.9 million for fiscal 1995.  Excluding $1.0 million of
gross profit earned by the divested southern Georgia operations in fiscal 1995,
gross profit increased 13.4% or $7.2 million and was attributable to the retail
volume growth, improved wholesale gross profit margins and increased revenues
from the sale, service and rental of appliances.  Partially offsetting these
positive influences on gross profit were the effects of the second quarter rise
in wholesale propane costs and the decline in sales to lower margin agricultural
customers.  On an overall basis, per gallon retail gross profit margins
increased as a greater proportion of the Partnership's sales were made to higher
margin residential and commercial customers.

                                       15
<PAGE>
 
Delivery and Branch Expenses

   Delivery and branch expenses declined 1.3% or $0.5 million to $34.8 million
for fiscal 1996 as compared to $35.2 million for fiscal 1995.  This decline was
due to the elimination of $1.6 million of operating costs attributable to the
southern Georgia operations which was partially offset by an increase of $1.1
million or 3.4% in the remaining core operations.  The 10.4% volume increase and
the impact on operating costs of the severe winter weather experienced in the
Partnership's Northeast markets were the primary factors for the $1.1 million
increase in operating costs in the core operations.  On a per gallon basis,
operating costs in the Midwest and Northeast operations declined 6.4% due to
lower insurance expense, improved operating efficiencies and economies of scale
achieved in connection with growing the Partnership's customer base.

Depreciation and Amortization

Depreciation and amortization expense declined $0.3 million to $9.8 million for
fiscal 1996, as compared to $10.1 million for fiscal 1995 primarily due to a
reduction in these expenses due to the divestiture of the southern Georgia
operations.

General and Administrative Expenses

   General and administrative expenses increased approximately $0.3 million to
$6.5 million for fiscal 1996, as compared to $6.1 million for fiscal 1995.  This
increase was primarily due to $0.4 million of non-recurring expenses associated
with certain professionals engaged by the partnership to assist management in
analyzing and structuring two significant acquisition candidates.

Net Gain (Loss) on Sales of Assets

   Loss on sales of assets declined to $0.3 million for fiscal 1996 from $0.9
million in fiscal 1995.  During fiscal 1995 a loss of $0.7 million was recorded
in connection with the sale of the southern Georgia operations.

Interest Expense (Net)

   Interest expense, net of interest income, declined 16.7% or $1.4 million to
$7.1 million for fiscal 1996, as compared to $8.5 million for fiscal 1995.  This
reduction was primarily due to a decline in the weighted average long-term
borrowing rate and additional income generated on higher cash balances.  For
further discussions concerning the Partnership's current debt structure, refer
to footnote 10 of the consolidated financial statements.

Income Tax Expense

   Income tax expense for fiscal 1996 was approximately $0.1 million.  This
expense primarily represents certain state income taxes that the Star Gas Group
was required to pay.  Subsequent to December 20, 1995, taxes on income will be
borne by the Partners and not the Partnership, except for income taxes relating

                                       16
<PAGE>
 
to the Partnership's wholly owned corporate subsidiary which conducts non-
qualifying master limited partnership business.

Net Income

   Net Income increased $8.8 million to $2.6 million for fiscal 1996 as compared
to a loss of $6.2 million in fiscal 1995.  The improvement was attributable to
the 10.4% increase in retail propane volume, the positive impact of divesting
the southern Georgia operations and lower non-cash expenses, including the loss
on sales of assets.

EBITDA

   EBITDA (defined as operating income plus depreciation and amortization less
net gain (loss) of sale of assets) increased $6.3 million or 46.7% to $19.9
million for fiscal 1996 as compared to $13.5 million for fiscal 1995.  This
improvement in EBITDA was the result of the volume increase associated with
colder temperatures and growth in the Partnership's customer base due to both
acquisitions and internal marketing, partially offset by the impact of lower
per-gallon gross profit margins experienced during the second quarter of fiscal
1996.  For continuing operations, delivery and branch expenses declined by 6.4%,
when measured on a per gallon basis, due to the impact of the cost reduction
programs implemented over the past two years and the increase in volume.  Also
contributing to the growth in EBITDA was the divestiture of the southern Georgia
operations, which reduced EBITDA in the prior year by approximately $0.6
million. EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.


Fiscal Year Ended September 30, 1995
Compared to Fiscal Year Ended September 30, 1994
------------------------------------------------

Volume

   During the first and second quarters of fiscal 1995, the Star Gas Group
operated in unusually warm weather conditions. Based on degree days, the Midwest
was 14.0% warmer in fiscal 1995 than fiscal 1994, and 11.9% warmer than normal.
In the Northeast, fiscal 1995 was 10.0% warmer than fiscal 1994, and 9.1% warmer
than normal.  The Winter included in the first and second quarters of fiscal
1995 was the second warmest in the last 30 years in the areas serviced by the
Star Gas Group.

   During fiscal 1995, retail propane volume declined 19.0% to 89.1 million
gallons, as compared to 110.1 million gallons for fiscal 1994. The disposition
of the southern Georgia and Texas operations accounted for 15.7 million gallons,
or 75.4%, of the decline.  Retail volume for core operations in the Midwest and
Northeast declined 5.6%, from 92.4 million gallons to 87.2 million gallons, due
to temperatures that were 12.2% warmer than the previous year in all areas in
which the Partnership operates.  The Star Gas Group was able to partially

                                       17
<PAGE>
 
mitigate the effect of warmer than normal weather through internal account
growth of approximately 2% as well as the consummation of three acquisitions
during fiscal 1995.

   For fiscal 1995, wholesale volume decreased 17.7% to 39.0 million gallons, as
compared to 47.4 million gallons for fiscal 1994.  The volume decrease was
primarily attributable to the warmer than normal weather described above. In
addition, there was a reduction of 2.9 million gallons sold to certain wholesale
customers who purchase propane on a spot basis.

Sales

   Sales declined 18.3% to $104.6 million for fiscal 1995, as compared to $128.0
million for fiscal 1994.  Of this decline, $16.5 million was attributable to the
divestiture of the southern Georgia and Texas operations.  For the core Midwest
and Northeast operations, sales declined $6.9 million, or 6.3%, as the impact of
the warm weather was partially offset by increases in sales associated with
internal growth and acquisitions as well as an increase in average selling
prices, largely in response to higher wholesale product costs.

Cost of Sales

   Cost of sales fell 15.2%, or $8.9 million, to $49.7 million for fiscal 1995,
as compared to $58.6 million for fiscal 1994.  The divestiture of the southern
Georgia and Texas operations accounted for $7.7 million, or 86.6%, of this
reduction.  Cost of sales for the remaining operations declined $1.2 million due
to the decrease in volume, offset by an unexpected increase in wholesale supply
costs during the first two quarters of fiscal 1995.

Gross Profit

   Gross profit declined 21.0% to $54.9 million for fiscal year 1995, as
compared to $69.5 million for fiscal year 1994.  This decline can be attributed
to the sale of the southern Georgia and Texas operations, which accounted for
$8.8 million, or 60.4% of the reduction; lower volumes resulting from the
abnormally warm weather; and a reduction in per gallon gross profit margins, due
to the rapid and unexpected increase in wholesale supply costs in the fiscal
first quarter, which was not reflected in increased selling prices until the
fiscal second quarter.

Delivery and Branch Expenses

   Delivery and branch expenses decreased 15.2% to $35.2 million for fiscal
1995, as compared to $41.5 million for fiscal 1994.  The divestiture of the
southern Georgia and Texas operations alone accounted for a reduction of $7.2
million.  Despite the effect of inflation on delivery and branch expenses, these
expenses increased only $0.9 million or 2.6% in the core Midwest and Northeast
operations.

                                       18
<PAGE>
 
Depreciation and Amortization

   Depreciation of plant and equipment declined 19.5% to $6.6 million for fiscal
1995, as compared to $8.2 million for fiscal 1994.  This was partially due to
the divestiture of the southern Georgia and Texas operations, which accounted
for $0.7 million of the decline.  Excluding those operations, depreciation
declined 11.0% from $7.3 million to $6.5 million, largely due to the impact of
purchase accounting fair value adjustments in December 1994 that reallocated
asset values to longer-lived assets at the Star Gas Group, partially offset by
additional depreciation associated with acquisitions and purchases of fixed
assets.

   Amortization of intangible assets, including customer lists, declined 29.2%
to $3.4 million in fiscal 1995, as compared to $4.8 million for fiscal 1994. The
primary factor in this decline was the purchase accounting fair value
adjustments in December 1994, which, while increasing the total base of
amortizable intangible assets, resulted in a reallocation of value to categories
of assets with longer lives, thereby decreasing the annual amortization expense.

General and Administrative Expenses

   General and administrative expenses increased 1.9% to $6.1 million for fiscal
1995, as compared to $6.0 million for fiscal 1994.  This increase was due to
legal and professional fees of $0.6 million associated with nonrecurring events
including the restructuring of Star Gas' debt and bank credit facilities, offset
by a reduction in other general and administrative expenses, which declined
despite the impact of inflationary pressures on these costs.

Net Gain (Loss) on Sale of Assets

   During fiscal 1995, Star Gas recorded a one-time book loss of $0.7 million
in connection with its sale of the southeast Georgia operations.  In fiscal
1994, a gain of $0.5 million was recorded in connection with the sale of its
Gardner, Massachusetts facility.

Interest Expense (Net)

   Interest expense declined 18.6% to $8.5 million for fiscal 1995, as
compared to $10.5 million for fiscal 1994. This change was primarily due to the
purchase of Star Gas by Petro, the related financial restructuring and the
retirement of debt associated with the sale of the southern Georgia operations.

Income Tax Expense

   Despite a pretax loss of $6.0 million for fiscal 1995, the Star Gas Group was
required to pay certain state income taxes on profitable subsidiaries that were
not included in consolidated state returns.  Income tax expense decreased to
$0.2 million in fiscal 1995, as compared to $0.3 million in fiscal 1994, when
the pretax loss was $1.1 million.

                                       19
<PAGE>
 
Net Income (Loss)

   The Star Gas Group posted a net loss of $6.2 million for fiscal 1995, as
compared to a net loss of $1.4 million for fiscal 1994, primarily due to lower
volume associated with the abnormally warm winter.

EBITDA

   EBITDA declined 38.3% to $13.5 million for fiscal 1995, as compared to $21.9
million for fiscal 1994.  The divestiture of the southern Georgia and Texas
operations accounted for approximately 15.7% of the decline in EBITDA.  The
remaining EBITDA decline resulted primarily from the impact of the significantly
warmer than normal weather on sales in the core Midwest and Northeast markets,
which was not fully offset by sales associated with modest internal account
growth and acquisitions. EBITDA should not be considered as an alternative to
net income (as an indicator of operating performance) or as an alternative to
cash flow (as a measure of liquidity or ability to service debt obligations),
but provides additional information for evaluating the Partnership's ability to
make the Minimum Quarterly Distribution.

Accounting Changes

   In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Effective for fiscal years beginning after December 15, 1995, SFAS No. 121
requires companies to review assets for impairment losses related to long-lived
assets, certain intangibles and assets to be disposed.  The impact of adapting
SFAS No. 121 will be immaterial, if any.

   In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation."  SFAS No. 123 permits companies either to adopt a new method of
accounting for employee stock options and similar equity instruments or to
continue following the historical accounting method with supplemental pro forma
disclosures.  The Partnership will continue its historical practice, and provide
the necessary pro forma information when it adopts the standard in fiscal 1997.

Liquidity And Capital Resources

   For the year ended September 30, 1996, cash flow provided by operating
activities of $10.0 million consisted of $2.6 million of net income and $9.8
million of depreciation and amortization, which was offset by a $2.3 million
increase in working capital and other changes.  Inventories increased by $2.3
million due to both an increase in gallons stored and higher per unit propane
costs.  Net accounts receivable increased by $0.6 million due to an increase in
sales in the fourth quarter of fiscal 1996 compared to the fourth quarter of
fiscal 1995.  Cash used in investing activities was $7.0 million for 1996, as
the proceeds from the sale of fixed assets of $0.8 million were used to
partially fund $2.4 million of acquisitions and $5.3 million of growth and
maintenance capital expenditures.

                                       20
<PAGE>
 
   In December 1995, Star Gas issued $85.0 million of First Mortgage Notes with
an interest rate of 8.04% that provided $83.7 million in cash, net of expenses.
(The liability for these notes was assumed by the Operating Partnership pursuant
to the Conveyance Agreement).  Star Gas used the net proceeds from these notes
to repay $44.4 million of debt and preferred stock, pay dividends of $21.3
million, and loan $12.0 million, all to Petro, and $6.0 million was retained by
Star Gas to fund the General Partner's additional contribution obligation.
During fiscal 1996, the Partnership sold 2.9 million Common Units, representing
Limited Partnership interests, which provided $55.9 million in cash, net of
expenses.  The majority of the proceeds from this public offering were used to
repay $53.8 million to Petro, representing $50.3 million of debt and $3.5
million of additional indebtedness resulting from the excess of working capital
over $6.2 million at the time of closing.

   During the year ended September 30, 1996, the Partnership paid cash
distributions of $1.17 per Limited Partner Unit.  These distributions covered
the period from December 20, 1995, when the Partnership began operations, to
June 30, 1996, the end of the third quarter of fiscal 1996.  On October 8, 1996,
the Partnership declared its fourth quarter cash distribution of $0.55 per
Limited Partner Unit, to be paid on November 15, 1996.  The Partnership's
annualized distribution is presently $2.20 per Limited Partner Unit.

   The ability of the Partnership to satisfy its obligations is dependent upon
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control.  For the fiscal year ending September 30, 1997, the General Partner
believes that the Partnership will have sufficient funds to meet its obligations
and enable it to meet its obligations with respect to the First Mortgage Notes
issued in December 1995, and enable it to distribute the Minimum Quarterly
Distribution ($0.55 per Unit) on all Common Units and Subordinated Units,
although no assurance can be given with respect to such distributions.  Future
maintenance and working capital needs of the Partnership are expected to be
provided by cash generated from future operations, existing cash balances and
its $12.0 million Working Capital Facility.  In order to fund expansive capital
projects and future acquisitions, the Partnership may issue additional Common
Units or borrow under its $25.0 million Acquisition Facility.

   The First Mortgage Notes and Bank Credit Facility contain various
restrictive convenants applicable to the Operating Partnership and its
subsidiary, the most restrictive relating to additional indebtedness, sale and
disposition of assets and transactions with affiliates. In addition, the
Operating Partnership is prohibited from making cash distributions of the
Minimum Quarterly Distribution if a default or event of default exists or would
exist upon making such distribution, or if the Operating Partnership fails to
meet certain coverage tests. The Operating Partnership is in compliance with all
requirements, tests, limitations and covenants related to the First Mortgage
Notes and Bank Credit Facility.

                                       21
<PAGE>
 
                                    ITEM 8.
                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   SEE INDEX TO FINANCIAL STATEMENTS PAGE F-1

                                    ITEM 9.
                       CHANGES IN AND DISAGREEMENTS WITH
               ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
                                      NONE

                                   PART III

                                   ITEM 10.
              DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Partnership Management

   The General Partner manages and operates the activities of the Partnership.
Unitholders do not directly or indirectly participate in the management or
operation of the Partnership.  The General Partner owes a fiduciary duty to the
Unitholders.  Notwithstanding any limitation on obligations or duties, the
General Partner will be liable, as the general partner of the Partnership, for
all debts of the Partnership (to the extent not paid by the Partnership), except
to the extent that indebtedness or other obligations incurred by the Partnership
are made specifically non-recourse to the General Partner.

   William P. Nicoletti and Elizabeth K. Lanier, who are neither officers or
employees of the General Partner nor directors, officers or employees of any
affiliate of the General Partner, have been appointed to serve on the Audit
Committee of the General Partner's Board of Directors with the authority to
review, at the request of the General Partner, specific matters as to which the
General Partner believes there may be a conflict of interest in order to
determine if the resolution of such conflict proposed by the General Partner is
fair and reasonable to the Partnership.  Any matters approved by the Audit
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
General Partner of any duties it may owe the Partnership or the Unitholders. In
addition, the Audit Committee will review external financial reporting of the
Partnership, will recommend engagement of the Partnership's independent
accountants and will review the Partnership's procedures for internal auditing
and the adequacy of the Partnership's internal accounting controls. With respect
to such additional matters, the Audit Committee may act on its own initiative to
question the General Partner and, absent the delegation of specific authority by
the entire Board of Directors, its recommendations with regard thereto will be
advisory.

   As is commonly the case with publicly traded limited partnerships, the
Partnership will not directly employ any of the persons responsible for managing
or operating the Partnership.  The current management and workforce of Star Gas
and certain employees of Petro will continue to manage and operate the
Partnership's business as officers and employees of the General Partner and its
Affiliates. See Item 1 - Business--Employees.

                                       22
<PAGE>
 
Directors and Executive Officers of the General Partner

   The following table sets forth certain information with respect to the
directors and executive officers of the General Partner. Executive officers and
directors are elected for one-year terms.

<TABLE>
<CAPTION>
 
 
          Name                       Age  Position with the General Partner
          ----                       ---  ---------------------------------
<S>                                  <C>  <C>
Irik P. Sevin.....................    49  Chairman of the Board of
                                            Directors
William G. Powers, Jr.............    43  President and Chief Executive
                                            Officer
David R. Eastin...................    38  Vice President--Operations
Norman L. Bushey..................    67  Vice President--
                                            Safety/Compliance
Richard F. Ambury.................    39  Vice President-Finance
Audrey L. Sevin...................    70  Director and Secretary
Thomas J. Edelman.................    45  Director
Paul Biddelman....................    50  Director
Wolfgang Traber...................    52  Director
William P. Nicoletti..............    51  Director
Elizabeth K. Lanier...............    45  Director
</TABLE>

Irik P. Sevin has been the Chairman of the Board of Directors of Star Gas since
December 1993. Mr. Sevin has been a director of Petro since its organization in
October 1983, and Chairman of the Board of Petro since January 1993. Mr. Sevin
has been President of Petro, Inc. since November 1979 and of Petro since 1983.
Mr. Sevin was an associate in the investment banking division of Kuhn Loeb & Co.
and then Lehman Brothers Kuhn Loeb Incorporated from February 1975 to December
1978.  Mr. Sevin is a graduate of the Cornell University School of Industrial
and Labor Relations (B.S.), New York University School of Law (J.D.) and the
Columbia University School of Business Administration (M.B.A.).

William G. Powers, Jr. has been President of Star Gas since December 1993. Prior
to joining Star Gas, he was employed by Petro from 1984 to 1993 where he served
in various capacities, including Regional Operations Manager and Vice President
of Acquisitions.  He has participated in over 90 acquisitions for Petro. From
1977 to 1983, he was employed by The Augsbury Corporation, a company engaged in
the wholesale and retail distribution of fuel oil and gasoline throughout New
York and New England and served as Vice President of Marketing and Operations.
Mr. Powers is a graduate of the University of Notre Dame (B.A. 1975) and the
University of Vermont Graduate School of Business (M.B.A. 1984).

David R. Eastin has served as Vice President of Operations of the General
Partner since September 1995.  He joined Star Gas in 1992, and served as a
Regional Manager and as Director of Operations--Eastern Area. Prior to joining
Star Gas, he was employed by Ferrellgas, Inc. (1987 through 1992) and a
predecessor company, Buckeye Gas Products (1980 through 1987), in a variety of
operational capacities. Mr. Eastin is a graduate of the University of Tulsa
(B.S. 1980) and Duquesne University (M.B.A. 1985).

Richard F. Ambury has been Vice President-Finance of Star Gas since February
1996.  Prior to joining Star Gas, he was employed by Petro from 1983-1996 where
he served in various accounting/finance capacities.

                                       23
<PAGE>
 
Norman L. Bushey has served as Vice President of Safety/Compliance of the
General Partner since September 1995.  Prior thereto he served as the Northeast
Area Safety Manager for Star Gas following Star Gas' acquisition of Maingas,
Inc. in 1988. From 1974 through 1988, Mr. Bushey served as Vice President and
General Manager of Maingas, Inc. From 1953 through 1974, Mr. Bushey was employed
by Suburban Propane.

Audrey L. Sevin has been a director of Star Gas since December 1993 and the
Secretary of Star Gas since June 1994. Mrs. Sevin has been a director and
Secretary of Petro since its organization in October 1983. Mrs. Sevin was a
director, executive officer and principal shareholder of A. W. Fuel Co., Inc.
from 1952 until its purchase by Petro in May 1981.  Mrs. Sevin is a graduate of
New York University (B.S.).

Thomas J. Edelman has been a director of Star Gas from December 1993 through
June 1995 and since October 1995.  Mr. Edelman has been a director of Petro
since its organization in October 1983.  Mr. Edelman is the President and a
Director of Snyder Oil Corporation, a company he co-founded, since 1981. Mr.
Edelman also serves as Chairman of Lomak Petroleum, Inc., a company he
restructured in 1988 and which he served as Chairman and CEO until 1992 and as
Chairman and CEO of Patina Oil & Gas Corporation, a NYSE listed affiliate of
Snyder Oil.  Prior to 1981, Mr. Edelman was Vice President of The First Boston
Corporation and from 1975 through 1980 was with Lehman Brothers Kuhn Loeb
Incorporated.  Mr. Edelman received his Bachelor of Arts Degree from Princeton
University and his Masters Degree in Finance from the Harvard University
Graduate School of Business Administration.  Mr. Edelman serves as a director of
Command Petroleum Limited, an affiliate of Snyder Oil.  Mr. Edelman also serves
as a trustee of the Hotchkiss School.

Paul Biddelman has been a director of Star Gas from December 1993 through June
1995 and since October 1995. Mr. Biddelman has been a director of Petro since
October 1994. Mr. Biddelman has been Treasurer of Hanseatic Corporation since
April 1992. Mr. Biddelman joined Hanseatic from Clements Taee Biddelman
Incorporated, a merchant banking firm which he co-founded in 1991. From 1982
through 1990, he was a Managing Director in Corporate Finance at Drexel Burnham
Lambert Incorporated.  Mr. Biddelman also worked in corporate finance at Kuhn,
Loeb & Co. from 1975 to 1979, and at Oppenheimer & Co. from 1979 to 1982. Mr.
Biddelman is a director of Celadon Group, Inc., Electronic Retailing Systems
International, Inc., Insituform Technologies, Inc., Oppenheimer Group, Inc., and
Premier Parks, Inc.

Wolfgang Traber has been a director of Star Gas from December 1993 through June
1995 and since October 1995.  Mr. Traber has been a director of Petro since its
organization in October 1983.  Mr. Traber is Chairman of the Board of Hanseatic
Corporation, a private investment corporation in New York, New York. Mr. Traber
is a director of Deltec Asset Management Corporation, Blue Ridge Real Estate
Company, Hellespont Tankers Ltd. and M.M. Warburg & Co.

William P. Nicoletti has been a director of Star Gas since November 1995. Since
1991, Mr. Nicoletti has been Managing Director of Nicoletti & Company Inc., a
private investment bank servicing clients in energy-related industries. From
1988 through 1990, he was a Managing Director and head of the Energy and Natural
Resources Group of PaineWebber Incorporated.  From 1969 through 1987 he was with
E.F. Hutton & Company Inc., where from 1980 through 1987 he was a Senior Vice
President and head of the Energy and Natural Resources Group. He is also
Chairman of the Board of Amerac Energy Corporation and a director of StatesRail
L.L.C.

                                       24
<PAGE>
 
Elizabeth K. Lanier has been a director of Star Gas since November 1995. Since
June 1996, Ms. Lanier has been Vice President and Chief of Staff for Cinergy
Corp.  Before joining Cinergy, Ms. Lanier was a partner in the law firm of Frost
& Jacobs in Cincinnati Ohio.  From 1976 through 1982, she was associated with
Davis Polk & Wardwell in New York, New York.  Ms. Lanier is a graduate of Smith
College (B.A.) and the Columbia University School of Law (J.D.).

Audrey Sevin is the mother of Irik P. Sevin.  There are no other familial
relationships between any of the directors and executive officers.

Meetings and Compensation of Directors

   During fiscal 1996, the Board of Directors met three times.  All Directors
attended each meeting.  Star Gas pays each director including the chairman an
annual fee of $17,500.  Members of the audit committee receive an additional
$5,000 per annum.

Committees of the Board of Directors

   The Company's Board of Directors has an Audit Committee and a Compensation
Committee.  The members of each committee are appointed by the Board of
Directors for a one year term and until their respective successors are elected.

   In connection with the Partnership's decision to explore strategic
alternatives to maximize shareholder value, the board of directors has appointed
a special committee to review the proposals received by Morgan Stanley & Co.,
Incorporated.  Ms. Lanier and Mr. Nicoletti are members of this special
committee and will receive $20,000 each for compensation in serving on this
committee.

Audit Committee

   The duties of the Audit Committee are described above under "Partnership
Management".

   The members of the Audit Committee are Elizabeth K. Lanier and William P.
Nicoletti.  Members of the Audit Committee may not be employees of the Company.

Compensation Committee

   The duties of the Compensation Committee are (i) to determine the annual
salary, bonus and other benefits, direct and indirect, of any and all named
executive officers (as defined under Regulation S-K promulgated by the
Securities and Exchange Commission), (ii) to review and recommend to the full
Board any and all matters related to benefit plans covering the foregoing
officers and any other employees in the event such matters are appropriate for
stockholder approval, and (iii) to administer the Partnership's Unit Option Plan
as the Option Committee thereunder.  The members of the Compensation Committee
are Wolfgang Traber and Irik P. Sevin.

Reimbursement of Expenses of the General Partner

   The General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership. The General
Partner is reimbursed at cost for all expenses incurred on behalf of the
Partnership, including the costs of compensation described herein properly
allocable to the Partnership, and all other expenses necessary or appropriate to
the conduct of 

                                       25
<PAGE>
 
the business of, and allocable to, the Partnership. The Partnership Agreement
provides that the General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Affiliates of the General Partner, including
Petro, perform certain management and acquisition services for the General
Partner on behalf of the Partnership. Such affiliates do not receive a fee for
such services, but are reimbursed for all direct and indirect expenses incurred
in connection therewith.

   In addition, the General Partner owns 2,396,078 subordinated units of the
Partnership and is entitled to receive distributions on such Units, and the
General Partner is entitled to incentive distributions in respect of its general
partner interest.

                        ITEM 11.  EXECUTIVE COMPENSATION

   The following table sets forth the annual salary, bonuses and all other
compensation awards and payouts to the President and Chief Executive Officer and
to certain named executive officers of the General Partner for services rendered
to Star Gas and its subsidiaries during the fiscal years ended September 30,
1996 and 1995.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                       Annual Compensation             
                                           ------------------------------------------
                                                                            Other     
                                                                            Annual    
    Name and Principal Position      Year     Salary            Bonus    Compensation 
-----------------------------------  ----  -------------       --------  ------------ 
<S>                                  <C>   <C>                 <C>       <C>          
                                                                                      
William G. Powers, Jr.               1996   $225,000           $100,000  $21,071/(1)/ 
    President and Chief Executive    1995   $219,231           $ 75,000  $18,094/(1)/ 
     Officer                                                                          
David R. Eastin                      1996   $106,826           $ 26,707  $ 3,214/(2)/ 
    Vice President - Operations      1995   $ 89,896           $ 10,000  $ 9,292/(3)/  
Richard F. Ambury                    1996   $ 99,667/(4)/      $ 25,000       -
    Vice President - Finance
Norman L. Bushey                     1996   $ 63,000           $ 15,750  $ 1,900/(2)/
    Vice President -
     Safety/Compliance
--------------------
</TABLE>
(1) Represents amounts paid in lieu of contribution under Star Gas' 401(k) plan.
(2) Represents matching contributions paid to Star Gas' 401(k) plan.
(3) Represents a $7,570 relocation allowance and Star Gas' matching contribution
    to Mr. Eastin's 401(k) retirement plan of $1,722.
(4) Mr. Ambury joined the General Partner on February 1, 1996.

Transition Compensation/Severance Plan

   In connection with the Partnership's decision to explore strategic
alternatives to maximize shareholders value, the General Partner has adopted a
Transition Compensation/Severance plan for its employees and named executive
officers which is triggered by the successful completion of a transaction by the
Partnership involving a sale of the Partnership's business.  Under the plan, Mr.
Powers will receive an amount equal to approximately twice his current annual
compensation including bonus, Mr. Ambury will receive an amount equal to his
current salary, and Messrs. Eastin and Bushey will receive an amount equal to
one-half their annual salary. If there is a change in Messrs. Eastin's and
Bushey's employment status, they will also receive an additional amount equal to
their annual salary.

                                       26
<PAGE>
 
                Aggregated Option Exercises in Last Fiscal Year
                       and Fiscal Year End Option Values
<TABLE>
<CAPTION>
                             Number of Unexercised Options at                                       
                                    September 30, 1996              Value of In the Money Options   
Name                           Exercisable(E)/Unexercisable(U)          at September 30, 1996 
----                           -------------------------------          ---------------------
 
<S>                            <C>                                      <C>
William G. Powers, Jr.                   30,000 (U)                               $0

David R. Eastin                          10,000 (U)                               $0
</TABLE>

(1) Values are calculated by deducting the exercise price from the fair market
    value of the common units as of September 30, 1996.



Options Granted in Last Fiscal Year

   The following table sets forth certain information concerning options granted
during 1996 to the named executives:

<TABLE>
<CAPTION>
                                    Individual Grants                                       Potential Realizable
------------------------------------------------------------------------------------------    Value at Assumed
                                          % of Total                                        Annual Rates of Stock
                                           Options                                           Prices Appreciation
                                          Granted to   Exercise   Market Price                 for Option Term
                             Options      Employees     Price     on the Date   Expiration     ---------------
         Name                Granted       in 1996     ($ Share)    of Grant       Date        5%           10% 
         ----             --------------  ----------   --------   ------------  ----------     --          ----    

<S>                       <C>             <C>          <C>        <C>           <C>         <C>        <C> 
William G. Powers, Jr.    30,000/(1)(2)/     75.0%       $22.00       $22.00      12/20/05   $554,000  $1,402,000
David R. Eastin           10,000/(1)(2)/     25.0%       $22.20       $22.00      12/20/05   $138,500  $  350,600

----------------- 
</TABLE>
(1)  The options were issued in December 1995 in connection with the Common Unit
     offering.
(2)  These options become exercisable on January 12, 2001.

Unit Option Plan

   In December 1995, the General Partner adopted the 1995 Star Gas Corporation
Unit Option Plan (the "Unit Option Plan"), which currently authorizes the
issuance of options (the "Unit Options") and Unit Appreciation Rights ("UARS")
covering up to 300,000 Subordinated Units to certain officers and employees of
the General Partner.  A total of 40,000 options were granted to key executives
in December 1995.  The Unit Options have the following characteristics:  1)
exercise price of $22 per unit, which is an estimate of the fair market value of
the Subordinated Units at the time of grant, 2) vest over five year period, 3)
exercisable after January 12, 2001, assuming the lapse of the subordination
period and 4) expire on the tenth anniversary of the date of grant.  Upon
conversion of the Subordinated Units held by the General Partner and its
affiliates, the Unit Options granted will convert to Common Unit Options.

                                       27
<PAGE>
 
401(k) Plan

   The Star Gas Corporation Employee Savings Plan is a voluntary defined
contribution plan covering non-union and union employees who have attained the
age of 21 and who have completed one year of service.  Participant's in the plan
may elect to contribute a sum not to exceed 15% of a participant's compensation.
For non-union employees, the Company contributes a matching amount equaling the
participant's contribution not to exceed 3% of the participant's compensation.
In addition, the plan does allow the Company to contribute an additional
discretionary amount which will be allocated to each defined participant based
on each participant's compensation as a percentage of total compensation of all
participant's.



                                    ITEM 12.
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Ownership of Common and Subordinated Units

   The following table set forth certain information as of September 30, 1996
regarding the beneficial ownership of (i) the Common and Subordinated Units of
the Partnership by certain beneficial owners and all directors of the General
Partner, each of the named executive officers and all directors and executive
officers as a group.  The General Partner knows of no person beneficially owning
more than 5% of the Common Units.

<TABLE>
<CAPTION>
                                                           Units                
                             Name and Address of       Beneficially    Percent of
      Title of Class           Beneficial Owner          Owned (1)        Class 
      --------------           ----------------          ---------        ----- 
<S>                          <C>                       <C>             <C>       
Common Units                 Richard F. Ambury/(1)/            525           -
Subordinated Units           Star Gas Corporation/(1)/   2,396,078         100%
                             
</TABLE> 
------------------
/(1)/ The address of such person is care of the Partnership at 2187 Atlantic
      Street, Stamford, CT 06902.

                                       28
<PAGE>
 
Ownership of Petro Common Stock by the Directors and Executive Officers of the
General Partner

   The table below sets forth as of September 30, 1996, the beneficial ownership
of Petro Common Stock by each director and each named executive officer of the
General Partner, as well as the directors and all of the executive officers of
the General Partner as a group.  The total shares beneficially owned by the
directors and executive officers as a group, including 288,759 shares of Class A
Common Stock and 44,190 shares of Class C Common Stock subject to options
exercisable within the next 60 days, represent 22.66% of Petro's outstanding
Class A Common Stock and 55.23% of Petro's outstanding Class C Common Stock.
Each share of Class A Common Stock is entitled to one vote and each share of
Class C Common Stock is entitled to 10 votes, but otherwise the two Classes have
the same rights. The Class A Common Stock is traded on the Nasdaq National
Market.

<TABLE>
<CAPTION>
                                         Number of Shares (1)                 Percent of Total               
                                   ---------------------------------       ----------------------       Percent of                 
                                                                                                       Total Voting       
              Name                    Class A             Class C          Class A       Class C         Power (2)   
---------------------------------  --------------       ------------       --------      --------     ------------- 
<S>                                <C>                  <C>                <C>           <C>          <C>           
Audrey L. Sevin (3)..............    1,893,573            477,716            8.23%        18.39%           13.61% 
Irik P. Sevin(3)(4)..............    1,127,876            245,831            4.84%         9.31%            7.21% 
Wolfgang Traber (5)..............    1,652,203/(6)/       606,472/(7)/       7.18%        23.35%           15.75%  
Thomas J. Edelman................      593,049/(8)/       129,019            2.58%         4.97%            3.84%
Paul Biddelman (3)...............        2,386                 --            0.01%           --               --
William G. Powers, Jr.(3)........           --                 --              --            --               --
Richard F. Ambury (3)............       12,345                 --            0.05%           --             0.03%
David R. Eastin (3)..............           --                 --              --            --               --
Norman L. Bushey (3).............           --                 --              --            --               --
Elizabeth K. Lanier (9)..........           --                 --              --            --               --
William P. Nicoletti (10)........           --                 --              --            --               -- 
All officers and directors as a
 group (10 persons)..............    5,281,432          1,459,038           22.66%        55.23%           39.96%
--------------------
</TABLE>
(1)  For purposes of this table, a person or group is deemed to have
     ''beneficial ownership'' of any shares which such person has the right to
     acquire within 60 days after September 30, 1996. For purposes of
     calculating the percentage of outstanding shares held by each person named
     above, any shares which such person has the right to acquire within 60 days
     after September 30, 1996 are deemed to be outstanding, but not for the
     purpose of calculating the percentage ownership of any other person.
(2)  Total voting power means the total voting power of all shares of Class A
     Common Stock and Class C Common Stock. This column reflects the percentage
     of total voting power represented by all shares of Class A Common Stock and
     Class C Common Stock held by the named persons.
(3)  The address of such person is c/o the Partnership at 2187 Atlantic Street,
     Stamford, CT 06902.
(4)  Includes options to purchase 276,759 shares of Class A Common Stock and
     44,190 shares of Class C Common Stock.
(5)  The address of such person is 450 Park Avenue, New York, NY 10022.
(6)  These shares are owned of record by Hanseatic Corp., 450 Park Avenue, New
     York, NY 10022, which has the power to vote the shares under discretionary
     account arrangements, which power may be revoked at any time by Mr. Traber.
(7)  Includes 597,434 shares of Class C Common Stock owned of record by Deltec
     on behalf of Tortosa GmbH of which Mr. Traber is the beneficial owner.
(8)  Includes 76,000 shares of Class A Common Stock owned by Mr. Edelman's wife
     and minor children.
(9)  The address of such person is 221 E. Fourth St., 30th Fl., Cincinnati, OH
     45202.
(10) The address of such person is 1155 Avenue of the Americas, 29th Fl., New
     York, NY 10036.

   Section 16(a) of the Securities and Exchange Act of 1934 requires the General
Partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and

                                       29
<PAGE>
 
Exchange Commission ("SEC"). Officers, directors and greater than 10 percent
unitholders are required by SEC regulation to furnish the General Partner with
copies of all Section 16(a) forms.

   Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year 1996 all filing requirements applicable to its officers,
directors, and greater than 10 percent beneficial owners were met in a timely
manner.


            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The Partnership and the General Partner have certain ongoing relationships
with Petro and its Affiliates.  Affiliates of the General Partner, including
Petro, perform certain administrative services for the General Partner on behalf
of the Partnership.  Such Affiliates do not receive a fee for such services, but
are reimbursed for all direct and indirect expenses incurred in connection
therewith.

   For the period December 20, 1995 through September 30, 1996, the Partnership
reimbursed the General Partner and Petro $14.4 million representing salary,
payroll tax and other compensation to the employees of the General Partner,
including $0.3 million paid to Petro for corporate services such as compliance,
supply and finance.  In addition, the Partnership has reimbursed Petro for $1.9
million relating to the Partnership's share of the costs incurred by Petro in
conducting the operations of certain shared branch locations which include
managerial services.

   Petro and the General Partner entered into a Management Services Agreement on
December 21, 1993 pursuant to which Petro agreed to provide executive, financial
and managerial oversight services to the General Partner for a period of ten
years. Pursuant to the Management Services Agreement, Petro was entitled to a
yearly management fee of $500,000, plus a bonus under certain circumstances. For
the fiscal years ended September 30, 1995 and 1994, the General Partner paid
fees of $500,000 and $575,000, respectively, pursuant to the Management Services
Agreement. The Management Services Agreement was terminated in December 1995.

   Prior to Petro's acquisition of Star Gas, Star Gas engaged Nicoletti &
Company Inc., an investment banking firm owned by William P. Nicoletti, who is
now a director of the General Partner, to perform certain investment banking
services for Star Gas.  Pursuant to such engagement, Star Gas paid Nicoletti &
Company Inc. fees of $81,600, $521,500 and $40,000 for services rendered during
1994, 1993 and 1992, respectively.  In 1995 Star Gas paid Nicoletti & Company
Inc. $20,000 in advisory fees in connection with a proposed acquisition.

   Elizabeth K. Lanier, a director of the General Partner, was a partner in the
law firm of Frost & Jacobs, in Cincinnati, Ohio until June 1996.  Frost & Jacobs
has acted as counsel to Star Gas in connection with certain litigation matters.

                                       30
<PAGE>
 
   In 1993 Star Gas paid an aggregate of $50,000 in advisory fees to Warwick
Energy Advisors, Inc. (Warwick), a company controlled by Thomas Edelman, now a
director of the General Partner and Petro. In 1993, Petro paid Warwick and Mr.
Edelman an aggregate of $211,500 in advisory fees in connection with Petro's
acquisition of Star Gas. In 1994, Petro paid Mr. Edelman an additional $248,500
in such fees.  In 1995, Petro paid Mr. Edelman $20,000 in advisory fees in
connection with a proposed acquisition by Star Gas.

   For a discussion of certain indebtedness of the General Partner to Petro, see
Note 10 of the notes to the financial statements.

                                    PART IV

    ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

       (a)  1. Financial Statements

               See "Index to Consolidated Financial Statements and Financial
               Statement Schedule" set forth on page F-1.

            2. Financial Statement Schedule.

               See "Index to Consolidated Financial Statements and Financial
               Statement Schedule" set forth on page F-1.

            3. Exhibits.

               See "Index to Exhibits" set forth on page 32.

       (b)     Reports on Form 8-K.

               The Partnership did not file a Form 8-k during the quarter
               ended September 30, 1996.

 

                                       31
<PAGE>
 
                               INDEX TO EXHIBITS
                                  Description
                                  -----------
<TABLE>
<CAPTION>
            Exhibit
            Number       Description                                        
            ------       -----------                                        
<S>         <C>          <C>                                                
                                                                            
     (1)       3.1       Form of Agreement of Limited Partnership of Star   
                         Gas Partners, L.P. (included as Appendix A to      
                         the Prospectus)                                    
     (1)       3.2       Form of Agreement of Limited Partnership of        
                         Star Gas Propane, L.P.                             
     (1)      10.1       Form of Credit Agreement among Star Gas Propane,   
                         L.P. and certain banks                             
     (1)      10.2       Form of Conveyance and Contribution Agreement      
                         among Star Gas Corporation, the Partnership and    
                         the Operating Partnership                          
     (1)      10.3       Form of First Mortgage Note Agreement among        
                         certain insurance companies, Star Gas              
                         Corporation and Star Gas Propane, L.P.             
     (1)      10.4       Intercompany Debt                                  
     (1)      10.5       Form of Non-competition Agreement between Petro    
                         and the Partnership                                
     (1)      10.6       Form of Star Gas Corporation 1995 Unit Option      
                         Plan                                               
     (1)      10.7       Amoco Supply Contract                              
     (1)        21       Subsidiaries of the registrant                     
     (2)        27       Financial data schedule                             
</TABLE>

     _____________________________________
     (1) Incorporated by reference to the same Exhibit to Registrant's Statement
         on Form S-1, File No. 33-98496, filed with the Commission on December
         13, 1995.
     (2) Filed herein
 

                                       32
<PAGE>
 
SIGNATURE
---------

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

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

                                               William G. Powers, Jr.
                                               ----------------------
                                         By:/s/William G. Powers, Jr.
                                               William G. Powers, Jr.
                                               President and
                                                Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated:

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


/s/  William G. Powers, Jr.    President                    November 14, 1996
     -----------------------   Star Gas Corporation
     William G. Powers, Jr.    (Principal Executive Officer) 
                               


/s/  Richard F. Ambury         Vice President - Finance     November 14, 1996
     -----------------------   Star Gas Corporation
     Richard F. Ambury         (Principal Financial and Accounting Officers) 
                               


/s/  Irik P. Sevin             Director                     November 14, 1996
     -----------------------   Star Gas Corporation
     Irik P. Sevin             


/s/  Audrey L. Sevin           Director                     November 14, 1996
     -----------------------   Star Gas Corporation
     Audrey L. Sevin           


/s/  William P. Nicoletti      Director                     November 14, 1996
     -----------------------   Star Gas Corporation
     William P. Nicoletti      


/s/  Elizabeth K. Lanier       Director                     November 14, 1996
     -----------------------   Star Gas Corporation 
     Elizabeth K. Lanier       


/s/  Paul Biddleman            Director                     November 14, 1996
     -----------------------   Star Gas Corporation
     Paul Biddleman            


/s/  Thomas J. Edelman         Director                     November 14, 1996
     -----------------------                                             
     Thomas J. Edelman


/s/  Wolfgang Traber           Director                     November 14, 1996
     -----------------------                                             
     Wolfgang Traber

                                       33
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE> 
<CAPTION> 
                                                                      PAGE
                                                                      ----

Part II   Financial Information:

          Item 8 - Financial Statements

          Star Gas Partners, L.P. and the Star Gas Group (Predecessor)
          -----------------------------------------------------------

              <S>                                                     <C> 
              Independent Auditors' Report                            F-2
 
              Consolidated Balance Sheets as of September 30,
              1996 and 1995 (Predecessor)                             F-3
 
              Consolidated Statements of Operations from October 1
              through December 20, 1995 (Predecessor) and,
              from December 20, 1995 through September 30, 1996,
              and the years ended September 30, 1995
              and 1994 (Predecessor)                                  F-4
 
              Consolidated Statements of Partners' Capital/
              Predecessor Equity from December 20, 1995
              through September 30, 1996 and from October 1,
              through December 20, 1995 (Predecessor) and the
              years ended September 30, 1995 and 1994 (Predecessor)   F-5
 
              Consolidated Statements of Cash Flows from October 1
              through December 20, 1995 (Predecessor) and
              December 20 through September 30, 1996 and the
              years ended September 30, 1995 and 1994 (Predecessor)   F-6
 
              Notes to Consolidated Financial Statements              F-7 - F-21
 
              Schedule for the years ended September 30, 1996,
              1995 and 1994
 
                  II.  Valuation and Qualifying Accounts              F-22

                  All other schedules are omitted because
                  they are not applicable or the required
                  information is shown in the consolidated
                  financial statements or the notes therein.
</TABLE> 


                                      F-1
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Partners of Star Gas Partners, L.P.:

       We have audited the accompanying consolidated financial statements of
       Star Gas Partners, L.P. and Subsidiary and its Predecessor as of
       September 30, 1996 and 1995 for each of the years in the three-year
       period ended September 30, 1996 as listed in the accompanying index. In
       connection with our audit of the consolidated financial statements we
       have also audited the financial statement schedule listed in the
       accompanying index. These consolidated financial statements and financial
       statement schedule are the responsibility of the Partnership's
       management. Our responsibility is to express an opinion on these
       consolidated financial statements and financial statement schedule based
       on our audits.

       We conducted our audits in accordance with generally accepted auditing
       standards. Those standards require that we plan and perform the audit to
       obtain reasonable assurance about whether the financial statements are
       free of material misstatement. An audit includes examining, on a test
       basis, evidence supporting the amounts and disclosures in the financial
       statements. An audit also includes assessing the accounting principles
       used and significant estimates made by management, as well as evaluating
       the overall financial statement presentation. We believe that our audits
       provide a reasonable basis for our opinion.

       In our opinion, the consolidated financial statements referred to above
       present fairly, in all material respects, the financial position of Star
       Gas Partners, L.P. and Subsidiary and its Predecessor at September 30,
       1996 and 1995 and the results of their operations and their cash flows
       for each of the years in the three-year period ended September 30, 1996,
       in conformity with generally accepted accounting principles. Also in our
       opinion, the related financial statement schedule, when considered in
       relation to the basic consolidated financial statements taken as a whole,
       presents fairly, in all material respects, the information set forth
       therein.



                                            KPMG Peat Marwick LLP

Stamford, Connecticut
November 13, 1996

                                      F-2
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>
 
                                                                 September 30,    
                                                  September 30,       1995        
                                                      1996       (Predecessor)    
                                                  -------------  --------------   
<S>                                               <C>            <C>              
Assets                                                                            
                                                                                  
Current assets:                                                                   
  Cash                                                 $  1,106       $    727    
  Receivables, net of allowance of $291                                           
   and $362, respectively                                 7,226          6,436    
  Inventories                                             8,494          6,154    
  Prepaid expenses and other current                         
   assets                                                 1,016            949 
                                                       --------       --------  
       Total current assets                              17,842         14,266    
                                                       --------       --------    
                                                                                  
Property and equipment, net                              97,733         98,687    
                                                                                  
Intangibles and other assets, net                        41,338         42,440    
                                                       --------       --------    
        Total assets                                   $156,913       $155,393    
                                                       ========       ========    
                                                                                  
Liabilities and Partners'                                                         
 Capital/Predecessor Equity                                                       

Current liabilities:                                                              
  Bank credit facility borrowings and                                             
    current debt                                       $  2,350       $    748    
  Accounts payable                                        1,991          2,824    
  Accrued expenses                                        3,097          3,000    
  Dividends payable                                           -          4,875    
  Customer credit balances                                2,858          3,305    
                                                       --------       --------    
        Total current liabilities                        10,296         14,752    
                                                       --------       --------    
                                                                                  
Long-term debt                                           85,000          1,389    
Due to Petro                                                  -         86,002    
Other long-term liabilities                                 219            320    
Cumulative redeemable preferred stock                         -          8,625    
                                                                                  
Predecessor Equity                                                      44,305    
Partners' Capital:                                                                
  Common unitholders                                     52,821                   
  Subordinated unitholder                                 8,410                   
  General partner                                           167                   
                                                       --------       --------    
    Total Partners' Capital/Predecessor Equity           61,398         44,305    
                                                       --------       --------    
                                                                                  
        Total Liabilities and Partners'                                           
          Capital/Predecessor Equity                   $156,913       $155,393    
                                                       ========       ========     
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per unit amounts)
                                        
<TABLE>
<CAPTION>
 
 
 
                                          October 1,                           October 1,
                                            1995           December 20,          1995            Year           Year        
                                           through            1995             through           Ended          Ended         
                                      December 20, 1995     through          September 30,     September 30,  September 30,         
                                            1995           September 30,          1996             1995           1994      
                                        (Predecessor)         1996            (Combined)       (Predecessor)  (Predecessor)     
                                       --------------     --------------     --------------    -------------- --------------  

<S>                                       <C>                <C>              <C>                <C>             <C>           
Sales                                     $28,159             $91,475          $119,634           $104,550       $ 128,040     
Cost of sales                              12,808              45,749            58,557             49,660          58,553     
                                          -------             -------           -------           --------        --------     
  Gross profit                             15,351              45,726            61,077             54,890          69,487     
                                                                                                                               
Delivery and branch                         7,729              27,021            34,750             35,222          41,530     
Depreciation and                                                                                                               
  amortization                              2,177               7,631             9,808             10,073          13,039     
General and                                                                                                                    
  administrative                            1,349               5,108             6,457              6,127           6,011     
Net gain (loss) on sales                                                                                                       
  of assets                                  (113)               (147)             (260)              (913)            486     
                                          -------             -------           -------           --------        --------   
  Operating income                          3,983               5,819             9,802              2,555           9,393   
Interest expense, net                       1,922               5,202             7,124              8,549          10,497   
                                          -------             -------           -------           --------        --------   
  Income (loss) before                                                                                                       
   income taxes                             2,061                 617             2,678             (5,994)         (1,104)   
Income tax expense                             60                  25                85                175             300   
                                          -------             -------           -------           --------        --------   
  Net income (loss)                       $ 2,001             $   592          $  2,593           $ (6,169)      $  (1,404)  
                                          =======             =======          ========           ========       =========   

 General Partner's
  interest in net income                                      $    12
                                                              -------
 
 
Limited Partners'
  interest in net income                                      $   580
                                                              =======
 
 
Net Income per Limited
  Partner unit                                                $   .11           
                                                              =======
 
Weighted average number 
of Limited Partner           
units outstanding                                               5,271
                                                              ======= 
 </TABLE>



 See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

         CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL/PREDECESSOR EQUITY
                                 (in thousands)

                               Partners' Capital
       For the period ended December 20, 1995 through September 30, 1996
<TABLE>
<CAPTION>
 
                                                                                                 
                                      Number of Units                                         Total 
                                    --------------------                           General   Partners' 
                                    Common  Subordinated   Common   Subordinated   Partner    Capital
                                    ------  ------------  --------  -------------  --------  ----------
<S>                                 <C>     <C>           <C>       <C>            <C>       <C> 
Balance as of December 20, 1995       -          -           -            -           -          -
 
   Contribution of assets, net           -         2,396  $     -        $10,956     $ 225     $11,181
   Issuance of Common Units, net     2,875             -   55,875              -        56      55,931
   Distributions                                           (3,371)        (2,809)     (126)     (6,306)
   Net income                            -             -      317            263        12         592
                                    ------       -------  -------        -------     -----     -------  
 
Balance as of September 30, 1996     2,875         2,396  $52,821        $ 8,410     $ 167     $61,398
                                    ======       =======  =======        =======     =====     =======
 </TABLE>


                              Predecessor's Equity
 Years ended September 30, 1994 and 1995 and the period October 1, 1995 through
                               December 20, 1995
<TABLE>
<CAPTION>
 
                                                                                                                        
 
 
                                                                           
                                                                                                      
                                             8% Cumulative                                                              Total
                            Preferred         Convertible        12.5%        Capital in                  Common      Predecessor's
                              Stock            Preferred        Preferred      Excess of                  Treasury      Equity
                            Series A             Stock            Stock        Par Value      Deficit     Stock (Old)   (Deficiency)
                            --------             -----            -----        ---------      -------     ----------    -----------
                                           Old          New
                                           ---          ---        
<S>                          <C>         <C>          <C>            <C>       <C>         <C>               <C>       <C> 
Balance as of
   Sept. 30, 1993            $  41       $   1         $   -       $   -        $58,472      $(59,151)      $(2,188)      $ (2,825)
Recapitalization               (41)         (1)          525           -         52,413             -         2,188         55,084
Redemption of                                                                                                       
  preferred Stock                -           -           (56)          -         (5,685)            -             -         (5,741)
Stock dividends                                                                                                     
  declared                       -           -            31           -          3,136        (3,931)            -           (764)
Cash dividends                                                                                                      
  preferred stock                -           -             -           -              -           (22)            -            (22)
 Net loss                        -           -             -           -              -        (1,404)            -         (1,404)
                            ------      ------        ------      ------        -------        ------        ------        ------- 
Balance as of                                                                                                       
  Sept. 30, 1994                 -           -           500           -        108,336       (64,508)            -         44,328
Conversion of                                                                                                       
  preferred stock                -           -          (266)        319            (53)            -             -              -
Redemption of                                                                                                       
  preferred stock                -           -           (49)          -         (5,042)            -             -         (5,091)
Stock dividends                                                                                                     
  declared                       -           -             4           -            368          (732)            -           (360)
Cash dividends                                                                                                      
  preferred stock                -           -             -           -              -        (5,287)            -         (5,287)
Purchase accounting                                                                                                 
  adjustment                     -           -             -           -        (51,906)       68,790             -         16,884 
 Net loss                        -           -             -           -              -        (6,169)            -         (6,169)
                            ------      ------        ------      ------        -------        ------        ------        ------- 
 Balance as of                                                                                                      
   Sept. 30, 1995                -           -           189         319         51,703        (7,906)            -         44,305
Dividends                                                                                     (21,309)                     (21,309)
Additional                                                                                                          
 capital                                                                                                            
 contribution                    -           -             -           -          4,184             -             -          4,184
Net income                       -           -             -           -              -         2,001             -          2,001
                            ------      ------        ------      ------        -------        ------        ------        ------- 
Balance as of                                                                                                       
 Dec. 20, 1995               $   -       $   -         $ 189       $ 319        $55,887      $(27,214)      $     -       $ 29,181
                            ======      ======        ======      ======        =======        ======        ======        ======= 
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>

                                                         October 1, 1995 
                                                             through                             October 1, 1995 
                                                           December 20,    December 20, 1995          through 
                                                              1995              through          September 30, 1996 
                                                          (Predecessor)     September 30, 1996      (combined)         
                                                          -------------     ------------------   ------------------  
<S>                                                         <C>                <C>                   <C>            
Cash Flows from Operating activities:                                                                            
Net income (loss)                                            $  2,001           $    592              $  2,593       
Adjustments to reconcile net income (loss) to net cash                                                           
  provided by operating activities:                                                                              
Depreciation and amortization                                   2,177              7,631                 9,808   
Provision for losses on accounts receivable                       101                321                   422   
Net (gain) loss on sales of assets                                113                147                   260   
Changes in operating assets and liabilities:                                                                     
   Decrease (increase) in receivables                          (2,779)             1,766                (1,013)  
   Decrease (increase) in inventories                           1,430             (3,770)               (2,340)  
   Decrease (increase) in prepaid and other assets               (455)               754                   299    
   Increase (decrease) in other current liabilities            (1,703)             1,757                    54    
   Decrease in other long-term liabilities                        (12)               (89)                 (101)   
                                                             --------           --------              --------    
       Net cash provided by operating activities                  873              9,109                 9,982    
                                                             --------           --------              --------    
                                                                                                                  
Cash Flows from Investing activities:                                                                             
Capital expenditures                                           (1,617)            (3,715)               (5,332)   
Business acquisitions                                               -             (2,440)               (2,440)   
Proceeds from sales of fixed assets                               566                252                   818    
Proceeds from sale of businesses                                    -                  -                     -    
                                                             --------           --------              --------    
     Net cash provided by (used in) investing activities       (1,051)            (5,903)               (6,954)   
                                                             --------           --------              --------    
                                                                                                                  
Cash Flows from Financing activities:                                                                             
Net borrowings (repayments) under bank credit facilities            -              2,350                 2,350    
Borrowings (repayments) of debt                               (35,783)           (53,780)              (89,563)   
Repayments of preferred stock                                  (8,625)                 -                (8,625)   
Net proceeds from the issuance of preferred stock                   -                  -                     -    
Cash dividends paid                                           (21,309)                 -               (21,309)   
Distributions                                                       -             (6,306)               (6,306)   
Loan to Petro                                                 (12,000)                 -               (12,000)   
Proceeds from issuance of First Mortgage Notes                 85,000                  -                85,000    
Proceeds from issuance of Common Units, net                         -             55,931                55,931    
Debt placement and credit agreement expenses                   (1,313)              (814)               (2,127)   
Cash retained by general partner                               (6,000)                 -                (6,000)   
                                                             --------           --------              --------    
    Net cash provided by (used in) financing activities           (30)            (2,619)               (2,649)   
                                                             --------           --------              --------    
    Net increase (decrease) in cash                              (208)               587                   379    
Cash at beginning of period                                       727                519                   727    
                                                             --------           --------              --------    
Cash at end of period                                        $    519           $  1,106              $  1,106    
<CAPTION>                                                    ========           ========              ========    
 
                                                          Year Ended         Year Ended   
                                                         September 30,      September 30, 
                                                             1995               1994      
                                                         (Predecessor)      (Predecessor) 
                                                         ------------        ---------    
                                                                                          
 <S>                                                      <C>                <C>          
 Cash Flows from Operating activities:                                                    
 Net income (loss)                                          $(6,169)          $ (1,404)   
 Adjustments to reconcile net income (loss) to net cash                                   
   provided by operating activities:                                                      
 Depreciation and amortization                               10,073             13,039    
 Provision for losses on accounts receivable                    809                589    
 Net (gain) loss on sales of assets                             913               (258)   
 Changes in operating assets and liabilities:                                             
 Decrease (increase) in receivables                           1,390                306    
 Decrease (increase) in inventories                          (1,196)             1,631    
   Decrease (increase) in prepaid and other assets              188                396     
   Increase (decrease) in other current liabilities          (5,504)           (12,017)    
   Decrease in other long-term liabilities                      (87)              (175)    
                                                            -------           --------     
       Net cash provided by operating activities                417              2,107     
                                                            -------           --------     
                                                                                           
Cash Flows from Investing activities:                                                      
Capital expenditures                                         (7,988)            (5,419)    
Business acquisitions                                        (4,557)            (2,690)    
Proceeds from sales of fixed assets                             707                480     
Proceeds from sale of businesses                             13,250              1,650     
                                                            -------           --------     
     Net cash provided by (used in) investing activities      1,412             (5,979)    
                                                            -------           --------     
                                                                                          
Cash Flows from Financing activities:                                                     
Net borrowings (repayments) under bank credit facilities     (4,000)            (2,809)    
Borrowings (repayments) of debt                               6,576            (13,416)    
Repayments of preferred stock                                (5,091)            (5,740)    
Net proceeds from the issuance of preferred stock                 -             26,254     
Cash dividends paid                                            (412)               (22)    
Distributions                                                     -                  -     
Loan to Petro                                                     -                  -     
Proceeds from issuance of First Mortgage Notes                    -                700     
Proceeds from issuance of Common Units, net                       -                  -     
Debt placement and credit agreement expenses                      -                  -     
Cash retained by general partner                                  -                  -     
                                                            -------           --------     
    Net cash provided by (used in) financing activities      (2,927)             4,967     
                                                            -------           --------     
    Net increase (decrease) in cash                          (1,098)             1,095     
Cash at beginning of period                                   1,825                730     
                                                            -------           --------     
Cash at end of period                                       $   727           $  1,825     
                                                           =======           ========      
</TABLE> 
 
      See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (In thousands except per share data)

1) Partnership Organization and Formation

     Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") was
   formed on October 16, 1995, as a Delaware limited partnership.  Star Gas
   Partners and its subsidiary, Star Gas Propane, L.P., a Delaware limited
   partnership, (the "Operating Partnership") were formed to acquire, own and
   operate substantially all of the propane operations and assets and
   liabilities of Star Gas Corporation ("Star Gas"), a Delaware corporation (and
   the general partner of Star Gas Partners and the Operating Partnership) and
   the propane operations and assets and liabilities of Star Gas' parent
   corporation, Petroleum Heat and Power Co., Inc., a Minnesota corporation
   ("Petro"), (collectively hereinafter referred to as the "Star Gas Group" or
   the "Predecessor Company").  The Operating Partnership is, and the Star Gas
   Group was, engaged in the marketing and distribution of propane gas and
   related appliances to retail and wholesale customers in the United States
   located principally in the Midwest and Northeast.  On December 20, 1995, (i)
   Petro conveyed all of its propane assets and related liabilities to Star Gas
   and (ii) Star Gas and its subsidiaries conveyed substantially all of their
   assets (other than $83.7 million in cash from the proceeds of the First
   Mortgage Notes and certain non-operating assets) to the Operating Partnership
   (the "Star Gas Conveyance") in exchange for general and limited partner
   interests in the Operating Partnership and the assumption by the Operating
   Partnership of substantially all of the liabilities of Star Gas and its
   subsidiaries (excluding certain income tax liabilities and certain other
   long-term obligations of Star Gas that were assumed by Petro), including the
   First Mortgage Notes and approximately $53.8 million in outstanding Star Gas
   debt due to Petro.  The net book value of the assets contributed by Star Gas
   and its subsidiaries to the Operating Partnership exceeded the liabilities
   assumed by $11.2 million.  Immediately after the Star Gas Conveyance, Star
   Gas and its subsidiaries conveyed their limited partner interests in the
   Operating Partnership to Star Gas Partners in exchange for an aggregate of
   2.4 million Subordinated Units of limited partner interest in Star Gas
   Partners.

     Of the $83.7 million in cash retained by the General Partner, $35.8 was
   paid to Petro in satisfaction of additional indebtedness, $8.6 million was
   used to redeem preferred stock of the General Partner held by Petro, $12.0
   million was loaned to Petro, and $6.0 million was retained to be available to
   fund the General Partner's additional capital contribution obligation.  The
   remaining $21.3 million was paid to Petro as dividends.

     During fiscal 1996, Star Gas Partners completed its initial public offering
   of 2.9 million Common Units, including overallotment shares of 0.3 million,
   representing Limited Partner interests, at a price of $22.00 a unit. The net
   proceeds received of $55.9 million, after deducting underwriting discounts,
   commissions and expenses were contributed to the Operating Partnership and

                                      F-7
<PAGE>
 
1) Partnership Organization and Formation - Continued

   used to repay $50.3 million of debt due to Petro, which was assumed by the
   Operating Partnership in the Star Gas Conveyance and the Partnership used the
   balance of $5.6 million for general operating purposes.

     In order that the Partnership would commence operations with $6.2 million
   of working capital on December 20, 1995, the Conveyance Agreement provided
   that the amount of debt due to Petro at closing would be adjusted upwards or
   downwards to the extent that the Star Gas Partners' net working capital
   exceeded or was less than $6.2 million.  At closing, net working capital was
   $9.7 million and $3.5 million was repaid to Petro on January 18, 1996.

     The General Partner holds a 1.0% general partner interest in Star Gas
   Partners and a 1.0101% general partner interest in the Operating Partnership.
   Star Gas Partners and the Operating Partnership have no employees, except for
   certain employees of its corporate subsidiary Stellar Propane Service
   Corporation.  The General Partner conducts, directs and manages all
   activities of Star Gas Partners and the Operating Partnership and is
   reimbursed on a monthly basis for all direct and indirect expenses it incurs
   on their behalf including the cost of employee wages.

2)   Acquisition by Petro

     In December 1993, Petro acquired an approximate 29.5% interest in Star Gas
   for $16.0 million. Petro exercised its right in December 1994 to purchase the
   remaining outstanding common equity of Star Gas by paying $3.8 million in
   cash and issuing approximately 2.5 million shares of its common stock.

     The acquisition was accounted for as a purchase, accordingly, the purchase
   price was allocated to the underlying assets and liabilities based upon their
   estimated fair value at the date of acquisition. The fair value of assets
   acquired was $141.3 million (including $3.3 million in cash) and liabilities
   and preferred stock was $109.5 million. The excess of the purchase price over
   the fair value of assets acquired and liabilities assumed was $9.0 million
   and is being amortized over a period of twenty-five years.

3) Divestitures

     In November 1994, the Company sold all of its retail propane operations
   located in southern Georgia for $13,250 in cash, realizing a loss of $695 on
   the sale.

     In September 1994, the Company sold one of its retail propane operations,
   in the Northeast for approximately $650, net of expenses, realizing a gain of
   $459 on the sale.

     In December 1993, the Company, in an effort to improve profitability and to
   concentrate on its core business, sold one of its wholly owned subsidiaries,
   Federal Petroleum Company, for $1,650 in cash and an 8% interest bearing note
   in the amount of $500.  The note is due in 48 monthly installments commencing
   on November 1, 1994 and ending October 1, 1998.  At September 30, 1993, the
   Company adjusted the carrying value and the net assets of Federal to then
   equal the expected sales price of $2,150.

                                      F-8
<PAGE>
 
4) Summary of Significant Accounting Policies
 
   Basis of Presentation

     The Consolidated Financial Statements for the period December 20, 1995
   through September 30, 1996 include the accounts of Star Gas Partners, L.P.,
   the Operating Partnership and its corporate subsidiary, Stellar Propane
   Service Corp., collectively referred to herein as (the "Partnership"). The
   Consolidated Financial Statements for the period October 1, through December
   20, 1995 and the years ended September 30, 1995 and 1994 include the propane
   operations, assets and liabilities of the Star Gas Group. All material
   intercompany items and transactions have been eliminated in consolidation and
   certain reclassifications have been made to the 1995 and 1994 financial
   statements to conform to the 1996 presentation.

   Net Income per Limited Partner Unit
     Net income per Limited Partner Unit is computed by dividing net income,
   after deducting the General Partner's 2.0% interest, by the weighted average
   number of Common Units and Subordinated Units outstanding.

   Revenue Recognition
     Sales of propane and propane appliances are recognized at the time of
   delivery of the product to the customer or at the time of sale or
   installation. Revenue from service repairs and maintenance is recognized upon
   completion of the service provided.

   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:
<TABLE>
<CAPTION>
 
                                        September 30, 
                                    --------------------
                                     1996          1995  
                                    ------        ------ 
<S>                                 <C>           <C>    
Propane gas...................      $6,625        $4,594 
Appliances and equipment......       1,869         1,560 
                                    ------        ------ 
                                    $8,494        $6,154 
                                    ======        ======        
</TABLE>

     Substantially all of the Partnership's propane supply for the Northeast
   retail operations are purchased under supply contracts. Certain of the supply
   contracts provide for minimum and maximum amounts of propane to be purchased
   thereunder, and provide for pricing in accordance with posted prices at the
   time of delivery or include a pricing formula that typically is based on
   current market prices. One supply agreement, representing approximately 7,200
   gallons, extends through March 31, 1999. During 1996, spot purchases from
   Mont. Belvieu sources accounted for approximately 26% of the Partnership's
   total volume of propane purchases, while the three single largest suppliers
   accounted for approximately 32% of total propane purchases.

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

                                      F-9
<PAGE>
 
4) Summary of Significant Accounting Policies - Continued

   Intangible Assets
     The excess of cost over the fair value of net assets resulting from
   the acquisition of the Company by Petro in December 1994 is being amortized
   using the straight-line method over 25 years.  For the period October 1993
   through December 1994, goodwill was being amortized over 10 years.  Other
   intangible assets, including covenants not to compete and customer lists are
   recorded at cost and are being amortized over their estimated useful lives,
   ranging from 1 to 15 years.  Also included as intangible assets are the costs
   associated with the issuance of the Company's First Mortgage Notes which are
   being amortized under the interest method over the life of the notes.

     The Partnership assesses the recoverability of intangible assets by
   comparing the carrying values of such intangibles to market values, where a
   market exists, supplemented by cash flow analyses to determine that the
   carrying values are recoverable over the remaining estimated lives of the
   intangibles through undiscounted future operating cash flows. When an
   intangible asset is deemed to be impaired, the amount of intangible
   impairment is measured based on market values, as available, or by projected
   cash flows.

   Customer Credit Balances
     Customer credit balances primarily represents pre-payments received
   from customers pursuant to a budget payment plan (whereby customers pay their
   estimated annual propane gas charges on a fixed monthly basis) in excess of
   actual deliveries billed.

   Use of Estimates
     In accordance with generally accepted accounting principles, management of
   the Partnership has made a number of estimates and assumptions relating to
   the reporting of assets and liabilities and the disclosure of contingent
   assets and liabilities to prepare these financial statements. Actual results
   could differ from those estimates.

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

   Income Taxes
     The Partnership is a master limited partnership. As a result, for Federal
   income tax purposes, earnings or losses are allocated directly to the
   individual partners. Except for the Partnership's corporate subsidiary which
   generates non-qualifying Master Limited Partnership income in the northeast,
   no recognition has been given to income taxes in the accompanying financial
   statements of the Partnership. Net earnings for financial statement purposes
   may differ significantly from taxable income reportable to unitholders as a
   result of differences between the tax basis and financial reporting basis of
   assets and liabilities and the due to taxable income allocation requirements
   of the Partnership agreement.


                                      F-10
<PAGE>
 
4) Summary of Significant Accounting Policies - Continued

     Since December 1994 and prior to the Partnership's formation, the
   Predecessor filed a consolidated Federal income tax return with Petro and its
   affiliates.  Income taxes were computed as though each company filed its own
   income tax return.  Deferred income taxes were recognized for the tax
   consequences of temporary differences between the financial statement
   carrying amounts and the tax basis of existing assets and liabilities.

     Prior to the December 1994 acquisition by Petro, Star Gas filed
   consolidated tax returns with its subsidiaries.

5) Quarterly Distribution of Available Cash

     The Partnership will distribute to its partners, on a quarterly basis, all
   of its Available Cash.  "Available Cash" generally means, with respect to any
   fiscal quarter of the Partnership, all cash on hand at the end of such
   quarter, less the amount of cash reserves that are necessary or appropriate
   in the reasonable discretion of the General Partner.

     Distribution by the Partnership in an amount equal to 100% of its Available
   Cash will generally be made 98% to the Common and Subordinated Unitholders
   and 2% to the General Partner, subject to the payment of incentive
   distributions in the event Available Cash exceeds the Minimum Quarterly
   Distribution ($0.55) on all Units. To the extent there is sufficient
   Available Cash, the holders of Common Units have the right to receive the
   Minimum Quarterly Distribution, plus any arrearage, prior to the distribution
   of Available Cash to holders of Subordinated Units. Common Units will not
   accrue arrearage for any quarter after the end of the Subordination Period
   (as defined below) and Subordinated Units will not accrue any arrearage with
   respect to distributions for any quarter.

     The first distribution commenced with the quarter ending March 31, 1996 and
   was paid on May 15, 1996 to holders of record as of May 1, 1996.  The initial
   distribution was $0.6225 per unit and represented a pro rata distribution of
   $0.0725 per unit for the period December 20, 1995 to December 31, 1995 and a
   quarterly distribution of $0.55 per unit for the three months ended March 31,
   1996.  The distribution for the quarter ending June 30, 1996 of $0.55 was
   paid on August 15, 1996 to holders of record as of August 1, 1996.

     For the quarter ending September 30, 1996 the Partnership announced on
   October 8, 1996 that it will pay a distribution of $0.55 per unit payable
   November 15, 1996 to the Unitholders of record November 1, 1996.

     To enhance the Partnership's ability to pay the Minimum Quarterly
   Distribution on the Common Units, the General Partner has agreed, subject to
   certain limitations, to contribute additional capital to the Partnership in
   the amount necessary to distribute the Minimum Quarterly Distribution on all
   outstanding Common Units for such quarter.  As of September 30, 1996, the
   General Partner's additional Capital Contribution obligation was $3.0
   million.

                                      F-11
<PAGE>
 
6) Distributions from Operating Surplus During Subordination Period

     The Subordination Period will generally extend until the first day of any
   quarter beginning on or after January 1, 2001 in respect of which (i)
   distributions of Available Cash from Operating Surplus on the Common Units
   and the Subordinated Units equals or exceeds the sum of the Minimum Quarterly
   Distribution on all of the outstanding Common Units and Subordinated Units
   with respect to each of the three non-overlapping four-quarter periods
   immediately preceding such date, (ii) the Adjusted Operating Surplus
   generated during each of the three immediately preceding non-overlapping
   four-quarter periods equals or exceeds the sum of the Minimum Quarterly
   Distribution on all of the outstanding Common Units and Subordinated Units
   during such periods and (iii) there are no arrearages in payment of the
   Minimum Quarterly Distribution on the Common Units.

     Prior to the end of the Subordination Period, a portion of the Subordinated
   Units will convert into Common Units on the first day after the record date
   established for any quarter ending on or after March 31, 1999 (with respect
   to 599,020 of the Subordinated Units) and March 31, 2000 (with respect to an
   additional 599,020 of the Subordinated Units), on a cumulative basis, in
   respect of which (i) distributions of Available Cash from Operating Surplus
   on the Common Units and the Subordinated Units equals or exceeds the sum of
   the Minimum Quarterly Distribution on all of the outstanding Common Units and
   Subordinated Units with respect to each of the three non-overlapping four-
   quarter periods immediately preceding such date, (ii) the Adjusted Operating
   Surplus generated during each of the three immediately preceding non-
   overlapping four-quarter periods equals or exceeds the sum of the Minimum
   Quarterly Distribution on all of the outstanding Common Units and
   Subordinated Units during such periods and (iii) there are no arrearages in
   payment of the Minimum Quarterly Distribution on the Common Units.

7) Acquisitions - Pro Forma

     During 1996, 1995 and 1994, the Partnership acquired several propane
   dealers with an aggregate cost of $2,440, $4,557 and $2,690 respectively.

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

     Unaudited Pro forma data giving effect to the purchased business as
   if they had been acquired on October 1 of the year preceding the year of
   purchase.
<TABLE>
<CAPTION>
 
                                Years Ended September 30,
                             -----------------------------
                               1996      1995       1994   
                               ----      ----       ----   
<S>                          <C>       <C>        <C>      
Sales                        $120,645  $107,714   $132,549 
Net income (loss)               2,817    (6,260)    (1,471) 
</TABLE>
                                      F-12
<PAGE>
 
8) Property, Plant and Equipment

     The components of property, plant and equipment and their estimated
   useful lives were as follows at the indicated dates:
<TABLE>
<CAPTION>
                                      September 30,        Estimated            
                                     ----------------                           
                                     1996       1995      Useful Lives          
                                     ----       ----      ------------          
<S>                               <C>         <C>        <C>                    
Land                               $  3,916   $  4,796                          
Buildings                             8,945      8,465        30 years          
Fleet                                12,679     11,432    5 - 30 years          
Tanks and equipment                  82,296     76,754    5 - 30 years          
Furniture and fixtures                2,440      2,432        10 years          
                                   --------   --------                          
  Total                            $110,276   $103,879                          
Less: accumulated                                                               
 depreciation                       (12,543)    (5,192)                         
                                   --------   --------                          
  Total                            $ 97,733   $ 98,687                          
                                   ========   ========                          
</TABLE> 
 
9) Intangibles and Other Assets
 
     The components of intangibles and other assets were as follows at the
   indicated dates:

<TABLE> 
<CAPTION> 
                                                    September 30,               
                                                   ---------------              
                                                1996           1995             
                                              ---------      --------           
   <S>                                        <C>            <C> 
   Goodwill                                   $ 14,186        $ 13,681          
   Covenants not to compete                      2,040           1,879          
   Customer lists                               28,797          28,797          
   Deferred charges and other assets             2,795           1,350          
                                              --------        --------          
    Total                                     $ 47,818        $ 45,707          
   Less: accumulated amortization               (6,480)         (3,267)         
                                              --------        --------          
    Total                                     $ 41,338        $ 42,440          
                                              ========        ========          
</TABLE>
10) Long-Term Debt and Working Capital Borrowings

      In December 1995, the General Partner issued $85.0 million of first
   mortgage notes (the "First Mortgage Notes") with an annual interest rate of
   8.04%.  These notes were assumed as part of the Star Gas Conveyance by the
   Operating Partnership.  The Operating Partnership's obligations under the
   First Mortgage Note Agreement are secured, on an equal basis with the
   Operating Partnership's obligations under the Bank Credit Facilities, by a
   mortgage on substantially all of the real property and liens on substantially
   all of the operating facilities, equipment and other assets of the Operating
   Partnership.  The First Mortgage Notes will mature September 15, 2009, and
   will require semiannual prepayments, without premium on the principal
   thereof, beginning on March 15, 2001.  Interest is payable semiannually on
   March 15 and September 15.  For the year ended September 30, 1996, the
   Partnership paid interest in the amount of $5.1 million on the First Mortgage
   Notes.

      The First Mortgage Note Agreement contains various restrictive and
   affirmative covenants applicable to the Operating Partnership, including
   restrictions on the incurrence of additional indebtedness and restrictions on
   certain investments, guarantees, loans, sales of assets and other
   transactions.

      As of September 30, 1996, the Partnership was in compliance with all
        borrowing agreement covenants, as amended.
                                      F-13
<PAGE>
 
 10) Long-Term Debt and Working Capital Borrowings - Continued

       The Bank Credit Facilities consist of a $25.0 million
     Acquisition Facility and a $12.0 million Working Capital Facility.  The
     agreement governing the Bank Credit Facilities contains covenants and
     default provisions generally similar to those contained in the First
     Mortgage Note Agreement.  As of September 30, 1996, $2,350 was
     outstanding under the Working Capital Facility.

       The Bank Credit Facilities bear interest at a rate based upon, at the
     Partnership's option, either the London Interbank Offered Rate plus a
     margin or a Base Rate (each as defined in the Bank Credit Facilities). The
     weighted average interest rate for borrowings under the Working Capital
     Facility was 8.25% at September 30, 1996 and for fiscal 1996. In addition,
     the Partnership is required to pay a fee for unused commitments which
     amounted to $104 for fiscal 1996.

       The Working Capital Facility will expire December 31, 1998, but may be
     extended annually thereafter with the consent of the banks. Borrowings
     under the Acquisition Facility will revolve until September 30, 1998, after
     which time any outstanding loans thereunder, will amortize quarterly in
     equal principal payments with a final payment due on December 31, 2001.
     However, there must be no amount outstanding under the Working Capital
     Facility for at least 30 consecutive days during each fiscal year.

       As of September 30, 1995, the Star Gas Group had $86,002 of notes due to
     Petro with interest rates ranging from 8.75% to 12.625% with a final
     maturity of August 2001. The debt due to Petro was repaid on December 20,
     1995 with a portion of the proceeds from the sale of the First Mortgage
     Notes and the sale of the Common Units. In connection with certain
     acquisitions, the Star Gas Group had obligations payable to former owners
     aggregating $2,137, of which $748 was classified as current as of September
     30, 1995. These obligations primarily consisted of capital lease
     obligations, notes payable and payments pursuant to certain covenants not-
     to-compete and consulting agreements and were assumed by Petro as part of
     the Star Gas Conveyance.

       As of September 30, 1996, the annual maturities of the First
     Mortgage Notes and the Working Capital Facility are set forth in the
     following table:
<TABLE>
<CAPTION>
 
           <S>           <C>    
           1997          $ 2,350
           1998                -
           1999                -
           2000                -
           2001            1,923
           Thereafter     83,077
                         -------
                         $87,350
                         ======= 
</TABLE>

                                      F-14
<PAGE>
 
11) Employee Benefit Plans

      Star Gas has a 401(k) plan which covers certain eligible union and non-
    union employees. Subject to IRS limitations, the 401(k) plan provides for
    each employee to contribute from 1% to 15% of compensation. Star Gas
    contributes to non-union participants a matching amount up to a maximum of
    3% of compensation. Aggregate matching contributions made to the 401(k) plan
    during fiscal 1996, 1995 and 1994 were $293, $247 and $131, respectively.

      Star Gas also makes monthly contributions on behalf of its union employees
    to a union sponsored defined benefit plan. The amount charged to expense was
    $278, $238 and $207 in fiscal 1996, 1995 and 1994, respectively.

12) Unit Option Plan

      On December 20, 1995, the General Partner adopted the 1995 Star Gas
    Corporation Unit Option Plan (the "Unit Option Plan"), which currently
    authorizes the issuance of options (the "Unit Options") and Unit
    Appreciation Rights ("UARS") covering up to 300,000 Subordinated Units to
    certain officers and employees of the General Partner. A total of 40,000
    options were granted to key executives in December 1995. The Unit Options
    have the following characteristics: 1) exercise price of $22 per unit, which
    is an estimate of the fair market value of the Subordinated Units at the
    time of grant, 2) vest over five year period, 3) exercisable after January
    1, 2001, assuming the subordination's period elapsed, and 4) expire on the
    tenth anniversary of the date of grant. Upon conversion of the Subordinated
    Units held by the General Partner and its affiliates, the Unit Options
    granted will convert to Common Unit Options.

13) Lease Commitments

      The Partnership has entered into certain operating leases for
    office space, trucks and other equipment.
 
      The future minimum rental commitments at September 30, 1996 under leases
    having an initial or remaining noncancellable term of one year or more are
    as follows:
<TABLE>
<CAPTION>
 
       <S>                             <C>   
       1997                            $  883
       1998                               828
       1999                               317
       2000                               266
       2001                               251
       Thereafter                         720
                                       ------
                                             
       Total Minimum lease payments    $3,265
                                       ====== 
</TABLE>
     The Partnership incurred rent expense of $1,212, $1,160 and
   $1,685 in 1996, 1995 and 1994, respectively.

                                      F-15
<PAGE>
 
14) Unaudited Pro Forma Financial Information

      The accompanying unaudited Pro Forma Condensed Consolidated Statements of
    Operations for the twelve months ended September 30, 1996 and 1995 were
    derived from the Consolidated Statement of Operations of the Partnership
    from December 20, 1995 through September 30, 1996 and the Statements of
    Operations of the Star Gas Group, for the periods October 1, 1994 through
    September 30, 1995 and October 1, 1995 through December 20, 1995. The Pro
    Forma Condensed Consolidated Statements of Operations were prepared to
    reflect the effects of Partnership formation as if it had been completed in
    its entirety as of the beginning of the periods presented.

      However, these statements do not purport to present the results of
    operations of the Partnership had partnership formation actually been
    completed as of the beginning of the periods presented. In addition, the Pro
    Forma Condensed Consolidated Statements of Operations are not necessarily
    indicative of the results of future operations of the Partnership and should
    be read in conjunction with the Consolidated Financial Statements of the
    Predecessor Company and the Partnership.



                                      F-16
<PAGE>
 
14) Unaudited Pro Forma Financial Information - Continued


                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

           PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per unit amounts)
                                  (unaudited)
<TABLE>
<CAPTION>
 
 
                                                     Fiscal Year Ended   
                                                       September 30,     
                                                    -------------------- 
                                                      1996       1995    
                                                    ---------  --------- 
<S>                                                 <C>        <C>       
Sales                                               $119,634   $102,496  
Cost of sales                                         58,557     48,649  
                                                    --------   --------  
  Gross profit                                        61,077     53,847  
                                                    --------   --------  
                                                                         
Operating expenses                                    41,081     39,888  

Depreciation and amortization                          9,870     10,147  
Net loss on sales of assets                             (260)      (278) 
                                                    --------   --------  
  Operating income                                     9,866      3,534  
Interest expense (net)                                 6,713      7,134  
                                                    --------   --------  
  Income (loss) before income taxes                    3,153     (3,600) 
Income tax expense                                        25         25  
                                                    --------   --------  
  Net income (loss)                                 $  3,128   $ (3,625) 
                                                    ========   ========  
                                                                         
General Partner's interest in net income                                 
  (loss)                                                  63        (73) 
                                                    --------   --------  
Limited Partners' interest                                               
  in net income (loss)                              $  3,065   $ (3,552) 
                                                    ========   ========  
                                                                         
Net income (loss) per Limited Partner unit             $0.58     $(0.67) 
                                                    ========   ========  
Weighted average number of Limited                                       
  Partner units outstanding                            5,271      5,271  
                                                    ========   ========  
                                                                         
Other data:                                                              
Distributable cash:                                                      
EBITDA/(A)/                                         $ 19,996   $ 13,959  
  Less: Interest expense                               6,713      7,134  
        Income taxes                                      25         25  
        Maintenance capital expenditures/(B)/          2,288      4,222  
                                                    --------   --------  
Distributable cash                                    10,970      2,578  
General Partners' interest                              (220)       (52) 
                                                    --------   --------  
Distributable cash available for Limited                                 
  Partners                                          $ 10,750   $  2,526  
                                                    ========   ========  
Distributable cash available per Limited                                 
  Partner unit                                         $2.04      $0.48  
                                                    ========   ========  
Retail propane gallons sold                           96,294     87,202  
                                                    ========   ========   
</TABLE>

(A) EBITDA is defined as operating income (loss) plus depreciation and
    amortization expense and less net gain (loss) on sales of assets. EBITDA
    should not be considered as an alternative to net income (as an indicator of
    operating performance) or as an alternative to cash flow (as a measure of
    liquidity or ability to service debt obligations), but provides additional
    information for evaluating the Partnership's ability to make the Minimum
    Quarterly Distribution.
(B) Maintenance capital expenditures net of certain proceeds from fixed asset
    sales.


                                      F-17
<PAGE>
 
14) Unaudited Pro Forma Financial Information - Continued

    Significant pro forma adjustments reflected in the above data include the
    following:

1.     For the year ended September 30, 1995 the elimination of the results of
    the Star Gas Group's propane operations in Southern Georgia.

2.     For the years ended September 30, 1996 and September 30, 1995, the
    elimination of management fees paid by the Star Gas Group to Petro.

3.     For the years ended September 30, 1996 and September 30, 1995, the
    addition of the estimated incremental general and administrative costs
    associated with operating as a publicly traded partnership.

4.     For the years ended September 30, 1996 and September 30, 1995, an
    adjustment to interest expense to reflect the repayment of debt due to Petro
    and to reflect the interest expense associated with the First Mortgage Notes
    and Bank Credit Facility.

5.     For the years ended September 30, 1996 and September 30, 1995, the
    elimination of the provision for income taxes, as taxes on income will be
    borne by the Partners and not the Partnership, except for corporate income
    taxes relative to the Partnership's wholly owned corporate subsidiary, which
    conducts non-qualifying Master Limited Partnership business.

15) Unaudited General Partner Financial Statements

       The following presents the Condensed Consolidated Balance Sheet as
  of September 30, 1996 together with the Condensed Consolidated Statement of
  Operations of the General Partner, Star Gas Corporation and Subsidiaries, for
  the period December 20, 1995 through September 30, 1996.

                     STAR GAS CORPORATION AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheet
                                 (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
Assets
<S>                                               <C>
Current assets:
 Cash                                             $ 3,154
 Interest receivable                                1,062
 Other receivables                                  5,941
                                                  -------
    Total current assets                           10,157
Note receivable from Petro                         12,000
Investment in Partnership                           8,577
                                                  -------
    Total assets                                  $30,734
                                                  =======
 
Liabilities and Shareholder's Equity
Current liabilities:
Accrued expenses                                  $    32
                                                  -------
Shareholder's equity                               30,702
                                                  -------
 
    Total liabilities and shareholder's equity    $30,734
                                                  =======
</TABLE>
                                      F-18
<PAGE>
 
15) Unaudited General Partner Financial Statements - Continued

                     STAR GAS CORPORATION AND SUBSIDIARIES

                 Condensed Consolidated Statement of Operations
                                 (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
 
 
                                                         December 20, 1995   
                                                              through        
                                                         September 30, 1996  
                                                         ------------------  
<S>                                                            <C> 
Revenues:                                                                    
Reimbursement of employee expenses from Operating Partnership  $14,102  
                                                                             
Expenses:                                                                    
Cost of employee services provided to Operating Partnership     14,102       
                                                               -------       
  Operating income                                                   -       
Interest income                                                  1,246       
                                                               -------       
Income before equity interest in Star Gas Partners, L.P.         1,246       
                                                                             
Share of income of Star Gas Partners, L.P.                         275       
                                                               -------       
                                                                             
Net income                                                     $ 1,521       
                                                               =======       
</TABLE>

16)  Supplemental Disclosures of Cash Flow Information:
<TABLE>
<CAPTION>
 
                                        Years Ended September 30, 
                                        -------------------------- 
                                         1996      1995     1994
                                        -------  --------  -------
<S>                                     <C>      <C>       <C>
Cash paid during the year for:
  Income taxes                           $   80  $ 2,950   $   356
                                        -------  -------   -------
  Interest                               $5,088  $ 4,284   $15,052
                                        =======  =======   =======
 
Non-cash adjustment:
 
Purchase accounting adjustment:
  Increase in intangibles                        $23,028
  Decrease in property & equipment                  (680)
  Increase in other accrued expenses              (4,000)
  Increase in long-term debt                      (1,700)
  Decrease in deferred income taxes                  236
                                                 -------
                                                 $16,884
                                                 =======
 
  Dividends declared                             $ 4,875
                                                 =======
</TABLE>



                                      F-19
<PAGE>
 
17) Commitments and Contingencies

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

18) Related Party Transactions

      The Partnership has no employees except for certain employees of its
    corporate subsidiary, Stellar Propane Service Corporation and is managed and
    controlled by the General Partner.  Pursuant to the Partnership Agreement,
    the General Partner is entitled to reimbursement for all direct and indirect
    expenses incurred or payments it makes on behalf of the Partnership, and all
    other necessary or appropriate expenses allocable to the Partnership or
    otherwise reasonably incurred by the General Partner in connection with
    operating the Partnership's business.  For the period December 20, 1995
    through September 30, 1996, the Partnership reimbursed the General Partner
    and Petro $14.4 million representing salary, payroll tax and other
    compensation paid to the employees of the General Partner, including $0.3
    million paid to Petro for certain corporate functions such as finance and
    compliance.  In addition, the Partnership reimbursed Petro for $1.9 million
    relating to the Partnership's share of the costs incurred by Petro in
    conducting the operations of certain shared branch locations which include
    managerial services.

19) Retention of Morgan Stanley & Co., Incorporated

      On August 1, 1996, the Partnership announced that it has retained Morgan
    Stanley & Co., Incorporated to assist it in the development and
    consideration of strategic alternatives designed to maximize value for its
    unitholders. Alternatives to be investigated may include, but are not
    limited to, the sale or merger of Star Gas.

20) Disclosures About the Fair Value of Financial Instruments

    Cash, Accounts Receivable, Notes Receivable and Other Current Assets,
    Working Capital Borrowing, Accounts Payable and Accrued Expenses
    ----------------------------------------------------------------
 
      The carrying amount approximates fair value because of the short maturity
    of these instruments.

    Long-Term Debt
    --------------

      The fair values of each of the Partnership's long-term financing
    instruments, including current maturities, are based on the amount of future
    cash flows associated with each instrument, discounted using the Company's
    current borrowing rate for similar instruments of comparable maturity.



                                      F-20
<PAGE>
 
20) Disclosures About the Fair Value of Financial Instruments - Continued


      The estimated fair value of the Partnership's long term debt is summarized
    as follows:
<TABLE>
<CAPTION>
 
                          At September 30, 1996
                          ---------------------        
                          Carrying     Estimated 
                           Amount      Fair Value  
                           ------      ----------  

      <S>               <C>              <C> 
      Long-term debt       $85,000       $80,117
</TABLE>

21) Selected Quarterly Financial Data (Unaudited)

      The seasonal nature of the Partnership's business results in the sale by
    the Partnership of approximately 35% of its volume in the first fiscal
    quarter and 40% of its volume in the second fiscal quarter of each year. The
    Partnership generally realizes net income in both of these quarters and net
    losses during the quarters ending June and September.

<TABLE>
<CAPTION>
 
 
                                               Three Months Ended
                      -------------------------------------------------------------------
                       December 31,    March 31,      June 30,    September 30,  
                         1995            1996           1996          1996         Total  
                       -----------    ----------     ---------      ---------    ---------          
<S>                       <C>         <C>             <C>             <C>         <C>               
Sales                 $34,634/(a)/       $47,080      $ 18,416       $ 19,504     $119,634      
Gross profit           18,729/(a)/        22,599         9,933          9,816       61,077      
Income (loss)                                                                                   
 before taxes           3,546/(a)/         7,244        (4,029)        (4,083)       2,678      
Net income (loss)       3,486/(a)/         7,230        (4,046)        (4,077)       2,593      
Limited Partner                                                                                 
  interest in net                                                                               
  income (loss)         1,455/(b)/         7,085        (3,965)        (3,995)         580      
Net income (loss)                                                                               
  per Limited                                                                                   
  Partner Unit        $  0.28/(b)/         $1.34       ($ 0.75)       ($ 0.76)       $0.11       
 
 
                                                 Predecessor
                                             Three Months Ended
                         -------------------------------------------------------------------------
                         December 31,      March 31,       June 30,     September 30,                      
                             1994            1995           1995            1995            Total           
                         ------------      ----------     ---------     ------------      ---------          
<S>                        <C>              <C>           <C>             <C>             <C>               
Sales                      $32,324          $38,347       $ 16,718        $ 17,161        $104,550         
Gross profit                16,174           20,564          9,052           9,100          54,890         
Income (loss)                                                                                              
 before taxes               (1,025)           5,663         (4,875)         (5,757)         (5,994)        
Net income (loss)           (1,100)           5,633         (4,910)         (5,792)         (6,169)         
</TABLE>


(a) Reflects the results of operations of the Predecessor Company for the period
    October 1, 1995 through December 20, 1995 and of Star Gas Partners, L.P.
    from December 20, 1995 through December 31, 1995.
(b) Reflects limited partners interest from December 20, 1995 through December
    31, 1995.

                                      F-21
<PAGE>
 
                                                                     Schedule II

                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                       VALUATION AND QUALIFYING ACCOUNTS

                 Years Ended September 30, 1996, 1995 and 1994

                                 (In thousands)
<TABLE>
<CAPTION>
                                                                     Additions                                                     
                                                 -------------------------------------------------                                  

                                                   Balance at        Charged to     Charged to         Other        
                                                    Beginning         Costs and       Other           Changes      Balance at 
Year          Description                           of Year           Expenses       Account        Add(Deduct)    End of Year 
----          -----------                           -------           --------       -------        ----------     -----------

<S>        <C>                                     <C>               <C>              <C>             <C>           <C>
1996       Allowance for doubtful                                                                      (184)/(a)/
           accounts                                  $362              422                             (309)/(b)/      $291
                                                     =====             ===                             =====           ====
                                                
 1995      Allowance for doubtful               
           accounts                                  $521              809                             (968)/(b)/      $362
                                                     ====              ===                             =====           ====
                                                
 1994      Allowance for doubtful               
           accounts                                  $716              589                             (784)/(b)/      $521
                                                     ====              ===                             =====           ====
 </TABLE> 
 
 

(a)  Amount excluded from the Star Gas Conveyance which took place on December
     20, 1995.
(b)  Bad debts written off (net of recoveries).



                                      F-22