Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549 FORM 10-K (Mark One) xxANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2006OR ¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-14129Commission File Number: 333-103873STAR GAS PARTNERS, L.P.STAR GAS FINANCE COMPANY(Exact name of registrants as specified in its charters) Delaware 06-1437793Delaware 75-3094991(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 2187 Atlantic Street, Stamford, Connecticut 06902(Address of principal executive office) (Zip Code)(203) 328-7310(Registrants’ telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Units New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x.Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes ¨ No xIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Act (check one). Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of Star Gas Partners, L.P. Common Units held by non-affiliates of Star Gas Partners, L.P. on March 31, 2006 wasapproximately $89,627,000. As of December 14, 2006, the registrants had units and shares outstanding for each of the issuers’ classes of common stock asfollows: Star Gas Partners, L.P. Common Units 75,774,336Star Gas Partners, L.P. General Partner Units 325,729Star Gas Finance Company Common Shares 100Documents Incorporated by Reference: None Table of ContentsSTAR GAS PARTNERS, L.P.2006 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS Page PART I Item 1. Business 3Item 1A. Risk Factors 8Item 1B. Unresolved Staff Comments 14Item 2. Properties 14Item 3. Legal Proceedings—Litigation 14Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for the Registrant’s Units and Related Matters 15Item 6. Selected Historical Financial and Operating Data 16Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35Item 8. Financial Statements and Supplementary Data 35Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35Item 9A. Controls and Procedures 35Item 9B. Other Information 36 PART III Item 10. Directors and Executive Officers of the Registrant 36Item 11. Executive Compensation 40Item 12. Security Ownership of Certain Beneficial Owners and Management 42Item 13. Certain Relationships and Related Transactions 43Item 14. Principal Accounting Fees and Services 43 PART IV Item 15. Exhibits and Financial Statement Schedules 44 2 Table of ContentsPART I ITEM 1.BUSINESSStatement Regarding Forward-Looking DisclosureThis Annual Report on Form 10-K includes “forward-looking statements” which represent our expectations or beliefs concerning future events thatinvolve risks and uncertainties, including those associated with the effect of weather conditions, on our financial performance, the price and supply of homeheating oil, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, our ability to obtain new accounts and retainexisting accounts, our ability to effect strategic acquisitions or redeploy assets, the impact of litigation, the continuing impact of the business processredesign project and our ability to address issues related to that project, our ability to contract for our future supply needs, natural gas conversions, futureunion relations and outcome of current and future union negotiations, the impact of current and future environmental, health, and safety regulations,customer credit worthiness, and marketing plans. All statements other than statements of historical facts included in this Report including, without limitation,the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-lookingstatements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to have been correct and actual results may differ materially from those projected as a result of certain risks and uncertainties. Theserisks and uncertainties include, but are not limited to, those set forth under the heading “Risk Factors” and “Business Initiatives and Strategy.” Withoutlimiting the foregoing, the words “believe”, “anticipate”, “plan”, “expect”, “seek”, “estimate” and similar expressions are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in thisAnnual Report on Form 10-K. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf areexpressly qualified in their entirety by the Cautionary Statements. Unless otherwise required by law, we undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise after the date of this Report.StructureStar Gas Partners, L.P. (“Star Gas Partners”, the “Partnership”, “we,” “us” or “our”) is a home heating oil distributor and services provider. Star GasPartners is a master limited partnership, which at September 30, 2006 had outstanding 75.8 million common units (NYSE: “SGU” representing an 99.6%limited partner interest in Star Gas Partners) and 0.3 million general partner units (representing an 0.4% general partner interest in Star Gas Partners).The Partnership is organized as follows: • The general partner of the Partnership is Kestrel Heat, LLC, a Delaware limited liability company (“Kestrel Heat” or the “general partner”). TheBoard of Directors of Kestrel Heat is appointed by its sole member, Kestrel Energy Partners, LLC, a Delaware limited liability company (“Kestrel”). • The Partnership’s heating oil operations are conducted through Petro Holdings, Inc. (“Petro”) and its subsidiaries. Petro is a Minnesota corporationthat is a wholly-owned subsidiary of Star/Petro, Inc. (“Star/Petro”), which is a wholly-owned subsidiary of the Partnership. • Star Gas Finance Company is a wholly owned subsidiary of the Partnership. Star Gas Finance Company serves as the co-issuer, jointly andseverally with the Partnership, of the Partnership’s $172.8 million 10 1/4% Senior Notes, which are due in 2013. The Partnership is dependent ondistributions including intercompany interest payments from its subsidiaries to service the Partnership’s debt obligations. The distributions fromthe Partnership’s subsidiaries are not guaranteed and are subject to certain loan restrictions. Star Gas Finance Company has nominal assets andconducts no business operations.We file annual, quarterly, current and other reports and information with the SEC. These filings can be viewed and downloaded from the Internet at theSEC’s website at www.sec.gov. In addition, these SEC filings are available at no cost as soon as reasonably practicable after the filing thereof on our websiteat www.star-gas.com/Edgar.cfm. These reports are also available to be read and copied at the SEC’s public reference room located at Judiciary Plaza, 100 FStreet, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of these filings and other information at the offices of the New York Stock Exchange located at 11 Wall Street, New York,New York 10005. 3 Table of ContentsRecapitalizationEffective as of April 28, 2006, the Partnership completed its recapitalization pursuant to the terms of a unit purchase agreement dated as of December 5,2005, as amended, by and among, the Partnership, Star Gas LLC (the former general partner), Kestrel and its wholly-owned subsidiaries, Kestrel Heat (the newgeneral partner) and KM2, LLC, a Delaware limited liability company (“M2”). (See Note 3 – Recapitalization to the Consolidated Financial Statements)Business OverviewAs of September 30, 2006 we serviced approximately 430,000 home heating oil customers from locations in the Northeast and Mid-Atlantic regions.We believe we are the largest retail distributor of home heating oil in the United States. In addition to selling home heating oil, we install, maintain and repairheating and air conditioning equipment. To a limited extent, we also market other petroleum products including diesel fuel and gasoline to approximately10,000 commercial customers. During fiscal 2006, total sales were comprised of approximately 75% from sales of home heating oil; 15% from the installationand repair of heating equipment; and 10% from the sale of other petroleum products. We provide home heating equipment repair service 24 hours a day,seven days a week, 52 weeks a year. These services are an integral part of our heating oil business, and are intended to maximize customer satisfaction andloyalty.In fiscal 2006, sales to residential customers represented 85% of the retail heating oil gallons sold and 92% of heating oil gross profits.We have operations and markets in the following states: Connecticut Massachusetts New York Rhode IslandFairfield Suffolk Dutchess ProvidenceNew Haven Norfolk Ulster KentMiddlesex Essex Orange WashingtonLitchfield Bristol Westchester NewportHartford Middlesex Putnam Bristol Barnstable Nassau Maryland Plymouth Suffolk VirginiaBaltimore Worcester Queens LoudounHarford Kings Prince WilliamCecil New Jersey Richmond FauquierAnne Arundel Salem New York StaffordCarroll Gloucester ArlingtonHoward Camden Pennsylvania FairfaxMontgomery Burlington Philadelphia Prince George’s Ocean Bucks Washington, D.C.Calvert Monmouth Montgomery Charles Somerset Chester Frederick Middlesex Lehigh Mercer Northampton Hunterdon Berks Union Monroe Hudson Dauphin Bergen Cumberland Essex York Passaic Sussex Morris Warren 4 Table of ContentsIndustry CharacteristicsHome heating oil is primarily used as a source of fuel to heat residences and businesses in the New England and Mid-Atlantic regions. According to theU.S. Department of Energy—Energy Information Administration, 2001 Residential Energy Consumption Survey (the latest survey published), these regionsaccount for 77% of the households in the United States where heating oil is the main space-heating fuel and 31% of the homes in these regions use homeheating oil as their main space-heating fuel. In recent years, as the price of home heating oil increased, customers have tended to increase their conservationefforts, which has decreased their consumption of home heating oil. Weather conditions have a significant impact on demand for home heating oil as we haveseen in fiscal 2006 and fiscal 2002 when temperatures were significantly warmer than normal for the areas in which we sell home heating oil.The retail home heating oil industry is mature, with total market demand expected to decline in the foreseeable future due to conversions to naturalgas. We have lost an average of 1.0% of our customers per year over the last five years due to conversions to natural gas. Therefore, our ability to grow withinthe industry is dependent on the acquisition of other retail distributors as well as the success of our marketing programs designed to attract and retaincustomers to help offset customer losses. It is common practice in the home heating oil distribution industry to price products to customers based on a pergallon margin over wholesale costs. As a result, we believe distributors such as ourselves generally seek to maintain their margins by passing wholesale priceincreases through to customers, thus insulating themselves from the volatility in wholesale heating oil prices. However, during periods of significantvolatility in wholesale prices, which occurred over the last three fiscal years, distributors may be unable or unwilling to pass the entire product cost increasesthrough to customers. In these cases, significant decreases in per gallon margins may result. The timing of cost pass-throughs can also significantly affectmargins. The retail home heating oil industry is highly fragmented, characterized by a large number of relatively small, independently owned and operatedlocal distributors. Some dealers provide full service, like ourselves, and others offer delivery only on a cash on delivery basis. The industry is becoming morecomplex and costly due to increasing regulations, working capital requirements and the need to hedge. We purchase derivative instruments (futures, optionsand swaps) in order to hedge a substantial majority of the heating oil volume we expect to sell to protected-price customers that have renewed their priceplans, mitigating our exposure to changing commodity prices.Business Initiatives and StrategyPrior to the fiscal 2004 winter heating season, we attempted to develop a competitive advantage in customer service through a business processredesign project and, as part of that effort, centralized our heating equipment service and oil dispatch functions and engaged a centralized customer carecenter to fulfill our telephone requirements for a majority of our home heating oil customers. We experienced difficulties in advancing this initiative, whichadversely impacted the customer base in fiscal years 2004, 2005 and 2006.We believe we have identified the problems associated with the past centralization efforts and continue to address these issues. Our goal is toreestablish a more traditional customer service model in which the majority of the customer service calls will be handled locally in each district with minimalreliance on a centralized call center. We initiated this change with a test in several districts to measure the impact on retention of customers as well as to get abetter understanding of what our local needs would be. Based on the results of these tests, we have begun to move forward more aggressively with our returnto a more localized customer service model.Going forward, our strategy is to increase unit-holder value through (i) reduced net customer attrition, (ii) operational efficiencies and productivityimprovements, and (iii) increased market share through the acquisition of other heating oil distributors or the possible expansion into other energy orpetroleum-related businesses.Customers and PricingOur home heating oil customer base is comprised of residential customers (95%) and commercial customers (5%). Our residential customer receivessmall deliveries on average of 170 gallons per delivery and our commercial accounts receive larger deliveries on average of 425 gallons. Typically, we makefour to six deliveries per customer per year. Deliveries are scheduled based on each customer’s historical consumption pattern and prevailing weatherconditions. Currently, 96% of our deliveries are scheduled automatically and 4 % of our home heating oil customer base call from time to time to schedule adelivery. Our practice is to bill customers promptly after delivery. We also offer a budget payment plan in which a customer’s estimated annual oil purchasesand service contract fees are paid for in a series of equal monthly payments and 30% of our residential home heating oil customers have elected this option.We offer several pricing alternatives to our customers. Our variable pricing program allows the price to float with the home heating oil market andgenerally move up or down in response to market changes and other factors. In addition, we 5 Table of Contentsoffer price protection programs, which establish a fixed or a maximum per gallon price that the customer would pay over the following 12-month period. AtSeptember 30, 2006, 41 % of our total home heating oil customer base had a price protection plan as compared to 38 % at September 30. 2005.Sales to residential customers ordinarily generate higher margins than sales to commercial customers. Due to the greater price sensitivity of residentialprotected price customers, the per gallon margins realized from these customers generally are less than variable priced residential customers. Per gallon grossprofit margins can also vary by geographic region. Accordingly, per gallon gross profit margins could vary significantly from year to year in a period ofidentical sales volumes.Customer AttritionNet customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added throughacquisitions are not included in the calculation of net customer attrition. Gross customer losses are the result of a number of factors, including pricecompetition, move outs, service issues and credit losses. When a customer moves out of an existing home we count the “move out” as a loss and if we aresuccessful in signing up the new homeowner, the “move in” is treated as a gain.For fiscal 2006, we lost 29,600 accounts (net) or 6.6% of our home heating oil customer base, as compared to fiscal 2005 in which we lost 35,100accounts (net) or 7.1% of our home heating oil customer base. In fiscal 2004, we lost 33,100 accounts (net) or 6.4% of our home heating oil customer base.(See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Customer Attrition)Suppliers and Supply ArrangementsWe purchase home heating oil for delivery in either barge, pipeline or truckload quantities, and have contracts with approximately 100 terminals forthe right to temporarily store heating oil at facilities we do not own. Purchases are made under supply contracts or on the spot market. We enter into marketprice based contracts for a majority of our home heating oil requirements. During fiscal 2006, Sunoco Inc., NIC Holding Corp., and Global Companiesprovided 21.4%, 16.8% and 12.3% respectively, of our product purchases. Aside from these three suppliers, no single supplier provided more than 10% of ourproduct supply during fiscal 2006. Supply contracts typically have terms of 6 to 12 months. All of the supply contracts provide for minimum quantities. In allcases, the supply contracts do not establish in advance the price of fuel oil. This price is based upon a published market index price at the time of deliveryplus an agreed upon differential. We believe that our policy of contracting for the majority of our anticipated supply needs with diverse and reliable sourceswill enable us to obtain sufficient product should unforeseen shortages develop in worldwide supplies.DerivativesWe use derivative instruments in order to mitigate our exposure to market risk associated with the purchase of home heating oil for our protected pricecustomers, physical inventory on hand, inventory in transit and purchase commitments. At September 30, 2006 we had outstanding derivative instrumentswith the following banks or brokers: Wachovia Bank, NA, Fimat, BP North America Petroleum, Cargill, LaSalle Bank, NA, Morgan Stanley, JPMorgan ChaseBank, NA, Societe Generale, Citibank, N.A., and Bank of America, N.A.SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), established accounting and reporting standards requiringthat derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent derivativeinstruments designated as cash flow hedges are effective and SFAS 133 documentation requirements are met, changes in fair value are recognized in othercomprehensive income until the forecasted hedged item is recognized in earnings. Currently, none of our derivative instruments qualify for hedge accountingtreatment because we have not met the documentation requirements of SFAS 133. Therefore, we could experience great volatility in earnings as thesecurrently outstanding derivative instruments are marked to market. While we largely expect our realized derivative gains and losses to be offset by increasesor decreases in the value of our physical purchases, we will experience volatility in reported earnings due to the recording of unrealized gains and losses onour derivative instruments that do not qualify for hedge accounting for the periods in which we hold such derivative instruments prior to their maturity. ThePartnership is currently evaluating whether to elect hedge accounting for future periods.Home Heating Oil Price VolatilityThe wholesale price of home heating oil has been extremely volatile over the last three fiscal years and has resulted in increased consumer pricesensitivity to heating costs and increased net customer attrition. Like any other market commodity, the price of home heating oil is generally set by variouseconomic and geopolitical forces. Rapid global economic expansion is fueling an ever-increasing demand for oil. The price of home heating oil is closelylinked to the price refiners pay for crude oil which is the principal cost component of home heating oil. Crude oil is bought and sold in the internationalmarketplace and as such is significantly affected by the economic forces of worldwide supply and demand. The volatility in home heating oil wholesale cost,as measured by the New York Mercantile Exchange (“Nymex”) for fiscal 2006, 2005 and 2004 by quarter, is illustrated by the following chart: Fiscal 2006 Fiscal 2005 Fiscal 2004 Low High Low High Low HighQuarter Ended December 31 $1.6097 $2.0809 $1.2108 $1.5944 $0.7728 $0.9642March 31 1.6075 1.8843 1.1922 1.6576 0.8645 1.0384June 30 1.8558 2.0964 1.3508 1.6761 0.8472 1.0641September 30 1.6472 2.1435 1.5609 2.1985 1.0606 1.3917 6 Table of ContentsIn a volatile market even small changes in supply or demand can dramatically affect prices. Heating oil prices are subject to price fluctuations if demand risessharply because of excessively cold weather and/or disruptions at refineries and instability in key oil producing regions.CompetitionWe compete with distributors offering a broad range of services and prices, from full-service distributors, like ourselves, to those offering delivery only.Like many companies in the home heating oil business, we provide home heating equipment repair service on a 24-hour-a-day, seven-day-a-week, 52 weeks ayear basis. This tends to build customer loyalty. In some instances homeowners have formed buying cooperatives that seek to purchase fuel oil fromdistributors at a price lower than individual customers are otherwise able to obtain. We also compete for retail customers with suppliers of alternative energyproducts, principally natural gas, propane, and electricity. The rate of conversion from the use of home heating oil to natural gas is primarily affected by therelative retail prices of the two products and the cost of replacing an oil fired heating system with one that uses natural gas, in addition to environmentalconcerns. We believe that approximately 1% of the home heating oil customer base annually converts from home heating oil to natural gas. The expansion ofnatural gas into traditional home heating oil markets in the Northeast has historically been inhibited by the capital costs required to expand distribution andpipeline systems.Most of our branch locations compete with several distributors, primarily on the basis of reliability of service, price, and response to customer needs.Each branch location operates in its own competitive environment.SeasonalityOur fiscal year ends on September 30. All references to quarters and years in this document are to fiscal quarters and years unless otherwise noted. Theseasonal nature of our business results in the sale of approximately 30% of our volume in the first quarter and 45% of our volume in the second quarter ofeach fiscal year, the peak heating season. We generally realize net income the first and second fiscal quarters and net losses during the third and fourth fiscalquarter.AcquisitionsWe made no acquisitions in fiscal 2006 and 2005. In fiscal 2004, we completed the purchase of three retail heating oil dealers for an aggregate cost of$3.5 million. Under the terms of our revolving credit facility, there are limitations on the size of individual acquisitions and an annual limitation on totalacquisitions. There are also certain financial tests that must be satisfied before an acquisition can be consummated.EmployeesAs of September 30, 2006, we had 2,610 employees, of whom 736 were office, clerical and customer service personnel; 935 were heating equipmentrepairmen; 365 were oil truck drivers and mechanics; 385 were management and 189 were employed in sales. Of these employees 1,100 are represented by 20different local chapters of labor unions. Some of these unions have union administered pension plans that have significant unfunded liabilities, a portion ofwhich could be assessed to us should we withdraw from these plans. In addition, approximately 400 seasonal employees are rehired annually to support therequirements of the heating season. We are currently involved in one union negotiation. We believe that our relations with both our union and non-unionemployees are generally satisfactory.Government RegulationsWe are subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose limitations on thedischarge of pollutants and establish standards for the handling of solid and hazardous wastes. These laws include the Resource Conservation and RecoveryAct, 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 statutes. CERCLA, also known as the “Superfund”law, imposes joint and several liabilities without regard to fault or the legality of the original conduct on certain classes of persons that are considered to havecontributed to the release or threatened release of a hazardous substance into the environment. Heating oils and certain automotive waste products generatedby the Partnership’s fleet are hazardous substances within the meaning of CERCLA. These laws and regulations could result in civil or criminal penalties incases of non-compliance or impose liability for remediation costs. The Partnership is currently a named “potentially responsible party” in one CERCLA civilenforcement action. This action is in its early stages of litigation with preliminary discovery activities taking place. We do not believe that this action willhave a material impact on our financial condition or results of operations. 7 Table of ContentsWith respect to the transportation of distillates and gasoline by truck, we are subject to regulations promulgated under the Federal Motor Carrier SafetyAct. These regulations cover the transportation of hazardous materials and are administered by the United States Department of Transportation or similar stateagencies. We conduct ongoing training programs to help ensure that our operations are in compliance with applicable safety regulations. We maintainvarious permits that are necessary to operate some of our facilities, some of which may be material to our operations.Trademarks and Service MarksWe market our products and services under various trademarks, which we own. They include marks such as Petro and Meenan. We believe that thePetro, Meenan and other trademarks and service marks are an important part of our ability to attract new customers and to effectively maintain and service ourcustomer base. ITEM 1A. RISK FACTORSAn investment in the Partnership involves a high degree of risk. Security holders and Investors should carefully review the following risk factors.Unitholders May Have to Report Income for Federal Income Tax Purposes on Their Investment in the Partnership Without Receiving Any CashDistributions From Us.Star Gas Partners is a master limited partnership and thus not subject to federal income taxes. Instead, our unitholders are required to report for federalincome tax purposes their allocable share of our income, gains, losses, deductions and credits, regardless of whether we make cash distributions. We expectthat an investor will be allocated taxable income (mostly dividend and interest income) regardless of whether a cash distribution has been paid. There will beno mandatory distributions of available cash by us to unitholders through the fiscal quarter ending September 30, 2008.Our corporate subsidiary Star/Petro Inc. and its subsidiaries (“Star/Petro”) are subject to federal and state income taxes. See the following risk factorregarding net operating loss availability.A change in ownership for Star Gas Partners may result in the limitation of the potential utilization of net operating loss carryforwards by ourcorporate subsidiary and our ability to pay cash distributions.If Star Gas Partners were to experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended, its corporatesubsidiary, Star/Petro may be materially restricted in the potential utilization of its net operating loss carryforwards to offset future taxable income. Arestriction on Star/Petro’s ability to use its net operating loss carryforwards to reduce its federal taxable income would reduce the amount of cash Star/Petrohas available to make distributions to the Partnership, which would consequently reduce the amount of cash the Partnership has available to makedistributions to its unitholders. As of September 30, 2006 Star/Petro had a total federal net operating loss carryforward of $162.7 million, of whichapproximately $47.9 million were limited as a result of prior transactions.The continuation of high wholesale energy costs may adversely affect our liquidity.Recent dynamics of the heating oil industry have increased working capital requirements, principally because high selling prices require additionalborrowing to finance accounts receivable and inventory. Under our revolving credit facility, as amended, we may borrow up to $260 million, which increasesto $310 million during the peak winter months from December through March of each year, (subject to borrowing base limitations and a coverage ratio) forworking capital purposes subject to maintaining availability (as defined in the credit agreement) of $25 million or a fixed charge coverage ratio of not lessthan 1.1 to 1.0.If our credit requirements should exceed the amounts available under our revolving credit facility or should we fail to maintain the requiredavailability, we would not have sufficient working capital to operate our business, which could have a material adverse effect on our financial condition andresults of operations.Our substantial debt and other financial obligations could impair our financial condition and our ability to fulfill our debt obligations.We had total debt, exclusive of our working capital facility, of approximately $174 million as of September 30, 2006. Our substantial indebtedness andother financial obligations could: • impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes; 8 Table of Contents • have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our debt agreements and anevent of default occurs as a result of a failure that is not cured or waived; • require us to dedicate a substantial portion of our cash flow for interest payments on our indebtedness and other financial obligations, therebyreducing the availability of our cash flow to fund working capital and capital expenditures; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and • place us at a competitive disadvantage compared to our competitors that have proportionately less debt.If we are unable to meet our debt service obligations and other financial obligations, we could be forced to restructure or refinance our indebtednessand other financial transactions, seek additional equity capital or sell our assets. We might then be unable to obtain such financing or capital or sell our assetson satisfactory terms, if at all.Since weather conditions may adversely affect the demand for home heating oil, our financial condition is vulnerable to warm winters.Weather conditions have a significant impact on the demand for home heating oil because our customers depend on this product principally for spaceheating purposes. As a result, weather conditions may materially adversely impact our operating results and financial condition. During the peak-heatingseason of October through March, sales of home heating oil historically have represented approximately 75% to 80% of our annual home heating oil volume.Actual weather conditions can vary substantially from year to year, significantly affecting our financial performance. Furthermore, warmer than normaltemperatures in one or more regions in which we operate can significantly decrease the total volume we sell and the gross profit realized on those sales and,consequently, our results of operations. For example, in fiscal 2002 and fiscal 2006, temperatures were significantly warmer than normal for the areas inwhich we sell home heating oil, which adversely affected the amount of net income and EBITDA that we generated during these periods. In fiscal 2002,temperatures in our areas of operation were an average of 18.4% warmer than in fiscal 2001 and 18.0% warmer than normal. In fiscal 2006, temperatures inour areas of operation were an average of 11.0% warmer than in fiscal 2005 and 10.4% warmer than normal. For fiscal 2007, we have purchased $12.5 millionin weather insurance to help minimize the adverse effect of weather volatility on our cash flows. The policy covers the period from November 1, 2006 toFebruary 28, 2007 taken as a whole. However, there can be no assurance that this insurance will be adequate to protect us from adverse effects of weatherconditions.Our operating results will be adversely affected if we continue to experience significant net attrition in our home heating oil customer base.Our net attrition rate of home heating oil customers for fiscal 2006, 2005 and 2004 was approximately 6.6%, 7.1% and 6.4%, respectively. This raterepresents the net of our annual gross customer losses after gross customer gains. For fiscal 2006, 2005 and 2004 we had gross customer losses of 19.6%, 20%and 19.5%, respectively, which were partially offset by gross customer gains during these periods of 13%, 12.9% and 13.1%, respectively. The gain of a newcustomer does not fully compensate for the loss of an existing customer because of the expenses incurred during the first year to acquire a new customer andthe higher attrition rate associated with new customers. Customer losses are the result of various factors, including but not limited to: • price competition; • customer relocations; • credit problems; and • quality of service issues, including those related to our centralized call center.The continuing unprecedented rise and volatility in the price of heating oil has intensified price competition and added to our difficulty in reducingnet customer attrition. We believe our attrition rate has risen not only because of increased price competition related to the rise in oil prices but also becauseof operational problems.High net customer attrition rates may continue through fiscal 2007 and perhaps beyond and even to the extent the rate of attrition can be halted,attrition from prior fiscal years will adversely impact net income in the future.For additional information about customer attrition, See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Customer Attrition.” 9 Table of ContentsSudden and sharp oil price increases that cannot be passed on to customers may adversely affect our operating results.The retail home heating oil industry is a “margin-based” business in which gross profit depends on the excess of retail sales prices over supply costs.Consequently, our profitability is sensitive to changes in the wholesale price of home heating oil caused by changes in supply or other market conditions.These factors are beyond our control and thus, when there are sudden and sharp increases in the wholesale cost of home heating oil, we may not be able topass on these increases to customers through increased retail sales prices. Wholesale price increases could reduce our gross profits and could, if continuingover an extended period of time reduce demand by encouraging conservation or conversion to alternative energy sources. In an effort to retain existingaccounts and attract new customers, we may offer discounts, which will impact the net per gallon gross margin realized.A significant portion of our home heating oil volume is sold to price-protected customers and our gross margins could be adversely affected if we arenot able to effectively hedge against fluctuations in the volume and cost of product sold to these customers.A significant portion of our home heating oil volume is sold to individual customers under an agreement pre-establishing the maximum sales price or afixed price of home heating oil over a 12-month period. For the fiscal years ended September 30, 2006 and 2005, approximately 38% and 48%, respectively,of the total home heating oil volume sold was under a price-protected plan. We currently purchase futures contracts, swaps and option contracts for asubstantial majority of the heating oil that we expect to sell to these price-protected customers when the customer renews his purchase commitment for thenext 12 months. We generally get a signed agreement or a voice recording from these price-protected customers acknowledging the fixed or maximum priceper gallon. The amount of home heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per customer,per month. In the event that the actual usage exceeds the amount of the hedged volume on a monthly basis, we could be required to obtain additional volumeat unfavorable margins. In addition, should actual usage be less than the hedged volume we may have excess inventory on hand at unfavorable costs.Currently, none of our derivative instruments qualify for hedge accounting treatment. Therefore, to the extent we continue to have derivative instruments thatdo not qualify for hedge accounting treatment, we could experience great volatility in earnings as these currently outstanding derivative contracts are markedto market. The Partnership is currently evaluating whether to elect hedge accounting for future periods.If we do not make acquisitions on economically acceptable terms, our future growth will be limited.The home heating oil industry is not a growth industry because new housing generally does not use oil heat and increased competition exists fromalternative energy sources. Accordingly, future growth will depend on our ability to make acquisitions at attractive prices. We cannot assure that we will beable to identify attractive acquisition candidates in the home heating oil sector in the future or that we will be able to acquire businesses on economicallyacceptable terms. Factors that may adversely affect home heating oil operating and financial results may limit our access to capital and adversely affect ourability to make acquisitions. Under the terms of our revolving credit facility, we are restricted from making any individual acquisition in excess of $10.0million and in any fiscal year may not exceed an aggregate of $25 million, unless waived. In addition, the Partnership is restricted from making anyacquisition unless availability (essentially borrowing base availability less borrowings) would be at least $40 million, on a pro forma basis, during the last12-month period ending on the date of such acquisition. These restrictions may limit our ability to make acquisitions. Any acquisition may involve potentialrisks to us and ultimately to our unitholders, including: • an increase in our indebtedness; • an increase in our working capital requirements • our inability to integrate the operations of the acquired business; • our inability to successfully expand our operations into new territories; • the diversion of management’s attention from other business concerns; • an excess of customer loss or loss of key employees from the acquired business; and • the assumption of additional liabilities including environmental liabilities 10 Table of ContentsIn addition, acquisitions may be dilutive to earnings and distributions to unitholders and any additional debt incurred to finance acquisitions mayamong other things, affect our ability to make distributions to our unitholders.Because of the highly competitive nature of the retail home heating oil industry, we may not be able to retain existing customers or acquire newcustomers, which would have an adverse impact on our operating results and financial condition.If our home heating oil business is unable to compete effectively, we may lose existing customers or fail to acquire new customers, which would have amaterial adverse effect on our results of operations and financial condition.We can make no assurances that we will be able to compete successfully. If competitors continue to increase market share by reducing their prices, aswe believe occurred recently, our operating results and financial condition could be materially and adversely affected. We also compete for customers withsuppliers of alternative energy products, principally natural gas. We face competition from electricity and natural gas. Over the past five years, customerconversions from heating oil to natural gas have averaged approximately 1% per year.The continuing unprecedented rise in the price of heating oil has intensified price competition, and added to our difficulty in reducing customerattrition as consumers become more price sensitive.Energy efficiency and new technology may reduce the demand for our products and adversely affect our operating results.Increased conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces andother heating devices, have adversely affected the demand for our products by retail customers. Future conservation measures or technological advances inheating, conservation, energy generation or other devices might reduce demand and adversely affect our operating results.We are subject to operating and litigation risks that could adversely affect our operating results whether or not covered by insurance.Our operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing customerswith home heating oil. As a result, we may be a defendant in legal proceedings and litigation arising in the ordinary course of business.We maintain insurance policies with insurers in amounts and with coverage and deductibles as we believe are reasonable. However, there can be noassurance that this insurance will be adequate to protect us from all material expenses related to potential future claims for remediation costs and personal andproperty damage or that these levels of insurance will be available in the future at economical prices.Our insurance reserves may not be adequate to cover actual losses.We self-insure a portion of workers’ compensation, automobile and general liability claims. We establish reserves based upon expectations as to whatour ultimate liability will be for these claims using our historical developmental factors. We evaluate on an annual basis the potential for changes in lossestimates with the support of qualified actuaries. As of September 30, 2006, we had approximately $38.8 million of insurance reserves and had issued $47.8million in letters of credit for current and future claims. The ultimate settlement of these claims could differ materially from the assumptions used to calculatethe reserves, which could have a material effect on our results of operations.We are the subject of a number of class action lawsuits alleging violation of the federal securities laws, which if decided adversely, could have amaterial adverse effect on our financial condition.On or about October 21, 2004, a purported class action lawsuit on behalf of a purported class of unitholders was filed against the Partnership andvarious subsidiaries and officers and directors in the United States District Court of the District of Connecticut entitled Carter v. Star Gas Partners, L.P.,et.al., No. 3:04-cv-01766-IBA, et.al. Subsequently, 16 additional class action complaints, alleging the same or substantially similar claims, were filed in thesame district court. The class actions were consolidated into one consolidated amended complaint.On September 23, 2005, defendants filed motions to dismiss the consolidated amended complaint for failure to state a claim under the federal securitieslaws and failure to satisfy the applicable pleading requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), and the Federal Rules ofCivil Procedure. On August 21, 2006, the court issued its rulings on defendants’ motions to dismiss, granting the motions and dismissing the consolidatedamended complaint in its 11 Table of Contentsentirety. On August 23, 2006, the court entered a judgment of dismissal. On September 7, 2006, the plaintiffs moved for reconsideration and to alter andreopen the court’s August 23, 2006 judgment of dismissal and for leave to file a second consolidated amended complaint. On October 20, 2006, defendantsfiled their memorandum of law in opposition to the plaintiffs’ motion. Plaintiffs filed their reply brief on or about November 20, 2006. The matter is nowunder consideration by the court. In the interim, discovery in the matter remains stayed pursuant to the mandatory stay provisions of the PSLRA. While noprediction may be made as to the outcome of litigation, we intend to defend against this class action vigorously.In the event the above action is decided adversely to us, it could have a material adverse effect on our results of operations, financial condition andliquidity.Our results of operations and financial condition may be adversely affected by governmental regulation and associated environmental and regulatorycosts.The home heating oil business is subject to a wide range of federal and state laws and regulations related to environmental and other regulated matters.We have implemented environmental programs and policies designed to avoid potential liability and costs under applicable environmental laws. It ispossible, however, that we will experience increased costs due to stricter pollution control requirements or liabilities resulting from noncompliance withoperating or other regulatory permits. New environmental regulations might adversely impact operations, including underground storage and transportationof home heating oil. In addition, there are environmental risks inherently associated with home heating oil operations, such as the risks of accidental releaseor spill. It is possible that material costs and liabilities will be incurred, including those relating to claims for damages to property and persons.Conflicts of interest have arisen and could arise in the future as a result of relationships between the general partner and its affiliates on the one hand,and the Partnership and its limited partners, on the other hand.Conflicts of interest have arisen and could arise in the future as a result of relationships between the general partner and its affiliates, on the one hand,and the Partnership or any of the limited partners, on the other hand. As a result of these conflicts the general partner may favor its own interests and those ofits affiliates over the interests of the unitholders. The nature of these conflicts is ongoing and includes the following considerations: • The general partner’s affiliates are not prohibited from engaging in other business or activities, including direct competition with us. • The general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings and reserves, each of whichcan impact the amount of cash, if any, available for distribution to unitholders, and available to pay principal and interest on debt. • The general partner controls the enforcement of obligations owed to the Partnership by the general partner. • The general partner decides whether to retain separate counsel or others to perform services for the Partnership. • In some instances the general partner may borrow funds in order to permit the payment of distributions to unitholders. • The general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to unitholders for actionsthat might, without limitations, constitute breaches of fiduciary duty. Unitholders are deemed to have consented to some actions and conflicts ofinterest that might otherwise be deemed a breach of fiduciary or other duties under applicable state law. • The general partner is allowed to take into account the interests of parties in addition to the Partnership in resolving conflicts of interest, therebylimiting its fiduciary duty to the unitholders. • The general partner determines whether to issue additional units or other securities of the Partnership. • The general partner determines which costs are reimbursable by us. • The general partner is not restricted from causing us to pay the general partner or its affiliates for any services rendered on terms that are fair andreasonable to us or entering into additional contractual arrangements with any of these entities on our behalf. 12 Table of ContentsThe risk of global terrorism and political unrest may adversely affect the economy and the price and availability of home heating oil and have amaterial adverse effect on our business, financial condition, and results of operations.Terrorist attacks and political unrest may adversely impact the price and availability of home heating oil, our results of operations, our ability to raisecapital and our future growth. The impact that the foregoing may have on the heating oil industry in general, and on our business in particular, is not knownat this time. An act of terror could result in disruptions of crude oil supplies and markets, the source of home heating oil, and its facilities could be direct orindirect targets. Terrorist activity may also hinder our ability to transport home heating oil if our normal means of transportation become damaged as a resultof an attack. Instability in the financial markets as a result of terrorism could also affect our ability to raise capital. Terrorist activity could likely lead toincreased volatility in prices for home heating oil. Insurance carriers are routinely excluding coverage for terrorist activities from their normal policies, butare required to offer such coverage as a result of new federal legislation. We have opted to purchase this coverage with respect to our property and casualtyinsurance programs. This additional coverage has resulted in additional insurance premiums.The impact of hurricanes and other natural disasters could cause disruptions in supply and have a material adverse effect on our business, financialcondition and results of operations.Hurricanes, particularly in the Gulf of Mexico, and other natural disasters may cause disruptions in the supply chains for home heating oil and otherpetroleum products. Disruptions in supply could have a material adverse effect on our business, financial condition and results of operations, causing anincrease in wholesale prices and decrease in supply.Cash distributions (if any) are not guaranteed and may fluctuate with performance and reserve requirements.There will be no mandatory distributions of available cash by us through the fiscal quarter ending September 30, 2008. Thereafter, distributions on thecommon units will depend on the amount of cash generated, and distributions may fluctuate based on our performance. The actual amount of cash that isavailable will depend upon numerous factors, including: • profitability of operations; • required principal and interest payments on debt; • debt covenants • margin account requirements; • cost of acquisitions; • issuance of debt and equity securities; • fluctuations in working capital; • capital expenditures; • adjustments in reserves; • prevailing economic conditions; • financial, business and other factors; and • increased pension funding requirements • preserving our net operating loss carryforwardsMost of these factors are beyond the control of the general partner.The partnership agreement gives the general partner discretion in establishing reserves for the proper conduct of our business. These reserves will alsoaffect the amount of cash available for distribution.The revolving credit facility and the indenture for the senior notes both impose certain restrictions on our ability to pay distributions to unitholders. 13 Table of ContentsITEM 1B.UNRESOLVED STAFF COMMENTSNot applicable. ITEM 2.PROPERTIESWe provide services to our customers from 19 principle operating locations and 46 depots, 28 of which are owned and 37 of which are leased, in 31marketing areas in the Northeast and Mid-Atlantic regions of the United States. As of September 30, 2006, we had a fleet of 918 truck and transport vehicles,the majority of which were owned and 1,177 service vans, the majority of which are leased. We lease our corporate headquarters in Stamford, Connecticut.Our obligations under our credit facility are secured by liens and mortgages on substantially all of the Partnership’s and subsidiaries real and personalproperty. ITEM 3.LEGAL PROCEEDINGS—LITIGATIONOn or about October 21, 2004, a purported class action lawsuit on behalf of a purported class of unitholders was filed against the Partnership andvarious subsidiaries and officers and directors in the United States District Court of the District of Connecticut entitled Carter v. Star Gas Partners, L.P., et.al., No. 3:04-cv-01766-IBA, et. al. Subsequently, 16 additional class action complaints, alleging the same or substantially similar claims, were filed in thesame district court. The class actions were consolidated into one consolidated amended complaint.On September 23, 2005, defendants filed motions to dismiss the consolidated amended complaint for failure to state a claim under the federal securitieslaws and failure to satisfy the applicable pleading requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), and the Federal Rules ofCivil Procedure. On August 21, 2006, the court issued its rulings on defendants’ motions to dismiss, granting the motions and dismissing the consolidatedamended complaint in its entirety. On August 23, 2006, the court entered a judgment of dismissal. On September 7, 2006, the plaintiffs moved forreconsideration and to alter and reopen the court’s August 23, 2006 judgment of dismissal and for leave to file a second consolidated amended complaint. OnOctober 20, 2006, defendants filed their memorandum of law in opposition to the plaintiffs’ motion. Plaintiffs filed their reply brief on or about November 20,2006. The matter is now under consideration by the Court. In the interim, discovery in the matter remains stayed pursuant to the mandatory stay provisions ofthe PSLRA. (See Note 22)Our operations are subject to all operating hazards and risks normally incidental to handling, storing and transporting and otherwise providing for useby consumers of combustible liquids such as propane and home heating oil. As a result, at any given time we are a defendant in various legal proceedings andlitigation arising in the ordinary course of business. We maintain insurance policies with insurers in amounts and with coverages and deductibles we believeare reasonable and prudent. However, we cannot assure that this insurance will be adequate to protect us from all material expenses related to potential futureclaims for personal and property damage or that these levels of insurance will be available in the future at economical prices. In addition, the occurrence of anexplosion may have an adverse effect on the public’s desire to use our products. In the opinion of management, except as described above we are not a partyto any litigation, which individually or in the aggregate could reasonably be expected to have a material adverse effect on our results of operations, financialposition or liquidity. (See Note 22 – Commitments and Contingencies) ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone. 14 Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S UNITS AND RELATED MATTERSThe common units, representing common limited partner interests in the Partnership, are listed and traded on the New York Stock Exchange, Inc.(“NYSE”) under the symbol “SGU”.The following tables set forth the high and low closing price ranges for the common units for the fiscal 2006 and 2005 quarters indicated. There wereno cash distributions declared on the common units during these periods. SGU – Common Unit Price Range High Low FiscalYear2006 FiscalYear2005 FiscalYear2006 FiscalYear2005Quarter Ended December 31, $2.39 $22.23 $1.05 $4.32March 31, $2.97 $7.22 $1.84 $3.11June 30, $2.98 $4.11 $2.26 $1.94September 30, $2.62 $3.64 $2.24 $2.39As of September 30, 2006, there were approximately 533 holders of record of common units.There is no established public trading market for the Partnership’s 0.3 million general partner units.Partnership Distribution ProvisionsThere will be no mandatory distributions of available cash by us to the holders of our common units and general partner units through the fiscal quarterending September 30, 2008. Beginning October 1, 2008, minimum quarterly distributions on the common units will start accruing at the rate of $0.0675 perquarter ($0.27 on an annual basis). The information concerning restrictions on distributions required by Item 5. of this report is incorporated by reference toNote 6 Quarterly Distribution of Available Cash, of the Partnership’s consolidated financial statements.The revolving credit facility and the indenture for the new notes both impose certain restrictions on our ability to pay distributions to unitholders.Tax MattersStar Gas Partners is a master limited partnership and thus not subject to federal and state income taxes. The corporate subsidiaries wholly owned by StarGas Partners are subject to federal and state income taxes at the corporate level. Our unitholders are required to report for income tax purposes their allocableshare of our income, gains, losses, deductions and credits, regardless of whether we make distributions. We expect that an investor will be allocated taxableincome regardless of whether a cash distribution has been paid. 15 Table of ContentsITEM 6.SELECTED HISTORICAL FINANCIAL AND OPERATING DATAThe selected financial data as of September 30, 2006 and 2005, and for the years ended September 30, 2006, 2005 and 2004 is derived from thefinancial statements of the Partnership included elsewhere in this Report. The Consolidated Financial Statements for the years ended September 30, 2005 and2004 have been restated. See Note 2 to Consolidated Financial Statements. The selected financial data as of September 30, 2004, 2003 and 2002 is derivedfrom financial statements of the Partnership not included elsewhere in this Report. See Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations. Fiscal Years Ended September 30, (in thousands, except per unit data) 2006 2005 2004 2003(e) 2002(d)(e) (restated,see note 2) (restated,see note 2) (restated) (restated) Statement of Operations Data: Sales $1,296,512 $1,259,478 $1,105,091 $1,102,968 $790,378 Costs and expenses: Cost of sales 1,014,908 983,732 797,330 793,134 549,841 Change in the fair value of derivative instruments 45,677 (6,081) (25,811) 5,299 (13,939)Delivery and branch expenses 205,037 231,581 232,985 217,244 174,030 Depreciation and amortization expenses 32,415 35,480 37,313 35,535 40,444 General and administrative expenses 21,673 43,190 19,537 39,413 17,515 Goodwill impairment charge — 67,000 — — — Operating income (loss) (23,198) (95,424) 43,737 12,343 22,487 Interest expense, net (21,203) (31,838) (36,682) (29,530) (23,843)Amortization of debt issuance costs (2,438) (2,540) (3,480) (2,038) (1,197)Gain (loss) on redemption of debt (6,603) (42,082) — 212 — Income (loss) from continuing operations before income taxes (53,442) (171,884) 3,575 (19,013) (2,553)Income tax expense (benefit) 477 696 1,240 1,200 (1,700)Income (loss) from continuing operations (53,919) (172,580) 2,335 (20,213) (853)Income (loss) from discontinued operations, net of income taxes — (6,189) 22,176 19,523 507 Gain (loss) on sales of discontinued operations, net of income taxes — 157,560 (538) — — Cumulative effects of changes in accounting principles for discontinuedoperations - Adoption of SFAS No. 142 — — — (3,901) — Income (loss) before cumulative effects of changes in accounting principle forcontinuing operations (53,919) (21,209) 23,973 (4,591) (346)Cumulative effects of changes in accounting principles-change in inventorypricing method (344) — — — — Net income (loss) $(54,263) $(21,209) $23,973 $(4,591) $(346)Weighted average number of limited partner units: Basic 52,944 35,821 35,205 32,659 28,790 Diluted 52,944 35,821 35,205 32,767 28,821 16 Table of Contents Fiscal Years Ended September 30, (in thousands, except per unit data) 2006 2005 2004 2003(e) 2002(d)(e) (restated,see note 2) (restated,see note 2) (restated) (restated) Per Unit Data: Basic and diluted loss from continuing operations per unit (a) $(1.01) $(4.77) $0.07 $(0.61) $(0.40)Basic and diluted net income (loss) per unit (a) $(1.02) $(0.59) $0.67 $(0.14) $(0.1)Cash distribution declared per common unit $— $— $2.30 $2.30 $2.30 Cash distribution declared per senior sub. unit $— $— $1.73 $1.65 $1.65 Cash distribution declared per junior sub. unit $— $— $— $1.15 $1.15 Cash distribution declared per general partner unit $— $— $— $1.15 $1.15 Balance Sheet Data (end of period): Current assets $295,880 $305,319 $228,053 $204,417 $214,648 Total assets $581,208 $623,148 $954,858 $968,918 $936,213 Long-term debt $174,056 $267,417 $503,668 $499,341 $396,733 Partners’ Capital $173,325 $145,108 $169,771 $189,776 $232,264 Summary Cash Flow Data: Net Cash provided by (used in) operating activities $18,364 $(54,915) $13,669 $15,365 $18,773 Net Cash provided by (used in) investing activities $(3,271) $467,431 $6,447 $(48,395) $(12,381)Net Cash provided by (used in) financing activities $(23,120) $(306,694) $(19,874) $48,049 $28,135 Other Data: Earnings from continuing operations before interest, taxes, depreciation andamortization (EBITDA) (b)(c) $2,614 $(102,026) $81,050 $48,090 $62,931 Retail gallons sold 389,920 487,300 551,612 567,024 457,749 (a) Income (loss) from continuing operations per unit is computed by dividing the limited partners’ interest in income (loss) from continuingoperations by the weighted average number of limited partner units outstanding. Net income (loss) per unit is computed by dividing the limitedpartners’ interest in net income (loss) by the weighted average number of limited partner units outstanding. (b) EBITDA was reduced (increased) by the following: 2006 2005 2004 2003 2002 (restated,see note 2) (restated,see note 2) (restated) (restated) Change in the fair value of derivative instruments $45,677 $(6,081) $(25,811) $5,299 $(13,939)(Gain) loss on redemption of debt 6,603 42,082 — (212) — Goodwill impairment charge — 67,000 — — — Total $52,280 $103,001 $(25,811) $5,087 $(13,939) (c)EBITDA from continuing operations should not be considered as an alternative to net income (as an indicator of operating performance) or as analternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating our abilityto make the minimum quarterly distribution. The working capital facility and the senior secured notes, impose certain restrictions on our ability to paydistributions to unitholders. See Item 5 “Market for Registrant’s Units and Related Matters” with respect to the provisions of our partnership agreementthat govern the payment of distributions. 17 Table of ContentsThe definition of “EBITDA” set forth above may be different from that used by other companies. EBITDA from continuing operations is calculated forthe fiscal years ended September 30 as follows: (in thousands) 2006 2005 2004 2003 2002 (restated,see note 2) (restated,see note 2) (restated) (restated) Loss from continuing operations $(53,919) $(172,580) $2,335 $(20,213) $(853)Plus: Income tax expense (benefit) 477 696 1,240 1,200 (1,700)Amortization of debt issuance cost 2,438 2,540 3,480 2,038 1,197 Interest expense, net 21,203 31,838 36,682 29,530 23,843 Depreciation and amortization 32,415 35,480 37,313 35,535 40,444 EBITDA from continuing operations $2,614 $(102,026) $81,050 $48,090 $62,931 (d)Our results for fiscal year ended September 30, 2002 do not reflect the impact of the provisions of SFAS No. 142.(e)Fiscal 2003 and fiscal 2002 have been restated with respect to the accounting for derivative transactions and the calculation of pension expense. ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.Statement Regarding Forward-Looking DisclosureThis Annual Report on Form 10-K includes “forward-looking statements” which represent our expectations or beliefs concerning future events thatinvolve risks and uncertainties, including those associated with, the effect of weather conditions on our financial performance, the price and supply of homeheating oil, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, our ability to obtain new accounts and retainexisting accounts, our ability to effect strategic acquisitions or redeploy assets, the impact of litigation, the continuing impact of the business processredesign project and our ability to address issues related to that project, our ability to contract for our current and future supply needs, natural gasconversions, future union relations and outcome of current and future union negotiations, the impact of future environmental, health, and safety regulations,customer credit worthiness, and marketing plans. All statements other than statements of historical facts included in this Report including, without limitation,the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-lookingstatements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to have been correct and actual results may differ materially from those projected as a result of certain risks and uncertainties. Theserisks and uncertainties include, but are not limited to, those set forth under the heading “Risk Factors” and “Business Initiatives and Strategy.” Withoutlimiting the foregoing the words “believe,” “anticipate,” “plan,” “expect,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in thisAnnual Report on Form 10-K. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf areexpressly qualified in their entirety by the Cautionary Statements. Unless otherwise required by law, we undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise after the date of this Report.OverviewThe following is a discussion of the historical condition and results of operations of the Partnership and its subsidiaries, and should be read inconjunction with the description of our business in Item 1. “Business” and the historical Financial and Operating Data and Notes thereto included elsewherein this Report. We completed the sale of our propane segment in December 2004 and the following discussion reflects the historical results for the propanesegment as discontinued operations.RestatementOn December 13, 2006, one day before the planned filing of the Partnership’s annual report, the Partnership’s external auditors, KPMG, made thePartnership aware of a speech given by a professional accounting fellow of the Securities and Exchange Commission (“SEC”) on December 11, 2006 relatingto Statement of Financial Accounting Standards “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). After reviewing the speech,the Partnership conducted an extensive review of its accounting for derivative transactions under SFAS 133 to determine whether the Partnership’sdocumentation for certain derivative transactions met the strict requirements of SFAS 133 to permit hedge accounting and the deferral of unrecognized non-cash gains and losses for such transactions. The documentation was consistent with the documentation previously used by the Partnership and provided toKPMG in support of hedge accounting treatment for similar transactions that had been reflected in prior period financial statements. However, SFAS 133 is avery complex and highly technical standard, which has been the subject of an evolving interpretation by the accounting community. After further review, onDecember 26, 2006 the Partnership, the Audit Committee and the Board of Directors, determined that the Partnership’s accounting for derivative transactionsdid not comply with the technical requirements of SFAS 133 to qualify for hedge accounting.As a result, the Partnership determined that it was necessary to amend and restate its financial statements for each of the fiscal years ended September30, 2005 and 2004 as well as the Partnership’s quarterly reports for the periods ended June 30, 2006, March 31, 2006, December 31, 2005, September 30,2005, June 30, 2005, March 31, 2005 and December 31, 2004 with respect to the accounting and disclosures for certain derivative transactions under SFAS133. In addition, prior to June 30, 2006, the Partnership did not include the amortization of an unrecognized gain in the calculation of pension expenseresulting in an overstatement of pension expense for fiscal year’s 1999 to 2005 of $1.7 million. The Partnership has restated our results to record theamortization of the unrecognized gain. See Note 2 to our Consolidated Financial Statements for further details on the restatement. The Partnership hasdiscussed this matter with KPMG, who served as the Partnership’s external auditors for all affected periods, in reaching the conclusion to restate the financialstatements.The restatement does not impact the economics of the hedge transactions nor does it affect the Partnership’s liquidity, cash flow from operatingactivities in any historical or future period, or the amount of available cash to pay distributions as defined in the Partnership agreement in any historical orfuture period. The hedges were primarily entered into in order to mitigate the Partnership’s exposure to market risk associated with the purchase of homeheating oil for its price-protected customers.The Partnership has been contacted informally by the Boston District Office of the SEC requesting the voluntary provision of documents and relatedinformation concerning the Partnership’s use of derivatives and hedge accounting. The SEC has advised the Partnership that the inquiry should not beconstrued as an indication by the SEC or its staff that any violations of the law have occurred, nor should it be considered a reflection upon any person, entity or security. The Partnership is fully cooperating with this inquiry.RecapitalizationEffective as of April 28, 2006, the Partnership completed its recapitalization pursuant to the terms of a unit purchase agreement dated as of December 5,2005, as amended, by and among, the Partnership, Star Gas LLC (the former general partner), Kestrel and its wholly-owned subsidiaries, Kestrel Heat (the newgeneral partner) and KM2, LLC, a Delaware limited liability company. (See Note 3 to the Consolidated Financial Statements - Recapitalization)Seasonality In analyzing our financial results, the following matters should be considered. Our fiscal year ends on September 30. All references to quarters and yearsrespectively in this document are to fiscal quarters and years unless otherwise noted. The seasonal nature of our business results in the sale of approximately30% of our volume of home heating oil in the first fiscal quarter and 45% of our volume in the second fiscal quarter of each fiscal year, the peak heatingseason. We generally realize net income in the first and 18 Table of Contentssecond fiscal quarters and net losses during the third and fourth fiscal quarters. In addition, sales volume typically fluctuates from year to year in response tovariations in weather, wholesale energy prices and other factors. Gross profit is not only affected by weather patterns but also by changes in customer mix. Inaddition, our gross profit margins vary by geographic region. Accordingly, gross profit margins could vary significantly from year to year in a period ofidentical sales volumes.DerivativesSFAS No. 133, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in theconsolidated balance sheet as assets or liabilities. To the extent derivative instruments designated as cash flow hedges are effective, changes in fair value arerecognized in other comprehensive income until the forecasted hedged item is recognized in earnings. Currently, none of our derivative instruments havebeen designated for hedge accounting treatment. Therefore, we could experience great volatility in earnings as these currently outstanding derivativeinstruments are marked to market. To the extent that the partnership continues to have derivative instruments that do not qualify for hedge accountingtreatment, the volatility in any given period related to unrealized gains or losses on derivative instruments can be significant to the overall results of thePartnership, however, we ultimately expect those gains and losses to be offset when they become realized. The Partnership is currently evaluating whether toelect hedge accounting in future periods.Home Heating Oil Price VolatilityThe wholesale price of home heating oil has been extremely volatile over the last three fiscal years and has resulted in increased consumer awareness ofheating costs and increased net customer attrition. Like any other market commodity, the price of home heating oil is subject to the economic forces ofsupply and demand. Rapid global economic expansion is fueling an ever-increasing demand for oil. The price of home heating oil is closely linked to theprice refiners pay for crude oil which is the principal cost component of home heating oil. Crude oil is bought and sold in the international marketplace andas such is significantly affected by the economic forces of worldwide supply and demand.We have seen home heating oil price movements ranging from $0.54 to $1.00 per gallon over the last three fiscal years. In a volatile market even smallchanges in supply or demand can dramatically affect prices. Heating oil prices are subject to price fluctuations if demand rises sharply because of excessivelycold weather and/or disruptions at refineries and instability in key oil producing regions.Customer AttritionFor fiscal 2006, we lost 29,600 accounts (net) or 6.6% of our home heating oil customer base, as compared to fiscal 2005 in which we lost 35,100accounts (net) or 7.1% of our home heating oil customer base. This decrease in net customers lost of 5,500 was due to fewer gross customer gains (5,600) andless gross customer losses (11,100). In fiscal 2006, 26,200 of the homes we serviced changed ownership compared to 34,200 homes in the prior year. In 2006,we were able to retain 13,600 of those homes versus 15,800 retained in fiscal 2005. Gross gains were negatively impacted by (i) the continuation of ourhigher minimum profitability standards for new customers, (ii) a reduction in mass-market advertising, which attracted more transient customers in the past,(iii) continued customer price sensitivity due to the increased level and volatility of energy prices and (iv) increased minimum credit standards for customers.In addition to the reduction in gross losses due to moves in fiscal 2006, we also experienced fewer losses relating to price (2,500), service (1,000) andother factors.For fiscal 2005, we lost approximately 35,100 accounts (net) or 7.1% of our home heating oil customer base, as compared to fiscal 2004 in which welost 33,100 accounts (net) or 6.4%. This increased loss of 2,000 accounts was largely due to the factors described above as well as our ability to retainexisting homes that changed hands worsened by over 4,000 accounts. Losses of protected price accounts also increased. Certain of these accounts that wererenewed at a low fixed price and per gallon margin in the summer and fall of 2004 chose not to renew as we sought higher prices and higher per gallonmargins in fiscal 2005.Gross customer gains and gross customer losses Fiscal Year Ended Description 2006 2005 2004 Gross Customer Gains 58,200 63,800 67,400 Gross Customer Losses (87,800) (98,900) (100,500)Net Customer Loss (29,600) (35,100) (33,100) 19 Table of ContentsNet customer attrition as a percent of the home heating oil customer base Fiscal Year Ended Description 2006 2005 2004 Gross Customer Gains 13.0% 12.9% 13.1%Gross Customer Losses (19.6)% (20.0)% (19.5)%Net Customer Attrition (6.6)% (7.1)% (6.4)%During the three months ended September 30, 2006, we lost 5,500 accounts (net) or 1.2% of our home heating oil customer base, as compared to thethree months ended September 30, 2005 in which we lost 15,800 accounts (net) or 3.2% of its home heating oil customer base. This reduction in net losses of10,300 accounts was due to an increase in gross customer gains of 1,300 accounts and a reduction in customer losses of 9,000 accounts as losses due topricing declined by approximately 6,000 accounts and the number of customer homes changing hands declined by 3,600. In the fourth quarter of 2006, weretained 40% of those homes compared to 33% in the same period in 2005.Net home heating oil customers accounts (lost) by quarter Quarter Ended Fiscal 2006 Fiscal 2005 Fiscal 2004 December 31 (7,200)* (2,000) (3,300)March 31 (10,600)* (9,900) (8,600)June 30 (6,300)* (7,400) (10,300)September 30 (5,500) (15,800) (10,900)TOTAL (29,600) (35,100) (33,100) *Net customers lost have been increased by a total of 1,400 accounts from previously disclosed amounts.We have continued to experience net customer attrition during fiscal 2007. For the period from October 1 to December 31, 2006, we lost 4,100accounts (net), 1.0% of our home heating oil customer base as compared to the period from October 1 to December 31, 2005 in which we lost 7,200 accounts(net) or 1.6% of our customer base.We believe that the continued price volatility and high cost of home heating oil will continue to adversely impact our ability to attract customers andretain existing customers.Results of OperationsThe following is a discussion of the results of operations of the Partnership and its subsidiaries, and should be read in conjunction with the historicalFinancial and Operating Data and Notes thereto included elsewhere in this Annual Report. We completed the sale of the propane segment in December 2004.The following discussion reflects the historical results for the propane segment as discontinued operations. 20 Table of ContentsFiscal Year Ended September 30, 2006Compared to Fiscal Year Ended September 30, 2005VolumeFor fiscal 2006, retail volume of home heating oil declined by 97.4 million gallons, or 20.0%, to 389.9 million gallons, as compared to 487.3 milliongallons for fiscal 2005. Volume of other petroleum products declined by 11.5 million gallons, or 15.8%, to 62.0 million gallons for fiscal 2006, as comparedto 73.5 million gallons for fiscal 2005. An analysis of the change in the retail volume of home heating oil, which is based on management’s estimates,sampling and other mathematical calculations, is found below: (in millions of gallons) Heating OilSegment Volume—Fiscal 2005 487.3 Impact of warmer temperatures (53.6)Net customer attrition (36.0)Asset sale (2.3)Conservation and other, net (5.5)Change (97.4)Volume—Fiscal 2006 389.9 Temperatures in our geographic areas of operations for fiscal 2006 were 11.0% warmer than fiscal 2005 and approximately 10.4% warmer than normal,as reported by the National Oceanic Atmospheric Administration (“NOAA”). Due to the significant increase in the price per gallon of home heating oil, webelieve that customers are using less home heating oil given similar temperatures when compared to prior periods. We cannot determine if conservation is apermanent or temporary phenomenon. Home heating oil volume declined by 2.3 million gallons due to the sale of certain of our assets in New England.Excluding the impact of weather, we expect that home heating oil volume for the fiscal quarter ended December 31, 2006 and fiscal 2007 will besubstantially less than the comparable period in fiscal 2006 due to net customer attrition, conservation and other factors. In addition, we expect that homeheating oil volume for fiscal 2007 will be adversely affected by warmer than normal temperatures. Temperatures from October 1, 2006 to January 14, 2007 inthe New York City area, which approximates our geographic areas of operations, were 20.6% warmer than normal. From October 1, 2005 to January 31, 2006,temperatures in our areas of operations were 8.5% warmer than normal.Product SalesFor fiscal 2006, product sales increased $38.1 million, or 3.6%, to $1,109.3 million, as compared to $1,071.3 million for fiscal 2005 due to an increasein selling prices, which more than offset a decline in home heating oil volume sold. Selling prices were higher in response to the increase in wholesale homeheating oil supply costs noted below of $0.4307 per gallon and our decision to pursue higher per gallon gross profit margins, particularly from our price-protected customers. Average home heating oil prices increased from $1.9405 per gallon for fiscal 2005 to $2.5067 for fiscal 2006.In an effort to reduce net customer attrition, we delayed increasing our selling price to certain customers whose price plan agreements expired duringthe July to September 2004 time period. This decision negatively impacted sales by an estimated $2.8 million in fiscal 2005, primarily during the first quarterof fiscal 2005.Installation and Service SalesFor fiscal 2006, service and installation sales decreased $1.0 million, or 0.5%, to $187.2 million, as compared to $188.2 million for fiscal 2005.Installation sales decreased by $2.1 million; however, despite a decline in the customer base, service revenues increased $1.1 million due to measures takenin the last several years to increase service billing and service contract rates. 21 Table of ContentsCost of ProductFor fiscal 2006, cost of product increased $39.4 million, or 5.0%, to $825.7 million, as compared to $786.3 million for fiscal 2005, as higher wholesaleproduct cost was reduced by lower home heating oil volume of 20.0%. Average wholesale product cost for home heating oil increased by $0.4307 per gallon,or 30.0%, to an average of $1.8137 per gallon for fiscal 2006, from an average of $1.3831 for fiscal 2005.We believe that the change in home heating oil margins should be evaluated before the effects of increases or decreases in the fair value of derivativeinstruments, as we believe that realized per gallon margins should not include the impact of non cash changes in the market value of hedges before thesettlement of the underlying transaction. Home heating oil margins for fiscal 2006 increased by $0.1355 per gallon to $ 0.6930 per gallon in fiscal 2006 from$ 0.5575 per gallon in fiscal 2005 due largely to an increase in the margin realized on price-protected customers, an increase in the percentage of volume soldto higher margin residential variable customers, an increase in home heating oil margins realized on new accounts, the loss of some of our less profitableaccounts and our decision in the summer of fiscal 2005 and fiscal 2006 to maintain profit margins going forward in spite of competitors’ aggressive pricingtactics. During the renewal period for price-protected customers in fiscal 2004, which was a period of rising heating oil prices, a number of residential variableconsumers migrated to price protected plans. This shift resulted in an increase in volume sold to residential price-protected customers for the heating seasonof fiscal 2005. During the renewal period for price-protected customers in fiscal 2005, a period with even higher average heating oil prices than the renewalperiod in fiscal 2004, a number of residential price-protected customers elected variable pricing or failed to respond to our price-protected programs, whichresulted in a shift back to variable pricing for these customers. The percentage of home heating oil volume sold to residential variable price customersincreased to 45.0% of total home heating oil volume sales for fiscal 2006, as compared to 36.0% for fiscal 2005. Accordingly, the percentage of home heatingoil volume sold to residential price-protected customers decreased to 38.3% for fiscal 2006, as compared to 48.0% for fiscal 2005. For fiscal 2006, sales tocommercial/industrial customers represented 16.7% of total home heating oil volume sales, as compared to 16.0% for fiscal 2005.Also contributing to the increase in home heating oil per gallon margins were the favorable market conditions experienced during the first quarter offiscal 2006, as compared to the first quarter of fiscal 2005. During the three months ended December 31, 2004, home heating oil prices spiked by over 20cents a gallon from the beginning of the period and contributed to margin compression experienced during the three months ended December 31, 2004.Conversely, during the three months ended December 31, 2005, home heating oil prices declined by over 30 cents per gallon from the beginning of theperiod, which contributed to the expansion of home heating oil margins during this period, as we were able to lag the reduction in our variable selling pricesas the wholesale cost of heating oil declined.In addition, the year-over-year comparison was favorably impacted by $3.4 million of expenses that we incurred in fiscal 2005 due to a delay inhedging the price of product for certain residential price-protected customers, as well as an additional $1.6 million of expenses associated with not hedginguntil December 2004 the price of product for certain residential price-protected customers that were incorrectly coded as variable customers.For fiscal 2006, total product gross profit decreased by $1.3 million, as compared to fiscal 2005, as the increase in realized home heating oil per gallonmargins of $52.8 million was more than offset by the decline of $54.3 million attributable to the decline in home heating oil volume.Change in the Fair Value of Derivative InstrumentsHome heating oil prices increased in the fourth quarter of fiscal 2005 in response to the numerous hurricanes in the Gulf Coast and we recorded asignificant mark to market gain. In September 2006, the home heating prices collapsed and we recorded a mark to market loss. As a result of these events, theimpact on the change in the fair value of derivative instruments is $45.7 million for fiscal 2006. In the summers of fiscal 2005 and fiscal 2004, home heatingoil prices increased which resulted in the recording of unrealized gains at the close of both fiscal 2005 and fiscal 2004. The net gain for fiscal 2005 exceededthe gain for fiscal 2004 by $6.1 million.Cost of Installations and ServiceFor fiscal 2006, cost of installations, service and appliances decreased $8.2 million, or 4.2%, to $189.2 million, as compared to $197.4 million forfiscal 2005. The 4.2% decrease in cost of installation and service was less than the 6.6% decrease in customers for fiscal 2006 due to the fixed nature of theseexpenses. The net loss realized from service (including installations) improved by $7.2 million, from a $9.2 million loss for fiscal 2005 to a $2.0 million lossfor fiscal 2006.Delivery and Branch ExpensesFor fiscal 2006, delivery and branch expenses decreased $26.5 million, or 11.5%, to $205.0 million, as compared to $231.6 million for fiscal 2005.This decrease was due to a reduction in marketing expenses of $6.0 million, an estimated 22 Table of Contents$15.2 million decrease in certain variable operating expenses directly associated with the 20.0% decline in home heating oil volume, $4.4 million receivedunder our weather insurance policy, lower bad debt expense and collection costs of $4.7 million due in part to more stringent credit terms and other expensereductions of $0.7 million, offset by wage and benefit increases of approximately $4.4 million. On a cents per gallon basis (excluding the proceeds receivedfrom weather insurance), delivery and branch expenses increased 6.2 cents per gallon, or 13%, from 47.5 cents per gallon for fiscal 2005 to 53.7 cents pergallon for fiscal 2006 due to the fixed nature of certain delivery and branch expenses.Depreciation and AmortizationFor fiscal 2006, depreciation and amortization expenses declined by $3.1 million, or 8.7%, to $32.4 million, as compared to $35.5 million for fiscal2005 as certain assets, which were not replaced, became fully depreciated.General and Administrative ExpensesFor fiscal 2006, general and administrative expenses decreased by $21.5 million, or 49.8%, to $21.7 million, as compared to $43.2 million for fiscal2005 due to the absence of bridge financing expenses of $7.5 million, which were incurred in fiscal 2005, lower fees and expenses totaling $3.4 millionassociated with certain amendments and waivers on our previous bank credit facility obtained during the first fiscal quarter of 2005, lower compensationexpense of $0.9 million attributable to staff reductions, a $5.6 million decline in legal expenses related to defending several purported class action lawsuitsand exploring financing options in fiscal 2005, $3.3 million less in first year Sarbanes-Oxley compliance cost, a $3.8 million reduction in compensationexpense related to separation agreements recorded in the prior period with certain former executives, other expense reductions of $0.6 million, and a gain onthe sale of certain assets of $0.9 million. Partially offsetting these reductions was an increase in directors and officers liability insurance expense of $0.7million and $1.4 million of legal and professional expenses incurred in fiscal 2006 relating to the exploration of our financial options. In addition, the fiscal2005 results were positively impacted by a reversal of previously recorded compensation expenses of $2.2 million due to the decline in the price of seniorsubordinated units.Goodwill Impairment ChargeDuring the fiscal second quarter of 2005, a number of events occurred that indicated a possible impairment of goodwill might exist. These eventsincluded our determination in February 2005 of significantly lower than expected operating results for the year and a significant decline in the Partnership’sunit price. As a result of these triggering events and circumstances, the Partnership completed an additional SFAS 142 impairment review with the assistanceof a third party valuation firm at February 28, 2005. This review resulted in a non-cash goodwill impairment charge of approximately $67.0 million, whichreduced the carrying amount of goodwill. There was no goodwill impairment charge recorded during fiscal 2006.Operating Income (Loss)For fiscal 2006 operating income increased $72.2 million to a $23.2 million loss, as compared to an operating loss of $95.4 million fiscal 2005. This increasewas due to the non-recurrence during fiscal 2006 of a $67.0 million goodwill impairment charge recorded in fiscal 2005, a $52.8 million increase in heatingoil gross profit due to higher home heating oil margins, a $48.1 million decline in branch and general and administrative expenses, reduction in the netservice and installation loss of $7.2 million, lower depreciation and amortization expense of $3.1 million, reduced by a decrease in heating oil gross profit of$54.3 million due to lower volume and the impact of comparative change in the fair value of derivative instruments of $51.8 million.Loss on Redemption of DebtFor fiscal 2006, we recorded a $6.6 million loss on the early redemption and conversion of our 10.25% senior notes (See Notes 3 and 15 of theConsolidated Financial Statements). The loss consists of the $5.4 million attributable to the difference between the value of the Partnership’s common units($32.2 million) exchanged for debt ($26.9 million), and the write-off of previously capitalized net deferred financing costs of $2.0 million, reduced in part bya $0.8 million basis adjustment to the carrying value of long-term debt.For fiscal 2005, we recorded a $42.1 million loss on the early redemption of certain notes in connection with the sale of the propane segment. The lossconsisted of cash premiums paid of $37 million for early redemption, the write-off of previously capitalized net deferred financing costs of $6.1 million andlegal expenses of $0.7 million, reduced in part by a $1.7 million basis adjustment to the carrying value of long-term debt. 23 Table of ContentsInterest expenseFor fiscal 2006, interest expense decreased $9.9 million, or 27.3%, to $26.3 million, as compared to $36.2 million for fiscal 2005. This decreaseresulted from a lower principal amount in total debt outstanding of approximately $142.5 million, which was offset in part by an increase in the Partnership’sweighted average interest rate of 1.2% from 8.9% during fiscal 2005 to 10.1% for fiscal 2006.Total debt outstanding declined by $142.5 million due to the recapitalization (see Notes 3 and 15 to the Consolidated Financial Statements) and lowerworking capital borrowings as a portion of the proceeds from the sale of the propane segment was used to fund working capital.Interest IncomeFor fiscal 2006, interest income increased by $0.8 million, or 17.9%, to $5.1 million, as compared to $4.3 million for fiscal 2005.Amortization of Debt Issuance CostsFor fiscal 2006, amortization of debt issuance costs was $2.4 million, $0.1 million less than fiscal 2005.Income Tax ExpenseIncome tax expense for fiscal 2006 was $0.5 million and represents certain state income tax, alternative minimum federal tax and capital tax. Incometax expense for fiscal 2005 was $0.7 million. The decrease in state taxes for 2006 as compared to 2005 was largely attributable to an election made at thestate level during the fourth quarter of 2006.Loss From Continuing OperationsFor fiscal 2006, the loss from continuing operations decreased $118.7 million to $53.9 million, as compared to a loss of $172.6 million for fiscal 2005.This change was due to the $72.2 million increase in operating income, a $9.9 million decline in interest expense and a $0.8 million increase in interestincome. The year over year comparison was favorably impacted by a $35.5 million reduction in the loss on redemption of debt.Loss From Discontinued OperationsThe discontinued propane segment was sold on December 17, 2004 and it generated a $6.2 million loss in fiscal 2005.Gains On Sale of SegmentsDuring fiscal 2005, the Partnership recorded a gain on the sale of the propane segment of $156.8 million. Additionally, the purchase price for theTG&E segment was finalized and a positive adjustment of $0.8 million was recorded in fiscal 2005. There were no similar transactions in fiscal 2006Cumulative Effect of Change in Accounting PrincipleEffective October 1, 2005, we changed our method of accounting from the first-in, first-out method to the weighted average cost method for heating oiland other fuels. This change resulted in the recording of a charge of $0.3 million.Net LossFor fiscal 2006, net loss increased by $33.1 million to $54.3 million as a $118.7 million increase in income from continuing operations and a $6.2million decline in the loss from discontinued operations in the 2005 fiscal first quarter was offset by the gains on the sale of discontinued operations recordedin the year ago period of $157.6 million and the $0.3 million charge for the change in accounting principle.Earnings From Continuing Operations Before Interest, Taxes, Depreciation and Amortization (EBITDA)For fiscal 2006, EBITDA increased $104.6 million, to $2.6 million, as compared to an EBITDA loss of $102.0 million for fiscal 2005. For fiscal 2006,EBITDA was reduced by $ 6.6 million due to the non-cash loss for the early redemption of debt and the non-cash change in the fair value of derivativeinstruments of $45.7 million in fiscal 2006. For fiscal 2005, EBITDA was reduced by $ 67.0 due to a goodwill impairment charge and $ 42.1 million due tothe non-cash loss for the early redemption of debt. In fiscal, 2005, EBITDA was favorably impacted by $6.1 million due to the change in the fair value ofderivative instruments. 24 Table of ContentsEBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as ameasure of liquidity or ability to service debt obligations), but provides additional information for evaluating our ability to make the Minimum QuarterlyDistribution. EBITDA is calculated as follows: Fiscal Year Ended September 30, (in thousands) 2006 2005 (restated) Loss from continuing operations $(53,919) $(172,580)Plus: Income tax expense 477 696 Amortization of debt issuance costs 2,438 2,540 Interest expense, net 21,203 31,838 Depreciation and amortization 32,415 35,480 EBITDA 2,614 (102,026)Add/(subtract) Income tax expense (477) (696)Interest expense, net (21,203) (31,838)Unit compensation expense (income) — (2,185)Provision for losses on accounts receivable 6,105 9,817 Gain on sales of fixed assets, net (956) (43)Goodwill impairment loss — 67,000 Loss on redemption of debt 6,603 42,082 Unrealized (gains) losses on derivative contracts 45,677 (6,081)Change in operating other assets and liabilities (19,999) (30,945)Net cash provided by (used in) operating activities $18,364 $(54,915) 25 Table of ContentsFiscal Year Ended September 30, 2005Compared to Fiscal Year Ended September 30, 2004VolumeFor fiscal 2005, retail volume of home heating oil decreased 64.3 million gallons, or 11.7%, to 487.3 million gallons, as compared to 551.6 milliongallons for fiscal 2004. Volume of other petroleum products declined by 7.6 million gallons, or 9.3%, to 73.5 million gallons for fiscal 2005, as compared to81.1 million gallons for fiscal 2004. An analysis of the change in retail volume of home heating oil, which is based on management’s estimates, sampling,and other mathematical calculations (as actual customer consumption patters cannot be precisely determined) is found below: (in millions of gallons) Heating OilSegment Volume—Fiscal 2004 551.6 Impact of colder temperatures 4.2 Impact of acquisitions 3.2 Net customer attrition (39.0)Conservation (24.5)Delivery scheduling (6.0)Other (2.2)Change (64.3)Volume—Fiscal 2005 487.3 Total degree-days in our geographic areas of operations were approximately 0.9% greater in fiscal 2005 than in fiscal 2004 and approximately 0.5%greater than normal, as reported by NOAA. Due to the significant increase in the price per gallon of home heating oil during the year, we believe thatcustomers are using less home heating oil given similar temperatures. Indications based on internal studies suggest that our customers have reduced theirconsumption by approximately 4.4%. In addition, we estimate that during fiscal 2005, home heating oil volume was reduced by 6.0 million gallons due to adelivery scheduling variance.Product SalesFor fiscal 2005, product sales increased $149.8 million, or 16.3%, to $1,071 million, as compared to $921.4 million for fiscal 2004, as increases inselling prices more than offset a decline in product sales due to lower volume sold. Selling prices during fiscal 2005 were higher due to the increase inwholesale supply costs. Average wholesale supply costs were $1.40 per total gallon for fiscal 2005, as compared to $0.94 per total gallon for fiscal 2004. Theweighted average selling price per total gallon was $1.91 per total gallon in fiscal 2005 compared to $1.46 per total gallon in fiscal 2004. Average homeheating oil prices increased from $1.49 per gallon in fiscal 2004 to $1.94 per gallon in fiscal 2005.Installation, Service and Other SalesFor fiscal 2005, installation, service and other sales increased $4.6 million, or 2.5%, to $188.2 million compared to $183.6 million in fiscal 2004, as adecline in installation and other sales of $2.8 million was offset by an increase in service revenues of $7.4 million. Over the last several years, we havemodified service plans and billing strategies, in order to maximize service revenue.Cost of ProductFor fiscal 2005, cost of product increased $193.9 million, or 32.7%, to $786.3 million, compared to $592.4 million for fiscal 2004. This is the result ofan increase in the average wholesale product cost of $0.46 per total gallon, or 49%, to an average of $1.40 per total gallon for fiscal 2005, from an average of$0.94 per total gallon for fiscal 2004. Average wholesale home heating oil product cost increased by $0.46 per gallon to an average of $1.38 per gallon forfiscal 2005, from an average of $0.92 for fiscal 2004.We believe that the changes in home heating oil margins should be evaluated before the effects of increases or decreases in the fair value of derivativeinstruments, as we believe that realized per gallon margins should not include the impact of changes in the market value of hedges before the settlement ofthe underlying transaction. Home heating oil margins decreased by $0.0159 per gallon 26 Table of Contentsto $ 0.5575 per gallon in fiscal 2005 from $ 0.5734 per gallon in fiscal 2004. In an effort to reduce net customer attrition, we delayed increasing our sellingprice to certain customers whose price plan agreements expired during the July to September 2004 time period. This decision negatively impacted grossprofit by an estimated $2.8 million in fiscal 2005, primarily during the first quarter of fiscal 2005.During fiscal 2005, product cost was adversely impacted by $3.4 million due to a delay in hedging the price of product for certain residential protectedprice customers due to cash constraints under our previous credit agreement. Cost of product was also adversely impacted by $1.6 million associated with nothedging the price of product for certain residential price protected customers that were incorrectly coded as variable customers. This coding error wascorrected in December 2004. Home heating oil per gallon margins for the year ended September 30, 2005 declined by 5.0 cents per gallon, compared to fiscal2004 due to an increase in the percentage of volume sold to lower margin residential price protected customers, the delay in increasing the selling price tocustomers whose price plans expired during the July to September 2004 time period and the aforementioned hedging issues concerning price protectedcustomers. Gross profit from product sales decreased by $44.0 million in fiscal 2005 when compared to fiscal 2004 due to lower sales volume of $37.4million and lower per gallon margins of $6.7 million (which includes $2.8 million delay in price increases previously described)The percentage of home heating oil volume sold to residential protected price customers increased to approximately 48% of total home heating oilvolume sales during fiscal 2005, as compared to 43% for fiscal 2004. Accordingly, the percentage of home heating oil volume sold to residential variablecustomers decreased to approximately 36% for fiscal 2005, as compared to 40% for fiscal 2004. During fiscal 2005, sales to commercial/industrial customersrepresented approximately 16% of total home heating oil volume sales, unchanged from fiscal 2004. Rising energy costs have increased consumer interest inprice protection.Change in the Fair Value of Derivative InstrumentsIn the summers of fiscal 2005 and fiscal 2004, home heating oil prices increased which resulted in the recording of unrealized gains at the close of bothfiscal 2005 and fiscal 2004. The net gain for fiscal 2005 exceeded the gain for fiscal 2004 by $6.1 million. Home heating oil prices were relatively stable inthe summer of 2003 and we recorded a small change in the value of derivative instruments. The increase in home heating oil prices in the summer of 2004 isthe main driver of the change in the fair value of derivative instruments in fiscal 2004 of $25.8 million.Cost of Installations and ServiceFor fiscal 2005, cost of installations and service decreased $7.5 million, or 3.6%, to $197.4 million, as compared to $204.9 million for fiscal 2004. Thisreduction was due to a lower level of variable installation costs of $2.0 million attributable to the lower level of installation sales and a $5.5 million declinein service expenses. Service expenses decreased due to a contraction in costs resulting from servicing a smaller customer base, warmer temperatures duringthe peak heating season, which reduced the frequency of service calls, and an improvement in the scheduling of preventative maintenance service calls whichlowered overtime hours. The loss realized from service (including installations) improved by $12.1 million from a $21.3 million loss for fiscal 2004 to a $9.2million loss for fiscal 2005.Delivery and Branch ExpensesFor fiscal 2005, delivery and branch expenses decreased $1.4 million or 0.6% to $231.6 million compared to $233.0 million of expenses incurred infiscal 2004. Bad debt expense, credit card processing fees and collection expenses all increased, primarily due to the increase in product sales dollars.Delivery costs were also higher due to the rise in vehicle fuel costs. In total, delivery and branch expenses increased by $4.9 million due to the increase inbad debt expense, credit card processing fees, collection expenses, and fuel costs. Delivery and branch expenses also increased by approximately $5.9million due to wage and benefit increases. These delivery and branch expense increases were offset by a reduction in operating costs due to the variablenature of certain delivery and operating expenses such as direct delivery expense, which decreased with lower volume. On a cents per gallon basis, operatingcosts increased 5.3 cents per gallon, or 12.6%, from 42.2 cents per gallon for fiscal 2004 to 47.5 cents per gallon for fiscal 2005. The 5.3 cents per gallonincrease was due to higher bad debt and collection expenses, wage and benefit increases, and the inability to reduce certain fixed expenses commensuratewith a reduction in home heating oil volume of 11.7%.Depreciation and AmortizationFor fiscal 2005, depreciation and amortization expenses declined by $1.8 million, or 4.9%, to $35.5 million, as compared to $37.3 million for fiscal2004 as certain assets, which were not replaced, became fully depreciated. 27 Table of ContentsGeneral and Administrative ExpensesDuring fiscal 2005, general and administrative expenses increased by $23.7 million, or 121.1%, to $43.2 million, compared to $19.5 million for fiscal2004 due to $7.5 million in bridge financing fees, $4.4 million of legal expenses incurred relating to defending several purported class action lawsuits, legaland professional fees associated with exploring several refinancing alternatives, legal expense attributable to inquiries from regulatory agencies, $3.4 millionof expenses and fees associated with certain bank amendments and waivers on our previous credit facility obtained during the first fiscal quarter of 2005, anincrease in officers and directors insurance of $1.1 million, $4.1 million in expenses for compliance with Sarbanes-Oxley, $3.8 million in expense relating toseparation agreements entered into with certain former executives and $1.7 million higher compensation expense associated with unit appreciation rights. (Infiscal 2004 and fiscal 2005, the decline in the unit price for senior subordinated units resulted in the reversal of previously recorded expenses of $3.9 millionand $2.2 million, respectively.) Partially offsetting these increases were lower business process improvement expenses of $1.4 million and a reduction incompensation and benefit expense of $1.2 million.Goodwill Impairment ChargeDuring the second quarter of fiscal 2005, a number of events occurred that indicated a possible impairment of goodwill might exist. These eventsincluded our determination in February 2005 of significantly lower than expected operating results for fiscal 2005 and a significant decline in thePartnership’s unit price. As a result of these triggering events and circumstances, we completed an interim SFAS No. 142 impairment review with theassistance of a third party valuation firm as of February 28, 2005. This review resulted in a non-cash goodwill impairment charge of approximately $67.0million, which reduced the carrying amount of goodwill.Operating Income (Loss)For fiscal 2005, operating income decreased $139.2 million to a loss of $95.4 million, compared to $43.7 million in operating income for fiscal 2004.The decrease in our operating income in fiscal 2005 is the result of a $67.0 million non-cash goodwill impairment charge, as described above, lower grossprofit from the sale of petroleum products of $44.0 million, increases in general and administrative expense totaling $23.7 million and the impact ofcomparative change in the fair value of derivative instruments of $19.7 million offset in part by an increase in service profitability of $12.1 million, decreasesin branch and delivery expenses of $1.4 million and depreciation and amortization of $1.8 million.Interest ExpenseDuring fiscal 2005, interest expense decreased $3.9 million, or 9.8%, to $36.2 million, compared to $40.1 million for fiscal 2004. This change was dueto the impact of lower average debt outstanding offset by an increase in our weighted average interest rate during fiscal 2005. Total debt outstandingdeclined because a portion of the proceeds from the propane sale, were used in part to repay debt. Average working capital borrowings were higher in fiscal2005 due principally to the increase in wholesale product cost.Interest IncomeDuring fiscal 2005, interest income increased by $0.9 million, or 27.3%, to $4.3 million, compared to $3.4 million for fiscal 2004 due principally tohigher average invested cash balances.Amortization of Debt Issuance CostsFor fiscal 2005, amortization of debt issuance costs decreased $0.9 million, or 27.0%, to $2.5 million, compared to $3.5 million for fiscal 2004.Loss on Redemption of DebtDuring the first quarter of fiscal 2005, we recorded a loss of $42.1 million on the early redemption of certain notes at the heating oil and propanesegments. The loss consisted of cash premiums paid of $37.0 million for early redemption, the write-off of previously capitalized net deferred financing costsof $6.1 million and legal expenses of $0.7 million, reduced in part by the realization of the unamortized portion of a $1.7 million basis adjustment to thecarrying value of long-term debt.Income Tax Expense (Benefit)Income tax expense for fiscal 2005 was approximately $0.7 million compared to $1.2 million in fiscal 2004. The decrease of approximately $0.5million is the result of increases in state capital taxes of $0.5 million in fiscal 2005, which is more than offset by $1.0 million in tax benefits that were fullyutilized against taxes associated with the gain on the sale of the propane segment. 28 Table of ContentsIncome (Loss) From Continuing OperationsFor fiscal 2005 the loss from continuing operations increased $174.9 million to a loss of $172.6 million, compared to income of $2.3 million for fiscal2004, as the decline in operating income of $139.2 million and the loss on the redemption of debt of $42.1 million were reduced by lower interest expense of$3.9 million, higher interest income of $0.9 million, lower amortization of debt issuance costs of $0.9 million and a decrease in income tax expense of $0.5million.Income (Loss) From Discontinued OperationsFor fiscal 2005, income from discontinued operations decreased $28.4 million. Income from the discontinued propane segment, which was sold onDecember 17, 2004, generated $21.3 million in net income for fiscal 2004 and a net loss of $6.2 million for fiscal 2005. The discontinued TG&E segment wassold on March 31, 2004 and generated net income of $0.9 million for fiscal 2004.Gain on Sales of Discontinued OperationsDuring fiscal 2005, we recorded a gain on the sale of the propane segment totaling approximately $156.8 million, which is net of income taxes of $1.3million. The purchase price for the TG&E segment was also finalized in fiscal 2005 and a positive adjustment of $0.8 million was recorded.Net lossFor fiscal 2005, the net loss increased $45.2 million to a net loss of $21.2 million, compared to a net income of $24.0 million incurred in fiscal 2004, asthe decline in operating income (loss) from continuing operations of $174.9 million, and the reduction in income from discontinued operations of $28.4million were partially offset by the gain on the sale of the propane segment and TG&E segment of $157.6 million.Earnings From Continuing Operations Before Interest, Taxes, Depreciation and Amortization (EBITDA)For fiscal 2005, EBITDA decreased $183.1 million to an EBIDTA loss of $102.0 million, as compared to $81.1 million in EBITDA for fiscal 2004. Forfiscal 2005, EBITDA was reduced by $67.0 due to a goodwill impairment charge and $42.1 million due to the non cash loss for the early redemption of debtfor fiscal 2005, EBITDA was favorably impacted by $6.1 million due to the change in the fair value of derivative instruments. For fiscal 2004, EBITDA wasfavorably impacted by $25.8 million due to the change in the fair value of derivative instruments.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 ameasure of liquidity or ability to service debt obligations), but provides additional information for evaluating our ability to make the minimum quarterlydistribution. EBITDA is calculated for the fiscal years ended September 30 as follows: Fiscal Year Ended September 30, (in thousands) 2005 2004 (restated) (restated) Loss from continuing operations $(172,580) $2,335 Plus: Income tax expense 696 1,240 Amortization of debt issuance costs 2,540 3,480 Interest expense, net 31,838 36,682 Depreciation and amortization 35,480 37,313 EBITDA (102,026) 81,050 Add/(subtract) Income tax expense (696) (1,240)Interest expense, net (31,838) (36,682)Unit compensation expense (income) (2,185) (4,382)Provision for losses on accounts receivable 9,817 7,646 Gain on sales of fixed assets, net (43) (281)Goodwill impairment charge 67,000 — Loss on redemption of debt 42,082 — Unrealized (gains) losses on derivative contracts (6,081) (25,811)Change in operating assets and liabilities (30,945) (6,631)Net cash provided by (used in) operating activities $(54,915) $13,669 29 Table of ContentsLIQUIDITY AND CAPITAL RESOURCESOur ability to satisfy our obligations depends on our future performance, which will be subject to prevailing economic, financial, business and weatherconditions, the ability to pass on the full impact of high wholesale heating oil prices to customers, the effects of high net customer attrition, conservation andother factors, most of which are beyond our control. See Item 1A—“Risk Factors.” Capital requirements, at least in the near term, are expected to be providedby cash flows from operating activities, cash on hand at September 30, 2006 or a combination thereof. To the extent future capital requirements exceed cashon hand plus cash flows from operating activities, we anticipate that working capital will be financed by our revolving credit facility as discussed below andrepaid from subsequent seasonal reductions in inventory and accounts receivable.DISCUSSION OF CASH FLOWSOperating ActivitiesFor fiscal 2006, cash provided by operating activities was $18.4 million, as compared to cash used in operating activities of $54.9 million for fiscal2005. The change of $73.3 million was largely due to an increase in operating income of $5.2 million (before the non cash goodwill impairment charge of$67.0 million recorded in June 2005) and lower cash requirements to finance accounts receivable of $10.0 million. During fiscal 2006, the increase inaccounts receivable was $3.8 million or $10.0 million less than the comparable increase in accounts receivable at September 30, 2005 of $13.8 million, as theincrease in sales of $37.0 million in fiscal 2006 over fiscal 2005 was $117.4 million less than the increase experienced in fiscal 2005 of $154.4 millioncompared to fiscal 2004. Generally, accounts receivable collections in fiscal 2006 were favorably impacted by warmer temperatures, which resulted in lowersales of $104.1 million. Net cash used in operating activities on a comparable basis was negatively impacted by $5.6 million primarily due to an increase inthe quantity of home heating oil on hand at September 30, 2006 versus September 30, 2005. During the fourth quarter of fiscal 2006, we increased ourquantity of home heating oil inventory on hand to take advantage of favorable prices in the spot delivery and futures markets. As a result, at September 30,2006 inventory increased by 11.2 million gallons to 32.5 million gallons as compared to September 30, 2005.Investing ActivitiesDuring fiscal 2006, we spent $5.4 million for fixed assets and received $2.2 million from the sale of certain fixed assets. Cash flow provided byinvesting activities was $467.3 million for fiscal 2005, primarily due to the sale of the propane segment in December 2004.Financing ActivitiesFor fiscal 2006, cash flows used in financing activities were $23.1 million, as the $50.2 million (net of expenses) raised in our recapitalization alongwith $46.3 million borrowed under our revolving credit facility, was used to repay $52.9 million previously borrowed under the revolving credit facility,repay long-term debt of $66.1 million, and pay $0.6 million to amend our bank facility. Cash flows used in financing activities were $306.7 million for fiscal2005. During fiscal 2005, $292.2 million of cash was provided from borrowings under our new revolving credit facility ($181.2 million) and previous creditfacility ($111.0 million), which was used to repay $119.0 million borrowed under our previous credit agreement and $174.6 million borrowed under the newagreement. Also, during fiscal 2005, we repaid $259.5 million in long-term debt, paid $37.7 million in debt prepayment premiums and expenses and paid$8.0 million in fees and expenses related to refinancing our bank credit facilities.As a result of the above activity, cash decreased by $8.0 million, to $91.1 million as of September 30, 2006. 30 Table of ContentsFINANCING AND SOURCES OF LIQUIDITYWe have an asset based revolving credit facility with a group of lenders, which provides us with the ability to borrow up to $260 million for workingcapital purposes (subject to certain borrowing base limitations and coverage ratios) including the issuance of up to $95 million in letters of credit. FromDecember through March of each year, we can borrow up to $310.0 million. Obligations under the revolving credit facility are secured by liens onsubstantially all of our assets including accounts receivable, inventory, general intangibles, real property, fixtures and equipment. On December 28, 2006, thePartnership obtained a waiver from the lender group which extended the date for the delivery of financial statements for fiscal 2006 to February 15, 2007.Under the terms of the revolving credit facility, we must maintain at all times either availability (borrowing base less amounts borrowed and letters ofcredit issued) of $25.0 million or a fixed charge coverage ratio (as defined in the credit agreement) of not less than 1.1 to 1.0. As of September 30, 2006,availability was $140.2 million and the fixed charge coverage ratio was 2.65 to 1.0. As of September 30, 2006, $52.3 million in letters of credit wereoutstanding, primarily for current and future insurance reserves. For fiscal 2007, we expect to free-up $7 million in cash by issuing an additional $4.0 millionin letters of credit in connection with our insurance program and by issuing very short-term duration (2-5 days) letters of credit from time to time to financeour inventory purchases.During the first half of fiscal 2006, we purchased futures contracts to manage the majority of our exposure to market risk related to changes in thecurrent and future market price of home heating oil purchased for resale to our fixed price customers. To a certain extent, availability must be set aside torespond to the volatile home heating oil markets. Futures contracts are marked to market on a daily basis and require an initial cash margin deposit andpotentially require a daily adjustment to such cash deposit (maintenance margin). For example, assuming 100 million gallons, a 30-cent per gallon decline inthe market value of these hedged instruments (as we experienced from time-to-time) would create an additional cash margin requirement of approximately$30.0 million. In this example, availability in the short-term is reduced, as we fund the margin call. This availability reduction should be temporary, as weshould be able to purchase product at a later date for 30 cents a gallon less than the anticipated strike price when the agreement with the price-protectedcustomer was entered into. A spike in wholesale heating oil prices could also reduce availability, as we must finance a portion of our inventory and accountsreceivable with internally generated cash as the net advance for eligible accounts receivable is 85% and 40% to 80% of eligible inventory.Since the beginning of the second half of fiscal 2006, we have entered into forward swaps with members of our bank group to manage our exposure tomarket risk for our protected-price customers rather than purchase futures contracts. These institutions have not required an initial cash margin deposit or anymark to market maintenance margin for these swaps. Any mark to market exposure is reserved against our borrowing base. As a result of this strategy, the costto finance our protected-price program will be reduced.Included in our accounts receivable is $20.6 million related to the sale of heating and air-conditioning equipment that is payable on a short-terminstallment basis. In July 2006, we entered into a preferred arrangement with a financial institution that finances installations for our customers. Over time, weanticipate that these short-term installation receivables will be reduced and both liquidity and availability will be increased.Prior to October 18, 2004, we were generally able to obtain trade credit from home heating oil suppliers. Since then we have been required to prepay formost of our heating oil supply. However, as a result of the recapitalization, we have received some form of trade credit from several of our suppliers and weplan to issue letters of credit rather than prepay with cash for inventory purchases.For the majority of our fiscal year, the amount of cash received from customers with a budget payment plan is greater than actual billings. This amountis reflected on the balance sheet under the caption “customer credit balances.” At September 30, 2006, customer credit balances aggregated $73.9 million.Generally, customer credit balances are at their low point after the end of the heating season and peak prior to the beginning of the heating season. AtSeptember 30, 2005, customer credit balances were $65.3 million. During the non-heating season, cash is provided from customer credit balances to fundoperating activities.Before October 2007, we must implement certain changes to ensure compliance with amended Environmental Protection Agency regulations. Wecurrently estimate that the capital required to effectuate these requirements will range from $1.0 to $1.5 million. Annual maintenance capital expenditures areestimated to be approximately $4 to $6 million, excluding the capital requirements for environmental compliance. We have $174.2 million of long-term debtoutstanding as of September 30, 2006, which includes $174.1 million of 10 1/4% senior notes due 2013. 31 Table of ContentsAs mentioned in Item 1. - Business Initiatives and Strategy, we plan to seek to acquire other heating oil distributors. Currently we are reviewing severalacquisition candidates.Partnership Distribution ProvisionsThere will be no mandatory distributions of available cash by us to the holders of our common units and general partner units through the fiscal quarterending September 30, 2008. (See Part II - Item 5. Market for Registrant’s Units and Related Matters - Partnership Distribution Provisions and Note 6.Quarterly Distribution of Available Cash)Contractual Obligations and Off-Balance Sheet ArrangementsWe have no special purpose entities or off balance sheet debt, other than operating leases entered into in the ordinary course of business.Long-term contractual obligations, except for our long-term debt obligations, are not recorded in our consolidated balance sheet. Non-cancelablepurchase obligations are obligations we incur during the normal course of business, based on projected needs.The table below summarizes the payment schedule of our contractual obligations at September 30, 2006 (in thousands): Payments Due by Year Total 1 Year 2 - 3Years 4 - 5Years More Than5 YearsLong-term debt obligations (a) $174,056 $— $— $— $174,056Capital lease obligations (b) 743 173 470 100 — Operating lease obligations (c) 55,794 8,772 14,873 9,954 22,195Purchase obligations (d) 128,980 25,970 39,856 36,515 26,639Interest obligations Senior Notes (e) 115,095 17,707 35,414 35,414 26,560Long-term liabilities reflected on the balance sheet (f) 5,900 395 790 165 4,550 $480,568 $53,017 $91,403 $82,148 $254,000 (a)Excludes current maturities of long-term debt of $0.1 million, which are classified within current liabilities. (b)Represents various third party capital leases for trucks. (c)Represents various operating leases for office space, trucks, vans and other equipment from third parties. (d)Represents non-cancelable commitments as of September 30, 2006, including amounts due under employment agreements. (e)Reflects 10 1/4% interest obligations on our $174.1 million senior notes due February 2013. (f)Reflects long-term liabilities excluding a pension accrual of approximately $21.2 million. Under current prescribed regulatory minimum fundingrequirements, we have satisfied the minimum funding obligations related to our pension plans for fiscal 2006 and 2007. The remaining long-termliabilities reflected on the balance sheet represent the present value of amounts due subsequent to September 30, 2006 per the separation agreemententered into with the former CEO in March 2005. At September 30, 2006, approximately $5.9 million is scheduled to be paid out to the former CEOover the term of the separation agreement as follows: (i) $395,000 per year for five years following the termination date in March 2005, and(ii) $350,000 per year for 13 years beginning with the month following the five-year anniversary of the termination date. The payments scheduled byyear in the tabular presentation above, totaling $5.9 million, represents undiscounted payments and are therefore greater than the present value of thesepayments totaling $3.9 million at September 30, 2006, which is part of the other long-term liabilities amount on the Balance Sheet.Recent Accounting PronouncementsIn July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109.” In September 2006, the FASB issued Statement No. 157 “Fair Value Measurements” and Statement No. 158“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” And in September 2006, the Securities and Exchange Commission(“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements.” (See Note 4. Summary of Significant Accounting Policies – Recent Accounting Pronouncements) 32 Table of ContentsCritical Accounting EstimatesThe preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to establish accountingpolicies and make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the Consolidated Financial Statements. StarGas evaluates its policies and estimates on an on-going basis. The Partnership’s Consolidated Financial Statements may differ based upon different estimatesand assumptions. The Partnership’s critical accounting estimates have been reviewed with the Audit Committee of the Board of Directors.Our significant accounting policies are discussed in Note 3 to the Consolidated Financial Statements. We believe the following are our criticalaccounting policies and estimates:Goodwill and Other Intangible AssetsWe calculate amortization using the straight-line method over periods ranging from five to ten years for intangible assets with definite useful lives. Weuse amortization methods and determine asset values based on our best estimates using reasonable and supportable assumptions and projections. We assessthe useful lives of intangible assets based on the estimated period over which we will receive benefit from such intangible assets such as historical evidenceregarding customer churn rate. In some cases, the estimated useful lives are based on contractual terms. At September 30, 2006, we had $61 million of netintangible assets subject to amortization. If circumstances required a change in estimated useful lives of the assets, it could have a material effect on results ofoperations. For example, if lives were shortened by one year, we estimate that amortization for these assets for fiscal 2006 would have increased byapproximately $2.6 million.SFAS No. 142 requires goodwill to be assessed at least annually for impairment. These assessments involve management’s estimates of future cashflows, market trends and other factors to determine the fair value of the reporting unit, which includes the goodwill to be assessed. If the carrying amount ofgoodwill exceeds its implied fair value and is determined to be impaired, an impairment charge is recorded to write-down goodwill to its fair value. AtSeptember 30, 2006, we had $166.5 million of goodwill. Intangible assets with finite lives must be assessed for impairment whenever changes incircumstances indicate that the assets may be impaired. Similar to goodwill, the assessment for impairment requires estimates of future cash flows related tothe intangible asset. To the extent the carrying value of the assets exceeds its future undiscounted cash flows, an impairment loss is recorded based on the fairvalue of the asset. We test the carrying amount of goodwill annually during the fourth fiscal quarter. During the second quarter of fiscal 2005, a number ofevents occurred that indicated a possible impairment of goodwill. These events included: the determination in February 2005 that we could expect togenerate significantly lower than expected operating results for the year and a significant decline in the Partnership’s unit price. As a result of these triggeringevents and circumstances, we completed an interim SFAS No. 142 impairment review with the assistance of a third party valuation firm as of February 28,2005. The evaluation utilized both an income and market valuation approach and contained reasonable assumptions and reflected management’s bestestimate of projected future cash flows. This review resulted in a non-cash goodwill impairment charge of approximately $67 million, which reduced thecarrying amount of goodwill. As of August 31, 2006, we performed our annual goodwill impairment valuation. Based upon this analysis, we determined thatthere is no additional goodwill impairment as of August 31, 2006.Depreciation of Property, Plant and EquipmentDepreciation is calculated using the straight-line method based on the estimated useful lives of the assets ranging from 1 to 40 years. Net property,plant and equipment was $42.4 million at September 30, 2006. If circumstances required a change in estimated useful lives of the assets, it could have amaterial effect on results of operations. For example, if the remaining estimated useful lives of these assets were shortened by one year, we estimate thatdepreciation for fiscal 2006 would have increased by approximately $3.6 million.Fair Values Of DerivativesThe fair market value of all derivative instruments is recognized as an asset or liability on our balance sheet. To the extent that any derivativeinstrument does not meet the requirements of SFAS 133 to qualify for hedge accounting, changes in the fair value of that derivate instrument is recognizedcurrently in earnings. The Partnership is currently evaluating whether to elect hedge accounting for future periods. 33 Table of ContentsThe estimated fair value of our derivative instruments requires judgment on our part. We have established the fair value of our derivative instrumentsusing estimates determined by our counterparties and subsequently evaluated them internally using established index prices and other sources. These valuesare based upon, among other things, future prices, volatility, time-to-maturity value and credit risk. The values we report in our financial statements change asthese estimates are revised to reflect actual results, changes in market conditions, or other factors, many of which are beyond our control. The factorsunderlying our estimates of fair value are impacted by actual results and changes in conditions, market and otherwise, which may be beyond our control.Defined Benefit ObligationsSFAS No. 87, “Employers’ Accounting for Pensions” as amended by SFAS No. 132 “Employers Disclosure about Pensions and Other PostretirementBenefits” requires the Partnership to make assumptions as to the expected long-term rate of return that could be achieved on defined benefit plan assets anddiscount rates to determine the present value of the plans’ pension obligations. The Partnership evaluates these critical assumptions at least annually.The discount rate enables the Partnership to state expected future cash flows at a present value on the measurement date. The rate is required torepresent the market rate for high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations and increasespension expense. A 25 basis point decrease in the discount rated used for fiscal 2006 would have increased pension expense by approximately $0.1 millionand would have increased the minimum pension liability by another $1.7 million. The discount rate used to determine net periodic pension expense was5.5% in 2006 and 6.0% in 2005 and 2004. The discount rate used in determining end of year pension obligations was 5.75% in 2006, 5.5% in 2005 and 6.0%in 2004. These rates reflect the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flows are expected tomatch the timing and amounts of future benefit payments.We consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets to determine ourexpected long-term rate of return on pension plan assets. The expected long-term rate of return on assets is developed with input from the Partnership’squalified actuaries. The long-term rate of return assumption used for determining net periodic pension expense for fiscals 2006 and 2005 was 8.25%. Afurther 25 basis point decrease in the expected return on assets would have increased pension expense in fiscal 2006 by approximately $0.1 million.Over the life of the plans, both gains and losses have been recognized by the plans in the calculation of annual pension expense. As of September 30,2006, $21.2 million of unrecognized losses remain to be recognized by the plans. These losses may result in increases in future pension expense as they arerecognized.Allowance for Doubtful AccountsWe periodically review past due customer accounts receivable balances. After giving consideration to economic conditions, overdue status and otherfactors, the heating oil segment establishes an allowance for doubtful accounts, which it deems sufficient to cover future potential losses. Actual losses coulddiffer from management’s estimates; however, based on historical experience, we do not expect our estimate of uncollectible accounts to vary significantlyfrom actual losses.Insurance ReservesWe currently self-insure a portion of workers’ compensation, auto and general liability claims. We establish reserves based upon expectations as towhat our ultimate liability may be for outstanding claims using developmental factors based upon historical claim experience. We periodically evaluate thepotential for changes in loss estimates with the support of qualified actuaries. As of September 30, 2006, we had approximately $38.8 million of insurancereserves. The ultimate resolution of these claims could differ materially from the assumptions used to calculate the reserves, which could have a materialadverse effect on results of operations. 34 Table of ContentsITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to interest rate risk primarily through our bank credit facilities. We utilize these borrowings to meet our working capital needs. Duringfiscal 2006, our average working capital borrowing was $9.7 million and the maximum borrowed was $47 million in January 2006.At September 30, 2006, we had outstanding borrowings totaling $ 174.2 million, none of which is subject to variable interest rates.We also selectively use derivative financial instruments to manage our exposure to market risk related to changes in the current and future market priceof home heating oil. The value of market sensitive derivative instruments is subject to change as a result of movements in market prices. Sensitivity analysisis a technique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product atSeptember 30, 2006, the potential impact on our hedging activity would be to increase the fair market value of these outstanding derivatives by $7.0 millionto a fair market value of $(2.6) million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value ofthese outstanding derivatives by $7.2 million to a fair market value of $(16.8) million. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe financial statements and financial statement schedules referred to in the index contained on page F-1 of this report are incorporated herein byreference. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENONE ITEM 9A.CONTROLS AND PROCEDURES (a)Evaluation of disclosure controls and procedures.The General Partner’s principal executive officer and its principal financial officer evaluated the effectiveness of the Partnership’s disclosurecontrols and procedures (as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2006, toensure that the information required to be disclosed by the Partnership in reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, such principal executiveofficer and principal financial officer concluded that the Partnership’s disclosure controls and procedures as of September 30, 2006 were not effectivebecause of the material weakness in internal control over financial reporting in hedge accounting as discussed below. (b)Management’s Report on Internal Control over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision of management and with the participation of ourmanagement, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation of internal control over financial reporting, the Partnership identified thefollowing material weakness with regard to its accounting for certain derivative instruments in accordance with Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133):The Partnership did not have personnel with sufficient technical expertise related to the application of the provisions of SFAS 133. Specifically,the Partnership’s personnel lacked sufficient technical expertise to ensure compliance with the documentation requirements of SFAS 133 at inceptionof certain hedge relationships. This material weakness resulted in the restatement of the Partnership’s consolidated financial statements for fiscal yearsended September 30, 2005 and 2004, the first, second and third quarters of fiscal 2006 and each of the quarters in fiscal 2005.As a result of the material weakness described above, management concluded that the Partnership’s internal control over financial reporting wasnot effective as of September 30, 2006.Our management’s assessment of the effectiveness of our internal control over financial reporting as of September 30, 2006 has been audited byKPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. 35 Table of Contents(c)Change in Internal Control over Financial Reporting.No change in the Partnership’s internal control over financial reporting occurred during the Partnership’s most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect the Partnership’s internal control over financial reporting. (d)Other.The Partnership restated its financial statements for fiscal years ended September 30, 2005 and 2004 and the first, second and third quarters offiscal 2006 and each of the quarters in fiscal 2005 because it did not comply with the initial documentation requirements of paragraph 28(a)(2) of SFAS133 which states that a forecasted transaction shall be described with sufficient specificity such that when a specific transaction occurs, it is clearwhether the specific transaction is or is not the hedged transaction. The Partnership’s initial documentation lacked this clarity as the hedginginstruments for a given month could not be linked to a specific purchase during the month. In addition to not meeting the documentation requirements,the Partnership has also determined that its forward contracts did not meet the criteria as described in paragraph 65(a) of SFAS 133 which permits anentity to assume that a hedge of a forecasted purchase of a commodity with a forward contract will be highly effective and that there will be noineffectiveness to be recognized.The Partnership believes that its initial accounting treatment of certain derivative transactions properly reflected the intent and economics of theunderlying transactions; however, the interpretations of how to apply SFAS 133 and how to adequately provide documentation for such instruments soas to qualify for hedge accounting are complex and continue to evolve. Since the initial documentation did not meet the requirements of SFAS 133 toallow certain derivative instruments to qualify for hedge accounting, any changes in the market value of these derivative instruments prior to theirmaturity are recorded through the Consolidated Statements of Operations rather than through Consolidated Statements of Comprehensive Income.There is no effect on consolidated cash flows, or Total Partners’ Capital.The General Partner and the Partnership believe that a control system, no matter how well designed and operated, can not provide absoluteassurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues andinstances of fraud, if any, within the Partnership have been determined. (e)RemediationThe Partnership is evaluating the accounting technical expertise requirements necessary for compliance with SFAS 133 and considering whetherit will choose to apply hedge accounting in the future. Prior to applying hedge accounting in future periods, the Partnership will ensure that it hasappropriate resources with sufficient technical expertise to comply with the provisions of SFAS 133 to qualify for hedge accounting. ITEM 9B.OTHER INFORMATIONNot ApplicablePART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTPartnership ManagementEffective as of April 28, 2006, Star Gas LLC withdrew as the general partner of the Partnership and Kestrel Heat became the general partner of thePartnership, in accordance with the terms of the unit purchase agreement. Kestrel Heat is wholly-owned by Kestrel. Kestrel appoints all of the directors ofKestrel Heat. Kestrel is a private equity investment partnership formed by Yorktown Energy Partners VI, L.P. (“Yorktown”), Paul A. Vermylen and otherinvestors.Kestrel Heat, as the general partner of the Partnership, oversees the activities of the Partnership. Unitholders do not directly or indirectly participate inthe management or operation of the Partnership or elect the directors of the general partner. The Board of Directors of the general partner has adopted a set ofPartnership Governance Guidelines in accordance with the requirements of the New York Stock Exchange. A copy of these Guidelines is available on thePartnership’s website at www.Star-Gas.com or a copy may be obtained without charge by contacting Richard F. Ambury, (203) 328-7300.As of December 14, 2006, Kestrel Heat and its affiliates owned an aggregate of 12,803,128 common units, representing 16.9% of the issued andoutstanding common units, and Kestrel Heat owned 325,729 general partner units.The general partner owes a fiduciary duty to the unitholders. However, our partnership agreement contains provisions that allow the general partner totake into account the interests of parties other than the Limited Partners in resolving conflict of interest, thereby limiting such fiduciary duty.Notwithstanding any limitation on obligations or duties, the general partner will be liable, as the general partner of the Partnership, for all debts of thePartnership (to the extent not paid by the Partnership), except to the extent that indebtedness or other obligations incurred by the Partnership are madespecifically non-recourse to the general partner.As is commonly the case with publicly traded limited partnerships, the general partner does not directly employ any of the persons responsible formanaging or operating the Partnership. 36 Table of ContentsDirectors and Executive Officers of the General PartnerDirectors are elected for one-year terms. The following table shows certain information for directors and executive officers of the general partner as ofDecember 29, 2006: Name Age PositionPaul A. Vermylen, Jr. 60 Chairman, DirectorJoseph P. Cavanaugh 69 Chief Executive Officer and DirectorDaniel P. Donovan 60 President, Chief Operating Officer and DirectorRichard F. Ambury 49 Chief Financial OfficerRichard G. Oakley 47 Vice President and ControllerHenry D. Babcock (1) 66 DirectorC. Scott Baxter (1) 45 DirectorBryan H. Lawrence 64 DirectorSheldon B. Lubar 77 DirectorWilliam P. Nicoletti (1) 61 Director(1)Audit Committee memberPaul A. Vermylen, Jr. Mr. Vermylen has been the Chairman and a director of Kestrel Heat since April 28, 2006. Mr. Vermylen is a founder of Kestrel and hasserved as its President and as a manager since July, 2005. Mr. Vermylen has been employed since 1971, serving in various capacities, including as a VicePresident of Citibank N.A. and Vice President-Finance of Commonwealth Oil Refining Co. Inc. Mr. Vermylen served as Chief Financial Officer of Meenan OilCo., L.P. from 1982 until 1992 and as President of Meenan Oil Co., L.P. until 2001, when Meenan was acquired by the Partnership. Since 2001, Mr. Vermylenhas pursued private investment opportunities. Mr. Vermylen serves as a director of certain non-public companies in the energy industry in which Kestrelholds equity interests including Downeast LNG, Inc., COALition Energy, LLC and Moneta Energy Services Ltd. Mr. Vermylen is a graduate of GeorgetownUniversity and has a M.B.A. from Columbia University.Joseph P. Cavanaugh. Mr. Cavanaugh has been Chief Executive Officer and a director of Kestrel Heat since April 28, 2006. Mr. Cavanaugh was ChiefExecutive Officer and a director of Star Gas from March 2005 until April 28, 2006. From December 2004, after the sale of the Partnership’s propane segmentto Inergy L.P. to March 2005, Mr. Cavanaugh was employed by Inergy to direct the transition of the business to them. From March 1999 to December 2004Mr. Cavanaugh was Chief Executive Officer of the Partnership’s propane segment. From December 1997 to March 1999, Mr. Cavanaugh served as Presidentand Chief Executive Officer of Star Gas Corporation, a predecessor general partner. From October 1969 to December 1997, Mr. Cavanaugh held variousfinancial and management positions with Petro. Mr. Cavanaugh is a graduate of Iona College and received an MS from Pace University.Daniel P. Donovan. Mr. Donovan has been President and Chief Operating Officer and a director of Kestrel Heat since April 28, 2006. Mr. Donovan wasPresident and Chief Operating Officer of Star Gas from May 2004 until April 28, 2006. From January 1980 to May 2004, he held various managementpositions with Meenan Oil Co. LP, including Vice President and General Manager from 1998 to 2004. Mr. Donovan worked for Mobil Oil Corp. from 1971 to1980. His last position with Mobil was President and General Manager of its heating oil subsidiary in New York City and Long Island. Mr. Donovan is agraduate of St. Francis College in Brooklyn, New York and received an M.B.A. from Iona College.Richard F. Ambury. Mr. Ambury has been Chief Financial Officer, Treasurer and Secretary of Kestrel Heat since April 28, 2006. Mr. Ambury was ChiefFinancial Officer, Treasurer and Secretary of Star Gas from May 2005 until April 28, 2006. From November 2001 to May 2005, Mr. Ambury was VicePresident and Treasurer of Star Gas. From March 1999 to November 2001, Mr. Ambury was Vice President of Star Gas Propane, L.P. From February 1996 toMarch 1999, 37 Table of ContentsMr. Ambury served as Vice President—Finance of Star Gas Corporation, the predecessor general partner. Mr. Ambury was employed by Petro from June 1983through February 1996, where he served in various accounting/finance capacities. From 1979 to 1983, Mr. Ambury was employed by a predecessor firm ofKPMG, a public accounting firm. Mr. Ambury has been a Certified Public Accountant since 1981 and is a graduate of Marist College.Richard G. Oakley. Mr. Oakley has been Vice President and Controller of Kestrel Heat since May 22, 2006. From September 1982 until May 2006 he heldvarious positions with Meenan Oil Co. LP, most recently that of Controller since 1993. Mr. Oakley is a graduate of Long Island University.Henry D. Babcock. Mr. Babcock has been a director of Kestrel Heat since April 28, 2006. Mr. Babcock is Chairman of Train, Babcock Advisors LLC, aprivately-owned registered investment advisor. He joined the firm in 1976, became a partner in 1980 and CEO in 1999. Prior to this, he ran an affiliatedventure capital company that was active the in the U.S. and abroad. Mr. Babcock is a graduate of Yale University and received an MBA from ColumbiaUniversity. He serves on the Education Leadership Council of Save the Children and is a director of the Caumsett Foundation.C. Scott Baxter. Mr. Baxter has been a director of Kestrel Heat since April 28, 2006. Mr. Baxter is the Managing Partner for Green River Energy Partners,LLC, headquartered in New York City. Green River is a principal investing firm, which invests in public and private equity in energy and was founded in2005. From 2002 to 2005, he was a founding partner of Baxter Bold & Company, a corporate energy M&A and private equity advisory firm. From 1999through 2001, he was Head of Americas for the Global Energy Investment Banking Group of JPMorgan. From 1989 to 1999, Mr. Baxter worked for SalomonSmith Barney’s Global Energy Investment Banking Group where he was a Managing Director. Mr. Baxter holds a B.S. degree in Economics from Weber StateUniversity where he graduated cum laude, and received an MBA degree from the University of Chicago Graduate School of Business. From 2002 to 2005Mr. Baxter was also an adjunct professor of finance at Columbia University’s Graduate School of Business.Bryan H. Lawrence. Mr. Lawrence has been a director of Kestrel Heat since April 28, 2006 and as a manager of Kestrel since July, 2005. Mr. Lawrence is afounder and senior manager of Yorktown, the manager of the Yorktown group of investment partnerships, which make investments in companies engaged inthe energy industry. The Yorktown partnerships were formerly affiliated with the investment firm of Dillon, Read & Co. Inc., where Mr. Lawrence had beenemployed since 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence also serves as adirector of Crosstex Energy, Inc., Hallador Petroleum Company (each a United States publicly traded company), Winstar Resources Ltd. (a Canadian publiccompany) and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Lawrence also serves as adirector of Crosstex Energy GP, LLC, the general partner of Crosstex Energy, L.P. (a United States publicly traded company). Mr. Lawrence is a graduate ofHamilton College and received an M.B.A. from Columbia University.Sheldon B. Lubar. Mr. Lubar has been a director of Kestrel Heat since April 28, 2006 and a manager of Kestrel since July, 2005. Mr. Lubar has been Chairmanof the board of Lubar & Co. Incorporated, a private investment and venture capital firm he founded, since 1977. He was Chairman of the board of ChristianaCompanies, Inc., a logistics and manufacturing company, from 1987 until its merger with Weatherford International in 1995. Mr. Lubar had also beenChairman of Total Logistics, Inc., a logistics and manufacturing company until its acquisition in 2005 by SuperValu Inc. He has served as a director of GrantPrideco, Inc., an energy services company, since 2000; Weatherford International, Inc., an energy services company, since 1995; Crosstex Energy, Inc. sinceJanuary 2004 and Crosstex Energy GP, LLC, the General Partner of Crosstex Energy, L.P. He is also a director of several private companies. Mr. Lubar holds abachelor’s degree in Business Administration and a Law degree from the University of Wisconsin-Madison. He was awarded an honorary Doctor ofCommercial Science degree from the University of Wisconsin-Milwaukee.William P. Nicoletti. Mr. Nicoletti has been a director of Kestrel Heat since April 28, 2006. Mr. Nicoletti was the non-executive chairman of the board of StarGas from March 2005 until April 28, 2006. Mr. Nicoletti was a director of Star Gas from March 1999 until April 28, 2006 and was a director of Star GasCorporation, the predecessor general partner from November 1995 until March 1999. He is Managing Director of Nicoletti & Company, Inc., a privateinvestment banking firm. Mr. Nicoletti was formerly a senior officer and head of Energy Investment Banking for E. F. Hutton & Company, Inc., PaineWebberIncorporated and McDonald Investments, Inc. Mr. Nicoletti is a director of MarkWest Energy Partners, L.P., and SPI Petroleum, LLC. Mr. Nicoletti is agraduate of Seton Hall University and received an M.B.A. from Columbia University. 38 Table of ContentsMeetings and Compensation of DirectorsDuring fiscal 2006, the Board of Directors of Star Gas met 15 times and the Board of Directors of Kestrel Heat met one time. All Star Gas Directorsattended each meeting except one former director did not attend one meeting. Following its appointment as general partner, all Kestrel directors exceptMr. Lubar attended the Board of Directors meeting.Each non-management director, with the exception of Bryan Lawrence who has chosen not to receive any fees, receives an annual fee of $27,000 plus$1,500 for each regular meeting attended and $750 for each telephonic meeting attended. The Chairman of the Audit Committee receives an annual fee of$12,000 while other Audit Committees members receive an annual fee of $6,000. Each member of the Audit Committee receives $1,500 for every regularmeeting attended and $750 for every telephonic meeting attended. The non-executive chairman of the Board receives an annual fee of $120,000.Committees of the Board of DirectorsKestrel Heat’s Board of Directors has one standing committee, the Audit Committee. Its members are appointed by the Board of Directors for a one-yearterm and until their respective successors are elected.Audit CommitteeWilliam P. Nicoletti, Henry D. Babcock and C. Scott Baxter have been appointed to serve on the Audit Committee of the general partner’s Board ofDirectors. Kestrel Heat’s Board of Directors has adopted an Audit Committee Charter. A copy of this charter is available on the Partnership’s website atwww.Star-Gas.com or a copy may be obtained without charge by contacting Richard F. Ambury (203)328-7300. The Audit Committee reviews the externalfinancial reporting of the Partnership, selects and engages the Partnership’s independent registered public accountants and approves all non-auditengagements of the independent registered public accountants. During fiscal 2006, the Audit Committee of Star Gas met three times and the AuditCommittee of Kestrel Heat met four times. All members attended each meeting.Members of the Audit Committee may not be employees of Kestrel Heat or its affiliated companies and must otherwise meet the New York StockExchange and SEC independence requirements for service on the Audit Committee. The Board of Directors has determined that Messrs. Nicoletti, Babcockand Baxter are independent directors in that they do not have any material relationships with the Partnership (either directly, or as a partner, shareholder orofficer of an organization that has a relationship with the Partnership) and they otherwise meet the independence requirements of the NYSE and the SEC. ThePartnership’s Board of Directors has also determined that at least one member of the Audit Committee, Mr. Nicoletti, meets the SEC criteria of an “auditcommittee financial expert.”Reimbursement of Expenses of the General PartnerThe general partner does not receive any management fee or other compensation for its management of the Partnership. The general partner isreimbursed for all expenses incurred on behalf of the Partnership, including the cost of compensation, which is properly allocable to the Partnership. ThePartnership’s partnership agreement provides that the general partner shall determine the expenses that are allocable to the Partnership in any reasonablemanner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to the Partnership forwhich a reasonable fee would be charged as determined by the general partner.Adoption of Code of Business Conduct and EthicsThe Partnership has adopted a written Code of Business Conduct and Ethics that applies to the Partnership’s officers, directors and employees. A copyof the Code of Business Conduct and Ethics is available on the Partnership’s website at www.Star-Gas.com or a copy may be obtained without charge, bycontacting Richard F. Ambury, (203) 328-7300.Non-Management DirectorsThe non-management directors on the Board of Directors of the general partner are Messrs. Babcock, Baxter, Lawrence, Lubar, Nicoletti and Vermylen.The non-management directors have selected Mr. Vermylen to serve as lead director to chair executive sessions of the non-management directors. Unitholdersinterested in contacting the non-management directors as a group may do so by contacting Paul A. Vermylen, Jr. c/o Star Gas Partners, L.P., 2187 AtlanticStreet, Stamford, CT 06902. 39 Table of ContentsOfficer Certification RequirementsThe Partnership’s chief executive officer submitted to the NYSE the CEO certification required pursuant to Section 303A 12(a) of the NYSE rules forthe fiscal year ended September 30, 2005.This annual report on Form 10-K includes as exhibits the certifications of the Partnership’s chief executive officer and chief financial officer requiredunder Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. ITEM 11.EXECUTIVE COMPENSATIONThe following table sets forth the annual salary, bonuses and all other compensation awards and payouts to the Chief Executive Officer and to thenamed executive officers for services rendered to the Partnership and its subsidiaries during the fiscal years ended September 30, 2006, 2005 and 2004. Year Summary Compensation Table AnnualCompensation RestrictedStockAwards Long-TermCompensationName and Principal Position Salary Bonus (1) OtherAnnualComp. SecuritiesUnderlyingUARs AllOtherComp.Joseph P. Cavanaugh, 2006 $275,000 $220,000 $34,040(3) Chief Executive Officer 2005 $189,000 $1,140,894(2) $9,910(3) 2004 $267,800 $— $494,169(3) Daniel P. Donovan, 2006 $300,000 $240,000 $12,985(4) President and Chief 2005 $300,000 $— $21,778(4) 5,000 Operating Officer 2004 $253,654 $85,785 $24,614(4) 10,000 Richard F. Ambury 2006 $236,333 $240,000 $12,492(4) Chief Financial Officer 2005 $232,988 $100,000 $16,629(4) 9,917 2004 $222,956 $— $10,034(4) 9,917 Richard G. Oakley 2006 $162,730(5) $50,000 $7,729(4) Vice President - Controller (1)Amounts represent bonuses earned and accrued in the fiscal year. (2)In connection with the sale of the propane segment in December 2004, the Partnership paid the segment’s then Chief Executive Officer, JosephCavanaugh, a bonus equal to three times Mr. Cavanaugh’s annual salary and bonus upon the successful completion of the sale. (3)These amounts represent company paid contributions under Petro’s 401(k) defined contribution retirement plan. In fiscal 2006, other annualcompensation includes a Company reimbursement of $13,134 for the payment of taxes. In fiscal 2004, other annual compensation includes a $474,679distribution from the Partnership’s SERP retirement plan. Mr. Cavanaugh became eligible in fiscal 2004 to receive distributions from the SERP plan. (4)These amounts represent company paid contributions under Petro’s 401(k) defined contribution retirement plan. (5)Mr. Oakley was elected an officer of the Partnership in October 2006, but has been serving as its Controller since May 2006, and prior thereto served asController of Meenan Oil Co. LP. 40 Table of ContentsAggregated Option/UAR Exercises in Last Fiscal Year and Fiscal Year End Option/UAR ValuesNoneLong-Term Incentive Plans—Awards in Last FiscalNoneEquity Compensation Plan InformationNoneEmployment Contracts and Service AgreementsAgreement with Joseph P. CavanaughIn connection with the sale of the propane segment in December 2004, the Partnership paid the segment’s then Chief Executive Officer, JosephCavanaugh, a bonus of $1,140,894 (equal to three times Mr. Cavanaugh’s annual salary and bonus) upon the successful completion of the sale. Uponcompletion of the sale, Mr. Cavanaugh’s position was terminated by the Partnership. Mr. Cavanaugh was subsequently employed by Inergy, the entity thatacquired the propane segment, from December 2004 to March 2005 as President, of its Star Gas Division. Mr. Cavanaugh was appointed as the ChiefExecutive Officer of Star Gas, effective as of March 7, 2005, at an annual salary of $275,000.Agreement with Daniel P. DonovanThe Partnership entered into an employment agreement with Mr. Donovan effective as of May 5, 2004. Mr. Donovan’s employment agreement has aterm of three-years ending on July 12, 2007, or unless otherwise terminated in accordance with the employment agreement. The employment agreementprovides for an annual base salary of $300,000. In addition, Mr. Donovan may earn a bonus of up to 40% of his base salary for services rendered based uponachieving certain performance criteria. Mr. Donovan will also be entitled to receive 10,000 common units annually under a long-term incentive plan that isto be developed by the Partnership. The employment agreement provides for one year’s salary as severance if Mr. Donovan’s employment is terminatedwithout cause or by Mr. Donovan for good reason.Agreement with Richard F. AmburyEffective May 4, 2005, Petro entered into an employment agreement with Richard F. Ambury pursuant to which Mr. Ambury will be employed by Petrofor a three-year term ending on May 3, 2008. Mr. Ambury will serve as Vice President and Chief Financial Officer of both Petro and the general partner of thePartnership. The agreement provides for an annual base salary of $236,333 and a performance-based bonus of up to 40% of his base salary or such higherpercentage as shall be applicable to Petro’s chief operating officer. In addition to the performance-based bonus, Mr. Ambury will receive a payment of$50,000 on the last day of each 12-month period during the term. If Mr. Ambury’s employment is terminated without cause or Mr. Ambury terminates hisemployment for good reason, Mr. Ambury would be entitled to the following severance compensation: $572,666 if the agreement is terminated after May 1,2006 and prior to April 30, 2007; and $286,333, if the agreement is terminated after May 1, 2007 and prior to May 3, 2008.Agreement with Richard G. OakleyEffective May 22, 2006, the Partnership entered into an employment agreement with Mr. Richard G. Oakley pursuant to which Mr. Oakley will beemployed for a three-year term ending on May 21, 2009. Mr. Oakley will serve as Vice President – Controller of the Partnership. The agreement provides foran annual base salary of $190,000 and a performance-based bonus of up to 25% of his base salary or such higher percentage as may be applicable. If thePartnership terminates Mr. Oakley’s employment for reasons other than cause, he will be entitled to one year’s salary as severance.401(k) PlanMr. Cavanaugh, Mr. Donovan, Mr. Ambury, and Mr. Oakley are covered under a 401(k) defined contribution plan maintained by Petro. Participants inthe plan may elect to contribute a sum not to exceed the lesser of 17% of a participant’s compensation or the maximum limit under the Internal RevenueCode of 1975, as amended. Under this plan, Petro makes a core contribution from 4% up to a maximum 5.5% of a participant’s compensation up to $220,000and matches 2/3 of each amount that a participant contributes with a maximum employer match of 2%. 41 Table of ContentsManagement Incentive Compensation PlanOn July 20, 2006, the Board of Directors of Kestrel Heat adopted a Management Incentive Compensation Plan (the “Plan”) for the Partnership. Underthe Plan, certain management employees of the Partnership and its direct and indirect subsidiaries that are selected by the Board to participate in the Planshall be entitled to receive a pro rata share of an amount in cash up to: • 50% of the Incentive Distributions (as defined in the Partnership Agreement) otherwise distributable to Kestrel Heat pursuant to the PartnershipAgreement; and • 50% of the cash proceeds (the “Gains Interest”) which Kestrel Heat shall receive from the sale of its General Partner Units (as defined in thePartnership Agreement), less expenses and applicable taxes.To fund the benefits under the Plan, Kestrel Heat has agreed to forego receipt of up to 50% of all distributions to which it would be entitled in excess ofminimum quarterly distributions. Amounts payable to management under this Plan will be treated as compensation and will reduce both EBITDA and netincome. Kestrel Heat has also agreed to contribute to the Partnership, as a contribution to capital, an amount equal to the Gains Interest payable toparticipants in the Plan by the Partnership.The Plan is administered by the Partnership’s Chief Financial Officer under the direction of the Board or by such other officer as the Board may fromtime to time direct.In October 2006, the Board awarded 1,000 participation points in the Plan to certain officers, including the following points to the following namedexecutive officers: Joseph Cavanaugh-233 1/3; Dan Donovan-233 1/3; and Richard Ambury-233 1/3. This would entitle each of them to receiveapproximately 23% of any amounts distributed under the Plan during the 2007 fiscal year. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe following table shows the beneficial ownership as of December 14, 2006 of common units and general partner units by:(1) Kestrel and certain beneficial owners;(2) each of the named executive officers and directors of Kestrel Heat;(3) all directors and executive officers of Kestrel Heat as a group; and(4) each person the Partnership knows to hold 5% or more of the Partnership’s units.Except as indicated, the address of each person is c/o Star Gas Partners, L.P. at 2187 Atlantic Street, Stamford, Connecticut 06902-0011. Common Units General Partner Units Name Number Percentage Number Percentage Kestrel (a) 12,803,128 16.90% 325,729 100%Paul A. Vermylen, Jr. — — Joseph P. Cavanaugh — — Daniel P. Donovan — — Richard F. Ambury 2,125 * Richard G. Oakley — — Henry D. Babcock 41,121 * C. Scott Baxter — — Bryan H. Lawrence — — Sheldon B. Lubar — — William P. Nicoletti 20,252 * All officers and directors and Kestrel Heat, LLC as a group (10 persons) 12,866,626 16.98% 325,729 100%MacKay Shields, LLC (b) 8,808,932 11.63% (a)Includes (i) 500,000 common units and 325,729 general partner units owned by Kestrel Heat, and (ii) 12,303,128 common units owned by KM2, as towhich Kestrel, in its capacity as sole member of Kestrel Heat and KM2, may be deemed to share beneficial ownership. 42 Table of Contents(b)According to a Schedule 13G filed with the SEC on May 8, 2006, MacKay Shields, LLC an investment adviser for various clients registered underSection 203 of the Investment Advisers Act of 1940, is deemed to be the beneficial owner of the common units. *Amount represents less than 1%.Section 16(a) of the Securities Exchange Act of 1934 requires the General Partner’s officers and directors, and persons who own more than 10% of aregistered class of the Partnership’s equity securities, to file reports of beneficial ownership and changes in beneficial ownership with the Securities andExchange Commission (“SEC”). Officers, directors and greater than 10 percent unitholders are required by SEC regulation to furnish the General Partner withcopies 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 noSection 16 Forms were required for those persons, the General Partner believes that during fiscal 2006 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 TRANSACTIONSThe general partner does not receive any management fee or other compensation for its management of the Partnership. The general partner isreimbursed for all expenses incurred on behalf of the Partnership, including the cost of compensation, which is properly allocable to the Partnership. ThePartnership’s partnership agreement provides that the general partner shall determine the expenses that are allocable to the Partnership in any reasonablemanner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to the Partnership forwhich a reasonable fee would be charged as determined by the general partner.Kestrel has the ability to elect the Board of Directors of Kestrel Heat, including Messrs. Vermylen, Lawrence and Lubar. Messrs. Vermylen, Lawrenceand Lubar are also members of the board of managers of Kestrel and, either directly or through affiliated entities, own equity interests in Kestrel. Kestrel ownsall of the issued and outstanding membership interests of Kestrel Heat and KM2, LLC, a Delaware limited liability company (“M2”). Kestrel Heat and M2purchased an aggregate of 12,722,523 common units in connection with the recapitalization.On April 26, 2006, Mr. Vermylen contributed 50,000 common units that he owned prior to the commencement of the negotiation of therecapitalization to Kestrel and an additional 30,605 common units acquired upon exercise of the rights, in exchange for additional membership interests inKestrel. Kestrel, in turn, contributed the 80,605 common units to M2. ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe following table represents the aggregate fees for professional audit services rendered by KPMG LLP including fees for the audit of thePartnership’s annual financial statements for the fiscal years 2006 and 2005, and for fees billed and accrued for other services rendered by KPMG LLP (inthousands). 2006 2005Audit Fees (1) $1,540 $1,716Audit-Related Fees (2) 65 139Audit and Audit-Related Fees 1,605 1,855Tax Fees (3) 653 390Total Fees $2,258 $2,245(1)Audit fees were for professional services rendered in connection with audits and quarterly reviews of the consolidated financial statements of thePartnership, review of and preparation of consents for registration statements filed with the Securities and Exchange Commission, for review of thePartnership’s tax provision and for subsidiary statutory audits. The fees in 2005 also included fees related to services in connection with Section 404 ofthe Sarbanes-Oxley Act of 2002. Audit fees incurred in connection with registration statements were $90,000 and $95,000 for fiscal years 2006 and2005, respectively. 43 Table of Contents(2)Audit-related fees were principally for audits of financial statements of certain employee benefit plans, internal controls reviews, other services relatedto financial accounting and reporting standards and preparation for the Partnership’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002. (3)Tax fees related to services for tax consultation and tax compliance.Audit Committee: Pre-Approval Policies and Procedures. At its regularly scheduled and special meetings, the Audit Committee of the Board of Directorsconsiders and pre-approves any audit and non-audit services to be performed by the Partnership’s independent accountants. The Audit Committee hasdelegated to its chairman, an independent member of the Partnership’s Board of Directors, the authority to grant pre-approvals of non-audit services providedthat the service(s) shall be reported to the Audit Committee at its next regularly scheduled meeting.Promptly after the effective date of the Sarbanes-Oxley Act of 2002, the Audit Committee approved all non-audit services being performed at that timeby the Partnership’s principal accountant. On June 18, 2003, the Audit Committee adopted its pre-approval policies and procedures. Since that date, therehave been no non-audit services rendered by the Partnership’s principal accountants that were not pre-approved. PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES1. Financial StatementsSee “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 the following page. 44 Table of ContentsINDEX TO EXHIBITS ExhibitNumber Incorp byRef. to Exh. Description3.1 3.1(1) Amended and Restated Certificate of Limited Partnership4.1 99.1(2) Second Amended and Restated Agreement of Limited Partnership4.2 99.3(3) Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership4.3 99.1(3) Amended and Restated Unit Purchase Rights Agreement dated as of July 20, 200610.1 10.21(4) June 2000 Star Gas Employee Unit Incentive Plan†10.2 10.41(5) Employment Agreement between Petro Holdings, Inc. and Daniel P. Donovan.†10.3 10.1(6) Interest Purchase Agreement for the sale of the propane operations10.4 10.2(6) Non-Competition Agreement with Inergy10.5 10.35(7) Credit Agreement dated December 17, 2004, between Petroleum Heat and Power Co., Inc. and JPMorgan Chase Bank, N.A., Bankof America, N.A., Wachovia Bank, National Association, General Electric Capital Corporation, Citizens Bank of Massachusettsand J. P. MorganSecurities, Inc.10.6 99.1(8) Amendment, dated as of November 2, 2005, to the Credit Agreement, dated as of December 17, 2004 among Petroleum Heat andPower Co., Inc. and JPMorgan Chase Bank, N.A., Bank of America, N.A., Wachovia Bank, National Association, General ElectricCapital Corporation, and Citizens Bank of Massachusetts10.7 99.2(9) Letter Agreement and general release dated March 7, 2005 between Star Gas Partners L.P. and Irik P. Sevin †10.8 10.1(10) Employment Agreement dated May 4, 2005 between the Registrant and Richard F. Ambury†10.9 99.1(11) Unit Purchase Agreement dated as of December 5, 2005 among Star Gas Partners, L.P., Star Gas LLC, Kestrel Energy Partners,LLC, Kestrel Heat, LLC and KM2, LLC10.10 99.2(2) Indenture for the new senior notes10.11 99.3(2) Amended and Restated Indenture for the existing senior notes10.12 10.60(12) Second Amendment dated as of February 3, 2006 to Credit Agreement10.13 99.2(3) Management Incentive Compensation Plan†10.14 99.4(3) Form of Indemnification Agreement for Officers and Directors.10.15 * Approved Dealer / Contractor Agreement dated as of July 11, 2006 by and between AFC First Financial Corporation and PetroHoldings, Inc.10.16 * Employment Agreement dated May 17, 2006 between Star Gas Partners, L.P. and Richard G. Oakley.10.17 * Third Amendment dated as of October 30, 2006 to the Credit Agreement.10.18 99.4(13) Form of Amendment No. 1 to Indemnification Agreement.10.19 * Fourth Amendment and Waiver dated as of December 28, 2006 to the Credit Agreement.14 * Code of Business Conduct and Ethics21 * Subsidiaries of the Registrant 45 Table of Contents23.1 * Consent of KPMG LLP31.1 * Certification of Chief Executive Officer, Star Gas Partners, L.P., pursuant to Rule 13a-14(a)/15d-14(a).(1)31.2 * Certification of Chief Financial Officer, Star Gas Partners, L.P., pursuant to Rule 13a-14(a)/15d-14(a).(1)31.3 * Certification of Chief Executive Officer, Star Gas Finance Company, pursuant to Rule 13a-14(a)/15d-14(a).(1)31.4 * Certification of Chief Financial Officer, Star Gas Finance Company, pursuant to Rule 13a-14(a)/15d-14(a).(1)32.1 * Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002(1)32.2 * Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)*Filed herewith. †Employee compensation plan. (1)Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 9, 2006. (2)Incorporated by reference to an exhibit to the Registrant’s Form 8-K dated April 28, 2006. (3)Incorporated by reference to an exhibit to the Registrant’s Form 8-K dated July 20, 2006. (4)Incorporated by reference to the same Exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 10, 2000. (5)Incorporated by reference to and exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004, filed with theCommission on December 14, 2004. (6)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated November 18, 2004. (7)Incorporated by reference to an exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on February 9, 2005. (8)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated November 4, 2005. (9)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 8, 2005. (10)Incorporated by reference to the an exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 6, 2005. (11)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated December 5, 2005. (12)Incorporated by reference to an exhibit to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on February 7, 2006. (13)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated October 19, 2006. 46 Table of ContentsSIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the General Partner has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized: STAR GAS PARTNERS, L.P.By: KESTREL HEAT, LLC (General Partner)By: /s/ JOSEPH P. CAVANAUGH Joseph P. Cavanaugh Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on thedate indicated: Signature Title Date/s/ Joseph P. CavanaughJoseph P. Cavanaugh Chief Executive Officer and DirectorKestrel Heat, LLC January 16, 2007/s/ Daniel P. DonovanDaniel P. Donovan President, Chief Operating Officer and Director KestrelHeat, LLC January 16, 2007/s/ Richard F. AmburyRichard F. Ambury Chief Financial Officer(Principal Financial Officer)Kestrel Heat, LLC January 16, 2007/s/ Richard G. OakleyRichard G. Oakley Vice President – Controller(Principal Accounting Officer)Kestrel Heat, LLC January 16, 2007/s/ Paul A. Vermylen, Jr.Paul A. Vermylen, Jr. Non-Executive Chairman of the Board and Director KestrelHeat, LLC January 16, 2007/s/ Henry D. BabcockHenry D. Babcock DirectorKestrel Heat, LLC January 16, 2007/s/ C. Scott BaxterC. Scott Baxter DirectorKestrel Heat, LLC January 16, 2007/s/ Bryan H. LawrenceBryan H. Lawrence DirectorKestrel Heat, LLC January 16, 2007/s/ Sheldon B. LubarSheldon B. Lubar DirectorKestrel Heat, LLC January 16, 2007/s/ William P. NicolettiWilliam P. Nicoletti DirectorKestrel Heat, LLC January 16, 2007 47 Table of ContentsSIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized: STAR GAS FINANCE COMPANYBy: (Registrant)By: /s/ JOSEPH P. CAVANAUGH Joseph P. Cavanaugh Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on thedate indicated: Signature Title Date/s/ JOSEPH P. CAVANAUGHJoseph P. Cavanaugh Chief Executive Officer and Director(Principal Executive Officer)Star Gas Finance Company January 16, 2007/s/ RICHARD F. AMBURYRichard F. Ambury Chief Financial Officer(Principal Financial Officer)Star Gas Finance Company January 16, 2007/s/ RICHARD G. OAKLEYRichard G. Oakley Vice President - Controller(Principal Accounting Officer)Star Gas Finance Company January 16, 2007 48 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULE PagePart II Financial Information: Item 8—Financial Statements Reports of Independent Registered Public Accounting Firm F-2 – F-3Consolidated Balance Sheets as of September 30, 2006 and September 30, 2005 (restated) F-4Consolidated Statements of Operations for the years ended September 30, 2006, September 30, 2005 (restated) and September 30, 2004(restated) F-5Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2006, September 30, 2005 (restated) andSeptember 30, 2004 (restated) F-6Consolidated Statements of Partners’ Capital for the years ended September 30, 2006, September 30, 2005 (restated) and September 30,2004 (restated) F-7Consolidated Statements of Cash Flows for the years ended September 30, 2006, September 30, 2005 (restated) and September 30, 2004(restated) F-8Notes to Consolidated Financial Statements F-9 – F-32Schedules for the years ended September 30, 2006, September 30, 2005 and September 30, 2004 I. Condensed Financial Information of Registrant (restated) F-33 – F-35II. Valuation and Qualifying Accounts F-36All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financialstatements or the notes therein. F - 1 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Partners of Star Gas Partners, L.P.:We have audited the consolidated financial statements of Star Gas Partners, L.P. and Subsidiaries (the “Partnership”) as listed in the accompanyingindex. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in theaccompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Partnership’s management. Ourresponsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour 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 Subsidiaries as of September 30, 2006 and 2005 and the results of their operations and their cash flows for each of the years in the three-year periodended September 30, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules,when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forththerein.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of thePartnership’s internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 16, 2007 expressed an unqualifiedopinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.As discussed in Note 2 to the consolidated financial statements, the fiscal 2005 and 2004 consolidated financial statements have been restated.As discussed in Note 8 to the consolidated financial statements, the Partnership changed to the weighted average cost method of valuing inventory infiscal 2006.KPMG, LLPStamford, ConnecticutJanuary 16, 2007 F - 2 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Partners of Star Gas Partners, L.P.:We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reportingappearing under Item 9A(b), that Star Gas Partners, L.P. did not maintain effective internal control over financial reporting as of September 30, 2006, becauseof the effect of the material weakness identified in management’s assessment, based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of Star Gas Partners, L.P. is responsible for maintainingeffective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility isto express an opinion on management’s assessment and an opinion on the effectiveness of the Partnership’s internal control over financial reporting based onour audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified andincluded in management’s assessment:The Partnership did not have personnel with sufficient technical expertise related to the application of the provisions of Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS133). Specifically, the Partnership’s personnel lackedsufficient technical expertise to ensure compliance with the documentation requirements of SFAS 133 at inception of certain hedge relationships. Thismaterial weakness resulted in the restatement of the Partnership’s consolidated financial statements for fiscal years ended 2005 and 2004, the first, second,third quarters of 2006 and each of the quarters in fiscal 2005.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Star Gas Partners, L.P. and Subsidiaries as of September 30, 2006 and 2005, and the related consolidated statements of operations, comprehensiveincome (loss), partners’ capital, and cash flows for each of the years in the three-year period ended September 30, 2006. This material weakness wasconsidered in our audit of 2006 consolidated financial statements, and this report does not affect our report dated January 16, 2007, which expressed anunqualified opinion on those consolidated financial statements.In our opinion, management’s assessment that Star Gas Partners, L.P. did not maintain effective internal control over financial reporting as ofSeptember 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above onthe achievement of the objectives of the control criteria, Star Gas Partners, L.P. has not maintained effective internal control over financial reporting as ofSeptember 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).KPMG LLPStamford, ConnecticutJanuary 16, 2007 F - 3 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS Years Ended September 30, (in thousands) 2006 2005 (restated) ASSETS Current assets Cash and cash equivalents $91,121 $99,148 Receivables, net of allowance of $6,532 and $8,433, respectively 87,393 89,703 Inventories 75,859 52,461 Fair asset value of derivative instruments 3,766 35,140 Prepaid expenses and other current assets 37,741 28,867 Total current assets 295,880 305,319 Property and equipment, net 42,377 50,022 Long-term portion of accounts receivables 3,513 3,788 Goodwill 166,522 166,522 Intangibles, net 61,007 82,345 Deferred charges and other assets, net 10,899 15,152 Long-term assets held for sale 1,010 — Total assets $581,208 $623,148 LIABILITIES AND PARTNERS’ CAPITAL Current liabilities Accounts payable $21,544 $19,780 Working capital facility borrowings — 6,562 Fair liability value of derivative instruments 13,790 — Current maturities of long-term debt 96 796 Accrued expenses and other current liabilities 62,651 56,580 Unearned service contract revenue 36,634 36,602 Customer credit balances 73,863 65,287 Total current liabilities 208,578 185,607 Long-term debt 174,056 267,417 Other long-term liabilities 25,249 25,016 Partners’ capital (deficit) Common unitholders 194,818 175,461 Subordinated unitholders — (5,469)General partner (293) (3,621)Accumulated other comprehensive loss (21,200) (21,263)Total partners’ capital 173,325 145,108 Total liabilities and partners’ capital $581,208 $623,148 See accompanying notes to consolidated financial statements. F - 4 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS Years Ended September 30, (in thousands, except per unit data) 2006 2005 2004 (restated) (restated) Sales: Product $1,109,332 $1,071,270 $921,443 Installations and service 187,180 188,208 183,648 Total sales 1,296,512 1,259,478 1,105,091 Cost and expenses: Cost of product 825,694 786,302 592,428 Cost of installations and service 189,214 197,430 204,902 Change in the fair value of derivative instruments 45,677 (6,081) (25,811)Delivery and branch expenses 205,037 231,581 232,985 Depreciation and amortization expenses 32,415 35,480 37,313 General and administrative expenses 21,673 43,190 19,537 Goodwill impairment charge — 67,000 — Operating income (loss) (23,198) (95,424) 43,737 Interest expense (26,288) (36,152) (40,072)Interest income 5,085 4,314 3,390 Amortization of debt issuance costs (2,438) (2,540) (3,480)Loss on redemption of debt (6,603) (42,082) — Income (loss) from continuing operations before income taxes (53,442) (171,884) 3,575 Income tax expense 477 696 1,240 Income (loss) from continuing operations (53,919) (172,580) 2,335 Income (loss) from discontinued operations, net of income taxes — (6,189) 22,176 Gain (loss) on sales of discontinued operations, net of income taxes — 157,560 (538)Income (loss) before cumulative effect of changes in accounting principles (53,919) (21,209) 23,973 Cumulative effect of changes in accounting principles — change in inventory pricing method (344) — — Net income (loss) $(54,263) $(21,209) $23,973 General Partner’s interest in net income (loss) (160) (191) 221 Limited Partners’ interest in net income (loss) $(54,103) $(21,018) $23,752 Basic and diluted loss per Limited Partner Unit: Continuing operations $(1.01) $(4.77) $0.07 Net income (loss) $(1.02) $(0.59) $0.67 Weighted average number of Limited Partner Units outstanding: Basic 52,944 35,821 35,205 Diluted 52,944 35,821 35,205 See accompanying notes to consolidated financial statements. F - 5 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Years Ended September 30,(in thousands) 2006 2005 2004 (restated) (restated)Net income (loss) $(54,263) $(21,209) $23,973Other comprehensive income (loss): Unrealized gain (loss) on pension plan obligations 63 (3,931) 759Comprehensive income (loss) $(54,200) $(25,140) $24,732Reconciliation of Accumulated Other Comprehensive Income (Loss) (in thousands) Pension PlanObligations Balance as of September 30, 2003 (restated) $(18,091)Unrealized gain on pension plan obligations (restated) 759 Other comprehensive income (restated) 759 Balance as of September 30, 2004 (restated) (17,332)Unrealized loss on pension plan obligations (3,931)Other comprehensive loss (restated) (3,931)Balance as of September 30, 2005 (restated) (21,263)Unrealized gain on pension plan obligations 63 Other comprehensive income 63 Balance as of September 30, 2006 $(21,200) See accompanying notes to consolidated financial statements. F - 6 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF PARTNERS’ CAPITALYears Ended September 30, 2006, 2005 and 2004 Number of Units (in thousands, except per unit amounts) Common Sr.Sub. Jr.Sub. GeneralPartner Common Sr.Sub. Jr.Sub. GeneralPartner Accum. OtherComprehensiveIncome (Loss) TotalPartners’Capital Balance as of September 30, 2003 30,671 3,142 345 326 $210,636 $1,571 $(1,628) $(3,082) $(17,721) $189,776 Restatement adjustment (1) 376 3 (3) (6) (370) — Balance as of September 30, 2003 (restated) 30,671 3,142 345 326 211,012 1,574 (1,631) (3,088) (18,091) 189,776 Issuance of units 1,495 103 34,996 34,996 Net income (restated) 21,352 2,167 233 221 23,973 Other comprehensive income, net (restated) 759 759 Unit compensation expense 76 10 86 Distributions: — $2.30 per unit (73,119) (73,119)$1.725 per unit (5,540) (597) (563) (6,700)Balance as of September 30, 2004 (restated) 32,166 3,245 345 326 194,317 (1,789) (1,995) (3,430) (17,332) 169,771 Issuance of units 147 459 459 Net loss (restated) (18,874) (1,943) (201) (191) (21,209)Other comprehensive income, net (restated) (3,931) (3,931)Unit compensation expense 18 18 Balance as of September 30, 2005 (restated) 32,166 3,392 345 326 175,461 (3,273) (2,196) (3,621) (21,263) 145,108 Net income (loss) (55,619) 1,376 140 (160) (54,263)Other comprehensive loss, net 63 63 Issuance of units (2) 39,871 326 82,417 82,417 Exchange / retirement of units (2) 3,737 (3,392) (345) (326) (7,441) 1,897 2,056 3,488 — Balance as of September 30, 2006 75,774 — — 326 $194,818 $— $— $(293) $(21,200) $173,325 (1)See Note 2 - Restatement of Financial Information.(2)See Note 3 - Recapitalization.See accompanying notes to consolidated financial statements. F - 7 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended September 30, (in thousands) 2006 2005 2004 (restated) (restated) Cash flows provided by (used in) operating activities of continuing operations: Net income (loss) $(54,263) $(21,209) $23,973 Deduct: (Income) loss from discontinued operations — 6,189 (22,176)(Gain) loss on sales of discontinued operations — (157,560) 538 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Change in fair value of derivative instruments 45,677 (6,081) (25,811)Depreciation and amortization 34,853 38,020 40,793 Cumulative effect of change in accounting principle 344 — — Loss on redemption of debt 6,603 42,082 — Unit compensation expense — (2,185) (4,382)Provision for losses on accounts receivable 6,105 9,817 7,646 Goodwill impairment charge — 67,000 — Gain on sales of fixed assets, net (956) (43) (281)Changes in operating assets and liabilities net of amounts related to acquisitions: Increase in receivables (3,809) (13,845) (6,178)Increase in inventories (23,830) (18,248) (10,067)Decrease (increase) in other assets and assets held for sale, net (8,833) (5,574) 812 Increase (decrease) in accounts payable 1,764 (5,230) 5,832 Increase (decrease) in other current and long-term liabilities 14,709 11,952 2,970 Net cash provided by (used in) operating activities of continuing operations 18,364 (54,915) 13,669 Cash flows provided by (used in) investing activities of continuing operations: Capital expenditures (5,433) (3,153) (3,984)Proceeds from sales of fixed assets 2,162 3,398 1,462 Cash proceeds from sale of discontinued operations — 467,186 12,495 Acquisitions — — (3,526)Net cash provided by (used in) investing activities of continuing operations (3,271) 467,431 6,447 Cash flows provided by (used in) financing activities of continuing operations: Working capital facility borrowings 46,336 292,200 128,000 Working capital facility repayments (52,898) (293,638) (126,000)Acquisition facility borrowings — — 3,000 Acquisition facility repayments — — (36,000)Proceeds from the issuance of debt — — 70,512 Repayment of debt (66,138) (259,559) (8,471)Debt extinguishment costs — (37,688) — Distributions — — (79,819)Proceeds from the issuance of common units, net 50,174 — 34,996 Increase in deferred charges (594) (8,009) (6,092)Net cash used in financing activities of continuing operations (23,120) (306,694) (19,874)Cash flows of discontinued operations: Operating activities — (21,402) 48,076 Investing activities — (664) (18,589)Financing activities — 10,700 (29,293)Net cash provided by (used in) discontinued operations — (11,366) 194 Net increase (decrease) in cash (8,027) 94,456 436 Cash and cash equivalents at beginning of period 99,148 4,692 4,256 Cash and cash equivalents at end of period $91,121 $99,148 $4,692 See accompanying notes to consolidated financial statements. F - 8 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1) Partnership OrganizationStar Gas Partners, L.P. (“Star Gas Partners” or the “Partnership”) is a home heating oil distributor and services provider. Star Gas Partners is a masterlimited partnership, which at September 30, 2006 had outstanding 75.8 million common units (NYSE: “SGU” representing an 99.6% limited partner interestin Star Gas Partners) and 0.3 million general partner units (representing an 0.4% general partner interest in Star Gas Partners).The Partnership is organized as follows: • The general partner of the Partnership is Kestrel Heat, LLC, a Delaware limited liability company (“Kestrel Heat” or the “general partner”). TheBoard of Directors of Kestrel Heat is appointed by its sole member, Kestrel Energy Partners, LLC, a Delaware limited liability company (“Kestrel”). • The Partnership’s operations are conducted through Petro Holdings, Inc. (“Petro”) and its subsidiaries. Petro is a Minnesota corporation that is awholly-owned subsidiary of Star/Petro, Inc., which is a wholly-owned subsidiary of the Partnership. Petro is a retail distributor of home heating oilthat as of September 30, 2006 served approximately 440,000 total customers in the Northeast and Mid-Atlantic regions. • Star Gas Finance Company is a wholly-owned subsidiary of the Partnership. Star Gas Finance Company serves as the co-issuer, jointly andseverally with the Partnership, of the Partnership’s $172.8 million 10 1/4% Senior Notes, which are due in 2013. The Partnership is dependent ondistributions including intercompany interest payments from its subsidiaries to service the Partnership’s debt obligations. The distributions fromthe Partnership’s subsidiaries are not guaranteed and are subject to certain loan restrictions. Star Gas Finance Company has nominal assets andconducts no business operations.The Partnership was formerly engaged in the retail distribution of propane and related supplies and equipment. In December 2004, the Partnership soldall of its interests in its propane operations to Inergy Propane, LLC (“Inergy”) for a purchase price of $481.3 million. The Partnership recorded a gain on thissale of approximately $157 million.2) Restatement of Financial InformationOn December 26, 2006, management and the audit committee determined that it was necessary to amend and restate the Partnership’s previously issuedfinancial statements with respect to the accounting and disclosures for certain derivative transactions under Statement of Financial Accounting Standards(“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).The Partnership has determined that its documentation for certain hedged transactions related to the purchase of heating oil did not meet therequirements of paragraph 28(a)(2) of SFAS 133 which states that documentation shall include all relevant details including the date on or the period inwhich the forecasted transaction is expected to occur. The documentation of these hedges did not contain sufficient specificity to qualify for hedgeaccounting. In addition to not meeting the documentation requirements, the Partnership has also determined that its forward contracts did not meet thecriteria as described in paragraph 65(a) of SFAS 133 which permits an entity to assume that a hedge of a forecasted purchase of a commodity with a forwardcontract will be highly effective and that there will be no ineffectiveness to be recognized.Prior to the restatement, the changes in fair value of derivative instruments that were designated as cash flow hedges were recorded in accumulatedother comprehensive income until the forecasted transaction affected earnings. As a result of the restatement, those changes in fair value of derivativeinstruments are now recorded in change in the fair value of derivative instruments in the statements of operations. In addition, the change in fair value ofderivative instruments that were not designated as a hedge pursuant to SFAS 133, were previously classified in cost of product. As a result of the restatement,changes in fair value of derivative instruments that were previously included in cost of product are now classified in change in fair value of derivativeinstruments in the statements of operations. The fair value of derivative instruments were previously classified in prepaid expenses and other current assets.The Partnership has reclassified these amounts to fair asset value of derivative instruments and fair liability value of derivative instruments in theconsolidated balance sheets.Prior to June 30, 2006, the Partnership did not include the amortization of an unrecognized gain in the calculation of pension expense resulting in anoverstatement of pension expense for fiscal years 1999 to 2005 of $1.7 million. We have also restated our results to record the amortization of theunrecognized gain. The reduction to expense has been recorded as a reduction to general and administrative expense. In addition, we inappropriately grossedup our prepaid pension assets and minimum pension liability by $6.1 million and $6.4 million for fiscal years 2005 and 2004 respectively. As a result of the foregoing, we are restating herein our historical balance sheet as of September 30, 2005; our statements of operations, cash flows andpartners’ capital for fiscal 2005 and 2004; and financial information for the fiscal quarters ended June 30, 2006, March 31, 2006, December 31,2005, September 30, 2005, June 30, 2005, March 31, 2005 and December 31, 2004.Effects of Restatement The following tables set forth the effects of the restatement relating to derivative transactions and pension expense on affected line items within ourpreviously reported financial statements for fiscal 2005 and 2004. For fiscal 2005, the effect of derivative transactions reduced the net loss by $4.7 million, asa positive adjustment to the change in the fair value of derivative instruments of $6.1 million for continuing operations was reduced by a decrease in incomefrom discontinued operations of $1.6 million. In fiscal 2005, general and administrative expenses were reduced by $0.2 million, as the unamortized pensiongain was recorded.As of September 30, 2005, the balance in prepaid expenses and other current assets was reduced by $41.2 million to reflect a reclassification of $35.1million to fair asset value of derivative instruments and a reduction to prepaid pension expense of $6.1 million. Long-term liabilities were reduced by $6.1million, as the $6.1 million reclassification from prepaid pension expense was netted against the minimum pension obligation. Partners’ capital increased by$34.9 million and accumulated other comprehensive income decreased by $34.9 million to reflect the effects relating to derivative transactions of $33.4million and the cumulative unrecognized pension gain of $1.5 million. F - 9 Table of ContentsFor fiscal 2004, the effect of derivative transactions positively impacted net income by $29.4 million, which resulted from a positive adjustment to thechange in the fair value of derivative instruments of $25.8 million for continuing operations, a $1.7 million decrease in cost of product and increased incomefrom discontinued operations of $1.9 million. In fiscal 2004, general and administrative expenses were reduced by $0.4 million, as the unamortized pensiongain was recorded. Fiscal 2005 Fiscal 2004 (In thousands except per unit amounts) AsPreviouslyReported Restated AsPreviouslyReported Restated Statement of Operations Cost of product $786,349 $786,302 $594,153 $592,428 Change in the fair value of derivative instruments — (6,081) — (25,811)General and administrative expenses 43,418 43,190 19,937 19,537 Operating income (loss) (101,780) (95,424) 15,801 43,737 Income (loss) from continuing operations (178,936) (172,580) (25,601) 2,335 Income (loss) from discontinued operations (4,552) (6,189) 20,276 22,176 Net income (loss) (25,928) (21,209) (5,863) 23,973 Basic and diluted loss from continuing operations per unit (4.95) (4.77) (0.72) 0.07 Basic and diluted net income loss per unit (0.72) (0.59) (0.16) 0.67 Consolidated Balance Sheets Fair asset value of derivative instruments — 35,140 Prepaid expenses and other current assets 70,120 28,867 Current assets 311,432 305,319 Other long-term liabilities 31,129 25,016 Partners’ capital (deficit) 131,446 166,371 Partners’ capital accumulated other comprehensive income (loss) 13,662 (21,263) The effect of the restatement on opening partners’ capital as of September 30, 2003 was a net adjustment of $(0.4) million from accumulated othercomprehensive income to the common, senior subordinated and junior subordinated unitholders and the general partner; reflecting $(0.9) million adjustmentfor cumulative unrecognized pension gain and $0.5 million adjustment for the effects relating to derivative transactions.Quarterly Information (unaudited) The following tables set forth the effects of the restatement relating to derivatives transactions on affected line items within our previously reportedfinancial statements for fiscal quarters ended June 30, 2006; March 30, 2006; and December 31, 2005.For three months ended June 30, 2006, the net loss declined due to the effect of derivative transactions by $2.0 million, as the change in the fair valueof derivative instruments was positively impacted by $2.3 million and cost of product increased by $0.3 million. As of June 30, 2006, the balance in prepaidexpenses and other current assets was reduced by $11.9 million to reflect a reclassification of $5.9 million to fair asset value of derivative instruments, areclassification of $0.1 million to fair liability value of derivative instruments and a reduction to prepaid pension expense of $6.1 million. Long-termliabilities were reduced by $6.1 million, as the $6.1 million reclassification from prepaid pension expense was netted against the minimum pensionobligation. Partners’ capital increased by $6.6 million and accumulated other comprehensive (loss) increased by $6.6 million to reflect the effects relating toderivative transactions of $5.1 million and the cumulative unrecognized pension gain of $1.5 million.For three months ended March 31, 2006, net income increased by $10.5 million due to the effect of derivative transactions, which positively impactedthe change in the fair value of derivative instruments by $11.2 million and increased cost of product by $0.7 million. As of March 31, 2006, the balance inprepaid expenses and other current assets was reduced by $9.4 million to reflect a reclassification of $3.3 million to fair asset value of derivative instrumentsand a reduction to prepaid pension expense of $6.1 million. Long-term liabilities were reduced by $6.1 million, as the $6.1 million reclassification fromprepaid pension expense was netted against the minimum pension obligation. Partners’ capital increased by $4.6 million and accumulated othercomprehensive (loss) increased by $4.6 million to reflect the effects relating to derivative transactions of $3.1 million and the cumulative unrecognizedpension gain of $1.5 million. For three months ended December 31, 2005, net income was reduced by $40.9 million due to the effect of derivative transactions, which negativelyimpacted the change in the fair value of derivative instruments by $40.6 million and increased cost of product by $0.3 million. As of December 31, 2005, thebalance in prepaid expenses and other current assets was reduced by $0.4 million to reflect a reclassification of $1.3 million to fair asset value of derivativeinstruments, a reclassification of $7.0 million to fair liability value of derivative instruments and a reduction to prepaid pension expense of $6.1 million.Long-term liabilities were reduced by $6.1 million, as the $6.1 million reclassification from prepaid pension expense was netted against the minimumpension obligation. Partners’ capital decreased by $5.9 million and accumulated other comprehensive (loss) decreased by $5.9 million to reflect the effectsrelating to derivative transactions of $7.4 million and the cumulative unrecognized pension gain of $1.5 million. F - 10 Table of Contents Quarter Ending June 30, 2006 March 31, 2006 December 31, 2005 (In thousands except per unit amounts) AsPreviouslyReported Restated AsPreviouslyReported Restated AsPreviouslyReported Restated Statement of Operations Cost of product $114,900 $115,154 $367,870 $368,588 $261,972 $262,280 Change in the fair value of derivative instruments — (2,257) — (11,230) — 40,563 Operating income (loss) (24,330) (22,327) 51,748 62,260 20,437 (20,434)Income (loss) from continuing operations (36,079) (34,076) 43,557 54,069 12,874 (27,997)Net income (loss) (36,079) (34,076) 43,557 54,069 12,530 (28,341)Basic and diluted loss from continuing operations per unit (0.56) (0.53) 1.20 1.49 0.36 (0.77)Basic and diluted net income loss per unit $(0.56) $(0.53) $1.20 $1.49 $0.35 $(0.78)Consolidated Balance Sheets Fair asset value of derivative instruments $— $5,856 $— $3,331 $— $1,258 Prepaid expenses and other current assets 48,176 36,262 47,058 37,614 62,806 62,445 Current assets 292,800 286,742 314,043 307,930 322,026 322,923 Fair liability value of derivative instruments — 55 — — — 7,010 Total current liabilities 159,877 159,932 147,462 not restated 218,316 225,326 Other long-term liabilities 31,535 25,422 31,645 25,532 31,756 25,643 Partners’ capital (deficit) 233,871 240,440 187,533 192,099 143,976 138,030 Partners’ capital accumulated other comprehensive income (loss) (14,694) (21,263) (16,697) (21,263) (27,209) (21,263)The following tables set forth the restatement relating to derivative transactions on affected line items within our previously reported financialstatements for the fiscal quarters ended September 30, 2005, June 30, 2005, March 31, 2005 and December 31, 2004.For three months ended September 30, 2005, the net loss was reduced by $23.2 million due to the effect of derivative transactions, which resulted froma positive adjustment to the change in the fair value of derivative instruments of $ 20.1 million, a reduction in cost of product of $ 3.1 million, and areduction in general and administrative expenses by $0.2 million, for the recognition of unamortized pension cost.For three months ended June 30, 2005, the net loss increased by $8.0 million due to the effect of derivative transactions, which resulted from a negativeadjustment to the change in the fair value of derivative instruments of $ 7.2 million and an increase in cost of product of $ 0.8 million. As of June 30, 2005,the balance in prepaid expenses and other current assets was reduced by $19.8 million to reflect a reclassification of $13.4 million to fair asset value ofderivative instruments and a reduction to prepaid pension expense of $6.4 million. Long-term liabilities were reduced by $6.4 million, as the $6.4 millionreclassification from prepaid pension expense was netted against the minimum pension obligation. Partners’ capital increased by $11.5 million andaccumulated other comprehensive (loss) increased by $11.5 million to reflect the current quarter’s impact relating to derivative transactions of $10.2 million(including discontinued operations) and the cumulative unrecognized pension gain of $1.3 million.For three months ended March 31, 2005, net income was positively impacted by $14.4 million due to the effect of derivative transactions, whichresulted from a positive adjustment to the change in the fair value of derivative instruments of $ 21.0 million and an increase in cost of product of $ 6.6million. As of March 31, 2005, the balance in prepaid expenses and other current assets was reduced by $27.3 million to reflect a reclassification of $20.9million to fair asset value of derivative instruments and a reduction to prepaid pension expense of $6.4 million. Long-term liabilities were reduced by $6.4million, as the $6.4 million reclassification from prepaid pension expense was netted against the minimum pension obligation. Partners’ capital increased by$19.5 million and accumulated other comprehensive income decreased by $19.5 million to reflect the effects relating to derivative transactions of $18.2million and the cumulative unrecognized pension gain of $1.3 million.For three months ended December 31, 2004, net income was negatively impacted by $25.1 million due to the effect of derivative transactions, whichresulted from a negative adjustment to the change in the fair value of derivative instruments of $ 27.9 million for continuing operations, the negative effect ofderivative transactions on discontinued operations of $1.6 million and a reduction in cost of product of $ 4.4 million. As of December 31, 2004, the balancein prepaid expenses and other current assets was reduced by $10.0 million to reflect a reclassification of $6.3 million to fair asset value of derivativeinstruments, a reclassification of $2.7 million to fair liability value of derivative instruments and a reduction to prepaid pension expense of $6.4 million.Long-term liabilities were reduced by $6.4 million, as the $6.4 million reclassification from prepaid pension expense was netted against the minimumpension obligation. Partners’ capital increased by $5.1 million and accumulated other comprehensive (loss) increased by $5.1 million to reflect the effectsrelating to derivative transactions of $3.8 million and the cumulative unrecognized pension gain of $1.3 million. F - 11 Table of ContentsQuarterly Information (unaudited) Quarter Ending September 30, 2005 June 30, 2005 March 31, 2005 December 31, 2004 (In thousands except per unitamounts) AsPreviouslyReported Restated AsPreviouslyReported Restated AsPreviouslyReported Restated AsPreviouslyReported Restated Statement of Operations Cost of product $82,902 $79,841 $117,803 $118,610 $362,741 $369,385 $222,903 $218,466 Change in the fair value of derivativeinstruments — (20,114) — 7,216 — (21,049) — 27,866 General and administrative expenses 6,825 6,597 7,833 not restated 12,918 not restated 15,842 not restated Operating loss (39,963) (16,560) (23,448) (31,471) (17,341) (2,936) (21,028) (44,457)Loss from continuing operations (48,752) (25,349) (28,917) (36,940) (26,619) (12,214) (74,648) (98,077)Income (loss) from discontinuedoperations — — — — — — (4,552) (6,189)Net income (loss) (46,952) (23,549) (29,321) (37,344) (24,099) (9,694) 74,444 49,378 Basic and diluted loss from continuingoperations per unit (1.35) (0.70) (0.80) (1.02) (0.74) (0.34) (2.07) (2.72)Basic and diluted net income loss perunit $(1.30) $(0.65) $(0.81) $(1.03) $(0.67) $(0.27) $2.06 $1.37 Consolidated Balance Sheets Fair asset value of derivativeinstruments $— $35,140 $— $13,357 $— $20,822 $— $6,255 Prepaid expenses and other currentassets 70,120 28,867 54,570 34,779 62,577 35,321 59,243 49,260 Current assets 311,432 305,319 318,205 311,771 445,148 438,714 393,630 389,902 Fair liability value of derivativeinstruments — — — — — — — 2,706 Total current liabilities 185,607 not restated 271,015 not restated 369,410 not restated 298,065 300,771 Other long-term liabilities 31,129 25,016 27,576 21,142 27,634 21,200 23,766 17,332 Partners’ capital (deficit) 131,446 166,371 178,226 189,748 207,547 227,092 231,359 236,499 Partners’ capital accumulated othercomprehensive income (loss) 13,662 (21,263) (5,810) (17,332) 2,213 (17,332) (12,192) (17,332)Certain amounts in notes 5, 8, 16, 17 and 24 have been restated to reflect the restatement adjustments reflected above.3) RecapitalizationEffective as of April 28, 2006 the Partnership completed a recapitalization of the Partnership pursuant to the terms of a unit purchase agreement datedas of December 5, 2005, as amended (the “unit purchase agreement”), by and among, the Partnership, Star Gas LLC (“Star Gas”), Kestrel and its wholly ownedsubsidiaries, Kestrel Heat, and KM2, LLC, a Delaware limited liability company. In connection with the recapitalization: • The Partnership received an aggregate of $57.7 million in new equity financing through (i) the sale of an aggregate of 6,750,000 common units toKestrel Heat and KM2, LLC at a purchase price of $2.50 per unit and (ii) the sale of 19,687,500 common units in a rights offering to commonunitholders at a subscription price of $2.00 per common unit ($2.25 per unit in the case of 5,972,523 units purchased by KM2, LLC pursuant to astandby commitment). Proceeds net of $7.5 million in related capitalization costs were $50.2 million. • The Partnership (i) repurchased $65.3 million in face amount of its existing notes, (ii) converted $26.9 million in face amount of existing notesinto 13.4 million common units at a conversion price of $2.00 per unit and (iii) exchanged $165.3 million in principal amount of existing notesfor a like amount of new notes that were issued under a new indenture. (See Note 14 – Long-term Debt) • The Partnership also entered into an amended indenture for the $7.6 million in face amount of existing notes that remained outstanding thatremoved the restrictive covenants from the existing indenture (See Note 14 – Long-term Debt): • The Partnership entered into an amended and restated partnership agreement pursuant to which, among other things: • Star Gas LLC withdrew as the general partner of the Partnership and Kestrel Heat was appointed the general partner of the Partnership andreceived 325,729 general partner units in the Partnership; • each outstanding senior subordinated unit and each junior subordinated unit was converted into one common unit, as a result of which thesubordination period has ended; F - 12 Table of Contents • the minimum quarterly distribution on the common units was reduced from $0.575 per unit per quarter, or $2.30 per year, to $0.0 per unitthrough September 30, 2008. Beginning October 1, 2008, minimum quarterly distributions will start accruing at a rate of $0.0675 perquarter ($0.27 on an annual basis). If the Partnership elects to commence making distributions of available cash before October 1, 2008,minimum quarterly distributions will start accruing at that earlier date; • all previously accrued cumulative distribution arrearages, which aggregated $111.0 million at February 14, 2006, were eliminated; • the target distribution levels for the incentive distribution rights were reduced so that, commencing with the quarter beginningOctober 1, 2008, or, if the Partnership elects to commence making distributions sooner, the quarter in which any distribution of availablecash is made, the new general partner units in the aggregate will be entitled to receive 10% of the cash distributions (subject to aManagement Incentive Plan – see Item 11) in a quarter once each common unit and general partner unit has received $0.0675 for thatquarter, plus any arrearages on the common units from prior quarters, and 20% of the cash distributions in a quarter once each commonunit and general partner unit has received $0.1125 for that quarter, plus any arrearages on the common units from prior quarters; • the Partnership is not required to distribute available cash through the quarter ending September 30, 2008.The following table shows the amount of units before and after the April 28, 2006 recapitalization. Before Recapitalization* After Recapitalization** (in thousands) Number Percentage Number Percentage Common Units Existing common units 32,166 88.8% 32,166 42.3%Issued to Kestrel entities — — 6,750 8.9%Issued in rights offering (1) — — 19,687 25.9%Issued to senior noteholders — — 13,434 17.6%Issued to subordinated unitholders — — 3,737 4.9%Subtotal 32,166 88.8% 75,774 99.6%Subordinated Units Senior subordinated units 3,392 9.4% — — Junior subordinated units 345 0.9% — — Subtotal 3,737 10.3% — — General Partner Units 326 0.9% 326 0.4%Total 36,229 100% 76,100 100%*As of March 31, 2006 **As of April 28, 2006 (1)Includes 6.0 million common units issued to Kestrel at $2.25 per share, pursuant to its standby commitment. As part of the recapitalization a total of12.7 million common units were issued to Kestrel entities, representing approximately 16.7% of total units after the recapitalization.4) Summary of Significant Accounting PoliciesBasis of PresentationThe Consolidated Financial Statements include the accounts of Star Gas Partners, L.P. and its subsidiaries. All material intercompany items andtransactions have been eliminated in consolidation.The Partnership completed the sale of its propane operations on December 17, 2004 and its natural gas and electricity operations (“TG&E”) onMarch 31, 2004. The results of operations of these sold operations have been classified as discontinued operations in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” F - 13 Table of ContentsReclassificationCertain prior year amounts have been reclassified to conform with the current year presentation.Use of EstimatesThe preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from thoseestimates.Revenue RecognitionSales of heating oil and other fuels are recognized at the time of delivery of the product to the customer and sales of heating and air conditioningequipment are recognized at the time of installation. Revenue from repairs and maintenance service is recognized upon completion of the service. Paymentsreceived from customers for heating oil equipment service contracts are deferred and amortized into income over the terms of the respective service contracts,on a straight-line basis, which generally do not exceed one year. To the extent that the Partnership anticipates that future costs for fulfilling its contractualobligations under its service maintenance contracts will exceed the amount of deferred revenue currently attributable to these contracts, the Partnershiprecognizes a loss in current period earnings equal to the amount that anticipated future costs exceed related deferred revenues.Basic and Diluted Net Income (Loss) per Limited Partner UnitNet income (loss) per limited partner unit is computed by dividing net income (loss), after deducting the general partner’s interest, by the weightedaverage number of common units, senior subordinated units and junior subordinated units outstanding. Each unit in each of the partnership’s ownershipclasses participates in net income (loss) equally.Cash EquivalentsThe Partnership considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents.InventoriesAt September 30, 2005, the Partnership’s inventory of heating oil and other fuels were stated at the lower of cost or market computed on the first-in,first-out (FIFO) method. Effective October 1, 2005, the Partnership changed from the FIFO method to the weighted average cost (WAC) method. All otherinventories, representing parts and equipment have been and continue to be stated at the lower of cost or market using the FIFO method. (See Note 8. Changein Accounting Principle and Note 10. Inventories)Property, Plant, and EquipmentProperty, plant, and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the depreciable assets using the straight-line method. F - 14 Table of ContentsGoodwill and Intangible AssetsGoodwill and intangible assets include goodwill, customer lists and covenants not to compete.Goodwill is the excess of cost over the fair value of net assets in the acquisition of a company. In accordance with Statements of Financial AccountingStandards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized, butinstead are annually tested for impairment. Also in accordance with this standard, intangible assets with definite useful lives are amortized over theirrespective estimated useful lives to their estimated residual values, and reviewed for impairment. The Partnership performs its annual impairment reviewduring its fiscal fourth quarter or more frequently if events or circumstances indicate that the value of goodwill might be impaired. During its interim reviewduring the second quarter of 2005, the Partnership wrote-down goodwill by $67 million. See Note 12.Customer lists are the names and addresses of the acquired company’s patrons. Based on the historical retention experience, these lists are amortized ona straight-line basis over seven to ten years.Covenants not to compete are agreements established with the owners of an acquired company and are amortized over the respective lives of thecovenants on a straight-line basis, which are generally five years.Impairment of Long-lived AssetsIt is the Partnership’s policy to review intangible assets and other long-lived assets in accordance with SFAS No. 144 “Accounting for the Impairmentor Disposal of Long-Lived Assets,” for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not berecoverable. The Partnership determines whether the carrying values of such assets are recoverable over their remaining estimated lives through undiscountedfuture cash flow analysis. If such a review should indicate that the carrying amount of the assets is not recoverable, it is the Partnership’s policy to reduce thecarrying amount of such assets to fair value.Deferred ChargesDeferred charges represent the costs associated with the issuance of debt instruments and are amortized over the lives of the related debt instruments.Advertising ExpenseAdvertising costs are expensed as they are incurred. Advertising expenses were $5.9 million, $9.2 million and $6.9 million in 2006, 2005 and 2004,respectively.Customer Credit BalancesCustomer credit balances represent payments received in advance from customers pursuant to a budget payment plan (whereby customers pay theirestimated annual usage on a fixed monthly basis) and the payments made have exceeded the charges for heating oil deliveries.Environmental CostsCosts associated with managing hazardous substances and pollution are expensed on a current basis. Accruals are made for costs associated with theremediation of environmental pollution when it becomes probable that a liability has been incurred and the amount can be reasonably estimated.Insurance ReservesThe Partnership accrues for workers’ compensation, general liability and automobile claims not covered under its insurance policies and establishesestimates based upon actuarial assumptions as to what its ultimate liability will be for these claims. The Partnership recorded $38.8 million and $33.8 millionto accrued expenses at September 30, 2006 and 2005 respectively, representing its anticipated liability for claims not covered under its insurance policies. F - 15 Table of ContentsIncome TaxesThe Partnership is a master limited partnership and is not subject to tax at the entity level for federal and state income tax purposes. Rather, any incomeand losses of the Partnership are allocated directly to the individual partners. Except for the Partnership’s corporate subsidiaries, no recognition has beengiven to federal income taxes in the accompanying financial statements of the Partnership. While the Partnership’s corporate subsidiaries will generate non-qualifying Master Limited Partnership revenue, distributions from the corporate subsidiaries to the Partnership are generally included in the determination ofqualified Master Limited Partnership income. All or a portion of the distributions received by the Partnership from the corporate subsidiaries could be taxableas either a dividend or capital gain to the partners.The accompanying financial statements are reported on a fiscal year, however, the Partnership and its Corporate subsidiaries file state and federalincome tax returns on a calendar year.For corporate subsidiaries of the Partnership, a consolidated Federal income tax return is filed. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases andoperating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled.Sales, Use and Value Added TaxesTaxes are assessed by various governmental authorities on many different types of transactions. Sales reported for product, installation and serviceexcludes taxes.Derivatives and HedgingSFAS No. 133, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in theconsolidated balance sheet as assets or liabilities. To the extent derivative instruments designated as cash flow hedges are effective and SFAS 133documentation requirements have been met, changes in fair value are recognized in other comprehensive income until the underlying hedged item isrecognized in earnings. Currently, none of the Partnership’s derivatives qualify for hedge accounting treatment. Therefore, the Partnership could experiencegreat volatility in earnings as these currently outstanding derivative instruments are marked to market. F - 16 Table of ContentsRecent Accounting PronouncementsIn July 2006, the FASB issued Financial Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109” (“FIN 48”), which clarifies the criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return.Using a two-step approach, FIN 48 requires an entity to determine whether it is more likely than not that a tax position will be sustained upon examination,based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured to determine theamount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likelyof being realized upon ultimate settlement. FIN 48 also requires the recognition of liabilities created by differences between tax positions taken in a taxreturn and amounts recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are required to adoptFIN 48 in fiscal 2008. The Partnership is currently assessing the impact of adopting FIN 48.In September 2006, the FASB issued Statement No. 157 “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective in fiscalyears beginning after November 15, 2007. We are required to adopt SFAS 157 in fiscal 2009. It is expected that adoption of this standard will not have asignificant impact on the Partnership’s financial statements.In September 2006, the FASB issued Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS158”), which requires an employer to (i) measure the funded status of a defined benefit postretirement plan as of the date of its fiscal year-end statement offinancial position, (ii) to recognize the overfunded or underfunded status of this plan as an asset or liability in its statement of financial position and (iii) torecognize changes in that funded status in the year which the changes occur through comprehensive income. The required date of adoption of the recognitionand disclosure provisions of SFAS 158 differs for an employer that is an issuer of publicly traded equity securities and an employer that is not. An employerwith publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and provide the required disclosuresas of the end of the fiscal year ending after December 15, 2006. We are required to adopt this provision of SFAS 158 in fiscal 2007. The requirement tomeasure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years endingafter December 15, 2008. We are required to adopt this provision of SFAS 158 in fiscal 2009. The Partnership is currently assessing the impact of adoptingSFAS 158.In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which addresses the process of quantifying financialstatement misstatements. SAB No. 108 states that companies should use both a balance sheet approach and an income statement approach when quantifyingand evaluating the materiality of a misstatement. The interpretations in SAB No. 108 contain guidance on correcting errors under the dual approach as well asprovide transition guidance for correcting errors. If the effect of the error is determined to be material, the cumulative effect may be reported as an adjustmentto the beginning of the year retained earnings with disclosure of the nature and amount of each individual error being corrected in the cumulative adjustment.SAB No. 108 is effective for fiscal years ending after November 15, 2006. We are required to adopt SAB No. 108 in fiscal 2007. The Partnership is currentlyassessing the impact of adopting SAB No. 108.5) Discontinued OperationsOn December 17, 2004, the Partnership completed the sale of all of its interests in its propane operations to Inergy for a net purchase price ofapproximately $481.3 million. Closing and other settlement costs totaled approximately $14 million and approximately $311 million was used to repayoutstanding debt. In accordance with the purchase agreement, the effective date of the disposition was November 30, 2004. The Partnership recognized a gainon the sale of the propane operations totaling approximately $157 million net of income taxes of $1.3 million.On March 31, 2004, the Partnership sold the stock and business of its natural gas and electricity operations to a private party for a purchase price ofapproximately $13.5 million. The Partnership realized a gain of approximately $0.2 million as a result of this transaction. F - 17 Table of ContentsThe components of discontinued operations for the years ended September 30, are as follows (in thousands): 2005 2004 Propane NaturalGas &Electricity Propane Total (restated) (restated) (restated)Sales $58,722 $52,413 $348,846 $401,259Cost of sales 40,079 46,867 195,100 241,967Delivery and branch expenses 17,796 — 92,701 92,701Depreciation & amortization expenses 3,481 258 20,030 20,288General & administrative expenses 2,096 4,255 10,090 14,345 (4,730) 1,033 30,925 31,958Net interest expense 1,384 — 9,221 9,221Other loss 27 — 166 166Income (loss) from discontinued operations before income taxes (6,141) 1,033 21,538 22,571Income tax expense 48 110 285 395Income (loss) from discontinued operations $(6,189) $923 $21,253 $22,1766) Quarterly Distribution of Available Cash (See Note 3.)Partnership Distribution ProvisionsBeginning October 1, 2008, minimum quarterly distributions on the common units will start accruing at the rate of $0.0675 per quarter ($0.27 on anannual basis). If the Partnership elects to commence making distributions of available cash before October 1, 2008, minimum quarterly distributions willbegin to accrue at such earlier date. Thereafter, in general, the Partnership intends to distribute to its partners on a quarterly basis, all of its available cash, ifany, in the manner described below. “Available cash” generally means, for any of its fiscal quarters, all cash on hand at the end of that quarter, less theamount of cash reserves that are necessary or appropriate in the reasonable discretion of the general partners to: • provide for the proper conduct of the Partnership’s business; • comply with applicable law, any of its debt instruments or other agreements; or • provide funds for distributions to the common unitholders during the next four quarters, in some circumstances.Available cash will generally be distributed as follows: • first, 100% to the common units, pro rata, until the Partnership distributes to each common unit the minimum quarterly distribution of $0.0675; • second, 100% to the common units, pro rata, until the Partnership distributes to each common unit any arrearages in payment of the minimumquarterly distribution on the common units for prior quarters; • third, 100% to the general partner units, pro rata, until the Partnership distributes to each general partner unit the minimum quarterly distributionof $0.0675; • fourth, 90% to the common units, pro rata, and 10% to the general partner units, pro rata (subject to the Management Incentive Plan See Item 11),until the Partnership distributes to each common unit the first target distribution of $0.1125; and • thereafter, 80% to the common units, pro rata, and 20% to the general partner units, pro rata.The revolving credit facility and the indenture for the new notes both impose certain restrictions on the Partnership’s ability to pay distributions tounitholders. F - 18 Table of Contents7) Segment ReportingAt September 30, 2006, 2005 and 2004 the Partnership had one reportable operating segment, the retail distribution of heating oil. It operates primarilyin the Northeast and Mid-Atlantic regions. Heating oil is principally used by the Partnership’s residential and commercial customers to heat their homes andbuildings, and as a result, weather conditions have a significant impact on the demand for heating oil.In March 2004, the Partnership sold the stock and business of its natural gas and electricity segment to a private party. In December 2004, thePartnership completed the sale of all its interest in its propane segment to Inergy. In prior years, the administrative expenses and debt service costs for thepublic master limited partnership were not allocated to the existing segments and were disclosed separately.8) Change in Accounting PrincipleAt September 30, 2005, the Partnership’s inventory of heating oil and other fuels were stated at the lower of cost or market computed on the first-in,first-out (FIFO) method.Effective October 1, 2005, the Partnership changed from the FIFO method to the weighted average cost (WAC) method for its inventory of heating oiland other fuels. All other inventories, representing parts and equipment, have been and continue to be stated at the lower of cost or market using the FIFOmethod. The Partnership believes that the WAC methodology is preferable in the circumstances because it reflects a more accurate correlation betweenrevenues and product costs experienced in the Partnerships business environment by normalizing the carrying cost of heating oil and other fuels given theincreasing short-term volatility in the marketplace for these products. The cumulative effect of this change as of October 1, 2005 decreased net income by$0.3 million for fiscal year ended September 30, 2006.Pro forma amounts assuming the change in accounting principle is applied retroactively are: Years Ended September 30,in thousands except per unit data 2006 2005 2004 (restated) (restated)Net income (loss) as previously reported $(54,263) $(21,209) $23,973Pro forma net income (loss) $(53,919) $(21,346) $24,632General Partners interests in pro forma net income (loss) $(159) $(192) $227Limited Partners interests in pro forma net income (loss) $(53,760) $(21,154) $24,405Basic and fully diluted income (loss) per Limited Partner unit as previously reported $(1.02) $(0.59) $0.67Pro forma basic and fully diluted income (loss) per Limited Partner unit $(1.02) $(0.59) $0.699) Derivative Instruments - InventoryThe Partnership periodically enters into derivatives in order to economically hedge a portion of its forecasted future home heating oil purchasesthrough futures, options, and swap agreements. Depending upon the fair value of these instruments by counterparty, the amount can be included in fair assetvalue of derivative instruments or fair liability value of derivative instruments. At September 30, 2006, $3.8 million was carried as a current asset in fair assetvalue of derivative instruments and $13.8 million carried as a current liability in fair liability value of derivative instruments. At September 30, 2005, $35.1million was carried as a current asset in fair asset value of derivative instruments. None of the Partnerships derivative instruments qualify for hedgeaccounting treatment as explained in Note 4.To economically hedge a substantial portion of the purchase price associated with heating oil gallons anticipated to be sold to its price plan customersunder contract, the Partnership at September 30, 2006 had outstanding 44.9 million gallons of swap contracts to buy heating oil with a notional value of$97.8 million and a fair value of $(13.7) million; 23.7 million gallons of futures contracts to buy heating oil with a notional value of $47.9 million and a fairvalue of $(4.1) million; and 35.0 million gallons of purchased call option contracts to buy heating oil with a notional value of $77.5 million and a fair valueof $1.7 million. To economically hedge its inventory, the Partnership at September 30, 2006 also had outstanding 4.9 million gallons of future contracts tobuy heating oil with a notional value of $8.3 million and a fair value of $0.4 million; 38.5 million gallons of future contracts to sell heating oil with anotional value of $75.5 million and a fair value of $6.1 million. In addition, to economically hedge its internal fuel usage the Partnership had outstanding 1.9million gallons of future contracts to buy gasoline with a notional value of $3.9 million and a fair value of $(0.4) million. The contracts expire at varioustimes with no contract expiring later than October 31, 2007.To economically hedge a substantial portion of the purchase price associated with heating oil gallons anticipated to be sold to its price plan customersunder contract, the Partnership at September 30, 2005 had outstanding 26.2 million gallons of swap contracts to buy heating oil with a notional value of$41.8 million and a fair value of $13.8 million; 64.0 million gallons of futures contracts to buy heating oil with a notional value of $116.1 million and a fairvalue of $18.3 million; F - 19 Table of Contentsand 17.6 million gallons of purchased call option contracts to buy heating oil with a notional value of $38.6 million and a fair value of $4.2 million. Toeconomically hedge its inventory, the Partnership at September 30, 2005 also had outstanding 1.0 million gallons of future contracts to buy heating oil witha notional value of $2.2 million and a fair value of $0.1 million; 20.5 million gallons of future contracts to sell heating oil with a notional value of $36.8million and a fair value of $(1.3) million. These contracts expired in fiscal 2006.Given the staggered renewals of price protected contracts, the derivative instruments associated with price protected customers described in the twoforegoing paragraphs represent a substantial majority of the volume anticipated to be required to satisfy the Partnership’s then established fixed andmaximum price obligations for the twelve months following September 30, 2006 and 2005, respectively.To the extent that any derivative instruments do not meet the requirements of SFAS No. 133 to qualify for hedge accounting the Partnership recordschanges in the fair value of derivative instruments in the statement of operations in the line item change in the fair value of derivative instruments. Realizedgains and losses are recorded in cost of product with the related purchase of home heating oil for price protected customers. The following table summarizesthe total derivative gains and losses included in the statement of operations. Years Ended September 30, 2006 2005 2004 Change in the fair value of derivative instruments $45,677 $(6,081) $(25,811)Realized (gains) and losses—included in cost of product (17,431) (34,901) (10,870)Total $28,246 $(40,982) $(36,681)10) InventoriesThe components of inventory were as follows (in thousands): September 30, 2006 2005Heating oil and other fuels $63,618 $39,858Fuel oil parts and equipment 12,241 12,603 $75,859 $52,461Heating oil and other fuel inventories were comprised of 32.5 million gallons and 21.3 million gallons on September 30, 2006 and September 30,2005, respectively. F - 20 Table of Contents11) Property, Plant and EquipmentThe components of property, plant and equipment and their estimated useful lives were as follows (in thousands): September 30, Useful Estimated Lives 2006 2005 Land $10,476 $10,885 — Buildings and leasehold improvements 21,534 21,627 1 -40 yearsFleet and other equipment 36,487 35,249 1 -16 yearsTanks and equipment 7,786 7,438 8 -35 yearsFurniture, fixtures and office equipment 46,219 45,645 3 -12 yearsTotal 122,502 120,844 Less accumulated depreciation 80,125 70,822 Property and equipment, net $42,377 $50,022 Depreciation expense was $11.2 million, $13.5 million and $15.3 million for the fiscal years ended September 30, 2006, 2005 and 2004, respectively.12) Goodwill and Other Intangible AssetsUnder SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. If goodwill of areporting unit is determined to be impaired, the amount of impairment is measured based on the excess of the net book value of the goodwill over the impliedfair value of the goodwill.The Partnership has selected August 31 of each year to perform its annual impairment review under SFAS No. 142. The evaluations utilize both anincome and market valuation approach and contain reasonable and supportable assumptions and projections and reflect management’s best estimate ofprojected future cash flows. If the assumptions and estimates underlying the goodwill impairment evaluation are not achieved, a goodwill impairment chargemay be necessary. On August 31, 2004, the Partnership, with the assistance of a third party valuation firm, performed its annual goodwill impairmentevaluation for its reporting units and at that time determined that no impairment charge was necessary. During the second fiscal quarter of 2005, a number ofevents occurred that indicated a possible impairment of goodwill might exist. These events included: the Partnership’s determination in February 2005 thatthe Partnership could expect to generate significantly lower than expected operating results for the year and a significant decline in the Partnership’s unitprice. As a result of these triggering events and circumstances, the Partnership completed an additional SFAS No. 142 impairment review with the assistanceof a third party valuation firm as of February 28, 2005. The evaluation utilized both an income and market valuation approach and contained reasonableassumptions and reflected management’s best estimate of projected future cash flows. This review resulted in a non-cash goodwill impairment charge ofapproximately $67 million for fiscal year 2005, which reduced the carrying amount of goodwill. On August 31, 2005, the Partnership performed its annualgoodwill impairment valuation with the assistance of a third party valuation firm and it was determined based on this analysis that there was no additionalgoodwill impairment.The Partnership performed its annual goodwill impairment valuation as of August 31, 2006, and it was determined based on this analysis that there wasno goodwill impairment.A summary of changes in the Partnership’s goodwill during the fiscal years ended September 30, 2006 and 2005 are as follows (in thousands): Balance as of September 30, 2004 $233,522 Second fiscal quarter 2005 impairment charge (67,000)Balance as of September 30, 2005 166,522 Fiscal year 2006 activity — Balance as of September 30, 2006 $166,522 F - 21 Table of ContentsIntangible assets subject to amortization consist of the following (in thousands): September 30, 2006 September 30, 2005 GrossCarryingAmount Accum.Amortization Net GrossCarryingAmount Accum.Amortization NetCustomer lists $187,604 $126,601 $61,003 $189,559 $107,265 $82,294Covenants not to compete 4,755 4,751 4 4,755 4,704 51 $192,359 $131,352 $61,007 $194,314 $111,969 $82,345Amortization expense for intangible assets was $21.2 million, $21.6 million and $21.7 million for the fiscal years ended September 30, 2006, 2005 and2004, respectively. Total estimated annual amortization expense related to intangible assets subject to amortization, for the year ended September 30, 2007and the four succeeding fiscal years ended September 30, is as follows (in thousands): Amount2007 $20,1712008 $18,3862009 $11,6412010 $6,4422011 $4,36713) Long-Term Assets Held for SalePrior to December 31, 2005, the Partnership received two separate offers to sell certain net assets of two separate heating oil locations in New England.The Partnership determined at that time that the assets being offered in these pending sales met the criteria as “Assets Held for Sale” in accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, in contemplation of the future sale of these heating oil locations,the carrying value of the assets and liabilities were reclassified on the Partnership’s Consolidated Balance Sheet. The sale of one heating oil location closedon January 18, 2006 and the Partnership recognized a gain of approximately $0.8 million. In June 2006, the Partnership decided to retain the other heatingoil location and no longer hold it out for sale. The Partnership has reclassified this heating oil location from assets held for sale and has resumed normaldepreciation and amortization of these assets.Prior to June 30, 2006, the Partnership authorized the sale of three facilities located in New Jersey, Massachusetts and Rhode Island with a total netbook value of $1.1 million. The Partnership determined that these facilities meet the criteria as “Assets Held for Sale” in accordance with SFAS No. 144 .Accordingly, in contemplation of the future sale of these facilities, the carrying value of the assets and liabilities were reclassified on the Partnership’sConsolidated Balance Sheet. The sale of the Rhode Island facility was finalized in July 2006 and the Partnership recognized a gain of approximately $0.1million. The remaining two facilities at September 30, 2006 have a total net book value of $1.0 million. The New Jersey facility is still on the market and thePartnership is negotiating with suitable buyers. The Massachusetts facility was sold in December 2006 and the Partnership recognized a gain ofapproximately $0.2 million. The Partnership cannot provide any assurance that its activities will ultimately lead to a sale of the New Jersey facility. In theevent that a suitable buyer cannot be found, the Partnership will reclassify the New Jersey facility from assets held for sale and will resume normaldepreciation of the asset. No impairment has been recorded in connection with the contemplated sale, as it is anticipated that proceeds from any future salewill exceed the net book value of the assets sold. F - 22 Table of Contents14) Accrued Expenses and Other Current LiabilitiesThe components of accrued expenses and other current liabilities were as follows (in thousands): September 30, 2006 2005Accrued wages and benefits $12,731 $10,147Accrued workers’ compensation, general liability and auto claims 38,808 33,763Other accrued expenses and other current liabilities 11,112 12,670 $62,651 $56,58015) Long-Term Debt and Bank Facility BorrowingsThe Partnership’s long-term debt at September 30, 2006 and 2005 is as follows (in thousands): September 30, 2006 2005 10.25% Senior Notes (a) $174,056 $267,322 Working Capital Facility Borrowings (b) — 6,562 Acquisition Notes Payable and other 96 891 Total debt 174,152 274,775 Less current maturities (96) (796)Less working capital facility borrowings — (6,562)Total long-term portion debt $174,056 $267,417 (a)These notes accrue interest at an annual rate of 10.25% and require semi-annual interest payments on February 15 and August 15 of each year. Thesenotes are redeemable at the option of the Partnership, in whole or in part, from time to time by payment of a premium.On April 28, 2006, in connection with the closing of the recapitalization of the Partnership, (see Note 3), the Partnership (i) repurchased $65.3 millionof Senior Notes at face value, (ii) converted $26.9 million in face amount of Senior Notes into 13.4 million common units at a conversion price of$2.00 per unit and (iii) exchanged $165.3 million in principal amount of Senior Notes for a like amount of new 10.25% senior notes due 2013 (the“new notes”) that were issued under an indenture dated as of April 28, 2006 (the “new indenture”). The Senior Notes conversion price was $2.00 perunit while the closing price of the Partnership’s units on April 27, 2006 was $2.40 per unit. As such, the Partnership recorded a loss on the conversionof the existing debt in the amount of $6.6 million, consisting of $5.4 million attributable to the difference between the above unit prices, $2.0 milliondue to the write off of previously capitalized net deferred financing costs reduced by a $0.8 million basis adjustment to the carrying value of long-termdebt.The terms of the new indenture are substantially the same as the terms of the indenture under which the Senior Notes were issued (the “existingindenture”), except that the new indenture permits restricted payments of $22 million and allows the Partnership to make acquisitions of up to $60million without passing certain financial tests. In addition, the new indenture provides that proceeds of asset sales may not be invested in current assetsfor purposes of the “asset sale” covenant. The repurchase, conversion and exchange of the existing notes in connection with the recapitalization hasresolved any claims of the participating noteholders resulting from the sale of the Partnership’s propane business in December 2004, including thePartnership’s use of such proceeds to purchase working capital inventory and Star Gas Partners’ determination that “excess proceeds” (as defined in theexisting indenture) did not include any amounts invested in such inventory and the granting of liens or collateral to the lenders pursuant to the creditfacility.The Partnership also entered into an amended and restated indenture (the “amended indenture”) for $7.6 million in face amount of Senior Notes thatremained outstanding that removed most of the restrictive covenants from the existing indenture. F - 23 Table of ContentsThe closing of the recapitalization was deemed to be a “change of control” under the existing indenture for the remaining $7.6 million in face amountof Senior Notes that were not repurchased, converted into common units or exchanged for new notes in connection with the recapitalization.Consequently, the Partnership was required to make an offer to repurchase such Senior Notes at a purchase price equal to 101% of their face value. ThePartnership completed such offer on June 22, 2006, at which time the Partnership purchased $0.1 million in face amount of the Senior Notes. (b)In December 2004, Petro entered into a $260 million revolving credit facility agreement with a group of lenders which expires in December 2009. Thisrevolving credit facility, as amended, provides the Partnership with the ability to borrow up to $260 million for working capital purposes (subject tocertain borrowing base limitations and coverage ratios), including the issuance of up to $95 million in letters of credit. For the peak winter months fromDecember through March, Petro can borrow up to $310 million. Obligations under the revolving credit facility are secured by liens on substantially allassets and are guaranteed by Petro and by the Partnership. On December 28, 2006, the Partnership obtained a waiver from the lender group whichextended the date for the delivery of financial statements for fiscal 2006 to February 15, 2007.The revolving credit facility imposes certain restrictions on Petro, including restrictions on its ability to incur additional indebtedness, to paydistributions, make investments, grant liens, sell assets, make acquisitions and engage in certain other activities. The revolving credit facility alsorequires Petro to maintain certain financial ratios, and contains borrowing conditions and customary events of default, including nonpayment ofprincipal or interest, violation of covenants, inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and otherinsolvency events. The occurrence of an event of default or an acceleration under the revolving credit facility would result in the Partnership’sinability to obtain further borrowings under that facility, which could adversely affect its results of operations. An acceleration under the revolvingcredit facility would result in a default under the Partnership’s other funded debt.Under the terms of the revolving credit facility, the Partnership must maintain at all times either availability (borrowing base less amounts borrowedand letters of credit issued) of $25.0 million or a fixed charge coverage ratio (as defined in the credit agreement) of not less than 1.1 to 1.0. As ofSeptember 30, 2006, availability was $140 million and the fixed charge coverage ratio (as defined in the credit agreement) was 2.65 to 1.0. AtSeptember 30, 2006, restricted net assets of Petro totaled approximately $214.0 million.On December 17, 2004, Petro borrowed $119 million under this revolving credit facility, which was used to repay amounts outstanding under itsprevious credit facilities and recognized a loss of approximately $3 million in fiscal year 2005, as a result of the early redemption of this debt. AtSeptember 30, 2005, $6.6 million was borrowed at an average interest rate of 6.0%. At September 30, 2006, there were no amounts outstanding underthis credit facility.As of September 30, 2006, the maturities including working capital borrowings during fiscal years ending September 30, are set forth in thefollowing table: (in thousands) 2007 $962008 $— 2009 $— 2010 $— 2011 $— Thereafter $174,056 F - 24 Table of Contents16) AcquisitionsThe Partnership made no acquisitions in fiscal 2006 and 2005.During fiscal 2004, the Partnership acquired three retail heating oil dealers. The aggregate purchase price was approximately $3.5 million.The following table indicates the allocation of the aggregate purchase price paid and the respective periods of amortization assigned for fiscal 2004 (inthousands): 2004 Useful LivesTanks and equipment $427 5-30 yearsCustomer lists 2,179 7 yearsGoodwill 920 — Total $3,526 Acquisitions are accounted for under the purchase method of accounting. Purchase prices have been allocated to the acquired assets and liabilitiesbased on their respective fair values on the dates of acquisition. The purchase prices in excess of the fair values of net assets acquired are classified asgoodwill in the Consolidated Balance Sheets. Sales and net income have been included in the Consolidated Statements of Operations from the respectivedates of acquisition. Customer lists are amortized on a straight line basis over seven to ten years.The following un-audited pro forma information presents the results of operations of the Partnership, including the acquisitions previously described,as if the acquisitions had been acquired on October 1, of the year preceding the year of purchase. This pro forma information is presented for informationalpurposes; it is not indicative of future operating performance. in thousands (except per unit data) Year EndedSeptember 30,2004 (restated)Sales $1,110,826Net income $25,562General Partner’s interest in net income 237Limited Partners’ interest in net income $25,325Basic and Diluted net income per limited partner unit $0.7117) Employee Benefit PlansThe Partnership has a 401(k) plan, which covers eligible non-union and union employees. Subject to IRS limitations, the 401(k) plan provides for eachemployee to contribute from 1.0% to 17.0% of compensation. The Partnership makes a 4% core contribution of a participant’s compensation and matches 2/3of each amount a participant contributes up to a maximum of 2.0% of a participant’s compensation. The Partnership’s aggregate contributions to the 401(k)plan during fiscal 2006, 2005 and 2004 were $4.4 million, $5.1 million and $5.4 million, respectively.The Partnership has two frozen defined benefit pension plans. Benefits under the frozen defined benefit plans were generally based on years of serviceand each employee’s compensation. Since these plans are frozen, the projected benefit obligation and the accumulated benefit obligation are the same. ThePartnership’s pension expense for 2005 and 2004 was $0.8 million and $1.0 million, respectively. For 2006, the Partnership’s pension expense was $0.9million before recording the corrections to 2005 and 2004 pension expense of $0.6 million as described in Note 2. F - 25 Table of ContentsThe following tables provide a reconciliation of the changes in the plan benefit obligations, fair value of assets, and a statement of the funded status atthe indicated dates (using a measurement date of September 30): Years Ended September 30, (in thousands) 2006 2005 (restated) Reconciliation of Benefit Obligations Benefit obligations at beginning of year $63,481 $60,321 Interest cost 3,382 3,501 Actuarial loss 203 5,286 Benefit payments (4,227) (5,627)Settlements — — Benefit obligation at end of year $62,839 $63,481 Reconciliation of Fair Value of Plan Assets Fair value of plan assets at beginning of year $50,082 $51,363 Actual return on plan assets 2,732 4,327 Employer contributions 400 19 Benefit payments (4,227) (5,627)Settlements — — Fair value of plan assets at end of year $48,987 $50,082 Funded Status Benefit obligation $62,839 $63,481 Fair value of plan assets 48,987 50,082 Amount included in accumulated other comprehensive income (21,200) (21,263)Unrecognized net actuarial loss 21,200 21,263 Accrued benefit cost $13,852 $13,399 Amounts included in the Consolidated Balance Sheets Prepaid benefit cost $7,348 $7,864 Accrued benefit liability (21,200) (21,263)Net amount recognized as excess accrual $(13,852) $(13,399) Years Ended September 30, (in thousands) 2006 2005 2004 (restated) (restated) Components of Net Periodic Benefit Cost Interest cost $3,382 $3,501 $3,593 Expected return on plan assets (3,912) (4,062) (4,170)Net amortization 1,447 1,090 1,148 Settlement loss — — 120 Net periodic benefit cost $917 $529 $691 Years Ended September 30, 2006 2005 2004 Weighted-Average Assumptions Used in the Measurement of the Partnership’s Benefit Obligation as of theperiod indicated Discount rate 5.75% 5.50% 6.00%Expected return on plan assets 8.25% 8.25% 8.25%Rate of compensation increase N/A N/A N/A The expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of planassets determined using fair value. F - 26 Table of ContentsThe Partnership’s expected long-term rate of return on plan assets is updated at least annually, taking into consideration our asset allocation, historicalreturns on the types of assets held, and the current economic environment. Based on these factors, the Partnership expects its pension assets will earn anaverage of 8.25% per annum.The Partnership’s Pension Plan assets by category are as follows (in thousands): Years Ended September 30, 2006 2005Asset Categories: Equity Securities $29,147 $33,228Debt Securities 19,477 16,690Cash Equivalents 363 164 $48,987 $50,082The Plan’s objectives are to have the ability to pay benefit and expense obligations when due, to maintain the funded ratio of the Plan, to maximizereturn within reasonable and prudent levels of risk in order to minimize contributions and charges to the profit and loss statement, and to control costs ofadministering the Plan and managing the investments of the Plan. The strategic asset allocation of the Plan (currently 60% domestic equities and 40%domestic fixed income) is based on a long-term perspective and the premise that the Plan can tolerate some interim fluctuations in market value and rates ofreturn in order to achieve long-term objectives.The Partnership recorded an additional minimum pension liability for under-funded plans of $21.2 million at September 30, 2006 and $21.3 million atSeptember 30, 2005 representing the excess of unfunded accumulated benefit obligations over plan assets. A corresponding amount is recognized as areduction of the Partnership’s capital through a charge to accumulated other comprehensive income.Expected benefit payments over each of the next five years will total approximately $4.2 million per year. Expected benefit payments for the five yearsthereafter will aggregate approximately $21.8 million.In addition, the Partnership made contributions to union-administered pension plans of $6.0 million for fiscal 2006, $7.9 million for fiscal 2005 and$7.4 million for fiscal 2004.The discount rate used to determine net periodic pension expense was 5.5% in 2006, 6.0% in 2005 and 6.0% in 2004. The discount rate used by thePartnership in determining pension expense and pension obligations reflects the yield of high quality (AA or better rating by a recognized rating agency)corporate bonds whose cash flows are expected to match the timing and amounts of projected future benefit payments.18) Income TaxesIncome tax expense is comprised of the following for the indicated periods (in thousands): Years Ended September 30, 2006 2005 2004Current: Federal $112 $— $— State 365 696 1,240Deferred — — — $477 $696 $1,240 F - 27 Table of ContentsThe sources of the deferred income tax expense and the tax effects are as follows (in thousands): Years Ended September 30, 2006 2005 2004 (restated) (restated) Depreciation $(1,293) $(3,017) $614 Amortization expense 1,510 (14,657) 2,155 Vacation expense (96) 10 (140)Restructuring expense 28 52 52 Bad debt expense 196 (1,084) 1,066 Hedge accounting (18,066) 2,321 8,015 Pension (182) (1,776) 260 Insurance expense (6,098) — — Inventory valuation adjustment (947) — — Other, net (1,312) (90) (114)Recognition of tax benefit of net operating loss to the extent of current and previous recognized temporarydifferences 7,599 (15,620) (10,726)Change in valuation allowance 18,661 33,861 (1,182) $— $— $— The components of the net deferred taxes and the related valuation allowance for the years ended September 30, 2006 and September 30, 2005 usingcurrent tax rates are as follows (in thousands): Years Ended September 30, 2006 2005 (restated) Deferred Tax Assets: Net operating loss carryforwards $65,072 $72,671 Vacation accrual 2,237 2,141 Restructuring accrual — 28 Bad debt expense 2,613 2,809 Amortization 11,262 12,772 Excess of book over tax hedge accounting 4,010 — Insurance accrual 6,098 — Inventory valuation 947 — Pension 5,541 5,360 Other, net 1,633 321 Total deferred tax assets 99,413 96,102 Valuation allowance (96,696) (78,036)Net deferred tax assets $2,717 $18,066 Deferred Tax Liabilities: Depreciation $2,717 $4,010 Excess of tax over book hedge accounting — 14,056 Total deferred tax liabilities $2,717 $18,066 Net deferred taxes $— $— In order to fully realize the net deferred tax assets, the Partnership’s corporate subsidiaries will need to generate future taxable income. A valuationallowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based upon the level of current taxableincome and projections of future taxable income of the Partnership’s corporate subsidiaries over the periods which the deferred tax assets are deductible,management believes it is more likely than not that the Partnership will not realize the full benefit of its deferred tax assets at September 30, 2006 and 2005. F - 28 Table of ContentsAt September 30, 2006, Star/Petro had a total federal net operating loss carryforward of $162.7 million, of which approximately $47.9 million waslimited. These carryforwards will expire between 2018 and 2024 and are generally available to offset any future taxable income.Following an evaluation, the Partnership has determined that the issuance of units in its April 2006 recapitalization should not have resulted in an"ownership change" of Star/Petro under Section 382 of the Internal Revenue Code of 1986. The determination of whether or not an ownership change underSection 382 has occurred requires that the Partnership evaluate certain acquisitions and dispositions of units that have occurred over a rolling three-yearperiod. As a result, future acquisitions and dispositions of units could result in an ownership change of Star/Petro.19) Lease CommitmentsThe Partnership has entered into certain operating leases for office space, trucks and other equipment. The future minimum rental commitments atSeptember 30, 2006, under operating leases having an initial or remaining non-cancelable term of one year or more are as follows (in thousands): 2007 $8,7712008 7,3952009 7,4782010 5,8122011 4,143Thereafter 22,195Total future minimum lease payments $55,794Rent expense for the fiscal years ended September 30, 2006, 2005 and 2004 was $13.4 million, $14.7 million and $12.8 million, respectively.20) Unit Incentive PlansThe Partnership recorded income of $2.2 million and $4.5 million for unit appreciation rights during fiscal years 2005 and 2004, respectively. Inaddition, in fiscal year 2004 the Partnership recorded $0.1 million of general and administrative expense for restricted unit grants. At September 30, 2006,there were no outstanding unit appreciation rights.21) Supplemental Disclosure of Cash Flow Information Years Ended September 30, (in thousands) 2006 2005 2004 Cash paid during the period for: Income taxes, net $1,335 $3,022 $1,028 Interest, net $22,392 $36,345 $36,459 Non-cash financing activities: Decrease in other asset for interest rate swaps $— $— $293 Decrease in long-term debt—exchange Existing Notes $(165,250) $— $— Increase in long-term debt—exchange New Notes $165,250 $— $— Decrease in long-term debt $(27,135) $(314) $(293)Increase Partner’s Capital—exchange debt for Common Units $32,242 $— $— Decrease in interest expense—amortization of debt discount $267 $314 $— Increase in other current and long-term liabilities for capital leases $(969) $— $— Increase in fixed assets for capital leases $969 $— $— F - 29 Table of Contents22) Commitments and ContingenciesOn or about October 21, 2004, a purported class action lawsuit on behalf of a purported class of unitholders was filed against the Partnership andvarious subsidiaries and officers and directors in the United States District Court of the District of Connecticut entitled Carter v. Star Gas Partners, L.P., et al,No. 3:04-cv-01766-IBA, et al. Subsequently, 16 additional class action complaints, alleging the same or substantially similar claims, were filed in the samedistrict court: (1) Feit v. Star Gas, et al. Civil Action No. 04-1832 (filed on 10/29/2004), (2) Lila Gold vs. Star Gas, et al, Civil Action No. 04-1791 (filed on10/22/2004), (3) Jagerman v. Star Gas, et al, Civil Action No. 04-1855 (filed on 11/3/2004), (4) McCole, et al v. Star Gas, et al, Civil Action No. 04-1859(filed on 11/3/2004), (5) Prokop vs. Star Gas, et al, Civil Action No. 04-1785 (filed on 10/22/2004), (6) Seigle v. Star Gas, et al, Civil Action No. 04-1803(filed on 10/25/2004), (7) Strunk v. Star Gas, et al, Civil Action No. 04-1815 (filed on 10/27/2004), (8) Harriette S. & Charles L. Tabas Foundation vs. StarGas, et al, Civil Action No. 04-1857 (filed on 11/3/2004), (9) Weiss v. Star Gas, et al, Civil Action No. 04-1807 (filed on 10/26/2004), (10) White v. Star Gas,et al, Civil Action No. 04-1837 (filed on 10/9/2004), (11) Wood vs. Star Gas et al, Civil Action No. 04-1856 (filed on 11/3/2004), (12) Yopp vs. Star Gas, etal, Civil Action No. 04-1865 (filed on 11/3/2004), (13) Kiser v. Star Gas, et al, Civil Action No. 04-1884 (filed on 11/9/2004), (14) Lederman v. Star Gas, etal, Civil Action No. 04-1873 (filed on 11/5/2004), (15) Dinkes v. Star Gas, et al, Civil Action No. 04-1979 (filed 11/22/2004) and (16) Gould v. Star Gas, etal, Civil Action No. 04-2133 (filed on 12/17/2004) (including the Carter Complaint, collectively referred to herein as the “Class Action Complaints”). Theclass actions have been consolidated into one action entitled In re Star Gas Securities Litigation, No 3:04cv1766 (JBA).The class action plaintiffs generally allege that the Partnership violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,and Rule 10b-5 promulgated hereunder, by purportedly failing to disclose, among other things: (1) problems with the restructuring of Star Gas’s dispatchsystem and customer attrition related thereto; (2) that Star Gas’ business process improvement program was not generating the benefits allegedly claimed;(3) that Star Gas was struggling to maintain its profit margins; (4) that Star Gas’s fiscal 2004 second quarter profit margins were not representative of itsability to pass on heating oil price increases; and (5) that Star Gas was facing an inability to pay its debts and that, as a result, its credit rating and ability toobtain future financing was in jeopardy. The class action plaintiffs seek an unspecified amount of compensatory damages including interest against thedefendants jointly and severally and an award of reasonable costs and expenses. On February 23, 2005, the Court consolidated the Class Action Complaintsand heard argument on motions for the appointment of lead plaintiff. On April 8, 2005, the Court appointed the lead plaintiff. Pursuant to the Court’s order,the lead plaintiff filed a consolidated amended complaint on June 20, 2005 (the “Consolidated Amended Complaint”). The Consolidated AmendedComplaint named: (a) Star Gas Partners, L.P.; (b) Star Gas LLC; (c) Irik Sevin; (d) Audrey Sevin; (e) Hanseatic Americas, Inc.; (f) Paul Biddelman; (g) AmiTrauber; (h) A.G. Edwards & Sons Inc.; (i) UBS Investment Bank; and (j) RBC Dain Rauscher Inc. as defendants. The Consolidated Amended Complaintadded claims arising out of two registration statements and the same transactions under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 as well ascertain allegations concerning the Partnership’s hedging practices. On September 23, 2005, defendants filed motions to dismiss the Consolidated AmendedComplaint for failure to state a claim under the federal securities laws and failure to satisfy the applicable pleading requirements of the Private SecuritiesLitigation Reform Act of 1995 or PSLRA, and the Federal Rules of Civil Procedure. Plaintiffs filed their response to defendants’ motions to dismiss on orabout November 23, 2005 and defendants filed their reply briefs on December 20, 2005. On July 27, 2006, the Court heard oral argument on the pendingmotions to dismiss. On August 21, 2006, the court issued its rulings on defendants’ motions to dismiss, granting the motions and dismissing the consolidatedamended complaint in its entirety. On August 23, 2006, the court entered a judgment of dismissal. On September 7, 2006, the plaintiffs moved forreconsideration and to alter and reopen the court’s August 23, 2006 judgment of dismissal and for leave to file a second consolidated amended complaint. OnOctober 20, 2006, defendants filed their memorandum of law in opposition to the plaintiffs’ motion. Plaintiffs filed their reply brief on or about November 20,2006. The matter is now under consideration by the court. In the interim, discovery in the matter remains stayed pursuant to the mandatory stay provisions ofthe PSLRA. While no prediction may be made as to the outcome of litigation, we intend to defend against this class action vigorously.In the event that the above action is decided adversely to us, it could have a material effect on our results of operations, financial condition andliquidity.The Partnership’s operations are subject to all operating hazards and risks normally incidental to handling, storing and transporting and otherwiseproviding for use by consumers of combustible liquids such as propane and home heating oil.As a result, at any given time the Partnership is a defendant in various legal proceedings and litigation arising in the ordinary course of business. ThePartnership maintains insurance policies with insurers in amounts and with coverages and deductibles we believe are reasonable and prudent. However, thePartnership cannot assure that this insurance will be adequate to protect it from all material expenses related to potential future claims for personal andproperty damage or that F - 30 Table of Contentsthese levels of insurance will be available in the future at economical prices. In addition, the occurrence of an explosion may have an adverse effect on thepublic’s desire to use the Partnership products. In the opinion of management, except as described above the Partnership is not a party to any litigation,which individually or in the aggregate could reasonably be expected to have a material adverse effect on the Partnership’s results of operations, financialposition or liquidity.23) Disclosures About the Fair Value of Financial InstrumentsCash, Accounts Receivable, Notes Receivable, Working Capital Facility Borrowings, and Accounts PayableThe carrying amount of cash, accounts receivable, notes receivable, working capital facility borrowings, and accounts payable approximates fair valuebecause of the short maturity of these instruments.Derivative Instruments and Long-Term DebtFor fiscal 2006 and 2005, the fair value is based on open market or counterparty quotations. The estimated fair value of the Partnership’s derivativeinstruments and long-term debt is summarized as follows (in thousands): At September 30, 2006 At September 30, 2005 CarryingAmount EstimatedFair Value CarryingAmount EstimatedFair ValueDerivative instruments included in fair asset value of derivative instruments $3,766 $3,766 $35,140 $35,140Derivative instruments included in fair liability value of derivative instruments $13,790 $13,790 $— $— Long-term debt $174,152 $178,460 $268,213 $216,866LimitationsFair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Theseestimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changesin assumptions could significantly affect the estimates.24) Earnings Per Limited Partner Units Years Ended September 30, (in thousands, except per unit data) 2006 2005 2004 (restated) (restated) Income (loss) from continuing operations per Limited Partner unit: Basic and Diluted $(1.01) $(4.77) $0.07 Income (loss) from discontinued operations, net of income taxes per Limited Partner Unit: Basic and Diluted $— $(0.18) $0.62 Gain (loss) on sale of discontinued operations, net of income taxes per Limited Partner unit: Basic and Diluted $— $4.36 $(0.02)Cumulative effect of change in accounting principles-change in inventory pricing method per Limited Partner unit: Basic and Diluted $(0.01) $— $— Net income (loss) per Limited Partner unit: Basic and Diluted $(1.02) $(0.59) $0.67 Basic and Diluted Earnings Per Limited Partner Unit: Net income (loss) $(54,263) $(21,209) $23,973 Less: General Partners’ interest in net income (loss) (160) (191) 221 Limited Partner’s interest in net income (loss) $(54,103) $(21,018) $23,752 Common Units 50,804 32,166 31,647 Senior Subordinated Units 1,942 3,310 3,213 Junior Subordinated Units 198 345 345 Weighted average number of Limited Partner units outstanding 52,944 35,821 35,205 F - 31 Table of Contents25) Selected Quarterly Financial Data (unaudited)The seasonal nature of the Partnership’s business results in the sale by the Partnership of approximately 30% of its volume in the first fiscal quarter and45% 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 thequarters ending June and September. Three Months Ended Total (in thousands - except per unit data) Dec. 31,2005 Mar. 31,2006 Jun. 30,2006 Sep. 30,2006 (restated) (restated) (restated) Sales $414,381 $539,121 $191,514 $151,496 $1,296,512 Operating income (loss) (20,434) 62,260 (22,327) (42,697) (23,198)Income (loss) from continuing operations before income taxes (27,747) 54,509 (33,608) (46,596) (53,442)Cumulative effect of changes in accounting principles-change in inventory pricingmethod (344) — — — (344)Net income (loss) (28,341) 54,069 (34,076) (45,915) (54,263)Limited Partner interest in net income (loss) (28,082) 53,581 (33,887) (45,715) (54,103)Net income (loss) per Limited Partner unit: Basic and diluted (a) $(0.78) $1.49 $(0.53) $(0.60) $(1.02) Three Months Ended Total (in thousands - except per unit data) Dec. 31,2004 Mar. 31,2005 Jun. 30,2005 Sep. 30,2005 (restated) (restated) (restated) (restated) (restated) Sales $350,694 $555,317 $202,768 $150,699 $1,259,478 Operating loss (44,457) (2,936) (31,471) (16,560) (95,424)Loss from continuing operations before income taxes (97,746) (11,545) (39,340) (23,253) (171,884)Gain (loss) on sale of segment, net of income taxes 153,644 2,520 (404) 1,800 157,560 Net income (loss) 49,378 (9,694) (37,344) (23,549) (21,209)Limited Partner interest in net income (loss) 48,934 (9,607) (37,006) (23,339) (21,018)Net income (loss) per Limited Partner unit: Basic and diluted (a) $1.37 $(0.27) $(1.03) $(0.65) $(0.59)(a)The sum of the quarters do not add-up to the total due to the weighting of Limited Partner Units outstanding. F - 32 Table of ContentsSchedule ISTAR GAS PARTNERS, L.P. (PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in thousands) Sept. 30,2006 Sept. 30,2005Balance Sheets ASSETS Current assets Cash and cash equivalents $8,009 $46Prepaid expenses and other current assets 3,026 1,796Total current assets 11,035 1,842Investment in subsidiaries (a) 340,632 414,441Deferred charges and other assets, net 3,450 6,131Total Assets $355,117 $422,414LIABILITIES AND PARTNERS’ CAPITAL Current liabilities Accrued expenses $4,198 $6,232Total current liabilities 4,198 6,232Long-term debt (b) 174,056 267,322Other long-term liabilities 3,538 3,752Partners’ capital 173,325 145,108Total Liabilities and Partners’ Capital $355,117 $422,414(a)Investments in Star Petro, Inc. and subsidiaries are recorded in accordance with the equity method of accounting. (b)Scheduled principal repayments of long-term debt during each of the next five fiscal years ending September 30, are as follows: 2007—$0; 2008—$0;2009—$0; 2010—$0; 2011—$0 thereafter $174,056. F - 33 Table of ContentsSTAR GAS PARTNERS, L.P. (PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT Years Ended September 30, (in thousands) 2006 2005 2004 (restated) (restated) Statements of Operations Revenues $— $— $— General and administrative expenses 9,403 26,042 3,402 Operating loss (9,403) (26,042) (3,402)Net interest expense 22,720 27,041 22,442 Amortization of debt issuance costs 702 822 730 Loss on redemption of debt 6,603 2,053 — Loss from continuing operations (39,428) (55,958) (26,574)Income (loss) from discontinued operations, net of income taxes — (3,171) 26,736 Gain on sale of discontinued operations, net of income taxes — 156,803 — Net income (loss) before equity income (loss) (39,428) 97,674 162 Equity income (loss) of Star Petro Inc. and subs (14,835) (118,883) 23,811 Net income (loss) $(54,263) $(21,209) $23,973 F - 34 Table of ContentsSTAR GAS PARTNERS, L.P. (PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT Years Ended September 30, (in thousands) 2006 2005 2004 Statements of Cash Flows Cash flows provided by operating activities: Net cash provided by (used in) operating activities of continuing operations (a) $23,171 $(11,262) $26,868 Cash flows provided by (used in) investing activities: Cash proceeds from sale of discontinued operations — 466,424 — Contributions to subsidiaries — (441,881) (49,733)Net cash provided by (used in) investing activities of continuing operations — 24,543 (49,733)Cash flows provided by (used in) financing activities: Proceeds from issuance of debt — — 70,512 Repayment of debt (65,382) (2,000) — Distributions — — (79,819)Proceeds from the issuance of common units, net 50,174 — 34,996 Increase in deferred charges — — (1,409)Net cash provided by (used in) financing activities of continuing operations (15,208) (2,000) 24,280 Cash flows of discontinued operations: Operating activities — (21,402) 46,586 Investing activities — (664) (18,589)Financing activities — 10,700 (29,293)Net cash provided by (used in) discontinued operations — (11,366) (1,296)Net increase (decrease) in cash 7,963 (85) 119 Cash and cash equivalents at beginning of period 46 131 12 Cash and cash equivalents at end of period $8,009 $46 $131 (a) Includes distributions from subsidiaries $59,038 $42,820 $55,865 F - 35 Table of ContentsSchedule IISTAR GAS PARTNERS, L.P. AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTSYears Ended September 30, 2006, 2005 and 2004(in thousands) Year Description Balance atBeginningof Year Chargedto Costs &Expenses OtherChangesAdd (Deduct) Balance atEnd of Year2006 Allowance for doubtful accounts $8,433 $6,104 $(8,005) (a) $6,5322005 Allowance for doubtful accounts $5,622 $9,817 $(7,006) (a) $8,4332004 Allowance for doubtful accounts $6,346 $7,646 $(8,370) (a) $5,622 (a)Bad debts written off (net of recoveries). F - 36 Exhibit 10.15APPROVED DEALER/CONTRACTOR AGREEMENTThis Agreement (“Agreement”) is made this 11 day of July, 2006 by and between AFC FIRST FINANCIAL CORPORATION (hereinafter “AFC”), aPennsylvania corporation, and PETRO HOLDINGS, INC. (hereinafter “Seller”), Clearwater House, 2187 Atlantic Street Stamford, CT 06902 organized underthe laws of the State of Minnesota.WHEREAS, Seller engages in the sale and installation of energy-related home improvement goods and services (“Products”), each evidenced by a writtencontract (“Purchase Contract”); andWHEREAS, Seller offers, or desires to offer, credit sale purchase opportunities to its retail customers (“Customers”) through the use of in-home, closed-endretail installment sale contracts (“Installment Contracts”) and other financing options in order to assist Customers in purchasing Products; andWHEREAS, AFC is engaged in the business of purchasing Installment Contracts from merchants and also offers direct loans to consumers to assist suchconsumers in purchasing Products (“Loans”); andWHEREAS, from time-to-time Seller may wish to sell to AFC certain Installment Contracts and to offer its Customers the opportunity to obtain Loans fromAFC, and AFC may wish to purchase such Installment Contracts from AFC and provide Loans to the Customers, all in accordance with the terms andconditions set forth in this Agreement;NOW THEREFORE, in consideration of the foregoing and the mutual promises, covenants, and agreements set forth below and for other good and valuableconsideration, the receipt and sufficiency of which are hereby acknowledged, Seller and AFC agree as follows:1. Representations and Warranties of Seller. Seller represents, warrants and covenants to AFC that:A. At all times during the term of this Agreement, Seller shall be and remain duly licensed, authorized to conduct business, and in good standing in allstates in which it conducts business, and shall have the legal authority and power to sell and/or install its Products.B. Seller will not represent itself as an agent or employee of AFC.C. With regard to any sale or installation of Products, Seller will comply with all applicable laws and regulations in the solicitation, sale andinstallation of its Products, including all federal and state rights of rescission.D. The Products will be duly delivered and set in place by the Seller in a good and workmanlike manner, accepted by the Customer in good andhabitable condition and working order, shall conform with all warranties, express or implied, representations, legal obligations and local, state andfederal requirements and codes concerning the condition, construction, and placement of the eligible improvements, and, upon receipt of notice fromAFC and/or Customer to correct any defective work and/or to replace defective material, Seller will within sixty (60) days of such notice correctdefective work and/or replace any defective materials.E. THE SELLER HEREBY GUARANTEES ITS PERFORMANCE IN THE SALE AND INSTALLATION OF PRODUCTS BUT DOES NOTGUARANTEE THE PERFORMANCE OF ANY CUSTOMER ON ANY INSTALLMENT CONTRACT OR LOAN.F. Seller represents that AFC’s right to receive payments under any installment sale contract or direct loan will not be subject to any defense theCustomer may raise relating to proper sale and installation of Products by Seller.G. Each Purchase Contract arises from the bona fide sale of the Products described therein, and the Seller has not engaged in fraud, misrepresentationsor deceptive practices.H. No part of any down payment has been provided directly or indirectly by Seller, or to the best of Seller’s knowledge, by any person other than theCustomer.I. Any buyer protection plan purchased by a Customer in conjunction with the sale or installation of Products will be in writing and shall comply withall applicable laws.J. Seller shall honor all warranty or service agreements of Seller or manufacturer with any Customer.K. AFC may inspect, upon reasonable notice during customary business hours, Seller’s records and work to determine compliance with this Agreement.L. The execution, delivery and performance by Seller of this Agreement, and of each of the documents contemplated hereunder which are required tobe executed and delivered by Seller on an ongoing basis, does not and will not: (i) violate any of the provisions of Seller’s governing documents;(ii) violate any provision of any law in effect which is applicable to Seller, the installment sale contract, the work contract, or any security interest;(iii) require compliance with the notice procedures of any state’s bulk transfer laws; (iv) violate any judgment, decree, writ, injunction, award,determination or order currently in effect applicable to Seller or its properties or by which Seller or its properties is or are bound or affected; (v) conflictwith, or result in a breach of, or constitute a default under, any of the provisions of any indenture, mortgage, deed of trust, contract or other instrumentto which Seller is a party or by which it or its properties is or are bound; or (vi) result in the creation or imposition of any lien upon any of theproperties of Seller pursuant to the terms of any such indenture, mortgage, deed of trust or contract instrument.2. Representations and Warranties of AFC. AFC represents, warrants and covenants to Seller that:A. At all times during the term of this Agreement, AFC is and shall be and remain duly organized and in good standing under the laws of theCommonwealth of Pennsylvania.B. At all times during the term of this Agreement, AFC is and shall be and remain duly licensed, authorized to conduct business in all states in which itconducts business, and shall have all necessary and appropriate legal authority and power either to purchase each Installment Contract or to make eachLoan, as the case may be. C. AFC acknowledges that Seller is not an agent or employee of AFC.D. Any Installment Contract or Loan documentation provided by AFC for use by Seller under this Agreement will comply in all respects with allapplicable state and federal laws, subject to the proper use of such documentation by Seller in accordance with instructions from AFC. Any pre-printedinformation contained on any Installment Contract or Loan documentation provided by AFC for use by Seller under this Agreement will comply in allrespects with all applicable state and federal laws, subject to the genesis of such information being provided by Seller to AFC in accordance withAFC’s instructions.E. AFC shall conduct its business in all respects in accordance with all applicable state and federal law, including without limitation the processingand servicing of any purchased Installment Contracts and the origination, processing and servicing of any Loans.3. Breach of Representations and Warranties; Indemnification by Seller. In the event that either party hereto breaches any of the representations orwarranties in this Agreement, it shall indemnify, defend and hold harmless the other party for, from and against any and all claims, actions, causes of action,liabilities, damages, losses, settlements, judgments, penalties, any return, forgiveness or cancellation of all or any part of the principal or interest paid orpayable on any account, any reasonable attorney fees or expenses, and costs (including, without limitation, litigation-related costs and expenses andreasonable attorneys’ fees) which result directly or indirectly from such breach. The term “losses” as used in this Section includes any amounts recovered byCustomer from either party and any unpaid balance of the amount financed and any unpaid finance charges that are not paid by the Customer due to suchbreach by Seller pursuant to 16 C.F.R. 433 et. seq., Preservation of Borrower’s Claims and Defenses.4. Reporting Requirements. A party (the “responding party”) shall make available to the other party, promptly upon the other party’s request, all or any ofthe following information:A. Financial statements within one hundred twenty (120) days of the responding party’s fiscal year end.B. Dun and Bradstreet report on responding party.C. Three (3) trade references.D. Copy of any license(s) required by applicable law for responding party to operate its business.E. Evidence of Liability and Workmen’s Compensation Insurance coverage.5. Sale, Purchase and Assignment of Installment Contracts. Notwithstanding anything to the contrary contained herein or elsewhere, Seller shall not beobligated to sell to AFC, and AFC shall not be obligated to acquire from Seller, any specific Installment Contract, or to make any specific Loan, nor shall anyparty hereto be required to engage in any particular number of transactions or any particular principal amount of such transactions, either individually or inthe aggregate. AFC shall not acquire from Seller any Installment Contract, unless the same is executed and delivered by Seller and all of the other conditionsto a sale set forth herein or otherwise have been met to AFC’s complete and sole satisfaction. No liabilities or obligations of Seller under or relating to anyInstallment Contract or otherwise are being assumed by AFC hereunder, nor shall any such liabilities be assumed by AFC by virtue of entering into thisAgreement or purchasing any Installment Contract. Seller may, or shall at AFC’s request, execute a written assignment to AFC, which may be in the form ofan individual assignment or part of a blanket assignment, of each Installment Contract. At either its own option or that of AFC, Seller shall endorse eachInstallment Contract as follows:“For value received, the undersigned hereby sells, transfers and assigns to AFC all its right, title and interest in and to the within instrument and anyreal or personal property securing the obligations evidenced thereby.”The assignment of an Installment Contract, which shall be effective as of Seller’s receipt in good funds of payment under Section 7 below, shall includeassignment of all Seller’s right, title and interest to said Installment Contract, all documentation evidencing or executed or provided by the Customer inconnection therewith, all of Seller’s rights thereunder, including without limitation Seller’s rights to insurance proceeds or insurance policies relating to suchInstallment sale Contract or the underlying real or personal property, and all proceeds of any of the foregoing. The Assignment shall be WITHOUTRECOURSE except to the limited extent provided in Section 8 below.6. Delivery of Documents. Seller shall deliver to AFC the following documents:A. With respect to an Installment Contract, the original of each Installment Contract executed by the Customer, together with any assignment and/orendorsement executed pursuant to Section 5 above;B. The original pledge or grant of a security interest, if any, securing the Customer’s obligations under an Installment Contract or Loan, as the case maybe;C. The original credit application completed and signed by the Customer(s);D. The original underlying Purchase Contract and all related rescission notices and completion certificates with respect to each Purchase Contract andInstallment Contract, all properly executed and dated;E. All documents, agreements, notices, instruments and assignments of any kind relating to the Installment Contract including all of Seller’s books,records, ledger cards, plus all certificates of title, appraisals, opinions or abstracts of title, certificates or policies pertaining to title insurance, hazardinsurance, credit life or disability insurance, or any other certificate or document pertaining to the Installment Contract.7. Payment of Purchase Price or Loan Proceeds. AFC shall purchase any Installment Contract hereunder for the “Amount Financed”, as set forth on theInstallment Contract, unless specifically otherwise agreed in writing between Seller and AFC. The purchase price of each Installment Contract purchased orthe proceeds of each Loan, as the case may be, will be payable by AFC to the Seller upon satisfaction of the following conditions: (i) delivery of thedocuments required under Section 6 above to AFC and satisfactory completion of AFC’s quality check thereof, which may include at AFC’s option atelephone audit with Customer to ensure quality control; (ii) delivery by Seller to AFC of a completion certificate on a form supplied by AFC and signed by the Seller and the Customer (“Completion Certificate”), confirming that the work has been completed, is satisfactory, and that the Customerauthorizes payment to Seller, and (iii) compliance with all applicable terms of this Agreement and all federal, state and local laws and regulations applicableto the transactions set forth herein.8. Breach; Repurchase; Termination. In the event of a breach of any representation, warranty or covenant of Seller, any claim by a Customer based uponallegations of fact which if found to be true would constitute a breach of Seller’s warranties herein or if Seller or AFC is named as a defendant or respondingparty in any administrative, regulatory, or judicial proceeding or complaint based upon allegations of fact which if found to be true would constitute a breachof Seller’s warranties or representations herein, Seller shall:(a) At AFC’s request, immediately repurchase the Installment Contract affected by the breach of representation or warranty or alleged breach of representationor warranty by paying to AFC the total purchase price for such account, plus accrued interest at the rate set forth in the Installment Contract, plus expenses,less actual payments received by AFC after purchase. Said repurchase is without any representation, warranty or recourse on part of AFC; and(b) On demand, hold AFC, its parent, subsidiaries, affiliates, lenders, successors and assigns and their respective officers, employees, agents and directors freeand harmless from any resulting claims, losses, costs, damages, punitive damages, penalties, any return, forgiveness or cancellation of all or any part of theprincipal or interest paid or payable on any Account, any attorney fees, legal fees or expenses imposed or sought to be imposed upon it, howeverdenominated, and, at AFC’s option, forthwith enter and defend AFC at Seller’s sole expense in any judicial, administrative, or regulatory proceedings usingcounsel selected by AFC.Either party may terminate this Agreement in writing at any time and for any reason by thirty (30) days written notice of termination. The provisions of thisAgreement which by their plain meaning are intended to survive termination shall so survive. Termination of this Agreement shall not release either partyhereto from any of its responsibilities or liabilities related to such transactions unless and until a party expressly agrees in writing to release the other fromthose responsibilities or liabilities.9. Notices. All notices between the parties shall be in writing and shall be sent by registered or certified US Mail, return receipt requested, addressed to theaddress set forth below, (except that AFC may notify Seller of changes in its programs and procedures from time to time orally, by FAX, by mail, by handdelivery, or by whatever means AFC in its sole discretion deems appropriate), or to such other address as may be specified by written notices delivered inaccordance herewith. (1) AFC: (2) SellerPeter J. Krajsa, President PresidentAFC First Financial Corp. Petro Holdings, Inc.P.O. Box 1844 Clearwater House, 2187 Atlantic StreetAllentown, PA 18105-1844 Stamford, CT 0690210. Amendment. This Agreement may be amended or modified by the parties from time to time, but only by written agreement executed by both parties.11. Governing Law. This Agreement has been executed in and shall be governed by the laws of the Commonwealth of Pennsylvania.12. Assignment. The rights and obligations under this Agreement shall not be assigned by either party, except with the prior written consent of the otherparty, which consent shall not be unreasonably withheld.13. Entire Agreement. The terms contained herein constitute the entire agreement of the parties with respect to the matters herein. Any representations oragreements that may have been made by any party prior to the execution of this Agreement with respect to such matters are void, and neither of the partieshas relied on such prior representation in executing this Agreement. The recitals set forth above are included herein as if set forth in full. If any one or more ofthe provisions contained in this Agreement for any reason are held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, orunenforceability shall not affect any other provision thereof and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision hadnever been contained herein.IN WITNESS WHEREOF, the duly authorized representatives of each of the parties hereto have hereunto set their hands and seals as of the date and year firstabove written. AFC FIRST FINANCIAL CORPORATION PETRO HOLDINGS, INC.By: /s/ Peter J. Krajsa By: /s/ Joseph R. McDonald Peter J. Krajsa, President Joseph R. McDonald V.P. Sales and Marketing Print Name and Title ADDENDUMTO APPROVED DEALER/CONTRACTOR AGREEMENT FORAPPROVED PENNSYLVANIA ENERGYLOAN SELLERSIN KEYSTONE HOME ENERGYLOAN PROGRAMTHIS ADDENDUM (“Addendum”) SHALL FORM A PART OF, AND ITS TERMS AND CONDITIONS ARE INCORPORATED INTO, THE APPROVEDDEALER/CONTRACTOR AGREEMENT DATED July 11, 2006 BY AND BETWEEN AFC First Financial Corporation and PETRO HOLDINGS, INC. as“Seller” (the “Agreement”).WHEREAS, the parties hereto desire to facilitate financing at reduced interest rates under the Keystone Home Energy Loan Program (the “Program”) forCustomers resident in the Commonwealth of Pennsylvania, who procure certain qualifying Products from contractors and dealers who are qualified, in thedetermination of AFC, to install and service ENERGYSTAR™ products and services (“Approved Seller”).NOW, THEREFORE, the parties agree as follows. (a)Seller shall represent its role in the Program properly to the Consumer solely as an Approved Seller authorized to make Installment Contractsunder the Program, and not to identify itself as an “approved” ENERGYSTAR™ dealer or to use a similar reference. (b)Each Installment Contract written by Seller and purchased by AFC under the Program shall comply with the terms of the Program, includingwithout limitation with respect to the Products subject thereto and the percent of the total cost shown on the Installment Contract that representsqualifying Products. (c)Seller shall report the exact nature, make and model of the qualifying ENERGYSTAR™ or other improvement to AFC at the time of application,on a form approved by AFC and signed by both Seller and Consumer. (d)AFC shall assist Seller in marketing of the Program and the training of its staff in explaining to the Consumer the benefits of financing andutilizing ENERGYSTAR™ and other qualifying improvements. (e)All other terms, conditions and representation of the Agreement remain in full force and effect. To the extent there is any conflict between theterms of this Addendum and the Agreement, the Agreement shall control.IN WITNESS WHEREOF, the duly authorized representatives of each of the parties hereto have hereunto set their hands and seals as of the date shown below. PETRO HOLDINGS, INC. By: /s/ Joseph R. McDonald 7/11/06Dealer Signature DateJoseph R. McDonald V.P. Sales and MarketingPrint Name and Title AFC First FinancialBy: /s/ Peter J. krajsa Peter J. krajsa, President Exhibit 10.16May 17, 2006Mr. Richard G. OakleyDear Rich,This letter confirms your new compensation package, effective May 22, 2006 as Vice President-Controller of Star Gas Partners, L.P. (“Star” or the“Company”).Term: The term of this Agreement will be for three years beginning on May 22, 2006 and ending on May 21, 2009 (the “Term”).Base Salary: During the Term, your base annual salary will be $190,000 subject to withholding of all applicable taxes and benefit deductions.Annual Bonus: Your annual target performance based bonus will be 25% of your annual salary, or such higher percentage as may be applicable.Benefits: You will be entitled to participate in all benefit plans (including automobile allowance) that are maintained by the Company on the samebasis as such benefits are generally available to senior Star executives.Equity Incentives: The Company plans to establish an equity program for key executives, although there is no assurance that it will do so. If an equityprogram is implemented, you will be entitled to participate.Duties: You shall perform those duties presently performed by the Vice President-Controller. During the Term, you agree to perform your duties to thebest of your ability on a full time basis. You shall at all times be subject to observe and carry out such reasonable rules, regulations and directives asthe Board shall from time to time establish. So long as Petro’s principal office is located in Stamford, CT or elsewhere in the greater New York area,your duties will be performed at Petro’s principal office. The Company acknowledges that you presently live in Fort Salonga, NY and until such timeas you relocate to the Stamford area, you will be permitted to perform some duties out of Petro’s Melville, NY office. STAR GAS PARTNERS, L.P.Mr. Richard G. OakleyMay 17, 2006Page 2Moving Expenses: The Company agrees to reimburse you for all moving related expenses to relocate you to a location within a reasonable commutingdistance if the Company’s office in Stamford, CT. Such expenses will be calculated consistent with past practice of the Company and its affiliates, theintent of which is that you should incur no out of pocket expense for moving at the request of the Company, including any additional income taxesarising from such reimbursements.Severance: It is understood that your employment is at will and that either party can terminate the relationship at any time. If the Company terminatesyour employment for reasons other than cause, you will be entitled to one year’s salary as severance. In consideration of this offer you agree that whileyou are an employee of the Company and for twelve months thereafter, you will not compete with the Company nor become involved either as anemployee, as a consultant or in any other capacity, in the sale of heating oil or propane on a retail basis. You agree that you will not reveal anyconfidential information concerning Star and that you will not solicit nor seek to hire, employees of the Company during that time.Confidentiality: You agree that you will not during the term of this agreement and for a period of twelve months thereafter, other than as required bylaw, disclose to any third party, without the Company’s consent, any material non-public information concerning the Company, but this shall notapply during the Term to disclosures which you believe in good faith are made pursuant to the performance of your duties and in the best interest of theCompany.Notices: All notices under this agreement shall be in writing and shall be effective when received and shall be delivered in person or facsimiletransmission (with confirmation of receipt) or by mail to the above addresses.Entire Agreement: This Agreement represents our entire agreement concerning your employment and may be amended only by a subsequent writtenagreement signed by both parties. STAR GAS PARTNERS, L.P.Mr. Richard G. OakleyMay 17, 2006Page 3Please indicate your acceptance of this offer by signing and dating this letter and returning it to me.Should you have any questions, please do not hesitate to call me. Sincerely,/s/ Richard F. AmburyRichard F. AmburyChief Financial Officer Accepted:/s/ Richard G. OakleyRichard G. OakleyDated: May 22, 2006 Exhibit 10.17EXECUTION COPYTHIRD AMENDMENTTHIRD AMENDMENT, dated as of October 30, 2006 (this “Amendment”), to the Credit Agreement, dated as of December 17, 2004 (as amended by theFirst Amendment dated as of November 2, 2005, the Second Amendment dated as of February 3, 2006, this Amendment and as the same may be furtheramended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among PETROLEUM HEAT AND POWER CO., INC., aMinnesota corporation (the “Borrower”), the other Loan Parties party thereto, the several lenders from time to time parties thereto (collectively, the“Lenders”), JPMORGAN CHASE BANK, N.A., as an LC Issuer and as Agent (in such capacity, the “Agent”), BANK OF AMERICA, N.A. and WACHOVIABANK, NATIONAL ASSOCIATION, as co-syndication agents, and CITIZENS BANK OF MASSACHUSETTS and GENERAL ELECTRIC CAPITALCORPORATION, as co-documentation agents.W I T N E S S E T H :WHEREAS, the Borrower has requested that the Lenders amend certain terms in the Credit Agreement in the manner provided for herein; andWHEREAS, the Lenders are willing to agree to the requested amendments;NOW, THEREFORE, in consideration of the premises contained herein, the parties hereto agree as follows:1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein (and in the recitals hereto) asdefined terms are so used as so defined.2. Amendments to Article I of the Credit Agreement. Article I of the Credit Agreement is hereby amended by deleting the pricing grid in the definitionof “Applicable Margin” and replacing it with the pricing grid below: Applicable Margin Availability Eurodollar Advances Floating Rate Advances > $90,000,000 1.50% 0.50%> $75,000,000 1.75% 0.75%> $60,000,000 2.00% 1.00%> $45,000,000 2.25% 1.25%< $45,000,000 2.50% 1.50%3. Amendment to Section 2.1.2(a) of the Credit Agreement. Section 2.1.2(a) of the Credit Agreement is hereby amended by deleting the words “in anamount equal to $75,000,000” in clause (i) of the first proviso and replacing them with the words “in an amount equal to $95,000,000.”4. Representations and Warranties. On and as of the date hereof, each of the Borrower and the other Loan Parties hereby confirms, reaffirms and restatesin all material respects the representations and warranties set forth in Article V of the Credit Agreement, except to the extent that such representations and warranties expressly relate to a specific earlier date in which case the Borrower or such Loan Party hereby confirms, reaffirms and restates suchrepresentations and warranties as of such earlier date. In addition, the Borrower represents that the Excess Proceeds Reserve Amount will be zero as of theAmendment Effective Date.5. Effectiveness of Amendment. This Amendment shall become effective (the “Amendment Effective Date”) upon as of the date of receipt by the Agentof (a) counterparts of this Amendment duly executed by the Borrower, the other Loan Parties and each of the Lenders, submitted by facsimile or electronicsubmission and (b) all other fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses oflegal counsel) in connection with the preparation and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements ofcounsel to the Agent.6. Reference to and Effect on Loan Documents. On and after the Amendment Effective Date, (i) each reference in the Credit Agreement to “thisAgreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the CreditAgreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement asamended hereby. Except as expressly amended herein, all of the provisions of the Credit Agreement and the other Loan Documents are and shall remain infull force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. The execution, delivery and effectiveness ofthis Amendment shall not be deemed to be a waiver of, or consent to, or a modification or amendment of, any other term or condition of the Credit Agreementor any other Loan Document or to prejudice any other right or rights which the Agents or the Lenders may now have or may have in the future under or inconnection with the Credit Agreement or any of the instruments or agreements referred to therein, as the same may be amended from time to time.7. Expenses. The Borrower agrees to pay and reimburse the Agent for all its reasonable costs and out-of-pocket expenses incurred in connection withthe preparation and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to the Agent.8. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto (including by facsimile transmission), each ofwhich counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument.9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THELAWS OF THE STATE OF NEW YORK.[Signature pages follow] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers asof the date first above written. BORROWER:PETROLEUM HEAT AND POWER CO., INC.By: Name: Title: OTHER LOAN PARTIES:STAR GAS FINANCE COMPANYKESTREL HEAT, LLCSTAR/PETRO, INC.PETRO HOLDINGS, INC.MEENAN OIL CO., INC.MEENAN HOLDINGS OF NEW YORK, INC.REGIONOIL PLUMBING, HEATING AND COOLING CO.,INC.PETRO PLUMBING CORPORATIONMAXWHALE CORP.ORTEP OF PENNSYLVANIA, INC.RICHLAND PARTNERS, LLCCOLUMBIA PETROLEUM TRANSPORTATION, LLCPETRO, INC.MAREX CORPORATIONA.P. WOODSON COMPANYBy: Name: Title: STAR GAS PARTNERS, L.P.By: KESTREL HEAT, LLC, its General PartnerBy: Name: Title: Signature Page to Third Amendment MEENAN OIL CO. L.P.By: MEENAN OIL CO., INC., its General PartnerBy: Name: Title: Signature Page to Third Amendment JPMORGAN CHASE BANK, N.A., as an LC Issuer, Agent,Collateral Agent and LenderBy: Name: Title: Signature Page to Third Amendment BANK OF AMERICA, N.A., as LenderBy: Name: Title: Signature Page to Third Amendment WACHOVIA BANK, NATIONAL ASSOCIATION, as LenderBy: Name: Title: Signature Page to Third Amendment GENERAL ELECTRIC CAPITAL CORPORATION, as LenderBy: Name: Title: Signature Page to Third Amendment CITIZENS BANK OF MASSACHUSETTS, as LenderBy: Name: Title: Signature Page to Third Amendment WELLS FARGO FOOTHILL, LLC, as LenderBy: Name: Title: Signature Page to Third Amendment SOCIETE GENERALE, as LenderBy: Name: Title: Signature Page to Third Amendment LASALLE BANK NATIONAL ASSOCIATION, as LC Issuerand LenderBy: Name: Title: Signature Page to Third Amendment ALLIED IRISH BANKS, P.L.C., as LenderBy: Name: Title: Signature Page to Third Amendment PNC BANK, NATIONAL ASSOCIATION, as LenderBy: Name: Title: Signature Page to Third Amendment CITIBANK, N.A., as LenderBy: Name: Title: Signature Page to Third Amendment ISRAEL DISCOUNT BANK OF NEW YORK, as LenderBy: Name: Title: By: Name: Title: Signature Page to Third Amendment RZB FINANCE LLC, as LenderBy: Name: Title: By: Name: Title: Signature Page to Third Amendment BANK LEUMI USA, as LenderBy: Name: Title: By: Name: Title: Signature Page to Third Amendment Exhibit 10.19FOURTH AMENDMENT AND WAIVERFOURTH AMENDMENT AND WAIVER, dated as of December 28, 2006 (this “Amendment”), to the Credit Agreement, dated as of December17, 2004 (as amended by the First Amendment, dated as of November 2, 2005, the Second Amendment, dated as of February 3, 2006, the Third Amendment,dated as of October 30, 2006, this Amendment and as the same may be further amended, supplemented or otherwise modified from time to time, the “CreditAgreement”), among PETROLEUM HEAT AND POWER CO., INC., a Minnesota corporation (the “Borrower”), the other Loan Parties party thereto, theseveral lenders from time to time parties thereto (collectively, the “Lenders”), JPMORGAN CHASE BANK, N.A., as an LC Issuer and as Agent (in suchcapacity, the “Agent”), BANK OF AMERICA, N.A. and WACHOVIA BANK, NATIONAL ASSOCIATION, as co-syndication agents, and CITIZENS BANKOF MASSACHUSETTS and GENERAL ELECTRIC CAPITAL CORPORATION, as co-documentation agents.W I T N E S S E T H :WHEREAS, the Borrower has requested that the Lenders amend and waive certain terms in the Credit Agreement in the manner provided forherein; andWHEREAS, the Lenders are willing to agree to the requested amendments and waivers;NOW, THEREFORE, in consideration of the premises contained herein, the parties hereto agree as follows:1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein (and in the recitals hereto) asdefined terms are so used as so defined.2. Amendments to Article I of the Credit Agreement. Article I of the Credit Agreement is hereby amended by adding the following new definitions inthe proper alphabetical order:“Financial Restatement” means the restatement of the consolidated financial statements of the Parent and its Subsidiaries for each of the fiscalyears ended September 30, 2004 and September 30, 2005, including the consolidated financial statements for each quarterly period included therein, andthe restatement of the consolidated financial statements for the first three quarterly periods of the fiscal year ended September 30, 2006, in each case inorder to (a) recognize the change in the fair values of derivative assets and liabilities in the current period and (b) make such other changes that do notresult in a failure to satisfy the Financial Restatement Condition.“Financial Statement Completion Date” means the date on which the consolidated financial statements of the Parent for the fiscal year endedSeptember 30, 2006 and the Financial Restatement, together with the certificates and reports required to be delivered pursuant to Section 6.1(a), have, ineach case, been delivered, and any Reporting Violations (as defined in the Fourth Amendment) have been cured. “Financial Restatement Condition” means the condition that the Financial Restatement does not decrease the cash generated from operationsas reflected on the consolidated statement of cash flows of the Parents and its Subsidiaries in accordance with GAAP for any of the fiscal years endedSeptember 30, 2004, September 30, 2005 and September 30, 2006 or for any of the quarterly periods included therein.“Fourth Amendment” means the Fourth Amendment and Waiver, dated as of December 28, 2006, to this Agreement.3. Amendment to Section 2.1 of the Credit Agreement. Section 2.1 of the Credit Agreement is hereby amended to add the following proviso at the endof the first sentence thereof:“, provided further, that the Aggregate Credit Exposure between the Amendment Effective Date (as defined in the Fourth Amendment) and theFinancial Statement Completion Date shall not exceed $ 119,000,000.”4. Amendment to Section 5.5(a) of the Credit Agreement. Section 5.5(a) of the Credit Agreement hereby is amended to add, at the end of the lastsentence thereof, the following:“, and, in each case, subject to any changes that may result from the Financial Restatement (provided that any such changes comply with theFinancial Restatement Condition).”5. Amendment to Section 5.11 of the Credit Agreement. Section 5.11 of the Credit Agreement is amended to add, at the end of the last sentence thereof,the following:“, and, in each case, subject to any changes that may result from the Financial Restatement (provided that any such changes comply with theFinancial Restatement Conditions).”6. Amendment to Section 6.1 of the Credit Agreement. Section 6.1 of the Credit Agreement is hereby amended to add the following proviso at the endof the first sentence thereof:“, provided, that, with respect to period ended September 30, 2006, such financial statements and certificate, as of the end of and for the fiscalyear ended September 30, 2006, may be delivered later than otherwise required hereunder, but (i) shall be delivered as soon as available upon completionof the Financial Restatement, but in any event not later than February 15, 2007, (ii) such financial statements shall be accompanied by the FinancialRestatement, (iii) such financial statements and Financial Restatement shall be delivered together with a certificate of the Borrower’s chief financialofficer, certifying that (A) the financial statements and Financial Restatement present fairly, in all material respects, the financial condition and results ofoperations of the Borrower and its Restricted Subsidiaries, in each case on a consolidated basis in accordance with GAAP consistently applied, and (B) theFinancial Restatement complies with the Financial Restatement Condition and (iv) the 2 Financial Restatement shall be delivered together with or shall include a report by independent public accountants of recognized national standing(without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect thatsuch portion of the Financial Restatement covering the fiscal year ended September 30, 2005 presents fairly, in all material respects, the financialcondition and results of operations of the Borrower and its Restricted Subsidiaries, in each case on a consolidated basis in accordance with GAAP.”7. General Amendment and Waiver. The undersigned Lenders hereby waive any Default arising under clause (a) of Article VII of the Credit Agreementto the extent, but only to the extent, any such Default results from an incorrect representation under Section 5.5 or 5.11 made prior to the AmendmentEffective Date (as defined below), but only to the extent such representation was incorrect when made as a result of changes made pursuant to the FinancialRestatement that comply with the Financial Restatement Condition. The undersigned Lenders hereby waive any Default arising under clause (c) ofArticle VII of the Credit Agreement to the extent, but only to the extent, any such Default results from a failure to comply with Section 6.1 prior to theAmendment Effective Date (as defined below), but only to the extent such failure to comply was a result of changes made pursuant to the FinancialRestatement that comply with the Financial Restatement Condition. The undersigned Lenders hereby waive any Default arising under clause (e) ofArticle VII of the Credit Agreement in relation to the Parent Indentures, the Parent Notes or any Parent Subordinated Debt, to the extent, but only to theextent, any such Default results from a Reporting Violation (as defined below); provided, that such waiver shall terminate and cease to apply if (i) any ParentNotes or Parent Subordinated Debt becomes due, or is declared to become due, or is required to be prepaid, repurchased, redeemed or defeased, prior to itsstated maturity, in any such case as a result of a Reporting Violation, or (ii) the holder or holders of any Parent Notes or Parent Subordinated Debt (or therequisite number or percentage in interest entitled to do so under the terms thereof, if applicable), or any trustee or agent on its or their behalf, (A) gives noticeto the Borrower or any Subsidiary of a Reporting Violation, if the effect of such notice is to commence a grace or cure period upon the expiration of whichany right or remedy may be exercised if the Reporting Violation is continuing, or (B) otherwise commences any proceeding with respect to the exercise ofany material rights or remedies (as determined by the Required Lenders) that may be exercised based upon a Reporting Violation. A “Reporting Violation”means any failure to comply with any provision of any agreement or instrument evidencing or governing the terms of the Parent Notes or Parent SubordinatedDebt that require the filing of financial statements or the filing by the Borrower of reports (or delivery of reports required to be filed by it) with the Securitiesand Exchange Commission, to the extent such non-compliance results from the failure to deliver audited financial statements with respect to the periodended September 30, 2006, within the time required. Neither the Borrower shall, nor shall the Borrower permit the Parent or any Subsidiary to, give anyconsideration to or for the benefit of any holder of Parent Notes or Parent Subordinated Debt for any amendment, modification or waiver relating to aReporting Violation.8. Restriction on Dividends. Notwithstanding anything to the contrary in Section 6.16 of the Credit Agreement, the Borrower shall not pay anydividends after the date hereof and prior to the Financial Statement Completion Date. 3 9. Representations and Warranties. On and as of the date hereof, each of the Borrower and the other Loan Parties hereby confirms, reaffirms and restatesin all material respects the representations and warranties set forth in Article V of the Credit Agreement, except to the extent that such representations andwarranties expressly relate to a specific earlier date in which case the Borrower or such Loan Party hereby confirms, reaffirms and restates such representationsand warranties as of such earlier date.10. Effectiveness of Amendment. This Amendment shall become effective (the “Amendment Effective Date”) upon as of the date of receipt by theAgent of (a) counterparts of this Amendment duly executed by the Borrower, the other Loan Parties and each of the Lenders, submitted by facsimile orelectronic submission and (b) all other fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees andexpenses of legal counsel) in connection with the preparation and delivery of this Amendment, including, without limitation, the reasonable fees anddisbursements of counsel to the Agent.11. Reference to and Effect on Loan Documents. On and after the Amendment Effective Date, (i) each reference in the Credit Agreement to “thisAgreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the CreditAgreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement asamended hereby. Except as expressly amended herein, all of the provisions of the Credit Agreement and the other Loan Documents are and shall remain infull force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. The execution, delivery and effectiveness ofthis Amendment shall not be deemed to be a waiver of, or consent to, or a modification or amendment of, any other term or condition of the Credit Agreementor any other Loan Document or to prejudice any other right or rights which the Agent or the Lenders may now have or may have in the future under or inconnection with the Credit Agreement or any of the instruments or agreements referred to therein, as the same may be amended from time to time.12. Expenses. The Borrower agrees to pay and reimburse the Agent for all its reasonable costs and out-of-pocket expenses incurred in connection withthe preparation and delivery of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to the Agent.13. Counterparts. This Amendment may be executed in any number of counterparts by the parties hereto (including by facsimile transmission), each ofwhich counterparts when so executed shall be an original, but all the counterparts shall together constitute one and the same instrument.14. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THELAWS OF THE STATE OF NEW YORK.[Signature pages follow] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorizedofficers as of the date first above written. BORROWER:PETROLEUM HEAT AND POWER CO., INC.By: Name: Title: OTHER LOAN PARTIES:STAR GAS FINANCE COMPANYKESTREL HEAT, LLCSTAR/PETRO, INC.PETRO HOLDINGS, INC.MEENAN OIL CO., INC.MEENAN HOLDINGS OF NEW YORK, INC.REGIONOIL PLUMBING, HEATING AND COOLING CO., INC.PETRO PLUMBING CORPORATIONMAXWHALE CORP.ORTEP OF PENNSYLVANIA, INC.RICHLAND PARTNERS, LLCCOLUMBIA PETROLEUM TRANSPORTATION, LLCPETRO, INC.MAREX CORPORATIONA.P. WOODSON COMPANYBy: Name: Title: STAR GAS PARTNERS, L.P.By: KESTREL HEAT, LLC, its General PartnerBy: Name: Title: 5 MEENAN OIL CO. L.P.By: MEENAN OIL CO., INC., its General PartnerBy: Name: Title: 6 JPMORGAN CHASE BANK, N.A.., as an LCIssuer, Agent, Collateral Agent and Lender By: Name: Title: 7 BANK OF AMERICA, N.A., as LenderBy: Name: Title: 8 WACHOVIA BANK, NATIONAL ASSOCIATION, as LenderBy: Name: Title: 9 GENERAL ELECTRIC CAPITAL CORPORATION, as LenderBy: Name: Title: 10 CITIZENS BANK OF MASSACHUSETTS, as LenderBy: Name: Title: 11 WELLS FARGO FOOTHILL, LLC, as LenderBy: Name: Title: 12 SOCIETE GENERALE, as LenderBy: Name: Title: 13 LASALLE BANK NATIONAL ASSOCIATION, as LC Issuerand LenderBy: Name: Title: 14 ALLIED IRISH BANKS, P.L.C., as LenderBy: Name: Title: 15 PNC BANK, NATIONAL ASSOCIATION, as LenderBy: Name: Title: 16 CITIBANK, N.A., as LenderBy: Name: Title: 17 ISRAEL DISCOUNT BANK OF NEW YORK, as LenderBy: Name: Title: By: Name: Title: 18 RZB FINANCE LLC, as LenderBy: Name: Title: By: Name: Title: 19 BANK LEUMI USA, as LenderBy: Name: Title: By: Name: Title: 20 Exhibit 14STAR GAS PARTNERS, L.P. POLICY NUMBER / SUBJECT:102 CODE OF BUSINESS CONDUCT & ETHICS DATE OF ISSUE:JUNE 1, 2006SECTION:100 – BUSINESS PRACTICES SUPERSEDES ISSUE DATE:APRIL 1, 2005CODE OF BUSINESS CONDUCT AND ETHICSTo Whom the Code AppliesThis Code applies to all employees of Star Gas Partners, L.P. and its direct and indirect subsidiaries (collectively “Star Gas Partners”), including, but notlimited to, its principal executive officer; principal financial officer; principal accounting officer; or persons performing similar functions, as well as thedirectors of the general partner of Star Gas Partners. Its purpose is to deter wrongdoing and to provide full, fair, timely and understandable disclosures inpublic filings.The Standard of ConductStar Gas Partners employees must maintain the highest standards of ethical conduct in their work. Behaving ethically means avoiding: actual or apparentconflicts of interest between personal and professional relationships; lying; cheating; and stealing; as well as deception and subterfuge. Behaving ethicallyalso means personal compliance with all applicable government laws, rules and regulations.Every employee records information of some kind, which is used for business purposes. Full, fair, accurate, understandable and timely reporting ofinformation is critical. Any employee who falsifies, alters, or misrepresents data or information, (including financial information), whether in a filing with anadministrative agency or in a public communication, will be severely disciplined, if not discharged.Accurate Periodic ReportsAs you are aware, full, fair, accurate, timely and understandable disclosures in Star Gas Partners’ reports filed with the Securities and Exchange Commission(“SEC”) is legally required and is essential to the success of the business. Please exercise the highest standards of care in preparing such reports in accordancewith the following guidelines: • All Star Gas Partners accounting records, as well as reports produced from those records, must be in accordance with the laws of each applicablejurisdiction. • All records must fairly and accurately reflect the transactions or occurrences to which they relate. • All records must fairly and accurately reflect, in reasonable detail, the Star Gas Partners’ assets, liabilities, revenues and expenses. RESPONSIBILITY OF:CHIEF EXECUTIVE OFFICER PAGE NO.1 of 5 EFFECTIVE DATE:JUNE 1, 2006 STAR GAS PARTNERS, L.P. POLICY NUMBER / SUBJECT:102 CODE OF BUSINESS CONDUCT & ETHICS DATE OF ISSUE:JUNE 1, 2006SECTION:100 – BUSINESS PRACTICES SUPERSEDES ISSUE DATE:APRIL 1, 2005 • Star Gas Partners’ accounting records must not contain any false or intentionally misleading entries. • No transactions should be intentionally misclassified as to accounts, departments or accounting periods. • All transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the properaccounting period. • No information should be concealed from the internal auditors or the independent auditors. • Compliance with Star Gas Partners’ system of internal accounting controls is required.Reporting MisconductThe duty and responsibility to accurately and honestly report information and to not lie, cheat, steal or deceive extends to and includes the duty to reportthose who breach this duty and responsibility and to provide information or participate in a proceeding wherein someone is alleged to have violated thisduty and responsibility.People Who Report Misconduct Are ProtectedEmployees who report unethical conduct, or who provide information in an investigation of alleged unethical behavior, are protected against retaliation oradverse employment actions for reporting the unethical conduct or participating in the investigation. This protection extends to, but is not limited to,employees who reported alleged violations of the SEC rules relating to fraud against unitholders or any federal or state securities or anti fraud law.To Whom is The Report to be MadeAll actual or suspected fraud, misconduct, illegal activity and fraudulent financial reporting of any kind whatsoever should be reported directly to yourimmediate supervisor for appropriate follow-up action. It is the supervisor’s responsibility to notify Senior Management and the Internal Audit Director of allissues and resolutions. Employees may also wish to use either the anonymous Employee Awareness Hotline or the E-Mail addresses, or directly contact eitherDirector of Human Resources or Director-Compliance/Internal Audit. Employees are encouraged to use the anonymous employee hotline listed below orprovide timely written notification. The Company will treat all such calls and notifications as confidential and protect employee identity to the extentconsistent with its legal obligations. RESPONSIBILITY OF:CHIEF EXECUTIVE OFFICER PAGE NO.2 of 5 EFFECTIVE DATE:JUNE 1, 2006 STAR GAS PARTNERS, L.P. POLICY NUMBER / SUBJECT:102 CODE OF BUSINESS CONDUCT & ETHICS DATE OF ISSUE:JUNE 1, 2006SECTION:100 – BUSINESS PRACTICES SUPERSEDES ISSUE DATE:APRIL 1, 2005 • Employee Awareness Hotline – 1.877.STARGAS • E-MAIL – HelpStar@petroheat.com or HelpStar@stargaslp.com • Director of Human Resources – 1.203.325.5430 • Director-Compliance/Internal Audit – 1.203.328.7354Insider Trading/Access to Non-Public InformationIf you learn information that directly or indirectly relates to Star Gas Partners or could impact its value or unit price, you must share that information onlywith employees or advisers of Star Gas partners who have a business reason to know what you know. It would be illegal for you to personally invest, or causeother (e.g., friends, relatives) to invest for them or for you based on that information. Star Gas Partners has adopted a separate Insider Trading Policy, whichincludes, among other provisions, specific prohibitions on trading on non-public information or “tipping” others who might trade.Partnership OpportunitiesEmployees, Officers and Directors must never take for themselves personally opportunities that area discovered through the use of corporate property,information or position. Likewise, employees, Officers and Directors must never use corporate property or information for personal gain or to compete withStar Gas Partners. Your work hours are to be devoted solely to activities directly related to Star Gas Partners business. You may not perform work for or solicitbusiness for any other employer.Proper Use of Star Gas Partners AssetsAll Star Gas Partners assets, (e.g., phones, computers) should be used for legitimate business purposes. Carelessness and waste are unacceptable.Proprietary and/or Confidential InformationProprietary information is sensitive, confidential, private or classified technical, financial, personnel or business information. This includes trade secrets. Youmust not misuse or disclose such information to non-employees of Star Gas Partners (including family and friends). This obligation on your part not todisclose or misuse Star Gas Partners proprietary/confidential information continues when and if you leave Star Gas Partners for whatever reason. RESPONSIBILITY OF:CHIEF EXECUTIVE OFFICER PAGE NO.3 of 5 EFFECTIVE DATE:JUNE 1, 2006 STAR GAS PARTNERS, L.P. POLICY NUMBER / SUBJECT:102 CODE OF BUSINESS CONDUCT & ETHICS DATE OF ISSUE:JUNE 1, 2006SECTION:100 – BUSINESS PRACTICES SUPERSEDES ISSUE DATE:APRIL 1, 2005Relationships With Customers/SuppliersYou must treat all customers/suppliers fairly and according to applicable laws, customs and regulations. Business decisions regarding suppliers must be madeon the basis of the quality, delivery, value and reliability of the product or service offered. Employees may not borrow money or accept advances or otherpersonal payments from any person or company doing or seeking to do business with Star Gas Partners. Employees may not receive gifts of good, services,accommodations or otherwise from any person or company doing or seeking to do business with Star Gas Partners with a value in excess of $100, without theprior written approval of Star Gas Partners’ Chief Executive Officer, COO, Chief Financial Officer or a member of the Board of Directors’ Audit Committee inthe case of senior management.Conflicts of InterestA “conflict” occurs when an individual’s private interest interferes or even appears to interfere in any way with the person’s professional relationships and/orthe interests of Star Gas Partners. You are conflicted if you take actions or have interests that may make it difficult for you to perform your work for Star GasPartners objectively and effectively. Likewise, you are conflicted if you or a member of your family receives personal benefits as a result of your position inStar Gas Partners (directly or through a company they are employed by or in which they have an ownership interest). You should avoid even the appearanceof such a conflict. For example, there is a likely conflict of interest if you: 1.Cause Star Gas Partners to engage in business transactions with relatives or friends; 2.Use nonpublic Star Gas Partners client or vendor information for personal gain by you, relatives or friends (including securities transactions based onsuch information); 3.Have more than a modest financial interest in Star Gas Partners vendors, clients or competitors; 4.Receive a loan, or guarantee of obligations, for Star Gas Partners or a third party as a result of your position at Star Gas Partners; or 5.Compete, or prepare to compete, with Star Gas Partners while still employed by Star Gas Partners.If you think you have been, are, or may become conflicted, report the situation to Star Gas Partners, Vice President Controller at 203.325.5419 immediately.The prompt reporting of such situations will be favorable weighted should it be determined that corrective actions need to be administered. RESPONSIBILITY OF:CHIEF EXECUTIVE OFFICER PAGE NO.4 of 5 EFFECTIVE DATE:JUNE 1, 2006 STAR GAS PARTNERS, L.P. POLICY NUMBER / SUBJECT:102 CODE OF BUSINESS CONDUCT & ETHICS DATE OF ISSUE:JUNE 1, 2006SECTION:100 – BUSINESS PRACTICES SUPERSEDES ISSUE DATE:APRIL 1, 2005Waivers/ChangesNo waivers or changes in any provisions of this Code, other than technical changes or clarifications, can be granted by any person other than the Board ofDirectors or a member of the Audit Committee of the Board of Directors. Any waiver or change will be in writing and will be promptly disclosed to the public,in accordance with rules applicable to public companies like Star Gas Partners. Public disclosure will be made within five (5) business days after the waiver isgranted or changes is made or otherwise permitted under the applicable SEC regulations. It will be made by the filing of an SEC Form 8-K. Concurrently,notice will be made by a posting on Star Gas Partners’ website, which posting will be retained for at least 12 months after it is initially posted.AccountabilityViolations of this Code will result in discipline up to and including termination and/or civil and/or criminal prosecution. RESPONSIBILITY OF:CHIEF EXECUTIVE OFFICER PAGE NO.5 of 5 EFFECTIVE DATE:JUNE 1, 2006 Exhibit 21Partnership SubsidiariesA.P. Woodson Company—District of ColumbiaColumbia Petroleum Transportation, LLC—DelawareMarex Corporation—MarylandMaxwhale Corp.—MinnesotaMeenan Holdings of New York, Inc.—New YorkMeenan Oil Co., Inc.—DelawareMeenan Oil Co., L.P.—DelawareOrtep of Pennsylvania, Inc.—PennsylvaniaPetro Holdings, Inc.—MinnesotaPetro Plumbing Corporation—New JerseyPetro, Inc.—DelawarePetroleum Heat and Power Co., Inc.—MinnesotaRegionOil Plumbing, Heating and Cooling Co., Inc.—New JerseyRichland Partners, LLC—PennsylvaniaStar Gas Finance Company—DelawareStar/Petro, Inc.—MinnesotaTG&E Service Company, Inc.—Florida Exhibit 23.1Consent of Independent Registered Public Accounting FirmThe Partners ofStar Gas Partners, L.P.:We consent to the incorporation by reference in the registration statements No. 333-100976 on Form S-3, No. 333-49751 on Form S-4 and Nos. 333-40138, and 333-53716 on Form S-8 of Star Gas Partners, L.P. of our reports dated January 16, 2007, with respect to the consolidated balance sheets of StarGas Partners, L.P. as of September 30, 2006 and 2005, and the related consolidated statements of operations, comprehensive income (loss), partners’ capitaland cash flows for each of the years in the three-year period ended September 30, 2006, and the related financial statement schedules, management’sassessment of the effectiveness of internal control over financial reporting as of September 30, 2006 and the effectiveness of internal control over financialreporting as of September 30, 2006, which reports appear in the September 30, 2006 annual report on Form 10-K of Star Gas Partners, L.P.Our report refers to the restatement of the fiscal 2005 and 2004 consolidated financial statements. Our report also refers to a change to the weightedaverage cost method of valuing inventory in fiscal 2006.Our report dated January 16, 2007, on management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness ofinternal control over financial reporting as of September 30, 2006, expresses our opinion that the Partnership did not maintain effective internal control overfinancial reporting as of September 30, 2006 because of the effect of the material weakness on the achievement of the objectives of the control criteria andcontains an explanatory paragraph that states that the following material weakness has been identified; The Partnership did not have personnel withsufficient technical expertise related to the application of the provisions of Statement of Financial Accounting Standards Board No. 133, “Accounting forDerivative Instruments and Hedging Activities” (SFAS 133). Specifically, the Partnership’s personnel lacked sufficient technical expertise to ensurecompliance with the documentation requirements of SFAS 133 at inception of certain hedge relationships.KPMG LLPStamford, ConnecticutJanuary 16, 2007 Exhibit 31.1CERTIFICATIONSI, Joseph P. Cavanaugh, certify that: 1.I have reviewed this annual report on Form 10-K of Star Gas Partners, L.P. (“Registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted principles; (c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of this report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors: (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information and; (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: January 16, 2007 /s/ JOSEPH P. CAVANAUGH Joseph P. CavanaughChief Executive OfficerStar Gas Partners, L.P. Exhibit 31.2CERTIFICATIONSI, Richard F. Ambury, certify that: 1.I have reviewed this annual report on Form 10-K of Star Gas Partners, L.P. (“Registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrants’ other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted principles; (c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of this report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors: (c)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information and; (d)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: January 16, 2007 /s/ RICHARD F. AMBURY Richard F. AmburyChief Financial OfficerStar Gas Partners, L.P. Exhibit 31.3CERTIFICATIONSI, Joseph P. Cavanaugh, certify that: 1.I have reviewed this annual report on Form 10-K of Star Gas Finance Company (“Registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted principles; (c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of this report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors: (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information and; (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: January 16, 2007 /s/ JOSEPH P. CAVANAUGH Joseph P. CavanaughChief Executive OfficerStar Gas Finance Company Exhibit 31.4CERTIFICATIONSI, Richard F. Ambury, certify that: 1.I have reviewed this annual report on Form 10-K of Star Gas Finance Company (“Registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; (b)designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted principles; (c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of this report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors: (a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information and; (b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: January 16, 2007 /s/ RICHARD F. AMBURY Richard F. AmburyChief Financial OfficerStar Gas Finance Company Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Star Gas Partners, L.P. (the “Partnership”) and Star Gas Finance Company on Form 10-K for the year endedSeptember 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph P. Cavanaugh, Chief Executive Officerof the Partnership and Star Gas Finance Company, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, following due inquiry, I believe that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of thePartnership and Star Gas Finance Company.A signed original of this written statement required by Section 906 has been provided to Star Gas Partners, L.P. and will be retained by Star GasPartners, L.P. and furnished to the Securities and Exchange Commission or its staff upon request. STAR GAS PARTNERS, L.P.STAR GAS FINANCE COMPANYBy: KESTREL HEAT, LLC (General Partner)January 16, 2007 By: /s/ JOSEPH P. CAVANAUGH Joseph P. Cavanaugh Chief Executive Officer Star Gas Partners, L.P. Star Gas Finance Company Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Star Gas Partners, L.P. (the “Partnership”) and Star Gas Finance Company on Form 10-K for the year endedSeptember 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard F. Ambury, Chief Financial Officer ofthe Partnership and Star Gas Finance Company, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, following due inquiry, I believe that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of thePartnership and Star Gas Finance Company.A signed original of this written statement required by Section 906 has been provided to Star Gas Partners, L.P. and will be retained by Star GasPartners, L.P. and furnished to the Securities and Exchange Commission or its staff upon request. STAR GAS PARTNERS, L.P.STAR GAS FINANCE COMPANYBy: KESTREL HEAT, LLC (General Partner)January 16, 2007 By: /s/ RICHARD F. AMBURY Richard F. Ambury Chief Financial Officer Star Gas Partners, L.P. Star Gas Finance Company
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