Table of Contents UNITED 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 1934 For the fiscal year ended September 30, 2009OR ¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-14129Commission File Number: 333-103873 STAR 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 of incorporation or organization) (I.R.S. Employer Identification 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: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate 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 x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files).* Yes ¨ No ¨* The registrant has not yet been phased into the interactive data requirements.Indicate 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, a non-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act (check one).Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨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, 2009 wasapproximately $197,013,000. As of November 30, 2009, the registrants had units and shares outstanding for each of the issuers’ classes of common stock asfollows: Star Gas Partners, L.P. Common Units 71,714,982Star 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.2009 FORM 10-K ANNUAL REPORTTABLE OF CONTENTS Page PART I Item 1. Business 3Item 1A. Risk Factors 8Item 1B. Unresolved Staff Comments 16Item 2. Properties 16Item 3. Legal Proceedings—Litigation 16Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5. Market for the Registrant’s Units and Related Matters 17Item 6. Selected Historical Financial and Operating Data 19Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22Item 7A. Quantitative and Qualitative Disclosures about Market Risk 46Item 8. Financial Statements and Supplementary Data 46Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46Item 9A. Controls and Procedures 46Item 9B. Other Information 47 PART III Item 10. Directors and Executive Officers of the Registrant 48Item 11. Executive Compensation 51Item 12. Security Ownership of Certain Beneficial Owners and Management 62Item 13. Certain Relationships and Related Transactions 62Item 14. Principal Accounting Fees and Services 64 PART IV Item 15. Exhibits and Financial Statement Schedules 64 2 Table of ContentsPART IStatement 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 make strategic acquisitions, the impact of litigation, our ability to contract for our current and future supply needs, naturalgas conversions, future union relations and the outcome of union negotiations, the impact of current and future environmental, health, and safety regulations,the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, and general economic conditions. Allstatements other than statements of historical facts included in this Report including, without limitation, the statements under “Management’s Discussionand Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-looking statements. Although we believe that theexpectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct and actualresults may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to,those set forth under the heading “Risk Factors” and “Business Initiatives and Strategy.” Without limiting 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 actualresults to differ materially from our expectations (“Cautionary Statements”) are disclosed in this Annual Report on Form 10-K. All subsequent written andoral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by the CautionaryStatements. Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise after the date of this Report. ITEM 1.BUSINESSStructureStar Gas Partners, L.P. (“Star Gas Partners,” the “Partnership,” “we,” “us,” or “our”) is a home heating oil distributor and services provider with onereportable operating segment that principally provides services to residential and commercial customers to heat their homes and buildings. Star Gas Partnersis a master limited partnership, which at November 30, 2009, had outstanding 71.7 million common units (NYSE: “SGU”) representing a 99.5% limitedpartner interest in Star Gas Partners, and 0.3 million general partner units, representing a 0.5% 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. (a Minnesota corporation that is an indirect wholly owned subsidiary of thePartnership ) and its subsidiaries (“Petro”). Petro is a Northeast and Mid-Atlantic region retail distributor of home heating oil and related services. • Star Gas Finance Company is a 100% owned subsidiary of the Partnership. Star Gas Finance Company serves as the co-issuer, jointly and severallywith the Partnership, of the Partnership’s $133.1 million 10.25% Senior Notes, which are due in 2013. The Partnership is dependent on distributionsincluding inter-company interest payments from its subsidiaries to service the Partnership’s debt obligations. The distributions from thePartnership’s subsidiaries are not guaranteed and are subject to certain loan restrictions. Star Gas Finance Company has nominal assets and conductsno 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/sec.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 ContentsBusiness OverviewAs of September 30, 2009, we sold home heating oil to approximately 374,000 full service residential and commercial home heating oil customers andpropane to approximately 7,000 propane customers. We believe we are the largest retail distributor of home heating oil in the United States. We also sellhome heating oil, gasoline and diesel fuel to approximately 34,000 customers on a delivery only basis. We install, maintain, and repair heating and airconditioning equipment for our customers and provide ancillary home services, including home security and plumbing, to approximately 11,000 customers.During fiscal 2009, total sales were comprised approximately 79% from sales of home heating oil; 15% from the installation and repair of heating and airconditioning equipment and ancillary services; and 6% from the sale of other petroleum products. We provide home heating equipment repair service 24hours 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 customersatisfaction and loyalty.In fiscal 2009, sales to residential customers represented 88% of the retail heating oil gallons sold and 95% of heating oil gross profits.We have operations and markets in the following states, regions and counties: 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 Bronx LoudounHarford Queens Prince WilliamCecil New Jersey Kings FauquierAnne Arundel Salem Richmond StaffordCarroll Gloucester New York ArlingtonHoward Camden FairfaxMontgomery Burlington Pennsylvania Prince George’s Ocean Philadelphia Washington, D.C.Calvert Monmouth Bucks District of ColumbiaCharles Somerset Montgomery Frederick Middlesex Chester Mercer Lancaster Hunterdon Lebanon Union Lehigh Hudson Northampton Bergen Berks Essex Monroe Passaic Dauphin Sussex Cumberland Morris York Warren Industry CharacteristicsHome heating oil is primarily used as a source of fuel to heat residences and businesses in the Northeast and Mid-Atlantic regions. According to theU.S. Department of Energy—Energy Information Administration, 2005 Residential Energy Consumption Survey (the latest survey published), these regionsaccount for 81% 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.The retail home heating oil industry is mature, with total market demand expected to decline in the foreseeable future due to conversions to naturalgas. Our customer losses to natural gas have recently increased. In each of the fiscal years 2009 and 2008, we lost 1.6% of our home heating oil customer baseto natural gas conversions, which compares to an approximate 1.0% per annum loss in prior years. Therefore, our ability to maintain our business or growwithin the industry is dependent on the acquisition of other retail distributors as well as the success of our marketing programs. It is common practice in our 4 Table of Contentsbusiness to price products to customers based on a per gallon margin over wholesale costs. As a result, we believe distributors such as ourselves generallyseek to maintain their per gallon margins by passing wholesale price increases through to customers, thus insulating themselves from the volatility inwholesale heating oil prices. However, distributors may be unable or unwilling to pass the entire product cost increases through to customers. In these cases,significant decreases in per gallon margins may result. The timing of cost pass-throughs can also significantly affect margins. The retail home heating oilindustry is highly fragmented, characterized by a large number of relatively small, independently owned and operated local distributors. Some dealersprovide full service, as we do, and others offer delivery only on a cash-on-delivery basis, which we also do to a significantly lesser extent. The industry isbecoming more complex and costly due to increasing regulations, working capital requirements, including the cost to hedge for protected price customers.We utilize derivative instruments in order to hedge a substantial majority of the heating oil volume we expect to sell to protected price customers that haverenewed their protected price plans, mitigating our exposure to changing commodity prices. We also use derivative instruments as a hedge against ourphysical inventory and priced purchase commitments. We do not enter into any forward hedges for our variable price customers.Business Initiatives and StrategyWe are committed to our strategy to increase unitholder value and increase distributions over time through (i) reduced net customer attrition,(ii) operational efficiencies and productivity improvements, and (iii) increased market share through the acquisition of other heating oil distributors or thepossible expansion into other energy or petroleum-related businesses.To engage our employees and enhance their abilities to provide superior customer service and reduce gross customer losses, we require all employeesto attend a team-building and role-playing program that we call Boot Camp. The initiatives covered in Boot Camp are consistently reinforced throughconstant customer service monitoring and training in the field. In addition, we have recently created an internal, Director-level position, called the Director ofQuality Assurance. This position is responsible for the customer service evaluation process and directs the teams that conduct district quality assuranceassessments. These assessments are focused on escalating the performance in customer relations and retention and on driving customer service performance tothe best possible level.SeasonalityThe following matters should be considered in analyzing our financial results. Our fiscal year ends on September 30. All references to quarters andyears respectively in this document are to fiscal quarters and years unless otherwise noted. The seasonal nature of our business results in the sale ofapproximately 30% 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, thepeak heating season. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and otherfactors.CompetitionMost of our district locations compete with numerous distributors, primarily on the basis of reliability of service, price, and response to customer needs.Each district location operates in its own competitive environment.We 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. We believe that this level of service tends to help build customer loyalty. In some instances homeowners have formed buying cooperatives thatseek to purchase fuel oil from distributors at a price lower than individual customers are otherwise able to obtain. We also compete for retail customers withsuppliers of alternative energy products, principally natural gas, propane and electricity. The expansion of natural gas into traditional home heating oilmarkets in the Northeast has historically been inhibited by the capital costs required to expand distribution and pipeline systems.Customers and PricingOur full service home heating oil customer base is comprised of 97% residential customers and 3% commercial customers. Our residential customerreceives small deliveries on average of 160 gallons and our commercial accounts receive larger deliveries on average of 350 gallons. Typically, we make fourto six deliveries per customer per year. Currently, 90% of our deliveries are scheduled automatically and 10% of our home heating oil customer base call fromtime to time to schedule a delivery. Automatic deliveries are scheduled based on each customer’s historical consumption pattern and prevailing weatherconditions. Our practice is to bill customers promptly after delivery. We also offer a balanced payment plan in which a customer’s estimated annual oilpurchases and service contract fees are paid for in a series of equal monthly payments. Approximately 34% of our residential home heating oil customershave selected this billing option. 5 Table of ContentsWe 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 offer price protection programs, which establish either a ceilingor a fixed per gallon price that the customer would pay over a defined period. Over the last several years, a greater number of our price protected customershave selected the ceiling plan over the fixed price plan. As of September 30th 2009 2008 Variable 52.3% 48.6% Ceiling 44.6% 34.4% Fixed 3.1% 17.0% 100.0% 100.0% Sales to residential customers ordinarily generate higher per gallon margins than sales to commercial customers. Due to greater price sensitivity andhedging complexities of residential protected price customers, the per gallon margins realized from price protected customers generally are less than variablepriced residential customers.Customer AttritionWe measure net customer attrition for our full service residential and commercial home heating oil customers. Net customer attrition is the differencebetween gross customer losses and customers added through internal marketing efforts. Customers added through acquisitions are not included in thecalculation of gross customer gains. Gross customer losses are the result of a number of factors, including price competition, move outs, service issues, creditlosses and conversions to natural gas. When a customer moves out of an existing home we count the “move out” as a loss and if we are successful in signingup the new homeowner, the “move in” is treated as a gain.For fiscal 2009, we lost 30,200 accounts (net), or 7.5% of our home heating oil customer base, as compared to fiscal 2008, where we lost 18,300accounts (net), or 4.4% of our home heating oil customer base. In fiscal 2007 we lost 21,300 accounts (net), or 5.0% of our home heating oil customer base.Our net customer attrition increased in fiscal 2009 when compared to fiscal 2008, as gross losses (which is reflective of customer turn-over) increased to21.0% in fiscal 2009, as compared to 19.1% in fiscal 2008 and 17.6% in fiscal 2007. (See Item 7. Management’s Discussion and Analysis of FinancialCondition 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 60 third-partyterminals for the right to temporarily store heating oil at their facilities. Purchases are made under supply contracts or on the spot market. Including our ownphysical storage, we have entered into market price based contracts for approximately 77% of our home heating oil requirements for fiscal 2010. During fiscal2009, Sunoco Inc., Global Companies, and NIC Holding Corp. (Northville Industries) provided 15.1%, 13.5% and 8.7% respectively, of our productpurchases. Aside from these three suppliers, no single supplier provided more than 10% of our product supply during fiscal 2009. For fiscal 2010, we havesupply contracts for similar quantities with Sunoco Inc., Global Companies, and NIC Holding Corp. Supply contracts typically have terms of 6 to 12 months.All of the supply contracts provide for minimum quantities. In all cases, the supply contracts do not establish in advance the price of fuel oil. This price isbased upon a published market index price at the time of delivery or pricing date plus an agreed upon differential. We believe that our policy of contractingfor the majority of our anticipated supply needs with diverse and reliable sources will enable us to obtain sufficient product should unforeseen shortagesdevelop 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 priced purchase commitments.The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10-05 Derivatives and Hedging topic (SFASNo. 133), established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the consolidatedbalance sheet as assets or liabilities. Currently, the Partnership has elected not to designate its derivative instruments as hedging instruments under thisstandard, and the change in fair value of the derivative instruments are recognized in our statement of operations. While we largely expect our realized 6 Table of Contentsderivative gains and losses to be offset by increases or decreases in the value of our physical purchases, we will experience volatility in reported earnings dueto the recording of unrealized non-cash gains and losses on our derivative instruments prior to their maturity.Home Heating Oil Price VolatilityIn recent years, the wholesale price of home heating oil has been extremely volatile, resulting in increased consumer price sensitivity to heating costsand increased gross customer attrition. Like any other market commodity, the price of home heating oil is generally impacted by many factors, includingeconomic and geopolitical forces. The price of home heating oil is closely linked to the price refiners pay for crude oil, which is the principal cost componentof home heating oil. The volatility in the wholesale cost of home heating oil, as measured by the New York Mercantile Exchange (“Nymex”) for fiscal 2009,2008 and 2007 by quarter, is illustrated by the following chart: Fiscal 2009 Fiscal 2008 Fiscal 2007 Low High Low High Low HighQuarter Ended December 31 $1.1983 $2.8469 $2.1596 $2.7066 $1.5869 $1.8477March 31 1.1331 1.6263 2.4188 3.1483 1.4707 1.8794June 30 1.3147 1.8630 2.8797 3.9748 1.7978 2.0424September 30 1.5038 1.9569 2.7197 4.1060 1.9393 2.2609AcquisitionsIn fiscal 2009, we completed the purchase of one retail heating oil dealer with approximately 3,800 home heating oil customers for an aggregate cost ofapproximately $4.0 million, reduced by $0.7 million of working capital credits. In fiscal 2008, we completed the purchase of seven retail heating oil dealerswith approximately 5,700 home heating oil customers and one small home security business for an aggregate cost of approximately $2.6 million, reduced by$0.7 million of working capital credits. In fiscal 2007, we completed the purchase of seven retail heating oil dealers with approximately 19,400 home heatingoil customers and several thousand plumbing customers for an aggregate cost of $26.4 million.EmployeesAs of September 30, 2009, we had 2,655 employees, of whom 825 were office, clerical and customer service personnel; 844 were equipmenttechnicians; 360 were oil truck drivers and mechanics; 356 were management and 270 were employed in sales. Of these employees 951 are represented by 21different 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. The Partnership does not expect to withdraw from these plans. In addition, approximately378 seasonal employees (275 of which are represented by the local chapters of labor unions indicated earlier) are rehired annually to support the requirementsof the heating season. We are currently involved in 4 union negotiations. We believe that our relations with both our union and non-union employees aregenerally 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. Products stored and/or delivered by the Partnership and certainautomotive waste products generated by the Partnership’s fleet are hazardous substances within the meaning of CERCLA. These laws and regulations couldresult in civil or criminal penalties in cases of non-compliance or impose liability for remediation costs.In addition, transportation of distillates and gasoline by truck are subject to regulations promulgated under the Federal Motor Carrier Safety Act. Theseregulations cover the transportation of hazardous materials and are administered by the United States Department of Transportation or similar state agencies.We conduct ongoing training programs to help ensure that our operations are in compliance with applicable safety regulations. We maintain various permitsthat are necessary to operate some of our facilities, some of which may be material to our operations. 7 Table of ContentsTrademarks 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.Current economic conditions could adversely affect our results of operations and financial condition.In 2008 and continuing into fiscal 2009, economic conditions in the United States have experienced a downturn due to the sequential effects of thesub-prime lending crisis, general credit market crisis, the general unavailability of financing, collateral effects on the finance and banking industries, volatileenergy prices, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adversebusiness conditions, increased unemployment, liquidity concerns and declines in housing prices and house sales.Uncertainty about current economic conditions poses a risk as our customers may postpone spending in response to tighter credit, negative financialnews and/or declines in income or asset values, which could have a material negative effect on the demand for the Partnership’s equipment and services andcould lead to increased conservation and the possibility of certain of our customers seeking lower cost providers. Any increase in existing customers seekinglower cost providers and/or increase in the rejection rate of potential accounts could increase the Partnership’s overall rate of net customer attrition. If adverseeconomic conditions persist, the Partnership could experience an increase in bad debts from financially distressed customers, which would have a negativeeffect on our liquidity, results of operations and financial condition.In light of the recent financial turmoil, there can be no assurance that the lenders within our lending group will fund a borrowing request.From time to time, the Partnership borrows to meet its seasonal working capital needs. In light of the current financial turmoil affecting the bankingsystem and financial markets, there can be no assurances that all of the lending institutions within our lending group will have the ability to fund their prorata portion of a borrowing request. Our lending group includes JP Morgan Chase, Bank of America, RBS Citizens, PNC Bank, Societe Generale, Key Bank,TD Banknorth, Israel Discount Bank, and RZB Finance.The Partnership relies on the continued solvency of our derivative and insurance counterparties. The Partnership regularly uses derivativeinstruments such as futures, options, and swap agreements, in order to mitigate our exposure to market risk associated with the purchase of homeheating oil for our protected price customers, physical inventory on hand, inventory in transit and priced purchase commitments. The Partnershipinsures itself against catastrophic property and other losses with insurance companies.The financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out ofbusiness have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit,currency and equity markets that may also adversely affect the Partnership’s results of operations and financial conditions. There could be a number offollow-on effects from the credit crisis on the Partnership’s business, including insolvency of key suppliers resulting in product delays and failure ofderivative counterparties and other financial institutions negatively impacting the Partnership’s liquidity and financial condition.If counterparties to our derivative instruments were to fail, the Partnership’s liquidity, results of operations and financial condition could be materiallyimpacted, as we would be obligated to fulfill our operational requirement of purchasing, storing and selling home heating oil, while losing the mitigatingbenefits of economic hedges with a failed counterparty. If one of our insurance carriers should fail, the Partnership’s liquidity, results of operations andfinancial condition could be materially impacted, as we would have to fund any catastrophic loss. Currently, we have outstanding derivative instrumentswith the following counterparties: Newedge USA, LLC, Cargill, Inc., Key Bank National Association, JPMorgan Chase Bank, NA, Wachovia Bank, NA,Societe Generale, Bank of America, N.A., and RBS Sempra. Our primary insurance carrier is a subsidiary of Chartis, formerly known as American InternationalGroup. 8 Table of ContentsOur substantial debt and other financial obligations could impair our financial condition and our ability to fulfill our debt obligations. Any refinancingof this substantial debt could be at significantly higher interest rates.As of September 30, 2009, we had total debt, exclusive of borrowings under our revolving credit facility, of approximately $133.1 million. Oursubstantial indebtedness and other financial obligations could: • impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes; • have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our debt agreements and an eventof 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. Any refinancing of our indebtedness could be at significantly higher interest rates, and/or incur significant transaction fees.Unitholders may have to report income for federal income tax purposes on their investment in the Partnership without receiving any cash distributionsfrom us.Star Gas Partners is a master limited partnership. Our unitholders are required to report for federal income tax purposes their allocable share of ourincome, gains, losses, deductions and credits, regardless of whether we make cash distributions. We expect that an investor will be allocated taxable income(mostly dividend, interest income and cancellation of indebtedness income) regardless of whether a cash distribution has been paid.Our corporate subsidiary Star Acquisitions, Inc. and its subsidiaries (“Star Acquisitions”) are subject to federal and state income taxes. See thefollowing risk factor regarding net operating loss availability.A change in ownership of Star Gas Partners may result in the limitation of the potential utilization of net operating loss carry forwards by ourcorporate subsidiary may impact 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 Acquisitions (the Parent of Petro) may be materially restricted in the potential utilization of its net operating loss carry forwards to offsetfuture taxable income. A restriction on Star Acquisitions’ ability to use its net operating loss carry forwards to reduce its federal taxable income would reducethe amount of cash Star Acquisitions has available to make distributions to the Partnership, which would consequently reduce the amount of cash thePartnership has available to make distributions to its unitholders.As of the calendar tax year ended December 31, 2009, we anticipate that Star Acquisitions will have a federal net operating loss carry forward (“NOL”)of approximately $43.9 million. The NOLs, which will expire between 2018 and 2024, are generally available to offset any future taxable income. In general,the Partnership would be deemed to have an “ownership change” under Section 382 if, immediately after any owner shift involving a 5% unitholder or anyequity structure shift, the percentage of units of the Partnership owned by one or more 5% unitholders has increased by more than 50% over the lowestpercentage of units of the Partnership (or any predecessor entity) owned by such unitholder at any time during the three-year testing period.If the Partnership elects to be treated as a corporation for federal and state income tax purposes, such an election may result in adverse taxconsequences to unitholders.Currently, the Partnership’s main asset and source of income is an investment in Star Acquisitions. Our unitholders do not receive any of the taxbenefits normally associated with owning units in a publicly traded partnership, as any cash coming from Star Acquisitions to the Partnership will generallyhave been taxed first at a corporate level and then may also be taxable to our unitholders as dividends, reported via annual Forms K-1. The production of theForms K-1 themselves is an expensive and administratively intensive process. Thus the Partnership has all the administrative issues and costs associated withbeing a publicly traded partnership, but our unitholders do not currently receive any material tax benefits from this structure. 9 Table of ContentsTo reduce these administrative expenses and to rationalize our tax reporting structure, the Partnership is actively considering making an electionsometime in calendar 2010 or thereafter to be treated as a corporation for federal and state income tax purposes. While the Partnership would still remain apublicly traded partnership for legal and governance purposes, for income tax purposes its unitholders will be treated as owning stock in a corporation ratherthan being partners in a partnership. Subsequent to the year of election the unitholders would receive annually Form 1099-DIV for any dividends and wouldno longer receive K-1s. In the year of election they would receive both, each form covering part of the year.This election may have immediate short term tax implications as any unitholder who owns units at the time of the election would be deemed to haveexchanged his units for shares in a “new” corporation, and to have received a certain amount of dividend income related to having had some share of thePartnership’s public debt assumed, as the new corporation would assume this liability.Assuming that the Partnership’s taxable earnings and profits are equal to or less than the amount of distributions/dividends paid out during the year bythe Partnership and the unitholder holds the units for the entire calendar year (or at least long enough during the year to receive a distribution(s) at least equalto the tax resulting from a share of dividend income reported on Form K-1), then most partners should not have any material negative cash flow consequencesas a result of the Partnership making this election. Note that nothing herein should be interpreted as a projection of any future earnings amount or aprojection or guarantee of future distributions or dividends.In addition, there are risks that the Partnership could make this election and: • Not distribute or dividend enough cash to cover the taxes that may be due as a result of the dividend income generated by the election. • Even if distributions are made equal to the total taxable earnings of the Partnership, a particular unitholder could buy or sell units in a time periodthat might give rise to deemed dividend income caused by the election and not receive enough (or any) cash to offset the taxes due on suchdividend income.The Partnership intends to only make this election if it believes that it will have no overall material adverse impact on its unitholders, of which therecan be no assurance. Since determining this is a function of projecting taxable earnings, making assumptions regarding the payment of distributions, andtrying to determine when during any particular calendar year making the election will have the least impact on the most number of unitholders, when or, evenif, it will make this election is not determinable at this time. Unitholders are encouraged to consult their tax advisors with respect to these possible outcomes.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 or from month to month, significantly affecting our financial performance. Furthermore,warmer than normal temperatures in one or more regions in which we operate can significantly decrease the total volume we sell and the gross profit realizedand, 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, EBITDA and Adjusted EBITDA (see Item 6. EBITDA and AdjustedEBITDA calculation) that we generated during these periods. In fiscal 2002, temperatures in our areas of operation were an average of 18.4% warmer than infiscal 2001 and 18.0% warmer than normal. To partially mitigate the adverse effect of warm weather on our cash flows, we have purchased a weather hedgefrom Swiss Re Financial Products. We will receive a payment of $35,000 per degree-day, when the actual degree-days are less than the 10 year average by7.5%. The hedge covers the period from November 1, 2009 through March 31, 2010 taken as a whole and has a maximum payout of $12.5 million.However, there can be no assurance that this hedge will be adequate to protect us from adverse effects of weather conditions or that we may be able toobtain similar protection in the future. 10 Table of ContentsOur 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 2009, 2008, and 2007 was approximately 7.5%, 4.4%, and 5.0%, respectively. This raterepresents the net of our annual gross customer losses after gross customer gains. For fiscal 2009, 2008, and 2007 we had gross customer losses of 21.0%,19.1%, and 17.6%, respectively, which were partially offset by gross customer gains during these periods of 13.5%, 14.7%, and 12.6%, respectively. The gainof a new customer does not fully compensate for the loss of an existing customer because of the expenses incurred during the first year to acquire a newcustomer. Customer losses are the result of various factors, including but not limited to: • price competition; • customer relocations; • credit worthiness; and • conversions to natural gas.The continuing unprecedented volatility in the price of heating oil has intensified price competition and added to our difficulty in reducing netcustomer attrition.For additional information about customer attrition, See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Customer Attrition.”Because of the highly competitive nature of the home heating oil business, we may not be able to retain existing customers or acquire new customers,which would have an adverse impact on our operating results and financial condition.Our home heating oil business is subject to substantial competition. Most of our district locations compete with numerous distributors, primarily on thebasis of reliability of service, price, and response to customer needs. Each district location operates in its own competitive environment.We compete with distributors offering a broad range of services and prices, from full-service distributor, 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. We believe that this tends to build customer loyalty. In some instances homeowners have formed buying cooperatives that seek to purchase fueloil from distributors at a price lower than individual customers are otherwise able to obtain. We also compete for retail customers with suppliers of alternativeenergy products, principally natural gas, propane and electricity.If we are unable to compete effectively, we may lose existing customers or fail to acquire new customers, which would have a material adverse effect onour operating results and financial condition.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 uses natural gas when it is available, and competition has alsoincreased from alternative energy sources. Accordingly, future growth will depend on our ability to make acquisitions at attractive prices. We cannot assurethat we will be able to identify attractive acquisition candidates in the home heating oil sector in the future or that we will be able to acquire businesses oneconomically acceptable terms. Factors that may adversely affect home heating oil operating and financial results may limit our access to capital andadversely affect our ability to make acquisitions. Under the terms of our revolving credit facility, our most restrictive agreement, as long as we maintaincertain financial ratios, we are not limited on the number of individual acquisitions or aggregate dollar amount of acquisitions we make in any fiscal year, butwe are restricted from making any individual acquisition in excess of $25.0 million without the lenders’ approval. In addition, to make an acquisition, thePartnership is required to have Availability (as defined in the credit agreement) of $40.0 million, on a historical pro forma and forward-looking basis. Thiscovenant restriction may limit our ability to make acquisitions. Any acquisition may involve potential risks 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; 11 Table of Contents • an excess of customer loss or loss of key employees from the acquired business; and • the assumption of additional liabilities including environmental liabilities.In 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.Increases in home heating oil prices beyond current levels may have adverse effects on our business, financial condition and results of operations.Increases in home heating oil prices beyond current levels may have adverse effects on our business, financial condition and results of operations,including the following: • higher bad debt expense as a result of higher selling prices; • higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances; and • reduced liquidity as a result of higher receivables and/or inventory balances as the Partnership must fund a portion of any increase in receivables,inventory and hedging costs from its own resources thereby tying up funds that would otherwise be available for other purposes.The volatility in wholesale energy costs may adversely affect our liquidity.Our business requires a significant investment in working capital to finance accounts receivable and inventory during the heating season. Under ourrevolving credit facility, we may borrow up to $240 million, which increases to $290 million during the peak winter months from December through April ofeach year (subject to borrowing base limitations and a coverage ratio) for working capital purposes subject to maintaining availability (as defined in thecredit agreement) of $43.5 million or a fixed charge coverage ratio of not less than 1.10x.If increases in home heating oil costs cause our working capital requirements to exceed the amounts available under our revolving credit facility orshould we fail to maintain the required availability, we would not have sufficient working capital to operate our business, which could have a materialadverse effect on our financial condition and results of operations.We generally utilize forward swaps with members of our lending group to manage market risk associated with our fixed price customers, our physicalinventory and fuel we use for our vehicles. These institutions have not required an initial cash margin deposit or any mark to market maintenance margin forthese swaps. Any mark to market exposure is reserved against our borrowing base and can thus reduce the amount available to us under our revolving creditfacility. The mark to market reserve against our borrowing base for swap derivative instruments with our lending group was $4.7 million as of September 30,2009 and $6.5 million as of November 30, 2009.For our ceiling price customers and some of our fixed price customers, we purchase call options, which usually requires the Partnership to pay an upfront cash payment. This reduces our liquidity, as we must pay for the option before any sales are made to the customer.For certain of our supply contracts, we are required to establish the purchase price in advance of receiving the physical product. This occurs at the endof the month and is usually no more than 20 days prior to receipt of the product. We use futures contracts or swaps to “short” the purchase commitment suchthat the commitment floats with the market. As a result, any upward movement in the market for home heating oil would reduce our liquidity, as we would berequired to post additional cash collateral for a futures contract or our availability to borrow under our bank facility would be reduced in the case of a swap.At December 31, 2009, we expect to have approximately 40 million gallons of purchase commitments and physical inventory shorted with a futures contractor swap. Assuming a $1.00 per gallon increase in price, our near term liquidity would be reduced by $40 million.For the majority of our fiscal year, the amount of cash received from customers with a balanced payment plan is greater than actual billings. Thisamount is reflected on the balance sheet under the caption “customer credit balances.” At September 30, 2009, customer credit balances aggregated $74.2million. Generally, customer credit balances are at their low point after the end of the heating season and at their peak prior to the beginning of the heatingseason. We have approximately 133,000 customers, or 34% of our residential customer base, on the balanced payment plan. If home heating oil pricesincreased and we failed to recalculate the balanced payments to reflect current heating oil prices, our liquidity could also be reduced. 12 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 per gallon oversupply costs per gallon. Consequently, our profitability is sensitive to changes in the wholesale price of home heating oil caused by changes in supply orother 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 to pass on these increases to customers through increased retail sales prices. In an effort to retain existing accounts and attract newcustomers 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 (ceiling and fixed) and our gross margins could be adverselyaffected if we are not 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 arrangement pre-establishing the ceiling sales price or afixed price of home heating oil over a fixed period. When the customer makes a purchase commitment for the next period we currently purchase optioncontracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these price-protected customers. The amount ofhome heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per average customer, per month. In theevent that the actual usage exceeds the amount of the hedged volume on a monthly basis, we could be required to obtain additional volume at unfavorablemargins. In addition, should actual usage in any month be less than the hedged volume, (including, for example, as a result of early terminations by fixedprice customers) our hedging losses could be greater. Currently, the Partnership has elected not to designate its derivative instruments as hedging instrumentsunder FASB ASC 815-10-05 Derivatives and Hedging topic (SFAS 133), and the change in fair value of the derivative instruments are recognized in ourstatement of operations. Therefore, we could experience great volatility in earnings as these currently outstanding derivative contracts are marked to marketand non-cash gains or losses are recorded in the statement of operations.Significant declines in the wholesale price of home heating oil may cause protected price customers to renegotiate or terminate their arrangementswhich may adversely impact our gross profit and net income.When the wholesale price of home heating oil declines significantly after a customer enters into a protected price arrangement with us, some customerselect to renegotiate their arrangement in order to enter into a lower cost pricing plan with us or terminate their arrangement and switch to a competitor. As aresult of significant decreases in the price of home heating oil following the summer of 2008, many protected price customers decided to renegotiate theiragreements with us in fiscal 2009. It is our policy to bill a termination fee when customers terminate their arrangement with us. It is our belief thatapproximately 10,000 customers chose another supplier as a result of being billed the termination fee.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 our products. 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 that 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 operations are subject to operational hazards and our insurance reserves may not be adequate to cover actual losses.We self-insure workers’ compensation, automobile and general liability claims up to pre-established limits. In storing and delivering product to ourcustomers, our operations are subject to operational hazards such as natural disasters, adverse weather, accidents, fires, explosions, hazardous materialsreleases, mechanical failures and other events beyond our control. If any of these events were to occur, we could incur substantial losses because of personalinjury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment orsuspension of our related operations. 13 Table of ContentsWe establish reserves based upon expectations as to what our ultimate liability will be for claims using our historical developmental factors. Weevaluate on an annual basis the potential for changes in loss estimates with the support of qualified actuaries. As of September 30, 2009, we hadapproximately $34.8 million of insurance reserves and had issued $37.4 million in letters of credit for current and future claims. The ultimate settlement ofthese claims could differ materially from the assumptions used to calculate the reserves, which could have a material effect on our results of operations.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 matters. We haveimplemented environmental programs and policies designed to avoid potential liability and costs under applicable environmental laws. It is possible,however, that we will experience increased costs due to stricter pollution control requirements or liabilities resulting from noncompliance with operating orother regulatory permits. New environmental regulations might adversely impact operations, including underground storage and transportation of homeheating oil. In addition, there are environmental risks inherently associated with home heating oil operations, such as the risks of accidental release or spill. Itis possible that material costs and liabilities will be incurred, including those relating to claims for damages to property and persons.In addition, our results of operations and ability to issue distributions may be negatively impacted by significant changes in federal and state tax law.Proposed legislation concerning the regulation of greenhouse gases and other issues that impact the Partnership’s operations could, if adopted, increasethe Partnership’s costs and/or require changes to its operations, which could have a material adverse effect on the Partnership’s financial condition andresults of operations.There is increasing attention in the United States and worldwide concerning the issue of climate change and the effect of emissions of greenhousegases, in particular from the combustion of fossil fuels. There are efforts to develop new federal proposals by Congress and the EPA that could lead to theadoption of a mandatory program to reduce greenhouse gas emissions through, for example, an economy-wide cap-and-trade program, a carbon tax or acombination of both. Debate continues on the direction, scope and timing of U.S. policy on the regulation of greenhouse gas emissions. It is probable thatany regulatory program that caps emissions or imposes a carbon tax will increase costs for the Partnership and its customers which could lead to increasedconservation or customers seeking lower cost alternatives. However, at this time an estimate of such costs to comply with potential national, regional or stategreenhouse gas emissions reduction legislation, regulations or initiatives is not possible because these programs and proposals are in the early stages ofdevelopment and any final program, if adopted, could vary from current proposals.There is also pending legislation directed at over-the-counter derivatives that is considering the establishment of position limits in the energy market.While this legislation is in its early stages, passage of over-the-counter derivative position limits would affect the Partnership’s liquidity, expose it to greatercounterparty credit risk and contribute to earnings volatility, as the Partnership would have to alter its heating oil hedging program, and concentratepositions to the derivatives that would be available at fewer select counterparties.Furthermore, laws and regulations that affect the Partnership’s operations continue to evolve at both the state and federal levels, which may ultimatelyadd compliance costs to the Partnership. Changes in regulations under different political administrations, the imposition of additional regulations, or theenactment of new legislation that impacts employment, labor, trade, transportation or logistics, health care, tax or environmental issues could have thepotential of materially impacting our financial condition or results of operations.The Partnership will continue to monitor and evaluate federal, regional or state programs and proposals and judicial and administrative decisions thatcould affect our customers or operations.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. 14 Table of ContentsConflicts 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 which canimpact 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 actions thatmight, without limitations, constitute breaches of fiduciary duty. Unitholders are deemed to have consented to some actions and conflicts of interestthat 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.The 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 otherproducts that we sell. 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.Distributions of available cash by us to unitholders will depend on the amount of cash generated, and distributions may fluctuate based on ourperformance. The actual amount of cash that is available will depend upon numerous factors, including: • profitability of operations; • required principal and interest payments on debt or debt prepayments; 15 Table of Contents • 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; • increased pension funding requirements; • the amount of our net operating loss carry forwards; and • federal, state and local corporate income and franchise taxes.Most 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, including acquisitions.These reserves will also affect 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.The most restrictive covenant is found in the Partnership’s revolving credit facility. Under the terms of our credit facility, the Partnership must have a fixedcharge coverage ratio of 1.15x to pay the minimum quarterly distribution of $0.0675. Any distribution in excess of the minimum quarterly distributionrequires the Partnership to have a fixed charge coverage ratio of 1.25x. (See Note 11-Long-Term Debt and Bank Facility Borrowings) ITEM 1B.UNRESOLVED STAFF COMMENTSNot applicable. ITEM 2.PROPERTIESWe provide services to our customers in the Northeast and Mid-Atlantic regions of the United States from 25 principal operating locations and 46depots, 26 of which are owned and 45 of which are leased. As of September 30, 2009, we had a fleet of 845 truck and transport vehicles, the majority of whichwere owned and 1,012 service vans, the majority of which were leased. We lease our corporate headquarters in Stamford, Connecticut. Our obligations underour credit facility are secured by liens and mortgages on substantially all of the Partnership’s and subsidiaries real and personal property. 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 the samedistrict court collectively referred to herein as the “Class Action Complaints”). The class actions were consolidated into one action entitled In re Star GasSecurities Litigation, No 3:04cv1766 (JBA). The class action plaintiffs generally alleged that the Partnership violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On August 23, 2006, the court entered a judgment of dismissaldismissing the consolidated amended complaint in its entirety. The court subsequently denied plaintiffs’ motion to modify the judgment to grant leave toamend the complaint and other relief.On August 20, 2009, the Second Circuit issued a Summary Order affirming (1) the District Court’s order dismissing the class action with prejudice and(2) the District Court’s order denying plaintiffs’ motion to modify the judgment to grant leave to amend the complaint and other relief. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone. 16 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 and the cash distribution declared on each unit for the fiscal2009 and 2008 quarters indicated. SGU – Common Unit Price Range Distributions Declaredper Unit High Low FiscalYear2009 FiscalYear2008 FiscalYear2009 FiscalYear2008 FiscalYear2009 FiscalYear2008Quarter Ended December 31, $2.40 $4.82 $1.83 $3.62 $— $— March 31, $2.71 $3.97 $2.22 $2.79 $0.0675 $— June 30, $3.62 $3.45 $2.70 $2.55 $0.0675 $— September 30, $3.71 $2.90 $3.26 $2.05 $0.0675 $— As of September 30, 2009, there were approximately 500 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 ProvisionsCommencing with the fiscal quarter ended December 31, 2008, we are required to make distributions in an amount equal to our Available Cash, asdefined in our Partnership Agreement, no more than 45 days after the end of each fiscal quarter, to holders of record on the applicable record dates. AvailableCash, as defined in our Partnership Agreement, generally means all cash on hand at the end of the relevant fiscal quarter less the amount of cash reservesestablished by the Board of Directors of our general partner in its reasonable discretion for future cash requirements. These reserves are established for theproper conduct of our business, including acquisitions, the payment of debt principal and interest, for distributions during the next four quarters and tocomply with applicable laws and the terms of any debt agreements or other agreement to which we are subject. The Board of Directors of our general partnerreviews the level of Available Cash each quarter based upon information provided by management.According to the terms of our partnership agreement, minimum quarterly distributions on the common units accrue at the rate of $0.0675 per quarter($0.27 on an annual basis). The information concerning restrictions on distributions required by Item 5. of this report is incorporated by reference to Note 5.Quarterly Distribution of Available Cash, of the Partnership’s consolidated financial statements.The revolving credit facility and the indenture for the notes both impose certain restrictions on our ability to pay distributions to unitholders. The mostrestrictive covenant is found in the Partnership’s revolving credit facility. Under the terms of our credit facility, the Partnership must have a fixed chargecoverage ratio of 1.15x to pay the minimum quarterly distribution of $0.0675. Any distribution in excess of the minimum quarterly distribution requires thePartnership to have a fixed charge coverage ratio of 1.25x. 17 Table of ContentsCommon Unit Repurchase and RetirementOn July 21, 2009, the Board of Directors of the Partnership’s General Partner authorized the repurchase of up to 7.5 million of the Partnership’scommon units. The authorized common unit repurchases may be made from time-to-time in the open market, in privately negotiated transactions or in suchother manner deemed appropriate by management. The program does not have a time limit. The Partnership’s repurchase activities take into account SEC safeharbor rules and guidance for issuer repurchases. All of the common units purchased in the repurchase program will be retired.(in thousands, except per unit amounts) Period Total Number of UnitsPurchased as Part of aPublicly Announced Plan orProgram Average PricePaid perUnit Maximum Number (orapproximate Dollar Value)of Units that May Yet BePurchased Under thePlans or ProgramsJuly 2009 — $— 7,500August 2009 160 $3.59 7,340September 2009 477 $3.69 6,863Fiscal year 2009 total 637 $3.67 6,863October 2009 3,072(1) $3.97 3,791November 2009 350 $3.96 3,441 (1)October 2009 common unit repurchases include 2.7 million common units acquired in a private sale. 18 Table of ContentsITEM 6.SELECTED HISTORICAL FINANCIAL AND OPERATING DATAThe selected financial data as of September 30, 2009 and 2008, and for the years ended September 30, 2009, 2008 and 2007 is derived from thefinancial statements of the Partnership included elsewhere in this Report. The selected financial data as of September 30, 2007, 2006 and 2005 and for theyears ended September 30, 2006 and 2005 is derived from financial statements of the Partnership not included elsewhere in this Report. See Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. Fiscal Years Ended September 30, (in thousands, except per unit data) 2009 2008 2007 2006 2005 Statement of Operations Data: Sales $1,206,813 $1,543,093 $1,267,175 $1,296,512 $1,259,478 Costs and expenses: Cost of sales 875,755 1,257,592 981,559 1,014,565 983,732 (Increase) decrease in the fair value of derivative instruments (13,690) 25,467 (15,664) 45,677 (6,081) Delivery and branch expenses 222,740 211,868 197,513 203,535 231,086 Depreciation and amortization expenses 19,406 26,784 28,995 32,415 35,480 General and administrative expenses 22,480 18,077 19,661 23,518 43,685 Goodwill impairment charge — — — — 67,000 Operating income (loss) 80,122 3,305 55,111 (23,198) (95,424) Interest expense, net 13,637 13,808 11,525 21,203 31,838 Amortization of debt issuance costs 2,750 2,339 2,282 2,438 2,540 (Gain) loss on redemption of debt (9,706) — — 6,603 42,082 Income (loss) from continuing operations before income taxes 73,441 (12,842) 41,304 (53,442) (171,884) Income tax expense (benefit) (57,597) 566 2,002 477 696 Income (loss) from continuing operations 131,038 (13,408) 39,302 (53,919) (172,580) Loss from discontinued operations, net of income taxes — — — — (6,189) Gain (loss) on sales of discontinued operations, net of income taxes — — (1,061) — 157,560 Income (loss) before cumulative effects of changes in accounting principle forcontinuing operations 131,038 (13,408) 38,241 (53,919) (21,209) Cumulative effects of changes in accounting principles-change ininventory pricing method — — — (344) — Net income (loss) $131,038 $(13,408) $38,241 $(54,263) $(21,209) Weighted average number of limited partner units: Basic 75,738 75,774 75,774 52,944 35,821 Diluted 75,738 75,774 75,774 52,944 35,821 19 Table of Contents Fiscal Years Ended September 30, (in thousands, except per unit data) 2009 2008 2007 2006 2005 Per Unit Data: Basic and diluted income (loss) from continuing operations per unit (a) $1.43 $(0.18) $0.51 $(1.01) $(4.77) Basic and diluted net income (loss) per unit (a) $1.43 $(0.18) $0.50 $(1.02) $(0.59) Cash distribution declared per common unit $0.2025 $— $— $— $— Balance Sheet Data (end of period): Current assets $376,898 $344,299 $320,503 $295,880 $305,319 Total assets $664,126 $605,433 $602,104 $581,208 $623,148 Long-term debt $133,112 $173,752 $173,941 $174,056 $267,417 Partners’ Capital $306,334 $199,977 $216,331 $173,325 $145,108 Summary Cash Flow Data: Net Cash provided by (used in) operating activities $78,455 $71,555 $51,115 $18,364 $(54,915) Net Cash provided by (used in) investing activities $(7,568) $(5,488) $(29,254) $(3,271) $467,431 Net Cash provided by (used in) financing activities $(54,535) $(145) $(96) $(23,120) $(306,694) Other Data: Earnings from continuing operations before net interest expense, income taxes,depreciation and amortization (EBITDA) (b) $109,234 $30,089 $84,106 $2,614 $(102,026) Adjusted EBITDA (b) $85,838 $55,556 $68,442 $54,894 $975 Retail gallons sold 349,385 351,128 376,645 389,920 487,300 (a)Income (loss) from continuing operations per unit is computed by dividing the limited partners’ interest in income (loss) from continuing operations bythe weighted average number of limited partner units outstanding. Net income (loss) per unit is computed by dividing the limited partners’ interest innet income (loss) by the weighted average number of limited partner units outstanding.(b)EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA arenon-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such asinvestors, commercial banks and research analysts, to assess: • our compliance with certain financial covenants included in our debt agreements; • our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis; • our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; • our operating performance and return on invested capital as compared to those of other companies in the retail distribution of refined petroleumproducts business, without regard to financing methods and capital structure; and • the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.Adjusted EBITDA is calculated as earnings from continuing operations before net interest expense, income taxes, depreciation and amortization,(increase) decrease in the fair value of derivatives, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operatingcharges. Management believes the presentation of this measure is relevant and useful because it allows investors to view the Partnership’s performancein a manner similar to the method management uses, and makes it easier to compare its results with other companies that have different financing andcapital structures. In addition, this measure is consistent with the manner in which the Partnership’s debt covenants in its material debt agreements arecalculated. Both the Partnership’s 10.25% Senior Note agreement and its bank credit facility contain covenants that restrict equity distributions,acquisitions, and the amount of debt it can incur. Under the most restrictive of these covenants, which is found in the bank credit facility, the agentbank could step in and control all cash transactions for the Partnership if we failed to comply with the minimum availability or the fixed chargecoverage ratio. The Partnership is required to maintain either availability (borrowing base less amounts borrowed and letters of credit issued) of $43.5million (15% of the maximum facility size) or a fixed charge coverage ratio of 1.1x (Adjusted EBITDA being a significant component of thiscalculation). This method of calculating Adjusted EBITDA may not be consistent with that of other companies and should be viewed in conjunctionwith measurements that are computed in accordance with GAAP. 20 Table of ContentsEach of EBITDA and Adjusted EBITDA has its limitations as an analytical tool, and it should not be considered in isolation or as a substitute foranalysis of our results as reported under GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are: • EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures; • Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDAand Adjusted EBITDA do not reflect the cash requirements for such replacements; • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements; • EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and • EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.EBITDA and Adjusted EBITDA is calculated for the fiscal years ended September 30 as follows: (in thousands) 2009 2008 2007 2006 2005 Income (loss) from continuing operations $131,038 $(13,408) $39,302 $(53,919) $(172,580) Plus: Income tax expense (benefit) (57,597) 566 2,002 477 696 Amortization of debt issuance cost 2,750 2,339 2,282 2,438 2,540 Interest expense, net 13,637 13,808 11,525 21,203 31,838 Depreciation and amortization 19,406 26,784 28,995 32,415 35,480 EBITDA from continuing operations 109,234 30,089 84,106 2,614 (102,026) (Increase)/decrease in the fair value of derivative instruments (13,690) 25,467 (15,664) 45,677 (6,081) (Gain) loss on redemption of debt (9,706) — — 6,603 42,082 Goodwill impairment charge — — — — 67,000 Adjusted EBITDA 85,838 55,556 68,442 54,894 975 Add/(subtract) Income tax (expense) benefit 57,597 (566) (2,002) (477) (696) Interest expense, net (13,637) (13,808) (11,525) (21,203) (31,838) Unit compensation income — — — — (2,185) Provision for losses on accounts receivable 10,310 11,961 5,726 6,105 9,817 (Increase) decrease in accounts receivables 26,657 (28,002) 5,761 (3,809) (13,845) (Increase) decrease in inventories (17,747) 41,368 (8,222) (23,830) (18,248) Increase (decrease) in customer credit balances (11,964) 13,390 (3,724) 8,576 11,360 Change in deferred taxes (61,355) — — — — Change in other operating assets and liabilities 2,756 (8,344) (3,341) (1,892) (10,255) Net cash provided by (used in) operating activities $78,455 $71,555 $51,115 $18,364 $(54,915) Net Cash provided by (used in) investing activities $(7,568) $(5,488) $(29,254) $(3,271) $467,431 Net Cash provided by (used in) financing activities $(54,535) $(145) $(96) $(23,120) $(306,694) 21 Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSStatement 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 make strategic acquisitions, the impact of litigation, our ability to contract for our current and future supply needs, naturalgas conversions, future union relations and the outcome of current and future union negotiations, the impact of future environmental, health, and safetyregulations, the ability to attract and retain employees, customer credit worthiness, counter party credit worthiness, marketing plans, and general economicconditions. All statements other than statements of historical facts included in this Report including, without limitation, the statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-looking statements. Although we believe thatthe expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct andactual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limitedto, those set forth under the heading “Risk Factors” and “Business Initiatives and Strategy.” Without limiting the foregoing, the words “believe,”“anticipate,” “plan,” “expect,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements. Important factors that couldcause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in this Annual Report on Form 10-K. All subsequentwritten and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by theCautionary Statements. Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise after the date of this Report.OverviewThe following is a discussion of the historical financial 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.In fiscal 2008, we completed our transition from a centralized customer service model to a more traditional customer service model in which themajority of our customer service calls are answered locally. We have implemented an employee-staffed centralized call center to augment our internal staffingrequirements for certain overflow, off-peak and weekend hours.SeasonalityThe following matters should be considered in analyzing our financial results. Our fiscal year ends on September 30. All references to quarters andyears respectively in this document are to fiscal quarters and years unless otherwise noted. The seasonal nature of our business results in the sale ofapproximately 30% 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, thepeak heating season. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and otherfactors.Degree DayA “degree day” is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how farthe average temperature departs from 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperaturebelow 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or along-term (multi-year) average to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by the National WeatherService and officially archived by the National Climatic Data Center. For purposes of evaluating our results of operations, we use the normal heating degreeday amount as reported by the National Weather Service in our operating areas.Weather Hedge Contract—Warm WeatherWeather conditions have a significant impact on the demand for home heating oil because our customers depend on this product principally forheating purposes. Actual weather conditions can vary substantially from year to year, significantly affecting our financial performance. To partially mitigatethe adverse effect of warm weather on our cash flows, 22 Table of Contentswe have purchased a warm weather hedge from Swiss Re Financial Products. Under this hedge agreement, we will receive a payment of $ 35,000 per heatingdegree-day, when the total number of heating degree-days in the period covered is less than 92.5% of the 10-year average. The hedge covers the period fromNovember 1, 2009 through March 31, 2010 taken as a whole and has a maximum payout of $ 12.5 million.Per Gallon Gross Profit MarginsWe believe the change in home heating oil margins should be evaluated on a cents per gallon basis, before the effects of increases or decreases in thefair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value ofhedges before the settlement of the underlying transaction.A significant portion of our home heating oil volume is sold to individual customers under an arrangement pre-establishing the ceiling sales price or afixed price of home heating oil over a fixed period. When these price-protected customers agree to purchase home heating oil from us for the next heatingseason, we will purchase option contracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these customers.The amount of home heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per average customer, permonth. 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 volume atunfavorable margins. In addition, should actual usage in any month be less than the hedged volume, our hedging losses could be greater.DerivativesFASB ASC 815-10-05 Derivatives and Hedging topic (FAS 133), established accounting and reporting standards requiring that derivative instrumentsbe recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent derivative instruments designated as cash flowhedges are effective, as defined under this standard, changes in fair value are recognized in other comprehensive income until the forecasted hedged item isrecognized in earnings. Currently, the Partnership has elected not to designate its derivative instruments as hedging instruments under this standard, and, as aresult, the changes in fair value of the derivative instruments are recognized in our statement of operations. Therefore, we experience great volatility inearnings as outstanding home heating oil derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of thecommodity to the customer. To the extent that the Partnership continues this accounting treatment, the volatility in any given period related to unrealizednon-cash gains or losses on derivative home heating oil instruments can be significant to the overall results of the Partnership. However, we ultimately expectthose gains and losses to be offset by the cost of product when purchased.Impact on Liquidity of Wholesale Product Cost VolatilityThe wholesale price of home heating oil has been extremely volatile over the last several years. Our liquidity is adversely impacted in times ofincreasing heating oil prices, as the Partnership must use cash to pay for its hedging requirements and to fund a portion of the increased levels of accountsreceivable and inventory. Our liquidity is also adversely impacted at times by sudden and sharp decreases in heating oil prices due to the increased marginrequirements for futures contracts and collateral requirements for swaps that we use to manage market risks related to our fixed price customers and physicalinventory that are not immediately offset by lower inventory and accounts receivable carrying costs.Income Taxes—Valuation Allowance and Net Operating Loss Carry ForwardBased upon a review of a number of factors, including historical operating performance and our expectation that we could generate sustainableconsolidated taxable income for the foreseeable future, we concluded at the end of fiscal 2009 that the majority of the Partnership’s net deferred tax assetsshould be recognized. Thus, pursuant to FASB ASC 740-10 Income Taxes topic (FAS 109), we recorded a tax benefit during fiscal 2009 reversing a majorityof the opening valuation allowance, resulting in a non-cash increase in net income of $86.4 million. This benefit was offset by a current income tax expenseof $3.8 million and deferred income tax expense of $25.0 million related to current year activity (including net operating loss carry forward utilization),resulting in a net income tax benefit of $57.6 million.Most of the $86.4 million benefit relating to the valuation allowance release related to federal and state loss carry forwards (NOLs), insurance reserves,and the net operating book versus tax timing of intangible amortization.At December 31, 2004, we had federal NOLs of $170.6 million and at December 31, 2009, we anticipate that these NOLs will be reduced toapproximately $43.9 million. Over this five year period, we will have utilized $26.9 million of federal NOLs on average each year to offset our taxableincome. We expect that over the next few years, we will utilize the 23 Table of Contentsmajority of the remaining NOLs. After we exhaust the NOLs, the amount of cash taxes that we will pay will increase significantly and will reduce the annualamount of cash available for distribution to unitholders. For example, in calendar 2006, 2007, and 2008 we paid federal cash taxes of $0.1 million, $1.0million and $0.6 million, respectively. If we did not have the NOLs available to us for calendar 2006, 2007 and 2008, our federal cash taxes would haveincreased to $2.6 million, $17.2 million and $11.1 million for calendar 2006, 2007 and 2008, respectively.Income Taxes—Election to be Taxed as an Association or “C Corporation”Currently, the Partnership’s main asset and source of income is an investment in Star Acquisitions, Inc. Our unitholders do not receive any of the taxbenefits normally associated with owning units in a publicly traded partnership, as any cash coming from Star Acquisitions to the Partnership will generallyhave been taxed first at a corporate level and then may also be taxable to our unitholders as dividends, reported via annual Forms K-1. The production of theForms K-1 themselves is an expensive and administratively intensive process. Thus, the Partnership has all the administrative issues and costs associated withbeing a large, publicly traded partnership, but our unitholders do not currently receive any material tax benefits from this structure.To reduce these administrative expenses and to better rationalize our tax reporting structure, the Partnership is actively considering making an electionsometime in calendar 2010 or thereafter, to be treated as a corporation for federal and state income tax purposes. While the Partnership would still remain apublicly traded partnership for legal and governance purposes, for income tax purposes its unitholders would be treated as owning stock in a corporationrather than being partners in a partnership. Subsequent to the year of election unitholders would receive Forms 1099-DIV annually for any dividends andwould no longer receive K-1’s. In the year of election unitholders would receive both, each form covering part of the year.This election may have immediate short term tax implications as any unit holder who owns units at the time of the election would be deemed toexchange his units for shares in a “new” corporation and to have received a certain amount of deemed dividend income related to having had some share ofthe Partnership’s public debt “assumed”, as the corporation would assume this liability.Assuming that the Partnership’s taxable earnings and profits are equal to or less than the amount of distributions/dividends paid out during the year bythe Partnership and that the unit holder holds the units for the entire calendar year, (or at least long enough during the year to receive a distribution(s) at leastequal to the tax resulting from a share of dividend income reported on Form K-1), than most partners should not have any material negative cash flowconsequences as a result of the Partnership making this election. Note that nothing herein should be interpreted as a projection of any future earnings amountor a projection or guarantee of future distributions or dividends.In addition, there are risks that the Partnership could make this election but: • Not distribute or dividend enough cash to cover the taxes that may be due as a result of the dividend income generated by the election. • Even if distributions made are equal to the total taxable earnings of the Partnership, a particular unit holder could buy or sell units in a time periodthat might give rise to deemed dividend income caused by the election and not receive enough (or any) cash to offset the taxes due on suchdividend income.The Partnership intends to only make this election if it believes that it will have no overall material adverse impact on its unitholders, of which therecan be no assurance. Since determining this is a function of projecting taxable earnings, making assumptions regarding the payment of distributions, andtrying to determine when, during any particular calendar year, making the election will have the least impact on the most number of unitholders, when or,even if, it will make this election is not determinable at this time. Unitholders are encouraged to consult their tax advisors with respect to these possibleoutcomes.EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA arenon-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such asinvestors, commercial banks and research analysts, to assess: • our compliance with certain financial covenants included in our debt agreements; 24 Table of Contents • our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis; • our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; • our operating performance and return on invested capital as compared to those of other companies in the retail distribution of refined petroleumproducts business, without regard to financing methods and capital structure; and • the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.Adjusted EBITDA is calculated as earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, the(increase) decrease in the fair value of derivatives, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges.Management believes the presentation of this measure is relevant and useful because it allows investors to view the Partnership’s performance in a mannersimilar to the method management uses, and makes it easier to compare its results with other companies that have different financing and capital structures. Inaddition, this measure is consistent with the manner in which the Partnership’s debt covenants in its material debt agreements are calculated. Both thePartnership’s 10.25% Senior Note agreement and its bank credit facility contain covenants that restrict equity distributions, acquisitions, and the amount ofdebt it can incur. Under the most restrictive of these covenants, which is found in the bank credit facility, the agent bank could step in and control all cashtransactions for the Partnership if we failed to comply with the minimum “Availability” or the fixed charge coverage ratio. The Partnership is required tomaintain either availability (borrowing base less amounts borrowed and letters of credit issued) of $43.5 million (15% of the maximum facility size) or a fixedcharge coverage ratio of 1.1x (Adjusted EBITDA being a significant component of this calculation). This method of calculating Adjusted EBITDA may notbe consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance with GAAP.Each of EBITDA and Adjusted EBITDA has its limitations as an analytical tool, and it should not be considered in isolation or as a substitute foranalysis of our results as reported under GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are: • EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures; • Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced, and EBITDAand Adjusted EBITDA do not reflect the cash requirements for such replacements; • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements; • EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and • EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.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.Customer AttritionWe measure net customer attrition for our full service residential and commercial home heating oil customers. Net customer attrition is the differencebetween gross customer losses and customers added through internal marketing efforts. Customers added through acquisitions are not included in thecalculation of gross customer gains. Gross customer losses are the result of a number of factors, including price competition, move-outs, service issues, creditlosses and conversion to natural gas. When a customer moves out of an existing home, we count the “move out” as a loss and, if we are successful in signingup the new homeowner, the “move in” is treated as a gain. 25 Table of ContentsGROSS CUSTOMER GAINS, GROSS CUSTOMER LOSSES BY QUARTER AND NET CUSTOMER ATTRITION Fiscal Year Ended 2009 2008 2007 Gross Customer NetAttrition Gross Customer NetAttrition Gross Customer NetAttrition Gains Losses Gains Losses Gains Losses First Quarter 26,300 31,800 (5,500) 22,000 27,500 (5,500) 21,500 25,600 (4,100) Second Quarter 11,700 24,000 (12,300) 12,400 19,000 (6,600) 13,900 19,200 (5,300) Third Quarter 5,900 12,300 (6,400) 8,100 13,700 (5,600) 6,800 12,900 (6,100) Fourth Quarter 10,500 16,500 (6,000) 18,700 19,300 (600) 11,300 17,100 (5,800) Total 54,400 84,600 (30,200) 61,200 79,500 (18,300) 53,500 74,800 (21,300) GROSS CUSTOMER GAINS, GROSS CUSTOMER LOSSES AND NET CUSTOMER ATTRITION AS A PERCENTAGE OF THE HOMEHEATING OIL CUSTOMER BASE. Fiscal Year Ended 2009 2008 2007 Gross Customer NetAttrition Gross Customer NetAttrition Gross Customer NetAttrition Gains Losses Gains Losses Gains Losses First Quarter 6.5% 7.9% -1.4% 5.3% 6.6% -1.3% 5.1% 6.1% -1.0% Second Quarter 2.9% 6.0% -3.1% 3.0% 4.6% -1.6% 3.3% 4.5% -1.2% Third Quarter 1.5% 3.1% -1.6% 2.0% 3.3% -1.3% 1.6% 3.1% -1.5% Fourth Quarter 2.6% 4.1% -1.5% 4.5% 4.6% -0.1% 2.7% 4.0% -1.3% Total 13.5% 21.0% -7.5% 14.7% 19.1% -4.4% 12.6% 17.6% -5.0% In fiscal 2009, we lost 30,200 accounts, net, or 7.5% of our home heating oil customer base, as compared to fiscal 2008 in which we lost 18,300accounts, net, or 4.4 % of our home heating oil customer base. The increase in net losses of 11,900 accounts occurred primarily in the second and fourthquarters of fiscal 2009. In the second quarter of fiscal 2009, our gross customer losses were 24,000, or 5,000 accounts greater than the second quarter of fiscal2008. This increase in gross losses was largely from our fixed price customers, and to a lesser extent, our ceiling customers. As a result of significant decreasesin the price of home heating oil following the summer of 2008, many protected price customers decided to renegotiate their agreements with us in fiscal2009. It is our policy to bill a termination fee when customers terminate their arrangement with us. It is our belief that approximately 10,000 customers choseanother supplier as a result of being billed the termination fee. This compares to approximately 4,300 customers who terminated their relationship in fiscal2008 after we billed a termination fee.In the fourth quarter of fiscal 2009, we gained 10,500 customers or 8,200 fewer customers than in the fourth quarter of fiscal 2008. We believe that thissubstantial drop in customer gains was due to a lower level of interest in our product in the fourth quarter of fiscal 2009, as compared to the same period infiscal 2008, as consumer concerns over record increases in home heating oil costs in the summer of 2008 drove many consumers to shop for a protected pricein the summer of 2008. In addition, certain of our locations experienced a substantial increase in customer gains in the fourth quarter of fiscal 2008 due to thevolatile home heating oil market conditions. Some of our competitors ceased to offer protected price plans during the fourth quarter of 2008 due to anincrease in the cost to hedge these programs, which also positively impacted our customer gains in fiscal 2008.In fiscal 2009, our gross customers gains decreased by 6,800 accounts to 54,400 accounts (13.5 % of our home heating oil customer base) whencompared to gross customer gains of 61,200 (14.7 % of our home heating oil customer base) generated in fiscal 2008. As mentioned above, the decline ingross customer gains that occurred in fiscal 2009 was largely experienced in the fourth quarter of fiscal 2009. In addition, we believe that gains from realestate sources in fiscal 2009 declined by 2,500 accounts primarily as a result of the reduction in house sales during this period.In fiscal 2009, our gross customer losses increased by 5,100 accounts to 84,600 (21.0 % of our home heating oil customer base) when compared to79,500 in gross customer losses for fiscal 2008 (19.1 % of our home heating oil customer base). As noted above, gross losses from customers that were billed atermination fee increased by 5,700 accounts and the number of accounts that the Partnership proactively cancelled for credit increased by 2,400 accounts.In fiscal 2008, we lost 18,300 accounts, net, or 4.4% of our home heating oil customer base, as compared to fiscal 2007 in which we lost 21,300accounts, net, or 5.0% of our home heating oil customer base. For fiscal 2008, our gross customers gains increased by 7,700 accounts to 61,200 accounts(14.7 % of our home heating oil customer base) when compared to the gross customer gains of 53,500 (12.6 % of our home heating oil customer base)generated in fiscal 2007. The increase in 26 Table of Contentsgross customer gains in fiscal 2008 was largely due to the success of our customer and employee referral programs, selective media advertising and theunique circumstances, previously mentioned, that existed in the fourth quarter of fiscal 2008. Our gross customer losses increased by 4,700 in fiscal 2008 to79,500 (19.1% of our home heating oil customer base) when compared to the 74,800 in gross customer losses for fiscal 2007 (17.6% of our home heating oilcustomer base). In fiscal 2008, we experienced an increase in losses to price (6,300), credit (2,500) and conversions to natural gas (2,400), and our losses fromcustomers moving out of their existing home declined by 5,700.We believe that the continued price volatility and high cost of home heating oil will adversely impact our ability to attract customers and retainexisting customers in the future. 27 Table of ContentsFiscal Year Ended September 30, 2009Compared to the Fiscal Year Ended September 30, 2008VolumeFor fiscal 2009, retail volume of home heating oil decreased by 1.7 million gallons, or 0.5%, to 349.4 million gallons, as compared to 351.1 milliongallons for fiscal 2008. Volume of other petroleum products declined by 9.3 million gallons, or 19.0%, to 39.6 million gallons for fiscal 2009, as compared to48.9 million gallons for fiscal 2008. An analysis of the change in the retail volume of home heating oil, which is based on management’s estimates, samplingand other mathematical calculations, is found below: (In millions of gallons) Heating Oil Volume—Fiscal 2008 351.1 Impact of colder temperatures 28.4 Net customer attrition—retail and commercial (28.7) Acquisitions 6.1 Conservation/Other (7.5) Change (1.7) Volume—Fiscal 2009 349.4 Temperatures in our geographic areas of operations for fiscal 2009 were 8.1% colder than fiscal 2008 and 1.3% colder than normal, as reported by theNational Oceanic Administration (“NOAA”). For fiscal 2009, net customer attrition was 7.5%. Due to the significant increase in the price per gallon of homeheating oil over the last several years, we believe that customers are using less home heating oil given similar temperatures when compared to prior periodsand this decrease is reflected in the “Conservation/Other” heading in the above table.The percentage of home heating oil volume sold to residential variable price customers decreased to 40.1% of total home heating oil volume sales forfiscal 2009, as compared to 42.9% for fiscal 2008. Accordingly, the percentage of home heating oil volume sold to residential price-protected customersincreased to 45.5% for fiscal 2009, as compared to 42.4% for fiscal 2008. For fiscal 2009, sales to commercial/industrial customers represented 14.3% of totalhome heating oil volume sales, as compared to 14.7% for fiscal 2008.Product SalesFor fiscal 2009, product sales decreased $321.1 million, or 23.7%, to $1.033 billion, as compared to $1.354 billion for fiscal 2008, due to a 20.0%decrease in home heating oil selling prices, a 0.5% decrease in home heating oil volume, and a decline in sales of other petroleum products of $76.9 million.Installation and Service SalesFor fiscal 2009, installation and service sales decreased $15.1 million, or 8.0%, to $174.0 million, as compared to $189.1 million for fiscal 2008, as adecline in installation sales of $15.2 million was reduced by a slight increase in service revenue of $0.1 million. We believe that rising unemployment,reduced home equity loans and consumer credit, and reduced consumer confidence led to a decline in the demand for new heating systems ($8.3 million), airconditioning equipment ($2.2 million), as well as new construction plumbing installations ($4.5 million). The cool spring also adversely impacted thedemand for new and replacement air conditioning systems over the summer months. While service contract revenue increased by $2.2 million, revenue fromnon-essential services, which include plumbing and air conditioning service, declined $2.1 million. We believe that the decline in non-essential servicerevenue is the result of current economic conditions.Cost of ProductFor fiscal 2009, cost of product decreased $373.8 million, or 34.5%, to $708.2 million, as compared to $1.082 billion for fiscal 2008, due largely to adecline in the wholesale product cost for home heating oil and other petroleum products. The 0.5% decline in home heating oil volume sold and the 19.0%decline in other petroleum products sold also contributed to the decline in cost of product. 28 Table of ContentsGross Profit—ProductThe table below recalculates the Partnership’s per gallon margins and reconciles product gross profit for home heating oil and other petroleumproducts. We believe 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. On that basis, home heating oil margins for fiscal 2009 increased by $0.1522 per gallon, or 20.5%, to $0.8935 pergallon, from $0.7413 per gallon in fiscal 2008. Product sales and cost of product include home heating oil, other petroleum products and liquidated damagesbillings. Fiscal Year Ended September 30, 2009 September 30, 2008 Amount(000) PerGallon Amount(000) PerGallon Home Heating Oil Volume (in millions of gallons) 349.4 351.1 Sales $954.5 $2.7318 $1,198.6 $3.4137 Cost 642.3 1.8383 938.3 2.6724 Gross Profit $312.2 $0.8935 $260.3 $0.7413 Amount(000) PerGallon Amount(000) PerGallon Other Petroleum Products Volume (in millions of gallons) 39.6 48.9 Sales $78.4 $1.9785 $155.3 $3.1761 Cost 65.9 1.6640 143.5 2.9343 Gross Profit $12.5 $0.3145 $11.8 $0.2418 Amount(000) Amount(000) Change Total Product Sales $1,032.8 $1,353.9 $(321.1) Cost 708.2 1,081.8 (373.6) Gross Profit $324.6 $272.1 $52.5 For fiscal 2009, total product gross profit increased by $52.5 million to $324.6 million, as compared to $272.1 million for fiscal 2008, as the impact ofhigher home heating oil per gallon margins ($53.2 million) and an increase in gross profit from other petroleum products ($0.6 million) was reduced by theimpact of lower home heating oil volume ($1.3 million.)During the heating season of fiscal 2009, home heating oil product costs continued to decline, which largely contributed to the Partnership’s ability toexpand its home heating oil margins during this period, as wholesale prices decreased more rapidly than retail prices. Conversely, during the heating seasonof fiscal 2008, home heating oil costs continued to escalate, which limited margin expansion capability.Cost of Installations and ServiceFor fiscal 2009, cost of installations and service decreased $8.2 million, or 4.7%, to $167.6 million, as compared to $175.8 million for fiscal 2008, as adecrease in installation costs of $11.6 million was partially offset by higher service expenses of $3.4 million. Installation costs were lower, largely due to thecorresponding decrease in installation sales as described above. Service expenses were higher due to an increase in vehicle fuel costs of $2.1 million, as thePartnership hedged a portion of its vehicle fuel costs during a higher cost period. For fiscal 2010, the Partnership has again hedged its vehicle fuel costs,which should lower this expense by approximately $2.3 million in fiscal 2010. Colder than normal winter 29 Table of Contentstemperatures also increased the operating expense of the service department due to the increased need to service our customer’s heating equipment. The grossprofit realized from service (including installations) decreased by $7.0 million, from $13.4 million for fiscal 2008 to $6.4 million for fiscal 2009 due to thedecline in installation sales and the increase in vehicle fuel costs. Installation costs were $53.0 million, or 88.6% of installation sales during fiscal 2009, andwere $64.5 million, or 86.0% of installation sales during fiscal 2008. Installation costs as a percentage of installation sales increased due to the fixed natureof certain installation costs. Service expenses increased to $114.7 million, or 100.4% of service sales, during fiscal 2009, from $111.3 million in fiscal 2008,or 97.5% of service sales. Service costs as a percentage of total service revenue increased due to the rise in vehicle fuel costs and, the impact on service costsof colder temperatures. In addition, the Partnership was not able to fully reduce its service expenses in response to unforeseen reductions in non-essentialservice billings such as air conditioning and plumbing services, which also contributed to the increase in the percentage of service expense to servicerevenues. For fiscal 2010, the Partnership expects that service revenues will exceed service expenses.(Increase) Decrease in the Fair Value of Derivative InstrumentsDuring fiscal 2009, the change in the fair value of derivative instruments resulted in the recording of a $13.7 million credit due to the expiration ofcertain hedged positions ($21.2 million credit), and a decrease in market value for unexpired hedges ($7.5 million charge).During fiscal 2008, the change in the fair value of derivative instruments resulted in the recording of a $25.5 million charge due to the expiration ofcertain hedged positions ($1.3 million charge), and a decrease in market value for unexpired hedges ($24.2 million charge).Delivery and Branch ExpensesFor fiscal 2009, delivery and branch expenses increased $10.8 million, or 5.1%, to $222.7 million, as compared to $211.9 million fiscal 2008. Whileour bad debt expense did decline by $1.6 million due in part to the decline in sales of 21.8 %, we increased our collections efforts which resulted in anincrease in overall credit collection expense by $1.0 million. Delivery and plant expense, rose by $4.8 million due in part to the impact of coldertemperatures and higher vehicle fuel costs of $2.2 million, as the Partnership hedged a portion of its vehicle fuels during a higher cost period. The balance ofthe increase in delivery and plant expense was $2.6 million, or 3.7%, largely driven by wage and benefit increases. In an effort to improve our customerexperience and improve our net attrition, we spent an additional $2.2 million on marketing, sales and customer service in fiscal 2009 as compared to fiscal2008. Insurance expense was also higher by $1.0 million largely due to both the frequency and size of our claims in fiscal 2009 versus fiscal 2008. Otherbranch expenses increased $3.4 million due to higher wages, benefits and rent. On a cents per gallon basis, delivery and branch expenses increased 3.41 centsper gallon, or 5.6%, from $0.6034 cents per gallon for fiscal 2008, to $0.6375 cents per gallon for fiscal 2009, due to the fixed nature of certain delivery andbranch expenses, the increases in insurance expense and vehicle fuel cost and inflationary pressures.Depreciation and AmortizationFor fiscal 2009, depreciation and amortization expenses were $19.4 million, as compared to $26.8 million for fiscal 2008. Amortization expense waslower by $6.3 million, as acquisitions from fiscal 2001 with 7 year lives and acquisitions from 1999 with 10 year lives became fully amortized in fiscal 2009.Depreciation expenses declined by $1.1 million as capital expenditures for technology acquired in fiscal 2003 became fully depreciated.General and Administrative ExpensesFor fiscal 2009, general and administrative expenses increased $4.4 million, or 24.4%, to $22.5 million, as compared to $18.1 million for fiscal 2008,largely due to higher compensation expense of $2.1 million relating to the Partnership’s profit sharing plan and an increase in pension expense of $1.6million largely due to the decline in the assets of the Partnership’s frozen defined benefit pension plan. The balance of the increase, or $0.7 million, was dueto wage increases and higher legal and professional expenses. The Partnership accrues approximately 6% of Adjusted EBITDA as defined in the profit sharingplan for distribution to its employees and is payable when the Partnership achieves actual adjusted EBITDA of at least 70% of the amount budgeted. In fiscal2009, adjusted EBITDA increased by $30.3 million to $85.8 million, which drove the increase in profit sharing expense. If Adjusted EBITDA increases, thedollar amount of the profit sharing pool will increase. On the other hand, if Adjusted EBITDA decreases, the dollar amount of the profit sharing pool will beless. 30 Table of ContentsOperating IncomeFor fiscal 2009, operating income increased $76.8 million to $80.1 million, as compared to $3.3 million for fiscal 2008 as a net positive change in thefair value of derivative instruments of $39.2 million and an increase in product gross profit of $52.5 million was reduced by lower installation and serviceprofitability totaling $7.0 million and an increase in operating expenses of $7.9 million (including depreciation and amortization).Interest ExpenseFor fiscal 2009, interest expense decreased $2.9 million, or 13.8%, to $17.8 million, as compared to $20.7 million in fiscal 2008. In fiscal 2009, thePartnership repurchased $40.3 million of its 10.25% Senior Notes due February 2013, which lowered the average long-term debt outstanding by $26.7million and corresponding interest expense by $2.7 million. Working capital interest expense, including letters of credit fees, increased by $0.5 million.Interest IncomeFor fiscal 2009, interest income decreased $2.7 million to $4.2 million, as compared to $6.9 million for fiscal 2008, due to a reduction in interestincome of $1.1 million from invested cash and a decrease in finance charge income on past due accounts receivable balances. While average cash balanceswere higher in fiscal 2009 than in fiscal 2008, the investment returns were lower. Finance charge income declined largely due to a lower level of agedaccounts receivables.Amortization of Debt Issuance CostsFor fiscal 2009, amortization of debt issuance costs increased to $2.8 million, as compared to fiscal 2008 of $2.3 million largely due to the acceleratedamortization of fees related to the revolving credit facility that was amended in July 2009.Gains on Bond RepurchaseDuring fiscal 2009, the Partnership repurchased $40.3 million face value of its 10.25% Senior Notes due February 2013 at an average price of $75.10per $100 of principal plus accrued interest. The Partnership recorded a gain of $9.7 million for these transactions.Income Tax Expense (Benefit)For fiscal 2009, an income tax benefit of $86.4 million was recorded for the release of a majority of our opening valuation allowance. This benefit wasoffset by a current income tax expense of $3.8 million and a deferred income tax expense of $25.0 million related to current year activity, resulting in a netincome tax benefit of $57.6 million, as compared to income tax expense of $0.6 million for fiscal 2008. Based upon a review of a number of factors,including historical operating performance and our expectation that we could generate sustainable consolidated taxable income for the foreseeable future, weconcluded at the end of fiscal 2009 that the majority of the Partnership’s net deferred tax assets should be recognized. Thus, pursuant to FASB ASC 740-10-05 Income Taxes topic (SFAS No. 109), we recorded a tax benefit during fiscal 2009 releasing a majority of the remaining valuation allowance, resulting in anon-cash increase in net income of $86.4 million.For the next several years, our income tax expense will consist of two components, a current income tax expense and a deferred income tax expense.The current tax expense will represent our expected cash taxes. The deferred tax expense will represent the amount of income taxe that we would have paid ifwe do not have the benefit of our net loss carry forwards and other deferred tax assets.Net Income (Loss)For fiscal 2009, net income of $131.0 million was recorded, as compared to a net loss of $13.4 million for fiscal 2008. This increase of $144.4 millionwas primarily due to a $76.8 million increase in operating income, gains on bond repurchases of $9.7 million and lower income tax expense of $58.2 million. 31 Table of ContentsAdjusted EBITDAFor fiscal 2009, Adjusted EBITDA increased by $30.3 million to $85.8 million, as compared to $55.5 million for fiscal 2008, as an expansion in homeheating oil margins more than offset the impact of a decline in home heating oil volume and an increase in delivery and branch expense and general andadministrative expenses. 32 Table of ContentsAdjusted EBITDAEBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternativeto cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating our ability to make theMinimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows: Fiscal Year Ended September 30, (in thousands) 2009 2008 Income (loss) from continuing operations $131,038 $(13,408) Plus: Income tax expense (benefit) (57,597) 566 Amortization of debt issuance cost 2,750 2,339 Interest expense, net 13,637 13,808 Depreciation and amortization 19,406 26,784 EBITDA (a) from continuing operations 109,234 30,089 (Increase)/decrease in the fair value of derivative instruments (13,690) 25,467 Gain on redemption of debt (9,706) — Adjusted EBITDA (a) 85,838 55,556 Add/(subtract) Income tax (expense) benefit 57,597 (566) Interest expense, net (13,637) (13,808) Provision for losses on accounts receivable 10,310 11,961 (Increase) decrease in accounts receivables 26,657 (28,002) (Increase) decrease in inventories (17,747) 41,368 Increase (decrease) in customer credit balances (11,964) 13,390 Change in deferred taxes (61,355) — Change in other operating assets and liabilities 2,756 (8,344) Net cash provided by (used in) operating activities $78,455 $71,555 Net cash used in investing activities $(7,568) $(5,488) Net cash used in financing activities $(54,535) $(145) (a)EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA arenon-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such asinvestors, commercial banks and research analysts, to assess: • our compliance with certain financial covenants included in our debt agreements; • our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis; • our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; • our operating performance and return on invested capital as compared to those of other companies in the retail distribution of refined petroleumproducts business, without regard to financing methods and capital structure; and • the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.Adjusted EBITDA is calculated as earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, the(increase) decrease in the fair value of derivatives, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges.Management believes the presentation of this measure 33 Table of Contentsis relevant and useful because it allows investors to view the Partnership’s performance in a manner similar to the method management uses, and makes iteasier to compare its results with other companies that have different financing and capital structures. In addition, this measure is consistent with the mannerin which the Partnership’s debt covenants in its material debt agreements are calculated. Both the Partnership’s 10.25% Senior Note agreement and its bankcredit facility contain covenants that restrict equity distributions, acquisitions, and the amount of debt it can incur. Under the most restrictive of thesecovenants, which is found in the bank credit facility, the agent bank could step in and control all cash transactions for the Partnership if we failed to complywith the minimum “Availability” or the fixed charge coverage ratio. The Partnership is required to maintain either availability (borrowing base less amountsborrowed and letters of credit issued) of $43.5 million (15% of the maximum facility size) or a fixed charge coverage ratio of 1.1x (Adjusted EBITDA being asignificant component of this calculation). This method of calculating Adjusted EBITDA may not be consistent with that of other companies and should beviewed in conjunction with measurements that are computed in accordance with GAAP.Each of EBITDA and Adjusted EBITDA has its limitations as an analytical tool, and it should not be considered in isolation or as a substitute foranalysis of our results as reported under GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are: • EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures; • Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced, and EBITDAand Adjusted EBITDA do not reflect the cash requirements for such replacements; • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements; • EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and • EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes. 34 Table of ContentsFiscal Year Ended September 30, 2008Compared to the Fiscal Year Ended September 30, 2007VolumeFor fiscal 2008, retail volume of home heating oil decreased by 25.5 million gallons, or 6.8%, to 351.1 million gallons, as compared to 376.6 milliongallons for fiscal 2007. Volume of other petroleum products declined by 11.3 million gallons, or 18.8%, to 48.9 million gallons for fiscal 2008 as comparedto 60.2 million gallons for fiscal 2007. 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 Oil Volume—Fiscal 2007 376.6 Impact of warmer temperatures (2.3) Net customer attrition—retail and commercial (22.1) Acquisitions 13.4 Conservation/Other (14.5)(a) Change (25.5) Volume—Fiscal 2008 351.1 (a)Includes an estimated 3.0 million gallons reclassified to other petroleum product sales.Temperatures in our geographic areas of operations for 2008 were 0.5% warmer than fiscal 2007 and 6.2% warmer than normal, as reported by NOAA.For fiscal 2008, net customer attrition was 4.4%. Due to the significant increase in the price per gallon of home heating oil over the last several years, webelieve that customers are using less home heating oil given similar temperatures when compared to prior periods and this decrease is reflected in the“Conservation/Other” heading in the above table.The percentage of home heating oil volume sold to our residential variable price customers who are our highest margin customers decreased to 42.9%of total home heating oil volume sales for fiscal 2008, as compared to 45.9% for fiscal 2007. Accordingly, the percentage of home heating oil volume sold toresidential price-protected customers increased to 42.4% for fiscal 2008, as compared to 37.7% for fiscal 2007. For fiscal 2008, sales to commercial/industrialcustomers represented 14.7% of total home heating oil volume sales, as compared to 16.5% for fiscal 2007.Product SalesFor fiscal 2008, product sales increased $265.3 million, or 24.4%, to $1.354 billion, as compared to $1.089 billion for fiscal 2007, as a 33.7% increasein home heating oil selling prices was reduced by the 6.8% decrease in home heating oil volume.Installation and Service SalesFor fiscal 2008, installation and service sales increased $10.6 million, or 5.9%, to $189.1 million, as compared to $178.5 million for fiscal 2007, due toan increase in installation sales of $4.6 million and an increase in service revenue of $6.0 million, largely from acquisitions.Cost of ProductFor fiscal 2008, cost of product increased $276.4 million, or 34.3%, to $1.082 billion, as compared to $805.4 million for fiscal 2007, as the 6.8 %decrease in home heating oil volume was more than offset by higher per gallon wholesale product cost for home heating oil of 45.7%. 35 Table of ContentsGross MarginThe table below recalculates the Partnership’s per gallon margins and reconciles product gross profit for home heating oil and other petroleumproducts. Home heating oil margins for fiscal 2008 increased modestly by $0.0216 per gallon, or 3.0%, to $0.7413 per gallon, from $0.7197 per gallon infiscal 2007. We believe 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. Product sales and cost of product include home heating oil, other petroleum products and liquidated damagesbillings. Fiscal Year Ended September 30, 2008 September 30, 2007 Amount(000) PerGallon Amount(000) PerGallon Home Heating Oil Volume (in millions of gallons) 351.1 376.6 Sales $1,198.6 $3.4137 $961.9 $2.5540 Cost 938.3 2.6724 690.9 1.8343 Gross Profit $260.3 $0.7413 $271.0 $0.7197 Amount(000) PerGallon Amount(000) PerGallon Other Petroleum Products Volume (in millions of gallons) 48.9 60.2 Sales $155.3 $3.1761 $126.7 $2.1044 Cost 143.5 2.9343 114.6 1.9031 Gross Profit $11.8 $0.2418 $12.1 $0.2013 Amount(000) Amount(000) Change Total Product Sales $1,353.9 $1,088.6 $265.3 Cost 1,081.8 805.4 276.4 Gross Profit $272.1 $283.2 $(11.1) For fiscal 2008, total product gross profit decreased by $11.1 million to $272.1 million, as compared to $283.2 million for fiscal 2007, as the increasedue to higher home heating oil per gallon margins of $7.6 million was reduced by the impact of lower home heating oil volume of $18.4 million and areduction in gross profit from other petroleum products of $0.3 million.Cost of Installations and ServiceFor fiscal 2008, cost of installations and service decreased $0.3 million, or 0.2%, to $175.8 million, compared to $176.1 million for fiscal 2007, as anincrease in installation costs of $5.0 million was reduced by lower service expenses of $5.3 million. Installation costs were higher largely due to acquisitionrelated installation sales. Service expenses were lower due to our continued efforts to control our service department expenses and a reduction in ourcustomer base. The gross profit realized from service and installations was $13.4 million for fiscal 2008, as compared to $2.4 million for fiscal 2007. Again,this increase in service gross profits was largely driven by acquisition activity. Installation costs were $64.5 million, or 86.0% of installation sales duringfiscal 2008, and were $59.5 million, or 84.5% of installation sales during fiscal 2007. Service expenses decreased to $111.3 million, or 97.5% of service sales,during fiscal 2008, from $116.6 million in fiscal 2007, or 107.8% of service sales. Service costs as a percentage of total service revenue declined as thePartnership continued to increase its rates for service billings and further reduced its service costs. 36 Table of Contents(Increase) Decrease in the Fair Value of Derivative InstrumentsDuring fiscal 2008, the change in the fair value of derivative instruments resulted in the recording of a $25.5 million charge due to the expiration ofcertain hedged positions ($1.3 million charge), and a decrease in market value for unexpired hedges ($24.2 million charge).During fiscal 2007, the increase in the fair value of derivative instruments resulted in the recording of a $15.7 million net credit due to the expiration ofcertain hedged positions or their realization to cost of product ($14.4 million), and an increase in market value for unexpired hedges ($1.3 million).Delivery and Branch ExpensesFor fiscal 2008, delivery and branch expenses increased $13.1 million, or 6.6%, to $211.9 million, as compared to $198.8 million for fiscal 2007.During fiscal 2007, the Partnership recorded $4.3 million of proceeds received under our weather hedge contract, which reduced operating expenses. Whiletemperatures for fiscal 2008 were similar to fiscal 2007, we did not record any weather hedge benefit during fiscal 2008. The Partnership’s weather hedgecontract in place for fiscal 2008 and fiscal 2007 covered the period from November to February 28/29, as one period taken as a whole. Temperatures for thefour months ended February 28, 2007 were approximately 4.0% warmer than the weather hedge contract strike price, triggering a payment. For the fourmonths ended February 29, 2008, temperatures were colder than the weather hedge contract strike price, resulting in no payout.Exclusive of the weather hedge benefit in 2007, delivery and branch expenses increased $8.8 million, or 4.3%. Delivery and branch expenses werereduced by an estimated $5.7 million due to the volume decline before acquisitions, but were more than offset by increased delivery and branch expensesfrom the stand-alone acquisitions ($9.5 million) and higher bad debt expense ($6.2 million). Bad debt expense rose due to a higher level of sales, a modestincrease in the write-off rates, lower recoveries on accounts previously written off and an increase in the reserve for future write-offs. On a cents per gallonbasis (excluding the impact of weather insurance and acquisitions), delivery and branch expenses increased 6.0 cents per gallon, or 11.1%, from 54.0 centsper gallon for fiscal 2007 to 60.0 cents per gallon for fiscal 2008, due to the fixed nature of certain delivery and branch expenses, the increase in bad debtexpense and wage and benefit increases.Depreciation and AmortizationFor fiscal 2008, depreciation and amortization expenses declined $2.2 million, or 7.6%, to $26.8 million, as compared to $29.0 million for fiscal 2007.Amortization expense was lower by $1.2 million, as acquisitions from fiscal 2001 with 7 year lives became fully amortized in fiscal 2008. Depreciationexpenses declined by $1.2 million as capital expenditures for technology acquired in fiscal 2003 became fully depreciated.General and Administrative ExpensesFor fiscal 2008, general and administrative expenses decreased $0.3 million, or 1.8%, to $18.1 million, as compared to $18.4 million for fiscal 2007largely due to lower compensation expense relating to the Partnership’s profit sharing plan. In fiscal 2008, Adjusted EBITDA decreased by $12.9 million to$55.6 million, which drove the decrease in profit sharing expense. The Partnership accrues approximately 6% of Adjusted EBITDA, as defined in the profitsharing plan for distribution to its employees. If Adjusted EBITDA increases, the dollar amount of the profit sharing pool will increase. On the other hand, ifAdjusted EBITDA decreases, the dollar amount of the profit sharing pool will be less.Operating IncomeFor fiscal 2008, operating income decreased $51.8 million to $3.3 million, as compared to $55.1 million for fiscal 2007, as an improvement in serviceprofitability of $11.0 million was reduced by the decrease in the fair value of derivative instruments of $41.2 million, an increase in bad debt expense of $6.2million, the absence of a weather insurance benefit of $4.3 million and a decline in product gross profit of $11.1 million.Interest ExpenseFor fiscal 2008, interest expense increased $0.2 million, or 1.0%, to $20.7 million, as compared to $20.5 million in fiscal 2007. This increase resultedfrom higher average working capital borrowings. 37 Table of ContentsInterest IncomeFor fiscal 2008, interest income decreased $2.0 million to $6.9 million, as compared to $8.9 million for fiscal 2007, as a reduction in interest incomedue to lower invested cash balances and lower interest rates were partially offset by an increase in finance charge income on higher past due accountsreceivable balances.Amortization of Debt Issuance CostsFor fiscal 2008, amortization of debt issuance costs was $2.3 million, unchanged from fiscal 2007.Income Tax ExpenseFor fiscal 2008, income tax expense decreased by $1.4 million to $0.6 million, as compared to income tax expense of $2.0 million for fiscal 2007. The$1.4 million decrease was due to the decline in estimated taxable income for 2008 versus 2007.Loss on Sale of SegmentsFor fiscal 2007, we recorded a charge of $1.1 million relating to a purchase price adjustment for the sale of the propane segment. There was no similarcharge recorded in fiscal 2008.Net Income (Loss)For fiscal 2008, a net loss of $13.4 million was recorded, as compared to net income of $38.2 million for fiscal 2007. This decrease of $51.6 million wasdue to a $51.8 million decrease in operating income and an increase in net interest expense of $2.3 million, reduced by lower income tax expense of $1.4million and the change in loss on sale of discontinued operations of $1.1 million. The decrease in operating income largely resulted from a $41.2 millionchange in the fair value of derivative instruments from a $15.7 million non-cash gain in fiscal 2007 to a $25.5 million non-cash loss in fiscal 2008.Adjusted EBITDAFor fiscal 2008, Adjusted EBITDA decreased by $12.9 million, to $55.5 million, as compared to $68.4 million for fiscal 2007, due to the decline involume, the absence of a weather insurance benefit ($4.3 million) and higher bad debt expense ($6.2 million).EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternativeto cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating our ability to make theMinimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows: Fiscal Year Ended September 30, (in thousands) 2008 2007 Income (loss) from continuing operations $(13,408) $39,302 Plus: Income tax expense 566 2,002 Amortization of debt issuance cost 2,339 2,282 Interest expense, net 13,808 11,525 Depreciation and amortization 26,784 28,995 EBITDA (a) from continuing operations 30,089 84,106 (Increase)/decrease in the fair value of derivative instruments 25,467 (15,664) Adjusted EBITDA (a) 55,556 68,442 Add/(subtract) Income tax expense (566) (2,002) Interest expense, net (13,808) (11,525) 38 Table of ContentsProvision for losses on accounts receivable 11,961 5,726 (Increase) decrease in accounts receivables (28,002) 5,761 (Increase) decrease in inventories 41,368 (8,222) Increase (decrease) in customer credit balances 13,390 (3,724) Change in other operating assets and liabilities (8,344) (3,341) Net cash provided by (used in) operating activities $71,555 $51,115 Net cash used in investing activities $(5,488) $(29,254) Net cash used in financing activities $(145) $(96) (a)EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA arenon-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such asinvestors, commercial banks and research analysts, to assess: • our compliance with certain financial covenants included in our debt agreements; • our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis; • our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; • our operating performance and return on invested capital as compared to those of other companies in the retail distribution of refinedpetroleum products business, without regard to financing methods and capital structure; and • the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.Adjusted EBITDA is a non-GAAP financial measure that is calculated as earnings from continuing operations before net interest expense, income taxes,depreciation and amortization, (increase) decrease in the fair value of derivatives, loss on debt redemption, goodwill impairment, and other non-cash andnon-operating charges. Management believes the presentation of this measure is relevant and useful because it allows investors to view the Partnership’sperformance in a manner similar to the method management uses, and makes it easier to compare its results with other companies that have different financingand capital structures. In addition, this measure is consistent with the manner in which the Partnership’s debt covenants in its material debt agreements arecalculated. Both the Partnership’s 10.25% Senior Note agreement and its bank credit facility contain covenants that restrict equity distributions, acquisitions,and the amount of debt it can incur. Under the most restrictive of these covenants, which is found in the bank credit facility, the agent bank could step in andcontrol all cash transactions for the Partnership if we failed to comply with the minimum availability or the fixed charge coverage ratio. The Partnership isrequired to maintain either availability (borrowing base less amounts borrowed and letters of credit issued) of $43.5 million or a fixed charge coverage ratioof 1.1x (Adjusted EBITDA being a significant component of this calculation). This method of calculating Adjusted EBITDA may not be consistent with thatof other companies and should be viewed in conjunction with measurements that are computed in accordance with GAAP.Each of EBITDA and Adjusted EBITDA has its limitations as an analytical tool, and it should not be considered in isolation or as a substitute foranalysis of our results as reported under GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are: • EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures; • Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced, and EBITDAand Adjusted EBITDA do not reflect the cash requirements for such replacements; • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements; • EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and • EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes. 39 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 beprovided by cash flows from operating activities, cash on hand at September 30, 2009 or a combination thereof. To the extent future capital requirementsexceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our revolving credit facility, asdiscussed below, and repaid from subsequent seasonal reductions in inventory and accounts receivable.DISCUSSION OF CASH FLOWSWe use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows providedby operating activities by adjusting net income for those items that impact net income but may not result in actual cash receipts or payment during theperiod.Operating ActivitiesDue to the seasonal nature of the home heating oil business, cash is generally used in operations during the winter (our first and second fiscal quarters)as customers receive deliveries and pay for products purchased within our payment terms, and cash is generally provided by operating activities during thespring and summer (our third and fourth quarters) when customer payments exceed deliveries. During fiscal 2009, we generated $78.5 million in cash flowfrom operating activities, which was $6.9 million higher than the $71.6 million of cash used in operations for fiscal 2008. This improvement was primarilydue to the impact of lower wholesale product costs, which impacts accounts receivable collections, inventory costs, prepaid hedging costs, hedging marginrequirements, customer credit balances, accounts payable and accrued expenses. Our cash flow from operations for fiscal 2009 also benefited from higherearnings from operations, when compared to fiscal 2008.While the Partnership generated $78.8 million in cash from operations during fiscal 2009, this amount was reduced by a net increase in operating assetsand liabilities of $0.3 million. Accounts receivable declined by $26.7 million largely due to lower wholesale product costs and an improvement in our dayssales outstanding. During the summer of fiscal 2009, cash was used to finance an increase in inventories of $17.7 million, as we purchased 18.0 milliongallons of home heating oil for our fiscal 2010 fall and winter needs and increased our inventory quantities to 28.5 million gallons as of September 30, 2009,compared to 8.9 million gallons as of September 30, 2008. We increased our inventory levels to take advantage of favorable home heating oil prices in thespot and futures market.Approximately 34% of our customers are on a budget payment plan and these customers pay their annual estimated heating bill in 12 monthlyinstallments. Typically, these plans begin before the heating season and a liability is created as payments exceed deliveries. In fiscal 2009, we experienced adecline in payments from our budget customers of $12.0 million as compared to fiscal 2008. This change was largely due to the decline in home heating oilprices which reduced the required budget payments for the upcoming heating season.For fiscal 2008, cash provided by operating activities was $71.6 million, as cash generated from business operations of $53.1 million, lower productinventory purchases of $41.4 million and an increase in customer credit balances of $13.4 million was reduced by an increase in accounts receivable of $28.0million and other net changes in operating assets and liabilities of $8.3 million. Accounts receivable rose due to an increase in the wholesale cost for homeheating oil in fiscal 2008 as compared to fiscal 2007. Inventory levels were lower by $49.6 million, despite higher prices, as we reduced the quantity of homeheating oil on hand from 39.4 million gallons as of September 30, 2007 to 8.9 million gallons as of September 30, 2008. At September 30, 2007, we increasedour inventory levels to take advantage of favorable prices in the spot and futures market. We increased the monthly budget payment requirements for ourbudget customers during the summer of fiscal 2008, which provided $13.4 million more in cash at September 30, 2008, when compared to September 30,2007. 40 Table of ContentsInvesting ActivitiesDuring fiscal 2009, our capital expenditures totaled $4.3 million, as we invested in computer hardware and software ($1.4 million), refurbished certainphysical plants ($1.0 million) and made additions to our fleet and other equipment ($1.9 million). We also completed one acquisition for $4.0 million andallocated $3.4 million of the gross purchase to intangible assets and $0.6 million to fleet. We paid $ 3.4 million in cash and assumed net working capitalcredits of $ 0.6 million.During fiscal 2008, we spent $4.1 million for fixed assets and received $0.5 million from the sale of certain assets as we invested in computer hardwareand software ($1.1 million), refurbished certain physical plants ($1.6 million) and made additions to our fleet and other equipment ($1.4 million). Wecompleted eight acquisitions for $ 2.6 million and allocated $2.2 million of the gross purchase to intangible assets and $0.4 million to fleet. We paid $1.9 million in cash and assumed net working capital credits of $ 0.7 million.During fiscal 2007, we spent $4.9 million for fixed assets and received $1.9 million from the sale of several non essential buildings and other fixedassets, as we invested in computer hardware and software ($0.9 million), refurbished certain physical plants ($1.3 million) and made additions to our fleet andother equipment ($2.7 million). We completed eight acquisitions with a total cash outlay of $26.4 million allocated $22.8 million of the gross purchase tointangible assets, $2.5 million to fleet and $1.1 million to other net assets.Financing ActivitiesDuring fiscal 2009, the Partnership repurchased $40.3 million face value of its 10.25% Senior Notes due February 2013 for $30.2 million and paiddistributions to our unitholders of $15.4 million. During fiscal 2009, we did not borrow under our revolving credit facility but had letters-of-creditoutstanding under the facility. We also paid $6.6 million in fees for our new credit agreement and spent $2.3 million to purchase 637,285 common units inconnection with our unit repurchase plan program.For fiscal 2008, we borrowed and repaid $57.2 million under our revolving credit facility.For fiscal 2007, cash flows used in financing activities were $0.1 million.FINANCING AND SOURCES OF LIQUIDITYLiquidity and Capital ResourcesOur ability to satisfy our financial obligations depends on our future performance, which will be subject to prevailing economic, financial, businessand weather conditions, the ability to pass on the full impact of high wholesale heating oil prices to customers, the effects of high net customer attrition,conservation and other economic and geo-political factors, most of which are beyond our control. In the near term, capital requirements are expected to beprovided by cash flows from operating activities, cash on hand at September 30, 2009 or a combination thereof. To the extent future capital requirementsexceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by a our revolving credit facility.In July 2009, we entered into an amended and restated asset based revolving credit facility with a group of lenders, that expires in July, 2012 andwhich provides us with the ability to borrow up to $240 million ($290 million during the heating season from November through April of each year) forworking capital purposes (subject to certain borrowing base limitations and coverage ratios), including the issuance of up to $100.0 million in letters ofcredit. The Partnership can increase the facility size by $50 million without the consent of the bank group. However, the bank group is not obligated to fundthe $50 million increase. If the bank group elects not to fund the increase, the Partnership can add additional lenders to the group, with the consent of theAgent, which shall not be unreasonably withheld. Obligations under the new revolving credit facility are secured by liens on substantially all of our assetsincluding accounts receivable, inventory, general intangibles, real property, fixtures and equipment. During this past heating season, we did not borrowunder our previous credit facility. As of September 30, 2009, $40.9 million in letters of credit were outstanding, of which $39.3 million are for current andfuture insurance reserves and bonds and $1.6 million are for seasonal inventory purchases and other working capital purposes. We believe that our relianceon letters of credit for inventory purposes will be reduced in fiscal 2010 as we have increased our trade credit to over $24.0 million.Under the terms of the credit facility, we must maintain at all times either availability (borrowing base less amounts borrowed and letters of creditissued) of $43.5 million (15% of the maximum facility size) or a fixed charge coverage ratio 41 Table of Contents(as defined in the credit agreement) of not less than 1.1x. As of September 30, 2009, availability, as defined in the amended and restated credit agreement, was$194.4 million and the Partnership was in compliance with the fixed charge coverage ratio. The fixed charge coverage ratio is calculated based uponAdjusted EBITDA. In the event that the Partnership is not able to comply with these covenants it could have a material adverse effect on the Partnership’sliquidity and results of its operations.The Partnership’s scheduled interest payments for fiscal 2010 are $13.6 million and annual maintenance capital expenditures for fixed assets areestimated to be approximately $3.0 to $5.0 million, excluding the capital requirements for leased fleet. Based on the funding levels required by the PensionProtection Act of 2006, and certain actuarial assumptions, we estimate that the Partnership will be required to make minimum cash contributions to fund itsfrozen defined benefit pension obligations of approximately $13.2 million in fiscal 2010 and $14.4 million in total for the four years subsequent to fiscal2010. We anticipate paying distributions of approximately $19.5 million in fiscal 2010 and for the remainder of fiscal 2010, we will continue to purchase theremaining balance (3.4 million units) authorized under our unit repurchase plan. The Partnership also is contemplating calling a portion on our 10.25%senior notes in February 2010. In addition, we will continue to seek strategic acquisitions.Partnership Distribution ProvisionsCommencing with the fiscal quarter ended December 31, 2008, we are required to make distributions in an amount equal to our Available Cash, asdefined in our Partnership Agreement, no more than 45 days after the end of each fiscal quarter, to holders of record on the applicable record dates. AvailableCash, as defined in our Partnership Agreement, generally means all cash on hand at the end of the relevant fiscal quarter less the amount of cash reservesestablished by the Board of Directors of our general partner in its reasonable discretion for future cash requirements. These reserves are established for theproper conduct of our business, including acquisitions, the payment of debt principal and interest and for distributions during the next four quarters and tocomply with applicable laws and the terms of any debt agreements or other agreements to which we are subject. Under the terms of our credit facility, thePartnership must have a fixed charge coverage ratio of 1.15x to pay the minimum quarterly distribution of $0.0675. Any distribution in excess of theminimum quarterly distribution requires the Partnership to have a fixed charge coverage ratio of 1.25x. These tests restrict the amount of cash that thePartnership can use to pay distributions with respect to any fiscal quarter. The Board of Directors of our general partner reviews the level of Available Casheach quarter based upon information provided by management.On October 21, 2009, we declared a quarterly distribution of $0.0675 per unit, or $0.27 on an annualized basis, on all common units and generalpartner units in respect of the fourth quarter of fiscal 2009 payable on November 13, 2009 to holders of record on November 5, 2009. The total quarterlydistribution is $4.9 million.(See Part II—Item 5. Market for Registrant’s Units and Related Matters—Partnership Distribution Provisions and Note 5 Quarterly Distribution ofAvailable 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.Reserves for income taxes under FASB ASC 740-10-05 Income Taxes Topic (“FIN 48”) are not included in the table because we cannot reasonablypredict the ultimate timing of settlement of our reserves for income taxes with the respective taxing authorities. 42 Table of ContentsThe table below summarizes the payment schedule of our contractual obligations at September 30, 2009 (in thousands): Payments Due by Fiscal Year Total 2010 2011and 2012 2013and 2014 ThereafterLong-term debt obligations $133,112 $— $— $133,112 $— Capital lease obligations (a) 53 53 — — Operating lease obligations (b) 50,522 8,965 15,236 12,364 13,957Purchase obligations (c) 15,659 7,177 8,462 20 — Interest obligations (d) 51,659 15,081 29,787 6,791 — Long-term liabilities reflected on the balance sheet (e) 4,773 369 700 700 3,004 $255,778 $31,645 $54,185 $152,987 $16,961 (a)Represents various third party capital leases for trucks.(b)Represents various operating leases for office space, trucks, vans and other equipment with third parties.(c)Represents non-cancelable commitments as of September 30, 2009 for operations such as customer related stationary and voice and dataphone/computer services.(d)Reflects 10.25% interest obligations on our $133.1 million senior notes due February 2013 and the unused commitment fee on the revolving creditfacility.(e)Reflects long-term liabilities excluding a pension accrual of approximately $24.7 million. Under current prescribed regulatory minimum fundingrequirements, we have satisfied the minimum funding obligations related to our pension plans for fiscal 2009 and we estimate minimum cashcontributions of $13.2 million, $4.3 million, $3.6 million, $3.3 million and $3.2 million, for fiscal 2010, 2011, 2012, 2013 and 2014 respectively.Recent Accounting PronouncementsIn the first quarter of fiscal 2009, the Partnership adopted the provisions of FASB ASC 820-10 Fair Value Measurements and Disclosure topic (SFASNo. 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements.In the second quarter of fiscal 2009, the Partnership adopted the provisions of FASB ASC 815-10-50 Derivatives and Hedging topic, Disclosuresubtopic (SFAS No. 161) which amends and expands the disclosure requirements of FASB ASC 815-10-05 Derivatives and Hedging topic (SFAS No. 133).This standard also established qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amountsof gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.In the third quarter of fiscal 2009, the Partnership adopted the provisions of FASB ASC 855-10 Subsequent Events topic (SFAS No. 165). This standardestablished disclosures, principles and requirements for events that occur after the balance sheet date but before financial statements are issued.In December 2007, the FASB issued a revision to FASB ASC 805-10 Business Combinations (SFAS No. 141R). This standard establishes in a businesscombination principles and requirements for how an acquirer recognizes and measures identifiable assets acquired, goodwill acquired, liabilities assumed,and any noncontrolling interests. It is effective in fiscal years beginning after December 15, 2008. The Partnership is required to adopt this standard in fiscal2010. The Partnership is currently assessing its impact.Critical 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. 43 Table of ContentsOur 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 livesbased on historical statistics. We use amortization methods and determine asset values based on our best estimates using reasonable and supportableassumptions and projections. From time to time, we engage a third party valuation firm to ascertain asset values for intangible assets. We assess the usefullives of intangible assets based on the estimated period over which we will receive benefit from such intangible assets such as historical evidence regardingcustomer churn rate. In some cases, the estimated useful lives are based on contractual terms. At September 30, 2009, we had $20.5 million of net intangibleassets 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 2009 would have increased byapproximately $0.9 million.FASB ASC 350-10-05 Intangibles-Goodwill and Other topic (SFAS No. 142) requires goodwill to be assessed at least annually for impairment. Theseassessments involve management’s estimates of future cash flows, market trends and other factors to determine the fair value of the reporting unit, whichincludes the goodwill to be assessed. If the carrying amount of goodwill exceeds its implied fair value and is determined to be impaired, an impairmentcharge is recorded to write-down goodwill to its fair value. At September 30, 2009, we had $182.9 million of goodwill. Intangible assets with finite lives mustbe assessed for impairment whenever changes in circumstances indicate that the assets may be impaired. Similar to goodwill, the assessment for impairmentrequires estimates of future cash flows related to the 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 fair value of the asset.We test the carrying amount of goodwill annually during the fourth fiscal quarter. It was determined based on this analysis that there was no goodwillimpairment as of August 31, 2009. The preparation of this analysis was based upon management’s estimates and assumptions, and future impairmentcalculations would be affected by actual results that are materially different from projected amounts. To provide for a sensitivity of the discount rates andtransaction multiples used, ranges of high and low values are employed in the analysis, with the low values examined to ensure that a reasonably likelychange in an assumption would not cause the Partnership to reach a different conclusion.Although the Partnership believes that its projections reflect its best estimates of future performance, changes in estimated revenues, per gallon marginsor discount rates may have an impact on the estimated fair value. Any increase in estimated cash flows or a decrease in the discount rate would not have animpact on the carrying value of the goodwill. A decrease in future estimated cash flows or an increase in the discount rate could require the Partnership todetermine whether the recognition of a goodwill impairment charge would be required.The Partnership estimates the fair value of its sole reporting unit utilizing two generally accepted approaches: the Income Approach and the MarketApproach (which is a combination of the Market Comparable and the Market Transaction Approaches).The Income Approach uses management’s projections of cash flows, market trends and other factors to determine the value of the reporting unit basedon discounted cash flows. The Partnership’s discount rate was calculated based on the weighted average cost of capital, using inputs of comparablecompanies in the same industry. The Partnership’s conclusion of the fair value of the reporting unit was supported based on a sensitivity analysis performedusing a range of discount rates and terminal multiples.The Market Comparable Approach determines a fair value of the reporting unit based on comparable companies in similar industries, whose securitiesare actively traded in public markets. A financial multiple range was calculated and applied to the financial metrics of the Partnership. The Partnership’sconclusion was supported using the high and low range of multiples applied.The Market Transaction Approach determines a fair value of the reporting unit based on exchange prices in actual sales and purchases of comparablebusinesses. A transaction multiple was calculated and applied to the financial metrics of the Partnership. In addition, a transaction occurring after the analysisdate, but before the fiscal year-end was reviewed, and the Partnership’s conclusion of value was supported based on the calculations of these transactionmultiples. 44 Table of ContentsIn addition, the Partnership performs a reasonableness check of its concluded value for its sole reporting unit by reconciling the results of the goodwillanalysis with its market capitalization.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 $37.5 million at September 30, 2009. 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 2009 would have increased by approximately $1.2 million.Fair Values of DerivativesFASB ASC 815-10-05 Derivatives and Hedging topic (SFAS No. 133), established accounting and reporting standards requiring that derivativeinstruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent derivative instruments designated ascash flow hedges are effective and FASB ASC 815-10-05 Derivatives and Hedging topic documentation requirements have been met, changes in fair valueare recognized in other comprehensive income until the underlying hedged item is recognized in earnings. Currently, the Partnership has elected not todesignate its derivative instruments as hedging instruments under this standard, and the change in fair value of the derivative instruments are recognized inour statement of operations.We have established the fair value of our derivative instruments using estimates determined by our counterparties and subsequently evaluated theminternally using established index prices and other sources. These values are based upon, among other things, future prices, volatility, time-to-maturity valueand credit risk. The estimate of fair value we report in our financial statements change as these estimates are revised to reflect actual results, changes in marketconditions, or other factors, many of which are beyond our control.Defined Benefit ObligationsFASB ASC 715-10-05 Compensation-Retirement Benefits topic, requires an employer to (i) measure the funded status of a defined benefitpostretirement plan as of the date of its fiscal year-end statement of financial position, (ii) to recognize the overfunded or underfunded status of this plan as anasset or liability in its statement of financial position and (iii) to recognize changes in that funded status in the year which the changes occur throughcomprehensive income.This standard requires the Partnership to make assumptions as to the expected long-term rate of return that could be achieved on defined benefit planassets and discount rates to determine the present value of the plans’ pension obligations. The Partnership evaluates these critical assumptions at leastannually.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 in the following fiscal year. A 25 basis point decrease in the discount rated used for fiscal 2009 would have increased pension expense byapproximately $0.1 million and would have increased the pension liability by another $1.3 million. The discount rate used to determine net periodic pensionexpense was 7.6% in 2009, 6.2% in 2008, and 5.75% in 2007. The discount rate used in determining end of year pension obligations was 5.4% in 2009, 7.6%in 2008, and 6.2% in 2007. These rates reflect the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flowsare expected to match 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 fiscal 2009 and 2008 was 8.25%. A further25 basis point decrease in the expected return on assets would have increased pension expense in fiscal 2009 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 30,2009, $31.2 million of unrecognized losses remain to be recognized by the plans. These losses may result in increases in future pension expense as they arerecognized.Recent market conditions have resulted in an unusually high degree of volatility and increased the risks associated with certain investments held bythe plans that could impact the value of investments after the date of these financial statements. 45 Table of ContentsIn addition, we participate in a number of trustee-managed multi-employer pension and health and welfare plans for employees covered undercollective bargaining agreements. The Partnership makes timely contributions as required by the plans. Several factors could result in potentially higherfuture contributions to these plans, including unfavorable investment performance, changes in demographics, and increased benefits to participants.Allowance for Doubtful AccountsWe periodically review past due customer accounts receivable balances. After giving consideration to economic conditions, overdue status and otherfactors, we establish an allowance for doubtful accounts, representing the Partnership’s best estimate of amounts that may not be collectible. Actual lossescould differ from management’s estimates.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, supplemented by a third-partyactuary. We periodically evaluate the potential for changes in loss estimates with the support of qualified actuaries. As of September 30, 2009, we hadapproximately $34.8 million of insurance reserves. The ultimate resolution of these claims could differ materially from the assumptions used to calculate thereserves, which could have a material adverse effect on results of operations. ITEM 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.At September 30, 2009, we had outstanding borrowings totaling $133.1 million, none of which is subject to variable interest rates.We regularly use derivative financial instruments to manage our exposure to market risk related to changes in the current and future market price ofhome heating oil. The value of market sensitive derivative instruments is subject to change as a result of movements in market prices. Sensitivity analysis is atechnique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product atSeptember 30, 2009, the potential impact on our hedging activity would be to increase the fair market value of these outstanding derivatives by $7.2 millionto a fair market value of $21.6 million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value of theseoutstanding derivatives by $4.7 million to a fair market value of $9.7 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 disclosure controlsand procedures (as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2009. Based on thatevaluation, such principal executive officer and principal financial officer concluded that the Partnership’s disclosure controls and procedures were effectiveas of September 30, 2009 at the reasonable level of assurance. For purposes of Rule 13a-15(e), the term disclosure controls and procedures means controlsand other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits underthe Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by anissuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive andprincipal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 46 Table of Contents(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 inExchange Act Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision of management and with the participation ofour management, 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 Sponsoring Organizationsof the Treadway Commission. Based on our evaluation of internal Control over financial reporting, our management concluded that our internal control overfinancial reporting was effective as of September 30, 2009. The effectiveness of our internal control over financial reporting as of September 30, 2009 hasbeen audited by our independent registered public accounting firm, as stated in their report which is included herein.(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 has materiallyaffected, or is reasonably likely to materially affect the Partnership’s internal control over financial reporting.(d) Other.The General Partner and the Partnership believe that a control system, no matter how well designed and operated, can not provide absolute assurancethat the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, ifany, within the Partnership have been detected. Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonableassurances of achieving our desired control objectives, and the principal executive officer and principal financial officer of our general partner haveconcluded, as of September 30, 2009, that our disclosure controls and procedures were effective in achieving that level of reasonable assurance. ITEM 9B.OTHER INFORMATIONNot applicable. 47 Table of ContentsPART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEPartnership ManagementThe general partner of the Partnership is Kestrel Heat, LLC. The Board of Directors of Kestrel Heat, LLC is appointed by its sole member, KestrelEnergy Partners, LLC. Kestrel Energy Partners, LLC is a private equity investment partnership formed by Yorktown Energy Partners VI, L.P., Paul A.Vermylen and other investors.The Partnership’s operations are conducted through Petro Holdings, Inc. and its subsidiaries. Petro Holdings, Inc. is a corporation that is a wholly-owned subsidiary of Star Acquisitions, which is a wholly-owned subsidiary of the Partnership.Kestrel Heat, LLC as the general partner of the Partnership, oversees the activities of the Partnership. Unitholders do not directly or indirectlyparticipate in the management or operation of the Partnership or elect the directors of the general partner. The Board of Directors of the general partner hasadopted a set of Partnership Governance Guidelines in accordance with the requirements of the New York Stock Exchange. A copy of these Guidelines isavailable on the Partnership’s website at www.Star-Gas.com or a copy may be obtained without charge by contacting Richard F. Ambury, (203) 328-7310.As of November 30, 2009, Kestrel Heat, LLC and its affiliates owned an aggregate of 12,803,128 common units, representing 17.85% of the issued andoutstanding common units, and Kestrel Heat, LLC 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.Directors and Executive Officers of the General PartnerDirectors are appointed for one-year terms. The following table shows certain information for directors and executive officers of the general partner asof November 30, 2009: Name Age PositionPaul A. Vermylen, Jr. 62 Chairman, DirectorDaniel P. Donovan 63 President, Chief Executive Officer and DirectorRichard F. Ambury 52 Chief Financial OfficerSteven J. Goldman 49 Senior Vice President of OperationsRichard G. Oakley 49 Vice President and ControllerHenry D. Babcock 69 DirectorC. Scott Baxter 48 DirectorBryan H. Lawrence 67 DirectorSheldon B. Lubar 80 DirectorWilliam P. Nicoletti 64 Director 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 had 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. and Moneta Energy Services Ltd. Mr. Vermylen is a graduate of Georgetown University and has aM.B.A. from Columbia University. 48(1)(1)(1)(1) Table of ContentsDaniel P. Donovan. Mr. Donovan has been Chief Executive Officer of Kestrel Heat since May 31, 2007 and has been President and director since April 28,2006. From April 28, 2006 to May 30, 2007 Mr. Donovan was also the Chief Operating Officer of Kestrel Heat. Mr. Donovan was President and ChiefOperating Officer of Star Gas from March 2005 until April 28, 2006. From May 2004 to March 2005 he was President and Chief Operating Officer of the StarGas heating oil segment. Mr. Donovan held various management positions with Meenan Oil Co. LP, from January 1980 to May 2004, including VicePresident and General Manager from 1998 to 2004. Mr. Donovan worked for Mobil Oil Corp. from 1971 to 1980. His last position with Mobil was Presidentand General Manager of its heating oil subsidiary in New York City and Long Island. Mr. Donovan is a graduate of St. Francis College in Brooklyn, NewYork 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, Mr. Ambury served as Vice President—Finance of Star Gas Corporation, predecessor general partner. Mr. Ambury was employed by Petro fromJune 1983 through February 1996, where he served in various accounting/finance capacities. From 1979 to 1983, Mr. Ambury was employed by apredecessor firm of KPMG, a public accounting firm. Mr. Ambury has been a Certified Public Accountant since 1981 and is a graduate of Marist College.Steven J. Goldman. Mr. Goldman has been Senior Vice President of Operations of the Partnership since May 31, 2007. Mr. Goldman was Vice President ofOperations of Petro Holdings, Inc. from July 2004 until May 31, 2007. From February 2000 to June 2004, Mr. Goldman held various operating managementpositions with Petro Holdings, Inc. Prior to joining Petro Holdings, Inc. as a General Manager in 2000, Mr. Goldman worked for United Parcel Service from1982 to 2000. Mr. Goldman has also held various positions within the management of companies in industrial engineering and those with internationaloperations. Mr. Goldman is a graduate of the State University of New York at Stony Brook.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 currently the Managing Director & Head of Global EnergyGroup for Houlihan Lokey , headquartered in New York City. Prior to Houlihan, he was the Managing Partner for Green River Energy Partners, LLC. GreenRiver was a principal investing firm, which invested in public and private equity in energy and was founded in 2005. From 2002 to 2005, he was a foundingpartner of Baxter Bold & Company, a corporate energy M&A and private equity advisory firm. From 1999 through 2001, he was Head of Americas for theGlobal Energy Investment Banking Group of JPMorgan. From 1989 to 1999, Mr. Baxter worked for Salomon Smith Barney’s Global Energy InvestmentBanking Group where he was a Managing Director. Mr. Baxter holds a B.S. degree in Economics from Weber State University where he graduated cum laude,and received an MBA degree from the University of Chicago Graduate School of Business. From 2002 to 2005 Mr. Baxter was also an adjunct professor offinance 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 wasemployed beginning in 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence alsoserves as a director of Approach Resources, Inc., Crosstex Energy, Inc., Hallador Petroleum Company (each a United States publicly traded company), WinstarResources Ltd. (a Canadian public company) and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests.Mr. Lawrence also serves as a director of Crosstex Energy GP, LLC, the general partner of Crosstex Energy, L.P. (a United States publicly traded company).Mr. Lawrence is a graduate of Hamilton College and received an M.B.A. from Columbia University. 49 Table of ContentsSheldon 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 ofCrosstex Energy, Inc. since January 2004; Approach Resources, Inc. since June 2007 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 a bachelor’s degree in Business Administration and a Law degree from the Universityof Wisconsin-Madison. He was awarded an honorary Doctor of Commercial 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. Since February 1, 2009, he has been a Managing Director of ParkmanWhaling LLC, a Houston, Texas based energy investment banking firm. Previously, he was 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. Mr. Nicoletti is a graduate of Seton HallUniversity and received an M.B.A. from Columbia University.Director IndependenceIt is the policy of the Board of Directors that the number of independent Directors that comprise the Board shall at all times equal at least threeDirectors or such higher number as may be necessary to comply with the applicable federal securities law requirements. For the purposes of this policy,“independent director” shall have the meaning set forth in Section 10A(m) of the Securities Exchange Act of 1934, as amended, any applicable stockexchange rules and the rules and regulations promulgated in the Partnership governance guidelines available on its webpage www.Star-Gas.com. Messrs.Nicoletti, Babcock, and Baxter are independent Directors.Meetings of DirectorsDuring fiscal 2009, the Board of Directors of Kestrel Heat, LLC met five times. All directors attended each meeting except for one meeting where onedirector did not attend.Committees of the Board of DirectorsKestrel Heat, LLC’s Board of Directors has one standing committee, the Audit Committee. Its members are appointed by the Board of Directors for aone-year term and until their respective successors are elected. The NYSE corporate governance standards do not require limited partnerships to have aNominating or Compensation Committee.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, which has adopted an Audit Committee Charter. Mr. Nicoletti serves as chairman of the Audit Committee. A copy of this charter 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) 328-7310. The AuditCommittee reviews the external financial reporting of the Partnership, selects and engages the Partnership’s independent registered public accountants andapproves all non-audit engagements of the independent registered public accountants.Members of the Audit Committee may not be employees of Kestrel Heat, LLC’s or its affiliated companies and must otherwise meet the New YorkStock Exchange and SEC independence requirements for service on the Audit Committee. The Board of Directors has determined that Messrs. Nicoletti,Babcock and Baxter are independent directors in that they do not have any material relationships with the Partnership (either directly, or as a partner,shareholder or officer of an organization that has a relationship with the Partnership) and they otherwise meet the independence requirements of the NYSEand the SEC. The Partnership’s Board of Directors has also determined that at least one member of the Audit Committee, Mr. Nicoletti, meets the SEC criteriaof an “audit committee financial expert.”During fiscal 2009, the Audit Committee of Kestrel Heat, LLC met six times. All members attended each meeting except for two meetings where onedirector did not attend. 50 Table of ContentsReimbursement 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. There were no reimbursements in fiscal year 2009.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 Investor Relations, (203) 328-7310.Section 16(a) Beneficial Ownership Reporting ComplianceBased on copies of reports furnished to us, we believe that during fiscal year 2009, all reporting persons complied with the Section 16(a) filingrequirements applicable to them.Non-Management Directors and Interested Party CommunicationsThe 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, the Chairman of the Board, to serve as lead director to chair executive sessions of the non-management directors. Interested parties who wish to contact the non-management directors as a group may do so by contacting Paul A. Vermylen, Jr. c/o StarGas Partners, L.P., 2187 Atlantic Street, Stamford, CT 06902.Officer 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, 2008.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 there under. ITEM 11.EXECUTIVE COMPENSATIONCompensation Discussion And AnalysisThe Partnership’s Amended and Restated Agreement of Limited Partnership provides that the general partner of the Partnership, Kestrel Heat, LLC,shall conduct, direct and manage all activities of the Partnership. The limited liability company agreement of the general partner provides that the business ofthe general partner shall be managed by a Board of Directors. The responsibility of the Board is to supervise and direct the management of the Partnership inthe interest and for the benefit of the Partnership’s unitholders. Among the Board’s responsibilities is to regularly evaluate the performance and to approvethe compensation of the Chief Executive Officer and, with the advice of the Chief Executive Officer, regularly evaluate the performance and approve thecompensation of key executives.As a limited partnership that is listed on the New York Stock Exchange, the Partnership is not required to have a Compensation Committee. Since theChairman of the general partner and the majority of the Board are not employees, the Board determined that it has adequate independence to act in thecapacity of a Compensation Committee to establish and review the compensation of the Partnership’s executive officers and directors. The Board iscomprised of Paul A. Vermylen Jr. (Chairman), Daniel P. Donovan (President and Chief Executive Officer), Henry D. Babcock, C. Scott Baxter, Bryan H.Lawrence, Sheldon B. Lubar, and William P. Nicoletti.Throughout this Report, each person who served as chief executive officer (“CEO”) during fiscal 2009, each person who served as chief financialofficer (“CFO”) during fiscal 2009 and the two other most highly compensated executive officers serving at September 30, 2009 (there being no otherexecutive officers who earned more than $100,000 during fiscal 2009) are referred to as the “named executive officers” and are included in the SummaryCompensation Table below.In this Compensation Discussion and Analysis, we address the compensation paid or awarded to Messrs. Donovan, Ambury, Goldman, and Oakley. Werefer to these executive officers as our “named executive officers.” 51 Table of ContentsCompensation decisions for the above officers were made by the Board of Directors of the Partnership.COMPENSATION PHILOSOPHY AND POLICIESThe primary objectives of the Partnership’s compensation program, including compensation of the named executive officers, are to attract and retainhighly qualified officers, employees and directors and to reward individual contributions to our success. The Board of Directors considers the followingpolicies in determining the compensation of the named executive officers: • compensation should be related to the performance of the individual executive and the performance measured against both financial andnon-financial achievements; • compensation levels should be competitive to ensure that we will be able to attract, motivate and retain highly qualified executiveofficers; and • compensation should be related to improving unitholder value.Compensation MethodologyThe elements of the Partnership’s compensation program for named executive officers are intended to provide a total incentive package designed todrive performance and reward contributions in support of business strategies at the Partnership and operating unit level. Subject to the terms of employmentagreements that have been entered into with the named executive officers, all compensation determinations are discretionary and subject to the decision-making authority of the Board of Directors. We do not use benchmarking as a fixed criteria to determine compensation. Rather, after subjectively settingcompensation based on the above factors, we reviewed the compensation paid to officers holding similar positions at our peer group companies to obtain ageneral understanding of the reasonableness of base salaries and other compensation payable to our named executive officers. Our peer group of companieswas comprised of the following companies: Amerigas Partners, L.P., Suburban Propane Partners, L.P., Inergy Holdings, L.P., Ferrellgas Partners, L.P. andGlobal Partners, L.P. We chose these companies because they are master limited partnerships that are engaged in the retail distribution of energy products likethe Partnership.Elements of Executive CompensationFor the fiscal year ended September 30, 2009, the principal components of compensation for the named executive officers were: • base salary; • annual discretionary profit sharing allocation; • long-term management incentive compensation plan; and • retirement and health benefits.Under our compensation structure, the mix of base salary, discretionary profit sharing allocation and long-term compensation provided to eachexecutive officer varies depending on their position. The base salary for each executive officer is the only fixed component of compensation. All othercompensation, including annual discretionary profit sharing allocation and long-term incentive compensation, is variable in nature.For the CEO and the CFO, approximately 50% of the annual compensation is in the form of base salary and approximately 50% is from thediscretionary profit sharing allocation. For the Vice President of Operations, approximately 60% of the annual compensation is in the form of base salary and40% is from the discretionary profit sharing allocations. For the Vice President- Controller, approximately 65% of the annual compensation is in the form ofbase salary and 35% is from the discretionary profit sharing allocations. Since (as described below) no amounts were payable in fiscal 2009 under the terms ofthe long-term incentive plan, the Partnership’s compensation allocation in fiscal 2009 was 100% base salary and annual discretionary profit sharingallocation. In future fiscal years, the Partnership will also consider the percentage of overall compensation to be allocated to the long term incentive planawards based upon the Partnership’s expected ability to make distributions under this plan, as described below. 52 Table of ContentsWe believe that together all of our compensation components provide a balanced mix of base compensation and compensation that is contingent uponeach executive officer’s individual performance and our overall performance. A goal of the compensation program is to provide executive officers with areasonable level of security through base salary and benefits, while rewarding them through incentive compensation to achieve business objectives andcreate unitholder value. As a result, officers with lower overall compensation levels will tend to have a higher percentage of base compensation. We believethat each of our compensation components is important in achieving this goal. Base salaries provide executives with a base level of monthly income andsecurity. Annual discretionary profit sharing allocations motivate executives to drive our financial performance. Long-term incentive awards link theinterests of our executives with our unitholders, which motivates our executives to create unitholder value. In addition, we want to ensure that ourcompensation programs are appropriately designed to encourage executive officer retention, which is accomplished through all of our compensationelements.Base SalaryThe Board of Directors establishes base salaries for the named executive officers based on a number of factors, including: • The historical salaries for services rendered to the Partnership and responsibilities of the named executive officer. • The salaries of equivalent executive officers at our peer group companies. • The prevailing levels of compensation and cost of living in the location in which the named executive officer works.In determining the initial base compensation payable to individual named executive officers when they are first hired by the Partnership, our startingpoint is the historical compensation levels that the Partnership has paid to officers performing similar functions over the past few years. We also consider thelevel of experience and accomplishments of individual candidates and general labor market conditions, including the availability of candidates to fill aparticular position. When we make adjustments to the base salaries of existing named executive officers, we review the individual’s performance, the valueeach named executive officer brings to us and general labor market conditions.Elements of individual performance considered, among others, without any specific weighting given to each element, include business-relatedaccomplishments during the year, difficulty and scope of responsibilities, effective leadership, experience, expected future contributions to the Partnershipand difficulty of replacement. While base salary provides a base level of compensation intended to be competitive with the external market, the base salaryfor each named executive officer is determined on a subjective basis after consideration of these factors and is not based on target percentiles or other formalcriteria. Although we believe that base salaries for our named executive officers are generally competitive with the external market, we do not usebenchmarking as a fixed criteria to determine base compensation. Rather, after subjectively setting base salaries based on the above factors, we review thecompensation paid to officers holding similar positions at our peer group companies to obtain a general understanding of the reasonableness of base salariesand other compensation payable to our named executive officers. The Partnership also takes into account geographic differences for similar positions in theNew York Metropolitan area. While cost of living is considered in determining annual increases, the Partnership does not typically provide full cost of livingadjustments as salary increases are constrained by budgetary restrictions and the ability to fund the Partnership’s current cash needs such as interest expense,maintenance capital, income taxes and distributions.Profit Sharing AllocationsThe Partnership maintains a profit sharing pool for employees, including named executive officers, which in fiscal 2009 was equal to approximately6.0% of the Partnership’s earnings before income taxes, depreciation and amortization, excluding items affecting comparability (“adjusted EBITDA”). Theannual discretionary profit sharing allocations paid to the named executive officers are payable from this pool. The size of the pool fluctuates based uponupward or downwards changes in adjusted EBITDA. The amount of cash paid to the named executive officers under the plan is based on the targetpercentages of overall compensation described above under the caption “Elements of Executive Compensation.” Depending upon the size of the profitsharing pool, the amount paid to the named officers could be more or less. 53 Table of ContentsThere are no set formulas for determining the amount payable to our named executive officers from the profit sharing plan. Factors considered by ourCEO and the Board in determining the level of bonus compensation generally include, without assigning a particular weight to any factor: (i)whether or not we achieved certain budgeted goals for the year and any material shortfalls or superior performances relative to expectations.Under the plan, no profit sharing was payable with respect to fiscal 2009 unless the Partnership achieved actual adjusted EBITDA for fiscal 2009of at least 70% of the amount of budgeted adjusted EBITDA for fiscal 2009. The budget is developed annually using a bottom up process; (ii)the level of difficulty associated with achieving such objectives based on the opportunities and challenges encountered during the year and; (iii)significant transactions or accomplishments for the period not included in the goals for the year.Our CEO takes these factors into consideration as well as the relative contributions of each of the named executive officers to the year’s performance indeveloping his recommendations for bonus amounts. Based on such assessment, our CEO submits recommendations to the Board of Directors for the annualprofit sharing amounts to be paid to our named executive officers, for the Board’s review and approval. Similarly, the Chairman assesses the CEO’scontribution toward meeting the Partnership’s goals based upon the above factors, and recommends to the Board of Directors a bonus for the CEO it believesto be commensurate with such contribution.The Board of Directors retains the ultimate discretion to determine whether the named executive officers will receive annual discretionary bonusesbased upon the factors discussed above.Long-Term Management Incentive Compensation PlanThe long-term compensation structure is intended to align the employee’s performance with the long-term performance of our unitholders. In fiscal2007, following the Partnership’s recapitalization, the Board of Directors adopted the Management Incentive Compensation Plan (the “Plan”) for employeesof the Partnership. Under the Plan, employees who participate shall be entitled to receive a pro rata share of an amount in cash equal to: • 50% of the distributions (“Incentive Distributions”) of Available Cash in excess of the minimum quarterly distribution of $0.0675 per unitotherwise distributable to Kestrel Heat pursuant to the Partnership Agreement on account of its general partner units; 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.The pro rata share payable to each participant under the Plan is based on the number of participation points as described under “Fiscal 2009Compensation Decisions - Long-Term Management Incentive Plan.” The amount paid in Incentive Distributions is governed by the partnership agreementand the calculation of Available Cash. The Partnership was not required under its partnership agreement to make any distributions of available cash untilafter September 30, 2008. Commencing with the fiscal quarter ending December 31, 2008 (the first quarter of fiscal 2009), Available Cash from OperatingSurplus (as defined in our partnership agreement) is distributed to the holders of the Partnership’s common units and general partner units in the followingmanner:First, 100% to all common units, pro rata, until there has been distributed to each common unit an amount equal to the minimum quarterly distributionof $0.0675 for that quarter;Second, 100% to all common units, pro rata, until there has been distributed to each common unit an amount equal to any arrearages in the payment ofthe minimum quarterly distribution for prior quarters (commencing with the quarter ended December 31, 2008);Third, 100% to all general partner units, pro rata, until there has been distributed to each general partner unit an amount equal to the minimumquarterly distribution; 54 Table of ContentsFourth, 90% to all common units, pro rata, and 10% to all general partner units, pro rata, until each common unit has received the first targetdistribution of $0.1125; andFinally, 80% to all common units, pro rata, and 20% to all general partner units, pro rata.Available Cash, as defined in our partnership agreement, generally means all cash on hand at the end of the relevant fiscal quarter less the amount ofcash reserves established by the Board of Directors of our general partner in its reasonable discretion for future cash requirements. These reserves areestablished for the proper conduct of our business, including acquisitions, the payment of debt principal and interest and for distributions during the nextfour quarters and to comply with applicable law and the terms of any debt agreements or other agreements to which we are subject. The Board of Directors ofour general partner reviews the level of Available Cash each quarter based upon information provided by management.To fund the benefits under the Plan, Kestrel Heat has agreed to forego receipt of the amount of Incentive Distributions that are payable to planparticipants. For accounting purposes, amounts payable to management under this Plan will be treated as compensation and will reduce both EBITDA andnet income but not adjusted EBITDA. Kestrel Heat has also agreed to contribute to the Partnership, as a contribution to capital, an amount equal to the GainsInterest payable to participants in the Plan by the Partnership. The Partnership is not required to reimburse Kestrel Heat for amounts payable pursuant to thePlan.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. Determination of the employees that participate in the Plan is under the sole discretion of the Board of Directors. In general, no paymentswill be made under this plan if the Partnership is not distributing cash under the Incentive Distributions described above.The Board of Directors reserves the right to amend, change or terminate the Plan at any time. Without limiting the foregoing, the Board of Directorsreserves the right to adjust the amount of Incentive Distributions to be allocated to the Bonus Pool if in its judgment extenuating circumstances warrantadjustment from the guidelines, and to change the timing of any payments due thereunder at any time in its sole discretion.While certain management employees have already been allocated participation points, the Partnership did not make any Incentive Distributionsduring fiscal 2009 so the plan participants, which include the named executives, did not receive any distributions under this plan during this period. Withregard to the Gains Interest, Kestrel Heat has not given any indication that it will sell its General Partner Units within the next twelve months. Thus the Plan’svalue attributable to the Gains Interest currently cannot be determined.Retirement and Health BenefitsThe Partnership offers a health and welfare and retirement program to all eligible employees. The named executive officers are generally eligible for thesame programs on the same basis as other employees of the Partnership. The Partnership maintains a tax-qualified 401(k) retirement plan that provideseligible employees with an opportunity to save for retirement on a tax advantaged basis. Under the Partnership’s 401(k) plan, subject to IRS limitations, eachparticipant can contribute from 1.0% to 17.0% of compensation. The Partnership makes a 4% (to a maximum of 5.5% for participants who had 10 or moreyears of service at the time the Defined Benefit Plans were frozen and who have reached the age 55) core contribution of a participant’s compensation andmatches 2/3 of each amount a participant contributes up to a maximum of 2.0% of a participant’s compensation, also subject to IRS limitations.In addition, the Partnership has two frozen defined benefit pension plans that were maintained for all its eligible employees, including the namedexecutive officers. The present value of accumulated benefits under these frozen defined benefit pension plans for each named executive officer is providedin the table labeled, Pension Plans Pursuant to Which Named Executive Officers Have an Accumulated Benefit But Are Not Currently Accruing Benefits. 55 Table of ContentsFiscal 2009 Compensation DecisionsFor fiscal 2009, the foregoing elements of compensation were applied as follows:Base SalaryThe following table sets forth each named executive officer’s base salary as of October 1, 2009 and the percentage increase in his base salary overOctober 1, 2008. The base salaries for our named executive officers were determined prior to fiscal 2009, based upon the factors discussed under the caption“Base Salary.” The increases in such base salaries that were granted in fiscal 2009 were generally intended to reflect continued improvement in thePartnership’s operating results. The average percentage increase in base salary for executives in our peer group was 4.1%. Name Salary Percentage Over Prior Year Daniel P. Donovan $391,000 2.1% Richard F. Ambury $306,000 2.0% Steven Goldman $287,000 2.1% Richard G. Oakley $205,600 3.0% Annual Discretionary Profit Sharing AllocationBased on our CEO’s annual performance review and the individual performance of each of our named executive officers, our Board approved theannual profit sharing allocation reflected in the “Summary Compensation Table” and notes thereto. The aggregate profit sharing amounts reflected in theSummary Compensation Table are approximately 88.3% higher than the bonus amounts for fiscal 2008. One of the Partnership’s primary performancemeasure is Adjusted EBITDA. Adjusted EBITDA for fiscal year 2009 increased by $30.3 million or, 54.5%, to $85.8 million. The average percentage increasein EBITDA for companies in our peer group was 13.8%.Long-Term Management Incentive Compensation PlanIn October 2006, the Board awarded 1,000 participation points in the Plan to certain officers, including the following points to the following currentand former named executive officers: Joseph Cavanaugh - 233 1/3, Dan Donovan - 233 1/3, Richard Ambury - 233 1/3, and Steven Goldman - 100.In fiscal year 2007, Mr. Cavanaugh’s points were reallocated upon his retirement as provided for in the Plan and additional participation points weregiven to certain officers, increasing the Plan’s total participation points to 1,025. The named executive officers have participation points in the Plan are asfollows: Dan Donovan - 300, Richard Ambury - 235, Steven Goldman - 150, and Richard Oakley - 30.The participation points were awarded based on the length of service and level of responsibility of the named executive and the Partnership’s desire toretain the named executives, which is in the long-term best interest of the Partnership. In general, the largest awards were granted to the CEO and CFO, whowere the most senior participants in the plan and each of whom had more than 25 years service with the Partnership and lesser awards were granted to theremaining participants, based upon their level of responsibility and length of service, without using a fixed formula to set such awards.In fiscal 2009, no additional participation points were awarded under the Plan and no amounts were paid to the named executive officers.Retirement and Health BenefitsThere were no changes to the retirement and health benefits applicable to the named executive officers in fiscal 2009. 56 Table of ContentsEmployment Contracts and Severance AgreementsAgreement with Daniel P. DonovanThe Partnership entered into an employment agreement with Mr. Donovan effective as of May 31, 2007. Mr. Donovan’s employment agreement has aterm of three-years ending on May 31, 2010, or unless otherwise terminated in accordance with the employment agreement. Mr. Donovan will serve asPresident and Chief Executive Officer of the Partnership and its subsidiaries. The employment agreement provides for one year’s salary as severance ifMr. Donovan’s employment is terminated without cause or by Mr. Donovan for good reason.Agreement with Richard F. AmburyThe Partnership entered into an employment agreement with Mr. Ambury effective as of April 28, 2008. Mr. Ambury will serve as Chief FinancialOfficer and Treasurer of the Partnership and its subsidiaries. The employment agreement provides for one year’s salary as severance if Mr. Ambury’semployment is terminated without cause or by Mr. Ambury for good reason.Agreement with Steven GoldmanEffective May 31, 2007 Steven Goldman was appointed the Senior Vice President of Operations of the Partnership. On December 3, 2007 Mr. Goldmanentered into an employment agreement that provides for one year’s salary as severance if his employment is terminated without cause or by Mr. Goldman forgood reason.Agreement with Richard G. OakleyEffective November 2, 2009, the Partnership entered into an agreement with Mr. Richard G. Oakley pursuant to which Mr. Oakley will continue to beemployed as Vice President—Controller on an at-will basis, and provides for one year’s salary as severance if his employment is terminated for reasons otherthan cause.Change In Control AgreementsOn December 4, 2007, the Board of Directors authorized the Partnership and our general partner to enter into a Change In Control Agreement with thefollowing executive officers: Mr. Donovan, Chief Executive Officer and Mr. Ambury, Chief Financial Officer. Under the terms of each agreement, if the abovementioned executive officer’s employment is terminated as a result of a change in control (as defined in the agreement) that executive officer will be entitledto a payment equal to two times their base annual salary in the year of such termination plus two times the average amount paid as a bonus and/or as profitsharing during the three years preceding the year of such termination. The term change in control means the present equity owners of Kestrel and theiraffiliates collectively cease to beneficially own equity interests having the voting power to elect at least a majority of the members of the board of directors orother governing board of the general partner of the Partnership or any successor entity to the Partnership. If a change in control were to have occurred as ofthe date of this report, Mr. Donovan would have received a payment of $1.7 million and Mr. Ambury would have received a payment of $1.3 million.Indemnification AgreementsWe have entered into an indemnification agreement with each of our directors and senior executives. These agreements provide for us to, among otherthings, indemnify such persons against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expensesincurred as a result of a proceeding as to which they may be indemnified and to cover such person under any directors’ and officers’ liability insurance policywe choose, in our discretion, to maintain. These indemnification agreements are intended to provide indemnification rights to the fullest extent permittedunder applicable indemnification rights statutes in the State of Delaware and are in addition to any other rights such person may have under our partnershipagreement and the operating agreement of our general partner, and applicable law. We believe these indemnification agreements enhance our ability toattract and retain knowledgeable and experienced executives and independent, non-management directors. 57 Table of ContentsBoard of Directors ReportThe Board of Directors of the general partner of the Partnership does not have a separate compensation committee. Executive compensation isdetermined by the Board of Directors. Mr. Donovan is President, Chief Executive Officer and a Director.The Board of Directors reviewed and discussed with the Partnership’s management the Compensation Discussion and Analysis contained in this annualreport on Form 10-K. Based on that review and discussion, the Board of Directors recommends that the Compensation Discussion and Analysis be included inthe Partnership’s annual report on Form 10-K for the year ended September 30, 2009.Paul A. Vermylen, Jr.Daniel P. DonovanHenry D. BabcockC. Scott BaxterBryan H. LawrenceSheldon B. LubarWilliam P. Nicoletti 58 Table of ContentsExecutive Compensation TableThe following table sets forth the annual salary compensation, bonus and all other compensation awards earned and accrued by the named executiveofficers in the fiscal year. Summary Compensation TableName and Principal Position FiscalYear Salary Bonus UnitAwards OptionAwards Non-EquityIncentivePlanComp. Change inPensionValue andNonqualifiedDeferredComp.Earnings(1) All OtherComp.(2) TotalDaniel P. Donovan 2009 $388,333 — — $615,000 $181,947 $38,004 $1,223,284President and Chief Executive Officer 2008 $377,667 — — $330,000 $(33,326) $33,321 $707,662 2007 $325,288 $375,000 — — $6,665 $32,905 $739,858Richard F. Ambury 2009 $302,500 — — $485,000 $64,798 $30,722 $883,020Chief Financial Officer 2008 $292,028 — — $260,000 $(19,423) $27,855 $560,460 2007 $286,333 $286,000 — — $(4,043) $22,624 $590,914Steven J. Goldman 2009 $285,000 — — $337,000 $— $33,404 $655,404Senior Vice President of Operations 2008 $277,000 — — $182,000 $— $30,085 $489,085 2007 $244,561 $200,000 — — $— $29,415 $473,976Richard G. Oakley 2009 $199,600 — — $150,000 $88,066 $29,284 $466,950Vice President - Controller 2008 $195,700 — — $84,000 $(27,678) $26,657 $278,679 2007 $190,000 $96,000 — — $(6,595) $26,703 $306,108 (1)The Partnership has two frozen defined benefit pension plans where participants are not accruing additional benefits. The change in the namedexecutive’s pension values are non-cash, and reflect normal adjustments resulting from changes in discount rates and government mandated mortalitytables.(2)All other compensation is subdivided as follows: Name Company Match andCore Contribution to401 (K) Plan ($) Car Allowance orMonetary Value forPersonal Use ofCompany OwnedVehicle ($) Total ($)Daniel P. Donovan 20,679 17,325 38,004Richard F. Ambury 15,272 15,450 30,722Steven J. Goldman 16,532 16,872 33,404Richard G. Oakley 15,734 13,550 29,284 59 Table of ContentsGrants of Plan-Based AwardsNoneOutstanding Equity Awards at Fiscal Year-EndNoneOption Exercises and Stock VestedNonePension Plans Pursuant to Which Named Executive Officers Have an Accumulated Benefit But Are Not Currently Accruing Benefits Name Plan Name Number of YearsCredited Service Present Value ofAccumulated Benefit Payments DuringLast Fiscal YearDaniel P. Donovan Retirement Plan 21 $705,450 $— Richard F. Ambury Retirement Plan 13 $126,689 $— Supplemental EmployeeRetirement Plan — $24,246 $— Steve Goldman Retirement Plan — $— $— Richard G. Oakley Retirement Plan 19 $189,873 $— Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation PlansNonePotential Payments upon TerminationIf Mr. Donovan’s employment is terminated by the Partnership for reasons other than for cause or if Mr. Donovan terminates his employment for goodreason prior to May 31, 2010, he will be entitled to receive one-year’s salary as severance except in the case of a termination following a change in controlwhich is discussed above under “Change in Control Agreements.” For 12 months following the termination of his employment, Mr. Donovan is prohibitedfrom competing with the Partnership or from becoming involved either as an employee, as a consultant or in any other capacity, in the sale of heating oil orpropane on a retail basis.If Mr. Ambury’s employment is terminated for reasons other than cause or if Mr. Ambury terminates his employment for a good reason, he will beentitled to receive a severance payment of one year’s salary except in the case of a termination following a change in control which is discussed above under“Change in Control Agreements.” For 12 months following the termination of his employment, Mr. Ambury is prohibited from competing with thePartnership or from becoming involved either as an employee, as a consultant or in any other capacity, in the sale of heating oil or propane on a retail basis.If Mr. Goldman’s employment is terminated by the Partnership for reasons other than for cause, or if Mr. Goldman terminates his employment for goodreason, he will be entitled to receive one-years salary as severance. For 12 months following the termination of his employment, Mr. Goldman is prohibitedfrom competing with the Partnership or from becoming involved either as an employee, as a consultant or in any other capacity, in the sale of heating oil orpropane on a retail basis.If Mr. Oakley’s employment is terminated by the Partnership without cause, he will be entitled to receive one-year’s salary as severance. For 12 monthsfollowing the termination of his employment, Mr. Oakley is prohibited from competing with the Partnership or from becoming involved either as anemployee, as a consultant or in any other capacity, in the sale of heating oil or propane on a retail basis. 60 Table of ContentsThe amounts shown in the table below assume that the triggering event for each named executive officer’s termination or change in control paymentwas effective as of the date of this report based upon their historical compensation arrangements as of such date. The actual amounts to be paid out can onlybe determined at the time of such named executive officer’s termination of employment or the Partnerships’ change of control. Name Potential PaymentsUpon Termination Potential PaymentsFollowinga Change of ControlDaniel P. Donovan $391,000 $1,662,000Richard F. Ambury $306,000 $1,299,333Steve Goldman $287,000 $— Richard G. Oakley $205,600 $— The employment agreements of the foregoing officers also require that they not reveal confidential information of the Partnership within twelvemonths following the termination of their employment.Compensation of Directors Director Compensation TableName FeesEarnedor Paidin Cash UnitAwards OptionAwards Non-EquityIncentivePlanCompensation Change inPensionValue andNonqualifiedDeferredCompensationEarnings (6) All OtherCompensation TotalPaul A. Vermylen, Jr. (1) $126,750 — — — $180,121 — $306,871Daniel P. Donovan (2) — — — — — — $— Henry D. Babcock (3) $44,250 — — — — — $44,250C. Scott Baxter (3) $42,750 — — — — — $42,750Bryan H. Lawrence (4) — — — — — — $— Sheldon B. Lubar $30,000 — — — — — $30,000William P. Nicoletti (5) $50,250 — — — — — $50,250 (1)Mr. Vermylen is non-executive Chairman of the Board.(2)Mr. Donovan is a management director and the change in his pension value is already included in the summary compensation table.(3)Mr. Babcock and Mr. Baxter are Audit Committee members.(4)Mr. Lawrence has chosen not to receive any fees as a director of the general partner of the Partnership.(5)Mr. Nicoletti is Chairman of the Audit Committee. 61 Table of Contents(6)Mr. Vermylen had participated in one of the Partnership’s frozen defined benefit pension plans. Participants are currently not accruing additionalbenefits under the frozen plan. The change in the pension value reflects normal non-cash adjustments resulting from changes in discount rates andgovernment mandated mortality tables.Each non-management director receives an annual fee of $27,000 plus $1,500 for each regular meeting attended and $750 for each telephonic meetingattended. 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 regular meeting attended and $750 for every telephonic meeting attended. The non-executive chairman of the Board receives an annual fee of $120,000. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe following table shows the beneficial ownership as of November 30, 2009 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 17.85% 325,729 100.00% Paul A. Vermylen, Jr. 155,000 * Daniel P. Donovan 19,500 * Steven J. Goldman 5,000 * Richard F. Ambury 12,125 * Richard G. Oakley — — Henry D. Babcock 96,121 * C. Scott Baxter 75,000 * Bryan H. Lawrence — — Sheldon B. Lubar — — William P. Nicoletti 35,000 * All officers and directors and Kestrel Heat, LLC as a group (10 persons) 13,200,874 18.41% 325,729 100.00% Bandera Partners LLC (b) 5,020,000 7.00% (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.(b)According to a Schedule 13G/A filed with the SEC on February 13, 2009, Bandera Partners LLC is the investment manager of Bandera Master Fundand may be deemed to have beneficial ownership of the common units.*Amount represents less than 1%. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe Partnership has a written conflict of interest policy and procedure that requires all officers, directors and employees to report to senior corporatemanagement or the board of directors, all personal, financial or family interest in transactions that involve the individual and the Partnership. In addition, thePartnership Governance Guidelines provide that any monetary arrangement between a director and his or her affiliates (including any member of a director’simmediate family) and the Partnership or any of its affiliates for goods or services shall be subject to approval by the full Board of Directors. 62 Table of ContentsThe 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”).Policies Regarding Transactions with Related PersonsOur Code of Business Conduct and Ethics, Partnership Governance Guidelines and Partnership Agreement set forth policies and procedures withrespect to transactions with persons affiliated with the Partnership and the resolution of conflicts of interest, which taken together provide the Partnershipwith a framework for the review and approval of “transactions” with “related persons” as such terms are defined in Item 404 of regulation S-K.For the years ended September 30, 2009, 2008 and 2007, the Partnership had no related party transactions or agreements pursuant to Item 404 ofregulation S-K.Our Code of Business Conduct and Ethics applies to our directors, officers, employees and their affiliates. It deals with conflicts of interest (e.g.,transactions with the Partnership), confidential information, use of Partnership assets, business dealings, and other similar topics. The Code requires officers,directors and employees to avoid even the appearance of a conflict of interest and to report potential conflicts of interest to the Director of Internal Audit.Our Partnership Governance Guidelines provide that any monetary arrangement between a director and his or her affiliates (including any member of adirector’s immediate family) and the Partnership or any of its affiliates for goods or services shall be subject to approval by the full Board of Directors.Although the Partnership Governance Guidelines by their terms only apply to directors the Board intends to apply this requirement to officers and employeesand their affiliates.To the extent that the Board determines that it would be in the best interests of the Partnership to enter into a transaction with a related person, theBoard intends to utilize the procedures set forth in the Partnership Agreement for the review and approval of potential conflicts of interest. Our PartnershipAgreement provides that whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates (including its directors,executive officers and controlling members), on the one hand, and the Partnership or any partner, on the other hand, any resolution or course of action inrespect of such conflict of interest shall be permitted and deemed approved by all partners, and shall not constitute a breach of the Partnership Agreement, ofany agreement contemplated therein, or of any duty stated or implied by law or equity, if the resolution or course of action is, or by operation of thePartnership Agreement is deemed to be, fair and reasonable to the Partnership.Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Partnership if suchconflict of interest or resolution is (i) approved by a committee of independent directors (the “Conflicts Committee”), (ii) on terms no less favorable to thePartnership than those generally being provided to or available from unrelated third parties or (iii) fair to the Partnership, taking into account the totality ofthe relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership).The General Partner (including the Conflicts Committee) is authorized in connection with its determination of what is “fair and reasonable” to thePartnership and in connection with its resolution of any conflict of interest to consider: (A)the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest; (B)any customary or accepted industry practices and any customary or historical dealings with a particular person; (C)any applicable generally accepted accounting practices or principles; and 63, Table of Contents (D)such additional factors as the General Partner (including the Conflicts Committee) determines in its sole discretion to be relevant, reasonable orappropriate under the circumstances. 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 2009 and 2008, and for fees billed and accrued for other services rendered by KPMG LLP (inthousands). 2009 2008Audit Fees $1,510 $1,548Tax Fees 481 263Total Fees $1,991 $1,811 Audit fees were for professional services rendered in connection with audits and quarterly reviews of the consolidated financial statements of thePartnershipTax 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. On June 18, 2003, the Audit Committee adopted its pre-approval policies and procedures. Since that date, there have been no audit or non-audit services rendered by the Partnership’s principal accountants thatwere 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.INDEX TO EXHIBITS ExhibitNumber Incorp byRef. to Exh. Description 3.1 3.1(1) Amended and Restated Certificate of Limited Partnership 4.1 99.1(2) Second Amended and Restated Agreement of Limited Partnership 4.2 99.3(3) Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership 4.3 * Amendment No. 2 to Second Amended and Restated Agreement of Limited Partnership 4.4 99.1(3) Amended and Restated Unit Purchase Rights Agreement dated as of July 20, 2006 4.5 4.4(17) First Amendment to Amended and Restated Unit Purchase Rights Agreement dated as of June 7, 2007 4.6 (21) Second Amendment to Amended and Restated Unit Purchase Rights Agreement dated May 21, 2009.10.1 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.† 64(1)(2)(1)(2) Table of ContentsExhibitNumber Incorp byRef. to Exh. Description10.3 10.1(6) Interest Purchase Agreement for the sale of the propane operations10.4 10.2(6) Non-Competition Agreement with Inergy10.5 99.2(9) Letter Agreement and general release dated March 7, 2005 between Star Gas Partners L.P. and Irik P. Sevin†10.6 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, LLC10.7 99.2(2) Indenture for the new senior notes10.8 99.3(2) Amended and Restated Indenture for the existing senior notes10.9 99.2(3) Management Incentive Compensation Plan†10.10 99.4(3) Form of Indemnification Agreement for Officers and Directors.10.11 (14) Approved Dealer / Contractor Agreement dated as of July 11, 2006 by and between AFC First Financial Corporation and PetroHoldings, Inc.10.12 99.4(13) Form of Amendment No. 1 to Indemnification Agreement.10.13 99.1(16) Employment Agreement between Star Gas Partners, L.P. and Daniel P. Donovan.†10.14 (18) Description of 2008 Profit Sharing Plan.†10.15 (19) Employment Agreement dated December 3, 2007 between Star Gas Partners, L.P. and Steven J. Goldman.†10.16 (19) Change in Control Agreement dated December 4, 2007 between Star Gas Partners, L.P. and Daniel P. Donovan.†10.17 (19) Change in Control Agreement dated December 4, 2007 between Star Gas Partners, L.P. and Richard F. Ambury.†10.18 (20) Employment Agreement dated April 28, 2008 between Star Gas Partners, L.P. and Richard Ambury†10.19 (22) Amended and Restated Credit Agreement dated as of July 2, 2009.10.20 (23) Agreement dated November 2, 2009 between Star Gas Partners, L.P. and Richard G. Oakley.†14 (20) Code of Business Conduct and Ethics21 * Subsidiaries of the Registrant31.1 * 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 of 2002(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 an 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. 65 Table of Contents(6)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated November 18, 2004.(7)Intentionally Omitted.(8)Intentionally Omitted.(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)Intentionally Omitted.(11)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated December 5, 2005.(12)Intentionally Omitted.(13)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated October 19, 2006.(14)Intentionally Omitted.(15)Intentionally Omitted.(16)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated June 1, 2007.(17)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated June 8, 2007.(18)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated October 22, 2007.(19)Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 filed with theCommission on December 7, 2007.(20)Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008 filed with theCommission on December 10, 2008.(21)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated May 21, 2009.(22)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated July 7, 2009.(23)Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated November 3, 2009. 66 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/ Daniel P. Donovan Daniel P. Donovan President and 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/ Daniel P. DonovanDaniel P. Donovan President and Chief Executive Officerand Director Kestrel Heat, LLC December 9, 2009/s/ Richard F. AmburyRichard F. Ambury Chief Financial Officer(Principal Financial Officer)Kestrel Heat, LLC December 9, 2009/s/ Richard G. OakleyRichard G. Oakley Vice President—Controller(Principal Accounting Officer)Kestrel Heat, LLC December 9, 2009/s/ Paul A. Vermylen, Jr.Paul A. Vermylen, Jr. Non-Executive Chairman of the Boardand Director Kestrel Heat, LLC December 9, 2009/s/ Henry D. BabcockHenry D. Babcock DirectorKestrel Heat, LLC December 9, 2009/s/ C. Scott BaxterC. Scott Baxter DirectorKestrel Heat, LLC December 9, 2009/s/ Bryan H. LawrenceBryan H. Lawrence DirectorKestrel Heat, LLC December 9, 2009/s/ Sheldon B. LubarSheldon B. Lubar DirectorKestrel Heat, LLC December 9, 2009/s/ William P. NicolettiWilliam P. Nicoletti DirectorKestrel Heat, LLC December 9, 2009 67 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/ Daniel P. Donovan Daniel P. Donovan President and 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/ Daniel P. DonovanDaniel P. Donovan President, Chief Executive Officer andDirector(Principal Executive Officer)Star Gas Finance Company December 9, 2009/s/ RICHARD F. AMBURYRichard F. Ambury Chief Financial Officer(Principal Financial Officer)Star Gas Finance Company December 9, 2009/s/ RICHARD G. OAKLEYRichard G. Oakley Vice President—Controller(Principal Accounting Officer)Star Gas Finance Company December 9, 2009 68 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL STATEMENT SCHEDULE PagePart II Financial Information: Item 8—Financial Statements Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of September 30, 2009 and September 30, 2008 F-3 Consolidated Statements of Operations for the years ended September 30, 2009, September 30, 2008 and September 30, 2007 F-4 Consolidated Statements of Partners’ Capital and Comprehensive Income (Loss) for the years ended September 30, 2009, September 30,2008 and September 30, 2007 F-5 Consolidated Statements of Cash Flows for the years ended September 30, 2009, September 30, 2008 and September 30, 2007 F-6 Notes to Consolidated Financial Statements F-7 – F-27 Schedules for the years ended September 30, 2009, September 30, 2008 and September 30, 2007 I. Condensed Financial Information of Registrant F-28 – F-30 II. Valuation and Qualifying Accounts F-31 All 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 ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Partners of Star Gas Partners, L.P.:We have audited the accompanying consolidated balance sheets of Star Gas Partners, L.P. and Subsidiaries (the “Partnership”) as of September 30,2009 and 2008, and the related consolidated statements of operations, partners’ capital and comprehensive income (loss), and cash flows for each of the yearsin the three-year period ended September 30, 2009. In connection with our audits of the consolidated financial statements, we have also audited the financialstatement schedules I and II listed in the accompanying index. We also have audited the Partnership’s internal control over financial reporting as ofSeptember 30, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Partnership’s management is responsible for these consolidated financial statements, the financial statement schedules,for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedules and an opinion on the Partnership’s internal control over financial reporting based onour 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statementsincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.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.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, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year periodended September 30, 2009 in conformity with U.S. generally accepted accounting principles. In addition, in our opinion, the related financial statementschedules I and II listed in the accompanying index, when considered in relation to the basic consolidated financial statements taken as a whole, presentfairly, in all material respects, the information set forth therein. Also in our opinion, Star Gas Partners, L.P. and Subsidiaries maintained, in all materialrespects, effective internal control over financial reporting as of September 30, 2009, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission.KPMG LLPStamford, ConnecticutDecember 9, 2009 F-2 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS Years Ended September 30, (in thousands) 2009 2008 ASSETS Current assets Cash and cash equivalents $195,160 $178,808 Receivables, net of allowance of $6,267 and $10,821, respectively 58,854 95,691 Inventories 62,636 44,759 Fair asset value of derivative instruments 14,676 7,452 Current deferred tax asset, net 30,135 — Prepaid expenses and other current assets 15,437 17,589 Total current assets 376,898 344,299 Property and equipment, net 37,494 38,829 Long-term portion of accounts receivables 504 634 Goodwill 182,942 182,011 Intangibles, net 20,468 30,861 Long-term deferred tax asset, net 36,265 — Deferred charges and other assets, net 9,555 8,799 Total assets $664,126 $605,433 LIABILITIES AND PARTNERS’ CAPITAL Current liabilities Accounts payable $17,103 $16,887 Fair liability value of derivative instruments 665 7,188 Accrued expenses and other current liabilities 64,446 64,670 Unearned service contract revenue 37,121 39,085 Customer credit balances 74,153 85,408 Total current liabilities 193,488 213,238 Long-term debt 133,112 173,752 Other long-term liabilities 31,192 18,466 Partners’ capital Common unitholders 332,340 219,544 General partner 309 (186) Accumulated other comprehensive income (loss), net of taxes (26,315) (19,381) Total partners’ capital 306,334 199,977 Total liabilities and partners’ capital $664,126 $605,433 See accompanying notes to consolidated financial statements. F-3 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS Years Ended September 30, (in thousands, except per unit data) 2009 2008 2007 Sales: Product $1,032,812 $1,353,950 $1,088,610 Installations and service 174,001 189,143 178,565 Total sales 1,206,813 1,543,093 1,267,175 Cost and expenses: Cost of product 708,185 1,081,833 805,441 Cost of installations and service 167,570 175,759 176,118 (Increase) decrease in the fair value of derivative instruments (13,690) 25,467 (15,664) Delivery and branch expenses 222,740 211,868 197,513 Depreciation and amortization expenses 19,406 26,784 28,995 General and administrative expenses 22,480 18,077 19,661 Operating income 80,122 3,305 55,111 Interest expense (17,842) (20,691) (20,448) Interest income 4,205 6,883 8,923 Amortization of debt issuance costs (2,750) (2,339) (2,282) Gain on redemption of debt 9,706 — — Income (loss) from continuing operations before income taxes 73,441 (12,842) 41,304 Income tax expense (benefit) (57,597) 566 2,002 Income (loss) from continuing operations 131,038 (13,408) 39,302 Loss on sale of discontinued operations, net of income taxes — — (1,061) Net income (loss) $131,038 $(13,408) $38,241 General Partner’s interest in net income (loss) 561 (57) 164 Limited Partners’ interest in net income (loss) $130,477 $(13,351) $38,077 Basic and diluted income (loss) per Limited Partner Unit (1): Continuing operations $1.43 $(0.18) $0.51 Net income (loss) $1.43 $(0.18) $0.50 Weighted average number of Limited Partner units outstanding: Basic 75,738 75,774 75,774 Diluted 75,738 75,774 75,774 (1)See Note 19 Earnings Per Limited Partner Units.See accompanying notes to consolidated financial statements. F-4 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL AND COMPREHENSIVE INCOME (LOSS)Years Ended September 30, 2009, 2008 and 2007 Number of Units (in thousands) Common GeneralPartner Common GeneralPartner Accum. OtherComprehensiveIncome (Loss) TotalPartners’Capital Balance as of September 30, 2006 75,774 326 $194,818 $(293) $(21,200) $173,325 Net income 38,077 164 — 38,241 Unrealized gain on pension plan obligation — — 4,765 4,765 Total comprehensive income — — 38,077 164 4,765 43,006 Balance as of September 30, 2007 75,774 326 232,895 (129) (16,435) 216,331 Net loss (13,351) (57) — (13,408) Unrealized loss on pension plan obligation — — (2,946) (2,946) Total comprehensive loss — — (13,351) (57) (2,946) (16,354) Balance as of September 30, 2008 75,774 326 219,544 (186) (19,381) 199,977 Net income 130,477 561 — 131,038 Unrealized loss on pension plan obligation — — (11,854) (11,854) Tax affect of unrealized loss on pension plan obligation — — 4,920 4,920 Total comprehensive income — — 130,477 561 (6,934) 124,104 Distributions (15,345) (66) — (15,411) Retirement of units (1) (637) — (2,336) — — (2,336) Balance as of September 30, 2009 75,137 326 $332,340 $309 $(26,315) $306,334 (1)See Note 2—Common Unit Repurchase and Retirement. F-5 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended September 30, (in thousands) 2009 2008 2007 Cash flows provided by (used in) operating activities: Net income (loss) $131,038 $(13,408) $38,241 Loss on sale of discontinued operations — — 1,061 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: (Increase) decrease in fair value of derivative instruments (13,690) 25,467 (15,664) Depreciation and amortization 22,157 29,123 31,277 Gain on redemption of debt (9,706) — — Provision for losses on accounts receivable 10,310 11,961 5,726 Change in deferred taxes (61,355) — — Changes in operating assets and liabilities net of amounts related to acquisitions: (Increase) decrease in receivables 26,657 (28,002) 5,761 (Increase) decrease in inventories (17,747) 41,368 (8,222) (Increase) decrease in other assets 4,230 (8,797) 5,206 Increase (decrease) in accounts payable 216 (1,937) (2,747) Increase (decrease) in customer credit balances (11,964) 13,390 (3,724) Increase (decrease) in other current and long-term liabilities (1,691) 2,390 (5,800) Net cash provided by operating activities 78,455 71,555 51,115 Cash flows provided by (used in) investing activities: Capital expenditures (4,334) (4,145) (4,850) Proceeds from sales of fixed assets 159 533 1,948 Acquisitions (3,393) (1,876) (26,352) Net cash used in investing activities (7,568) (5,488) (29,254) Cash flows provided by (used in) financing activities: Revolving credit facility borrowings — 57,161 — Revolving credit facility repayments — (57,161) — Repayment of debt (30,230) (96) Distributions (15,411) — — Unit repurchase (2,336) — — Increase in deferred charges (6,558) (145) — Net cash used in financing activities (54,535) (145) (96) Net increase (decrease) in cash 16,352 65,922 21,765 Cash and equivalent at beginning of period 178,808 112,886 91,121 Cash and equivalent at end of period $195,160 $178,808 $112,886 See accompanying notes to consolidated financial statements. F-6 Table of ContentsSTAR GAS PARTNERS, L.P. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1) Partnership OrganizationStar Gas Partners, L.P. (“Star Gas Partners,” the “Partnership,” “we,” “us,” or “our”) is a home heating oil distributor and services provider with onereportable operating segment that principally provides services to residential and commercial customers to heat their homes and buildings. Star Gas Partnersis a master limited partnership, which at September 30, 2009, had outstanding 75.1 million common units (NYSE: “SGU”) representing 99.6% limited partnerinterest in Star Gas Partners, and 0.3 million general partner units, representing 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. and its subsidiaries (“Petro”). Petro is a Minnesota corporation that is anindirect wholly-owned subsidiary of the Partnership. Petro is a Northeast and Mid-Atlantic region retail distributor of home heating oil that atSeptember 30, 2009 served approximately 374,000 full-service residential and commercial home heating oil customers, and 7,000 propanecustomers. Petro also sold home heating oil, gasoline and diesel fuel to approximately 34,000 customers on a delivery only basis. In addition,Petro installed, maintained, and repaired heating and air conditioning equipment for its customers, and provided ancillary home services,including home security and plumbing, to approximately 11,000 customers. • Star Gas Finance Company is a 100% owned subsidiary of the Partnership. Star Gas Finance Company serves as the co-issuer, jointly andseverally with the Partnership, of the Partnership’s $133.1 million 10.25% Senior Notes, which are due in 2013. The Partnership is dependent ondistributions including inter-company 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. (See Note 11—Long-Term Debt and Bank Facility Borrowings)2) Common Unit Repurchase and RetirementOn July 21, 2009, the Board of Directors of the Partnership’s General Partner authorized the repurchase of up to 7.5 million of the Partnership’scommon units. The authorized common unit repurchases may be made from time-to-time in the open market, in privately negotiated transactions or in suchother manner deemed appropriate by management. The program does not have a time limit. The Partnership’s repurchase activities take into account SEC safeharbor rules and guidance for issuer repurchases. All of the common units purchased in the repurchase program will be retired.(in thousands, except per unit amounts) Period Total Number of UnitsPurchased as Part of aPublicly Announced Plan orProgram Average PricePaid per Unit Maximum Number (orapproximate Dollar Value)of Units that May Yet BePurchased Under the Plansor ProgramsJuly 2009 — $— 7,500August 2009 160 $3.59 7,340September 2009 477 $3.69 6,863Fiscal year 2009 total 637 $3.67 6,863 F-7 Table of Contents3) 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.ReclassificationCertain 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.Cost of ProductCost of product includes the cost of heating oil, diesel, kerosene, heavy oil, gasoline, throughput costs, barging costs, option costs, and realizedgains/losses on closed derivative positions for product sales.Cost of Installations and ServiceCost of installations and service includes equipment and material costs, wages and benefits for equipment technicians, dispatchers and other supportpersonnel, subcontractor expenses, commissions and vehicle related costs.Delivery and Branch ExpensesDelivery and branch expenses include wages and benefits and department related costs for drivers, dispatchers, mechanics, customer service, sales andmarketing, compliance, credit and branch accounting, information technology and operational support.General and Administrative ExpensesGeneral and administrative expenses include wages and benefits and department related costs for human resources, finance and accounting,administrative support and insurance.Allowance for Doubtful AccountsThe Partnership periodically reviews past due customer accounts receivable balances. After giving consideration to economic conditions, overduestatus and other factors, it establishes an allowance for doubtful accounts, representing the Partnership’s best estimate of amounts that may not be collectible.Allocation of Net Income (Loss)Net income (loss) for partners’ capital and statement of operations is allocated to the general partner and the limited partners in accordance with theirrespective ownership percentages, after giving effect to cash distributions paid to the general partner in excess of its ownership interest, if any. F-8 Table of ContentsNet Income (Loss) per Limited Partner UnitIncome per limited partner unit is computed in accordance with FASB ASC 260-10-05 Earnings Per Share topic, Master Limited Partnerships subtopic(EITF 03-6), by dividing the limited partners’ interest in net income by the weighted average number of limited partner units outstanding. The pro formanature of the allocation required by this standard provides that in any accounting period where the Partnership’s aggregate net income exceeds its aggregatedistribution for such period, the Partnership is required to present net income per limited partner unit as if all of the earnings for the periods were distributed,regardless of whether those earnings would actually be distributed during a particular period from an economic or practical perspective. This allocation doesnot impact the Partnership’s overall net income or other financial results. However, for periods in which the Partnership’s aggregate net income exceeds itsaggregate distributions for such period, it will have the impact of reducing the earnings per limited partner unit, as the calculation according to this standardresults in a theoretical increased allocation of undistributed earnings to the general partner. In accounting periods where aggregate net income does notexceed aggregate distributions for such period, this standard does not have any impact on the Partnership’s net income per limited partner unit calculation. Aseparate and independent calculation for each quarter and year-to-date period is required.Until the quarter ended March 31, 2009, either the partners had no rights to accrue or receive distributions, or the earnings of the period did not exceedthe aggregate distributions.Cash EquivalentsThe Partnership considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents.InventoriesHeating oil and other fuels inventory are stated at the lower of cost or market using the weighted average cost method of accounting. All otherinventories, representing parts and equipment are stated at the lower of cost or market using the FIFO method.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.Goodwill 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 FASB ASC 350-10-05 Intangibles-Goodwill and Other topic (SFAS No. 142), goodwill and intangible assets with indefinite useful lives are not amortized, but instead are annually tested forimpairment. Also in accordance with this standard, intangible assets with definite useful lives are amortized over their respective estimated useful lives totheir estimated residual values, and reviewed for impairment. The Partnership performs its annual impairment review during its fiscal fourth quarter or morefrequently if events or circumstances indicate that the value of goodwill might be impaired. Customer lists are the names and addresses of an acquiredcompany’s customers. Based on historical retention experience, these lists are amortized on a straight-line basis over seven to ten years.Trade names are the names of acquired companies. Based on the economic benefit expected and historical retention experience of customers, tradenames are amortized on a straight-line basis over seven to ten years.Covenants not to compete are agreements with the owners of acquired companies and are amortized over the respective lives of the covenants on astraight-line basis, which are generally five years.Impairment of Long-lived AssetsThe Partnership reviews intangible assets and other long-lived assets in accordance with FASB ASC 360-10-05-4 Property Plant and Equipment topic,Impairment or Disposal of Long-Lived Assets subsection (SFAS No. 144), for impairment whenever events or changes in circumstances indicate that thecarrying amount of such assets may not be recoverable. The Partnership determines whether the carrying values of such assets are recoverable over theirremaining estimated lives through undiscounted future cash flow analysis. If such a review should indicate that the carrying amount of the assets is notrecoverable, the Partnership will reduce the carrying amount of such assets to fair value. F-9 Table of ContentsDeferred 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 $8.4 million, $7.2 million, and $7.1 million in 2009, 2008, and 2007,respectively and are recorded in delivery and branch expenses.Customer Credit BalancesCustomer credit balances represent payments received in advance from customers pursuant to a balanced payment plan (whereby customers pay on afixed 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.Income 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, income andlosses of the Partnership are allocated directly to the individual partners. While the Partnership will generate non-qualifying Master Limited Partnershiprevenue, distributions from the corporate subsidiaries to the Partnership are generally included in the determination of qualified Master Limited Partnershipincome. All or a portion of the distributions received by the Partnership from the corporate subsidiaries could be 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 Federal and Stateincome tax returns on a calendar year.As most of the Partnership’s income is derived from its corporate subsidiaries, these financial statements reflect significant federal and state incometaxes. 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. A valuation allowance is recognized if, based on the weight of available evidenceincluding historical tax losses, it is more likely than not that some or all of deferred tax assets will not be realized.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 HedgingFASB ASC 815-10-05 Derivatives and Hedging topic (FAS 133) established accounting and reporting standards requiring that derivative instrumentsbe recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent derivative instruments designated as cash flowhedges are effective and the standard’s documentation requirements have been met, changes in fair value are recognized in other comprehensive income untilthe underlying hedged item is recognized in earnings. Currently, the Partnership has elected not to designate its derivative instruments as hedginginstruments under this standard, and the change in fair value of the derivative instruments are recognized in our statement of operations. F-10 Table of ContentsWeather Hedge ContractWeather hedge contract is recorded in accordance with the intrinsic value method defined by FASB ASC 815-45-15 Derivatives and Hedging topic,Weather Derivatives subtopic (EITF 99-2). The premium paid is amortized over the life of the contract and the intrinsic value method is applied at eachinterim period.Recent Accounting PronouncementsIn the first quarter of fiscal 2009, the Partnership adopted the provisions of FASB ASC 820-10 Fair Value Measurements and Disclosure topic (SFASNo. 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements.In the second quarter of fiscal 2009, the Partnership adopted the provisions of FASB ASC 815-10-50 Derivatives and Hedging topic, Disclosuresubtopic (SFAS No. 161) which amends and expands the disclosure requirements of FASB ASC 815-10-05 Derivatives and Hedging topic (SFAS No. 133).This standard also established qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amountsof gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.In the third quarter of fiscal 2009, the Partnership adopted the provisions of FASB ASC 855-10 Subsequent Events topic (SFAS No. 165). This standardestablished disclosures, principles and requirements for events that occur after the balance sheet date but before financial statements are issued.In December 2007, the FASB issued a revision to FASB ASC 805-10 Business Combinations (SFAS No. 141R). This standard establishes in a businesscombination principles and requirements for how an acquirer recognizes and measures identifiable assets acquired, goodwill acquired, liabilities assumed,and any noncontrolling interests. It is effective in fiscal years beginning after December 15, 2008. The Partnership is required to adopt this standard in fiscal2010. The Partnership is currently assessing its impact.4) Discontinued OperationsIn the fourth quarter of fiscal year 2007, the Partnership recorded an approximate $1.1 million expense to satisfy a notice received in connection withits propane operations sold to Inergy in fiscal year 2005.5) Quarterly Distribution of Available CashPartnership 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) in accordance with the Partnership agreement. There will be no distributions of available cash by us before February 2009. Thereafter, ingeneral, the Partnership intends to distribute to its partners on a quarterly basis, all of its available cash, if any, in the manner described below. “Availablecash” generally means, for any of its fiscal quarters, all cash on hand at the end of that quarter, less the amount of cash reserves that are necessary orappropriate in the reasonable discretion of the general partners to: • provide for the proper conduct of the Partnership’s business including acquisitions and debt payments; • 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), until thePartnership 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. F-11 Table of ContentsThe revolving credit facility and the indenture for the 10.25% Senior Notes both impose certain restrictions on the Partnership’s ability to paydistributions to unitholders. The most restrictive covenant is found in the Partnership’s revolving credit facility. Under the terms of our credit facility, thePartnership must have a fixed charge coverage ratio of 1.15x to pay the minimum quarterly distribution of $0.0675. Any distribution in excess of theminimum quarterly distribution requires the Partnership to have a fixed charge coverage ratio of 1.25x.6) Derivatives and Hedging—Disclosures and Fair Value MeasurementsThe Partnership uses derivative instruments such as futures, options, and swap agreements, in order to mitigate exposure to market risk associated withthe purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit and priced purchase commitments.To hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers as ofSeptember 30, 2009, the Partnership had 4.3 million gallons of swap contracts to buy heating oil with a notional value of $7.8 million and a fair value of $0.5million; 0.1 million gallons of futures contracts to buy heating oil with a notional value of $0.1 million and a fair value of $0.02 million; 0.3 million gallonsof futures contracts to sell heating oil with a notional value of $0.4 million and a fair value of $(0.1) million; 85.0 million gallons of call options with anotional value of $176.3 million and a fair value of $16.5 million; 3.2 million gallons of put options with a notional value of $3.3 million and a fair value of$0.01 million and synthetic calls (a swap combined with two offsetting puts at different prices) of 12.1 million net gallons with a contract notional value of$22.4 million, and a combined net fair value of $1.8 million. As of September 30, 2008, the Partnership had 37.6 million gallons of swap contracts to buyheating oil with a notional value of $121.8 million and a fair value of $(10.8) million; 55.8 million gallons of call options with a notional value of $185.9million and a fair value of $14.0 million; 3.4 million gallons of put options with a notional value of $9.9 million and a fair value of $1.2 million andsynthetic calls of 24.9 million net gallons with a contract notional value of $88.3 million, and a combined net fair value of $0.5 million.To hedge the inter-month differentials for our price protected customers, its physical inventory on hand, and inventory in transit, the Partnership atSeptember 30, 2009 had 6.2 million gallons of future contracts to buy heating oil with a notional value of $16.5 million and a fair value of $(4.0) million;12.5 million gallons of future contracts to sell heating oil with a notional value of $28.1 million and a fair value of $4.1 million; and 22.3 million gallons ofswap contracts to sell heating oil with a notional value of $36.7 million and a fair value of $(5.4) million. At September 30, 2008, the Partnership had10.8 million gallons of future contracts to buy heating oil with a notional value of $36.6 million and a fair value of $(4.3) million; 16.8 million gallons offuture contracts to sell heating oil with a notional value of $52.9 million and a fair value of $3.4 million; and 1.5 million gallons of swap contracts to sellheating oil with a notional value of $4.3 million and a fair value of $0.04 million.To hedge its internal fuel usage the Partnership at September 30, 2009, 1.5 million gallons of swap contracts to buy gasoline with a notional value of$2.1 million and a fair value of $0.7 million and 1.5 million gallons of swap contracts to buy diesel with a notional value of $2.4 million and a fair value of$0.4 million. At September 30, 2008, the Partnership had 1.8 million gallons of future contracts to buy gasoline with a notional value of $5.7 million and afair value of $(1.0) million.The majority of these derivative contracts have a maturity of less than one year. Approximately four million gallons of call options used to hedge thepurchase price associated with heating oil gallons anticipated to be sold expire in fiscal 2011.The Partnership’s derivative instruments are with the following counterparties: Newedge USA, LLC, Cargill, Inc., Key Bank National Association,JPMorgan Chase Bank, NA, Wachovia Bank, NA, Societe Generale, Bank of America, N.A., and RBS Sempra. At September 30, 2009, the Partnership did nothave cash posted as collateral at a counterparty.FASB ASC 815-10-05 Derivatives and Hedging topic (SFAS 133), established accounting and reporting standards requiring that derivative instrumentsbe recorded at fair value and included in the consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivativeactivity. To the extent derivative instruments designated as cash flow hedges are effective and the standard’s documentation requirements have been met,changes in fair value are recognized in other comprehensive income until the underlying hedged item is recognized in earnings. Currently, the Partnershiphas elected not to designate its derivative instruments as hedging instruments under this standard and the change in fair value of the derivative instrumentsare recognized in our statement of operations in the line item (increase) decrease in the fair value of derivative instruments. Realized gains and losses arerecorded in cost of product. F-12 Table of ContentsFASB ASC 820-10 Fair Value Measurements and Disclosures topic (SFAS 157), established a three-tier fair value hierarchy, which classified the inputsused in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservableinputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.The Partnership’s financial assets and liabilities measured at fair value on a recurring basis are listed on the following table. The Partnership had noassets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. All derivative instruments were non-tradingpositions. The market prices used to value the Partnership’s derivatives have been determined using the New York Mercantile Exchange (“NYMEX”) andindependent third party prices. (In thousands) Fair Value Measurements at Reporting Date Using:Derivatives Not Designated as HedgingInstruments Under FASB ASC 815-10 atSeptember 30, 2009 Balance Sheet Location Total Quoted Prices inActive Markets forIdentical AssetsLevel 1 Significant OtherObservable InputsLevel 2 SignificantUnobservableInputsLevel 3Asset Derivatives Commodity contracts Fair asset and fair liability valueof derivative instruments $23,867 $3,875 $19,992 $— Commodity contracts Long-term derivative assetsincluded in the deferredcharges and other assets, netbalance 389 133 256 Commodity contract assets $24,256 $4,008 $20,248 $— Liability Derivatives Commodity contracts Fair liability and fair asset valueof derivative instruments $(9,856) $(3,986) $(5,870) $— Commodity contract liabilities $(9,856) $(3,986) $(5,870) $— (In thousands) The Effect of Derivative Instruments on the Statement of Operations Amount of Gain or (Loss) Recognizedin Income on Derivative Derivatives Not Designated as HedgingInstruments Under FASB ASC 815-10 Location of Gain or (Loss)Recognized in Income on Derivative Twelve Months EndedSeptember 30, 2009 Twelve Months EndedSeptember 30, 2008 Twelve Months EndedSeptember 30, 2007 Commodity contracts Cost of product (a) $(79,846) $10,591 $(26,691) Commodity contracts Increase/(decrease) in the fairvalue of derivative instruments $13,690 $(25,467) $15,664 (a)Represents realized closed positions and includes the cost of options as they expire. F-13 Table of Contents7) InventoriesThe Partnership’s inventories of heating oil and other fuels are stated at the lower of cost or market computed on the weighted average cost method. Allother inventories, representing parts and equipment are stated at the lower of cost or market using the FIFO method. The components of inventory were asfollows (in thousands): September 30, 2009 2008Heating oil and other fuels $48,504 $30,208Fuel oil parts and equipment 14,132 14,551 $62,636 $44,759Heating oil and other fuel inventories were comprised of 28.5 million gallons and 8.9 million gallons on September 30, 2009 and September 30, 2008,respectively. The Partnership has market price based product supply contracts for approximately 214 million home heating oil gallons, that it expects to fullyutilize to meet its requirements over the next twelve months.During fiscal 2009, Sunoco Inc., Global Companies, and NIC Holding Corp. (Northville Industries) provided 15.1%, 13.5% and 8.7% respectively, ofour product purchases. During fiscal year 2008, Global Companies, Sunoco Inc., and NIC Holding Corp. provided 15.6%, 15.2% and 15% respectively, of ourproduct purchases.8) 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 2009 2008 Land and land improvements $11,261 $10,906 Land improvements - 30 yearsBuildings and leasehold improvements 24,319 23,643 1 -40 yearsFleet and other equipment 38,444 37,288 1 -16 yearsTanks and equipment 9,920 9,486 8 -35 yearsFurniture, fixtures and office equipment 51,325 49,593 3 -12 yearsTotal 135,269 130,916 Less accumulated depreciation 97,775 92,087 Property and equipment, net $37,494 $38,829 Depreciation expense was $6.2 million, $7.2 million, and $8.2 million, for the fiscal years ended September 30, 2009, 2008, and 2007 respectively.9) Goodwill and Other Intangible AssetsGoodwillUnder FASB ASC 350-10-05 Intangibles-Goodwill and Other topic (SFAS No. 142), goodwill impairment is deemed to exist if the net book value of areporting unit exceeds its estimated fair value. If goodwill of a reporting unit is determined to be impaired, the amount of impairment is measured based onthe excess of the net book value of the goodwill over the implied fair value of the goodwill.The Partnership has selected August 31 of each year to perform its annual impairment review under this standard. The evaluations utilize an IncomeApproach and Market Approach (consisting of the Market Comparable and the Market Transaction Approach), which contain reasonable and supportableassumptions and projections reflecting management’s best estimate in deriving the Partnership’s total enterprise value. The Income Approach calculates overa discrete period the free cash flow generated by the Partnership to determine the enterprise value. The Market Comparable approach compares thePartnership to comparable companies in similar industries to determine the enterprise value. The Market Transaction approach uses exchange prices in actualsales and purchases of comparable businesses to determine the enterprise value. F-14 Table of ContentsThe total enterprise value as indicated by these two approaches is compared to the Partnership’s book value of net assets and reviewed in light of thePartnership’s market capitalization.The Partnership performed its annual goodwill impairment valuation in each of the periods ending August 31, 2009, 2008, and 2007, and it wasdetermined based on each year’s analysis that there was no goodwill impairment.The preparation of this analysis was based upon management’s estimates and assumptions, and future impairment calculations would be affected byactual results that are materially different from projected amounts. To provide for a sensitivity of the discount rates and transaction multiples used, ranges ofhigh and low values are employed in the analysis, with the low values examined to ensure that a reasonably likely change in an assumption would not causethe Partnership to reach a different conclusion.A summary of changes in the Partnership’s goodwill during the fiscal years ended September 30, 2009 and 2008 are as follows (in thousands): Balance as of September 30, 2007 $181,496Fiscal year 2008 activity (Acquisitions see Note 12) 515Balance as of September 30, 2008 182,011Fiscal year 2009 activity (Acquisitions see Note 12) 931Balance as of September 30, 2009 $182,942Intangibles, netIntangible assets subject to amortization consist of the following (in thousands): September 30, 2009 September 30, 2008 GrossCarryingAmount Accum.Amortization Net GrossCarryingAmount Accum.Amortization NetCustomer lists and other intangibles $204,426 $183,958 $20,468 $201,865 $171,004 $30,861Amortization expense for intangible assets and deferred charges was $13.2 million, $19.6 million, and $20.8 million, for the fiscal years endedSeptember 30, 2009, 2008, and 2007, respectively. Total estimated annual amortization expense related to intangible assets subject to amortization, for theyear ended September 30, 2010 and the four succeeding fiscal years ended September 30, is as follows (in thousands): Amount2010 $7,8202011 $5,7692012 $1,4022013 $1,4002014 $1,324 F-15 Table of Contents10) Accrued Expenses and Other Current LiabilitiesThe components of accrued expenses and other current liabilities were as follows (in thousands): September 30, 2009 2008Accrued wages and benefits $17,043 $14,527Accrued workers’ compensation, general liability and auto claims 34,777 38,790Other accrued expenses and other current liabilities 12,626 11,353 $64,446 $64,67011) Long-Term Debt and Bank Facility BorrowingsThe Partnership’s long-term debt at September 30, 2009 and 2008 is as follows (in thousands): September 30, 2009 200810.25% Senior Notes (a) $133,112 $173,752Revolving Credit Facility Borrowings (b) — — Total debt $133,112 $173,752Total long-term portion debt $133,112 $173,752 (a) These notes mature in February 2013 and accrue interest at an annual rate of 10.25% requiring semi-annual interest payments on February 15 andAugust 15 of each year. The net premium on these notes were $0.6 million and $1.0 million at September 30, 2009 and 2008 respectively. These notesare redeemable at the option of the Partnership, in whole or in part, from time to time by payment of a premium. Under the terms of the indenture datedas of April 28, 2006, these notes permit restricted payments of $22 million, allow the Partnership to make acquisitions of up to $60 million withoutpassing certain financial tests, and restrict the proceeds of asset sales from being invested in current assets for purposes of the “asset sale” covenant.In fiscal year September 30, 2009, the Partnership repurchased in total $40.3 million (face value) of these notes and recorded a total gain of $9.7million. (b) In July 2009, the Partnership entered into an amended and restated asset based revolving credit facility agreement with a bank syndicationcomprised of nine banks. This amended facility, that extends to July 2012, provides the Partnership with the ability to borrow up to $240 million($290 million during the heating season from November to April each year) for working capital purposes (subject to certain borrowing base limitationsand coverage ratios), including the issuance of up to $100 million in letters of credit. The Partnership can increase the facility size by $50 millionwithout the consent of the bank group. The bank group is not obligated to fund the $50 million increase. If the bank group elects not to fund theincrease, the Partnership can add additional lenders to the group, with the consent of the Agent, which shall not be unreasonably withheld. The interestrate is LIBOR plus; 3.50% (if availability, as defined in the revolving credit facility agreement is greater than or equal to $150 million), or 3.75% (ifavailability is greater than $75 million but less than $150 million), or 4.00% (if availability is less than or equal to $75 million). The unusedcommitment fee is 0.75%At September 30, 2009 and 2008, no amount was outstanding under the revolving credit facility and $40.9 million and $56.1 million of lettersof credit were issued, respectively.Obligations under the revolving credit facility are secured by liens on substantially all assets and are guaranteed by the Partnership. Therevolving credit facility imposes certain restrictions on the Partnership, including restrictions on its ability to incur additional indebtedness, to paydistributions to its unitholders, to pay inter-company dividends or distributions, make investments, grant liens, sell assets, make acquisitions andengage in certain other activities. The revolving credit facility also requires the Partnership to maintain certain financial ratios, and contains borrowingconditions and customary events of default, including nonpayment of principal or interest, violation of covenants, inaccuracy of representations andwarranties, cross-defaults to other indebtedness, bankruptcy and other insolvency events. The occurrence of an F-16 Table of Contentsevent of default or an acceleration under the revolving credit facility would result in the Partnership’s inability to obtain further borrowings under thatfacility, which could adversely affect its results of operations. Such a default may also restrict the ability of the Partnership to obtain funds from itssubsidiaries in order to pay interest or paydown debt. An acceleration under the revolving credit facility would result in a default under thePartnership’s other funded debt.Under the terms of the revolving credit facility, the Partnership must maintain at all times either availability (borrowing base less amountsborrowed and letters of credit issued) of $43.5 million or a fixed charge coverage ratio (as defined in the credit agreement) of not less than 1.10x. Inaddition, the Partnership must maintain a fixed charge coverage ratio of 1.15x in order to make its minimum quarterly distributions of $0.0675 per unit,and 1.25x to make any distributions in excess of the minimum quarterly distributions. No inter-company dividends or distributions can be made(including those needed to pay interest or principle on the 10.25% Senior Notes) if the relevant covenant described above has not been met.As of September 30, 2009, availability was $194.4 million, the fixed charge coverage ratio was 2.4 and the restricted net assets totaledapproximately $432 million. Restricted net assets are assets of the Partnership in its subsidiaries that any distribution or transfer of which to Star GasPartners, L.P. from the subsidiary, are subject to limitations under its revolving credit facility. As of September 30, 2008, availability was $171.7million and the restricted net assets totaled approximately $365 million.As of September 30, 2009, the maturities including working capital borrowings during fiscal years ending September 30, are set forth in thefollowing table (in thousands): 2010 $— 2011 $— 2012 $— 2013 $133,1122014 $— Thereafter $— 12) AcquisitionsDuring fiscal 2009, the Partnership acquired one retail heating oil dealer. The aggregate purchase price was approximately $4.0 million, reduced byworking capital credits of $0.7 million.During fiscal 2008, the Partnership acquired seven retail heating oil dealers. The aggregate purchase price was approximately $2.6 million, reduced by$0.7 million of working capital credits.During fiscal 2007, the Partnership acquired seven retail heating oil dealers, including one that has a related plumbing business. The aggregatepurchase price was approximately $26.5 million, reduced by $0.1 million of other liabilities.The following table indicates the allocation of the aggregate purchase price paid and the respective periods of amortization assigned for acquisitionsmade during fiscal 2009 and 2008 (in thousands): September 30, Useful Lives 2009 2008 Fleet $558 $414 1 -10 yearsCustomer lists and other intangibles 2,442 1,535 7 -10 yearsGoodwill 931 515 — Trade names 120 120 7 -10 yearsWorking Capital (658) (708) — Total $3,393 $1,876 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, other intangibles and trade names are amortized on a straight-line basis over seven to ten years. F-17 Table of Contents13) Employee Benefit PlansDefined Contribution 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 eachparticipant to contribute from 1.0% to 17.0% of compensation. The Partnership makes a 4% (to a maximum of 5.5% for participants who had 10 or more yearsof service at the time the Defined Benefit Plans were frozen and who have reached the age 55) core contribution of a participant’s compensation and matches/3 of each amount a participant contributes up to a maximum of 2.0% of a participant’s compensation. The Partnership’s aggregate contributions to the401(k) plan during fiscal 2009, 2008, and 2007, were $4.2 million, $4.2 million, and $4.5 million, respectively.Union-Administered Pension PlansThe Partnership’s contributions to union-administered pension plans were $7.2 million for fiscal 2009, $6.9 million for fiscal 2008, and $6.1 millionfor fiscal 2007. Some of these union administered pension plans have significant unfunded liabilities, a portion of which could be assessed to the Partnershipshould we withdraw from these plans. The Partnership does not expect to withdraw from these plans.Defined Benefit PlansThe Partnership accounts for its two frozen defined benefit pension plans in accordance with FASB ASC 715-10-05 Compensation-Retirement Benefitstopic (SFAS No. 158). The Partnership has no post-retirement benefit plans. F-182 Table of ContentsThe following table provides the net periodic benefit cost for the period, a reconciliation of the changes in the plan assets, projected benefitobligations, and the amounts recognized in other comprehensive income and accumulated other comprehensive income at the dates indicated using ameasurement date of September 30: (in thousands) Debit / (Credit) Net PeriodicPensionCost inIncomeStatement Cash FairValue ofPensionPlanAssets ProjectedBenefitObligation OtherComprehensiveIncome Gross PensionRelatedAccumulatedOtherComprehensiveIncome Fiscal Year 2007 Beginning balance $48,987 $(62,839) $21,200 Interest cost 3,461 (3,461) Actual return on plan assets (4,223) 4,223 Employer contributions (19) 19 Benefit payments (4,011) 4,011 Investment and other expenses (487) 487 Difference between actual and expected return on plan assets 910 (910) Anticipated expenses 244 (244) Actuarial gain 2,419 (2,419) Amortization of unrecognized net actuarial loss 1,436 (1,436) Annual cost/change $1,341 $(19) 231 3,212 $(4,765) (4,765) Ending balance $49,218 $(59,627) $16,435 Funded status at the end of the year $(10,409) Fiscal Year 2008 Interest cost 3,533 (3,533) Actual return on plan assets 7,815 (7,815) Employer contributions (1,536) 1,536 Benefit payments (4,282) 4,282 Investment and other expenses (437) 437 Difference between actual and expected return on plan assets (11,282) 11,282 Anticipated expenses 246 (246) Actuarial gain 7,339 (7,339) Amortization of unrecognized net actuarial loss 997 (997) Annual cost/change $872 $(1,536) (10,561) 8,279 $2,946 2,946 Ending balance $38,657 $(51,348) $19,381 Funded status at the end of the year $(12,691) Fiscal Year 2009 Interest cost 3,647 (3,647) Actual return on plan assets (1,453) 1,453 Employer contributions (1,970) 1,970 Benefit payments (4,493) 4,493 Investment and other expenses (361) 361 Difference between actual and expected return on plan assets (1,227) 1,227 Anticipated expenses 193 (193) Actuarial loss (11,931) 11,931 Amortization of unrecognized net actuarial loss 1,304 (1,304) Annual cost/change $2,103 $(1,970) (1,070) (10,917) $11,854 11,854 Ending balance $37,587 $(62,265) $31,235 Funded status at the end of the year $(24,678) F-19 Table of ContentsAt September 30, 2009 and 2008, $24,678 million and $12,691 million respectively, were included in the other long-term liabilities amount on thebalance sheet.The $31.0 million net actuarial loss balance for the two frozen defined benefit pension plans in accumulated other comprehensive income will berecognized and amortized into net periodic pension costs as an actuarial loss in future years. The estimated amount that will be amortized from accumulatedother comprehensive income into net periodic pension cost over the next fiscal year is $2.5 million. Years Ended September 30, 2009 2008 2007 Weighted-Average Assumptions Used in the Measurement of the Partnership’s Benefit Obligation as of the periodindicated Discount rate 5.40% 7.60% 6.20% 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.The 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 discount rate used to determine net periodic pension expense was 7.6% in 2009, 6.2% in 2008, and 5.75% in 2007. 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.The Partnership’s Pension Plan assets by category are as follows (in thousands): Years Ended September 30, 2009 2008Asset Categories: Equity Securities $19,399 $21,413Debt Securities 17,795 16,956Cash Equivalents 393 288 $37,587 $38,657The 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 55% domestic equities and 45%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.Recent market conditions have resulted in an unusually high degree of volatility and increased the risks associated with certain investments held bythe plans that could impact the value of investments after the date of these financial statements.The Partnership expects to make pension contributions of approximately $13.2 million in fiscal 2010.Expected benefit payments over each of the next five years will total approximately $4.4 million per year. Expected benefit payments for the five yearsthereafter will aggregate approximately $21.2 million. F-20 Table of Contents14) Income TaxesIncome tax expense is comprised of the following for the indicated periods (in thousands): Years Ended September 30, 2009 2008 2007Current: Federal $2,068 $380 $758State 1,690 186 1,244Deferred (61,355) — — $(57,597) $566 $2,002The provision for income taxes differs from income taxes computed at the federal statutory rate as a result of the following: Years Ended September 30, 2009 2008 2007 Income from continuing operations before taxes $73,441 $(12,842) $41,304 Tax at Federal statutory rate 25,704 (4,495) 14,456 Less impact of Partnership income or loss not subject to federal income taxes (2,447) 1,043 1,393 State taxes net of federal benefit 4,319 121 730 Permanent Differences 52 368 861 Change in valuation allowance (86,445) 3,603 (15,756) Change in unrecognized tax benefit and other 1,220 (74) 318 Benefit / provision for income taxes per income statement $(57,597) $566 $2,002 F-21 Table of ContentsThe components of the net deferred taxes and the related valuation allowance for the years ended September 30, 2009 and September 30, 2008 usingcurrent tax rates are as follows (in thousands): Years Ended September 30, 2009 2008 Deferred Tax Assets: Net operating loss carryforwards $25,341 $44,923 Vacation accrual 2,479 2,680 Pension accrual 10,241 5,204 Allowance for bad debts 2,601 4,363 Intangibles 5,723 10,079 Fair value of derivative instruments 4,349 9,910 Insurance accrual 14,432 12,684 Inventory valuation 1,566 — Other, net 3,983 2,535 Total deferred tax assets 70,715 92,378 Valuation allowance (3,928) (90,376) Net deferred tax assets $66,787 $2,002 Deferred Tax Liabilities: Property and equipment $387 $919 Inventory valuation — 1,083 Total deferred tax liabilities $387 $2,002 Net deferred taxes $66,400 $— The income tax benefit recorded during fiscal 2009 was related to the release of a majority of the opening valuation allowance, resulting in a non-cashincrease in net income of $86.4 million. Based upon a review of a number of factors and all available evidence, including recent historical operatingperformance, the expectation of sustainable earnings, and the confidence that sufficient positive consolidated taxable income would continue for theforeseeable future, we concluded at the end of fiscal 2009 that it is more likely than not that the Partnership’s net deferred tax assets should be recognized.Thus, pursuant to FASB ASC 740-10 Income Taxes topic (FAS 109), we recorded a tax benefit during fiscal 2009 releasing a majority of the openingvaluation allowance, resulting in the non-cash increase in net income of $86.4 million. This benefit was offset by a current income tax expense of $3.8million and deferred income tax expense of $25.0 million related to current year activity (including net operating loss carry forward utilization), resulting ina net income tax benefit of $57.6 million. Most of the $86.4 million benefit relating to the valuation allowance release related to federal and state loss carryforwards (NOLs), insurance reserves, and the net operating book versus tax timing of intangible amortization. The remaining valuation allowance relatessolely to state NOLs that are expected to expire prior to utilization.As of the calendar tax year ended December 31, 2008, Star Acquisitions, a wholly-owned subsidiary of the Partnership, had a federal net operating losscarry forward (“NOL”) of approximately $80 million. The NOLs, which will expire between 2018 and 2024, are generally available to offset any futuretaxable income. In the event that the Partnership experiences an “ownership change” for federal income tax purposes under Internal Revenue CodeSection 382 (“Section 382”), Star Acquisitions may be restricted annually in its ability to use its NOLs to reduce its federal taxable income. In general, thePartnership would be deemed to have an “ownership change” under Section 382 if, immediately after any owner shift involving a 5% unitholder or anyequity structure shift, the percentage of units of the Partnership owned by one or more 5% unitholder has increased by more than 50% over the lowestpercentage of units of the Partnership (or any predecessor entity) owned by such unitholder at any time during the three-year testing period.In June 2007, the Partnership amended its Amended and Restated Unit Purchase Rights Agreement dated as of July 20, 2006 in order to protect thePartnership’s Net Operating Loss Carry forwards (“NOLs”) for federal income tax purposes by adding provisions which would have the effect of deterring anyperson or group from acquiring more than 5% (reduced from 15% prior to the amendment) of the Partnership’s issued and outstanding common units. Theamendment also discouraged existing 5% or greater unitholders (including the General Partner) from acquiring additional common units equal to 1% or moreof the outstanding common units. A person or group that acquires units in excess of these amounts would be subject to substantial dilution under the RightsAgreement. In May 2009, the Partnership entered into a further amendment to its Amended and Restated Unit Purchase Rights Agreement to amend thedefinition of acquiring person to restore the acquisition threshold to 15% of the outstanding common units. F-22 Table of ContentsFASB ASC 740-10-05-6 Income Taxes topic, Tax Position subtopic (SFAS No. 109 and FIN 48), provides financial statement accounting guidance foruncertainty in income taxes and tax positions taken or expected to be taken in a tax return.At September 30, 2009, we had unrecognized income tax benefits totaling $1.4 million including related accrued interest and penalties of $0.1 million.These unrecognized tax benefits are primarily the result of federal tax uncertainties. If recognized, these tax benefits and related interest and penalties wouldbe recorded as a benefit to the effective tax rate.Tax Uncertainties (in thousands) Balance at September 30, 2008 $369 Additions based on tax positions related to the current year 1,136 Additions for tax positions of prior years 50 Reduction for tax positions of prior years (22) Reductions due to lapse in statue of limitations/settlements (140) Balance at September 30, 2009 1,393 We believe that the total liability for unrecognized tax benefits will not materially change during the next 12 months ending September 30, 2010. Ourcontinuing practice is to recognize interest and penalties related to income tax matters as a component of income tax expense.We file U.S. federal income tax returns and various state and local returns. A number of years may elapse before an uncertain tax position is audited andfinally resolved. For our Federal income tax returns we have four tax years subject to examination. In our major state tax jurisdictions of New York,Connecticut, Pennsylvania and New Jersey, we have four, four, five, and five tax years, respectively, that are subject to examination. While it is often difficultto predict the final outcome or the timing of resolution of any particular uncertain tax position, based on our assessment of many factors including pastexperience and interpretation of tax law, we believe that our provision for income taxes reflect the most probable outcome. This assessment relies onestimates and assumptions and may involve a series of complex judgments about future events.15) Lease CommitmentsThe Partnership has entered into certain operating leases for office space, trucks and other equipment. The future minimum rental commitments atSeptember 30, 2009, under operating leases having an initial or remaining non-cancelable term of one year or more are as follows (in thousands): 2010 $8,9652011 7,9182012 7,3182013 6,5752014 5,789Thereafter 13,957Total future minimum lease payments $50,522Rent expense for the fiscal years ended September 30, 2009, 2008, and 2007, was $15.8 million, $13.9 million, and $13.3 million, respectively. F-23 Table of Contents16) Supplemental Disclosure of Cash Flow Information Years Ended September 30,(in thousands) 2009 2008 2007Cash paid during the period for: Income taxes, net $2,091 $2,241 $947Interest $18,221 $20,651 $20,448Non-cash financing activities: Decrease in interest expense—amortization of net debt premium $226 $188 $115Decrease in net debt premium attributable to redemption of debt $172 $— $— Decrease in deferred charges attributable to revolving credit facility amendment $322 $— $— 17) 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 collectively referred to herein as the “Class Action Complaints”). The class actions were consolidated into one action entitled In re Star GasSecurities Litigation, No 3:04cv1766 (JBA). The class action plaintiffs generally alleged that the Partnership violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. On August 23, 2006, the court entered a judgment of dismissaldismissing the consolidated amended complaint in its entirety. The court subsequently denied plaintiffs’ motion to modify the judgment to grant leave toamend the complaint and other relief.On August 20, 2009, the Second Circuit issued a Summary Order affirming (1) the District Court’s order dismissing the class action with prejudice and(2) the District Court’s order denying plaintiffs’ motion to modify the judgment to grant leave to amend the complaint and other relief.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 home heating oil and propane. As a result, at any given time the Partnership is a defendant invarious legal proceedings and litigation arising in the ordinary course of business. The Partnership maintains insurance policies with insurers in amounts andwith coverages and deductibles we believe are reasonable and prudent. However, the Partnership cannot assure that this insurance will be adequate to protectit from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the futureat economical prices. In the opinion of management, except as described above the Partnership is not a party to any litigation, which individually or in theaggregate could reasonably be expected to have a material adverse effect on the Partnership’s results of operations, financial position or liquidity.18) Disclosures About the Fair Value of Financial InstrumentsCash, Accounts Receivable, Notes Receivable, Revolving Credit Facility Borrowings, and Accounts PayableThe carrying amount of cash, accounts receivable, notes receivable, revolving credit facility borrowings, and accounts payable approximates fair valuebecause of the short maturity of these instruments. F-24 Table of ContentsDerivative Instruments and Long-Term DebtFor fiscal 2009 and 2008, 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, 2009 At September 30, 2008 CarryingAmount EstimatedFair Value CarryingAmount EstimatedFair ValueDerivative instruments included in fair asset value of derivative instruments $14,676 $14,676 $7,452 $7,452Derivative instruments included in deferred charges and other assets, net $389 $389 $2,656 $2,656Derivative instruments included in fair liability value of derivative instruments $665 $665 $7,188 $7,188Long-term debt $133,112 $133,112 $173,752 $150,293LimitationsFair 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.19) Earnings Per Limited Partner UnitsThe following table presents the net income allocation and per unit data in accordance with FASB ASC 260-10-45-60 Basic and Diluted Earnings perShare topic, Participating Securities and the Two-Class Method subtopic (EITF 03-06): Basic and Diluted Earnings Per Limited Partner:(in thousands, except per unit data) Years Ended September 30, 2009 2008 2007 Net income (loss) $131,038 $(13,408) $38,241 Less General Partners’ interest in net income (loss) 561 (57) 164 Net income (loss) available to limited partners 130,477 (13,351) 38,077 Dilutive impact of theoretical distribution of earnings under FASB ASC 260-10-45-60 * 21,964 — — Limited Partner’s interest in net income (loss) under FASB ASC 260-10-05 $108,513 $(13,351) $38,077 Per unit data: Basic and diluted income (loss) from continuing operations per Limited Partner unit $1.72 $(0.18) $0.51 Loss on sale of discontinued operations, net of income taxes per Limited Partner unit — — (0.01) Basic and diluted net income (loss) available to limited partners $1.72 $(0.18) $0.50 Dilutive impact of theoretical distribution of earnings under FASB ASC 260-10-45-60 * 0.29 — — Limited Partner’s interest in net income (loss) under FASB ASC 260-10-45-60 $1.43 $(0.18) $0.50 Weighted average number of Limited Partner units outstanding 75,738 75,774 75,774 *In any accounting period where the Partnership’s aggregate net income exceeds its aggregate distribution for such period, the Partnership is required as perFASB ASC 260-10-45-60 to present net income per limited partner unit as if all of the earnings for the period were distributed, based on the contractualparticipation rights of the security to share in earnings, regardless of whether those earnings would actually be distributed during a particular period froman economic or practical perspective. This allocation does not impact the Partnership’s overall net income or other financial results. F-25 Table of Contents20) 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 (in thousands - except per unit data) Dec. 31,2008 Mar. 31,2009 Jun. 30,2009 Sep. 30,2009 Total Sales $402,850 $520,500 $167,669 $115,794 $1,206,813 Gross profit for product, installation and service 104,362 152,234 45,122 29,340 331,058 Operating income (loss) (7,366) 110,880 956 (24,348) 80,122 Income (loss) before income taxes (8,363) 113,369 (2,422) (29,143) 73,441 Net income (loss) (8,011) 108,667 (1,924) 32,306 131,038 Limited Partner interest in net income (loss) (7,976) 108,201 (1,916) 32,168 130,477 Net income (loss) per Limited Partner unit: Basic and diluted (a) $(0.11) $1.17 $(0.03) $0.36 $1.43 Three Months Ended (in thousands - except per unit data) Dec. 31,2007 Mar. 31,2008 Jun. 30,2008 Sep. 30,2008 Total Sales $453,944 $665,286 $258,067 $165,796 $1,543,093 Gross profit for product, installation and service 82,176 128,874 42,701 31,750 285,501 Operating income (loss) 30,059 49,140 13,802 (89,696) 3,305 Income (loss) before income taxes 25,882 44,294 10,152 (93,170) (12,842) Net income (loss) 25,097 41,557 11,847 (91,909) (13,408) Limited Partner interest in net income (loss) 24,990 41,379 11,796 (91,516) (13,351) Net income (loss) per Limited Partner unit: Basic and diluted (a) $0.33 $0.55 $0.16 $(1.21) $(0.18) (a)The sum of the quarters do not add-up to the total due to the weighting of Limited Partner Units outstanding, rounding or the theoretical effects ofFASB ASC 260-10-45-60 to Master Limited Partners earnings per unit. F-26 Table of Contents21) Subsequent EventsSubsequent events have been evaluated up to December 9, 2009, the date the financial statements were issued.Quarterly Distribution DeclaredOn October 22, 2009, the Partnership declared a quarterly distribution of $0.0675 per unit on all common and general partner units, for unitholders ofrecord on November 5, 2009, to be paid on November 13, 2009.Common Units RepurchasedOn July 21, 2009, the Board of Directors of the Partnership’s General Partner authorized the repurchase of up to 7.5 million of the Partnership’scommon units. The authorized common unit repurchases may be made from time-to-time in the open market, in privately negotiated transactions or in suchother manner deemed appropriate by management. The program does not have a time limit. The Partnership’s repurchase activities take into account SEC safeharbor rules and guidance for issuer repurchases. All of the common units purchased in the repurchase program will be retired.(in thousands, except per unit amounts) Period Total Number of UnitsPurchased as Part of aPublicly Announced Plan orProgram Average PricePaid per Unit Maximum Number(or approximate Dollar Value)of Units that May Yet BePurchased Under the Plansor ProgramsJuly 2009 — $— 7,500August 2009 160 $3.59 7,340September 2009 477 $3.69 6,863Fiscal year 2009 total 637 $3.67 6,863October 2009 3,072(1) $3.97 3,791November 2009 350 $3.96 3,441 (1)October 2009 common unit repurchases include 2.7 million common units acquired in a private sale. F-27 Table of ContentsSchedule ISTAR GAS PARTNERS, L.P. (PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in thousands) Sept. 30,2009 Sept. 30,2008Balance Sheets ASSETS Current assets Cash and cash equivalents $46 $10Prepaid expenses and other current assets 1,471 1,963Total current assets 1,517 1,973Investment in subsidiaries (a) 442,146 375,444Deferred charges and other assets, net 1,404 2,382Total Assets $445,067 $379,799LIABILITIES AND PARTNERS’ CAPITAL Current liabilities Accrued expenses $3,002 $3,338Total current liabilities 3,002 3,338Long-term debt (b) 133,112 173,752Other long-term liabilities 2,619 2,732Partners’ capital 306,334 199,977Total Liabilities and Partners’ Capital $455,067 $379,799 (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: 2010—$0; 2011—$0;2012—$0; 2013—$133,112 due February 2013; 2014—$0; thereafter $0. F-28 Table of ContentsSTAR GAS PARTNERS, L.P. (PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT Years Ended September 30, (in thousands) 2009 2008 2007 Statements of Operations Revenues $— $— $— General and administrative expenses 2,592 2,371 3,605 Operating loss (2,592) (2,371) (3,605) Net interest expense (14,800) (17,512) (17,578) Amortization of debt issuance costs (444) (534) (534) Gain on redemption of debt 9,706 — — Loss from continuing operations (8,130) (20,417) (21,717) Income (loss) from discontinued operations, net of income taxes — — — Gain (loss) on sale of discontinued operations, net of income taxes — — (890) Net income (loss) before equity income (loss) (8,130) (20,417) (22,607) Equity income (loss) of Star Petro Inc. and subs 139,168 7,009 60,848 Net income (loss) $131,038 $(13,408) $38,241 F-29 Table of ContentsSTAR GAS PARTNERS, L.P. (PARENT COMPANY)CONDENSED FINANCIAL INFORMATION OF REGISTRANT Years Ended September 30, (in thousands) 2009 2008 2007 Statements of Cash Flows Cash flows provided by operating activities: Net cash provided by (used in) operating activities (a) $48,013 $(418) $(7,581) Cash flows provided by (used in) investing activities: Net cash provided by (used in) investing activities — — — Cash flows provided by (used in) financing activities: Repayment of debt (30,230) — — Distributions (15,411) Unit repurchase (2,336) Net cash provided by (used in) financing activities (47,977) — — Net increase (decrease) in cash 36 (418) (7,581) Cash and cash equivalents at beginning of period 10 428 8,009 Cash and cash equivalents at end of period $46 $10 $428 (a) Includes distributions from subsidiaries $65,164 $20,487 $14,205 F-30 Table of ContentsSchedule IISTAR GAS PARTNERS, L.P. AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTSYears Ended September 30, 2009, 2008 and 2007(in thousands) Year Description Balance atBeginningof Year Chargedto Costs &Expenses OtherChangesAdd (Deduct) Balance atEnd of Year2009 Allowance for doubtful accounts $10,821 $10,310 $(14,864) $6,2672008 Allowance for doubtful accounts $7,645 $11,961 $(8,785) $10,8212007 Allowance for doubtful accounts $6,532 $5,726 $(4,613) $7,645 Bad debts written off (net of recoveries). F-31(a)(a)(a)(a) Exhibit 4.3AMENDMENT NO. 2 TOSECOND AMENDED AND RESTATEDAGREEMENT OF LIMITED PARTNERSHIPOFSTAR GAS PARTNERS, L.P.This Amendment No. 2 to the Second Amended and Restated Agreement of Limited Partnership of Star Gas Partners, L.P. (the “Partnership”),dated as of February 21, 2008 (this “Amendment”), is entered into among Kestrel Heat, LLC, as the general partner of the Partnership (“Kestrel Heat” or the“General Partner”), and the limited partners of the Partnership. Initially capitalized terms used herein and not otherwise defined herein are used as defined inthe Partnership Agreement (as defined below).WHEREAS, the Partnership desires to modify the manner in which it makes available to unitholders its annual and quarterly reports; andWHEREAS, pursuant to Section 15.1(d)(i) of the Partnership Agreement, and subject to certain exceptions that the General Partner hasdetermined are not applicable in this instance, the General Partner, in its capacity as general partner of the Partnership, is authorized to make amendments tothe Partnership Agreement without the approval of any Limited Partner or assignee, so long as the amendments do not adversely affect the Limited Partners inany material respect; andWHEREAS, the General Partner has determined that the amendments to the Partnership Agreement set forth below do not adversely affect theLimited Partners in any material respect.NOW, THEREFORE, it is hereby agreed as follows:1. Amendments.A. Section 8.3 of the Partnership Agreement is hereby amended in its entirety to read as follows:Section 8.3 Reports. (a)As soon as practicable, but in no event later than 120 days after the close of each fiscal year of the Partnership, the General Partner shall makeavailable to each Record Holder of a Unit as of a date selected by the General Partner in its sole discretion (and shall cause to be mailed to eachsuch Unitholder upon their request) an annual report containing financial statements of the Partnership for such fiscal year of the Partnership,presented in accordance with generally accepted accounting principles, including a balance sheet and statements of operations, Partners’ equityand cash flows, such statements to be audited by a firm of independent public accountants selected by the General Partner. (b)As soon as practicable, but in no event later than 90 days after the close of each Quarter except the last Quarter of each fiscal year, the GeneralPartner shall make available to each Record Holder of a Unit, as of a date selected by the General Partner in its sole discretion (and shall cause tobe mailed to each such Unitholder upon their request) a report containing unaudited financial statements of the Partnership and such otherinformation as may be required by applicable law, regulation or rule of any National Securities Exchange on which the Units are listed fortrading, or as the General Partner determines to be necessary or appropriate.2. Binding Effect. This Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and all other parties to the PartnershipAgreement and their respective successors and assigns.3. Execution in Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which shallconstitute one and the same instrument.4. Agreement in Effect. Except as hereby amended, the Partnership Agreement shall remain in full force and effect.5. Governing Law. This Amendment shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, all rights and remediesbeing governed by such laws without regard to principles of conflicts of laws.6. Severability. Each provision of this Amendment shall be considered severable and if for any reason any provision or provisions herein aredetermined to be invalid, unenforceable or illegal under any existing or future law, such invalidity, unenforceability or illegality shall not impair theoperation of or affect those portions of this Amendment that are valid, enforceable and legal. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written. GENERAL PARTNER: KESTREL HEAT, LLCBy: /s/ Richard AmburyName: Richard AmburyTitle: Chief Financial Officer LIMITED PARTNERS: All limited partners of the Partnership,pursuant to the Powers of Attorney grantedto the General Partner.By: KESTREL HEAT, LLCGeneral Partner, as attorney-in-fact for allLimited Partners pursuant to the Powers ofAttorney granted pursuant to Section 1.4 ofthe Partnership AgreementBy: /s/ Richard AmburyName: Richard AmburyTitle: Chief Financial Officer Exhibit 21Partnership SubsidiariesA.P. Woodson Company—District of ColumbiaColumbia Petroleum Transportation, LLC—DelawareMarex Corporation—MarylandMeenan Holdings of New York, Inc.—New YorkMeenan Oil Co., Inc.—DelawareMeenan Oil Co., L.P.—DelawareMinnwhale, LLC .—New YorkOrtep 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 Acquisitions, Inc.—MinnesotaTG&E Service Company, Inc.—Florida Exhibit 31.1CERTIFICATIONSI, Daniel P. Donovan, 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 an annual 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: December 9, 2009/s/ Daniel P. DonovanDaniel P. DonovanPresident and Chief 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 an annual 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: December 9, 2009/s/ RICHARD F. AMBURYRichard F. AmburyChief Financial OfficerStar Gas Partners, L.P. Exhibit 31.3CERTIFICATIONSI, Daniel P. Donovan, 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 an annual 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: December 9, 2009/s/ Daniel P. DonovanDaniel P. DonovanPresident and Chief 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 an annual 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: December 9, 2009/s/ RICHARD F. AMBURYRichard 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, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel P. Donovan, President and ChiefExecutive Officer of the Partnership and Star Gas Finance Company, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-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)December 9, 2009 By: /s/ Daniel P. Donovan Daniel P. DonovanPresident and Chief Executive OfficerStar 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, 2009 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)December 9, 2009 By: /s/ RICHARD F. AMBURY Richard F. AmburyChief Financial OfficerStar Gas Partners, L.P.Star Gas Finance Company
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