The Partnership is organized as follows:

2) Summary of Significant Accounting Policies

Basis of Presentation

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

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial condition and results for the interim periods. Due to the seasonal nature of the Partnership’s business, the results of operations and cash flows for the threesix month period ended DecemberMarch 31, 20132014 and DecemberMarch 31, 20122013 are not necessarily indicative of the results to be expected for the full year.

These interim financial statements of the Partnership have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission and should be read in conjunction with the financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended September 30, 2013.

Reclassification

The accompanying DecemberMarch 31, 20122013 consolidated statements of operations have been revised from their previous presentation to reclassify finance charge income for the three and six months period of $1,088$2.2 million and $3.3 million respectively, and present it separately as an element of operating income. Previously, finance charge income was included in the caption interest income in the consolidated statements of operations. This reclassification was made in order to conform with common industry practice regarding the reporting of finance charge income in operating income, and had no impact on net income, financial position, and cash flows for any period. Interest expense, net consists of:

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of the unrealized gain (loss) amortization on the Partnership’s pension plan obligation for its two frozen defined benefit pension plans and the corresponding tax effect.

Recent Accounting Pronouncements

In the first quarter of fiscal 2014, the Partnership adopted the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities. This amendment as clarified by ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. The adoption of this amendment required added disclosures to enable users of our financial statements to understand the effect of those arrangements on our financial position, and did not impact our results of operations or the amount of assets and liabilities reported.

3) Common Unit Repurchase and Retirement

In July 2012, the Star Board of Directors (“the Board”) authorized the repurchase of up to 3.0 million of the Partnership’s common unitsCommon Units (“Plan III”). In July 2013, the Board authorized the repurchase of an additional 1.9 million common units to be repurchasedCommon Units under its Plan III common unit repurchase plan.III. The authorized common unitCommon Unit repurchases may be made from time-to-time in the open market, in privately negotiated transactions or in such other manner deemed appropriate by management. There is no guarantee of the exact number of units that will be purchased under the program and the Partnership may discontinue purchases at any time. The program does not have a time limit. The Board may also approve additional purchases of units from time to time in private transactions. The Partnership’s repurchase activities take into account SEC safe harbor rules and guidance for issuer repurchases. All of the common unitsCommon Units purchased in the repurchase program will be retired.

Under the Partnership’s second amended and restated credit agreement (see Note 14. Subsequent Events),dated January 14, 2014, in order to repurchase Common Units we must maintain Availability (as defined in the second amended and restated credit facility agreement) of $45 million, 15.0% of the facility size of $300 million (assuming the non-seasonal aggregate commitment is outstanding) on a historical pro forma and forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 in order to repurchase common units. Duringmeasured as of the three months ended December 31, 2013, thedate of repurchase. The Partnership was in compliance with this covenant (or the equivalent covenant inunder the credit agreement then in effect.effect) for all unit repurchases made during the six months ended March 31, 2014.

(in thousands, except per unit amounts)
Period		Total Number of Units Purchased (a)				Average Price Paid per Unit (b)				Maximum Number of Units that May Yet Be Purchased
Plan III - Number of units authorized											4,894
Private transaction - Number of units authorized (c)											1,150
											6,044
Plan III - Fiscal year 2012 total			22			$	4.26				6,022
Plan III - Fiscal year 2013 total (c)			3,284			$	4.63				2,738
Plan III - October 2013 (d)			250			$	5.20				2,488
Plan III - November 2013			—			$	—				2,488
Plan III - December 2013			—			$	—				2,488
Plan III - First quarter fiscal year 2014 total			250			$	5.20				2,488

The following table shows repurchases under Plan III.

4) Derivatives and Hedging—Fair Value Measurements and Accounting for the Offsetting of Certain Contracts

The Partnership uses derivative instruments such as futures, options and swap agreements in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit, and priced purchase commitments.commitments and internal fuel usage. The Partnership has elected not to designate its derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in ourits statement of operations in the line item (Increase) decrease in the fair value of derivative instruments. Depending on the risk being economically hedged, realized gains and losses are recorded in cost of product, cost of installations and service, or delivery and branch expenses.

To hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers as of DecemberMarch 31, 2013,2014, the Partnership held 1.60.3 million gallons of physical inventory and had bought 10.06.3 million gallons of swap contracts, 4.51.1 million gallons of call options, 6.94.2 million gallons of put options and 86.047.7 million net gallons of synthetic calls, all in future months to match anticipated sales. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of DecemberMarch 31, 2013,2014, had bought 57.6 million gallons of future contracts, had sold 76.546.2 million gallons of future contracts, and had sold 16.360.0 million gallons of future swap contracts. In addition to the previously described hedging instruments, the Partnership as of DecemberMarch 31, 2013,2014, had bought corresponding long and short 38.633.1 million net gallons of swap contracts and bought 3.9 million gallons of spread contracts (simultaneous long and short positions) to lock-in the differential between high sulfur home heating oil and ultra low sulfur diesel. To hedge a majority of its internal fuel usage for the remainder of fiscal 2014, the Partnership as of DecemberMarch 31, 2013,2014, had bought 2.41.0 million gallons of future swap contracts.

To hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers as of DecemberMarch 31, 2012,2013, the Partnership held 2.40.7 million gallons of physical inventory and had bought 10.25.0 million gallons of swap contracts, 3.80.9 million gallons of call options, 7.83.7 million gallons of put options and 84.845.4 million net gallons of synthetic calls, all in future months to match anticipated sales. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Partnership, as of DecemberMarch 31, 2012,2013, had bought 66.348.5 million gallons of future contracts, had sold 76.854.3 million gallons of future contracts and had bought 13.0sold 3.0 million gallons of diesel swap contracts (for NYS ultra-low sulfur heating oil customers) and had sold 30.8 million gallons of heating oil swap contracts (including 13.0 million gallons designated for NYS ultra-low sulfur heating oil customers).contracts. To hedge a majority of its internal fuel usage for the remainder of fiscal 2013, the Partnership as of DecemberMarch 31, 2012,2013, had bought 2.10.8 million gallons of future swap contracts.

The Partnership’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. The Partnership assesses counterparty credit risk and considers it to be low. We maintain master netting arrangements that allow for the non-conditional offsetting of amounts receivable and payable with counterparties to help manage our risks and record derivative positions on a net basis. The Partnership generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral maintainedit maintains at counterparties. At DecemberMarch 31, 2013,2014, the aggregate cash posted as collateral in the normal course of business at counterparties was $1.6 million. Positions with counterparties who are also parties to our revolving credit facility are collateralized under that facility. As of DecemberMarch 31, 2013, $5.12014, $7.1 million of hedge positions and payable amounts were secured under the credit facility.

FASB ASC 820-10 Fair Value Measurements and Disclosures, established a three-tier fair value hierarchy, which classified the inputs used 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 unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Partnership’s Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Partnership’s Level 2 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were non-trading positions and were either a Level 1 or Level 2 instrument. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Partnership. The Partnership’s calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (“NYMEX”) market prices for the commodity contracts open at the end of the period. For Level 2 derivative assets and liabilities the calculations performed by the Partnership are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

The Partnership had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Partnership’s financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.

The Partnership’s derivative assets (liabilities) offset by counterparty and subject to an enforceable master netting arrangement are listed on the following table.

5) Inventories

The Partnership’s product inventories are stated at the lower of cost or market computed on the weighted average cost method. All other inventories, representing parts and equipment are stated at the lower of cost or market using the FIFO method. The components of inventory were as follows (in thousands):

6) Property and Equipment

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

7) Other Intangible AssetsBusiness Combination

On March 4, 2014 (the “Acquisition Date”), the Partnership completed the acquisition of Griffith Energy Services, Inc. (“Griffith”) of Columbia, Maryland from Central Hudson Enterprises Corporation. The Partnership purchased 100% of the stock of Griffith for $98.7 million, consisting of $69.9 million paid for the long term assets and $28.8 million paid for estimated working capital (net of $4.2 million of cash acquired). The estimated working capital is subject to a final post closing adjustment. In addition, the Partnership issued $8.5 million in letters of credit for supply and insurance purposes. There was no long-term debt assumed in the acquisition. The business reason for this acquisition is that Griffith, being a 100-year-old brand that is broadly recognized as a premier fuel and service provider in its territories, is an excellent strategic fit for the Partnership. The Griffith acquisition adds scale to the Partnership and leverages our existing fixed cost base, providing access to approximately 50,000 residential and commercial accounts across the Mid-Atlantic region.

The following table summarizes the preliminary fair values and purchase price allocation at the acquisition date, of the assets acquired and liabilities assumed related to the Griffith acquisition as of the Acquisition Date. Given the proximity of this acquisition to the end of the quarter, the allocation of the purchase price is preliminary.

The total costs of $0.8 million related to this acquisition are included in the Consolidated Statement of Operations under general and administrative expenses for the three and six months ended March 31, 2014.

All of the $3.1 million of goodwill relating to the Griffith acquisition is expected to be deductible for income tax purposes.

Griffith’s operating results are included in the Partnership’s consolidated financial statements starting on the Acquisition Date. Customer lists, other intangibles and trade names are amortized on a straight-line basis over ten to twenty years.

Included in our consolidated statement of operations from the Acquisition Date through March 31, 2014, are Griffith’s sales and net earnings before income taxes of $29.6 million and $1.6 million, respectively.

The following table provides unaudited pro forma results of operations as if the Griffith acquisition had occurred on October 1, 2012, the beginning of fiscal year 2013. The unaudited pro forma results were prepared using Griffith’s current and prior year financial information, reflecting certain adjustments related to the acquisition, such as the elimination of directly attributable acquisition expenses and changes to depreciation and amortization expenses. These pro forma adjustments do not include any potential synergies related to combining the businesses. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of October 1, 2012 or of results that may occur in the future.

8) Goodwill and Intangibles, net

Goodwill

A summary of changes in the Partnership’s goodwill is as follows (in thousands):

Intangibles, net

The gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows (in thousands):

Amortization expense for intangible assets was $2.3$5.0 million for the threesix months ended DecemberMarch 31, 2013,2014, compared to $2.3$4.6 million for the threesix months ended DecemberMarch 31, 2012.2013. Total estimated annual amortization expense related to intangible assets subject to amortization, for the fiscal year ending September 30, 2014, and the four succeeding fiscal years ending September 30, is as follows (in thousands):

8)

9) Long-Term Debt and Bank Facility Borrowings

The Partnership’s debt is as follows (in thousands):

(b)

The 8.875% Senior Notes were originally issued in November 2010 in a private placement offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933, and in February 2011, were exchanged for substantially identical public notes registered with the Securities and Exchange Commission. These public notes mature in December 2017 and accrue interest at an annual rate of 8.875% requiring semi-annual interest payments on June 1 and December 1 of each year. The discount on these notes was $0.5 million at DecemberMarch 31, 2013.2014. Under the terms of the indenture, these notes permit restricted payments after passing certainparticular financial tests. The Partnership can incur debt up to $100 million for acquisitions and can also pay restricted payments of $22.0 million without passing certain financial tests.

In January 2014, the Partnership entered into a second amended and restated asset based revolving credit facility agreement with a bank syndicate comprised of fifteen participants, which replaced the existing revolving credit facility. (See Note 14. Subsequent Events).

The second amended and restated revolving credit facility provides the Partnership with the ability to borrow up to $300 million ($450 million during the heating season of December through April of each year) for working capital purposes (subject to certain borrowing base limitations and coverage ratios), including the issuance of up to $100 million in letters of credit, and extends the maturity date to June 2017, or January 2019 if the Partnership has met the conditions of the facility termination date as defined in the agreement and as discussed further below. The Partnership can increase the facility size by $100 million without the consent of the bank group. However, the bank group is not obligated to fund the $100 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 the Agent, which shall not be unreasonably withheld. Obligations under the second amended and restated credit facility are guaranteed by the Partnership and its subsidiaries and are secured by liens on substantially all of the Partnership’s assets including accounts receivable, inventory, general intangibles, real property, fixtures and equipment.

The interest rate on the second amended and restated credit facility is LIBOR plus (i) 1.75% (if Availability, as defined in the agreement is greater than or equal to $150 million), or (ii) 2.00% (if Availability is greater than $75 million but less than $150 million), or (iii) 2.25% (if Availability is less than or equal to $75 million). The Commitment Fee on the unused portion of the facility is 0.30% per annum.

Under the second amended and restated credit facility, the Partnership is obligated to meet certain financial covenants, including the requirement to maintain at all times either Availability (borrowing base less amounts borrowed and letters of credit issued) of 12.5% of the facility size, or a fixed charge coverage ratio (as defined in the revolving credit facility agreement) of not less than 1.1, which is calculated based upon Adjusted EBITDA for the trailing twelve months. In order to make acquisitions, the Partnership must maintain Availability of $40 million on a historical pro forma and forward-looking basis. In addition, the Partnership must maintain Availability of $45 million, 15.0% of the facility size of $300 million (assuming the non-seasonal aggregate commitment is outstanding), on a historical forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 in order to pay any distributions to unitholders or repurchase common units (Prior to the January 2014 agreement, the Partnership was required to maintain availability of 17.5% of the facility size, on a historical forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 in order to pay any distributions to unitholders or repurchase common units). Likewise, noCommon Units. No inter-company dividends or distributions can be made (including those needed to pay interest or principle on our 8.875% Senior Notes), except to the Partnership or a wholly owned subsidiary of the Partnership, if the immediately preceding covenants have not been met. Certain restrictions are also imposed by the agreement, including restrictions on the Partnership’s ability to incur additional indebtedness, to pay distributions to unitholders, to pay inter-company dividends or distributions, make investments, grant liens, sell assets, make acquisitions and engage in certain other activities.

All outstanding amounts owed under the second amended and restated credit facility become due and payable on the facility termination date of June 1, 2017. If the Partnership has repaid, prepaid or otherwise defeased at least $100 million of our 8.875% Senior Notes and Availability is equal to or greater than the aggregate amount required to repay the remaining outstanding 8.875% Senior Notes (“Payoff Amount”), then the facility termination date is January 14, 2019. However, after June 1, 2017, in the event that Availability is less than the Payoff Amount, the facility termination date shall be three days following such date. Notwithstanding this, all outstanding amounts are subject to acceleration upon the occurrence of events of default which the Partnership considers usual and customary for an agreement of this type, including failure to make payments under the second amended and restated credit facility, non-performance of covenants and obligations or insolvency or bankruptcy (as described in the second amended and restated credit facility).

At DecemberMarch 31, 2013, $100.32014, $165.7 million was outstanding under the revolving credit facility and $46.5$55.0 million of letters of credit were issued. At September 30, 2013, no amount was outstanding under the revolving credit facility and $44.7 million of letters of credit were issued.

At DecemberMarch 31, 2013,2014, availability was $148.0$97.1 million and the Partnership was in compliance with the fixed charge coverage ratio. At September 30, 2013, availability was $164.3 million and the Partnership was in compliance with the fixed charge coverage ratio.

In July 2011, the Partnership’s shelf registration became effective, providing for the sale of up to $250 million in one or more offerings of common unitsCommon Units representing limited partnership interests, partnership securities and debt securities; which may be secured or unsecured senior debt securities or secured or unsecured subordinated debt securities. This shelf registration expires in July 2014. As of DecemberMarch 31, 2013,2014, no offerings under this shelf registration have occurred.

9)10) Employee Benefit Plan