PETROLEUM HEAT & POWER CO INC, S-2, 1994-12-23

PETROLEUM HEAT & POWER CO INC
S-2, 1994-12-23
MISCELLANEOUS RETAIL

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As filed with the Securities and Exchange Commission on December 23, 1994
Registration No. 33-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
Petroleum Heat and Power Co., Inc.
(Exact name of registrant as specified in charter)

Minnesota 5983 06-1183025
(State or other (Primary Standard
jurisdiction of Industrial (I.R.S. Employer
incorporation or Classification Code Identification No.)
organization) Number)

2187 Atlantic Street
Stamford, Connecticut 06902
(203) 325-5400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
IRIK P. SEVIN,
President
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street
Stamford, Connecticut 06902
(203) 325-5400
(Name and address, including zip code and telephone number,
including area code of agent for service)
------------------------
Copies to:
ALAN SHAPIRO, Esq. BETH R. NECKMAN, Esq.
Phillips, Nizer, Benjamin, Krim & Latham & Watkins
Ballon 885 Third Avenue
31 W. 52nd Street New York, New York 10022-4802
New York, New York 10019-6167 (212) 906-1200
(212) 977-9700
------------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of the Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
------------------------

<TABLE><CAPTION>
CALCULATION OF REGISTRATION FEE

Proposed Maximum Proposed Maximum
Title of Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered Per Security(1) Price(1) Registration Fee
<S> <C> <C> <C> <C>
__% Subordinated Debentures
Due 2005................... $125,000,000 100% $125,000,000 $43,104

Class A Common Stock, par
value $.10 per share......... 3,450,000 shares $8.625(2) $ 29,756,250 $10,261

Total......................... $154,756,250 $53,365

</TABLE>
------------------------
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Based on the average of the high and low prices of the Class A Common
Stock reported on the Nasdaq National Market on December 20, 1994, in
accordance with Rule 457 under the Securities Act of 1933, as amended.
------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.

===============================================================================

<PAGE>

EXPLANATORY NOTE

This Registration Statement contains a Prospectus relating to an offering
of $125 million of __% Senior Subordinated Debentures ("Debenture Prospectus")
and a Prospectus relating to an offering of 3,450,000 shares of Class A Common
Stock ("Common Stock Prospectus").
The following sections of the Debenture Prospectus and the Common Stock
Prospectus are substantially identical and, for the convenience of the reader,
have not been produced in the Common Stock Prospectus.

AVAILABLE INFORMATION - See "Available Information" in the Debenture Prospectus

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE - See "Incorporation of Certain
Documents by
Reference" in the Debenture Prospectus

PROSPECTUS SUMMARY--THE COMPANY - See "Prospectus Summary--The Company" in the
Debenture Prospectus

THE COMPANY - See "The Company" in the Debenture Prospectus
RISK FACTORS - See "Risk Factors" in the Debenture Prospectus

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FINANCIAL
CONDITION - See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Debenture Prospectus

BUSINESS - See "Business" in the Debenture Prospectus
MANAGEMENT - See "Management" Debenture Prospectus

DESCRIPTION OF CERTAIN INDEBTEDNESS - See "Description of Other Indebtedness and
Redeemable Preferred
Stock

LEGAL MATTERS - See "Legal Matters" in the Debenture Prospectus
EXPERTS - See "Experts" in the Debenture Prospectus

INDEX TO FINANCIAL STATEMENTS - See Index to Financial Statements in the
Debenture Prospectus

<PAGE>

<TABLE>

PETROLEUM HEAT AND POWER CO., INC.
CROSS REFERENCE SHEET
Pursuant to S-K, Item 501(b)

Item of Form S-2 Prospectus Location
---------------- -------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus . . . . . . . . . . .

2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus . . . . . . . . . . . . . . . . . . . . .

3. Summary Information, Risk Factors, Ratio of Earnings
to Fixed Charges . . . . . . . . . . . . . . . . . . Prospectus Summary; Risk Factors; Selected Financial and Other
Data
4. Use of Proceeds . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . Underwriting

6. Dilution . . . . . . . . . . . . . . . . . . . . . . Inapplicable to Debenture Prospectus; see "Dilution" in Common
Stock Prospectus

7. Selling Security Holders . . . . . . . . . . . . . . Inapplicable to Debenture Prospectus; see "Principal and
Selling Stockholders" in Common Stock Prospectus

8. Plan of Distribution . . . . . . . . . . . . . . . . Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered . . . . . Description of Debentures in Debenture Prospectus; Description
of Capital Stock in Common Stock Prospectus

10. Interests of Named Experts and Counsel . . . . . . . Legal Matters; Experts

11. Information with Respect to the Registrant
(b)(1) Description of Business . . . . . Prospectus Summary; The Company; Business
(b)(2) Financial Statements . . . . . . Consolidated Financial Statements of Petroleum Heat and Power
Co., Inc. and Subsidiaries
(b)(3) Industry Information . . . . . . Business
(b)(4) Dividends and Related Stockholder
Matters . . . . . . . . . . . . Inapplicable

(b)(5) Selected Financial Data . . . . . Selected Financial and Other Data

(b)(6) Supplementary Financial
Information . . . . . . . . . . Consolidated Financial Statements of Petroleum Heat and Power
Co., Inc. and Subsidiaries

(b)(7) Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . Management's Discussion and Analysis of Results of
Operations and Financial Condition

(b)(8) Disagreements with Accountants . Inapplicable
12. Incorporation of Certain Information by Reference . Incorporation of Documents by Reference

13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . Inapplicable
</TABLE>

<PAGE>

SUBJECT TO COMPLETION, DATED DECEMBER 23, 1994

PROSPECTUS PETRO
____________, 1995
$125,000,000
Petroleum Heat and Power Co., Inc.
___% Senior Subordinated Debentures due 2005

The ____% Senior Subordinated Debentures due 2005 (the "Debentures") are
being offered (the "Debenture Offering") by Petroleum Heat and Power Co., Inc.
(the "Company"). Concurrent with the Debenture Offering, the Company is
offering 2,500,000 shares and selling shareholders are offering 500,000 shares
of the Company's Class A Common Stock (the "Class A Common Stock") to the public
(the "Common Stock Offering" and, together with the Debenture Offering, the
"Offerings"). In addition, the Company expects to offer to holders of $125
million principal amount of its outstanding subordinated indebtedness the right
to exchange such indebtedness for additional Debentures (the "Exchange Offer").
The Debenture Offering is not contingent upon the consummation of the Common
Stock Offering or the Exchange Offer, and there can be no assurance that either
the Common Stock Offering or the Exchange Offer will be consummated. See
"Common Stock Offering" and "Exchange Offer."

Interest on the Debentures is payable semi-annually on _______ and _______
of each year, commencing _______, 1995. The Debentures are not redeemable prior
to _______, 2000. Thereafter, the Debentures are redeemable, in whole or in
part, at the option of the Company, at the redemption prices set forth herein,
together with accrued and unpaid interest to the date of redemption. In
addition, at any time prior to _______, 1998, the Company may redeem Debentures
with the net proceeds of a public offering of Capital Stock (as defined) of the
Company, of Star Gas Corporation ("Star Gas") or of a subsidiary of Star Gas, at
a redemption price of ___% of the principal amount thereof, together with
accrued and unpaid interest to the date of redemption, provided that at least
65% in principal amount of the Debentures issued under the Indenture (as
defined) (including Debentures issued in the Exchange Offer) remain outstanding
immediately following any such redemption. Upon a Change of Control (as
defined), the Company will be obligated to make an offer to purchase all
outstanding Debentures at a price of 101% of the principal amount thereof,
together with accrued and unpaid interest to the date of purchase. See
"Description of Debentures."

The Debentures will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company, and senior in right of payment to all existing and
future indebtedness of the Company that is expressly subordinated to the
Debentures. As of September 30, 1994, after giving effect to the Pro Forma
Adjustments described in the Pro Forma Financial Statements contained elsewhere
herein, the Debentures would have been subordinated in right of payment to
approximately $48.6 million of Senior Debt, and senior in right of payment to
approximately $161.3 million of subordinated indebtedness (without giving effect
to the Exchange Offer). In addition, the Debentures will be effectively
subordinated to all indebtedness and other liabilities and commitments of the
Company's subsidiaries which, as of September 30, 1994, after giving effect to
the Pro Forma Adjustments, would have totalled approximately $11.4 million,
consisting primarily of trade payables.

See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Debentures offered hereby.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Underwriting
Price to the Discounts and Proceeds to the
Public (1) Commissions (2) Company (1)(3)
Per Debenture . . . . . % % %
Total . . . . . . . . . $ $ $

(1) Plus accrued interest, if any, from the date of issuance.
(2) See "Underwriting" for indemnification arrangements with the Underwriters.
(3) Before deducting expenses payable by the Company, estimated at $_______.

The Debentures are offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
certain prior conditions, including the right of the Underwriters to reject any
order in whole or part. It is expected that delivery of the Debentures will be
made in New York, New York on or about _________, 1995.

Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. PaineWebber Incorporated
Securities Corporation

<PAGE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE DEBENTURES
AND OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning the Company can be inspected without charge at the Public Reference
Room maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. In addition, upon request, such reports, proxy
statements and other information will be made available for inspection and
copying at the Commission's public reference facilities at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be obtained
at prescribed rates upon request from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's
Class A Common Stock is listed on the Nasdaq National Market, and such reports,
proxy statements and other information concerning the Company may be inspected
and copied at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a registration statement on Form
S-2 (the "Registration Statement") under the Securities Act of 1933 (the
"Securities Act") with respect to the Debentures. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in the
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description, and each such statement shall be
deemed qualified in its entirety by such reference.

The Company will furnish to holders of the Debentures annual reports
containing audited financial statements and quarterly reports containing
unaudited summary financial information for the first three quarters of each
fiscal year.

CERTAIN DEFINITIONS

As used in this Prospectus:

"EBITDA" means operating income before depreciation, amortization and other
non-cash charges.

"NIDA" means net income (loss), plus depreciation, amortization and other
non-cash charges, less dividends accrued on preferred stock, excluding net
income (loss) derived from investments accounted for by the equity method,
except to the extent of any cash dividends received by the Company.

"Star Gas Acquisition" refers to the acquisition by the Company of all
outstanding voting securities of Star Gas not owned by the Company in December
1994. Unless the context otherwise requires, all references to Star Gas,
including Star Gas' financial position and results of operations (but not
including the Consolidated

<PAGE>

Financial Statements of Star Gas included elsewhere herein) give pro forma
effect to the acquisition of two propane businesses and the disposition of
certain non-core assets by Star Gas since December 1993 and prior to the date
of the Star Gas Acquisition. See "-- Acquisition of Star Gas."

"Pro Forma Adjustments" refer to the Heating Oil Acquisitions, the Star Gas
Transactions, the Prior Note Offerings and the Offerings, in each case as
described in the Pro Forma Financial Statements contained elsewhere herein.

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus and by the information and financial statements
appearing in the documents incorporated by reference herein. See "Risk Factors"
for a discussion of certain factors that should be considered by prospective
purchasers of the Debentures offered hereby.

THE COMPANY

Petroleum Heat and Power Co., Inc. (the "Company" or "Petro") is the largest
retail distributor of home heating oil (#2 fuel oil) in the United States and,
with the Star Gas Acquisition, is the tenth largest retail distributor of
propane in the United States. The Company's home heating oil division had
total sales of $546.4 million for the twelve months ended September 30, 1994
and currently serves approximately 417,000 customers in 28 markets in the
Northeast, including the metropolitan areas of Boston, New York City,
Baltimore, Providence and Washington, D.C. Star Gas had total sales of $101.4
million for the twelve months ended September 30, 1994 and currently serves
more than 145,000 customers in 63 locations in the Midwest and Northeast.

The home heating oil industry is large, highly fragmented and undergoing
consolidation with approximately 3,700 independently owned and operated home
heating oil distributors in the Northeast. Petro is the principal acquiror in
this industry and since 1979, when current management assumed control, the
Company has acquired 154 retail heating oil distributors. As a result, volumes
sold increased from 59.4 million gallons in 1980 to 458.6 million gallons for
the twelve months ended September 30, 1994, a compound annual growth rate of
16.0%. The Company is uniquely positioned to continue this strategy given its
acquisition expertise, reputation, access to capital, and the absence of
competitors within the industry with a comparable combination of these
attributes. Despite the Company's size, Petro estimates that its customer
base represents only approximately 5% of the residential home heating oil
customers in the Northeast.

Petro acquires distributors in both new and existing markets, which are
integrated into the Company's branch system. Economies of scale are realized
from these purchases through the centralization of accounting, data processing,
fuel oil purchasing, credit and marketing functions. Due to its acquisition
history, the Company is well known in the heating oil industry and is regularly
contacted by potential sellers. In addition, the Company has recently become
more proactive in identifying and contacting potential acquisition candidates.
Petro has recently adopted an operating strategy to capitalize upon its size
and developments in technology to increase operational efficiency and to
improve customer retention.

The Company believes that the propane industry is an attractive complement
to its heating oil business and that it possesses many of the same industry and
operating characteristics. Like the home heating oil industry, the propane
industry is highly fragmented, consisting of over 2,600 independently owned and
operated distributors. The Company intends to apply the acquisition and
operating techniques it has successfully applied in the home heating oil
industry to its propane operations.

<PAGE>

natural gas. While over short periods of time weather may cause variability in
financial and operating results, the Company has typically been able to adjust
gross profit margins and operating expenses to partially offset lower volumes
associated with warmer winter temperatures. The Company historically has been
able to pass through wholesale price increases in the cost of fuel oil to its
customers and has minimized its exposure to oil price fluctuations by
maintaining an average of no more than a ten day inventory of home heating oil.

As a result of the successful implementation of the Company's strategy,
revenues have increased from $84.6 million in 1980 to $696.2 million on a pro
forma basis for the 12 months ended September 30, 1994, a compound annual
growth rate of 16.5%. EBITDA has increased during such period from $3.6
million to $86.9 million, a compound annual growth rate of 26.1%. Similarly,
NIDA has increased during such period from $2.9 million to $46.1 million, a
compound annual growth rate of 22.1%. While EBITDA and NIDA should not be
considered as substitutes for net income as an indicator of the Company's
operating performance and NIDA should not be considered a measure of the
Company's liquidity, they are the principal bases upon which the Company
evaluates its financial performance.

Acquisition of Star Gas Corporation

In December 1993, the Company purchased a 29.5% equity interest in Star Gas
for $16.0 million and acquired options to purchase the remaining equity
interest. In connection with this investment, the Company entered into a
management agreement with Star Gas wherein the Company agreed to provide Star
Gas with executive, financial and managerial oversight services. This
structure allowed the Company to limit its financial exposure until Star Gas
was operationally restructured. In December 1994, the Company completed the
acquisition of Star Gas for approximately $25.9 million, consisting of $3.8
million in cash and 2.5 million shares of the Company's Class A Common Stock.

In connection with its investment in Star Gas, William Powers, a Vice
President of Petro, became President of Star Gas. With the assistance of the
Company's management, during the past year Star Gas restructured its operations
through the sale of various non-core assets, including a trucking operation in
Texas and under performing propane operations in Texas and Georgia. Star Gas
realized net proceeds of approximately $23.4 million from the sale of such
assets, which assets generated EBITDA of $0.4 million for the year ended
September 30, 1993. In addition, Star Gas began implementing its propane
acquisition strategy with the purchase of two propane distributors with
aggregate annual volume of 1.2 million gallons.

Petro's net purchase price for Star Gas was $122.4 million, including Star
Gas' debt and preferred stock and giving effect to the sale of assets and the
two propane acquisitions referred to above. For the year ended September 30,
1994, Star Gas had EBITDA of $ 20.0 million.

<PAGE>

SUMMARY DATA
(In thousands, except ratios)

The following tables present summary consolidated financial and operating
data subsequent to the assumption of control by the Company's current
management in 1979. Management's strategy is to maximize EBITDA and NIDA,
rather than net income. Although EBITDA and NIDA should not be considered
substitutes for net income (loss) as an indicator of the Company's operating
performance and NIDA should not be considered a measure of the Company's
liquidity, they are included in the following tables as they are the principal
bases upon which the Company assesses its financial performance, compensates
management and establishes dividends. In addition, certain covenants in the
Company's borrowing arrangements are tied to similar measures.

Operating Data:

<TABLE><CAPTION>
Ratio of
Depreciation Interest Net Earnings to
Year Ended Gross and Expense, Income Fixed
December 31, Net Sales Profit Amortization(1) Net (Loss) Charges(2)
------------ --------- ------ --------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1980 . . . . . . . . $ 84,582 $ 11,938 $ 1,542 $ 4 $ 1,407 6.2x
1981 . . . . . . . . 125,946 17,229 1,336 (434) 1,612 7.2x
1982 . . . . . . . . 168,061 28,370 2,595 245 3,690 7.0x
1983 . . . . . . . . 159,794 33,806 3,633 375 4,723 9.3x

1984 . . . . . . . . 245,249 50,323 7,069 3,394 4,165 3.2x
1985 . . . . . . . . 283,493 59,241 11,016 5,053 1,427 1.5x
1986 . . . . . . . . 279,889 81,843 15,131 6,580 4,116 2.1x

1987 . . . . . . . . 354,508 96,444 20,782 9,212 194 1.0x
1988 . . . . . . . . 462,150 133,601 27,151 13,536 1,565 1.2x
1989 . . . . . . . . 541,521 139,343 32,093 17,915 (4,287) --(3)
1990 . . . . . . . . 567,414 132,383 36,313 20,900 (29,267) --(3)

1991 . . . . . . . . 523,243 144,471 35,575 20,728 (16,562) --(3)
1992 . . . . . . . . 512,430 161,489 34,394 18,622 (4,389) --(3)
1993 . . . . . . . . 538,526 171,717 34,664 20,508 (8,431) --(3)

Twelve months ended
September 30, 1994
Actual . . . . . . . 546,434 184,752 31,696 22,082 2,128 1.2x

Pro Forma(4) . . . . 696,223 256,302 43,611 35,750 5,556 1.2x
</TABLE>

<PAGE>

Other Data:
<TABLE><CAPTION>

Gallons of Home Heating Ratio of EBITDA to
Year Ended Oil and Interest
December 31, Retail Propane Sold EBITDA(5) NIDA(6) Expense, Net
------------ ------------------- --------- ------- ------------
<S> <C> <C> <C> <C>
1980 . . . . . . . . 59,399 $3,581 $2,949 N/A

1981 . . . . . . . . 72,653 4,351 2,947 N/A
1982 . . . . . . . . 104,583 9,713 6,285 39.6x

1983 . . . . . . . . 123,019 13,560 8,357 36.2x

1984 . . . . . . . . 180,998 19,756 11,234 5.8x
1985 . . . . . . . . 212,183 19,106 12,443 3.8x

1986 . . . . . . . . 255,319 30,274 19,247 4.6x

1987 . . . . . . . . 317,380 30,557 20,976 3.3x
1988 . . . . . . . . 414,535 44,470 28,717 3.3x

1989 . . . . . . . . 449,040 40,076 27,573 2.2x

1990 . . . . . . . . 398,989 26,307 4,639 1.3x
1991 . . . . . . . . 385,557 40,036 15,744 1.9x

1992 . . . . . . . . 423,354 51,325 27,721 2.8x

1993 . . . . . . . . 443,487 48,437 23,176 2.4x

Twelve months ended
September 30, 1994
Actual . . . . . . . 458,563 58,745 32,031 2.7x

Pro Forma(4) . . . . 584,807 86,897 46,106 2.4x
</TABLE>

<TABLE><CAPTION>
Balance Sheet Data:
At September 30, 1994
---------------------

Actual As Adjusted(7)
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,055 $ 39,518
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,357 33,629

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,138 386,999
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 219,084 334,034
Redeemable preferred stock (excluding current maturities) . . . . . . . . 16,666 16,666
Stockholders' equity deficiency . . . . . . . . . . . . . . . . . . . . . (84,568) (58,879)
- ---------------
</TABLE>

<PAGE>

(1) Depreciation and amortization includes depreciation and amortization of
plant and equipment and amortization of customer lists and deferred
charges.

(3) Earnings were insufficient to cover fixed charges by $7.4 million, $31.1
million, $16.3 million, $4.0 million and $7.2 million for the years ended
December 31, 1989, 1990, 1991, 1992 and 1993, respectively. However, if
non-cash charges to income consisting of depreciation and amortization
and non-cash expenses associated with key employees' deferred compen-
sation plans were excluded, the Company's earnings would have exceeded
fixed charges by $24.7 million, $5.2 million, $19.3 million, $32.4
million and $27.8 million, respectively, for such periods.

(4) The Pro Forma Operating and Other Data for the twelve months ended
September 30, 1994 represent the historical financial data derived from
the Company's financial statements for the twelve months ended September
30, 1994, adjusted to give effect to the Pro Forma Adjustments, including
the Heating Oil Acquisitions, the Star Gas Transactions, the Prior Note
Offerings and the Offerings. See the Pro Forma Financial Statements
contained elsewhere herein.

(5) EBITDA means operating income before depreciation, amortization and other
non-cash charges.

(6) NIDA means net income (loss), plus depreciation, amortization and other
non-cash charges, less dividends accrued on preferred stock, excluding
net income (loss) derived from investments accounted for by the equity
method, except to the extent of any cash dividends received by the
Company.

(7) As adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions and the Offerings;
provided, however, that the as adjusted data include approximately $24.2
million of working capital provided by the Offerings that is not required
for the stated uses. See the Pro Forma Financial Statements contained
elsewhere herein.

8
<PAGE>

THE DEBENTURE OFFERING
<TABLE>
<S> <C>
Securities Offered . . $125 million principal amount of ___% Senior Subordinated Debentures due 2005 (the "Debentures").
Maturity Date . . . . . _______, 2005.
Interest Payment Dates _______ and _______ of each year, commencing _______, 1995.
Optional Redemption . . The Debentures will be redeemable at the option of the Company, in whole or in part, at any time
on or after ____________, 2000, at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition, at any time prior to ____________, 1998, the
Company may redeem Debentures with the net proceeds of a public offering of Capital Stock of the
Company, of Star Gas or of a subsidiary of Star Gas, at a redemption price of ___% of principal
amount, together with accrued and unpaid interest to the date of redemption, provided that at
least 65% in principal amount of the Debentures
issued under the Indenture (including Debentures issued in the Exchange Offer) remain outstanding
immediately following any such redemption.
Change of Control . . . Upon a Change of Control, the Company will be obligated to make an offer to purchase all
outstanding Debentures at a price of 101% of the principal amount thereof, together with accrued
and unpaid interest to the date of purchase.
Ranking . . . . . . . . The Debentures will be general unsecured obligations of the Company, subordinated in right of
payment to all existing and future Senior Debt of the Company, and senior in right of payment to
all existing and future indebtedness of the Company that is expressly subordinated to the
Debentures. As of September 30, 1994, after giving effect to the Pro Forma Adjustments described
in the Pro Forma Financial Statements contained elsewhere herein, the Debentures would have been
subordinated in right of payment to approximately $48.6 million of Senior Debt, and senior in
right of payment to approximately $161.3 million in subordinated indebtedness (without giving
effect to the Exchange Offer). In addition, the Debentures will be effectively subordinated to
all indebtedness and other liabilities and commitments of the Company's subsidiaries which, as of
September 30, 1994, after giving effect to the Pro Forma Adjustments, would have totalled
approximately $11.4 million, consisting primarily of trade payables.
Certain Covenants . . . The indenture relating to the Debentures (the "Indenture") will restrict, among other things,
dividends and certain other distributions, the purchase, redemption or retirement of Capital Stock
or indebtedness that is pari passu or junior to the Debentures, the incurrence of certain
additional indebtedness, the creation of certain liens, certain transactions with Affiliates (as
defined) and certain mergers and consolidations.
Use of Proceeds . . . . The net proceeds to the Company from the Offerings are estimated to be $141.1 million. The
Company intends to use (i) approximately $98.6 million of such proceeds to purchase $63.7 million
principal amount of long-term debt of Star Gas, all outstanding shares of preferred stock of Star
Gas not owned by Petro and 1,521,316 shares of the Company's Class A Common Stock, (ii)
approximately $4.0 million of such proceeds to repay working capital borrowings of Star Gas and
(iii) approximately $14.3 million of such proceeds to redeem $12.8 million principal amount of
notes of the Company. The balance of the net proceeds, approximately $24.2 million, will be used
for working capital purposes and, until applied, will be used to reduce the amounts outstanding
under the Company's acquisition and working capital facilities. See "Use of Proceeds."
Common Stock Offering and
Exchange Offer . . . . Concurrent with the Debenture Offering, the Company is offering 2,500,000 shares and selling
stockholders are offering 500,000 shares of Class A Common Stock to the public. In addition, the
Company expects to offer holders of $125 million principal amount of its outstanding subordinated
indebtedness the right to exchange such indebtedness for additional Debentures. The Debenture
Offering is not contingent upon the consummation of the Common Stock Offering or the Exchange
Offer, and there can be no assurance that either the Common Stock Offering or the Exchange Offer
will be consummated. See "Common Stock Offering" and "Exchange Offer."
</TABLE>

<PAGE>

THE COMPANY

Petroleum Heat and Power Co., Inc. is the largest retail distributor of home
heating oil in the United States and, with the December 1994 Star Gas
Acquisition, is the tenth largest retail distributor of propane in the United
States. The Company's home heating oil division had total sales of $546.4
million for the twelve months ended September 30, 1994 and currently serves
approximately 417,000 customers in 28 markets in the Northeast, including the
metropolitan areas of Boston, New York City, Baltimore, Providence and
Washington, D.C. Star Gas had total sales of $101.4 million for the twelve
months ended September 30, 1994 and currently serves more than 145,000
customers in 63 locations in the Midwest and Northeast.

The Company's business, the sale of home heating oil and retail propane
principally to residential customers, has been relatively stable primarily due
to the following fundamental characteristics: (i) residential demand for
heating oil and propane has been relatively unaffected by general economic
conditions due to the non-discretionary nature of heating oil and propane
purchases, (ii) homeowners have tended to remain with their traditional
distributors of both products and (iii) customer loss to other energy sources,
primarily natural gas, has been low due to either the high cost of conversion
from home heating oil or lack of availability of natural gas. While over short
periods of time weather may cause variability in financial and operating
results, the Company has typically been able to adjust gross profit margins and
operating expenses to partially offset lower volumes associated with warmer
winter temperatures. The Company historically has been able to pass through
wholesale price increases in the cost of fuel oil to its customers and has
minimized its exposure to oil price fluctuations by maintaining an average of
no more than a ten day inventory of home heating oil.

The Company is a Minnesota corporation. Its principal executive offices are
located at 2187 Atlantic Street, Stamford, Connecticut 06902 and its telephone
number is (203) 325-5400. The Company operates directly and through its
subsidiaries in fifteen states and the District of Columbia.

<PAGE>

COMMON STOCK OFFERING

Concurrent with the Debenture Offering, the Company is offering 2,500,000
shares (plus up to an additional 450,000 shares to cover overallotments) and
selling stockholders are offering 500,000 shares of Class A Common Stock to the
public. The Debenture Offering and the Common Stock Offering are not
contingent upon each other and there can be no assurance that the Common Stock
Offering will be consummated.

EXCHANGE OFFER

Concurrent with or shortly after the consummation of the Debenture Offering,
the Company expects to commence the Exchange Offer, pursuant to which the
holders of $50 million principal amount of the Company's 10 1/8% Subordinated
Notes due 2003 (the "10 1/8% Notes") and $75 million principal amount of the
Company's 9 3/8% Subordinated Debentures due 2006 (the "9 3/8% Debentures")
will be entitled to exchange such 10 1/8% Notes and 9 3/8% Debentures for
additional Debentures. The Company has not yet determined the rate at which it
will offer to exchange Debentures for either the 10 1/8% Notes or the 9 3/8%
Debentures.

The Debenture Offering is not contingent upon the consummation of the
Exchange Offer, and there can be no assurance that the Exchange Offer will be
consummated. If the Exchange Offer is consummated, the aggregate principal
amount of outstanding Debentures will increase, and the aggregate amount of
indebtedness to which the Debentures are senior will be reduced, by the
aggregate amount of 10 1/8% Notes and 9 3/8% Debentures tendered for exchange
in the Exchange Offer. If holders of all of the 10 1/8% Notes and the 9 3/8%
Debentures tender such 10 1/8% Notes and 9 3/8% Debentures for exchange in the
Exchange Offer, an aggregate of $250 million principal amount of Debentures
will be outstanding (consisting of $125 million principal amount of Debentures
issued in the Debenture Offering and $125 million principal amount of
Debentures issued in the Exchange Offer), and the Debentures will be senior to
an aggregate of $36.3 million of indebtedness of the Company.

RISK FACTORS

Investors should carefully consider the factors set forth below as well as
the other information set forth in this Prospectus before purchasing the
Debentures offered hereby.

Leverage; Ability to Service Debt

At September 30, 1994 (after giving effect to the Pro Forma Adjustments),
the Company would have had outstanding an aggregate of $334.0 million of long-
term debt and stockholders' deficiency of $58.9 million. Of such long-term
debt, $3.2 million, $3.0 million and $2.9 million in principal amount will
mature in 1995, 1996 and 1997, respectively. In addition, approximately $4.2
million of the Company's 1989 Cumulative Redeemable Exchangeable Preferred
Stock (the "Redeemable Preferred Stock") is subject to mandatory redemption
each year through 1999. Prior to redemption, the Company has the right to
exchange shares of Redeemable Preferred Stock, in whole or in part, for
subordinated notes due August 1, 1999 (the "1999 Notes"), subject to meeting
certain debt incurrence tests. See "Capitalization." In addition, the Company
may incur further indebtedness from time to time to finance expansion, either
through capital expenditures or acquisitions, or for other general corporate
purposes. The degree to which the Company is leveraged could have important
consequences to holders of the Debentures, including the following: (i) a
substantial portion of the Company's cash flow from operations will be
dedicated to the payment of interest, principal and other

<PAGE>

repayment obligations, thereby reducing the funds available to the Company for
its operations and future acquisitions, (ii) the Company's ability to obtain
additional financing in the future may be impeded, and (iii) the Company's
degree of leverage may make it vulnerable to a downturn in its business or of
the economy generally. The Company believes that it will be able to meet its
obligations as they come due and will not be required to refinance or
restructure its debt obligations, although it may elect to do so.

The Company's earnings were insufficient to cover fixed charges by $7.4
million, $31.1 million, $16.3 million, $4.0 million and $7.2 million for the
years ended December 31, 1989, 1990, 1991, 1992 and 1993, respectively.
However, if non-cash charges to income consisting of depreciation and
amortization and non-cash expenses associated with key employees' deferred
compensation plans were excluded, the Company's earnings would have exceeded
fixed charges by $24.7 million, $5.2 million, $19.3 million, $32.4 million and
$27.8 million, respectively, for such periods. See "--Recent Net Losses."

Subordination

The Debentures will be subordinated to the prior payment of all existing and
future Senior Debt of the Company. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Debentures only after all Senior Debt has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on
any or all of the Debentures then outstanding. See "Description of Debentures--
Ranking."

Sensitivity to Weather; Seasonality

Because the Company's business is directly related to heating, weather
patterns during the winter months can have a material effect on the Company's
sales of heating oil and propane. Although temperature levels for the heating
season have been relatively stable over time, variations can occur from time to
time, and warmer than normal winter weather will adversely affect the Company's
results. There can be no assurance that average temperatures in future years
will not be above the historical average.

The seasonal nature of the Company's business results in the sale by the
Company of approximately 50% of its volume of home heating oil in the first
quarter and 30% of its volume of home heating oil in the fourth quarter of each
year. Similarly, the Company sells approximately 35% of its annual volume of
propane sales in each of the first and fourth calendar quarters. The Company
generally realizes positive NIDA in both of these quarters and negative NIDA
during the warmer quarters ending June and September.

Competition from Alternate Energy Sources

In all of its markets, the Company competes for customers with suppliers of
alternate energy products, principally natural gas and electricity. Over the
past five years, conversions by the Company's home heating oil customers from
fuel oil to other sources, primarily natural gas, have averaged approximately
1% per annum of the homes served by the Company. This rate of conversion is
largely a function of the cost of replacing an oil-fired heating system with
one that uses natural gas and the relative retail prices of fuel oil and
natural gas. During 1980 and 1981, when there were government controls on the
price of natural gas, and for a short time in 1990 and 1991, during the Persian
Gulf crisis, the Company's home heating oil customers converted to gas at
approximately a 2% annual rate as oil prices increased relative to the price of
natural gas. However, beginning in the spring of 1991 through September 1994,
gas conversions by the Company's home heating oil customers returned to their
approximate 1% historical annual rate as the prices for the two products
returned to parity. As fuel oil and propane are less expensive heating sources
than electricity, the Company believes

<PAGE>

that an insignificant number of its customers switch to electric heat from oil
heat or propane. See "Business--Fundamental Characteristics."

Because of the significant cost advantage of natural gas over propane,
propane is generally not competitive with natural gas in those areas where
natural gas is readily available. The expansion of the nation's natural gas
distribution systems has resulted in the availability of natural gas in areas
that previously depended upon propane. Propane is generally less expensive to
use than electricity for space heating, water heating and cooking and therefore
competes effectively with electricity. Although propane and fuel oil have
similar applications, propane and fuel oil have generally developed distinct
markets. Given the cost of conversion from propane to home heating oil,
consumers will only convert their heating systems when there is a significant
price advantage of home heating oil as compared to propane. See "Business -
Fundamental Characteristics."

Competition for New Retail Customers

The Company's businesses are highly competitive. The Company's fuel oil
division competes with fuel oil distributors offering a broad range of services
and prices, from full service distributors, like the Company, to those offering
delivery only. Competition with other companies in the fuel oil industry is
based primarily on customer service and price.

Long-standing customer relationships are typical in the retail home heating
oil industry. Many companies in the industry, including Petro, deliver home
heating oil to their customers based upon weather conditions and historical
consumption patterns without the customer having to make an affirmative
purchase decision each time oil is needed. In addition, most companies,
including Petro, provide home heating equipment repair service on a 24-hour per
day basis, which tends to build customer loyalty. Long-standing customer
relationships are also typical to the retail propane industry. Retail propane
customers generally lease their storage tanks from their suppliers. The lease
terms and, in most states, certain fire safety regulations restrict the
refilling of a leased tank solely to the propane supplier that owns the tank.
The inconvenience of switching tanks minimizes a customer's tendency to switch
among suppliers of propane on the basis of minor variations in price.

As a result of, among others, the factors noted above, the Company's fuel
oil and propane divisions may experience difficulty in acquiring new retail
customers due to existing relationships between potential customers and other
home heating oil or propane distributors. In addition, in certain instances,
homeowners have formed buying cooperatives which seek to purchase fuel oil from
distributors at a price lower than individual customers are otherwise able to
obtain. To date, these buying groups have not had a material impact on the
Company's fuel oil operations.

Growth Dependent Upon Acquisitions

In recent years, home heating fuel demand has been affected by conservation
efforts and conversions to natural gas. In addition, as the number of new homes
that use oil heat has not been significant, there has been virtually no
increase in the customer base due to housing starts. As a result, the size of
the home heating oil market is likely to be stagnant and may even decline in
the future. The Company's growth in the past decade has been directly tied to
the success of its acquisition program, and its future growth will depend on
its ability to continue to identify and successfully consummate acquisitions.
In addition, the Company loses approximately 90% of home heating oil customers
acquired in an acquisition within the first six years following an acquisition;
however, approximately 35% of the Company's customer losses are as a result of
homeowners moving. The Company, through its marketing program, is able to
retain approximately 60% of such homes.

<PAGE>

The Company's actual net loss of home heating oil customers has averaged
approximately 4% per annum over the past five years, as the loss of such
purchased customers has been partially offset by new customers obtained through
internal marketing. However, there can be no assurance that the Company will be
able to maintain or reduce this average home heating oil customer attrition
rate in the future.

The retail propane industry is mature with only limited growth in total
demand for the product foreseen. Based on information available from the
Energy Information Administration, the Company believes the overall demand for
propane has remained relatively constant over the past several years, with year
to year industry volumes being impacted primarily by weather patterns.
Therefore, the ability of the Company's propane division to grow will be
heavily dependent on its ability to acquire other distributors. Unlike the
home heating oil industry, where the Company believes it has an advantage over
other potential buyers and has established a reputation for making
acquisitions, the Company has only limited experience in the propane industry
and, in making acquisitions, will have to compete with other larger well-
financed companies.

There is no assurance that the Company will be able to continue to identify
new acquisitions or that it will have the access to capital necessary to
consummate such acquisitions. As occurred in 1990 and 1991, warm winter weather
can adversely affect the Company's operating and financial results which, in
turn, may limit the Company's access to capital and its acquisition activities.

Recent Net Losses

The Company incurred net losses in 1991, 1992 and 1993 of $16.6 million,
$4.4 million and $8.4 million, respectively, primarily as a result of the
amortization expense associated with the numerous acquisitions consummated
since 1980. In connection with each acquisition of a home heating oil
distributor, the Company has amortized for book purposes 90% of the amount
allocated to customer lists over a six year period and the balance over a 25
year period. In addition, the Company depreciates fixed assets on average over
an eight year period. The aggregate amortization of customer lists and deferred
charges and depreciation and amortization of property and equipment in 1991,
1992 and 1993 amounted to $35.6 million, $34.4 million and $34.7 million,
respectively. Management's strategy is to maximize EBITDA and NIDA, rather than
net income, and net losses may continue in the near term. Continued net losses
could adversely affect the Company. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Overview."

Supply of Home Heating Oil and Propane

Home heating oil and propane are available from numerous sources, including
integrated international oil companies, independent refiners and independent
wholesalers. The Company purchases home heating oil and propane from a variety
of suppliers pursuant to supply contracts or on the spot market. While there
can be no assurance that there will be no foreign crude oil disruptions which
may adversely affect the Company's home heating oil business, past disruptions
have affected the price, but not the availability, of home heating oil to the
Company. The Company's heating oil division historically has been able to pass
through wholesale price increases to its customers and has minimized inventory
risk by maintaining an average of no more than a ten day inventory. However,
there can be no assurance that the Company will be able to pass on such
increases in the future. The Company intends to minimize inventory risk in its
propane division by adopting inventory policies similar to those in its heating
oil division.

Conservation and Technology

The national trend toward increased conservation and technological advances,
including installation of improved insulation and the development of more
efficient furnaces and other heating devices, has caused a

<PAGE>

decline in demand for home heating oil by retail customers and has slowed the
growth of demand for propane by retail customers. Although the Company believes
that current oil prices have resulted in decreased incentive to conserve and
that most conservation efforts have already been implemented, the Company
cannot predict the impact of future conservation measures. The Company is also
unable to predict the effect that any technological advances in heating,
conservation, energy generation or other devices might have on the Company's
operations.

Operating Risks of Propane Business

In its propane division, the Company is subject to operating risks
incidental to handling, storing and transporting propane, which is a highly
explosive liquid. The Company maintains insurance which it believes is
adequate to protect it from potential future claims for personal injury and
property damage, subject to deductibles which the Company believes are
reasonable and prudent. The occurrence of an event not fully covered by
insurance could have a material adverse effect on the results of operations and
financial position of the Company.

Dependence on Key Person

The Company is dependent on the continued services of its President, Irik P.
Sevin, principally in its acquisition program. If Mr. Sevin were no longer to
serve as an employee of the Company, the Company's prospects for future growth
could be adversely affected. The Company does not maintain key man life
insurance with respect to Mr. Sevin.

Control by Principal Stockholders

The directors of the Company and certain affiliated parties own 100% of the
Class C Common Stock of the Company. In addition, the directors own 29.8% of
the Class A Common Stock of the Company (26.3% if the Common Stock Offering
consummated). Each share of Class A Common Stock is entitled to one vote per
share and each share of Class C Common Stock is entitled to ten votes per
share. The shares of Class C Common Stock owned by the directors and such
affiliated parties represent, in the aggregate, 54.7% of the voting power of
all of the outstanding shares of Common Stock (53.6% if the Common Stock
Offering is consummated). Consequently, the directors have the ability to
control the business and affairs of the Company by virtue of their ability to
elect a majority of the Company's board of directors and by virtue of their
voting power with respect to other actions requiring stockholder approval.

Absence of Public Market

There is no existing market for the Debentures and there can be no assurance
as to the liquidity of any market that may develop for the Debentures, the
ability of holders of the Debentures to sell their Debentures or the price at
which holders will be able to sell their Debentures. If such a market were to
develop, the Debentures could trade at prices that may be higher or lower than
the initial offering price thereof depending on many factors, including
prevailing interest rates, the Company's operating results and the markets for
similar securities. The Underwriters have advised the Company that they
currently intend to make a market in the Debentures; however, they are not
obligated to do so and any market making may be discontinued at any time
without notice. The Company does not intend to apply for listing of the
Debentures on any securities exchange.

<PAGE>
USE OF PROCEEDS

The net proceeds from the sale of the Debentures are estimated to be
approximately $120.3 million, after deducting underwriting discounts and
commissions and estimated offering expenses. The net proceeds to the Company
of the Common Stock Offering are estimated to be approximately $20.8 million
($24.6 million if the Underwriters' over-allotment option in connection with
the Common Stock Offering is exercised in full), assuming a public offering
price of $9.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses. The Company intends to use (i)
approximately $98.6 million of such proceeds to purchase $63.7 million
principal amount of long-term debt of Star Gas, all outstanding shares of
preferred stock of Star Gas not owned by Petro and 1,521,316 shares of the
Company's Class A Common Stock, (ii) approximately $4.0 million of such
proceeds to repay working capital borrowings of Star Gas and (iii)
approximately $14.3 million of such proceeds to redeem $12.8 million principal
amount of notes of the Company. The balance of the net proceeds, approximately
$24.2 million, will be available to the Company for working capital purposes
and, until applied, will be used to reduce the amounts outstanding under the
Company's acquisition and working capital facilities. If the Common Stock
Offering is not consummated, the balance of the net proceeds available to the
Company for working capital purposes would be approximately $3.4 million.

The Star Gas long-term debt to be purchased has a weighted average interest
rate of 10.3%, a weighted average maturity of 4.6 years at September 30, 1994
and a final maturity of August 28, 2001. The notes of the Company to be
redeemed bear interest at a floating rate equal to LIBOR plus 9.28% (14.34% at
December 20, 1994) and mature on March 1, 2000.

<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1994, on a pro forma basis giving effect to the Star Gas
Acquisition and the Home Heating Oil Acquisitions (as defined in the Pro Forma
Financial Statements), and as adjusted to give effect to the Offerings and the
use of proceeds therefrom as described under "Use of Proceeds." See the Pro
Forma Financial Statements contained elsewhere herein for the pro forma
capitalization of the Company if the Common Stock Offering is not consummated.

<TABLE><CAPTION>
At September 30, 1994
-------------------------
(dollars in thousands)
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Short-term obligations:
Working capital borrowings(1) . . . . . . . . . . . $ -- $4,000 $ --
Current maturities of long-term debt . . . . . . . 33 800 800
Current maturities of Redeemable Preferred Stock(2) 4,167 4,167 4,167
----- ------ ------
Total short-term obligations . . . . . . . . $4,200 $8,967 $4,967
====== ====== ======

Long-term debt:
Senior notes . . . . . . . . . . . . . . . . . . . $42,632 $42,632 $36,250
Other senior long-term debt(1) . . . . . . . . . . 8,820 11,533 11,533
__% Senior Subordinated Debentures(3) . . . . . . -- --- 125,000
Subordinated notes . . . . . . . . . . . . . . . . 42,632 42,632 36,251
10 1/8% Subordinated Notes(3) . . . . . . . . . . . 50,000 50,000 50,000
9 3/8% Subordinated Debentures(3) . . . . . . . . . 75,000 75,000 75,000
Debt of Star Gas(4) . . . . . . . . . . . . . . . . -- 63,650 --
------- ------- -------
Total long-term debt . . . . . . . . . . . . 219,084 285,447 334,034
------- ------- -------

Redeemable preferred stock:
Cumulative redeemable exchangeable preferred
stock, 409,722 shares authorized, 208,332 shares
outstanding, of which 41,667 are reflected as
current(2) . . . . . . . . . . . . . . . . . . . 16,666 16,666 16,666
Preferred stock of Star Gas . . . . . . . . . . . . . . -- 19,722 --
Stockholders' equity (deficiency):
Preferred stock, 5,000,000 shares
authorized, none outstanding . . . . . . . . . . --- --- ---
Class A Common Stock, 40,000,000 shares
authorized, 18,992,579, 21,482,205 and 22,460,889
shares outstanding . . . . . . . . . . . . . . . 1,899 2,148 2,246
Class B Common Stock, 6,500,000 shares
authorized, 25,963 shares outstanding . . . . . 3 3 3
Class C Common Stock, 5,000,000 shares
authorized, 2,545,139 shares outstanding . . . . 255 255 255
Additional paid-in capital . . . . . . . . . . . . 51,094 72,941 80,141
Deficit(5) . . . . . . . . . . . . . . . . . . . . (132,005) (132,005) (135,710)
Note receivable from stockholder . . . . . . . . . (1,280) (1,280) (1,280)
Minimum pension liability adjustment . . . . . . . (4,534) (4,534) (4,534)
-------- -------- --------
Total stockholders' equity (deficiency) . . . (84,568) (62,472) (58,879)
-------- --------- --------
Total capitalization . . . . . . . . . . . $151,182 $259,363 $291,821
======== ======== ========
</TABLE>

<PAGE>

- ---------------------------

(1) The Company has available under an amended and restated credit agreement
dated as of August 1, 1994 (the "Credit Agreement") a $140 million credit
facility, consisting of a $75 million working capital commitment, a $50
million revolving credit facility which is available for acquisitions and a
$15 million letter of credit facility. No borrowings were outstanding under
the Credit Agreement at September 30, 1994. At December 20, 1994, $24.0
million was outstanding under the acquisition facility of the Credit
Agreement.

(2) 41,667 shares of Redeemable Preferred Stock are subject to mandatory
redemption in each of 1995 through 1999. Prior to redemption, the Company
has the right to exchange shares of Redeemable Preferred Stock, in whole or
in part, for 1999 Notes, subject to meeting certain debt incurrence tests.

(3) Does not give effect to the Exchange Offer. See "Exchange Offer."

(4) Consists of the debt to be purchased with the proceeds of the Offerings:
$27.4 million principal amount of 11.56% Senior Notes, $7.5 million
principal amount of 12.625% Senior Subordinated Notes, $20.0 million
principal amount of Senior Reset Notes and $8.7 million principal amount of
Floating Rate Notes.

(5) If the Offerings had occurred on September 30, 1994, the Company would have
recorded an approximate $3.7 million extraordinary loss on the early
retirement of the debt to be purchased with the proceeds of the Offerings.

<PAGE>

SELECTED FINANCIAL AND OTHER DATA

The following table sets forth selected financial and other data of the
Company and should be read in conjunction with the more detailed financial
statements included elsewhere in this Prospectus. The financial data at the end
of and for each of the years in the five year period ended December 31, 1993
are derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The financial data at September 30, 1994 and for the nine month
periods ended September 30, 1993 and September 30, 1994 are derived from the
unaudited consolidated financial statements of the Company but include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The pro forma
financial data for the year ended December 31, 1993 and for the nine months
ended September 30, 1994 are derived from the historical consolidated financial
statements of the Company. The Company typically generates net income and NIDA
in the quarters ending in March and December and experiences net losses and
negative NIDA during the non-heating season quarters ending in June and
September; thus the results for interim periods are not indicative of the
results that may be obtained for the entire fiscal year. Although EBITDA and
NIDA should not be considered a substitute for net income (loss) as an
indicator of the Company's operating performance and NIDA should not be
considered a measure of the Company's liquidity, they are included in the
following table as they are the bases upon which the Company assesses its
financial performance, compensates management and establishes dividends. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Pro Forma Financial Statements included elsewhere in this
Prospectus.

Year Ended December 31,

Pro Forma(1)
1989 1990 1991 1992 1993 1993
---- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales . . . . . . . . . . . . $541,521 $567,414 $523,243 $512,430 $538,526 $716,072
Cost of sales . . . . . . . . . . 402,178 435,031 378,772 350,941 366,809 465,295
------- ------- -------- -------- -------- --------
Gross profit . . . . . . . . . 139,343 132,383 144,471 161,489 171,717 250,777
Operating expenses . . . . . . . 99,267 106,076 104,435 110,165 123,280 173,777

Amortization of customer lists and
deferred charges . . . . . . . 26,966 30,517 30,025 28,859 28,731 35,440
Depreciation and amortization of
plant and equipment . . . . . 5,127 5,796 5,550 5,534 5,933 13,142
Impairment of long-lived assets . -- -- -- -- -- 33,913
Provision for supplemental benefit -- -- -- 1,974 264 264
------- ------- ------- ------ ------- ------

Operating income (loss) . . . 7,983 (10,006) 4,461 14,957 13,509 (5,759)
Interest expense--net . . . . . . 17,915 20,900 20,728 18,622 20,508 36,257
Other income (expense)--net . . . 2,568 (228) (45) (324) (165) (165)
Share of loss of Star Gas . . . . -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Income (loss) before income taxes
and extraordinary item . . . . (7,364) (31,134) (16,312) (3,989) (7,164) (42,181)
Income taxes (benefit) . . . . . (3,077) (1,867) 250 400 400 580
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item . . . . . . . . . . . . . (4,287) (29,267) (16,562) (4,389) (7,564) (42,761)
Extraordinary item . . . . . . . -- -- -- -- (867) --
------- ------- ------- ------- ------- -------
Net income (loss) . . . . . . $(4,287) $(29,267) $(16,562) $(4,389) $(8,431) $(42,761)
======= ======== ======== ======== ======== =========
Ratio of earnings to fixed
charges(2). . . . . . . . . . . -- -- -- -- -- --
<CAPTION>
Nine Months Ended
September 30,
Pro
Forma(1)
1993 1994 1994
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales . . . . . . . . . . . . $377,384 $385,291 $486,790
Cost of sales . . . . . . . . . . 262,368 257,240 309,501
------- -------- --------

Gross profit . . . . . . . . . 115,016 128,051 177,289
Operating expenses . . . . . . . 89,180 91,907 123,293

Amortization of customer lists and
deferred charges . . . . . . . 18,236 14,802 23,009
Depreciation and amortization of
plant and equipment . . . . . 4,368 4,308 9,375
Impairment of long-lived assets . 4,137 4,665 --
Provision for supplemental benefit 193 210 209
------- ------ ------

Operating income (loss) . . . (1,098) 12,159 21,403
Interest expense--net . . . . . . 15,147 16,721 26,197
Other income (expense)--net . . . (29) 84 209
Share of loss of Star Gas . . . . -- (1,243) --
-------- ------- ------
Income (loss) before income taxes
and extraordinary item . . . . (16,274) (5,721) (4,585)
Income taxes (benefit) . . . . . 218 425 643
------- ------ -------
Income (loss) before extraordinary
item . . . . . . . . . . . . . (16,492) (6,146) (5,228)
Extraordinary item . . . . . . . (867) (654) --
-------- -------- --------
Net income (loss) . . . . . . $(17,359) $(6,800) $(5,228)
========= ======== ========
Ratio of earnings to fixed
charges(2). . . . . . . . . . . -- -- --
</TABLE>
20

<PAGE>
<TABLE><CAPTION>
Nine Months Ended
Year Ended December 31, September 30,

Pro Pro
Forma(1) Forma(1)
1989 1990 1991 1992 1993 1993 1993 1994 1994
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except ratios)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA(3) . . . . . . . . $40,076 $26,307 $40,036 $51,325 $ 48,437 $77,000 $25,836 $ 36,144 $53,996
Interest expense, net . . 17,915 20,900 20,728 18,622 20,508 36,257 15,147 16,721 26,197
NIDA(4) . . . . . . . . . 27,573 4,639 15,744 27,721 23,176 36,677 7,025 15,880 24,820
Ratio of EBITDA to interest
expense, net . . . . . 2.2x 1.3x 1.9x 2.8x 2.4x 2.1x 1.7x 2.2x 2.1x
Gallons of home heating oil
and propane sold . . . 449,040 398,989 385,557 423,354 443,487 579,221 307,247 322,323 417,142

</TABLE>

At December 31, At September 30,1994

As
1989 1990 1991 1992 1993 Actual Adjusted(5)
---- ---- ---- ---- ---- ------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash . . . . . . . . . . . . . . $3,210 $5,529 $2,907 $3,860 $24,614 $17,055 $39,518
Working capital (deficiency) . . 13,544 (5,520) (12,038) (6,744) 16,694 8,357 33,629
Total assets . . . . . . . . . . 286,435 260,665 220,010 252,783 256,589 234,138 386,999
Total long-term debt . . . . . . 143,988 146,193 141,830 135,058 185,311 219,084 334,034
Redeemable preferred stock
(excluding 10,000 25,000 30,023 37,718 20,883 16,666 16,666
current maturities) . . . . . (3,287) (40,087) (61,444) (33,917) (61,964) (84,568) (58,879)
Stockholders' equity (deficiency)

footnotes on following page)

</TABLE>
21

<PAGE>

- ------------------------------
(1) The Pro Forma Statement of Operations and Other Data represent the
historical data derived from the Company's financial statements for 1993,
adjusted to give effect to the Pro Forma Adjustments, including the Heating
Oil Acquisitions, the Star Gas Transactions, the Prior Note Offerings and
the Offerings. See the Pro Forma Financial Statements contained elsewhere
herein.

(2) For purposes of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income (loss) before income taxes, net income (loss)
derived from investments accounted for by the equity method, and
extraordinary items, plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of debt discount and the interest factor in
rental expense. Earnings were insufficient to cover fixed charges by $7.4
million, $31.1 million, $16.3 million, $4.0 million, $7.2 million, $16.3
million and $4.5 million for the years ended December 31, 1989, 1990, 1991,
1992 and 1993, and the nine months ended September 30, 1993 and 1994,
respectively. On a pro forma basis, earnings were insufficient to cover
fixed charges by $42.2 million and $4.6 millon for the year ended December
31, 1993 and the nine months ended September 30, 1994. However, if non-
cash charges to income consisting of depreciation and amortization and non-
cash expenses associated with key employees' deferred compensation plans
were excluded, the Company's earnings would have exceeded fixed charges by
$24.7 million, $5.2 million, $19.3 million, $32.4 million, $27.8 million,
$10.7 million, $18.3 million $40.6 million and $28.0 million, respectively,
for such periods.

(3) EBITDA means operating income before depreciation, amortization and other
non-cash charges.

(4) NIDA means net income (loss), plus depreciation, amortization and other
non-cash charges, less dividends accrued on preferred stock, excluding net
income (loss) derived from investments accounted for by the equity method,
except to the extent of any cash dividends received by the Company.

(5) As adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions and the Offerings;
provided, however, that the as adjusted data include approximately $24.2
million of working capital provided by the Offerings that is not required
for the stated uses. See the Pro Forma Financial Statements contained
elsewhere herein.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION

Overview

In analyzing the Company's results, investors should consider the Company's
active acquisition program, the rapid rate of amortization of customer lists
purchased in heating oil acquisitions, the seasonal nature of the demand for
residential heating and the general ability of heating oil and propane
distributors to pass on variations in wholesale costs to their customers.
Therefore, although net income (loss) calculated in accordance with generally
accepted accounting principles is generally considered by investors to be an
indicator of operating performance, management believes that in evaluating the
Company's results, two additional measures should be considered to supplement
the net income (loss) analysis. The first such measure is operating income
before depreciation, amortization and other non-cash charges (referred to
herein as EBITDA) and the second such measure is net income (loss), plus
depreciation, amortization and other non-cash charges, less dividends accrued
on preferred stock, excluding net income (loss) derived from investments
accounted for by the equity method, except to the extent of any cash dividends
received by the Company (referred to herein as NIDA). Although EBITDA and NIDA
should not be considered substitutes for net income (loss) as an indicator of
the Company's operating performance and NIDA should not be considered a measure
of the Company's liquidity, it is important for an investor to understand these
concepts since management's strategy is to maximize EBITDA and NIDA, rather
than net income. The computations of EBITDA and NIDA are derived from the
Company's financial statements as a supplement to the Company's traditional
financial statements. Because of management's acquisition and other strategies,
it believes that EBITDA is an important indicator as a measure of earnings
derived from operations before non-cash expenses and non-operating expenses,
such as other expenses and income taxes. The following enumerates other
factors that investors should consider.

First, the financial results of a given year do not reflect the full impact
of that year's acquisitions. Most acquisitions have been made during the non-
heating season because many sellers desire to retain winter profits but avoid
summer losses. Therefore, the effect of acquisitions made after the heating
season are not fully reflected in the Company's sales volume and operating and
financial results until the following calendar year.

Second, as stated above, the Company's objective is to maximize NIDA and
EBITDA, rather than net income. The large disparity between NIDA and net income
(loss) is primarily attributable to the substantial amortization of customer
lists and other intangibles in connection with acquisitions. Customer lists and
other intangibles acquired in connection with acquisitions represent the
allocation of acquisition costs which are amortized over the future periods
benefitted by such acquisitions. In general, costs are allocated to assets
based upon the fair market value of the assets purchased, as determined by
arms' length negotiations between the Company and the seller. Substantially all
purchased intangibles have been comprised of customer lists and covenants not
to compete. Amortization of customer lists is a non-cash expense which
represents the write-off of the amount paid for customers acquired in
connection with acquisitions who later terminate their relationship with the
Company. Based on the Company's analysis of historical purchased fuel oil
customer attrition rates, these lists are amortized 90% over a six-year period
and the balance over a 25-year period. However, the Company's net loss of
heating oil customers has only averaged approximately 4% per annum over the
past five years, as the loss of purchased accounts has been partially offset by
new customers obtained through internal marketing. The covenants not to
compete are amortized over the lives of the covenants, which generally range
from five to seven years.

Third, the seasonal nature of the Company's business results in the sale by
the Company of approximately 50% of its annual volume of fuel oil in the first
quarter and 30% in the fourth quarter of each year and 35% of its annual volume
of propane in each of the first and fourth quarters of each calendar year. The
Company

<PAGE>

generally realizes positive NIDA in both of these quarters and negative NIDA
during the warmer quarters ending June and September. As a result, acquisitions
made during the spring and summer months generally have a negative effect on
earnings and a limited impact on NIDA in the calendar year in which they are
made. Most of the costs associated with an acquired distributor are incurred
evenly throughout the remainder of the year, whereas a smaller percentage of
the purchased company's annual volume and gross profit is realized during the
same period.

Finally, changes in total dollar sales do not necessarily affect the
Company's gross profit, EBITDA, net income or NIDA. Since the Company
historically has added a per gallon margin onto its wholesale costs,
variability in supply prices has affected net sales but generally has not
affected EBITDA, net income, NIDA or any other measure of earnings. As a
result, the Company's margins are most meaningfully measured on a per gallon
basis and not as a percentage of sales. While fluctuations in wholesale prices
have not significantly affected demand to date, it is possible that significant
wholesale price increases over an extended period of time could have the effect
of encouraging conservation. If demand were reduced and the Company was unable
to increase its gross profit margin or reduce its operating expenses, the
effect of the decrease in volume would be to reduce EBITDA, net income, NIDA
and any other measure of earnings. Given the Company's operating strategy to
maximize EBITDA and NIDA as described above, an investor should also be aware
of certain risks that are inherent in such a strategy. Although an increased
level of acquisitions (which in turn adds to the Company's plant and equipment
and customer lists) is expected to have a positive impact on the long term
viability of the business, the near term effect of acquisitions would be to
increase EBITDA and NIDA by a significantly greater amount than would be the
increase, if any, of net income because of the substantial impact of
depreciation and amortization expense, items which generally do not impact
EBITDA or NIDA, but which do materially impact net income. A reduced level of
acquisitions, which would be expected to have an adverse impact on the long
term growth of the business, could lead to decreased EBITDA and NIDA, while
possibly increasing net income. In the year of an acquisition, depending on the
month it is consummated, it is possible that EBITDA and NIDA would not be
affected, while net income could be negatively impacted.

To the extent future acquisitions are financed with debt, the interest
expense associated with such debt would not impact EBITDA, but would reduce
NIDA and net income. If the Company were to finance future acquisitions by
issuing new preferred stock, the preferred stock dividends associated with the
new preferred stock would not affect EBITDA or net income, but would reduce
NIDA and increase the Company's stockholders' deficiency.

Since EBITDA and NIDA are not affected by depreciation and amortization, the
Company's failure to replace long-lived assets or its decision to delay needed
capital expenditures could have the short term effect of improving net income
(by minimizing depreciation and amortization expense), but could have a
negative impact on the long-term viability of the business. Because management
is concerned with the Company's long-term viability, and measures its operating
performance by EBITDA and NIDA, it intends to continue making capital
improvements as required.

Factors that impact the Company's ability to continue following its current
operating strategy in the foreseeable future include its ability to continue to
grow through acquisitions, while continuing to replace lost customers through
internal marketing.

<PAGE>

Results of Operations and Other Data

Nine Months Ended September 30, 1994 Compared to Nine Months Ended September
30, 1993

Net sales increased for the first nine months of 1994 to $385.3 million from
$377.4 million for the same period in 1993. The $7.9 million increase was
attributable to volume growth associated with acquisitions ($14.4 million or
3.8%) and to colder weather partially offset by the Company's delivery
efficiency program which shifts summertime deliveries to the more productive
fall and winter months. Also offsetting the effects of acquisitions and colder
weather were lower selling prices, reflecting a lower wholesale cost of product
and attrition in the Company's customer base, especially in the low margin and
commercial segments of the Company's business.

During the first nine months of 1994, home heating oil volume increased to
322.3 million gallons, 4.9% greater than the number of gallons delivered in the
nine months ended September 30, 1993, due to 7.3% colder temperatures (on a
degree-day basis) for the first nine months of 1994 compared to the prior
period and the impact of the nine acquisitions (with annual volumes of 25.8
million gallons) completed in 1993 whose entire nine month volume is first
reflected in 1994. The increase in volume associated with the Company's
acquisition program was not significantly affected by the seven 1994
acquisitions (with annual volumes of 43.3 million gallons) since the majority
of these acquisitions were completed after the heating season. The acquisition
growth and the increase in volume due to colder temperatures were partially
offset by the Company's delivery efficiency program and attrition in the
Company's customer base.

Gross profit increased $13.0 million (11.3%) from $115.0 million (37.4 cents
per gallon) for the nine months ended 1993 to $128.1 million (39.7 cents per
gallon) for the nine months ended 1994. This $13.0 million increase in gross
profit was attributable to the increase in volume and improved home heating
oil margins. The increase in heating oil gross profit was partially offset by
the higher cost of providing heating equipment repair and maintenance services
to customers in response to the severe Northeast winter weather experienced
during the first quarter of 1994.

Direct delivery expense increased $2.4 million from $20.9 million for the
first nine months of 1993 to $23.3 million for the first nine months of 1994.
This increase of 11.6% was greater than expected due primarily to the
additional costs associated with temporary delivery inefficiencies experienced
during the first quarter of 1994 created by the severe winter weather
conditions. The first quarter increase in delivery expense was partially
offset by a reduction in summertime deliveries pursuant to the Company's
delivery efficiency program.

Selling, general and administrative expenses increased slightly from $68.3
million in the first nine months of 1993 to $68.6 million for the first nine
months of 1994. On a per gallon basis, these expenses declined by 4.3% from
22.2 cents to 21.3 cents due to economies of scale associated with acquisitions,
a reduction in marketing expenses, the Company's ongoing commitment of
monitoring its operating expenses and the weather related volume increase.

Amortization of customer lists and deferred charges decreased 13.0%, or $2.9
million, to $19.5 million. These non-cash expenses declined as certain
customer lists and deferred charges became fully amortized. Depreciation and
amortization of plant and equipment decreased 1.4%, or $0.1, to $4.3 million
for the nine months ended September 30, 1994 due to certain fixed assets that
became fully depreciated.

Operating income increased to $12.2 million for the first nine months of 1994
compared with a loss of $1.1 million for the first nine months of 1993. This
significant improvement was due to the volume growth and

<PAGE>

to improved home heating oil margins which were partially offset by weather
related increases in service, delivery and operating expenses. The decline in
depreciation and amortization expense also contributed to the increase in
operating income.

Net interest expense increased by $1.6 million to $16.7 million for the nine
months ended September 30, 1994 due primarily to an increase in the average
long-term borrowings offset by a reduction in the average long-term borrowing
rate. Average long-term borrowings increased due to the issuance in April 1993
of $50 million of 10-1/8% Notes and the issuance in February 1994 of $75
million of 9-3/8% Debentures. The proceeds of these issues were used to
refinance $75 million in long-term debt and to finance the Company's ongoing
acquisition program. Short-term borrowings were also reduced by $6.9 million
on average as part of the proceeds of the debt issuances were used to reduce
working capital borrowings pending application towards the Company's
acquisition program.

The loss before income taxes, extraordinary items, and equity in earnings of
Star Gas were significantly reduced from $16.3 million for the first nine
months of 1993 to $4.5 million for the first nine months of 1994 as the $13.3
million increase in operating income was reduced by the $1.6 million increase
in net interest expense.

Income taxes were approximately $0.4 million for the nine months ended
September 30, 1994 compared to $0.2 million for the first nine months of 1993.
These taxes represent certain state income taxes. The Company has not provided
for any federal income taxes for the nine months ended September 30, 1994 due
to the availability and expected utilization of federal income tax net
operating loss carryforwards.

Based on Petro's ownership percentage of Star Gas at September 30, 1994, $1.2
million was recorded as a loss under the equity method of accounting. On
December 7, 1994, Petro executed certain options to acquire the remaining
common equity of Star Gas.

The extraordinary loss of $0.7 million for the nine months ended September
30, 1994 represents the cash premium paid in connection with the refinancing in
February 1994 of $50.0 million in long-term notes scheduled to mature in June
1994 with the proceeds of the $75 million 9 3/8% Debenture issue. For the nine
months ended September 30, 1993, the Company recorded an extraordinary charge
of $0.9 million representing a cash premium of $0.4 million and the write off
of $0.5 million in debt discount and related deferred charges when $25.0
million of subordinated debt scheduled to mature in 1993 and 1995 was
refinanced.

The net loss for the first nine months of 1994 decreased $10.6 million to
$6.8 million, due to the $13.3 million increase in operating income offset by
the $1.6 million increase in net interest and the $1.2 million of equity loss
in Star.

EBITDA increased 39.9% to $36.1 million in 1994 from $25.8 million for 1993.
This significant improvement was due to an increase in home heating oil volume
and gross profit margins, and a reduction in marketing expenses partially
offset by weather related increases in service, delivery and operating
expenses.

1993 Compared to 1992

Net sales increased in 1993 to $538.5 million from $512.4 million in 1992.
This $26.1 million increase was attributable to volume growth and related
service revenues associated with acquisitions ($55.4 million or 10.8%), offset
by attrition in the Company's customer base and 2.6% warmer weather (on a
degree-day basis).

<PAGE>

In 1993 home heating oil volume increased to 443.5 million gallons, 4.8%
greater than the 423.4 million gallons delivered in 1992 due to the impact of
the nine acquisitions completed in 1992 whose annual volume was fully reflected
for the first time in 1993, and to a lesser extent, the nine acquisitions
completed in 1993. The positive impact of the acquisitions was offset by the
slightly warmer weather and attrition in the Company's customer base.

Gross profit increased $10.2 million (6.3%), from $161.5 million (38.1 cents
per gallon) for 1992 to $171.7 million (38.7 cents per gallon) for 1993. Home
heating oil margins increased 2.0 cents per gallon, which was partially offset
by the higher cost of providing heating equipment repair and maintenance
service to a larger customer base and the utilization of this service as part
of the Company's internal marketing program.

Operating expenses increased $13.1 million (11.9%) from $110.2 million in
1992 to $123.2 million in 1993, primarily due to acquisitions, the severe
weather conditions experienced in March 1993 that temporarily increased
delivery expenses during that month and the expansion of the Company's
marketing program. On a per gallon basis, these expenses increased 6.9% from
26.0 cents in 1992 to 27.8 cents in 1993. However, after adjustment for the
warmer weather in 1993, the increase was only 4.2% per gallon which was
attributable entirely to above mentioned severe March weather and the
Company's marketing program.

The provision for supplemental benefits, representing the present value of
such benefits, returned to the more normal level of $0.3 million compared to
the accelerated accrual of $2.0 million in 1992.

Amortization of customer lists and deferred charges were $28.7 million,
approximately the same as in 1992. While volume increased 4.8%, these non-cash
expenses remained equal as certain customer lists and capitalized expenses
became fully amortized. Depreciation and amortization of plant and equipment
increased 7.2%, or $0.4 million, to $5.9 million for 1993 due to the
acquisitions.

Operating income was $13.5 million for 1993 compared to $15.0 million in
1992, as the 4.8% increase in volume and the increase in home heating oil
margins were offset by higher residential service related costs, increased
delivery and marketing expenses.

Net interest expense increased $1.9 million, or 10.1%, to $20.5 million for
1993. A reduction in the average borrowing rate was offset by a $31.1 million
increase in long-term borrowings from $148.5 million, at an average interest
rate of 11.9%, to $179.6 million, at an average interest rate of 11.4%. This
increase in long-term borrowings was due to the conversion in March 1993 of
$12.8 million of Redeemable Preferred Stock into Subordinated Notes due in 2000
and the issuance in April 1993 of $50.0 million of 10 1/8% Notes. The proceeds
of this debt issuance were used to repay $25.0 million of long-term obligations
with the balance being used to fund, in part, the Company's acquisition
program. Offsetting the increase in long-term borrowings was a decline in
short-term borrowings from $17.9 million, at an average interest rate of 5.9%,
to $11.2 million, at an average interest rate of 5.4%. In addition, the
Company reduced bank fees and generated interest income on higher cash balances
in 1993 compared to 1992.

The loss before income taxes and extraordinary items was $7.2 million in
1993, $3.2 million, or 79%, greater than in 1992, due to the reduction in
operating income and the increase in interest expense. Income taxes of $0.4
million were the same for both periods and represent certain state income taxes
applicable to profitable subsidiaries that are not included in consolidated
state returns. The Company had losses for federal income tax purposes in each
of these periods.

In May 1993, the Company recorded an extraordinary charge against earnings of
$0.9 million. This represented the cash premium paid of $0.4 million to retire
$25.0 million of the Company's long-term

<PAGE>

obligations maturing in 1993 and 1995 and the write off of $0.5 million in debt
discount and deferred charges associated with these obligations.

The net loss increased from $4.4 million in 1992 to $8.4 million in 1993 due
to the decline in operating income, the increase in interest expense and the
extraordinary charge.

EBITDA was $48.4 million compared to $51.3 million in 1992 as the 4.8%
increase in volume and the increase in home heating oil margins were offset by
higher residential service related costs and increased marketing expenses.

1992 Compared to 1991

Net sales decreased in 1992 to $512.4 million from $523.2 million in 1991.
This $10.8 million decrease was due to lower home heating oil prices ($37.9
million or 7.2%) as a result of lower per gallon wholesale costs, as well as to
reductions in sales of products other than home heating oil to commercial
accounts ($17.0 million or 3.3%), which were partially offset by an increase in
home heating oil volume ($41.0 million or 7.8%). The average price of home
heating oil in 1992 was approximately 14.8% below the 1991 levels, when prices
were affected by the Persian Gulf crisis.

In 1992, home heating oil volume increased to 423.4 million gallons, 9.8%
greater than the 385.6 million gallons delivered in 1991 due to colder
temperatures (45.3 million gallons) and the impact of the nine acquisitions
completed in 1991 whose full annual volume was realized for the first time in
1992 and from a portion of the annual volume associated with the nine
additional acquisitions completed in 1992 (19.2 million gallons). The impact of
the acquisitions was offset in part by attrition in the Company's customer
base, as well as the loss of certain of its high volume, low margin commercial
accounts, as the Company continued to focus its marketing efforts on smaller,
higher margin, more service-sensitive residential customers.

Gross profit increased $17.0 million (11.8%), or 1.8% per gallon, from $144.5
million in 1991 (37.5 cents per gallon) to $161.5 million in 1992 (38.2 cents
per gallon). This increase exceeded the percentage increase in home heating oil
volume due to improved per gallon gross profit margins attributable to the
Company's ability to add an increasing gross margin onto its wholesale costs,
designed to offset the impact of inflation, account attrition and weather.

Operating expenses increased 5.5% compared to the 9.8% increase in volume and
declined 3.9% on a per gallon basis from 27.1 cents in 1991 to 26.0 cents in
1992. The per gallon reduction in operating expenses reflects the savings from
the Company's cost reduction program which was begun in April 1991 and economies
of scale realized from the Company's acquisition program.

Amortization of customer lists declined 5.4%, or $1.3 million, to $23.5
million in 1992 as certain customer lists became fully amortized and a greater
portion of the purchase price in more recent acquisitions was allocated to
restrictive covenants and included in deferred charges. As a result of this
allocation, amortization of deferred charges increased 3.5% to $5.4 million in
1992. On a combined basis, amortization of customer lists and deferred charges
declined 3.9% as the annual amortization associated with assets that became
fully amortized was greater than the amount associated with the limited number
of acquisitions in 1991 and the impact of the 1992 acquisitions was not fully
realized in the current year.

Depreciation and amortization of plant and equipment was $5.5 million for
1992, approximately the same as in 1991, as reductions related to assets that
became fully depreciated were offset by increases associated with assets
purchased in 1991 and 1992.

<PAGE>

Provision for supplemental benefit in 1992 represents the present value of a
supplemental retirement benefit ($2.0 million) which is being paid over 10
years.

Operating income increased to $15.0 million from $4.5 million in 1991. This
improvement was due to an increase in home heating oil volume and an
improvement in per gallon operating income associated with higher gross profit
margins, lower per gallon operating expenses and the decline in non-cash
expenses, partially offset by the provision for the supplemental benefit in
1992.

Net interest expense in 1992 decreased $2.1 million, 10.2% below 1991, due to
a decline in average outstanding borrowings from 1991 to 1992 of $15.6 million,
which caused a reduction of $1.7 million in interest expense and to an increase
in interest income ($0.4 million), generated primarily by a higher average
balance in U.S. Treasury Notes held in the cash collateral account. The
Company's average borrowing rate increased from 11.2% in 1991 to 11.3% in 1992.
Average working capital borrowings dropped from $35.0 million in 1991 at an
average interest rate of 8.2% to $17.9 million in 1992 at an average interest
rate of 5.9%. Average fixed rate borrowings increased from $147.0 million in
1991 to $148.5 million in 1992 with an average interest rate of 11.9% for both
years.

Pretax loss decreased $12.3 million in 1992 from 1991 due to the increase in
operating income and the reduction in interest expense, partially offset by the
increase in other expenses. Taxes increased from $0.3 million in 1991 to $0.4
million in 1992. Despite the pretax loss, the Company was required to pay
certain state income taxes in 1992 on profitable subsidiaries that are not
included in consolidated state returns. The 1992 loss, while not providing any
Federal tax benefits in 1992, will increase the Company's tax loss
carryforwards to approximately $43.0 million as of December 31, 1992.

Net loss decreased to $4.4 million in 1992, a $12.2 million improvement over
the $16.6 million net loss in 1991.

EBITDA increased 28.2% to $51.3 million in 1992 from $40.0 million in 1991.
This improvement was primarily the result of the 9.8% home heating oil volume
increase and a 1.7 cents per gallon EBITDA margin improvement.

Liquidity and Financial Condition

The Company has financed its growth through a combination of internally
generated capital and the issuance of common stock, redeemable preferred stock
and debt. As indicated in the table below, the Company has financed
acquisitions and other asset requirements made from January 1, 1989 to December
31, 1993, 62.6% with internally generated cash and funds from a 1992 offering
of 4.3 million shares of Class A Common Stock, 13.3% with redeemable preferred
stock and 24.1% with long-term debt and working capital. For the year ended
December 31, 1993, EBITDA was 2.4 times net interest expense.

<PAGE>

Funding Sources
---------------------------------------------------------------------------------------
Acquisitions and
Purchases Internally Generated Funds Long-Term Debt and Net
Year Fixed Asset and Additional Equity(1) Redeemable Preferred Stock Working Capital(2)
---- ----------- ------------------------ -------------------------- ------------------

(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1989 $ 42,900 $ 20,643 48.1% $ 9,140 21.3% $13,117 30.6%

1990 33,077 (544) (1.6) 15,000 45.3 18,621 56.3

1991 16,399 13,834 84.4 4,449 27.1 (1,884) (11.5)

1992 48,478 64,431 132.9 7,500 15.5 (23,453) (48.4)
1993 34,654 11,461 33.1 (12,764) (36.8) 35,957 103.7
------ ------ ----- -------- ---- ------ -----

Total $175,508 $109,825 62.6% $23,325 13.3% $42,358 24.1%
======== ======== ======= =======
</TABLE>
- -----------------------------

(1) Internally generated funds consist of net income plus depreciation and
amortization less dividends. Additional equity consisted of $42.7 million
from the sale of Class A Common Stock in 1992.

(2) Net working capital was used for purposes other than acquisitions and long-
term requirements. This column reflects only that portion of net working
capital utilized to make acquisitions and purchase fixed assets.

The Company's cash flow from operations, as well as its ability to access
long-term debt and equity in both the public and private markets, has provided
sufficient capital to fund the Company's acquisition program. In February 1994,
the Company realized net proceeds of $71.1 million from its offering of its
9 3/8% Debentures. Of such net proceeds, $50.7 million was used to repay $50.0
million of outstanding notes, including premium, and the remaining $20.4
million of the proceeds became available to finance the Company's ongoing
acquisition program. As a result of the repayment of such outstanding notes, a
$20.0 million cash collateral account securing these notes was released to the
Company, increasing the amount available for acquisitions to $40.4 million. As
the Company continues to expand or the opportunity to refinance existing debt
arises because of interest rate considerations or maturity, the Company will
utilize both the public and private markets to raise capital when it deems
appropriate.

Net cash provided by operating activities of $47.9 million, along with the
$40.4 million of net proceeds from the issuance and refinancing of debt in
February 1994 as mentioned above, amounted to $88.3 million for the nine months
ended September 30, 1994. These funds were utilized in investing activities
for acquisitions and the purchase of fixed assets totalling $26.2 million and
in financing activities to repay $28.0 million of working capital borrowings,
to pay dividends of $12.6 million, to repurchase mandatorily redeemable
preferred stock of $4.2 million, to repurchase Class B Common Stock for $3.3
million, for the payment of deferred financing costs of $1.4 million and to
make principal payments on other long-term obligations of $0.2 million. In
addition, the Company financed a portion of its 1994 acquisitions with notes
payable in the aggregate amount of $8.8 million. As a result of the above
activity, the Company's cash balance increased by $12.4 million during this
nine-month period.

<PAGE>

Net cash provided by operating activities of $36.6 million for the year ended
December 31, 1993, net of repayments of working capital borrowings of $4.0
million, along with the $48.1 million of net proceeds from the April 1993
public offering of the 10 1/8% Notes amounted to $80.7 million. These funds
were utilized in investing activities for acquisitions, purchases of fixed
assets and the investment in Star Gas, all of which totalled $34.7 million,
and in financing activities to pay dividends of $14.6 million, to repurchase
subordinated debt, including premium, of $25.4 million, to deposit $5.0 million
into a cash collateral account to partially secure certain outstanding notes,
and to make principal payments on other long-term obligations of $0.3 million.

The Company has available a $140 million credit facility under the Credit
Agreement, consisting of a $75 million working capital commitment, a $50
million revolving credit facility which is available for acquisitions and a $15
million letter of credit facility. See "Description of Other Indebtedness and
Redeemable Preferred Stock -- Credit Agreement." No borrowings were
outstanding under the Credit Agreement at September 30, 1994. At December 20,
1994, $24.0 million was outstanding under the acquisition facility of the
Credit Agreement. At September 30, 1994 the Company had net working capital of
$8.4 million.

For 1995, the Company's financing obligations include redeeming $4.2 million
of Redeemable Preferred Stock and paying $3.0 million in dividends for such
stock. In addition, the Company anticipates paying $13.3 million in Common
Stock dividends (based on the current dividend rate). Based on the Company's
current cash position, bank credit availability expected net cash to be
provided by operating activities for 1995, and the proceeds from the Offerings,
the Company expects to be able to meet all of the above mentioned obligations
in 1995, as well as meet all of its other current obligations as they become
due.

<PAGE>

BUSINESS

Petro is the largest retail distributor of home heating oil and the tenth
largest retail distributor of propane in the United States. The Company's home
heating oil division had total sales of $546.4 million for the twelve months
ended September 30, 1994 and currently serves approximately 417,000 customers
in 28 markets in the Northeast, including the metropolitan areas of Boston, New
York City, Baltimore, Providence and Washington, D.C. The Company's propane
division had total sales of $101.4 million for the twelve months ended
September 30, 1994 and currently serves more than 145,000 customers in 63
locations in the Midwest and Northeast.

In addition to sales of home heating oil and propane, the Company installs
and repairs heating equipment, rents water softeners, sells propane appliances
and, to a limited extent, markets other petroleum products to commercial
customers, including diesel fuel and gasoline.

Installation and repair of heating equipment is provided as a service by the
Company to its heating oil customers, and has represented approximately 11% per
year of the Company's net sales for the last three fiscal years. The Company
considers the provision of installation and repair services to be an integral
part of its basic fuel oil business. Accordingly, the Company regularly
provides various service incentives to obtain and retain fuel oil customers and
such services are not designed to generate profits. Except in isolated
instances, the Company does not provide service to any person who is not a
heating oil customer.

Sales and installation of propane appliances to residential users are offered
to the Company's propane customers. Such items represented less than 5% of the
propane division's net sales for the twelve months ended September 30, 1994.

For the years ended December 31, 1991, 1992 and 1993, sales of home heating
oil and propane (not including related installation and service) constituted
approximately 83% of the Company's net sales, excluding sales of Star Gas.

Fundamental Characteristics

Unaffected by General Economy

The Company's business is relatively unaffected by business cycles. As home
heating oil and propane for residential use are such basic necessities,
variations in the amount purchased as a result of general economic conditions
have been limited.

Customer Stability

The fuel oil division has a relatively stable customer base due to the
tendency of homeowners to remain with their traditional distributors and a
majority of home buyers remaining with the previous homeowner's distributor.
The Company's fuel oil customer base each year includes approximately 90% of
the prior year's customers and home buyers who have purchased their homes from
customers. In an acquisition of a fuel oil distributor, while the Company loses
approximately 90% of the acquired customers within the first six years, the
retention of a majority of the homes underlying such customers make the homes
included in the customer list similar to the prior year. Management believes
its propane customer base to be relatively stable as well. In excess of 95% of
the Company's retail propane customers lease their tanks from the Company. The

<PAGE>

inconvenience associated with switching tanks greatly reduces a propane
customer's tendency to change distributors.

Approximately 80% of the Company's residential customers receive their fuel
supply needs pursuant to an automatic delivery system without the customer
having to make an affirmative purchase decision. The Company delivers home
heating oil and propane to its customers an average of approximately six times
during the year, depending upon weather conditions and historical consumption
patterns. In addition, the Company provides home heating equipment repair
service on a seven days a week, 52 weeks a year basis, generally within four
hours of request.

Weather Stability

Average temperatures over time have varied to a very limited extent
notwithstanding the warm winter weather experienced in 1990 and 1991.
Nevertheless, there can be no assurance that average temperatures in future
years will not be above the historical average. The following table presents
the average daily temperature (in degrees Fahrenheit) in the metropolitan New
York City area for January through March and October through December of the
year indicated (which are considered to be the heating season months):

<TABLE><CAPTION>
Average Average Average
Year Temperature Year Temperature Year Temperature
---- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C>
1960 . . . . . . . 40.4 1971 . . . . . . . . . 41.9 1982 . . . . . . . . 42.6
1961 . . . . . . . 41.9 1972 . . . . . . . . . 40.5 1983 . . . . . . . . 42.9
1962 . . . . . . . 40.0 1973 . . . . . . . . . 43.8 1984 . . . . . . . . 43.4
1963 . . . . . . . 41.1 1974 . . . . . . . . . 41.9 1985 . . . . . . . . 42.5
1964 . . . . . . . 42.1 1975 . . . . . . . . . 43.5 1986 . . . . . . . . 42.5
1965 . . . . . . . 41.5 1976 . . . . . . . . . 39.3 1987 . . . . . . . . 42.1
1966 . . . . . . . 41.9 1977 . . . . . . . . . 40.1 1988 . . . . . . . . 41.1
1967 . . . . . . . 40.5 1978 . . . . . . . . . 39.5 1989 . . . . . . . . 40.8
1968 . . . . . . . 40.2 1979 . . . . . . . . . 43.0 1990 . . . . . . . . 47.0
1969 . . . . . . . 40.4 1980 . . . . . . . . . 39.8 1991 . . . . . . . . 44.3
1970 . . . . . . . 39.8 1981 . . . . . . . . . 41.1 1992 . . . . . . . . 41.9
1993 . . . . . . . . 41.5
</TABLE>
- ------------------------------
Source: National Oceanic and Atmospheric Administration

Insulation from Oil and Propane Price Volatility

The Company has been insulated from the volatility of wholesale oil prices
due to its policy of maintaining on average no more than a ten day inventory of
home heating oil and by limiting its activities to the retail distribution of
home heating oil. Although the price of crude oil has been volatile, this has
not materially affected the performance of the Company's fuel oil division.
The Company has been able to add an increasing gross margin onto its wholesale
costs, whatever their level, designed to offset the impact of inflation,
account attrition and weather.

The profitability of the Company's retail propane business will be largely
determined by the difference between the purchase price and the sales price of
propane. To reduce its exposure to price fluctuations, the Company intends to
maintain an inventory policy with respect to propane similar to that
traditionally

<PAGE>

maintained for home heating oil. The Company intends to purchase propane on a
short term basis so that its supply costs will fluctuate with market price
variations. Should wholesale propane prices change in the future, the Company
believes that margins on its retail propane distribution business would also
change in the short-term because retail prices tend to change less rapidly than
wholesale prices. The Company is unable to predict, however, how and to what
extent a substantial change in the wholesale cost of propane would affect
margins and profitability.

Oil and Propane Supply

Petro's policy of contracting for a majority of its home heating oil supply
with a diverse group of domestic sources minimizes the potential impact of
foreign supply disruptions. This diversity, along with purchasing a certain
portion of its needs on the spot market, enables the Company to obtain supplies
at the lowest possible cost without jeopardizing product security. Given the
low proportion of crude oil that is refined into home heating oil and the
importance of home heating oil during cold periods, the Company believes that,
in the event of foreign oil supply disruptions, the level of production of home
heating oil will generally continue unaffected compared to other oil products.

The Company is not dependent upon any single propane supplier or group of
propane suppliers. To assure adequate supply, a portion of the Company's
propane inventory is purchased under supply contracts which typically have a
one year term and a fluctuating price relating to spot market prices. The
balance of the Company's propane suppliers are purchased on the spot market.
The Company owns a 22 million gallon propane storage facility located in
Seymour, Indiana which provides the Company certain propane supply advantages.
Supplies of propane are typically readily available and not easily subject to
disruption by international market forces. To reduce its exposure to price
fluctuations, the Company intends to maintain an inventory policy with respect
to propane similar to that of home heating oil.

Conversions to Natural Gas

The rate of conversion from the use of home heating oil to natural gas is
primarily affected by the relative prices of the two products and the cost of
replacing an oil-fired heating system with one that uses natural gas. The
Company believes that approximately 1% of its heating oil customer base
annually converts from home heating oil to natural gas. Even when natural gas
had a significant price advantage over home heating oil, such as in 1980 and
1981 when there were government controls on natural gas prices or, for a short
time in 1990 and 1991, during the Persian Gulf crisis, the Company's customers
converted to natural gas at only a 2% annual rate. Since such time, natural
gas conversions have returned to their approximate 1% historical annual rate as
the prices for the two products have been at parity.

<PAGE>

The following table presents the percentage of the Company's heating oil
customers that have converted to natural gas annually from 1983-1993:

Natural Gas Conversions
Year Percent
---- -------

1983 . . . . . . . . . . . . . . . . . . . . . 0.5
1984 . . . . . . . . . . . . . . . . . . . . . 0.6
1985 . . . . . . . . . . . . . . . . . . . . . 0.7
1986 . . . . . . . . . . . . . . . . . . . . . 0.8
1987 . . . . . . . . . . . . . . . . . . . . . 0.9
1988 . . . . . . . . . . . . . . . . . . . . . 1.0
1989 . . . . . . . . . . . . . . . . . . . . . 1.0
1990 . . . . . . . . . . . . . . . . . . . . . 1.5
1991 . . . . . . . . . . . . . . . . . . . . . 1.4
1992 . . . . . . . . . . . . . . . . . . . . . 1.1
1993 . . . . . . . . . . . . . . . . . . . . . 1.0

The rate of conversion from the use of propane to natural gas is primarily
affected by the availability of natural gas. When natural gas becomes
available to an area, residential propane customers can easily and
inexpensively convert their systems. The expansion of natural gas into rural
propane markets has been inhibited by the required capital costs. For 1993,
Star Gas customers converted to natural gas at a rate of approximately 0.5% per
annum.

Environmental Matters

Petro has not incurred any significant environmental compliance costs. This
is primarily due to the Company's general policy of not owning or operating
fuel oil terminals and of closely monitoring its compliance with all
environmental laws. While Petro has received notifications for three sites
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, two claims against the Company were voluntarily dismissed and the
third was closed for $20,000. There is no environmental risk associated with
propane since if it is accidentally released from a storage container it
becomes a gas and dissipates.

Home Heating Oil

Industry Overview

Since the 1930s, oil has been a primary source of home heat in the Northeast.
The Northeast accounts for approximately two-thirds of the demand for home
heating oil in the United States and, during 1991, approximately 7.7 million
homes, or approximately 40% of all homes in the Northeast, were heated by oil.
In recent years, demand has been affected by conservation efforts and
conversions to natural gas. In addition, as the number of new homes that use
oil heat has not been significant, there has been virtually no increase in the
customer base due to housing starts. As a result, residential home heating oil
consumption in the Northeast has declined from approximately 5.3 billion
gallons in 1982 to approximately 4.8 billion gallons in 1992. The Company does
not expect consumption to decline materially as a result of further
conservation efforts and conversions to natural gas because, unless worldwide
oil shortages develop, consumers have little incentive to take additional
conservation measures beyond what they have already implemented. In addition,
losses of

<PAGE>

customers to gas heat as an alternate energy source are presently insignificant
due to the recent stabilization of retail oil prices relative to retail natural
gas prices and the cost of conversion. See "Business--Fundamental
Characteristics--Conversions to Natural Gas."

The home heating oil distribution business is highly fragmented and
characterized by numerous local fuel oil distributors, most of which have fewer
than 20 employees and operate within a 25-mile radius from their distribution
facility. According to the United States Bureau of Census, there were
approximately 3,700 independently-owned and operated home heating oil
distributors in the Northeast at the end of 1992. Generally, these companies
were established in the late 1940s and early 1950s in response to the post-
World War II suburban housing boom. Now, approximately 45 years later, many of
the proprietors of these businesses are considering retirement and selling
their operations.

Business Strategy

Current management assumed control of the Company in 1979 and restructured
the Company's fuel oil operations by consolidating operating branches and
focusing primarily on the retail sale of home heating oil. In addition,
corporate overhead was significantly reduced, primarily through a reduction in
the number of employees and related expenses. After this reorganization,
management perceived an opportunity to achieve substantial growth and increased
profitability by acquiring fuel oil distributors in new and existing markets.

Acquisition Strategy. The Company's strategy is to continue to grow its fuel
oil operations through the acquisition and integration of additional
distributors in existing and new markets.

The Company acquires two types of fuel oil distributors. The first type are
relatively small and easily integrated into the Company's branch system,
resulting in significant economies of scale through the centralization of the
purchasing, marketing, credit, data processing and other administrative
functions of the acquired distributor. The second type are larger, stand-alone
businesses that are not integratable, but are usually in new markets.
Acquisitions of these businesses not only provide attractive investment
returns, but also provide hubs for future expansion.

From 1979 through the date hereof, the Company made 154 acquisitions of home
heating oil distributors, of which 24 resulted in the Company's expansion into
new markets and the remaining were located in existing markets. After an
initial start-up period, the Company's acquisitions have been made at a
relatively steady pace, with the Company acquiring an average of 14 companies
annually from 1984 through 1989, which, excluding one large acquisition in
1987, averaged 3.4 million gallons annually per acquisition, and cost an
average of $1.6 million per acquisition. While the Company continued to acquire
distributors in 1990 and 1991, it did so at a reduced pace, despite an increase
in opportunities, since the warm winter weather in those years limited the
Company's internally-generated capital and access to attractively priced
external capital.

The following table sets forth the number of home heating oil distributors
acquired by the Company during the 1979 to 1994 period, including the
approximate number of customers acquired and the gallons which such customers
purchased from the acquired distributors in the year preceding such
acquisition:

<PAGE>

Numbers of
Number of Number of Gallons Acquired
Year Acquisitions Customers Acquired (in thousands)
---- ------------ ------------------ --------------
<S> <C> <C> <C>
1979 . . . . . . . . . 1 800 900

1980 . . . . . . . . . 3 6,950 8,910
1981 . . . . . . . . . 6 50,800 49,050
1982 . . . . . . . . . 4 19,900 23,600
1983 . . . . . . . . . 5 40,000 65,151
1984 . . . . . . . . . 13 51,300 62,420

1985 . . . . . . . . . 10 49,900 61,934
1986 . . . . . . . . . 16 46,800 53,375
1987 . . . . . . . . . 12 76,300 114,527
1988 . . . . . . . . . 20 47,300 53,287
1989 . . . . . . . . . 16 34,400 51,569

1990 . . . . . . . . . 12 35,600 42,859
1991 . . . . . . . . . 9 15,300 18,220
1992 . . . . . . . . . 9 65,200 65,618
1993 . . . . . . . . . 9 27,652 25,800
1994 (Year to date) . . 9 36,322 47,216
</TABLE>

The Company's active acquisition program is designed to capitalize on the
highly fragmented nature of the home heating oil industry, Petro's acquisition
expertise, as well as what management believes to be an absence of competitors
with the combination of acquisition experience, reputation and access to
capital equivalent to that of Petro. In the Northeast, there are approximately
3,700 independently-owned and operated home heating oil distributors. Many of
the proprietors of these businesses are of retirement age and may be receptive
to selling their operations. Another source of acquisitions are companies that
are owned by individual entrepreneurs who find expansion within the heating oil
industry difficult, either operationally or financially, or who have other
investment opportunities.

The Company has an acquisition staff whose responsibility it is to develop
leads, analyze potential purchases, negotiate purchase prices and contracts and
oversee the integration process. This has resulted in acquisitions generally
requiring only three to four weeks from the time an understanding is reached to
the consummation of the transaction and the integration of the acquired
distributor into Petro's operations. In August 1993, the Company added two
senior managers to its acquisition staff in order to enhance the Company's
ability to actively identify new acquisition opportunities.

The two principal criteria the Company uses to evaluate a potential fuel oil
acquisition are return on investment and operational fit. The Company
determines the earnings potential of a possible acquisition using its
historical home heating oil volume and gross profit margin and the Company's
anticipated cost of operating the acquired distributor. Based on the
anticipated earnings, the Company determines the price it will offer for the
distributor to be acquired which is calculated to provide the appropriate
return on investment. The Company seeks an annual EBITDA return of 25% to 30%
on its capital investments in home heating oil acquisitions. The determination
of operational fit is based on the Company's evaluation of such distributor's
customer profile, including annual home heating oil gallons sold, the number of
customers on automatic delivery, types of service plans, customer payment
patterns and other operating matters such as fleet and supply requirements and
compliance with environmental and other laws.

<PAGE>

Recognizing the service nature of the home heating oil business, while
economies of scale are sought with each acquisition, the Company tries to
minimize changes that could adversely affect customer or employee relations. By
paying close attention to the operational, as well as financial,
characteristics of an acquisition, the Company has avoided significant problems
relating to its acquisitions over the past 14 years. This policy has not only
reduced the potential monetary risks associated with an acquisition but has
also enabled senior management to focus on new purchases rather than on post-
acquisition matters.

Petro is the largest retail distributor of home heating oil in the United
States and management believes there is no home heating oil distributor which
has a combination of acquisition experience, reputation and access to capital
comparable to Petro's. Petro is the only distributor operating in as many as
28 markets, and the Company believes that it sells approximately 3.5 times as
many gallons of retail home heating oil as the next largest distributor. While
in each of Petro's markets there are a limited number of distributors that from
time to time compete for acquisitions, these are generally small enterprises
that have limited capital resources and lack structured acquisition programs.
In addition, after 154 acquisitions, there is an awareness throughout the home
heating oil industry of Petro's interest in and ability to consummate
transactions. This high profile within the industry, combined with the
Company's reputation among potential sellers, results in Petro having the
opportunity to review many of the acquisition opportunities in the Northeast.
Several acquisition opportunities are currently being evaluated.

Operating Strategy. The Company has historically achieved operating
economies of scale through the centralization of accounting, purchasing,
credit, data processing and other administrative functions. The Company has
identified the best operating practices being employed by its branches and is
implementing those procedures throughout the Company. Petro has recently
adopted an operating strategy to capitalize upon its size and developments in
technology to become more operationally efficient as well as to improve its
customer retention through the utilization of advanced information processing
and telecommunication systems. Such systems are currently in use by other
distribution businesses, but not generally employed by other retail heating oil
companies. To accomplish this goal, in August 1994, the Company hired Thomas
M. Isola as Chief Operating Officer.

Marketing Strategy. The Company has recently begun to refine its marketing
efforts to focus on customer satisfaction rather than trying to solicit new
customers through the use of financial incentives. This effort, led by the
Company's new Senior Vice President of Marketing, Alex Szabo, consists of two
phases. The first phase is to implement Company-wide the best marketing
practices employed at its branches to add and retain accounts. The second
phase is designed to enhance customer satisfaction and thereby improve customer
retention by implementing its new operating procedures.

Customers and Sales

The Company's home heating oil division currently serves approximately
417,000 customers in the following 28 markets through a sales force of 145
individuals currently based primarily in the Company's branch offices:

<PAGE>

Connecticut New Jersey

Bridgeport--New Camden
Haven Neptune
Hartford Newark
(Metropolitan) (Metropolitan)
Litchfield County North Brunswick
Southern Fairfield Rockaway
County Trenton

Maryland/Virginia/D.C. New York

Baltimore Bronx, Queens and
(Metropolitan) Kings Counties
Washington, D.C. Eastern Long Island
(Metropolitan) Staten Island
Western Long Island
Dutchess County

Massachusetts Pennsylvania

Boston Allentown
(Metropolitan) Berks County
Northeastern (Centered in
Massachusetts Reading)
(Centered in Lebanon County
Lawrence) (Centered in
Springfield Palmyra)
Worcester Bucks County
(Centered in
Southampton)

New Hampshire Rhode Island

Milford Providence
Portsmouth
Portsmouth

Approximately 85% of the Company's fuel oil customers receive deliveries
pursuant to an automatic delivery system in which individual deliveries are
scheduled by computer based upon each customer's historical consumption
patterns and prevailing weather conditions. The Company delivers home heating
oil approximately six times during the year to the average customer. The
Company's practice is to bill customers promptly after delivery. In addition,
approximately 30% of the Company's customers are on the Company's budget
payment plan whereby their estimated annual oil purchases and service contract
is paid for in a series of equal monthly payments over an 11 or 12 month
period. Historically, the Company has lost a portion of its customer base each
year for various reasons, including customer relocation, price competition and
conversions to natural gas.

To generate leads for new fuel customers, the Company utilizes a variety of
techniques such as monitoring real estate turnover among its customer base as
well as among potential customers in the markets in which it operates. The
Company has instituted an ongoing customer service training and sensitivity
program in an effort to provide superior service to its existing customers.

<PAGE>

Propane

Industry Overview

Propane serves as an alternative to natural gas in rural and suburban areas
where natural gas is unavailable or portability of product is required.
Propane competes primarily with natural gas, electricity and fuel oil as an
energy source principally on the basis of price, availability and portability.
The level of consumption of propane throughout the United States has remained
relatively constant over the past ten years. Propane is generally more
expensive than natural gas in locations served by natural gas, although propane
is often sold in such areas as a standby fuel for use during peak demands and
during interruption in natural gas service. The expansion of natural gas into
traditional propane markets has historically been inhibited by the capital
costs required to expand distribution and pipeline systems. However, the
extension of natural gas pipelines tends to displace propane distribution in
the neighborhoods affected as equipment using propane can be converted to
natural gas use at little expense. The Company believes that new opportunities
for propane sales arise as more geographically remote neighborhoods are
developed. Propane is generally less expensive to use than electricity for
space heating, water heating and cooking and therefore competes effectively
with electricity.

Propane is similar to fuel oil in application; nevertheless, propane and fuel
oil have generally developed their own distinct markets. The residential and
commercial propane market is generally in rural areas and national in scope
while the market for fuel oil is principally located in the Northeast.

The propane distribution business is highly fragmented with primarily three
types of participants: large multi-state marketers with many branch locations,
smaller, local independent marketers and farm cooperatives. Based on industry
publications, the Company believes that the ten largest multi-state retail
marketers of propane, including Star Gas, account for less than 35% of the
total retail sales of propane in the United States, and that no single marketer
has a greater than 15% share of the total retail market in the United States.

Most of Star Gas' retail branch locations compete with three or more
marketers or distributors. The principal factors influencing competition with
other retail marketers are price, reliability and quality of service,
responsiveness to customer needs and safety concerns. Each branch location
operates in its own competitive environment as retail marketers are located in
close proximity to customers to lower the cost of providing service. The
typical branch location has an effective marketing radius of 25 miles.

Business Strategy

The Company believes that the propane industry is an attractive complement to
its heating oil business and possesses many of the same industry and operating
characteristics. The Company has begun to apply the acquisition and operating
techniques it has successfully applied in the heating oil industry to its
propane operations. In connection with its investment in Star Gas, William
Powers, a Vice President of Petro, became President of Star Gas. With the
assistance of the Company's management, during the past year, Star Gas
restructured its operations through the sale of various non-core assets,
including a trucking operation in Texas and underperforming propane operations
in Texas and Georgia, and consolidated various corporate functions, reducing
management overhead. Star Gas initiated the Company's propane acquisition
strategy with the purchase of two propane distributors with aggregate annual
volume of 1.2 million gallons.

Acquisition Strategy. The Company intends to grow its propane division
through the acquisition and integration of additional distributors in existing
and new markets. The Company intends to expand its propane business primarily
through the acquisition of smaller propane distributors that can be integrated
with existing

<PAGE>

operations. The Company will also pursue acquisitions of larger distributors
which would establish new markets and broaden its geographic coverage.
However, there are a number of propane companies larger than Star Gas actively
seeking to grow through acquisitions. Although the presence of such competitors
may make it more difficult for Star Gas to acquire propane distributors, it
could also present the opportunity to grow more significantly through the
acquisition of larger entities.

Operating Strategy. Star Gas currently operates from 63 branch locations, 49
in four operating regions in the Midwestern states of Ohio, Indiana, Kentucky
and Michigan, and 14 in two operating regions in six Northeastern states. The
accounting, data processing, and financial functions are centralized, while
branch locations maintain autonomy over delivery, service and customer
relations. Star Gas emphasizes and maintains corporate oversight regarding
safety, employee training, and resulting compliance issues. The principal
factors influencing competition with other retail marketers are price,
reliability, and quality of service and response to customer needs and safety
concerns.

Marketing Strategy. The Company intends to grow its propane volume by
competing for new customers and by marketing incremental uses of its existing
customer base, such as offering to supply a customer who uses propane for space
heating with propane for cooking and water heating. During the fiscal year
ended September 30, 1994 ongoing Star Gas operations experienced a growth of
approximately 2% in its retail base due largely to programs designed to
introduce additional uses of propane to existing residential customers. The
residential and commercial retail propane distribution business is
characterized by a relatively stable customer base, primarily due to the
expense of switching to alternate fuels and the emphasis placed on customer
relations and quality of service. The inconvenience of switching tanks
minimizes a customer's tendency to switch among suppliers of propane. The cost
and inconvenience of switching heating systems minimized a customer's tendency
to switch to alternative fuels other than natural gas, if it is available.
Over 95% of the Company's residential customers lease their tanks from the
Company, compared to 60% nationwide. Lease terms and, in most states in which
the Company operates, safety regulations prohibit any supplier, other than the
lessor, from filling a tank leased to a customer.

Customers and Sales

With the Star Gas Acquisition, the Company added over 145,000 new propane
customers which it currently serves through 63 locations in the following
markets in the Midwestern states and in the Northeast:

Ohio
----

Fairfield Waverly Lynchburg
Milford Ironton Mt. Orab
West Union Lewisburg Ripley
Peebles Macon Deshler
Lancaster Sabina Defiance
Hebron North Star Ft. Recovery

<PAGE>

Indiana
-------

Jeffersonville New Salisbury Salem
Seymour N. Vernon North Webster
Remington Warren Winamac
Decatur Portland Waterloo
Columbia City Versailles Linton
Coal City Madison Greencastle
Sulphur Springs Richmond College Corner
Akron N. Manchester Bluffton
Batesville Ferdinand

Maine Massachusetts Pennsylvania
----- ------------- ------------

Fairfield Rochdale Wind Gap
Fryeburg Belchertown Hazelton
Windham Ludlow
Wells Kentucky
--------
New Jersey
----------
New York Prospect
--------
Maple Shade Glencoe
Washington Tuckahoe Shelbyville
Poughkeepsie Williamstown
Rhode Island
------------
Michigan
--------
Davisville
Hillsdale

Sales are primarily to residential, commercial, industrial and agricultural
users. In the residential and commercial markets propane is primarily used for
space heating, water heating, cooking and clothes drying. In the agricultural
market, propane is used primarily for crop drying and space heating. In the
industrial market, propane is used principally for fuel to power fork lifts and
other vehicles. During the fiscal year ended September 30, 1994, sales to
residential customers accounted for 64% of Star Gas' retail propane sales,
sales to industrial and other commercial users accounted for 25% of Star Gas
retail propane sales and sales to agricultural customers accounted for 11% of
Star Gas' retail propane sales. Star Gas also engages in the wholesale
distribution of propane to other retail distributors. During the fiscal year
ended September 30, 1994, Star Gas sold 46.3 million gallons of propane to
wholesale customers for revenues of $17.4 million.

Suppliers

The Company obtains home heating oil from numerous sources, including
integrated international oil companies, independent refiners and independent
wholesalers, many of which have been suppliers to the Company for over 10
years. The Company's purchases are made pursuant to supply contracts or on the
spot market. The Company has market price - based contracts for substantially
all of its petroleum requirements with 15 different suppliers, all of which
have significant domestic sources for their product. The Company's current
suppliers are (in alphabetical order): Amerada Hess Corporation; Bayway
Refining Co.; Citgo Petroleum Corp.; Coastal New England and New York; Exxon
Company USA; Global Petroleum Corp.; Kerr McGee Refining Corp.; Louis Dreyfus
Energy Corp.; Meico Inc.; MG Refining and Marketing Co.; Mobil Oil Corporation;
Northeast Petroleum, a division of Cargill, Inc.; Sprague Energy Group; Stuart
Petroleum

<PAGE>

Company; and Sun Oil Company. The Company's supply contracts each have terms of
12 months and typically expire in May or June of each year. All of the supply
contracts provide for maximum quantities, but do not establish in advance the
price at which fuel oil is sold, which, like the Company's price to its
customers, is established from time to time.

The Company obtains its fuel oil in either barge or truckload quantities.
When purchasing in barge quantities, the Company hires independent barging
companies on an as needed basis to transport the Company's oil from refineries
and other bulk storage facilities to third-party storage terminals. The Company
has contracted with approximately 70 third party storage terminals for the
right to temporarily store its fuel oil at their facilities. The fuel oil is
then transported by the Company's fleet of approximately 775 delivery trucks to
its customers.

Star Gas obtains propane from approximately 30 sources including Ashland
Petroleum Company; Amoco Canada; Bayway Refining Company; Marathon Corp.; Enron
Gas Liquids Inc.; Petrolane Gas Service; Shell Oil Company; Sea 3, Inc.; Sun
Oil; Shell Canada Limited; and Texaco Exploration and Production Inc. Star Gas
owns a storage facility in Seymour, Indiana in which it is able to store
approximately 22 million gallons of propane in an underground cavern. The
facility is on a pipeline connected to Mont Belvieu, Texas, the major supply
source for propane.

Propane is transported from refineries, pipeline terminals (including the
Company's own pipeline terminal and storage facility in Seymour, Indiana), and
coastal terminals to the Company's branch locations by a combination of the
Company's own highway transport trucks, common carriers and by railroad tank
cars. Star Gas distributes propane to its retail and commercial customers
either by bulk truck or by service trucks which transport portable cylinders.
The primary method of delivery to customers is by the company's fleet of 225
owned bulk trucks, which generally are fitted with a pressurized propane vessel
with an average capacity of 2,500 gallons. The typical branch location has an
effective marketing radius of 25 miles.

The Company believes that its policy of contracting for substantially all its
supply needs with diverse and reliable sources will enable it to obtain
sufficient product should unforeseen shortages develop in worldwide supplies.
The Company further believes that relations with its current suppliers are
satisfactory.

Competition

The home heating oil business is highly competitive. The fuel oil division
competes with fuel oil distributors offering a broad range of services and
prices, from full service distributors, like the Company, to those offering
delivery only. Competition with other companies in the fuel oil industry is
based primarily on customer service and price. Long-standing customer
relationships are typical in the retail home heating oil industry. Many
companies in the industry, including Petro, deliver home heating oil to their
customers based upon weather conditions and historical consumption patterns
without the customer having to make an affirmative purchase decision each time
oil is needed. In addition, most companies, including Petro, provide home
heating equipment repair service on a seven days a week, 52 weeks a year basis,
which tends to build customer loyalty.

Competition within the propane distribution industry stems from primarily
three types of participants: larger multi-state marketers, smaller, local
independent marketers and farm cooperatives. The Company believes that the ten
largest multi-state marketers of propane account for less than 35% of the total
retail sales of propane in the United States. In the propane industry the
principal factors of competition are price and, because the

<PAGE>

propane business is more oriented to rural and suburban areas, reputation for
reliability and quality of service which is spread by word of mouth in local
communities.

Employees

As of September 30, 1994, the fuel oil division had 2,227 employees, of whom
751 were office, clerical and customer service personnel, 803 were heating
equipment repairmen, 331 were oil truck drivers and mechanics, 199 were
management and staff and 143 were employed in sales. Approximately 20 of those
employees are seasonal, and management expects to rehire the majority of them
for the next heating season. Approximately 694 employees are represented by 19
different local chapters of labor unions.

As of September 30, 1994, the propane division had 703 full time employees,
of which 31 were employed at the corporate office in Stamford, Connecticut and
672 were located in branch offices of which approximately 279 were
administrative, 272 were engaged in transportation and storage and 121 were
engaged in field servicing. Approximately 48 of Star Gas' employees are
represented by four different local chapters of labor unions. Management
believes that its relations with both its union and non-union employees are
satisfactory.

Litigation

The Company is not party to any litigation which individually or in the
aggregate could reasonably be expected to have a material adverse effect on the
results of operations or the financial condition of the Company.

Propane is an explosive gas and serious personal injury and property damage
can occur in connection with its transportation, storage and use. In the
ordinary course of business Star Gas is threatened with, or is named as
defendant in, various lawsuits. No lawsuits are pending at the present time;
however, one lawsuit has been threatened based upon a recent incident in the
Midwest. The Company believes that such lawsuit, if commenced, will not be
material to the Company based upon the adequacy of its insurance to cover any
liability which may result from claims arising out of such incident.

<PAGE>

MANAGEMENT

Directors and Executive Officers

Information with respect to the directors and executive officers of the
Company is set forth below:

Name Age Office
---- --- ------

Irik P. Sevin . . . . 47 Chief Executive Officer, President,
Chairman of the Board and Director

Thomas M. Isola . . . 51 Chief Operating Officer
C. Justin McCarthy . 50 Senior Vice President--Operations

Joseph P. Cavanaugh . 57 Senior Vice President--Administration
Audrey L. Sevin . . . 68 Secretary and Director

George Leibowitz . . 57 Senior Vice President--Finance and
Corporate Development

Alex Szabo . . . . . 41 Senior Vice President--Marketing and
Sales
James J. Bottiglieri 38 Vice President and Controller

Matthew J. Ryan . . . 37 Vice President--Supply
Phillip Ean Cohen(1) 47 Director

Thomas J. Edelman . . 43 Director

Richard 48 Director
O'Connell(1)(2) . . .
Wolfgang Traber(1)(2) 50 Director

Max M. Warburg . . . 46 Director
Paul Biddelman . . . 46 Director

- ----------------------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

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

Thomas M. Isola has been Chief Operating Officer of the Company since August,
1994. Mr. Isola joined Petro in August of 1994 in the newly created role of
Chief Operating Officer. Prior to joining Petro and beginning in 1988, Mr.
Isola served as President and Chief Executive Officer of three manufacturing

<PAGE>

converting companies owned by Butler Capital Corporation of New York. From
1972 to 1988, he was with Avery International, Inc. (now Avery-Dennison) in a
variety of marketing and operations roles before becoming Vice President-
General Manager of two Avery companies. Mr. Isola received B.A. and M.B.A.
degrees from Stanford University in 1965 and 1968, respectively. He served as
a 1st Lieutenant in the U.S. Army from 1969 to 1971.

C. Justin McCarthy has been Senior Vice President--Operations of Petro, Inc.
since January 1979 and of the Company since its organization in October 1983.
Prior to his joining the Company, Mr. McCarthy was General Manager of the New
York City operations for Whaleco Fuel Oil Company from 1976 to 1979 and was
General Manager of the Long Island Division of Meenan Oil Co., Inc. from 1973
to 1976. Mr. McCarthy is a graduate of Boston College (B.B.A.) and the New York
University Graduate School of Business Administration (M.B.A.).

Joseph P. Cavanaugh was Controller of Petro, Inc. from 1973 and of the
Company since its organization to 1994. He was elected a Vice President of the
Company in October 1983 and a Senior Vice President since January 1993. Mr.
Cavanaugh is a graduate of Iona College (B.B.A.) and Pace University (M.S. in
Taxation).

Audrey L. Sevin has been a director and Secretary of Petro, Inc. since
January 1979 and of the Company since its organization in October 1983. Mrs.
Sevin was a director, executive officer and principal shareholder of A.W. Fuel
Co., Inc. from 1952 until its purchase by the Company in May 1981. Mrs. Sevin
is a graduate of New York University (B.S.).

George Leibowitz has been Senior Vice President of the Company since November
1, 1992. From 1985 to 1992, prior to joining the Company, Mr. Leibowitz was the
Chief Financial Officer of Slomin's Inc., a retail heating oil dealer. From
1984 to 1985, Mr. Leibowitz was the President of Lawrence Energy Corp., a
consulting and oil trading company. From 1971 to 1984, Mr. Leibowitz was Vice
President--Finance and Treasurer of Meenan Oil Co., Inc. Mr. Leibowitz is a
Certified Public Accountant and a graduate of Columbia University (B.A. 1957)
and the Wharton Graduate Division, University of Pennsylvania (M.B.A. 1958).

Alex Szabo has been Senior Vice President--Marketing and Sales since June
1994. From 1989 to 1994, prior to joining the Company, Mr. Szabo was Executive
Vice President at Whittle Communications and President of Screenvision Cinema
Network. From 1987 to 1989, Mr. Szabo was Executive Vice President--General
Manager of Benckiser Consumer Products, Inc. Prior to 1987, Mr. Szabo held
executive management positions at Ecolab, Colgate Palmolive and I.B.M. Mr.
Szabo is a graduate of Brown University (B.A. 1975) and Columbia University
(M.B.A. 1980).

James J. Bottiglieri was Assistant Controller of the Company from 1985 to
1994 and was elected Vice President in December 1992. Mr. Bottiglieri was made
controller of the Company in 1994. From 1978 to 1984, Mr. Bottiglieri was
employed by a predecessor firm of KPMG Peat Marwick, a public accounting firm.
Mr. Bottiglieri graduated from Pace University with a degree in Business
Administration in 1978 and has been a Certified Public Accountant since 1980.

Matthew J. Ryan, who has been employed by the Company since 1987, has been
Manager of Supply and Distribution of the Company since 1990 and was elected
Vice President--Supply in December 1992. From 1974 to 1987, Mr. Ryan was
employed by Whaleco Fuel Corp., a subsidiary of the Company which was acquired
in 1987. Mr. Ryan graduated from St. Francis College with a degree in
Accounting in 1983 (B.S.).

<PAGE>

Phillip Ean Cohen has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October 1983. Since 1985, Mr. Cohen
has been Chairman of Morgan Schiff & Co., Inc., an investment banking firm.

Thomas J. Edelman has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October 1983. Mr. Edelman is the
President and a director of Snyder Oil Corporation, a Fort Worth, Texas-based,
independent oil company. Prior to 1981, he was a Vice President of The First
Boston Corporation. From 1975 through 1980, Mr. Edelman was with Lehman
Brothers Kuhn Loeb Incorporated. Mr. Edelman also serves as the Chairman of
Lomak Petroleum, Inc., and as a director of Wolverine Exploration Company,
Enterra Corporation and Command Petroleum Holdings N.L.

Richard O'Connell has been a director of Petro, Inc. since January 1979 and
of the Company since its organization in October 1983. Mr. O'Connell is a
private investor.

Wolfgang Traber has been a director of Petro, Inc. since January 1979 and of
the Company since its organization in October of 1983. Mr. Traber is Managing
Director of Hanseatic Corporation, in Hamburg, Germany, a private investment
corporation. Mr. Traber is a director of Deltec Securities Corporation, Blue
Ridge Real Estate Company, Hellespont Tankers Ltd. and M.M. Warburg & Co.

Max M. Warburg has been a director of the Company since May 1984. Since
January 1, 1982, Mr. Warburg has been a partner of M.M. Warburg & Co., a
private bank. For the prior four years he was a Managing Director of the same
organization. Since March 1988, he has been a member of the board of Holsten
Brauerei AG, Hamburg. Since May 1, 1987, he has been a member of the board of
Eurokai-Eckelmann Gruppe, Hamburg. Mr. Warburg is a member of the Board of DWS
Deutsche Gesellschaft fur Wertpapiersparen GmbH, Frankfurt; DEG Deutsche
Finanzierungsgesellschaft fur Beteilingungen in Entwicklungslandern GmbH, Koln;
the Hamburg Stock Exchange; and the Hamburg Banking Association.

Paul Biddelman has been a director of the Company since October 1994. Mr.
Biddelman has been a principal of Hanseatic Corporation since 1992. Mr.
Biddelman joined Hanseatic from Clements Taee Biddelman Incorporated, a
merchant banking firm which he co-founded in 1991. From 1982 through 1991, he
was a Managing Director in Corporate Finance at Drexel Burnham Lambert
Incorporated. Mr. Biddelman also worked in corporate finance at Kuhn, Loeb &
Co. from 1975 to 1979, and at Oppenheimer & Co. from 1979 to 1982.

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

The Company pays each of its directors other than Irik P. Sevin an annual fee
of $24,000. Directors are elected annually and serve until the next annual
meeting of shareholders and until their successors are elected and qualified.
Officers serve at the discretion of the Board.

Certain holders of the Class A and Class C Common Stock have entered into a
shareholders' agreement (the "Shareholders' Agreement") which provides that
they will vote their shares of Class A Common Stock and Class C Common Stock to
elect as directors of the Company five persons designated by a group consisting
of the Estate of Malvin P. Sevin, Irik P. Sevin, Audrey L. Sevin, Thomas J.
Edelman, Phillip Ean Cohen and Margot Gordon (the "Sevin Group") and three
persons designated by certain other shareholders of the Company (the "Traber
Group"). Each group may designate its nominees by action of the holders of a
majority of the Class C Common Stock held by the group.

<PAGE>

At present, there are eight directors serving on the Board. Of the present
directors, Irik P. Sevin, Audrey L. Sevin, Thomas J. Edelman, Phillip Ean Cohen
and Paul Biddelman have been designated by the Sevin Group and Wolfgang Traber,
Richard O'Connell and Max A. Warburg have been designated by the Traber Group.
All such obligations to vote for directors shall lapse if the Estate of Malvin
P. Sevin, Irik P. Sevin or Audrey L. Sevin, no longer owns, directly or
indirectly, or has sole voting power over shares having at least 51% of the
voting power of all shares of Class C Common Stock held by the Sevin Group.

The Shareholders' Agreement (as well as the Company's Restated Articles of
Incorporation) provides that certain actions may not be taken without the
affirmative vote of 80% of the entire Board of Directors (irrespective of
vacancies) including at least one director who has been designated by the
Traber Group. The Shareholders' Agreement also provides for first refusal
rights to the Company if a holder of Class C Common Stock receives a bona fide
written offer from a third party to buy such holder's Class C Common Stock.

<PAGE>

DESCRIPTION OF DEBENTURES

The Debentures will be issued pursuant to an Indenture, to be dated as of
____________, 1995, between the Company and _____________, as trustee (the
"Trustee"). The terms of the Debentures include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act"). The Debentures are subject to all such terms,
and holders of the Debentures are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete. A copy of the
proposed form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. Definitions of certain terms used
in this section appear at the end of this section under "Certain Definitions."

General

The Indenture authorizes the issuance of an aggregate principal amount of
$250 million of Debentures, consisting of the $125 million of Debentures
offered hereby and up to $125 million of Debentures to be issued in the
Exchange Offer. The Debentures will mature on ____________, 2005. The
Debentures will be general unsecured obligations of the Company and will bear
interest at the rate per annum shown on the cover page of this Prospectus,
payable semi-annually in arrears on __________ and __________ in each year to
the holders of record at the close of business on the __________ and __________
next preceding such interest payment date. Interest will initially accrue from
the date of issuance, and the first interest payment date will be __________,
1995. Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Debentures will be issued in fully registered form only in
denominations of $1,000 and integral multiples thereof.

As indicated under "Ranking" below, the Debentures will be subordinated in
right of payment to all Senior Debt of the Company and senior in right of
payment to all indebtedness of the Company that is expressly subordinated to
the Debentures.

Principal, premium, if any, and interest will be payable, and the Debentures
may be presented for redemption, repurchase, exchange or transfer, at the
office of the Trustee in the Borough of Manhattan, City of New York and at any
other office or agency maintained by the Company for such purpose. The
registrar and paying agent will be _____________. The Company may change the
registrar or paying agent without prior notice to holders and the Company or
any Subsidiary may act in such capacity.

Optional Redemption

The Debentures will be redeemable for cash on or after __________, 2000 at
the option of the Company, in whole or from time to time in part, at the
redemption prices set forth herein, together with interest accrued to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date). The
redemption prices (expressed as percentages of principal amount) are as follows
for Debentures redeemed during the twelve-month period beginning _________ of
the years indicated:

<PAGE>

Year Percentage
---- ----------

2000 . . . . . . . . . . . . . . . . . . . %
2001 . . . . . . . . . . . . . . . . . . .
2002 . . . . . . . . . . . . . . . . . . .
2003 and thereafter . . . . . . . . . . . . 100.000

In addition, at any time prior to __________ 1998, the Company may redeem
Debentures issued under the Indenture (including Debentures issued in the
Exchange offer) with the net proceeds of a public offering of Capital Stock
(other than Redeemable Stock) of the Company, of Star Gas or of a subsidiary of
Star Gas, at a redemption price of ____% of the principal amount thereof, plus
accrued and unpaid interest thereon, provided that at least 65% in aggregate
principal amount of the Debentures issued under the Indenture (including
Debentures issued in the Exchange Offer) remain outstanding immediately
following any such redemption.

Sinking Fund

There will be no mandatory sinking fund payments for the Debentures.

Selection of Debentures to be Redeemed and Notice of Redemption

In the event of optional redemption, as described above, of less than all
of the Debentures, the Trustee will select the Debentures for redemption pro
rata or by lot or by a method that complies with applicable legal and
securities exchange requirements, if any, and that the Trustee considers fair
and appropriate and in accordance with methods generally used at the time of
selection by fiduciaries in similar circumstances.

Notice of redemption will be mailed at least 30 but not more than 60 days
before the redemption date to each holder of Debentures to be redeemed at such
holder's registered address. The notice of redemption will identify the
Debentures to be redeemed and will state the redemption date; the redemption
price; the name and address of the paying agent; that Debentures called for
redemption must be surrendered to the paying agent to collect the redemption
price plus accrued interest; that, unless the Company defaults in making such
redemption payment or the paying agent is prohibited from making such payment
pursuant to the terms of the Indenture, interest on Debentures called for
redemption ceases to accrue on and after the redemption date; the paragraph of
the Debentures pursuant to which the Debentures called for redemption are being
redeemed; and that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Debentures.

Prior to the redemption date, the Company will deposit with the paying
agent (or, if the Company or a Subsidiary is the paying agent, will segregate
and hold in trust) money sufficient to pay the redemption price of and accrued
interest on all Debentures to be redeemed on that date other than Debentures or
portions of Debentures called for redemption which have been delivered by the
Company to the Trustee for cancellation.

Ranking

The payment of the principal of, premium (if any) and interest on the
Debentures is subordinated in right of payment, as set forth in the Indenture,
to the payment when due of all Senior Debt of the Company. However, payment
from the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "Defeasance" below is not subordinate to any
Senior Debt or subject to the restrictions

<PAGE>

described herein. At September 30, 1994, after giving pro forma effect to the
Debenture Offering and application of the net proceeds therefrom as described
under "Use of Proceeds," the outstanding Senior Debt of the Company would have
been approximately $48.6 million. The Indenture contains limitations on the
amount of additional Funded Debt that the Company may incur; however, under
certain circumstances the amount of such Funded Debt could be substantial. The
Indenture does not contain limitations on the amount of Indebtedness that is
not Funded Debt that the Company may incur. In addition, any Indebtedness that
the Company may incur may be Senior Debt. See "--Certain Covenants--Limitation
on Funded Debt." A portion of the operations of the Company is conducted
through its Subsidiaries. Claims of creditors of such Subsidiaries, including
trade creditors, secured creditors and creditors holding guarantees issued by
such Subsidiaries, and claims of preferred stockholders (if any) of such
Subsidiaries, generally will have priority with respect to the assets and
earnings of such Subsidiaries over the claims of creditors of the Company,
including holders of the Debentures, even though such obligations do not
constitute Senior Debt. The Debentures, therefore, will be effectively
subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of Subsidiaries of the Company. At September 30, 1994,
after giving pro forma effect to the Star Gas Acquisition and the Debenture
Offering and application of the net proceeds therefrom as described under "Use
of Proceeds," such Subsidiaries would have outstanding Indebtedness (other than
guarantees of the Company's Indebtedness under the Credit Agreement) and trade
credit of approximately $11.4 million. The Debentures will rank senior in
right of payment to all indebtedness of the Company that is expressly
subordinated to the Debentures, which aggregated approximately $161.3 million
as of September 30, 1994, without giving pro forma effect to the Exchange
Offer.

Although the Indenture limits the incurrence of Indebtedness and the
issuance of preferred stock by the Company's Subsidiaries, such limitation is
subject to a number of significant qualifications. See "Limitation on
Subsidiary Indebtedness and Preferred Stock."

"Senior Debt" means the following obligations, whether outstanding on the
date of the Indenture or thereafter issued:

(i) all obligations consisting of Bank Debt;

(ii) all obligations consisting of the principal of and premium, if
any, and accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to the Company to the extent post-filing interest is allowed in
such proceeding) in respect of (A) indebtedness of the Company for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which the Company is
responsible or liable;

(iii) all Capital Lease Obligations of the Company;

(iv) all obligations of the Company (A) for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (B) under interest rate swaps, caps, collars, options and
similar arrangements and foreign currency hedges entered into in respect
of any obligations described in clauses (i), (ii) and (iii) or (C) issued
or assumed as the deferred purchase price of property and all conditional
sale obligations of the Company and all obligations of the Company under
any title retention agreement;

(v) all obligations of other persons of the type referred to in
clauses (ii), (iii) and (iv) and all dividends of other persons for the
payment of which, in any case, the Company is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
guarantees of such obligations and dividends; and

<PAGE>

(vi) all obligations of the Company consisting of modifications,
renewals, extensions, replacements and refundings of any obligations
described in clauses (i), (ii), (iii), (iv) or (v);

unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations are not superior
in right of payment to the Debentures; provided, however, that Senior Debt will
not include (1) any obligation of the Company to any Subsidiary or other
Affiliate of the Company, (2) any liability for federal, state, local or other
taxes owed or owing by the Company, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities) or (4) that
portion of any Indebtedness that was incurred in violation of the Indenture.

The Company may not pay principal of, premium (if any) or interest on,
the Debentures or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire any
Debentures if (i) any Designated Senior Debt is not paid when due or (ii) any
other default on Designated Senior Debt occurs and the maturity of such
Designated Senior Debt is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived, any such acceleration has
been rescinded or such Designated Senior Debt has been paid in full. However,
the Company may pay the Debentures without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of each issue of Designated Senior Debt with respect to which
any such default relates. During the continuance of any default (other than a
default described in clause (i) or (ii) of the second preceding sentence) with
respect to any Designated Senior Debt pursuant to which the maturity thereof
may be accelerated immediately without further notice (except such notice as
may be required to effect such acceleration) or the expiration of any
applicable grace periods, the Company may not pay the Debentures for a period
(a "Payment Blockage Period") commencing upon the receipt by the Company and
the Trustee of written notice of such default from the Representative of the
holders of any such Designated Senior Debt specifying an election to effect
such prohibition (a "Payment Blockage Notice") and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Company from the Representative that gave such Payment
Blockage Notice, (ii) by repayment in full of such Designated Senior Debt or
(iii) because such default is no longer continuing). Notwithstanding the
provisions described in the immediately preceding sentence (but subject to the
provisions contained in the first two sentences of this paragraph), unless the
holders of such Designated Senior Debt or the Representative of such holders
have accelerated the maturity of such Designated Senior Debt, the Company may
resume payments on the Debentures after the end of such Payment Blockage
Period. Not more than one Payment Blockage Notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Designated Senior Debt during such period.

Upon any payment or distribution of the assets of the Company upon a
total or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of Senior Debt
will be entitled to receive payment in full before the holders of the
Debentures are entitled to receive any payment.

If payment of the Debentures is accelerated because of an Event of
Default, the Company or the Trustee will promptly notify the holders of the
Designated Senior Debt or their Representatives of the acceleration.

By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Debt may recover more, ratably, than the holders of the Debentures, and
creditors of the Company who are not holders of Senior Debt (including the
Debentures) may recover less, ratably, than holders of Senior Debt.

<PAGE>

Change of Control

Upon the occurrence of a Change of Control, each holder of Debentures
will have the right to require the Company to repurchase all or any part of
such holder's Debentures at a repurchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date). A "Change
of Control" will be deemed to occur if (i) any "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than the
members of the Sevin Group and the Traber Group, becomes the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person shall be deemed to be the beneficial owner of all shares that such
person has the right to acquire, regardless of whether such right is
exercisable immediately or after the passage of time), directly or indirectly,
of 50% or more of the total voting power of all classes of the Voting Stock of
the Company and the members of the Sevin Group and the Traber Group cease to
have the right to appoint at least a majority of the members of the Board of
Directors of the Company, (ii) the holders of the 10 1/8% Notes have the right
to require the Company to purchase any such 10 1/8% Notes pursuant to Section
4.08 of the Indenture, dated as of April 1, 1993, between the Company and
Chemical Bank, as trustee, relating thereto, (iii) any holder of the 11.85%
Notes, the 12.17% Notes or the 12.18% Notes exercises its right to declare any
such notes to be due and payable pursuant to Section 2.1 of the Note Agreement,
dated as of September 1, 1988, relating thereto (the "1988 Note Agreement"),
(iv) any holder of the 14.10% Notes exercises its right to declare any such
notes to be due and payable pursuant to Section 5.2(A) of the Note Agreement,
dated as of January 15, 1991, relating thereto (the "1991 Note Agreement") or
(v) any holder of 11.85% Notes, 12.17% Notes, 12.18% Notes or 14.10% Notes
shall have received any consideration (whether in the form of cash, a change in
the rate of interest relating to such notes, a change in any other provision of
the terms of such notes, or otherwise) to amend, modify, waive or otherwise
give up its right to declare any such notes to be due and payable upon a
"Change of Ownership," as defined in the 1988 Note Agreement or the 1991 Note
Agreement, as the case may be; provided, however, that an amendment to or
waiver or other modification of Section 2.1 of the 1988 Note Agreement or
Section 5.2(A) of the 1991 Note Agreement shall not, in the absence of any
consideration, constitute a Change of Control under the Indenture.

Within 30 days following any Change of Control, the Company will mail a
notice to each holder stating (i) that a Change of Control has occurred and
that such holder has the right to require the Company to purchase such holder's
Debentures at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); (ii) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (iii) the
purchase date (which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (iv) the instructions, determined by
the Company consistent with the Indenture, that a holder must follow in order
to have its Debentures repurchased.

If, at the time of a Change of Control, the Company is prohibited by the
terms of the Bank Debt from purchasing Debentures that may be tendered by
holders at the purchase price described above as a result of such Change of
Control, then prior to the mailing of the notice to holders described in the
preceding paragraph but in any event within 30 days following any Change of
Control, the Company must (i) repay in full all Bank Debt or offer to repay in
full all Bank Debt and repay the Bank Debt of each lender who has accepted such
offer or (ii) obtain the requisite consent under the Bank Debt to permit the
purchase of the Debentures as described above. The Company must first comply
with the covenant described in the preceding sentence before it will be
required to purchase Debentures in the event of a Change of Control, provided
that the Company's failure to comply with the covenant described in the
preceding sentence will constitute a Default described in

<PAGE>

clause (iii) under "Defaults" below. As a result of the foregoing, a holder of
the Debentures may not be able to compel the Company to purchase the Debentures
unless the Company is able at the time to refinance the Bank Debt.

The Change of Control purchase feature of the Debentures may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. Management has no present intention
to engage in a transaction involving a Change of Control, although it is
possible that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.

The Company's existing subordinated indebtedness contains provisions that
require the Company to repurchase such Indebtedness upon the occurrence of
certain events which are substantially similar to the events constituting a
Change of Control. The Credit Agreement limits the amount of the Company's cash
that may be used to repurchase indebtedness of the Company. In addition, the
Company's ability to pay cash to the holders of Debentures upon a repurchase
may be limited by the Company's then existing financial resources.

The Company will comply with any tender offer rules under the Exchange
Act which may then be applicable, including Rule 14e-1, in connection with any
offer required to be made by the Company to purchase the Debentures as a result
of a Change of Control.

Certain Covenants

Set forth below are certain covenants contained in the Indenture:

SEC Reports. Whether or not required by the rules and regulations of the
Commission, so long as any Debentures are outstanding, the Company will furnish
to the holders of Debentures all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file
a copy of all such information with the Commission for public availability and
make such information available to investors who request it in writing. The
Company also will comply with the provisions of Sec. 314(a) of the Trust
Indenture Act.

Limitation on Funded Debt. The Company will not, directly or indirectly,
create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable with respect to (collectively, "incur") any Funded Debt
unless, after giving effect thereto, the Company's Consolidated EBITDA Coverage
Ratio exceeds 2.0 to 1.

Notwithstanding the foregoing paragraph, the Company may incur the
following Funded Debt: (i) Funded Debt owed to and held by a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Funded Debt (other
than to a Wholly Owned Subsidiary) will be deemed, in each case, to constitute
the incurrence of such Funded Debt by the Company; (ii) the Debentures and
Funded Debt issued in exchange for, or the proceeds of which are used to refund
or refinance,

<PAGE>

any Funded Debt permitted by this clause (ii); provided, however, that (1) the
principal amount of the Funded Debt so incurred will not exceed the principal
amount of the Funded Debt so exchanged, refunded or refinanced and (2) the
Funded Debt so incurred (A) will not mature prior to the Stated Maturity of the
Funded Debt so exchanged, refunded or refinanced and (B) will have an Average
Life equal to or greater than the remaining Average Life of the Funded Debt so
exchanged, refunded or refinanced; (iii) Funded Debt (other than Funded Debt
described in clause (i) or (ii) of this paragraph) outstanding on the date of
the Indenture and Funded Debt issued in exchange for, or the proceeds of which
are used to refund or refinance, any Funded Debt permitted by this clause (iii)
or by the first paragraph of this covenant; provided, however, that (1) the
principal amount of the Funded Debt so incurred will not exceed the principal
amount of the Funded Debt so exchanged, refunded or refinanced, (2) the Funded
Debt so incurred (A) will not mature prior to the Stated Maturity of the Funded
Debt so exchanged, refunded or refinanced and (B) will have an Average Life
equal to or greater than the remaining Average Life of the Funded Debt so
exchanged, refunded or refinanced and (3) if the Funded Debt so exchanged,
refunded or refinanced is a Subordinated Obligation, the Funded Debt so
incurred will be subordinated to the Debentures; and (iv) additional Funded
Debt in an aggregate amount not to exceed $50 million at any one time
outstanding; provided, however, that at any time and to the extent the Company
is permitted to incur Funded Debt pursuant to the Consolidated EBITDA Coverage
Ratio test contained in the immediately preceding paragraph, the Company may
elect that amounts of Funded Debt incurred pursuant to this clause (iv) be
deemed to have been incurred pursuant to the immediately preceding paragraph
and be deemed not to have been incurred pursuant to this clause (iv).

In addition, the Company will not create, incur, assume or permit to
exist any Lien (other than Permitted Liens) upon or with respect to any of the
property of the Company or any Subsidiary to secure Funded Debt that is not
Senior Debt unless contemporaneously therewith effective provision is made to
secure the Debentures equally and ratably with such Funded Debt for so long as
such Funded Debt is secured by a Lien.

Limitation on Senior Subordinated Debt. The Company will not incur any
Indebtedness that is subordinate or junior in right of payment to any Senior
Debt of the Company and senior in any respect in right of payment to the
Debentures.

Limitation on Indebtedness and Preferred Stock of Subsidiaries. The
Company will not permit any Subsidiary to incur any Indebtedness or issue any
Preferred Stock except: (i) Indebtedness or Preferred Stock issued to and held
by the Company or a Wholly Owned Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock which results in any such
Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Indebtedness or Preferred Stock (other than to the
Company or a Wholly Owned Subsidiary) will be deemed, in each case, to
constitute the incurrence of such Indebtedness or the issuance of such
Preferred Stock, as the case may be, by the issuer thereof; (ii) Indebtedness
incurred or Preferred Stock of a Subsidiary issued and outstanding on or prior
to the date on which such Subsidiary was acquired by the Company (other than
Indebtedness incurred or Preferred Stock issued in contemplation of, as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company), provided that at the time such Subsidiary is acquired
by the Company, after giving effect to such Indebtedness or Preferred Stock of
such Subsidiary, the Company's Consolidated EBITDA Coverage Ratio exceeds 2.0
to 1; (iii) Indebtedness or Preferred Stock (other than Indebtedness or
Preferred Stock described in clause (i), (ii), (iv) or (vi) of this covenant)
incurred or issued and outstanding on or prior to the date of the Indenture;
(iv) Indebtedness of a Subsidiary consisting of guarantees issued by such
Subsidiary and outstanding on the date of the Indenture and Indebtedness of a
Subsidiary consisting of guarantees issued subsequent to the date of the
Indenture, in each case, to the extent such guarantee guarantees Bank Debt; (v)
Indebtedness of a Subsidiary (other than Indebtedness described in

<PAGE>

clause (iv) above) consisting of guarantees of Funded Debt of the Company
permitted by the first paragraph of "Limitation on Funded Debt," provided that
contemporaneously with the incurrence of such Indebtedness by such Subsidiary,
such Subsidiary issues a guarantee for the pro rata benefit of the holders of
the Debentures that is subordinated to such Indebtedness of such Subsidiary to
the same extent as the Debentures are subordinated to such Funded Debt of the
Company; and (vi) Indebtedness or Preferred Stock issued in exchange for, or
the proceeds of which are used to refund or refinance, Indebtedness or
Preferred Stock referred to in the foregoing clause (ii) or (iii); provided,
however, that (1) the principal amount of such Indebtedness or Preferred Stock
so incurred or issued (the "Refinancing Indebtedness") will not exceed the
principal amount of the Indebtedness or Preferred Stock so exchanged or
refinanced (the "Refinanced Indebtedness"), provided that if any such
Refinanced Indebtedness was incurred under a revolving credit or similar
working capital facility, the principal amount of the Refinancing Indebtedness
may be in an amount up to the aggregate amount available under the facility
under which the Refinanced Indebtedness was incurred (A) at the time the
Subsidiary that incurred such Indebtedness was acquired by the Company (in the
case of Indebtedness described in the foregoing clause (ii)) or (B) on the date
of the Indenture (in the case of Indebtedness described in the foregoing clause
(iii)), and (2) the Refinancing Indebtedness (other than revolving credit or
similar working capital facilities) will (A) have a Stated Maturity later than
the Stated Maturity of the Refinanced Indebtedness and (B) will have an Average
Life equal to or greater than the remaining Average Life of the Refinanced
Indebtedness.

Limitation on Restricted Payments. The Company will not, and will not
permit any Subsidiary, directly or indirectly, to (i) declare or pay any
dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) or to the direct or indirect holders of its Capital Stock (except
(x) dividends or distributions payable solely in its Non-Convertible Capital
Stock or in options, warrants or other rights to purchase its Non-Convertible
Capital Stock and (y) dividends or distributions payable to the Company or a
Subsidiary, and, if a Subsidiary is not wholly owned, to the other shareholders
of such Subsidiary on a pro rata basis in accordance with their ownership
interest in such Subsidiary), (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company or of any direct or indirect
parent of the Company, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition)
or (iv) make any Restricted Investment (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition or retirement,
or any such Restricted Investment, being herein referred to as a "Restricted
Payment") if at the time the Company or such Subsidiary makes such Restricted
Payment: (1) a Default will have occurred and be continuing (or would result
therefrom); or (2) the aggregate amount of such Restricted Payment and all
other Restricted Payments subsequent to December 31, 1994 would exceed the sum
of: (A) 50% of the Cash Flow of the Company and its Subsidiaries accrued during
the period (treated as one accounting period) subsequent to December 31, 1994,
to the end of the most recent fiscal quarter ending at least 45 days prior to
the date of such Restricted Payment (or, in case such Cash Flow will be a
deficit, minus 100% of such deficit), minus 100% of any deficit in NIDA for
such period of any Subsidiary described in clause (iii) of the proviso to the
definition of Consolidated Net Income; (B) the aggregate Net Cash Proceeds
received by the Company from the issue or sale of its Capital Stock subsequent
to December 31, 1994 (other than an issuance or sale to a Subsidiary or
Unrestricted Subsidiary of the Company or an employee stock ownership plan or
other trust established by the Company or any Subsidiary or Unrestricted
Subsidiary of the Company); (C) the amount by which indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion or exchange
(other than by a Subsidiary) subsequent to December 31, 1994, of any
Indebtedness of the

<PAGE>

Company convertible or exchangeable for Capital Stock of the Company (less the
amount of any cash, or other property, distributed by the Company upon such
conversion or exchange); and (D) $20 million.

The provisions of the foregoing paragraph will not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Capital Stock
issued or sold to a Subsidiary or an employee stock ownership plan or other
trust established by the Company or any Subsidiary); provided, however, that
(A) such purchase or redemption will be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale will
be excluded from clause (2)(B) of the foregoing paragraph; (ii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; provided,
however, that at the time of payment of such dividend, no other Default will
have occurred and be continuing (or result therefrom); provided further,
however, that such dividend will be included in the calculation of the amount
of Restricted Payments; (iii) dividends on, and mandatory redemptions and
exchanges of, the 1989 Preferred Stock outstanding on the date of the
Indenture; provided, however, that at the time of such dividend, redemption or
exchange, no Default will have occurred or be continuing; provided further,
however, that any such dividends, redemptions and exchanges will be excluded in
the calculation of Restricted Payments; (iv) Restricted Investments in an
aggregate amount not to exceed the sum of (A) $30 million, plus (B) $5 million
on each anniversary of the date of the Indenture, plus (C) the amount of all
dividends or other distributions received in cash by the Company or any of its
Wholly Owned Subsidiaries from, and the amount of any Net Cash Proceeds to the
Company or any of its Wholly Owned Subsidiaries from the sale of Capital Stock
(other than a sale of Capital Stock to the Company, a Subsidiary or
Unrestricted Subsidiary of the Company or an employee stock ownership plan or
other trust established by the Company or any Subsidiary or Unrestricted
Subsidiary of the Company) of, an Unrestricted Subsidiary of the Company, to
the extent that the aggregate amount of such dividends, distributions and Net
Cash Proceeds referred to in this clause (C) do not exceed the aggregate amount
of Restricted Investments made by the Company in such Unrestricted Subsidiary
since the date of the Indenture; provided, however, that Restricted Investments
permitted by this clause (iv) will be excluded in the calculation of the amount
of Restricted Payments; or (v) consummation of the Exchange Offer.

Limitation on Restrictions on Distributions from Subsidiaries. The
Company will not, and will not permit any Subsidiary to, create or otherwise
cause or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any Subsidiary to: (i) pay dividends or make any
other distributions on its Capital Stock or pay any Indebtedness owed to the
Company, (ii) make any loans or advances to the Company or (iii) transfer any
of its property or assets to the Company, except: (1) any encumbrance or
restriction pursuant to an agreement in effect on the date of the Indenture;
(2) any encumbrance or restriction with respect to a Subsidiary pursuant to an
agreement relating to any Indebtedness issued by such Subsidiary on or prior to
the date on which such Subsidiary was acquired by the Company (other than
Indebtedness issued in contemplation of, as consideration in, or to provide all
or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Subsidiary
became a Subsidiary or was acquired by the Company) and outstanding on such
date; (3) any encumbrance or restriction pursuant to an agreement effecting a
refinancing of Indebtedness issued pursuant to an agreement referred to in the
foregoing clause (1) or (2) or contained in any amendment to an agreement
referred to in the foregoing clause (1) or (2); provided, however, that the
encumbrances and restrictions contained in any such refinancing agreement or
amendment are no less favorable to holders of the Debentures than the
encumbrances and restrictions contained in such agreements; (4) any such
encumbrance or restriction consisting of customary non-assignment provisions in
leases governing leasehold interests to the extent such provisions restrict the
transfer of the lease; (5) in the case of clause (iii) above, restrictions
contained in security agreements securing Indebtedness of a Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such

<PAGE>

security agreements; and (6) any restriction with respect to a Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such Subsidiary
pending the closing of such sale or disposition.

Limitation on Transactions with Affiliates. The Company will not, and
will not permit any Subsidiary to, conduct any business or enter into any
transaction or series of similar transactions in an aggregate amount in excess
of $100,000 (including the purchase, sale, lease or exchange of any property or
the rendering of any service) with any Affiliate of the Company or any legal or
beneficial owner of 5% or more of any class of Capital Stock of the Company or
with an Affiliate of any such owner (any such business, transaction or series
of similar transactions, an "Affiliate Transaction") unless the terms of such
Affiliate Transaction are: (i) set forth in writing, (ii) fair to the Company
and its Subsidiaries from a financial point of view, (iii) in the case of any
Affiliate Transaction (other than an Affiliate Transaction with an Unrestricted
Subsidiary of the Company) in an aggregate amount in excess of $500,000, the
disinterested members of the Board of Directors have determined in good faith
that the criteria set forth in clause (ii) are satisfied and (iv) in the case
of any Affiliate Transaction involving an Unrestricted Subsidiary of the
Company in an aggregate amount in excess of $2.0 million, the members of the
Board of Directors have determined in good faith that the criteria set forth in
clause (ii) are satisfied. This covenant will not prohibit: (i) any Restricted
Payment permitted under "Limitation on Restricted Payments," (ii) any issuance
of securities, or other payments, awards or grants in cash, securities or
otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii)
loans or advances to employees in the ordinary course of business; (iv) the
payment of reasonable fees to directors of the Company and its subsidiaries who
are not employees of the Company or its subsidiaries, (v) any transaction
between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries or (vi) the Investment represented by the Sevin Note.

Limitation on Liens on Subsidiary Stock. The Company will not directly or
indirectly create, assume or suffer to exist, any Lien on any Capital Stock of
any of its Subsidiaries, other than Liens securing Senior Debt.

Except for the limitations on dividends and redemptions of capital stock
and the limitations on the incurrence of Indebtedness, the Indenture will not
contain any covenants or provisions that may afford holders of the Debentures
protection in the event of a highly leveraged transaction.

Successor Company

The Company may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any person unless:
(i) the resulting, surviving or transferee person (if not the Company) is
organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia and such entity expressly assumes by
a supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Indenture and the Debentures; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation of the
resulting, surviving or transferee person or any Subsidiary as a result of such
transaction as having been issued by such person or such Subsidiary at the time
of such transaction), no Default has happened and is continuing; (iii)
immediately after giving effect to such transaction, the resulting, surviving
or transferee person would be able to issue an additional $1.00 of Funded Debt
pursuant to the first paragraph of "Limitation on Funded Debt"; and (iv) the
Company delivers to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture. The resulting,
surviving or transferee person will be the successor company.

<PAGE>

Defaults

An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Debentures when due, continued for 30 days, whether
or not such payment is prohibited by the provisions described under "Ranking"
above, (ii)(A) a default in the payment of principal of any Debenture when due
at its Stated Maturity, upon redemption, upon declaration or otherwise, whether
or not such payment is prohibited by the provisions described under "Ranking"
above or (B) the failure by the Company to redeem or purchase Debentures when
required pursuant to the Indenture or the Debentures, whether or not such
redemption or purchase will be prohibited by the provisions described under
"Ranking" above, (iii) the failure by the Company to comply for 30 days after
notice with its agreements contained in the Debentures or the Indenture (other
than those referred to in clauses (i) and (ii) above) (the "covenant default
provision"), (iv) Indebtedness of the Company or any Significant Subsidiary is
not paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total amount of
such Indebtedness unpaid or accelerated exceeds $1 million or its foreign
currency equivalent (the "cross acceleration provision"), (v) certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy provisions") or (vi) any judgment or decree for the
payment of money in excess of $1 million is rendered against the Company or a
Significant Subsidiary and is not discharged and either (A) an enforcement
proceeding has been commenced by any creditor upon such judgment or decree or
(B) there is a period of 60 days following such judgment or decree during which
such judgment or decree is not discharged, waived or the execution thereof
stayed, and, in the case of (B), such default continues for 10 days after
notice (the "judgment default provision").

If an Event of Default (other than an Event of Default specified in
clause (v) above with respect to the Company) occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the Debentures
may declare the principal of and accrued but unpaid interest on all the
Debentures to be due and payable. Upon such a declaration, such principal and
interest will be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization with respect to
the Company occurs and is continuing, the principal of and interest on all the
Debentures will ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holders of the
Debentures. Under certain circumstances, the holders of a majority in principal
amount of the Debentures may rescind any such acceleration with respect to the
Debentures and its consequences. If payment of the Debentures is accelerated
because of an Event of Default, the Company or the Trustee must promptly notify
the holders of Designated Senior Debt of the acceleration.

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Debentures
unless such holders have offered to the Trustee indemnification satisfactory to
it in its sole discretion against all such losses and expenses caused by taking
or not taking any such action. No holder of a Debenture may pursue any remedy
with respect to the Indenture or the Debentures unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) holders of at least 25% in principal amount of the Debentures have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or
expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the Debentures have not given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the Debentures are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or,
subject to the provisions of the Indenture

<PAGE>

relating to the duties of the Trustee, that the Trustee determines is unduly
prejudicial to the rights of any other holder of a Debenture or that would
involve the Trustee in personal liability; provided, however, that the Trustee
may take any other action deemed proper by the Trustee that is not inconsistent
with such direction.

The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Debentures
notice of the Default within 90 days after it occurs; provided, however, that,
except in the case of a Default in the payment of principal of or interest on
any Debenture, the Trustee may withhold notice if and so long as a committee of
its Trust Officers determines that withholding notice is in the interest of the
holders of the Debentures. The Company also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.

Amendments and Waivers

Except as described below and except for amendments or waivers of the
Change of Control provisions (including the related definitions) of the
Indenture (which require the consent of the holders at least 66 2/3% in
principal amount of the Debentures), the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Debentures then
outstanding and any past default or compliance with any provisions may be
waived with the consent of the holders of a majority in principal amount of the
Debentures then outstanding. However, without the consent of each holder of
Debentures affected, no amendment may, among other things, (i) reduce the
amount of Debentures whose holders must consent to an amendment, (ii) reduce
the rate of or extend the time for payment of interest on any Debenture, (iii)
reduce the principal of or extend the Stated Maturity of any Debenture, (iv)
reduce the premium payable upon the redemption of any Debenture or change the
time at which any Debenture may or will be redeemed as described under
"Optional Redemption" above, (v) make any Debenture payable in money other than
that stated in the Debenture, (vi) impair the right of any holder of the
Debentures to receive payment of principal of and interest on such holder's
Debentures on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Debentures,
(vii) make any change to the subordination provisions of the Indenture that
adversely affects the rights of any holder or (viii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions.

Without the consent of any holder of the Debentures, the Company and the
Trustee may amend or supplement the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of the Company under the Indenture, to provide
for uncertificated Debentures in addition to or in place of certificated
Debentures (provided that the uncertificated Debentures are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner such
that the uncertificated Debentures are described in Section 163(f)(2)(B) of the
Code), to make any change to the subordination provisions of the Indenture that
adversely affects the rights of any holder of Senior Debt (or Representatives
therefor), to add guarantees with respect to the Debentures, to secure the
Debentures, to add to the covenants of the Company for the benefit of the
holders of the Debentures or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
holder of the Debentures or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust Indenture
Act. However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.

<PAGE>

The consent of the holders of the Debentures is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.

After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Debentures a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Debentures, or any defect therein, will not impair or affect the validity of
the amendment.

Transfer

The Debentures will be issued in registered form and will be transferable
only upon the surrender of the Debentures being transferred for registration of
transfer. The Company may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.

Defeasance

The Company at any time may terminate all its obligations under the
Debentures and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Debentures, to replace mutilated,
destroyed, lost or stolen Debentures and to maintain a registrar and paying
agent in respect of the Debentures. The Company at any time may terminate its
obligations under the covenants described under "Certain Covenants" (other than
under "SEC Reports") and "Change of Control," the operation of the covenant
default provision, the cross acceleration provision, the bankruptcy provisions
which respect to Significant Subsidiaries and the judgment default provision
described under "Defaults" above and the limitations contained in clause (iii)
described under "Successor Company" above ("covenant defeasance").

The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Debentures may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Debentures may not be
accelerated because of an Event of Default specified in clause (iii), (iv), (v)
(with respect only to Significant Subsidiaries) or (vi) under "Defaults" above
or because of the failure of the Company to comply with the covenants described
under "Certain Covenants" (other than the covenant described under "SEC
Reports" and certain other covenants not described above) above or "Change of
Control" above or with clause (iii) under "Successor Company" above.

In order to exercise either defeasance option, the Company must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Debentures to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an Opinion of
Counsel to the effect that holders of the Debentures will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been in the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).

<PAGE>

Concerning the Trustee

_____________ is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Debentures.

Governing Law

The Indenture provides that it and the Debentures will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the laws of another jurisdiction would be required thereby.

Certain Definitions

"Affiliate" of any person specified means (i) any person directly or
indirectly controlling or under direct or indirect common control with such
specified person, (ii) any spouse, immediate family member or other relative
who has the same principal residence as any person described in clause (i)
above, (iii) any trust in which any persons described in clause (i) or (ii)
above has a beneficial interest and (iv) in the case of the Company, any
Unrestricted Subsidiary of the Company. For the purposes of this definition,
"control," when used with respect to any person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, a contract or otherwise, and the terms
"controlling" and "controlled" have meaning correlative to the foregoing.

"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock of a Subsidiary (other than directors' qualifying shares),
property or other assets (each referred to for the purposes of this definition
as a "disposition") by the Company or any of its Subsidiaries (including any
disposition by means of a merger, consolidation or similar transaction) other
than (i) a disposition by a Subsidiary to the Company or by the Company or a
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property or
assets at fair market value in the ordinary course of business or (iii) a
disposition of obsolete assets in the ordinary course of business.

"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as of the time of determination, the present value (discounted at the
interest rate borne by the Debentures, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).

"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness
or redemption or similar payment with respect to such Preferred Stock
multiplied by the amount of such payment by (ii) the sum of all such payments.

"Bank Debt" means any and all amounts payable under or in respect of the
Credit Agreement, as amended from time to time, any Refinancing Agreement, any
Working Capital Financing Agreement, or any other loan agreement with a bank,
including principal, premium (if any), interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization
relating to the Company to the extent a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof.

"Banks" has the meaning specified in the Credit Agreement.

<PAGE>

"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.

"Business Day" means each day which is not a Legal Holiday.

"Capital Lease Obligations" of a person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such person prepared in accordance with generally accepted
accounting principles; the amount of such obligation will be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; and the Stated Maturity thereof will be the date of the last
payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.

"Capital Stock" of any person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such person, including any
Preferred Stock, but excluding any debt securities convertible into or
exchangeable for such equity.

"Cash Flow" of a person for any period means the sum of (i) the
Consolidated Net Income of such person for such period, plus (ii) to the extent
deducted in the calculation of such Consolidated Net Income, the amortization
of customer lists and other deferred charges and the amortization and
depreciation of capital assets, plus (iii) to the extent not included in
Consolidated Net Income, the amount of all dividends or other distributions
received in cash by the Company or any of its Wholly Owned Subsidiaries (other
than a Wholly Owned Subsidiary described in clause (iii) of the proviso to the
definition of Consolidated Net Income) from, and the amount of any Net Cash
Proceeds to the Company or any of its Wholly Owned Subsidiaries (other than a
Wholly Owned Subsidiary described in clause (iii) of the proviso to the
definition of Consolidated Net Income) from the sale of Capital Stock of, an
Unrestricted Subsidiary of the Company, plus (iv) such person's equity in the
Net Income of any Subsidiary described in clause (iii) of the proviso to the
definition of Consolidated Net Income to the extent of any cash actually
distributed by such Subsidiary during such period as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
another Subsidiary of such person, to the limitation contained in such clause
(iii)), plus (v) to the extent deducted in calculating Net Income of such
person and its Subsidiaries for such period, any gain realized upon the sale or
other disposition of any real property or equipment or of any Capital Stock of
the Company or a Subsidiary owned by such person or any of its Subsidiaries,
plus (vi) to the extent deducted in calculating Net Income of such person and
its Subsidiaries for such period, any non-cash charge relating to the grant of
stock options to executives of the Company; provided, however, that (a) Cash
Flow shall not include the amortization of customer lists or other deferred
charges or the amortization and depreciation of capital assets of any person or
Subsidiary described in clause (i) or clause (iii) of the proviso to the
definition of Consolidated Net Income and (b) any amounts included in clause
(iv)(C) of the second paragraph under "Limitations on Restricted Payments"
shall be excluded from Cash Flow of the Company.

"Code" means the Internal Revenue Code of 1986, as amended.

"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for purposes of
any provision contained herein and required by the TIA, each other obligor on
the indenture securities.

"Consolidated EBITDA Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of EBITDA for the period of the
most recent four consecutive fiscal quarters ending at least 45 days prior to
the date of such determination to (ii) Consolidated Interest Expense for such
four fiscal

<PAGE>

quarters; provided, however, that (1) if the Company or any Subsidiary has
incurred any Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate the
Consolidated EBITDA Coverage Ratio is an incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period will be calculated
after giving effect on a pro forma basis to (A) such Indebtedness as if such
Indebtedness had been incurred on the first day of such period, (B) the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, and (C) the interest income realized
by the Company and its Subsidiaries on the proceeds of such Indebtedness, to
the extent not yet applied at the date of determination, assuming such proceeds
earned interest at the Treasury Rate from the date such proceeds were received
through such date of determination, (2) if since the beginning of such period
the Company or any Subsidiary will have made any Asset Disposition, EBITDA for
such period will be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to EBITDA (if negative), directly
attributable thereto for such period and Consolidated Interest Expense for such
period will be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Subsidiaries in connection with such Asset
Dispositions for such period (or, if the Capital Stock of any Subsidiary is
sold, the Consolidated Interest Expense for such period directly attributable
for the Indebtedness of such Subsidiary to the extent the Company and its
continuing Subsidiaries are no longer liable for such Indebtedness after such
sale) and (3) if since the beginning of such period the Company or any
Subsidiary (by merger or otherwise) will have made an Investment in any
Subsidiary (or any person which becomes a Subsidiary) or an acquisition of
assets, including any acquisition of assets occurring in connection with a
transaction causing a calculation to be made hereunder, which constitutes all
or substantially all an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period will be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period. For
purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto, and
the amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations will be determined
in good faith by a responsible financial or accounting Officer of the Company;
provided, however, that such Officer shall assume (i) the historical sales and
gross profit margins associated with such assets for any consecutive 12-month
period ended prior to the date of purchase (provided that the first month of
such period will be no more than 18 months prior to such date of purchase),
less estimated post-acquisition loss of customers (not to be less than 3%) and
(ii) other expenses as if such assets had been owned by the Company since the
first day of such period. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest on such Indebtedness will be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period.

"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Subsidiaries (other than a Subsidiary described
in clause (iii) of the proviso to the definition of Consolidated Net Income),
determined on a consolidated basis, including (i) interest expense attributable
to capital leases, (ii) amortization of debt discount, (iii) capitalized
interest, (iv) non-cash interest expense, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) interest actually paid by the Company or any such Subsidiary
under any guarantee of Indebtedness or other obligation of any other Person,
(vii) net costs associated with Hedging Obligations (including amortization of
fees), (viii) Preferred Stock dividends in respect of all Preferred Stock of
Subsidiaries held by persons other than the Company or a Wholly Owned
Subsidiary, (ix) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan to pay
interest or fees to any person (other than the Company) in connection with
loans incurred by such plan or trust to purchase newly issued or

<PAGE>

treasury shares of the Company (but excluding interest expense associated with
the accretion of principal on non-interest bearing or other discount
securities) and (x) to the extent not already included in Consolidated Interest
Expense, the interest expense attributable to Indebtedness of another person
that is guaranteed by the Company or any of its Subsidiaries, less interest
income (exclusive of deferred financing fees) of the Company and its
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles.

"Consolidated Net Income" of a person, for any period, means the
aggregate of the Net Income of such person and its Subsidiaries for such
period, determined on a consolidated basis in accordance with generally
accepted accounting principles, provided that (i) the Net Income of any other
person (other than a Subsidiary) in which such person has an interest will be
included only to the extent of the amount of dividends or distributions paid to
such person, (ii) the Net Income of any person acquired by such person in a
pooling of interests transaction for any period prior to the date of such
acquisition will be excluded, (iii) any Net Income of any Subsidiary will be
excluded if such Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Subsidiary,
directly or indirectly, to such person, and (iv) the cumulative effect of a
change in accounting principles will be excluded.

"Credit Agreement" means the Second Amended and Restated Credit Agreement
dated as of December 31, 1992, between the Company and Chemical Bank, as agent,
as amended from time to time.

"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.

"Designated Senior Debt" means (i) the Bank Debt and (ii) any other
Senior Debt which, at the date of determination, has an aggregate principal
amount outstanding of, or commitments to lend up to, at least $10 million and
is specifically designated by the Company in the instrument evidencing or
governing such Senior Debt as "Designated Senior Debt" for purposes of the
Indenture.

"EBITDA" of a person for any period means the Consolidated Net Income of
such person for such period (but without giving effect to adjustments,
accruals, deductions or entries resulting from purchase accounting,
extraordinary losses or gains and any gains or losses from any Asset
Dispositions), plus (a) to the extent deducted in calculating such Consolidated
Net Income, (i) income tax expense, (ii) Consolidated Interest Expense, (iii)
depreciation expense, (iv) amortization expense and (v) all other non-cash
expenses, plus (b) such person's equity in the Net Income of any Subsidiary
described in clause (iii) of the proviso to the definition of Consolidated net
Income to the extent of any cash actually distributed by such Subsidiary during
such period as a dividend or other distribution (subject, in the case of a
dividend or other distribution to another Subsidiary of such person, to the
limitation contained in such clause (iii)), minus (c) such person's equity in
any deficit in NIDA for such period of any Subsidiary described in clause (iii)
of the proviso to the definition of Consolidated Net Income; provided, however,
that EBITDA shall not include any income tax expense, depreciation expense,
amortization expense or other non-cash expense of any person or Subsidiary
described in clause (i) or clause (iii) of the proviso to the definition of
Consolidated Net Income.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchangeable Stock" means any Capital Stock which is exchangeable or
convertible into another security (other than Capital Stock of the Company
which is neither Exchangeable Stock nor Redeemable Stock).

<PAGE>

"Funded Debt" as applied to any person means, without duplication, (a)
any Indebtedness with a Stated Maturity of more than one year from the date of
incurrence, (b) any Indebtedness, regardless of its term, if such Indebtedness
is renewable or extendable at the option of the obligor of such Indebtedness
pursuant to the terms thereof to a date more than one year from the date of
incurrence; and (c) any Indebtedness, regardless of its term, that by its terms
or by the terms of the agreement pursuant to which it is issued, may be paid
with the proceeds of other Indebtedness that may be incurred pursuant to the
terms of such first-mentioned Indebtedness or by the terms of such agreement,
which other Indebtedness has a Stated Maturity of more than one year from the
date of incurrence of such first-mentioned Indebtedness; provided, however,
that Working Capital Borrowings shall be excluded from Funded Debt except to
the extent that Working Capital Borrowings exceed an amount equal to (i) 100%
of the current assets (excluding cash) of such person and its Subsidiaries,
less (ii) the excess, if any, of current liabilities over current assets of
such person and its Subsidiaries, in each case determined on a consolidated
basis in accordance with generally accepted accounting principles.

"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other person and any obligation, direct or indirect, contingent or otherwise,
of such person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such other
person (whether arising by virtue of partnership arrangements, or by agreement
to keep-well, to purchase assets, goods, securities or services, to take-or-
pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for purposes of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "guarantee" will not include endorsements for collection
or deposit in the ordinary course of business. The term "guarantee" used as a
verb has a corresponding meaning.

"Hedging Obligations" of any person means the obligations of such person
pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such person against
changes in interest rates or foreign exchange rates.

"Indebtedness" of any person means, without duplication,

(i) the principal of (A) indebtedness of such person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such person is
responsible or liable;

(ii) all Capital Lease Obligations of such person and all Attributable
Indebtedness in respect of Sale/Leaseback Transactions entered into by
such person;

(iii) all obligations of such person issued or assumed as the
deferred purchase price of property, all conditional sale obligations of
such person and all obligations of such person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);

(iv) all obligations of such person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such
person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than
the third Business Day following receipt by such person of a demand
for reimbursement following payment on the letter of credit);

<PAGE>

(v) all obligations of the type referred to in clauses (i) through
(iv) of other persons and all dividends of other persons for the payment
of which, in either case, such person is responsible or liable, directly
or indirectly, as obligor, guarantor or otherwise, including any
guarantees of such obligations and dividends, including by means of any
agreement which has the economic effect of a guarantee; and

(vi) all obligations of the type referred to in clauses (i) through
(v) of other persons secured by any Lien on any property or asset of
such person (whether or not such obligation is assumed by such person),
the amount of such obligation being deemed to be the lesser of the value
of such property or assets or the amount of the obligation so secured.

"Investment" in any person means any loan or advance to, any guarantee
of, any acquisition of any Capital Stock, equity interest, obligation or other
security of, or capital contribution or other investment in, such person.
Investments will exclude advances to customers and suppliers in the ordinary
course of business.

"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.

"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.

"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.

"Net Income" of any person means the net income (loss) of such person,
determined in accordance with generally accepted accounting principles;
excluding, however, from the determination of Net Income any gain (but not
loss) realized upon the sale or other disposition (including, without
limitation, dispositions pursuant to leaseback transactions) of any real
property or equipment of such person, which is not sold or otherwise disposed
of in the ordinary course of business, or of any Capital Stock of the Company
or a Subsidiary owned by such person.

"NIDA" of a person for any period means the Net Income of such person and
its Subsidiaries determined on a consolidated basis for such period, plus, to
the extent deducted in determining such Net Income, depreciation, amortization,
other non-cash charges and the amount of cash interest paid to the Company,
less accrued preferred stock dividends (except to the extent paid to the
Company), excluding Net Income derived from investments accounted for by the
equity method except to the extent of any cash dividends received by such
person and its Subsidiaries.

"Non-Convertible Capital Stock" means, with respect to any corporation,
any non-convertible Capital Stock of such corporation and any Capital Stock of
such corporation convertible solely into non-convertible common stock of such
corporation; provided, however, that Non-Convertible Capital Stock will not
include any Redeemable Stock or Exchangeable Stock.

"Officer" means the Chairman of the Board, the Chief Executive Officer,
the President, any Vice President, the Treasurer or the Secretary of the
Company.

<PAGE>

"Officers' Certificate" means a certificate signed by two Officers.

"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.

"Permitted Liens" means (i) Liens existing on the date of the Indenture
and renewals, extensions and refinancings thereof; (ii) rights of banks to set
off deposits against debts owed to said banks; (iii) Purchase Money
Indebtedness; (iv) Liens on the property of any entity existing at the time
such property is acquired by the Company or any of its Subsidiaries and
renewals, extensions and refinancings thereof, whether by merger,
consolidation, purchase of assets or otherwise; provided, however, that in the
case of this clause (iv) that such Liens (x) are not created, incurred or
assumed in contemplation of such assets being acquired by the Company and (y)
do not extend to any other assets of the Company or any of its Subsidiaries;
and (v) Liens for taxes not yet due.

"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.

"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation; provided, however, that Preferred Stock will not include the
Company's Class B Common Stock.

"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligation
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Subsidiary of such asset, including
additions and improvements; provided, however, that any Lien arising in
connection with any such Indebtedness will be limited to the specified asset
being financed or, in the case of real property or fixtures, including
additions and improvements, the real property on which such asset is attached.

"Redeemable Stock" means any Capital Stock that by its terms or otherwise
is required to be redeemed on or prior to the first anniversary of the Stated
Maturity of the Debentures or is redeemable at the option of the holder thereof
at any time on or prior to the first anniversary of the Stated Maturity of the
Debentures.

"Refinancing Agreement" means any credit agreement or other agreement
between the Company and bank lenders pursuant to which the Company refinances
borrowings under the Credit Agreement or another Refinancing Agreement.

"Representative" means the holder, trustee, agent or representative (if
any) for an issue of Senior Debt.

"Restricted Investment" means any Investment in an Unrestricted
Subsidiary. At the time any Subsidiary of the Company is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary, the Company
shall be deemed to have made a Restricted Investment in an amount equal to the
fair market value as of such time of the Company's interest in such
Unrestricted Subsidiary, as determined in good faith by the Board of Directors
and set forth in a Board Resolution.

<PAGE>

"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby the Company or a Subsidiary transfers
such property to a person and the Company or a Subsidiary leases it from such
person.

"Sevin Group" means the Estate of Malvin P. Sevin and trusts created
thereunder, Audrey L. Sevin, Irik P. Sevin, Thomas J. Edelman, Margot Gordon
and Phillip Ean Cohen and any trust over which such persons have sole voting
power.

"Sevin Note" means the promissory note, dated December 31, 1993, of Irik
P. Sevin to the Company in a principal amount of $1,559,827 and due on December
31, 1994, as the same may be extended (but not otherwise amended) on a year-by-
year basis in accordance with the Company's past practices and the principal
amount of which may not be increased in any one year by more than the amount of
accrued and unpaid interest during the immediately preceding year.

"Significant Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination either (A) had assets which, as of the date of the
Company's most recent quarterly consolidated balance sheet, constituted at
least 3% of the Company's total assets on a consolidated basis as of such date,
or (B) had revenues for the 12-month period ending on the date of the Company's
most recent quarterly consolidated statement of income which constituted at
least 3% of the Company's total revenues on a consolidated basis for such
period, or (ii) any Subsidiary of the Company which, if merged with all
Defaulting Subsidiaries of the Company, would at the time of determination
either (A) have had assets which, as of the date of the Company's most recent
quarterly consolidated balance sheet, would have constituted at least 10% of
the Company's total assets on a consolidated basis as of such date or (B) have
had revenues for the 12-month period ending on the date of the Company's most
recent quarterly consolidated statement of income which would have constituted
at least 10% of the Company's total revenues on a consolidated basis for such
period (each such determination being made in accordance with generally
accepted accounting principles). "Defaulting Subsidiary" means any Subsidiary
of the Company with respect to which an event described under clause (iv), (v)
or (vi) under "Defaults" above has occurred and is continuing unless such
contingency has occurred.

"Stated Maturity" means, with respect to any Indebtedness, the date
specified in such Indebtedness, or in any agreement pursuant to which such
Indebtedness was incurred, as the fixed date on which the principal of such
Indebtedness is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
Indebtedness at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).

"Subordinated Obligations" means any Indebtedness of the Company (whether
outstanding on the date hereof or hereafter incurred) which is subordinate or
junior in right of payment to the Debentures.

"Subsidiary" means a corporation of which a majority of the Capital Stock
having voting power under ordinary circumstances to elect a majority of the
board of directors is owned by (i) the Company, (ii) the Company and one or
more Subsidiaries or (iii) one or more Subsidiaries; provided, however, that an
Unrestricted Subsidiary shall be deemed not to be a Subsidiary (except as used
in the definition thereof).

"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sec.Sec. 77aaa-
77bbbb) as in effect on the date of the Indenture.

"Traber Group" means (i) all the holders of Class C Common Stock as of
the date of the Indenture who are not members of the Sevin Group, (ii) any
person who receives shares from persons described in clause (i) without such
transfer of shares being subject to the first refusal right referred to in the
shareholders agreement

<PAGE>

among the holders of Class C Common Stock dated November 25, 1986, as amended
through the date of the Indenture, and (iii) any trust over which persons
described in clause (i) or (ii) have sole voting power.

"Treasury Rate" as of any date of determination means the yield to
maturity at the time of computation of United States Treasury securities with a
constant maturity (as compiled and published in the most recent federal Reserve
Statistical Release H.15(519) which has become publicly available at least two
business days prior to such date of determination (or, if such Statistical
Release is no longer published, any publicly available source of similar market
data)) of five years.

"Trust Officer" means the chairman or vice-chairman of the board of
directors, the chairman or vice-chairman of the executive committee of the
board of directors, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
and any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above-designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.

"Unrestricted Subsidiary" means a Subsidiary of the Company, and each
Subsidiary of such Subsidiary, designated by the Board of Directors of the
Company as an Unrestricted Subsidiary pursuant to a Board Resolution set forth
in an Officers' Certificate and delivered to the Trustee, (a) no portion of the
Indebtedness or any other obligations (contingent or otherwise) of which (i) is
guaranteed by the Company or any other Subsidiary of the Company, (ii) is
recourse to or obligates the Company or any other Subsidiary of the Company in
any way or (iii) subjects any property or asset of the Company or any other
Subsidiary of the Company, directly or indirectly, contingently or otherwise,
to the satisfaction thereof and (b) with which neither the Company nor any
other Subsidiary of the Company has any obligation (i) to subscribe for
additional shares of Capital Stock or other equity interests therein or (ii) to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results. An Unrestricted
Subsidiary may be designated a Subsidiary, provided that (A) no Default or
Event of Default shall have occurred and be continuing and (B) immediately
after giving effect to such designation, the Company would be able to issue an
additional $1.00 of Funded Debt pursuant to the first paragraph of "Limitation
on Funded Debt."

"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.

"Voting Stock" of a corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the election
of directors.

"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly Owned Subsidiary.

"Working Capital Borrowings" means, on any date of determination, all
Indebtedness of the Company and its Subsidiaries on a consolidated basis
incurred to finance current assets. "Working Capital Financing Agreement" means
any agreement entered into after the date of the Indenture by the Company and
bank lenders pursuant to which the Company issues Working Capital Borrowings.

<PAGE>

"1989 Preferred Stock" means the preference stock of the Company
designated as "1989 Preferred Stock, Par Value $.10."

<PAGE>

DESCRIPTION OF OTHER INDEBTEDNESS AND REDEEMABLE PREFERRED STOCK

Credit Agreement

A copy of the Credit Agreement has been incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of certain provisions of the Credit Agreement does not
purport to be complete and is subject to, and is qualified by reference to, all
of the provisions of the Credit Agreement.

The Credit Agreement provides for maximum aggregate advances of $75
million to finance working capital requirements of the Company ("Revolving
Credit Loans") with a sublimit under a borrowing base established each month.
Amounts borrowed under the Revolving Credit Loans are subject to a 45-day
clean-up requirement prior to September 30 of each year and the revolving
credit portion of the facility terminates on June 30, 1996. At September 30,
1994 no Revolving Credit Loans were outstanding.

On August 1, 1994, the Company amended the Credit Agreement to include a
$50 million two-year revolving credit acquisition facility, convertible into a
three-year self amortizing term loan ("Term Loans"). Assuming the refinancing
of the Company's 11.85%, 12.17% and 12.18% Senior and Subordinated Notes due in
1998, repayments and/or sinking fund deposits equal to one-third of the
outstanding balance of the facility on June 30, 1996 would be payable annually
with the final payment due May 30, 1999. If the assumed refinancing does not
occur on or prior to June 30, 1998, the final payment due on May 30, 1999 would
be accelerated to June 30, 1998.

Interest on the Revolving Credit Loans and the Term Loans is payable
monthly and is based upon a floating rate selected by the Company of either the
Eurodollar Rate (as defined below) or the Alternate Base Rate (as defined
below), plus 0 to 50 basis points on Alternate Base Rate Loans which are
Revolving Credit Loans or 25 to 75 basis points on Alternate Base Rate Loans
which are Term Loans and 125 to 175 basis points on Eurodollar Loans which are
Revolving Credit Loans or 225 to 275 basis points on Eurodollar Loans which are
Term Loans, based upon the ratio of Consolidated Operating Profit to Interest
Expense (as defined in the Credit Agreement). Eurodollar Rate means the
prevailing rate in the interbank Eurodollar market adjusted for reserve
requirements. Alternate Base Rate means the greater of (i) the prime or base
rate of Chemical Bank in effect or (ii) the Federal funds rate in effect plus
1/2 of 1%. In addition, the Company is required to pay certain fees for balance
deficiencies, if any, and unused commitments.

The Company's obligations under the Credit Agreement are secured by all
of its and its subsidiaries' customer lists, trade names and trademarks. The
Company has further secured its obligations under the Credit Agreement with a
lien on accounts receivable and inventories.

The Credit Agreement contains significant financial and other covenants.
Under the Credit Agreement, the Company and its subsidiaries may not:

(i) incur any indebtedness, whether recourse or non-recourse and
whether senior or junior, except subordinated debt and certain other
indebtedness as specifically authorized by the Credit Agreement;

(ii) create or permit any lien on any of its assets or properties,
except for identified permitted encumbrances; and

<PAGE>

(iii) sell, transfer or convey customer lists, except, among other
exceptions, a sale of from which a portion of the net cash proceeds, if
not reinvested in customer lists, are used to prepay the Revolving Credit
Loans and Term Loans.

The Credit Agreement also provides that the Company must meet the
following financial ratios and tests:

(i) for any fiscal year, the Company may not permit the ratio of
Adjusted Net Income to Consolidated Net Lease Obligations (as those
terms are defined in the Credit Agreement) to be less than 4.0 to 1.0;

(ii) the Company may not permit Consolidated Cash Flow (as defined in
the Credit Agreement) for any period of four consecutive fiscal quarters
to be less than $25.0 million prior to December 31, 1994; $27.5 million
from December 31, 1994 to March 30, 1995; $30.0 million from March 31,
1995 to March 30, 1996 and $35.0 million thereafter, provided that the
required levels of cash flow for the years 1995 and 1996 will be
increased by up to $10 million to reflect borrowings under the
acquisition facility.

(iii) for any fiscal year, Company may not permit the excess of 6
times Consolidated Operating Profit over Consolidated Funded Debt (other
than Subordinated Debt) (as those terms are defined in the Credit
Agreement) to be less than $125.0 million;

(iv) the Company may not incur Funded Debt if after giving effect
thereto to the ratio of Consolidated EBITDA to Consolidated Interest
Expense (as those terms are defined in the Credit Agreement) exceeds 2.0
to 1.0 through December 31, 1995, increasing to 2.1 to 1.0 through
December 31, 1996 and 2.2 to 1.0 thereafter.

(v) the Company may not permit at any time Consolidated Cash Uses
(as defined in the Credit Agreement), which include dividends and stock
redemptions, for the period from March 31, 1992 to such time to exceed
$57.4 million plus the sum of (a) net proceeds received from the
issuance of capital stock and Funded Debt after March 31, 1992 and (b)
the positive or negative amount of annual Cash Flow, in each annual
period ending on March 31 subsequent to March 31, 1992 (as those terms
are defined in the Credit Agreement).

The Credit Agreement contains various events of default customary for
such types of agreements, including breaches of the covenants described above.
If an Event of Default occurs and is occurring, the lenders may, without
notice, terminate the Revolving Credit Loans and the Term Loans and/or declare
all obligations under the Credit Agreement immediately due and payable, except
that in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, all such obligations shall become due and payable
without declaration, notice or demand.

Other Debt

On September 1, 1988, the Company authorized the issuance of $60.0
million of Subordinated Notes due October 1, 1998. The Company issued $40.0
million of such notes on October 14, 1988 bearing interest at the rate of
11.85% per annum (the "11.85% Notes"), $15.0 million of such notes on March 31,
1989 bearing interest at the rate of 12.17% per annum (the "12.17% Notes") and
$5.0 million of such notes on May 1, 1990 bearing interest at the rate of
12.18% per annum (the "12.18% Notes"). On January 15, 1991, the Company
authorized the issuance of $12.5 million of Subordinated Notes due January 15,
2001 bearing interest at the rate of 14.10% per annum (the "14.10% Notes"). The
Company issued $5.7 million of such notes in April 1991 and $6.8 million in
March 1992. On April 6, 1993, the Company issued $50.0 million of 10 1/8%
Notes. On February 3, 1994, the Company issued $75.0 million of 9 3/8%
Subordinated Debentures. The

<PAGE>

11.85% Notes, 12.17% Notes, 12.18% Notes, 14.10% Notes, 2000 Notes, 10 1/8%
Notes and 9 3/8% Debentures are collectively referred to herein as the
"Subordinated Debt."

The agreements pursuant to which the Company has issued the Subordinated
Debt contain various financial and other covenants relating to the maintenance
of corporate existence, timely payment of taxes, preservation of the Company's
assets and engaging in other businesses. Such agreements also contain covenants
relating to limitations on funded debt, restricted payments, mergers,
consolidations and sale of assets and transactions with affiliates which are
generally comparable to those contained in the Indenture, except that the
Consolidated EBITDA Coverage Ratio that is contained in the Subordinated Debt
and the Redeemable Preferred Stock is subject to increase to a maximum of 2.5
to 1.0.

Concurrently with or shortly after the consummation of the Debenture
Offering the Company expects to commence the Exchange Offer, pursuant to which
the holders of the 10 1/8 Notes and the 9 3/8% Debentures will be entitled to
exchange such 10 1/8% Notes and 9 3/8% Debentures for additional Debentures.
See "The Exchange Offer."

Redeemable Preferred Stock

The Company has outstanding 208,332 shares of Redeemable Preferred Stock,
of which 41,667 shares are classified as Series A, 41,667 shares are classified
as Series B and 124,998 shares are classified as Series C. The holders of the
Series A, Series B and Series C Redeemable Preferred Stock are entitled to
receive, as and when declared by the Board of Directors, annual dividends at
the rate of $14.00, $13.84 and $14.61 per share, respectively. The shares of
Redeemable Preferred Stock are exchangeable, in whole or in part, at the option
of the Company, for 1999 Notes, subject to meeting certain debt incurrence
tests. Commencing on August 1, 1994 and on August 1 of each year thereafter, so
long as any of the shares of Redeemable Preferred Stock remain outstanding,
one-sixth of the number of originally issued shares of each series of
Redeemable Preferred Stock, less the number of shares of such series previously
exchanged for 1999 Notes, must be redeemed in cash, with the final redemption
of the remaining outstanding shares on August 1, 1999. The redemption price of
the Redeemable Preferred Stock is $100 per share plus all accrued and unpaid
dividends to the redemption date. Except for dividends on the Company's Class B
Common Stock, no dividends may be declared or paid on any other capital stock
of the Company during any fiscal year until the Company has paid or declared
and set apart all dividends and satisfied the mandatory redemption requirements
on all outstanding shares of Redeemable Preferred Stock. The Redeemable
Preferred Stock has no voting rights, except as may be provided by law.

<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc. and PaineWebber
Incorporated (collectively, the "Underwriters"), the Underwriters have agreed
to purchase from the Company, and the Company has agreed to sell to the
Underwriters, the respective amount of Debentures set forth in the table below:

<TABLE>
Principal Amount of
Underwriter Debentures

<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation . . . . . . . . . . . . . . . . .
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PaineWebber Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,000,000
============
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriting
Agreement also provides that the Company will indemnify the Underwriters and
their controlling persons against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the
Underwriters may be required to make in respect thereof. The nature of the
Underwriters' obligations under the Underwriting Agreement is such that they
are required to purchase all of the Debentures if any of the Debentures are
purchased.

The Underwriters propose to offer the Debentures directly to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of ____% of
the principal amount. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of ____% of the principal amount. After the initial
public offering of the Debentures, the offering price and other selling terms
may be changed by the Underwriters.

The Debentures are a new issue of securities, have no established trading
market and may not be widely distributed. The Company has been informed by the
Underwriters that they currently intend to make a market in the Debentures;
however, the Underwriters are not obligated to do so and may discontinue market
making at any time without notice. Accordingly, no assurance can be given as to
the liquidity of, or trading market for, the Debentures.

In January 1994, DLJ acted as underwriter of the Company's 9-3/8%
Debentures, for which it received customary discounts and commissions, and as
advisor to the Company in connection with a consent solicitation, for which it
received customary fees. In addition, the Underwriters are acting as
underwriters in connection with the Common Stock Offering, for which they will
receive customary discounts and commissions, and DLJ is acting as advisor to
the Company in connection with the Exchange Offer, for which it will receive
customary fees.

LEGAL MATTERS

The validity of the Debentures offered hereby will be passed upon for the
Company by Phillips, Nizer, Benjamin, Krim & Ballon, New York, New York.
Phillips, Nizer, Benjamin, Krim & Ballon will rely upon Dorsey & Whitney,
Minneapolis, Minnesota with respect to certain matters concerning Minnesota
law. Certain

<PAGE>

legal matters with respect to the Debentures will be passed upon for the
Underwriters by Latham & Watkins, New York, New York.

EXPERTS

The audited financial statements and schedules of the Company included in
this Prospectus and Registration Statement or appearing in the Company's Annual
Report on Form 10-K have been examined by KPMG Peat Marwick LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing herein and in the Company's Annual Report on Form 10-K
and have been included and incorporated by reference herein in reliance upon
such reports given upon the authority of said firm as experts in accounting and
auditing.

The audited financial statements of Star Gas Corporation and subsidiaries
included in this Prospectus and Registration Statement have been examined by
KPMG Peat Marwick LLP, independent certified public accountants, as of
September 30, 1994 and 1993 and for the years then ended, and by Ernst & Young
LLP, independent auditors, for the year ended September 30, 1992, as set forth
in their respective reports thereon appearing elsewhere herein, and have been
so included in reliance upon the reports of KPMG Peat Marwick LLP and Ernst &
Young LLP given upon the authority of such firms as experts in accounting and
auditing.

The audited financial statements of Fuel Oil and Liquid Propane Divisions
of DeBlois Oil Company incorporated by reference in this Prospectus and
Registration Statement have been examined by Sansiveri, Ryan, Sullivan & Co.,
independent auditors, as of December 31, 1993, and 1992 and for the years then
ended as set forth in their report, incorporated by reference herein, and have
been so included in reliance upon such report given upon the authority of said
firm as experts in accounting and auditing.

INCORPORATION OF DOCUMENTS BY REFERENCE

The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, its Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, June 30, and September 30, 1994 and its Current Reports on Form
8-K filed on July 13, 1994, September 12, 1994 and December 22, 1994 are
incorporated in this Prospectus by reference. All documents filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the effective date of
the Registration Statement shall be deemed incorporated by reference into this
Prospectus from the date of filing of such documents. Any statement contained
herein or in a document, all or a portion of which is incorporated or deemed to
be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the request of
such person, a copy of the foregoing documents incorporated herein by
reference, other than exhibits to such documents (unless such exhibits are
incorporated by reference in such document). Requests shall be directed to the
attention of George Leibowitz, Senior Vice President, Petroleum Heat and Power
Co., Inc., 2187 Atlantic Street, Stamford, CT 06902 (telephone (203) 325-5400).

<PAGE>

INDEX TO FINANCIAL STATEMENTS

PAGE

Consolidated Financial Statements of Petroleum Heat and Power
Co., Inc. and Subsidiaries:

Independent Auditors' Report................................... F-2

Consolidated Balance Sheets.................................... F-3

Consolidated Statements of Operations.......................... F-4

Consolidated Statements of Changes in Stockholders' Equity
(Deficiency)................................................. F-5

Consolidated Statements of Cash Flows.......................... F-6

Notes to Consolidated Financial Statements..................... F-8

Consolidated Financial Statements of Star Gas Corporation and
Subsidiaries:

Independent Auditors' Reports.................................. F-30

Consolidated Balance Sheets.................................... F-32

Consolidated Statements of Operations.......................... F-33

Consolidated Statements of Shareholders' Equity (Deficiency)... F-34

Consolidated Statements of Cash Flows.......................... F-35

Notes to Consolidated Financial Statements..................... F-37

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors of
PETROLEUM HEAT AND POWER CO., INC.:

We have audited the accompanying consolidated balance sheets of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1992 and 1993, and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows for each of the years in the three-year
period ended December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1992, and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1993 in conformity with generally
accepted accounting principles.

As discussed in the notes to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standard Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, in 1993.

KPMG PEAT MARWICK LLP

New York, New York
February 28, 1994

F-2
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1992 1993 1994
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 3,859,557 $ 4,613,546 $ 17,054,782
Accounts receivable (net of allowance of $1,270,754, $1,026,202 and
$2,609,280)........................................................ 78,358,514 74,818,503 43,687,417
Inventories.......................................................... 15,729,305 13,992,928 14,198,175
Prepaid expenses..................................................... 4,623,433 5,230,865 6,239,369
Notes receivable and other current assets............................ 1,680,633 1,715,329 1,436,187
U.S. Treasury Notes held in a Cash Collateral Account................ -- 20,000,000 --
------------ ------------ -------------
Total current assets............................................ 104,251,442 120,371,171 82,615,930
------------ ------------ -------------
Property, plant and equipment......................................... 61,092,297 62,643,562 67,838,103
Less accumulated depreciation and amortization....................... 28,342,302 31,103,032 34,191,071
------------ ------------ -------------
32,749,995 31,540,530 33,647,032
------------ ------------ -------------
Intangible assets (net of accumulated amortization of $188,459,167,
$217,190,143 and $236,656,477)
Customer lists..................................................... 86,093,145 73,177,198 79,066,572
Deferred charges................................................... 14,128,629 13,717,281 22,293,795
Deferred pension costs............................................. -- 1,332,616 1,332,616
------------ ------------ -------------
100,221,774 88,227,095 102,692,983
------------ ------------ -------------
Investment in Star Gas Corporation.................................... -- 16,000,000 14,757,000
------------ ------------ -------------
U.S. Treasury Notes held in a Cash Collateral Account................. 15,000,000 -- --
------------ ------------ -------------
Other assets.......................................................... 560,000 450,000 425,000
------------ ------------ -------------
$252,783,211 $256,588,796 $ 234,137,945
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Working capital borrowings........................................... $ 32,000,000 $ 28,000,000 $ --
Current maturities of other long-term debt........................... 33,345 33,345 33,345
Current installments of capital lease obligations.................... 103,595 -- --
Current maturities of cumulative redeemable preferred stock.......... -- 4,166,667 4,166,667
Subordinated notes payable........................................... 12,400,373 -- --
Accounts payable..................................................... 15,289,518 16,664,026 8,550,814
Customer credit balances............................................. 19,317,863 22,324,023 27,090,937
Unearned service contract revenue.................................... 13,180,431 13,018,983 13,171,375
Accrued expenses:
Wages and bonuses.................................................. 5,030,100 6,392,559 6,155,676
Taxes other than income taxes...................................... 1,856,074 1,564,822 469,658
Pension............................................................ 2,373,188 1,465,905 1,015,989
Other.............................................................. 9,410,757 10,046,589 13,604,085
------------ ------------ -------------
Total current liabilities....................................... 110,995,244 103,676,919 74,258,546
------------ ------------ -------------
Maxwhale Notes Payable................................................ 50,000,000 50,000,000 --
------------ ------------ -------------
Senior notes payable.................................................. -- -- 42,631,832
------------ ------------ -------------
Other long-term debt.................................................. 80,404 47,059 8,820,800
------------ ------------ -------------
Supplemental benefits payable......................................... 1,688,728 1,652,314 1,636,919
------------ ------------ -------------
Pension plan obligation............................................... 1,239,250 7,079,494 7,059,730
------------ ------------ -------------
Subordinated notes payable............................................ 84,978,349 135,263,663 167,631,831
------------ ------------ -------------
Cumulative redeemable exchangeable preferred stock, par value $.10 per
share, 409,722 shares authorized 408,884, 250,000 and 208,332 shares
outstanding of which 41,667 at December 31, 1993 and September 30,
1994 are reflected as current........................................ 37,717,790 20,833,333 16,666,533
------------ ------------ -------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock-par value $.10 per share; 5,000,000 shares
authorized, none outstanding
Class A common stock-par value $.10 per share; 40,000,000 shares
authorized, 18,992,579 shares outstanding.......................... 1,899,258 1,899,258 1,899,258
Class B common stock-par value $.10 per share; 6,500,000 shares
authorized, 216,901, 216,901 and 25,963 shares outstanding
(liquidation preference--$1,236,336, $1,236,336 and $147,972)...... 21,690 21,690 2,596
Class C common stock-par value $.10 per share; 5,000,000 shares
authorized, 2,545,139 shares outstanding........................... 254,514 254,514 254,514
Additional paid-in capital........................................... 54,462,132 54,416,259 51,093,938
Deficit.............................................................. (89,274,148) (112,741,672) (132,004,517)
Minimum pension liability adjustment................................. -- (4,534,035) (4,534,035)
------------ ------------ -------------
(32,636,554) (60,683,986) (83,288,246)
Note receivable from stockholder...................................... (1,280,000) (1,280,000) (1,280,000)
------------ ------------ -------------
Total stockholders' equity (deficiency)............................... (33,916,554) (61,963,986) (84,568,246)
------------ ------------ -------------
$252,783,211 $256,588,796 $ 234,137,945
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1991 1992 1993 1993 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................ $523,243,243 $512,430,194 $538,526,317 $377,383,609 $385,290,895
Cost of sales.................... 378,771,961 350,941,386 366,809,517 262,367,466 257,239,663
------------ ------------ ------------ ------------ ------------
Gross profit.................... 144,471,282 161,488,808 171,716,800 115,016,143 128,051,232
Selling, general and
administrative expenses......... 79,427,873 83,407,680 93,378,666 68,270,664 68,570,797
Direct delivery expense.......... 25,007,204 26,756,585 29,901,565 20,909,602 23,336,788
Amortization of customer lists... 24,839,983 23,496,438 23,182,730 18,236,229 14,801,779
Depreciation and amortization of
plant and equipment............. 5,550,381 5,534,205 5,933,100 4,368,314 4,307,857
Amortization of deferred
charges......................... 5,185,113 5,363,321 5,548,246 4,136,435 4,664,555
Provision for supplemental
benefits........................ -- 1,973,728 263,586 193,122 209,601
------------ ------------ ------------ ------------ ------------
Operating income (loss)....... 4,460,728 14,956,851 13,508,907 (1,098,223) 12,159,855
Other income (expense):
Interest expense................ (21,916,205) (20,204,808) (22,155,840) (16,501,218) (18,055,514)
Interest income................. 1,187,676 1,582,885 1,647,435 1,354,068 1,334,718
Gains (losses) on sales of fixed
assets......................... (104,911) 8,297 (164,686) (28,817) 83,141
Other........................... 60,147 (332,590) -- -- --
------------ ------------ ------------ ------------ ------------
Loss before income taxes, equity
interest and extraordinary
item........................... (16,312,565) (3,989,365) (7,164,184) (16,274,190) (4,477,800)
Income taxes..................... 250,000 400,000 400,000 218,000 425,000
------------ ------------ ------------ ------------ ------------
Loss before equity interest and
extraordinary item............. (16,562,565) (4,389,365) (7,564,184) (16,492,190) (4,902,800)
------------ ------------ ------------ ------------ ------------
Share of loss of Star Gas
Corporation..................... -- -- -- -- (1,243,000)
------------ ------------ ------------ ------------ ------------
Loss before extraordinary
item........................... (16,562,565) (4,389,365) (7,564,184) (16,492,190) (6,145,800)
Extraordinary item--loss on early
extinguishment of debt.......... -- -- (867,110) (867,110) (654,500)
------------ ------------ ------------ ------------ ------------
Net loss........................ $(16,562,565) $ (4,389,365) $ (8,431,294) $(17,359,300) $ (6,800,300)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
stock........................... $(19,854,648) $ (8,842,105) $(11,798,320) $(20,726,296) $(10,140,746)
Income (loss) before
extraordinary item per common
share:
Class A Common Stock............ $(1.64) $(.81) $(.53) $(.94) $(.45)
Class B Common Stock............ .31 1.14 1.88 1.41 1.10
Class C Common Stock............ (1.64) (.81) (.53) (.94) (.45)
Extraordinary loss per common
share:
Class A Common Stock............ $ -- $ -- $(.04) $(.04) $(.03)
Class B Common Stock............ -- -- -- -- --
Class C Common Stock............ -- -- (.04) (.04) (.03)
Net income (loss) per common
share:
Class A Common Stock............ $(1.64) $(.81) $(.57) $(.98) $(.48)
Class B Common Stock............ .31 1.14 1.88 1.41 1.10
Class C Common Stock............ (1.64) (.81) (.57) (.98) (.48)
Weighted average number of common
shares outstanding:
Class A Common Stock............ 10,180,558 12,854,266 18,992,579 18,992,579 18,992,579
Class B Common Stock............ 3,034,060 2,447,473 216,901 216,901 195,919
Class C Common Stock............ 2,545,139 2,545,139 2,545,139 2,545,139 2,545,139
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 AND NINE MONTHS ENDED SEPTEMBER 30,
1994 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------
CLASS A CLASS B CLASS C
----------------------- --------------------- -------------------- ADDITIONAL
NO. OF NO. OF NO. OF PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- -------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1990............ 10,180,558 $1,018,056 3,034,060 $303,406 2,545,139 $254,514 $13,124,567 $ (53,507,701)
Net loss............. (16,562,565)
Cash dividends
declared and
paid................ (3,927,446)
Cash dividends
payable............. (292,610)
Redeemable preferred
stock issuance
costs............... (550,962)
Accretion of
redeemable preferred
stock............... (23,083)
---------- ---------- ---------- -------- --------- -------- ----------- -------------
Balance at December
31, 1991............ 10,180,558 1,018,056 3,034,060 303,406 2,545,139 254,514 12,550,522 (74,290,322)
Net loss............. (4,389,365)
Cash dividends
declared and
paid................ (7,987,026)
Cash dividends
payable............. (2,607,435)
Accretion of
redeemable preferred
stock............... (194,740)
Class A Common Stock
issued.............. 4,330,000 433,000 47,197,000
Class A Common Stock
exchanged for Class
B Common Stock...... 4,482,021 448,202 (2,817,159) (281,716) (166,486)
Class A Common Stock
issuance and
exchange offer
costs............... (4,924,164)
---------- ---------- ---------- -------- --------- -------- ----------- -------------
Balance at December
31, 1992............ 18,992,579 1,899,258 216,901 21,690 2,545,139 254,514 54,462,132 (89,274,148)
Net loss............. (8,431,294)
Cash dividends
declared and
paid................ (11,972,850)
Cash dividends
payable............. (3,063,380)
Accretion of
redeemable preferred
stock............... (45,873)
Minimum pension
liability
adjustment..........
---------- ---------- ---------- -------- --------- -------- ----------- -------------
Balance at December
31, 1993............ 18,992,579 1,899,258 216,901 21,690 2,545,139 254,514 54,416,259 (112,741,672)
Net loss............. (6,800,300)
Cash dividends
declared and
paid................ (9,501,108)
Cash dividends
payable............. (2,961,437)
Repurchase Class B
Common Stock........ (190,938) (19,094) (3,322,321)
---------- ---------- ---------- -------- --------- -------- ----------- -------------
Balance at September
30, 1994............ 18,992,579 $1,899,258 25,963 $ 2,596 2,545,139 $254,514 $51,093,938 $(132,004,517)
---------- ---------- ---------- -------- --------- -------- ----------- -------------
---------- ---------- ---------- -------- --------- -------- ----------- -------------

MINIMUM NOTE
PENSION RECEIVABLE
LIABILITY FROM
ADJUSTMENT STOCKHOLDER TOTAL
----------- ----------- ------------
<S> <C> <C> <C>
Balance at December
31, 1990............ $ -- $(1,280,000) $(40,087,158)
Net loss............. (16,562,565)
Cash dividends
declared and
paid................ (3,927,446)
Cash dividends
payable............. (292,610)
Redeemable preferred
stock issuance
costs................ (550,962)
Accretion of
redeemable preferred
stock............... (23,083)
----------- ----------- ------------
Balance at December
31, 1991............ -- (1,280,000) (61,443,824)
Net loss............. (4,389,365)
Cash dividends
declared and
paid................ (7,987,026)
Cash dividends
payable............. (2,607,435)
Accretion of
redeemable preferred
stock............... (194,740)
Class A Common Stock
issued.............. 47,630,000
Class A Common Stock
exchanged for Class
B Common Stock...... --
Class A Common Stock
issuance and
exchange offer
costs............... (4,924,164)
----------- ----------- ------------
Balance at December
31, 1992............. -- (1,280,000) (33,916,554)
Net loss............. (8,431,294)
Cash dividends
declared and
paid................ (11,972,850)
Cash dividends
payable............. (3,063,380)
Accretion of
redeemable preferred
stock............... (45,873)
Minimum pension
liability
adjustment.......... (4,534,035) (4,534,035)
----------- ----------- ------------
Balance at December
31, 1993............ (4,534,035) (1,280,000) (61,963,986)
Net loss............. (6,800,300)
Cash dividends
declared and
paid................ (9,501,108)
Cash dividends
payable............. (2,961,437)
Repurchase Class B
Common Stock........ (3,341,415)
----------- ----------- ------------
Balance at September
30, 1994............ $(4,534,035) $(1,280,000) $(84,568,246)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ------------------------------
1991 1992 1993 1993 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $ (16,562,565) $ (4,389,365) $ (8,431,294) $ (17,359,300) $ (6,800,300)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Amortization of customer
lists................... 24,839,983 23,496,438 23,182,730 18,236,229 14,801,779
Depreciation and
amortization of plant
and equipment........... 5,550,381 5,534,205 5,933,100 4,368,314 4,307,857
Amortization of deferred
charges and debt
discount................ 5,223,354 5,394,397 5,548,246 4,148,045 4,664,555
Share of loss of Star Gas
Corporation............. -- -- -- -- 1,243,000
Provision for losses on
accounts receivable..... 2,156,320 2,444,581 1,836,113 1,649,988 1,491,498
Provision for supplemental
benefits................ -- 1,973,728 263,586 193,122 209,601
(Gain) loss on bond
redemptions............. (60,147) 332,590 867,110 867,110 654,500
(Gain) loss on sales of
fixed assets............ 104,911 (8,297) 164,686 28,817 (83,141)
Amortization of acquired
pension plan
obligation.............. (23,328) (24,785) (26,407) (19,819) (19,764)
Decrease (increase) in
accounts receivable..... 8,217,612 (6,994,519) 1,703,898 33,522,017 29,639,588
Decrease (increase) in
inventory............... 12,509,679 (2,438,308) 1,736,377 2,941,246 (205,247)
Decrease in income taxes
receivable.............. 668,000 -- -- -- --
Decrease (increase) in
prepaid expenses, notes
receivable and other
current assets.......... 279,716 (12,823) (642,128) (1,465,990) (729,362)
Decrease (increase) in
other assets............ (100,000) (200,000) 110,000 10,000 25,000
Increase (decrease) in
accounts payable........ (6,133,548) 2,360,312 1,374,508 (6,115,613) (8,113,212)
Increase (decrease) in
customer credit
balances................ 2,378,664 (822,574) 3,006,160 7,168,515 4,766,914
Increase (decrease) in
unearned service
contract revenue........ 104,643 823,902 (161,448) (845,939) 152,392
Increase (decrease) in
accrued expenses........ 461,857 (756,093) 171,555 (150,670) 1,877,476
------------- ------------- ------------- ------------- -------------
Net cash provided by
operating activities...... 39,615,532 26,713,389 36,636,792 47,176,072 47,883,134
------------- ------------- ------------- ------------- -------------
Cash flows used in investing
activities:
Acquisition of customer
lists..................... (10,127,482) (33,361,262) (10,266,783) (10,199,182) (13,319,403)
Increase in deferred
charges................... (2,570,234) (1,800,647) (3,581,798) (3,047,753) (7,901,570)
Capital expenditures........ (4,146,765) (14,509,037) (5,182,335) (4,309,984) (6,622,621)
Net proceeds from sales of
fixed assets.............. 261,333 528,376 294,014 129,638 291,403
Investment in Star Gas
Corporation............... -- -- (16,000,000) -- --
------------- ------------- ------------- ------------- -------------
Net cash used in
investing
activities........... (16,583,148) (49,142,570) (34,736,902) (17,427,281) (27,552,191)
------------- ------------- ------------- ------------- -------------
</TABLE>

F-6
<PAGE>
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ------------------------------
1991 1992 1993 1993 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Proceeds from issuance of
common stock.............. -- 47,630,000 -- -- --
Costs of issuing and
exchanging common
stocks.................... -- (4,924,164) -- -- --
Net proceeds from issuance
of redeemable exchangeable
preferred stock........... 4,449,055 7,499,950 -- -- --
Net proceeds from issuance
of subordinated notes..... 5,700,000 6,800,000 48,067,642 48,067,642 71,087,500
Repayment of notes
payable................... -- -- -- -- (50,654,500)
Repurchase of preferred
stock..................... -- -- -- -- (4,166,800)
Repurchase of common stock--
Class B................... -- -- -- -- (3,341,415)
Repurchase of subordinated
notes..................... (5,616,508) (6,964,693) (25,368,574) (25,368,574) --
Net (reductions) under
financing arrangement..... (19,250,000) (7,750,000) (4,000,000) (32,000,000) (28,000,000)
Decrease (increase) in Cash
Collateral Account........ (5,000,000) (10,000,000) (5,000,000) (5,000,000) 20,000,000
Decrease in other debt and
supplemental obligations.. (33,345) (33,346) (161,089) (250,009) (250,004)
Principal payments under
capital lease
obligations............... (686,577) (596,833) (103,595) (103,595) --
Cash dividends paid......... (5,216,921) (8,279,636) (14,580,285) (11,516,905) (12,564,488)
------------- ------------- ------------- ------------- -------------
Net cash provided by
(used in) financing
activities........... (25,654,296) 23,381,278 (1,145,901) (26,171,441) (7,889,707)
------------- ------------- ------------- ------------- -------------
Net increase (decrease)
in cash.............. (2,621,912) 952,097 753,989 3,577,350 12,441,236
Cash at beginning of year.... 5,529,372 2,907,460 3,859,557 3,859,557 4,613,546
------------- ------------- ------------- ------------- -------------
Cash at end of year.......... $ 2,907,460 $ 3,859,557 $ 4,613,546 $ 7,436,907 $ 17,054,782
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Petroleum Heat
and Power Co., Inc. (Petro) and its subsidiaries (the Company), each of which is
wholly owned and, like Petro, is engaged in the retail distribution of home
heating oil and propane in the Northeast. The Company currently operates in 28
major markets in the Northeast, including the metropolitan areas of Boston, New
York City, Baltimore, Providence and Washington, D.C., serving approximately
417,000 customers in those areas. Credit is granted to substantially all of
these customers with no individual account comprising a concentrated credit
risk.

Investment in Star Gas Corporation

The Company's investment in Star Gas Corporation (see note 15) is accounted
for following the equity method.

Inventories

Inventories are stated at the lower of cost or market using the first-in,
first-out method. The components of inventories were as follows at the dates
indicated:

DECEMBER 31,
-------------------------- SEPTEMBER 30,
1992 1993 1994
----------- ----------- -------------
Fuel oil.......................... $ 8,151,053 $ 6,289,676 $ 5,354,914
Parts............................. 7,578,252 7,703,252 8,843,261
----------- ----------- -------------
$15,729,305 $13,992,928 $ 14,198,175
----------- ----------- -------------
----------- ----------- -------------

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.

Customer Lists and Deferred Charges

Customer lists are recorded at cost less accumulated amortization.
Amortization is computed using the straight-line method with 90% of the cost
amortized over six years and 10% of the cost amortized over 25 years.

Deferred charges include goodwill, acquisition costs and payments related to
covenants not to compete. The covenants are amortized using the straight-line
method over the terms of the related contracts; acquisition costs are amortized
using the straight-line method over a six-year period; while goodwill is
amortized using the straight-line method over a twenty-five year period. Also
included as deferred charges are the costs associated with the issuance of the
Company's long-term and subordinated debt. Such costs are being amortized using
the interest method over the lives of the instruments.

F-8
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

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

Customer Credit Balances

Customer credit balances represent payments received from customers pursuant
to a budget payment plan (whereby customers pay their estimated annual fuel
charges on a fixed monthly basis) in excess of actual deliveries billed.

Unearned Service Contract Revenue

Payments received from customers for burner service contracts are deferred
and amortized into income over the terms of the respective service contracts,
which generally do not exceed one year.

Income Taxes

The Company files a consolidated Federal income tax return with its
subsidiaries. When appropriate, deferred income taxes were provided to reflect
the tax effects of timing differences between financial and tax reporting.
Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) (see note 9).

Pensions

The Company funds accrued pension costs currently on its pension plans, all
of which are noncontributory.

Common Stock

In July 1992, the holders of Class A Common Stock exchanged 2,545,139 shares
of Class A Common Stock for 2,545,139 shares of Class C Common Stock (see note
6). All numbers of Class A and Class C Common Stock and related amounts have
been retroactively adjusted in the accompanying consolidated financial
statements to reflect such exchange.

Earnings per Common Share

Earnings per common share are computed utilizing the three class method
based upon the weighted average number of shares of Class A Common Stock, Class
B Common Stock and Class C Common Stock outstanding, after adjusting the net
loss for preferred dividends declared and the accretion of 1991 Redeemable
Preferred Stock, aggregating $3,292,000, $4,452,000, $3,367,000, $3,367,000 and
$3,341,000 for the years ended 1991, 1992 1993, and for the nine months ended
September 30, 1993 and 1994, respectively. Fully diluted earnings per common
share are not presented because the effect is not material or is antidilutive.

Interim Financial Information

The financial information as of September 30, 1994 and for the nine-month
periods ended September 30, 1993 and September 30, 1994 is unaudited; however,
such information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the financial position, results of operations and changes in cash

F-9
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

flows for the interim periods. Because of the seasonality of the business, the
results for the nine months ended September 30, 1994 are not indicative of the
results to be expected for the full year.

(2) PROPERTY, PLANT AND EQUIPMENT

The components of property, plant and equipment and their estimated useful
lives were as follows at the indicated dates:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30, ESTIMATED
1992 1993 1994 USEFUL LIVES
----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Land............................... $ 1,469,065 $ 1,519,065 $ 1,819,065
Buildings.......................... 7,151,142 7,420,171 8,141,837 20-45 years
Fleet and other equipment.......... 38,507,056 38,412,619 41,330,801 3-17 years
Furniture and fixtures............. 10,784,419 11,861,514 12,988,930 5-7 years
Leasehold improvements............. 3,180,615 3,430,193 3,557,470 Terms of leases
----------- ----------- -------------
61,092,297 62,643,562 67,838,103
Less accumulated depreciation and
amortization..................... 28,342,302 31,103,032 34,191,071
----------- ----------- -------------
$32,749,995 $31,540,530 $ 33,647,032
----------- ----------- -------------
----------- ----------- -------------
</TABLE>

(3) NOTES PAYABLE, OTHER LONG-TERM DEBT AND WORKING CAPITAL BORROWINGS

Notes payable and other long-term debt, including working capital borrowings
and current maturities of long-term debt, consisted of the following at the
indicated dates:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1992 1993 1994
----------- ----------- -------------
<S> <C> <C> <C>
Notes payable to banks under working capital
borrowing arrangements(a)(c)...................... $32,000,000 $28,000,000 $ --
Notes payable in connection with the acquisition of
Whale Oil Corp., refinanced on February 3, 1994
and paid on February 4, 1994, with interest at the
rate of 9% per annum(b)(c)........................ 50,000,000 50,000,000 --
Amounts payable in connection with the purchase of a
fuel oil dealer, due in monthly installments with
interest at 6% per annum, through June 1, 1996
(see note 10)..................................... 113,749 80,404 55,395
Notes payable in connection with the purchase of
fuel oil dealers, due in monthly, quarterly and
annual installments with interest at various rates
ranging from 8% to 9% per annum, maturing at
various dates through September 13, 1999.......... -- -- 8,798,750
----------- ----------- -------------
82,113,749 78,080,404 8,854,145
Less current maturities, including working capital
borrowings........................................ 32,033,345 28,033,345 33,345
----------- ----------- -------------
$50,080,404 $50,047,059 $ 8,820,800
----------- ----------- -------------
----------- ----------- -------------
</TABLE>

(Footnotes on following page)

F-10
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(3) NOTES PAYABLE, OTHER LONG-TERM DEBT AND WORKING CAPITAL
BORROWINGS--(CONTINUED)

(Footnotes for preceding page)

- ------------

<TABLE>
<C> <S>
(a) Pursuant to a Credit Agreement dated December 31, 1992, as restated and amended (Credit
Agreement), the Company may borrow up to $75 million under a revolving credit facility
with a sublimit under a borrowing base established each month. Amounts borrowed under
the revolving credit facility are subject to a 45 day clean-up requirement prior to
September 30, of each year and the facility terminates on June 30, 1996. As collateral
for the financing arrangement, the Company granted to the lenders a security interest
in the customer lists trademarks and trade names owned by the Company, including the
proceeds therefrom.

Interest on borrowings is payable monthly and is based upon the floating rate selected
at the option of the Company of either the Eurodollar Rate (as defined below) or the
Alternate Base Rate (as defined below), plus 125 to 175 basis points on Eurodollar
Loans or 0 to 50 basis points on Alternative Base Rate Loans, based upon the ratio of
Consolidated Operating Profit to Interest Expense (as defined in the Credit Agreement).
The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted
for reserve requirements. The Alternate Base Rate is the greater of (i) the prime rate
or base rate of Chemical Bank in effect or (ii) the Federal Funds Rate in effect plus
1/2 of 1%. At December 31, 1993, the rate on the working capital borrowings was 4.9%.
The Company pays a facility fee of 0.375% on the unused portion of the revolving credit
facility. Compensating balances equal to 5.0% of the average amount outstanding during
the relevant period are also required under the agreement.

On August 1, 1994, the Company further amended the Credit Agreement to include a $50
million two-year revolving credit acquisition facility, convertible into a three-year
self amortizing loan. Assuming the refinancing of the Company's 11.85%, 12.17% and
12.18% Senior and Subordinated Notes due in 1998, repayments and/or sinking fund
deposits equal to 1/3 of the outstanding balance of the facility on June 30, 1996 would
be payable annually with the final payment due May 30, 1999. If the assumed refinancing
does not occur on or prior to June 30, 1998, the final payment due on May 30, 1999
would be accelerated to June 30, 1998. The Company has additionally pledged its
accounts receivable and inventory as security under the Credit Agreement.

(b) On July 22, 1987, Maxwhale Corp. (Maxwhale), a wholly owned subsidiary of Petro,
acquired certain assets of Whale Oil Corp. for $50.0 million. The purchase price was
paid by the issuance of $50.0 million of 9% notes due June 1, 1994. The notes were
nonrecourse to Petro, but were secured by letters of credit issued by certain banks
pursuant to the Credit Agreement. Maxwhale paid a fee on these letters of credit,
calculated at a range of 1.75% to 2.25% on $50.0 million less the balance maintained in
a Cash Collateral Account, plus 0.25% on the Cash Collateral Account balance. Petro had
fully guaranteed these letters of credit. The Maxwhale customer list was pledged
pursuant to a security agreement in favor of the banks.

On February 4, 1994, the Company repaid the $50.0 million of Maxwhale notes at a
purchase price of 101.33% of the principal amount thereof, with a portion of the
proceeds of its $75.0 million 9 3/8% public subordinated debenture offering completed
on February 3, 1994 (see note 5). The Company recorded an extraordinary loss in 1994 of
approximately $0.7 million as a result of the early payment on such debt. Since the
Maxwhale notes were refinanced with the proceeds of new long term debt, such notes were
classified as long term at December 31, 1993.
</TABLE>

(Footnotes continued on following page)

F-11
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(3) NOTES PAYABLE, OTHER LONG-TERM DEBT AND WORKING CAPITAL
BORROWINGS--(CONTINUED)

(Footnotes continued from preceding page)

<TABLE>
<C> <S>
Under the Credit Agreement, the Company was required to make annual deposits into a
Cash Collateral Account to secure the outstanding letters of credit. The first such
deposit of $5 million was made on June 15, 1991 with additional deposits of $10 million
occurring on April 1, 1992 and $5 million on May 15, 1993. As a result of the repayment
of the Maxwhale notes, the $20 million in the cash collateral account was released for
general corporate purposes on February 4, 1994.

(c) The customer lists, trademarks and trade names pledged to the banks under the Credit
Agreement are carried on the December 31, 1993 balance sheet at $73,177,198. Under the
terms of the Credit Agreement, the Company is required, among other things, to maintain
certain minimum levels of cash flow, as well as certain ratios on consolidated debt. In
the event of noncompliance with certain of the covenants, the banks have the right to
declare all amounts outstanding under the loans to be due and payable immediately.

With the refinancing of the Maxwhale notes with a portion of the Company's 9 3/8%
subordinated debentures, there are no other annual maturities of long-term debt for
each of the next five years as of December 31, 1993, except for the required repayments
of the acquisition related payable of approximately $80,000 due in equal monthly
installments of approximately $3,300 through June 30, 1996.
</TABLE>

(4) LEASES AND CAPITAL LEASE OBLIGATIONS

The Company is obligated under various capital leases entered into during
1988 and 1989 for service vans. The leases expired in 1993 and were renewed on a
month to month basis thereafter. The gross amounts of fleet and other equipment
and related accumulated amortization recorded under the capital leases were as
follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1992 1993 1994
---------- ---------- -------------
<S> <C> <C> <C>
Fleet and other equipment............. $2,701,658 $2,701,658 $ 2,701,658
Less accumulated amortization......... 2,598,063 2,701,658 2,701,658
---------- ---------- -------------
$ 103,595 $ -- $ --
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

Amortization of assets held under capital leases is included with
depreciation expense.

The Company also leases real property and equipment under noncancelable
operating leases which expire at various times through 2008. Certain of the real
property leases contain renewal options and require the Company to pay property
taxes.

F-12
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(4) LEASES AND CAPITAL LEASE OBLIGATIONS--(CONTINUED)
Future minimum lease payments for all operating leases (with initial or
remaining terms in excess of one year) are as follows:

<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- -------------------------------------------------------------- -----------
<S> <C>
1994.......................................................... $ 3,260,000
1995.......................................................... 2,974,000
1996.......................................................... 2,128,000
1997.......................................................... 1,507,000
1998.......................................................... 1,392,000
Thereafter.................................................... 5,046,000
-----------
Total minimum lease payments.......................... $16,307,000
-----------
-----------
</TABLE>

Rental expense under operating leases for the years ended December 31, 1991,
1992 and 1993 was $4,916,000, $4,448,000, and $5,346,000, respectively, and for
the nine months ended September 30, 1993 and 1994 was $3,877,000 and $4,321,000,
respectively.

(5) SUBORDINATED AND SENIOR NOTES PAYABLE

Subordinated and Senior notes payable, net of unamortized original
discounts, at the dates indicated, consisted of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1992 1993 1994
----------- ------------ -------------
<S> <C> <C> <C>
11.40% Subordinated Notes due July 1,
1993(a)(b)...................................... $12,400,373 $ -- $ --
14.275% Subordinated Notes due October 1,
1995(b)......................................... 12,478,349 -- --
11.85%, 12.17%, and 12.18% Subordinated and Senior
Notes due October 1, 1998(c).................... 60,000,000 60,000,000 60,000,000
14.10% Subordinated and Senior Notes due January
15, 2001(d)..................................... 12,500,000 12,500,000 12,500,000
Subordinated and Senior Notes due March 1,
2000(e)......................................... -- 12,763,663 12,763,663
10 1/8% Subordinated Notes due April 1, 2003(f)... -- 50,000,000 50,000,000
9 3/8% Subordinated Debentures due February 1,
2006(g)......................................... -- -- 75,000,000
----------- ------------ -------------
97,378,722 135,263,663 210,263,663
Less current maturities........................... 12,400,373 -- --
----------- ------------ -------------
$84,978,349 $135,263,663 $ 210,263,663
----------- ------------ -------------
----------- ------------ -------------
</TABLE>

(Footnotes on following page)

F-13
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(5) SUBORDINATED AND SENIOR NOTES PAYABLE--(CONTINUED)

(Footnotes for preceding page)

- ------------

<TABLE>
<C> <S>
(a) On July 2, 1984, the Company sold $20,000,000 of subordinated notes at an original
discount of approximately $150,000. These notes (11.40% Notes) bore interest at 11.40%
and were redeemable at the Company's option in whole, at any time, or in part, from
time to time, at a redemption price of 101.5% of principal amount through June 30,
1993. Interest was payable quarterly.

(b) On October 8, 1985, the Company sold $25,000,000 of subordinated fixed rate notes at an
original discount of approximately $330,000. These notes (14.275% Notes) bore interest
at 14.275% and were redeemable at the option of the Company, in whole or in part, from
time to time, upon payment of a premium rate of approximately 3.7%, which declined on
October 1, 1992 to approximately 2.0% until October 1, 1993, when the 14.275% Notes
were redeemable at par.

In April 1991, the Company purchased $5,519,000 and $376,000 face value of its 11.40%
Notes and 14.275% Notes, respectively, for an aggregate of $5,617,000. Unamortized
deferred charges and bond discounts of $218,000 associated with the issuances of the
11.40% Notes and the 14.275% Notes were written off upon the repurchase of the debt.
The Company included a gain of $60,000 in 1991 on these repurchases and included such
gain in other income.

In March 1992, the Company purchased $2,445,000 of the 14.275% notes at par.
Unamortized deferred charges and bond discounts of $62,000 associated with the issuance
of these notes were written off on the repurchase of the debt in March 1992. On May 15,
1992, the Company purchased $4,355,000 of the 14.275% Notes at a premium of 3.7%.
Unamortized deferred charges and bond discounts of $106,000 associated with the
issuance of these notes were written off on the repurchase of the debt in May 1992. The
Company included a loss of $333,000 in 1992 on these repurchases and included such loss
in other expenses.

In May 1993, the Company repurchased the remaining outstanding amounts of its 11.40%
Subordinated Notes due July 1, 1993 having a face amount of $12,430,000, at a
redemption price of 101.5% of face value, for an aggregate of approximately $12.6
million and its outstanding 14.275% Subordinated Notes due October 1, 1995, having a
face amount of $12,524,000, at a redemption price of 102.0% of face value, for an
aggregate of approximately $12.8 million. Unamortized deferred charges and bond
discounts of $447,000 associated with the issuance of these Notes were written off on
the repurchase of the debt in May 1993. The Company recorded an extraordinary loss of
$867,000 as a result of the early retirement of these notes.

(c) On September 1, 1988, the Company authorized the issuance of $60,000,000 of
Subordinated Notes due October 1, 1998 bearing interest payable semiannually on the
first day of April and October. The Company issued $40,000,000 of such notes on October
14, 1988 bearing interest at the rate of 11.85% per annum, $15,000,000 of such notes on
March 31, 1989 bearing interest at the rate of 12.17% per annum and $5,000,000 of such
notes on May 1, 1990 bearing interest at the rate of 12.18% per annum. All such notes
are redeemable at the option of the Company, in whole or in part, from time to time,
upon payment of a premium rate as defined.

(d) On January 15, 1991, the Company authorized the issuance of $12,500,000 of 14.10%
Subordinated Notes due January 15, 2001 bearing interest payable quarterly on the
fifteenth day of January, April, July and October. The Company issued $5,700,000 of
such notes in April 1991 and $6,800,000 in March 1992. The notes are redeemable at the
option of the Company, in whole or in part, from time to time, upon payment of a
premium rate as defined. On each January 15, commencing in 1996 and ending on January
15, 2000, the Company is required to repay
</TABLE>

(Footnotes continued on following page)

F-14
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(5) SUBORDINATED AND SENIOR NOTES PAYABLE--(CONTINUED)

(Footnotes continued from preceding page)

<TABLE>
<C> <S>
$2,100,000 of the Notes. The remaining principal of $2,000,000 is due on January 15,
2001. No premium is payable in connection with these required payments.

(e) In March 1993, the Company issued $12,764,000 of Subordinated Notes due March 1, 2000
in exchange for an equal amount of 1991 Redeemable Preferred Stock (see note 7). The
Company issued the 1991 Redeemable Preferred Stock under an agreement which required
the Company to redeem the 1991 Redeemable Preferred Stock as soon as, and to the extent
that, it was permitted to incur Funded Debt. Under the applicable provisions of the
Company's debt agreements, the Company was allowed to incur Funded Debt in the first
quarter of 1993, and as such, was required to enter into the exchange. These notes call
for interest payable monthly based on the sum of LIBOR plus 9.28%. At September 30,
1994, LIBOR was 5.0625%.

(f) On April 6, 1993, the Company issued $50.0 million of 10 1/8% Subordinated Notes due
April 1, 2003. These Notes are redeemable at the Company's option, in whole or in part,
at any time on or after April 1, 1998 upon payment of a premium rate as defined.
Interest is payable semiannually on the first day of April and October.

(g) On February 3, 1994, the Company issued $75.0 million of 9 3/8% public subordinated
debentures due February 1, 2006. These debentures are redeemable at the Company's
option, in whole or in part, at any time on or after February 1, 1997 upon payment of a
premium rate as defined. Interest is payable semiannually on the first day of February
and August.

In connection with the offering of its 9 3/8% subordinated debentures, the Company
solicited and received consents of the holders of at least a majority in aggregate
principal amount of each class of subordinated debt and redeemable preferred stock (see
note 7) to certain amendments to the respective agreements under which the subordinated
debt and the redeemable preferred stock were issued. In consideration for the consents,
the Company paid to the holders of the subordinated debt due in 1998, 2000 and 2003 a
cash payment aggregating $0.6 million and caused approximately $42.6 million of the
aggregate principal amount of the subordinated debt to be ranked as senior debt. In
addition, the Company agreed to increase dividends on the redeemable preferred stock by
$2.00 per share per annum. The Company also paid approximately $1.5 million in fees and
expenses to obtain such consents (see note 7).

Expenses connected with the above seven offerings, and amendments thereto, amounted to
approximately $12,772,000. At December 31, 1992 and 1993, and September 30, 1994, the
unamortized balances relating to notes still outstanding amounted to approximately
$1,675,000, $2,762,000 and $6,915,000, respectively, and such balances are included in
deferred charges.

Aggregate annual maturities for each of the next five years, are as follows as of December
31, 1993:
</TABLE>

YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------
1994....................................................... $ --
1995....................................................... --
1996....................................................... 2,100,000
1997....................................................... 2,100,000
1998....................................................... 62,100,000

F-15
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(6) COMMON STOCK AND COMMON STOCK DIVIDENDS

The Company's outstanding Common Stock consists of Class A Common Stock,
Class B Common Stock and Class C Common Stock, each with various designations,
rights and preferences. In 1992, the Company restated and amended its Articles
of Incorporation increasing the authorized shares of Class A Common Stock to
40,000,000 and authorizing 5,000,000 shares of Class C Common Stock, $.10 par
value. On July 29, 1992, the holders of Class A Common Stock exchanged, pro
rata, 2,545,139 shares of Class A Common Stock for 2,545,139 shares of Class C
Common Stock. The financial statements, as well as the table on the following
page, give retroactive effect to this exchange.

Holders of Class A Common Stock and Class C Common Stock have identical
rights, except that holders of Class A Common Stock are entitled to one vote per
share and holders of Class C Common Stock are entitled to ten votes per share.
Holders of Class B Common Stock do not have voting rights, except as required by
law, or in certain limited circumstances.

On July 29, 1992 and September 2, 1992, the Company sold an aggregate of
4,330,000 shares of its Class A Common Stock in a Public Offering (the
"Offering") at an initial offering price of $11.00 per share.

On September 17, 1992 the Company commenced an Exchange Offer (Exchange
Offer) for all of the outstanding shares of its Class B Common Stock pursuant to
which each holder of Class B Common Stock who validly tendered a share of Class
B Common Stock for exchange was entitled to receive 1.591 shares of Class A
Common Stock. The Exchange Offer expired on October 16, 1992 and, as a result,
2,817,159 shares of Class B Common Stock (92.8% of the total then outstanding)
were exchanged for 4,482,021 shares of Class A Common Stock.

Holders of Class B Common Stock were entitled to receive, as and when
declared by the Board of Directors, Special Dividends equal to .000001666% per
share per quarter of the Company's Cash Flow, as defined, for its prior fiscal
year. For purposes of computing Special Dividends, Cash Flow represents the sum
of (i) consolidated net income, plus (ii) depreciation and amortization of plant
and equipment, and (iii) amortization of customer lists and restrictive
covenants, (iv) excluding net income (loss) derived from investments accounted
for by the equity method, except to the extent of any cash dividends received by
the Company. Special Dividends are cumulative and are payable quarterly. If not
paid, dividends on any other class of stock may not be paid until all Special
Dividends in arrears are declared and paid.

During July 1994, the Company exercised its right to terminate the Special
Dividends on the Class B Common Stock, effective August 31, 1994, "the
expiration date." The Company's restated and amended articles of incorporation
provides that when the Company terminates the Special Dividends, the holders of
Class B Common Stock have the right to require the Company to purchase their
shares at $17.50 per share plus all accrued and unpaid Special Dividends through
the expiration date ($0.2763 per share for the period July 1, 1994 through
August 31, 1994).

As of the expiration date of August 31, 1994, 190,938 shares of Class B
Common Stock were repurchased for approximately $3.3 million. The remaining
Class B Common Stockholders will not be paid any dividends until the aggregate
amount of dividends paid on all other classes of stock exceeds the Common Stock
Allocation (defined as the Company's cash flow for each fiscal year after
December 31, 1985, on a cumulative basis, minus all Special Dividends paid or
accrued). At December 31, 1993 the Common Stock Allocation amounted to
approximately $100.2 million. After the Common Stock

F-16
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(6) COMMON STOCK AND COMMON STOCK DIVIDENDS--(CONTINUED)

Allocation has been satisfied, each share of Class B Common Stock will
participate equally with each share of Class A Common Stock and Class C Common
Stock with respect to all dividends.

The following table summarizes the cash dividends declared on Common Stock
and the cash dividends declared per common share for the periods indicated:

<TABLE><CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDING SEPTEMBER 30,
---------------------------------- -----------------------
1991 1992 1993 1993 1994
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash dividends declared
Class A............................. $ -- $3,157,000 $9,971,000 $7,360,000 $7,834,000
Class B............................. 952,000 2,715,000 408,000 306,000 238,000
Class C............................. -- 465,000 1,336,000 986,000 1,050,000
Cash dividends declared per share
Class A............................. $ -- $ 0.18 $ 0.525 $ 0.39 $ 0.41
Class B............................. 0.31 1.14 1.88 1.41 1.10
Class C............................. -- 0.18 0.525 0.39 .41
</TABLE>

Under the Company's most restrictive dividend limitation, $7.1 million was
available at December 31, 1993 for the payment of dividends on all classes of
Common Stock. The amount available for dividends is increased each quarter by
50% of the cash flow, as defined, for the previous fiscal quarter.

In the event of liquidation of the Company, each outstanding share of Class
B Common Stock would be entitled to a distribution equal to its share of all
accrued and unpaid Special Dividends, without interest, plus $5.70 per share,
before any distribution is made with respect to the Class A or Class C Common
Stock. Thereafter, each share of Class B Common Stock and each share of Class A
and Class C Common Stock would participate equally in all liquidating
distributions, subject to the rights of the holders of the Cumulative Redeemable
Exchangeable Preferred Stock. The aggregate liquidation preference on the Class
B Common Stock at September 30, 1994 amounted to an aggregate of $147,972.

(7) CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK

The Company entered into agreements dated as of August 1, 1989 with John
Hancock Mutual Life Insurance Company and Northwestern Mutual Life Insurance
Company to sell up to 250,000 shares of its Redeemable Preferred Stock, par
value $. 10 per share, at a price of $100 per share, which shares are
exchangeable into Subordinated Notes due August 1, 1999 (1999 Notes). The
Company sold 50,000 shares of the Redeemable Preferred Stock in August 1989,
50,000 shares in December 1989 and 150,000 shares in May 1990. The Redeemable
Preferred Stock issued in August 1989 calls for dividends of $12 per share,
while the stock issued in December 1989 and May 1990 calls for dividends of
$11.84 and $12.61 per share, respectively. In connection with receiving the
consents in 1994 to modify certain covenants under which the Redeemable
Preferred Stock was issued, the Company has agreed to increase dividends on the
Redeemable Preferred Stock by $2.00 per share per annum which began in February
1994. The shares of the Redeemable Preferred Stock are exchangeable in whole, or
in part, at the option of the Company, for 1999 Notes of the Company.

F-17
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(7) CUMULATIVE REDEEMABLE EXCHANGEABLE PREFERRED STOCK--(CONTINUED)

On August 1, 1994, and on August 1 of each year thereafter, so long as any
of the shares of Redeemable Preferred Stock remain outstanding, one-sixth of the
number of originally issued shares of each series of Redeemable Preferred Stock
outstanding less the number of shares of such series previously exchanged for
1999 Notes, are to be redeemed, with the final redemption of remaining
outstanding shares occurring on August 1, 1999. The redemption price is $100 per
share plus all accrued and unpaid dividends to such August 1. The first such
redemption in the amount of $4,166,800 occurred on August 1, 1994.

The Company entered into an agreement dated September 1, 1991 with United
States Leasing International Inc. to sell up to 159,722 shares of its 1991
Redeemable Preferred Stock, par value $.10 per share, at an initial price of
$78.261 per share, which shares were exchangeable into Subordinated Notes due
March 1, 2000 (2000 Notes). The Company sold 63,889 shares of the Redeemable
Preferred Stock in September 1991 at $78.261 per share and 94,995 shares in
March 1992 at $78.951 per share, the accreted value of the initial price. The
holders of the shares of 1991 Preferred Stock were entitled to receive monthly
dividends based on the annual rate of the sum of LIBOR plus 4.7%.

The Company issued the 1991 Redeemable Preferred Stock under an agreement
which required the Company to redeem the 1991 Redeemable Preferred Stock as soon
as, and to the extent that it was permitted to incur Funded Debt. Under the
applicable provisions of the Company's debt agreements, the Company was allowed
to incur Funded Debt in the first quarter of 1993 and as such, was required to
enter into the exchange. In March 1993, the Company issued $12,763,663 of 2000
Notes in exchange for all of the 1991 Redeemable Preferred Stock (see note 5).

Preferred dividends of $3,269,000, $4,258,000 and $3,321,000 were declared
on all classes of preferred stock in 1991, 1992 and 1993, respectively. For the
nine months ended September 30, 1993 and 1994, Preferred Dividends of $3,321,000
and $3,341,000 respectively, were declared on all classes of preferred stock.

Aggregate annual maturities of Redeemable Preferred Stock are as follows as
of December 31, 1993:

YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------
1994....................................................... $ 4,167,000
1995....................................................... 4,166,000
1996....................................................... 4,167,000
1997....................................................... 4,167,000
1998....................................................... 4,167,000
1999....................................................... 4,166,000
-----------
$25,000,000
-----------
-----------

F-18
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(8) PENSION PLANS

The Company has several noncontributory defined contribution and defined
benefit pension plans covering substantially all of its nonunion employees.
Benefits under the defined benefit plans are generally based on years of service
and each employee's compensation, while benefits under the defined contribution
plans are based solely on compensation. Pension expense under all plans for the
years ended December 31, 1991, 1992 and 1993 was $2,774,000, $2,447,000 and
$3,342,000, respectively, net of amortization of the pension obligation
acquired.

The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's balance sheets at the indicated dates:

<TABLE><CAPTION>
DECEMBER 31,
----------------------------
1992 1993
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations including vested
benefits of $18,409,871 and $23,566,465.............. $ 18,790,759 $ 23,848,149
------------ ------------
------------ ------------
Projected benefit obligation........................... $(21,715,790) $(26,458,728)
Plan assets at fair value (primarily listed stocks and
bonds)............................................... 16,581,099 17,252,490
------------ ------------
Projected benefit obligation in excess of plan
assets............................................... (5,134,691) (9,206,238)
Unrecognized net loss from past experience different
from the assumed and effects of changes in
assumptions.......................................... 3,645,967 7,538,164
Unrecognized net transitional obligation............... 606,394 546,784
Unrecognized prior service cost due to plan
amendments........................................... 674,044 785,832
Additional liability................................... (2,133,731) (6,260,201)
------------ ------------
Accrued pension cost for defined benefit plans......... $ (2,342,017) $ (6,595,659)
------------ ------------
------------ ------------
</TABLE>

Net pension cost for defined benefit plans for the periods indicated
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1991 1992 1993
----------- ----------- ----------
<S> <C> <C> <C>
Service cost-benefits earned during the
period..................................... $ 1,154,607 $ 1,162,736 $1,391,564
Interest cost on projected benefit
obligation................................. 1,665,229 1,781,444 1,778,401
Actual return on assets...................... (2,515,808) (1,248,604) (994,937)
Net amortization and deferral of gains and
losses..................................... 1,471,819 (71,885) 207,465
----------- ----------- ----------
Net periodic pension cost for defined
benefit plans........................ $ 1,775,847 $ 1,623,691 $2,382,493
----------- ----------- ----------
----------- ----------- ----------
Assumptions used in the above accounting
were:
Discount rate................................ 8.5% 8.5% 7.0%
Rates of increase in compensation level...... 6.0% 6.0% 4.0%
Expected long-term rate of return on
assets..................................... 10.0% 10.0% 8.5%
</TABLE>

F-19
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(8) PENSION PLANS--(CONTINUED)

In addition to the above, the Company made contributions to
union-administered pension plans during the years ended December 31, 1991, 1992
and 1993 of $2,365,000, $2,442,000 and $2,867,000, respectively.

The Company has recorded an additional minimum pension liability for
underfunded plans of $5,866,651 at December 31, 1993, representing the excess of
unfunded accumulated benefit obligations over plan assets. A corresponding
amount is recognized as an intangible asset except to the extent that these
additional liabilities exceed the related unrecognized prior service costs and
net transition obligation, in which case the increase in liabilities is charged
as a reduction of stockholders' equity. The Company has recorded intangible
assets of $1,332,616 and a reduction in stockholders' equity of $4,534,035 as of
December 31, 1993.

In connection with the purchase of shares of a predecessor company as of
January 1, 1979 by a majority of the Company's present holders of Class C Common
Stock, the Company assumed a pension liability in the aggregate amount of
$1,512,000, as adjusted, representing the excess of the actuarially computed
present value of accumulated vested plan benefits over the net assets available
for such benefits. Such liability, which amounted to $1,212,843 at December 31,
1993, is being amortized over 40 years.

Under a 1992 supplemental benefit agreement, Malvin P. Sevin, the Company's
then chairman and co-chief executive officer, was entitled to receive $25,000
per month for a period of 120 months following his retirement. In the event of
his death, his designated beneficiary is entitled to receive such benefit. The
expense related to this benefit was being accrued over the estimated remaining
period of Mr. Sevin's employment. Mr. Sevin passed away in December 1992, prior
to his retirement. The accrual for such benefit payable was accelerated at
December 31, 1992 to $1,973,000, the present value (using a discount rate of 9%)
of the payments now payable to his beneficiary, which payments commenced in
January 1993.

During the first quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS No. 106) "Employers' Accounting for Post
Retirement Benefits Other Than Pensions." This Statement requires that the
expected cost of postretirement benefits be fully accrued by the first date of
full benefit eligibility, rather than expensing the benefit when payment is
made. As the Company generally does not provide for postretirement benefits,
other than pensions, the adoption of the new Statement did not have any material
effect on the Company's consolidated financial condition or results of
operations.

F-20
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(9) INCOME TAXES

Income tax expense was comprised of the following for the indicated periods:

<TABLE><CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current:
Federal...................................... $ -- $ -- $ -- $ -- $ --
State........................................ 250,000 400,000 400,000 218,000 425,000
-------- -------- -------- -------- --------
$250,000 $400,000 $400,000 $218,000 $425,000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>

Deferred income tax expense results from temporary differences in the
recognition of revenue and expense for tax and financial statement purposes. The
sources of these differences and the tax effects of each were as follows:

<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1991 1992 1993
--------- ---------- ----------
<S> <C> <C> <C>
Excess of tax over book (book over tax) depreciation.... $(114,000) $ (11,000) $ 242,000
Excess of book over tax vacation expense................ (223,000) (3,000) (93,000)
(Excess of book over tax) tax over book bad debt
expense............................................... (74,000) (165,000) 92,000
(Excess of book over tax) tax over book supplemental
benefit expense....................................... -- (671,000) 12,000
Deferred service contracts.............................. 66,000 66,000 18,000
Other, net.............................................. 36,000 50,000 (60,000)
Recognition of tax benefit of net operating loss to the
extent of current and previously recognized temporary
differences........................................... -- -- (211,000)
Deferred tax assets not recognized...................... 309,000 734,000 --
--------- ---------- ----------
$ -- $ -- $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>

As of December 31, 1993, the Company has for Federal tax reporting purposes,
a net operating loss (NOL) carryforward of approximately $51.3 million. Total
income tax expense amounted to $250,000 for 1991, $400,000 for 1992, and
$400,000 for 1993. The following reconciles the effective tax rates to the
"expected" statutory rates for the years indicated:

<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Computed "expected" tax (benefit) rate........... (34.0)% (34.0)% (34.0)%
Reduction of income tax benefit resulting from:
Net operating loss carryback limitation........ 34.0 34.0 34.0
State income taxes, net of Federal income tax
benefit........................................ 1.5 10.0 5.6
----- ----- -----
1.5% 10.0% 5.6%
----- ----- -----
----- ----- -----
</TABLE>

F-21
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(9) INCOME TAXES--(CONTINUED)

During the first quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
This Statement requires that deferred income taxes be recorded following the
liability method of accounting and adjusted periodically when income tax rates
change. Adoption of the new Statement did not have any effect on the Company's
consolidated financial condition or results of operations since the Company did
not carry any deferred tax accounts on its balance sheet at December 31, 1992
and any net deferred assets set up as a result of applying SFAS 109 were fully
reserved.

Under SFAS No. 109, as of January 1, 1993, the Company had net deferred tax
assets of approximately $14.1 million subject to a valuation allowance of
approximately $14.1 million. The components of and changes in the net deferred
tax assets and the changes in the related valuation allowance for 1993 using
current rates were as follows (in thousands):

<TABLE>
<CAPTION>
DEFERRED
JANUARY 1, EXPENSE DECEMBER 31,
1993 (BENEFIT) 1993
---------- --------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards........................... $ 14,389 $ 2,606 $ 16,995
Excess of tax over book depreciation....................... (2,472) (242) (2,714)
Excess of book over tax vacation expense................... 1,042 93 1,135
Excess of book over tax (tax over book) supplemental
benefit expense.......................................... 671 (12) 659
Excess of book over tax (tax over book) bad debt expense... 440 (92) 348
Other, net................................................. 76 42 118
---------- --------- ------------
14,146 2,395 16,541
---------- --------- ------------
Valuation allowance........................................ (14,146) (2,395) (16,541)
---------- --------- ------------
$ -- $ -- $ --
---------- --------- ------------
---------- --------- ------------
</TABLE>

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent history of annual net losses, that a
full valuation allowance is appropriate.

At December 31, 1993, the Company had the following income tax carryforwards
for Federal income tax reporting purposes (in thousands):

EXPIRATION
DATE AMOUNT
- ----------------------------------------------------------------- -------
2005............................................................ $26,651
2006............................................................ 15,012
2007............................................................ 1,367
2008............................................................ 8,286
-------
$51,316
-------
-------

F-22
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(10) RELATED PARTY TRANSACTIONS

In connection with the acquisition of customer lists, equipment and other
assets of previously unaffiliated fuel oil businesses, the Company entered into
lease agreements covering certain vehicles with individuals, including certain
stockholders, directors and executive officers. These leases are currently on a
month-to-month basis, on terms comparable with leases from unrelated parties.
Annual rentals under these leases are approximately $150,000.

During 1981, the Company acquired the customer list, equipment and accounts
receivable of a fuel oil business from two individuals, one of whom is, and the
other of whom was, prior to his death, stockholders, directors and executive
officers of the Company. The purchase price was approximately $1,233,000, of
which $733,000 was paid at the closing and the balance was financed through the
issuance of a $500,000, 6%, 15-year term note secured by property of the
Company. The unpaid balance of this note at December 31, 1993 was $80,404 (see
note 3).

On November 6, 1985, the Company sold a building to certain related parties
for $660,000, the same price the Company originally paid for the property in
June 1984 and which was also the facility's independently appraised fair market
value. The parties then leased the facility back to the Company pursuant to a
ten-year agreement providing for rentals of $90,000 per annum plus escalation
and taxes.

Until 1985, the Company occupied a certain building under a lease agreement
with an unaffiliated lessor. The lease was accounted for as a capital lease and,
as such, the capitalized leased asset and obligation were included on the
Company's balance sheet. In November 1985, pursuant to a competitive bidding
process, the Company purchased the building from the landlord for $1,500,000.
The building was resold for $1,500,000 in December 1985 to certain related
parties, some of whom are stockholders, directors and executive officers of the
Company. These related parties are leasing the building to the Company under a
lease agreement which calls for rentals of $315,000 per annum (which was the
independently appraised lease rental) plus escalations and which expires in
1995.

In October 1986, Irik P. Sevin purchased 161,313 shares of Class A Common
Stock and 40,328 shares of Class C Common Stock (after giving retroactive effect
to the exchange of Class C Common Stock for Class A Common Stock in July 1992)
of the Company for $1,280,000 (which was the fair market value as established by
the Pricing Committee pursuant to the Stockholders' Agreement described below).
The purchase price was financed by a note originally due December 31, 1989, but
which has been extended to December 31, 1994. The note was amended in 1991 to
increase the principal amount by $152,841, the amount of interest due from
October 22, 1990 through December 31, 1991 and to change the interest rate on
the note effective January 1, 1992 from 10% per annum to the LIBOR rate in
effect for each month plus 0.75%. The note was amended again in 1992 to increase
the principal amount by $66,537, the amount of interest due from January 1, 1992
through December 31, 1992. The note was amended in 1993 to increase the
principal amount by $60,449, the amount of interest due from January 1, 1993
through December 31, 1993. At any time prior to the due date of the note, Mr.
Sevin has the right to require the Company to repurchase all or any of these
shares (as adjusted for stock splits, dividends and the like) for $6.35 per
share (the Put Price), provided, however, that Mr. Sevin retain all shares of
Class B Common Stock issued as stock dividends on the shares without adjustments
to the Put Price. In December 1986, 50,410 shares of Class B Common Stock were
issued as a stock dividend with respect to these shares, which shares were
exchanged in October 1992 for 80,202 Class A Common Shares pursuant to the
Exchange Offer discussed in Note 6. Upon the repurchase of the shares, the
Company has agreed to issue an eight-year option to Mr. Sevin to purchase a like
number of

F-23
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(10) RELATED PARTY TRANSACTIONS--(CONTINUED)

shares at the Put Price. Mr. Sevin has entered into an agreement with the
Company that he will not sell or otherwise transfer to a third party any of the
shares of Class A Common Stock or Class C Common Stock received pursuant to this
transaction until the note has been paid in full.

In November 1986, the Company issued stock options to purchase 30,000 shares
and 20,000 shares, of the Class A Common Stock of the Company to Irik P. Sevin
and Malvin P. Sevin, respectively, subject to adjustment for stock splits, stock
dividends, and the like, upon the successful completion of a public offering of
at least 10% of the common stock of the Company. Such a public offering was
completed in December 1986. The option price for the shares of Class A Common
Stock was $20 per share. The options, which were to expire on November 30, 1994,
are nontransferable. As a result of stock dividends in the form of Class A
Common Stock and Class B Common Stock declared by the Company in December 1986,
the exchange of Class C Common Stock for Class A Common Stock in July 1992, and
special antidilution adjustments, the options held by Irik P. Sevin then applied
to 89,794 shares of Class A Common Stock and 22,448 shares of Class C Common
Stock and the options held by Malvin P. Sevin then applied to 59,862 shares of
Class A Common Stock and 14,966 shares of Class C Common Stock. The adjusted
option price for each such share was $4.10. In November 1994, the options
belonging to Malvin P. Sevin were exercised by his estate, while Irik P. Sevin's
options were extended to November 30, 1997 on generally the same terms and
conditions as the original options, however, Irik P. Sevin's extended options
will vest in three equal annual installments on each November 30th.

On December 2, 1986, the Company issued stock options to purchase 75,000
shares and 50,000 shares of Class A Common Stock to Irik P. Sevin and Malvin P.
Sevin, respectively. The option price for the shares of Class A Common Stock was
$20 per share. These options were nontransferable and were to expire on November
30, 1994. As a result of stock dividends in the form of Class A Common Stock and
Class B Common Stock declared by the Company in December 1986, the exchange of
Class C for Class A Common Stock in July 1992, and special antidilution
adjustments, the options held by Irik P. Sevin then applied to 224,483 shares of
Class A Common Stock and 56,121 shares of Class C Common Stock and the options
held by Malvin P. Sevin then applied to 149,655 shares of Class A Common Stock
and 37,414 shares of Class C Common Stock. The adjusted option price for each
such share were $4.10. In November 1994, the options belonging to Malvin P.
Sevin were exercised by his estate, while Irik P. Sevin's options were extended
to November 30, 1997 on generally the same terms and conditions as the original
options, however, Irik P. Sevin's extended options will vest in three equal
annual installments on each November 30th.

On December 28, 1987, the Company issued stock options to purchase 24,000
shares of Class A Common Stock and 6,000 shares of Class C Common Stock (after
giving retroactive effect to the exchange of Class C Common Stock for Class A
Common Stock in July, 1992) to Irik P. Sevin. The option price for each such
share is $7.50. These options are not transferable and expire on January 1,
1996.

On March 3, 1989, the Company issued stock options to purchase 72,000 shares
of Class A Common Stock and 18,000 shares of Class C Common Stock (after giving
retroactive effect to the exchange of Class C Common Stock for Class A Common
Stock in July 1992) to Irik P. Sevin and 48,000 shares of Class A Common Stock
and 12,000 shares of Class C Common Stock (after giving retroactive effect to
the exchange of Class C Common Stock for Class A Common Stock in July 1992)

F-24
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(10) RELATED PARTY TRANSACTIONS--(CONTINUED)

to Malvin P. Sevin. The option price for each such share is $11.25. These
options are nontransferable. Malvin P. Sevin's options expired in March 1994
unexercised while the expiration date of Irik P. Sevin's options were extended
to March 3, 1999.

On November 1, 1992, the Company issued stock options to an officer of the
Company to purchase 25,000 shares of Class A Common Stock and issued another
25,000 stock options to this officer in June 1993. The option price for each
such share is $11.00, the then market value of the stock on the date the options
were granted. Twenty percent of the options become exercisable on each of the
next five anniversary dates of the grants.

On August 23, 1994, the Company issued stock options to another officer of
the Company to purchase 50,000 shares of Class A Common Stock. The option price
for each such share is $7.50, the then market value of the stock on the date the
options were granted. Twenty percent of the options become exercisable on each
of the next five anniversary dates of the grant.

In December 1992, Malvin P. Sevin passed away. All options previously owned
by him were exercisable by his estate up until the original expiration dates of
such options.

During the first quarter of 1991, the Company contemplated the acquisition
of a business engaged in the distribution of packaged industrial gases for other
than heating purposes ("Packaged Industrial Gas Business"). As the Company was
prohibited from making this acquisition because of restrictions under the Credit
Agreement from which the Company was unable to obtain a waiver, the acquisition
was consummated by certain of the principal holders of the Class C Common Stock.
The Company entered into an agreement with the Packaged Industrial Gas Business
to provide management services on request for a fee equal to the allocable cost
of Company personnel devoted to the business with a minimum fee of $50,000 per
annum plus an incentive bonus equal to 10% of the cash flow above budget. The
fee received under such management contract for the seven months ended December
31, 1991 was $29,000 and for the years ended December 31, 1992 and 1993 was
$50,000 and $4,000, respectively. Simultaneously with this acquisition, the
Company entered into an option agreement expiring May 31, 1996 pursuant to which
the Company had the right, exercisable at any time, to acquire the Packaged
Industrial Gas Business for its fair market value, as determined by an
independent appraisal. In January 1993, the Packaged Industrial Gas Business was
sold by its owners to an unrelated third party and the Company's option
agreement and management services agreement were cancelled.

On August 1, 1991, the Company agreed to purchase certain assets of a fuel
oil distributor for approximately $17 million, however, certain restrictions
under the Company's lending arrangements made the cost of the acquisition unduly
burdensome. Accordingly, in October 1991, certain shareholders of the Company,
owning approximately 9% of the Class C Common Stock and certain unaffiliated
investors, organized RAC Fuel Oil Corp. (RAC) to acquire such business, but gave
Petro a five year option, which Petro was required to exercise when permitted by
its lending arrangements, to purchase RAC for the same price, as adjusted for
operations while the business was owned by RAC. Pending exercise of its option,
the Company had been managing RAC's business at an annual fee of $161,000, which
was designed to compensate the Company for its estimated costs and for supplying
fuel oil to RAC at the Company's cost. In August 1992, the Company was able to
and did exercise its option to buy RAC. The acquisition price was approximately
$17 million.

The existing holders of Class C Common Stock of the Company have entered
into a Shareholders' Agreement which provides that, in accordance with certain
agreed-upon procedures, each will vote his

F-25
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(10) RELATED PARTY TRANSACTIONS--(CONTINUED)

shares to elect certain designated directors. The Shareholders' Agreement also
provides for first refusal rights to the Company if a holder of Class C Common
Stock receives a bona fide written offer from a third party to buy such holder's
Class C Common Stock.

(11) ACQUISITIONS

During 1991, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$12,500,000.

During 1992, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$41,500,000.

During 1993, the Company acquired the customer lists and equipment of nine
unaffiliated fuel oil dealers. The aggregate consideration for these
acquisitions, accounted for by the purchase method, was approximately
$13,600,000. In addition, during 1993, the Company acquired a 29.5% interest in
Star Gas Corporation for $16,000,000. (See note 15)

Sales and net income of the acquired companies are included in the
consolidated statements of operations from the respective dates of acquisition.
Star Gas is accounted for following the equity method.

Unaudited pro forma data giving effect to the purchased businesses and to
the Star Gas investment as if they had been acquired on January 1 of the year
preceding the year of purchase, with adjustments, primarily for amortization of
intangibles, are as follows:

YEAR ENDED DECEMBER 31,
--------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net sales.................................. $593,876 $604,491 $557,843
-------- -------- --------
-------- -------- --------
Equity in earnings of (share of loss of)
Star Gas Corporation..................... -- 167 (11,923)
-------- -------- --------
-------- -------- --------
Net loss................................... (15,547) (3,012) (19,570)
-------- -------- --------
-------- -------- --------
Earnings (loss) per common share:
Class A Common Stock..................... $ (1.62) $ (.81) $ (1.09)
Class B Common Stock..................... .57 1.77 2.47
Class C Common Stock..................... (1.62) (.81) (1.09)
-------- -------- --------
-------- -------- --------

During the nine months ended September 30, 1994, the Company acquired the
customer lists and equipment of seven unaffiliated fuel oil dealers. The
aggregate consideration for these acquisitions, accounted for by the purchase
method, was approximately $31,000,000.

F-26
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE><CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1991 1992 1993 1993 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash paid during the periods
for:
Interest.................... $21,928,724 $20,238,486 $ 21,705,736 $13,062,177 $14,934,390
Income taxes................ 202,650 319,487 495,739 280,655 296,508
Noncash investing activity:
Acquisition of customer
lists and deferred
charges...................... -- -- -- -- (8,798,750)
Noncash financing activities:
Redemption of preferred
stock...................... -- -- (12,763,663) -- --
Issuance of subordinated
notes payable............. -- -- 12,763,663 -- --
Minimum pension liability... -- -- 5,866,651 -- --
Deferred pension costs...... -- -- (1,332,616) -- --
Minimum pension liability
adjustment................. -- -- (4,534,035) -- --
Issuance of Note Payable..... -- -- -- -- 8,798,750
</TABLE>

(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, Accounts Receivable, Notes Receivable and Other Current Assets, U.S.
Treasury Notes held in a Cash Collateral Account, Working Capital Borrowings,
Accounts Payable and Accrued Expenses

The carrying amount approximates fair value because of the short maturity of
these instruments.

Long-Term Debt, Subordinated Notes Payable and Cumulative Redeemable
Exchangeable Preferred Stock

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

The estimated fair value of the Company's financial instruments are
summarized as follows:

<TABLE><CAPTION>
AT DECEMBER 31, 1993
----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................ $ 50,080 $ 50,076
Subordinated notes payable............................ 135,264 148,644
Cumulative Redeemable Exchangeable Preferred Stock.... 25,000 27,170
</TABLE>

Limitations

Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.

F-27
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER
SHARE DATA)

<TABLE><CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1992 1992 1992 1992 TOTAL
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................ $ 219,975 $ 74,006 $ 46,912 $171,537 $512,430
Gross profit............................. 84,098 17,660 6,800 52,931 161,489
Income (loss) before taxes............... 39,268 (20,020) (28,553) 5,316 (3,989)
Net income (loss)........................ $ 38,937 $(19,990) $ (28,470) $ 5,134 $ (4,389)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
Earnings (loss) per common share
Class A Common Stock..................... $ 2.86 $ (1.67) $ (2.04) $ .22 $ (.81)
Class B Common Stock..................... .29 .29 .29 .29 1.14
Class C Common Stock..................... $ 2.86 $ (1.67) $ (2.04) $ .22 $ (.81)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
</TABLE>

<TABLE><CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1993 1993 1993 1993 TOTAL
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales................................ $ 251,271 $ 71,978 $ 54,135 $161,142 $538,526
Gross profit............................. 89,595 15,817 9,604 56,701 171,717
Income (loss) before taxes and
extraordinary item..................... 39,269 (25,972) (29,571) 9,110 (7,164)
Net income (loss)........................ $ 38,938 $(26,809) $ (29,488) $ 8,928 $ (8,431)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
Earnings (loss) per common share
Class A Common Stock..................... $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
Class B Common Stock..................... .47 .47 .47 .47 1.88
Class C Common Stock..................... $ 1.72 $ (1.25) $ (1.45) $ .41 $ (.57)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
</TABLE>

<TABLE><CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, JUNE 30, SEPT. 30, NINE MONTHS ENDED
1994 1994 1994 SEPTEMBER 30, 1994
--------- -------- --------- ------------------
<S> <C> <C> <C> <C>
Net sales................................... $ 266,793 $ 69,267 $ 49,231 $385,291
Gross profit................................ 103,530 17,616 6,905 128,051
Income (loss) before taxes, equity interest
and extraordinary item.................... 50,417 (22,217) (32,678) (4,478)
Net income (loss)........................... 51,425 (23,761) (34,464) (6,800)
--------- -------- --------- ----------
--------- -------- --------- ----------
Earnings (loss) per common share
Class A Common Stock........................ $ 2.30 $ (1.11) $ (1.67) $ (.48)
Class B Common Stock........................ .41 .41 .28 1.10
Class C Common Stock........................ $ 2.30 $ (1.11) $ (1.67) $ (.48)
--------- -------- --------- ----------
--------- -------- --------- ----------
</TABLE>

(15) INVESTMENT IN STAR GAS

In December 1993, the Company acquired an approximate 29.5% equity interest
(42.8% voting interest) in Star Gas for $16.0 million in cash. Of such $16.0
million investment, $14.0 million was invested directly in Star Gas through the
purchase of Series A 8% pay-in-kind Cumulative Convertible Preferred Stock of
Star Gas, which is convertible into common stock of Star Gas, and $2.0 million
was invested through Star Gas Holdings, Inc. ("Holdings"), a newly formed
corporation. Certain other investors (including Holdings) invested a total of
$49.0 million of additional equity in Star Gas, of which $11.0 million was in
the form of cash and $38.0 million resulted from the conversion of long-term
debt and preferred stock into equity. As a result of redemptions of a portion of
the equity in Star Gas held by certain of the other investors that the Company
expects will occur in connection with a Star Gas

F-28
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 IS
UNAUDITED)

(15) INVESTMENT IN STAR GAS--(CONTINUED)

recapitalization, the Company expects that its direct and indirect equity
interest in Star Gas will increase to 36.7% without any additional investment by
the Company.

Star Gas has granted to the Company an option, exercisable through December
20, 1998, to purchase 500,000 shares of common stock of Star Gas for an
aggregate purchase price of approximately $5.0 million. In addition, each of the
other investors in Star Gas (including each such investor whose investment is
held through Holdings) has granted to the Company an option, exercisable for the
period beginning on the date that Star Gas' audited financial statements for its
fiscal year ended September 30, 1994 are first delivered to such investors and
ending on December 31, 1998, to purchase such investor's interest in Star Gas
(or, in the case of Holdings, to purchase such investor's interest in Holdings).
In addition, each such investor has an unconditional option, exercisable
beginning January 1, 1999 and ending on December 31, 1999, to require the
Company to purchase such investor's interest in Star Gas (or Holdings). The
purchase prices upon exercise of any such options are calculated based upon
specified multiples of Star Gas' earnings before interest, taxes, depreciation
and amortization (EBITDA), subject to certain minimum prices, and are payable in
cash or Class A common stock of the Company or, in the case of Holdings'
options, in cash, subordinated debt of the Company or, if the Company is not
then permitted to issue such debt, preferred stock of the Company.

The investors in Star Gas have entered into a shareholders' agreement which
provides that the Company is entitled to nominate for election up to three
persons to serve as directors of Star Gas, Holdings is entitled to nominate up
to two persons, and the other investors (as a group) are entitled to nominate up
to three persons. In addition, the shareholders' agreement provides that each
investor in Star Gas, prior to selling any of its equity interests in Star Gas
to any purchaser other than another investor in Star Gas, must first offer to
sell such equity interests to Star Gas and then to the other investors.

The Company is managing Star Gas' business under a Management Services
Agreement which provides for an annual cash fee of $500,000 and an annual bonus
equal to 5% of the increase in Star Gas' EBITDA over the fiscal year ended
September 30, 1993, payable in common stock of Star Gas pursuant to a formula
set forth in the Management Services Agreement. Star Gas also reimburses the
Company for its expenses and the cost of certain Company personnel.

(16) SUBSEQUENT EVENT

In December 1994, the Company exercised its right to purchase the remaining
outstanding common equity of Star Gas by paying $3.8 million in cash and issuing
2.5 million shares of the Company's Class A common stock. In connection with
this transaction and in accordance to the option agreements entered into during
the Company's initial investment in Star Gas, certain other investors received
options on 0.7 million shares of the Company's Class A common stock exercisable
through December 1999 at $10.14 per share in exchange for certain options they
held in Star Gas.

F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of
STAR GAS CORPORATION:

We have audited the accompanying consolidated balance sheet of Star Gas
Corporation and subsidiaries as of September 30, 1993 and 1994 and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Star Gas
Corporation and subsidiaries at September 30, 1993 and 1994 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

As discussed in Note 6 to the Consolidated Financial Statements, Star Gas
Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1994.

KPMG PEAT MARWICK LLP

New York, New York
November 17, 1994

F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Star Gas Corporation and Subsidiaries

We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Star Gas Corporation and subsidiaries
for the year ended September 30, 1992. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Star Gas Corporation and Subsidiaries for the year ended September 30, 1992
in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

New York, New York
December 3, 1992,
except for Note 5
as to which the date is
April 1, 1993

F-31
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1993 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 730,256 $ 1,825,093
Receivables, net of allowance of $716,000 and $521,000........ 9,034,888 8,172,047
Inventories (note 3).......................................... 6,445,293 4,778,007
Prepaid expenses and other current assets..................... 1,596,457 1,734,090
Assets held for sale (note 1)................................. 7,378,126 --
------------ ------------
Total current assets.................................... 25,185,020 16,509,237
------------ ------------
Property and equipment:
Customer equipment............................................ 128,056,431 132,329,606
Land and buildings............................................ 9,918,745 9,739,310
------------ ------------
137,975,176 142,068,916
Less accumulated depreciation........................... 30,306,574 37,079,397
------------ ------------
107,668,602 104,989,519
------------ ------------
Intangibles, net of accumulated amortization of $32,455,238 and
$36,394,491, and other assets................................. 19,529,973 15,644,682
------------ ------------
Total assets............................................ $152,383,595 $137,143,438
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current debt (note 5)......................................... $ 8,197,953 $ 4,766,063
Accounts payable.............................................. 9,433,402 2,875,975
Accrued interest.............................................. 7,833,308 1,364,263
Other accrued expenses........................................ 2,888,373 3,039,216
Customer credit balances...................................... 2,733,000 3,286,425
------------ ------------
Total current liabilities............................... 31,086,036 15,331,942
------------ ------------
Long-term debt (note 5)......................................... 123,991,264 70,163,385
Deferred income taxes and other long-term liabilities........... 817,663 643,137
Cumulative redeemable preferred stock........................... -- 8,264,100
Shareholders' equity (deficiency): (notes 1,2 and 5)
Common stock.................................................. 266 45
Preferred stock............................................... 41,729 500,111
Capital in excess of par value................................ 58,471,501 108,336,313
Deficit....................................................... (59,836,948) (66,095,595)
Treasury stock, at cost....................................... (2,187,916) --
------------ ------------
(3,511,368) 42,740,874
------------ ------------
Total liabilities and shareholders' equity.............. $152,383,595 $137,143,438
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Propane and related products.................. $117,877,556 $132,194,740 $114,920,000
Hauling....................................... 16,225,561 16,220,657 11,129,869
Other, net.................................... 6,636,627 5,780,581 6,742,273
------------ ------------ ------------
140,739,744.. 154,195,978 132,792,142
------------ ------------ ------------
Costs and Expenses:
Propane and related products.................. 57,641,607 69,447,511 55,045,905
Delivery and branch........................... 57,855,438 62,332,227 53,714,862
Depreciation and amortization................. 14,128,104 16,092,452 11,781,088
General and administrative.................... 3,002,555 3,772,546 4,001,577
------------ ------------ ------------
132,627,704.. 151,644,736 124,543,432
------------ ------------ ------------
Impairment of long-lived assets................. -- 33,047,065 --
------------ ------------ ------------
Net loss on sales of businesses................. -- -- 739,789
------------ ------------ ------------
Income (loss) before interest expense and income
taxes........................................... 8,112,040 (30,495,823) 7,508,921
Interest expense................................ 16,665,525 16,335,155 9,514,569
------------ ------------ ------------
Loss before income taxes........................ (8,553,485) (46,830,978) (2,005,648)
Income tax expense (benefit).................... (1,294,003) 257,027 300,000
------------ ------------ ------------
Net loss........................................ $ (7,259,482) $(47,088,005) $ (2,305,648)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-33
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED SEPTEMBER 30, 1992, 1993 AND 1994

<TABLE>
<CAPTION>
8%
CUMULATIVE
CONVERTIBLE
COMMON PREFERRED CAPITAL IN TOTAL
STOCK PREFERRED STOCK EXCESS COMMON SHAREHOLDERS'
----------- STOCK ----------------- OF PAR TREASURY EQUITY
OLD NEW SERIES A OLD NEW VALUE DEFICIT STOCK (OLD) (DEFICIENCY)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of September
30, 1991................ $ 256 -- 40,309 -- -- 55,052,931 (5,489,461) (2,187,916) $ 47,416,119
Issuance of common stock
(old)................... 10 -- -- -- -- 1,999,990 -- -- 2,000,000
Net loss................. -- -- -- -- -- -- (7,259,482) -- (7,259,482)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
Balance as of September
30, 1992................ 266 -- 40,309 -- -- 57,052,921 (12,748,943) (2,187,916) 42,156,637
Conversion of $1,420,000
of junior subordinated
debt into 8% preferred
stock (old)............. -- -- -- 1,420 -- 1,418,580 -- -- 1,420,000
Net loss................. -- -- -- -- -- -- (47,088,005) -- (47,088,005)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
Balance as of September
30, 1993................ 266 -- 40,309 1,420 -- 58,471,501 (59,836,948) (2,187,916) (3,511,368)
Retirement of treasury
stock (old), conversion
of $4,080,000 of notes
plus accrued interest,
1,420 shares of 8%
preferred stock (old),
40,309 shares of Series
A Preferred Stock (old)
and 266 shares of common
stock (old) into 5,000
shares of Series E
preferred stock (new)
and 480,695 shares of
common stock (new)...... (266) 48 (40,309) (1,420) 5,000 2,220,547 -- 2,187,916 4,371,516
Issuance of 179,750
shares of Series A and
90,000 shares of Series
C preferred stock (new),
net of issuance costs... -- -- -- -- 269,750 25,984,523 -- -- 26,254,273
Conversion of $25,000,000
of subordinated debt,
net of unamortized
issuance costs, into
150,000 shares of Series
B and 100,000 shares of
Series D preferred stock
(new)................... -- -- -- -- 250,000 24,207,642 -- -- 24,457,642
Redemption of 56,311
shares of Series D
preferred stock (new)
with the cash proceeds
from the sale of Federal
Petroleum Company and
Highway Pipeline
Trucking Company........ -- -- -- -- (56,311) (5,683,431) -- -- (5,739,742)
Common stock contributed
(27,877 shares) in
connection with the
redemption of the Series
D preferred stock (new). -- (3 ) -- -- -- 3 -- -- --
Stock dividends declared
(31,672 shares) on
Series A, B, C, D and E
preferred stock (new)... -- -- -- -- 31,672 3,135,528 (3,167,200) -- --
Cash dividends declared
and paid on Series C
preferred stock (new)... -- -- -- -- -- -- (21,699) -- (21,699)
Stock dividends declared
(7,641 shares) on Series
A and B 12.625%
Cumulative Redeemable
Preferred Stock......... -- -- -- -- -- -- (764,100) -- (764,100)
Net loss................. -- -- -- -- -- -- (2,305,648) -- (2,305,648)
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
Balance as of September
30, 1994................ $-- 45 -- -- 500,111 108,336,313 (66,095,595) -- $ 42,740,874
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
----- --- --------- ------- ------- ----------- ------------ ----------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-34
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1992 1993 1994
------------ ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss......................................... $ (7,259,482) $ (47,088,005) $ (2,305,648)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Impairment of long-lived assets................ -- 33,047,065 --
Depreciation and amortization.................. 14,128,104 16,092,452 11,781,088
Deferred income taxes.......................... (1,497,840) (13,700) 15,300
Provision for losses on accounts receivable.... 731,781 1,368,742 588,657
Net loss on sales of businesses................ -- -- 739,789
Loss (gain) on sales of fixed assets and other
items........................................ (234,824) 214,625 201,305
Changes in operating assets and liabilities:
Decrease (increase) in receivables........... 813,836 (381,760) 454,771
Decrease (increase) in inventories........... (770,937) 2,170,477 1,667,286
Decrease (increase) in other assets.......... 453,934 5,865 (104,438)
Increase (decrease) in accounts payable...... (105,714) 131,132 (6,557,427)
Increase (decrease) in other current
liabilities................................ 3,074,016 3,977,004 (5,473,416)
Increase (decrease) in other long-term
liabilities................................ (1,330,070) 482,931 (189,826)
------------ ------------- ------------
Net cash provided by operating
activities............................... 8,002,804 10,006,828 817,441
------------ ------------- ------------
Investing activities:
Capital expenditures............................. (6,730,179) (4,787,637) (5,418,690)
Purchases of companies, net of cash acquired..... (1,206,681) (61,109) (760,000)
Proceeds from sales of fixed assets.............. 1,134,298 722,950 479,451
Proceeds from sales of businesses................ -- -- 6,392,214
------------ ------------- ------------
Net cash provided by (used in) investing
activities............................... (6,802,562) (4,125,796) 692,975
------------ ------------- ------------
Financing activities:
Proceeds from issuance of debt................... 182,999 1,938,930 700,000
Repayment of debt................................ (8,070,794) (9,972,296) (18,799,707)
Net proceeds (repayments) under revolving credit
facility....................................... (5,472,004) 1,580,708 (2,808,704)
Proceeds from the issuance of common stock....... 6,873,900 -- --
Net proceeds from the issuance of preferred
stock.......................................... 5,126,100 -- 26,254,273
Redemption of preferred stock.................... -- -- (5,739,742)
Cash dividends paid on preferred stock........... -- -- (21,699)
------------ ------------- ------------
Net cash used in financing activities...... (1,359,799) (6,452,658) (415,579)
------------ ------------- ------------
Net increase (decrease) in cash............ (159,557) (571,626) 1,094,837
Cash at beginning of year.......................... 1,461,439 1,301,882 730,256
------------ ------------- ------------
Cash at end of year................................ $ 1,301,882 $ 730,256 $ 1,825,093
------------ ------------- ------------
------------ ------------- ------------
</TABLE>

F-35
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1992 1993 1994
------------ ------------- ------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:

Cash paid during the year for:
Income taxes................................... $ 276,097 $ 296,372 $ 356,320
------------ ------------- ------------
------------ ------------- ------------
Interest....................................... $ 14,257,459 $ 15,145,124 $ 15,052,098
------------ ------------- ------------
------------ ------------- ------------
Other non-cash transactions:
Conversion of subordinated debt into preferred
stock........................................ $ 1,420,000
-------------
Reclassification to assets held for sale:
Property, plant and equipment, net........... $ 4,399,914
Net operating assets......................... 2,978,212
-------------
$ 7,378,126
-------------
-------------
Recapitalization:
Exchange of notes............................ $ 4,080,000
Exchange of accrued interest................. 291,516
Exchange of 1,420 shares of preferred
stock (old)................................ 1,420
Exchange of Series A preferred stock (old)... 40,309
Exchange of common stock (old)............... 266
Common stock contributed (new)............... 3
Retirement of treasury stock (old)........... (2,187,916)
Issuance of Series E convertible preferred
stock (new)................................ (5,000)
Issuance of common stock (new)............... (48)
Capital in excess of par value............... (2,220,550)
Exchange of subordinated debt................ (25,000,000)
Write-off of related unamortized issuance
costs...................................... 542,358
Issuance of Series B convertible preferred
stock (new)................................ 150,000
Issuance of Series D convertible preferred
stock (new)................................ 100,000
Capital in excess of par value............... 24,207,642
Exchange of subordinated debt................ (7,500,000)
Issuance of 12.625% cumulative redeemable
preferred stock............................ 7,500,000
------------
$ --
------------
------------
Stock dividends:
Stock dividends declared on 12.625%
cumulative redeemable preferred stock...... $ 764,100
Stock dividends declared on convertible
preferred stock (new)...................... 31,672
Capital in excess of par value............... 3,135,528
Deficit...................................... (3,931,300)
------------
$ --
------------
------------
Sale of assets:
Receipt of note receivable................... (500,000)
Reduction in assets held for sale............ 500,000
------------
$ --
------------
------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-36
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND BUSINESS

Star Gas Corporation (the "Company"), a Delaware Corporation, sells and
distributes propane gas and related appliances to retail and wholesale customers
located principally in the Midwest, Northeast and Southeast (see note 10)
sections of the United States. As of September 30, 1994, on an as-if-converted
basis (see note 2), the Company was owned by Petroleum Heat and Power Co., Inc.
("Petro") (33.3%), Star Gas Holdings ("Holdings") (18.6%), the Prudential
Insurance Company of America ("Prudential") (33.4%) and a group of limited
partnerships managed by First Reserve Corporation (the partnerships are
hereinafter collectively referred to as "FRC") (14.7%). In December 1993, the
Company was recapitalized (see note 2). Prior to the recapitalization, the
Company was owned by Star Energy Inc. (45%) and by FRC (55%), collectively
hereinafter referred to as the "Prior Shareholders". In connection with the
recapitalization, all shares held by Star Energy Inc. were acquired by FRC.

In December 1993, the Company entered into, and is currently being managed
under, a Management Services Agreement with Petro which provides for an annual
cash fee to Petro of $500,000 and an annual bonus equal to 5% of the increase in
the Company's cash flow, as defined, over the fiscal year ended September 30,
1993. The bonus is payable in Class A Common Stock of the Company pursuant to a
formula set forth in the Management Services Agreement. For the year ended
September 30, 1994, the value of this bonus approximated $69,000. The Company
also reimburses Petro for expenses and costs associated with certain Petro
personnel. In November 1994, Petro announced its intention to exercise its
options to purchase certain shares of Common Stock and Cumulative Convertible
Preferred Stock owned by FRC and Prudential. If these options are exercised,
Petro's ownership of Star will increase to approximately 80%.

In December 1993, the Company, in an effort to improve profitability and to
concentrate on its core business, sold one of its wholly owned subsidiaries,
Federal Petroleum Company ("Federal") and initiated discussions to sell another
wholly owned subsidiary, Highway Pipeline Trucking Company ("Highway"). For the
sale of Federal, the Company received $1,650,000 in cash and an 8% interest
bearing note in the amount of $500,000. The note is due in 48 monthly
installments commencing on November 1, 1994 and ending on October 1, 1998. At
September 30, 1993, the Company adjusted the carrying value and the net assets
of Federal to equal the then expected sale price of $2,150,000. In July 1994,
the Company sold Highway for $4.1 million in cash. At September 30, 1993, the
Company had adjusted the carrying value of the net assets of Highway to be sold
to $5,228,128, its estimated value at that date. In September 1994, the Company
sold one of its retail propane operations for approximately $650,000, net of
expenses.

Prior to the recapitalization (see note 2), the Company purchased, in
September 1989, 15.12 shares of common stock owned by a former officer for a 10%
Junior Subordinated Promissory Note in the amount of $2,187,916 (see note 5).
These shares were held in treasury at September 30, 1993, and were retired as
part of the recapitalization. In September 1991, the Company sold 30.60 shares
of Common Stock and 5,126.10 shares of Series A Preferred Stock to the prior
Shareholders for $4,873,900 and $5,126,100 respectively, the proceeds of which
were received in fiscal 1992. In August 1992, the Company sold 10.69 shares of
common stock to the Prior Shareholders for $2,000,000. In March 1993, the Prior
Shareholders agreed to exchange $1,420,000 of long-term liabilities acquired
from a third party (see note 5) in consideration of 1,420 shares of newly issued
8% Cumulative Convertible Preferred Stock.

F-37
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) RECAPITALIZATION

During September 1994, the Company effected a reverse stock split of its
newly authorized and issued common stock wherein each share became .001 share.
All newly authorized and issued shares of common stock presented in the
financial statements and notes, give effect to the reverse stock split.

In December 1993, the Company amended its Articles of Incorporation and
authorized three new classes of common Stock, par value $.10--Class A (30,000
shares), Class B (5,000 shares) and Class C (3,000 shares), each with identical
rights and preferences, except that Class A has one vote per share, Class B is
nonvoting and Class C has 10 votes per share. The Company also authorized
3,000,000 shares of new $1.00 par value preferred stock to be issued in one or
more series as the Board of Directors may determine. The Board is also
authorized to fix and determine the designation and relative rights and
preferences of each such series. Two new classes of preferred stock were then
created by the Board--an 8% Cumulative Convertible Preferred Stock [Series A
(530,000 shares), Series B (300,000 shares), Series C (160,000 shares), Series D
(500,000 shares) and Series E (10,000 shares)] and a 12.625% Cumulative
Redeemable Preferred Stock [Series A (30,000 shares) and Series B (120,000
shares)].

All dividends on the Series A, B, D and E 8% Cumulative Convertible
Preferred Stock and on the Series A and B 12.625% Cumulative Redeemable
Preferred Stock are payable in additional shares of the same preferred stock
series. The holders of the Series C 8% Cumulative Convertible Preferred Stock
have the option, upon delivering proper notice, to be paid in cash or in
additional shares of Series C 8% Cumulative Convertible Preferred Stock.

In December 1993, as part of the recapitalization, the Company sold 269,750
shares of 8% Cumulative Convertible Preferred Stock for $26,975,000 to the
following investors in the indicated amounts: Petro ($14,000,000), Holdings
($11,000,000) and FRC ($1,975,000). Holdings is a corporation formed for the
purpose of investing in the Company by a group of investors, including Petro who
contributed $2,000,000 of the $11,000,000 invested. The preferred shares were
sold in the following series: Series A--179,750 shares and Series C--90,000
shares. The cash proceeds received by the Company from the issuance of the
preferred stock were used to repay: $14,325,000 of its outstanding 11.56% Senior
Notes, $2,800,000 of its outstanding Term Loan and $7,957,000 of interest in
arrears. The expenses relating to the issuance were $720,727. In addition, the
Company, issued 250,000 shares of its 8% Cumulative Convertible Preferred Stock
(150,000 shares of Series B and 100,000 shares of Series D) and 75,000 shares of
its 12.625% Cumulative Redeemable Preferred Stock (15,000 shares of Series A and
60,000 Series B) to Prudential in exchange for $25,000,000 and $7,500,000,
respectively, of its 12.625% Senior Subordinated Participating Notes. (see note
5).

Petro has an option to buy all of the shares of common stock and the 8%
Cumulative Convertible Preferred Stock owned by Holdings, FRC and Prudential.
This option commences after the issuance of the audited financial statements for
the year ended September 30, 1994 and ends on December 31, 1998. In addition,
Holdings, FRC and Prudential have the option, beginning on January 1, 1999 and
ending on December 31, 1999, to require Petro to purchase all of their shares of
the Company's common stock and 8% Cumulative Convertible Preferred Stock. Under
the terms of the put/call agreements with FRC and Prudential, Petro has the
right to purchase these shares with either cash or shares of Petro's Class A
Common Stock. Under the terms of the put/call agreement with Holdings, Petro has
the right to purchase these shares for cash, notes or Petro preferred stock. In
addition, Petro and FRC have each been granted an option to purchase 500 shares
of the Company's Class A Common Stock for $9,903.10 and $14,854.60 per share,
respectively. These options expire on December 20, 1998.

During the year ended September 30, 1994, the Company declared stock
dividends on the 8% Cumulative Convertible Preferred Stock as follows: 11,462
shares of Series A, 9,565 shares of Series B,

F-38
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) RECAPITALIZATION--(CONTINUED)

5,509 shares of Series C, 4,817 shares of Series D and 319 shares of Series E.
The Company also declared stock dividends on the 12.625% Cumulative Redeemable
Preferred Stock as follows: 1,528 shares of Series A and 6,113 shares of Series
B. In addition, the Company declared and paid a dividend of $.24 per share on
its Series C 8% Cumulative Convertible Preferred Stock.

Each share of Series A, C and E 8% Cumulative Convertible Preferred Stock is
convertible into .0092278 shares of Class A Common Stock and the shareholders
are entitled to one vote for each as-if-converted common share. Each share of
Series B 8% Cumulative Convertible Preferred Stock is convertible into .0070746
shares of nonvoting Class B Common Stock and each share of Series D 8%
Cumulative Convertible Preferred Stock is convertible into .0092278 shares of
nonvoting Class B Common Stock.

The holders of Series A, C and E 8% Cumulative Convertible Preferred Stock
are entitled to vote together with the holders of the shares of common stock as
a single class, with each as-if-converted common share of such 8% Cumulative
Convertible Preferred Stock entitled to one vote. The holders of shares of the
Series B and D 8% Cumulative Convertible Preferred Stock and the Series A and B
12.625% Cumulative Redeemable Preferred Stock are not entitled to vote on any
matters, except as required by law or as specified in the Company's Articles of
Incorporation.

Upon the occurrence of any liquidating event, each holder of shares of
Series A, B, C and D 8% Cumulative Convertible Preferred Stock and Series A
12.625% Cumulative Redeemable Preferred stock is entitled, before any
distribution or payment is made upon any shares of common stock or any other
junior security, to receive a pro rata amount of each series' liquidation value
per share. In the event of liquidation, the remaining order of liquidation is as
follows: Series B 12.625% Cumulative Redeemable Preferred Stock, Series E 8%
Cumulative Convertible Preferred Stock and finally, the common stock of the
Company, with each share of Class A, B, and C Common Stock sharing ratably.

The Company, simultaneously with the issuance of the 8% Cumulative
Convertible Preferred Stock and the 12.625% Cumulative Redeemable Preferred
Stock, retired its treasury stock and redeemed $4,080,000 plus accrued interest
in certain notes held by FRC, 1,420 shares of previously outstanding 8%
Cumulative Convertible Preferred Stock, the previously outstanding Series A
Preferred Stock and all previously outstanding shares of common stock in
exchange for 5,000 shares of Series E 8% Cumulative Convertible Preferred stock
and 480.695 shares of Class A Common Stock.

Upon the sale of Highway and Federal, the Company was required to apply, and
did apply, the net proceeds received to repurchase, at $100 per share plus an
additional amount sufficient to generate a yield equal to 12.625% compounded
semiannually from December 21, 1993, the required number of shares of Series D
8% Cumulative Convertible Preferred stock from Prudential. In addition, the
Company has an option, which expires on December 31, 1995, to repurchase the
balance of the Series D shares at the same formula price. In December 1993, the
Company sold Federal for a net price of $2.1 million, consisting of $1.6 million
in cash and a $500,000 note. The cash from the Federal sale was used to
repurchase 16,285 shares of the Series D 8% Cumulative Preferred Stock from
Prudential. In July 1994, the Company sold Highway for a net price of $4.1
million in cash. The proceeds of that sale were used to repurchase 40,026 shares
of Series D 8% Cumulative Convertible Preferred Stock from Prudential.

As the Company redeems shares of its Series D 8% Cumulative Convertible
Preferred Stock, FRC has agreed to return, as a contribution to the capital of
the Company, a number of shares of Class A Common Stock of the Company owned by
FRC, determined by multiplying 48.569 by a fraction, the

F-39
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) RECAPITALIZATION--(CONTINUED)

numerator of which is the face value of the Series D 8% Cumulative Convertible
Preferred Stock redeemed and the denominator of which is a total of $10 million.
In connection with the Federal and Highway sales, FRC contributed 27.877 shares
of Class A Common Stock back to the Company.

The following table summarizes the number of recapitalized shares issued,
redeemed and contributed from December 21, 1993 through September 30, 1994:

<TABLE>
<CAPTION>
SHARES STOCK SHARES
ISSUED DIVIDENDS CONTRIBUTED BALANCE
DECEMBER 21, DECLARED SHARES TO THE SEPTEMBER 30,
1993 AND ISSUED REDEEMED COMPANY 1994
------------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Class A Common Stock................ 480.695 (27.877) 452.818
------------ ----------- -------------
------------ ----------- -------------
8% Cumulative Convertible Preferred
Stock:
Series A.......................... 179,750 11,462 191,212
Series B.......................... 150,000 9,565 159,565
Series C.......................... 90,000 5,509 95,509
Series D.......................... 100,000 4,817 (56,311) 48,506
Series E.......................... 5,000 319 5,319
------------ ---------- -------- -------------
524,750 31,672 (56,311) 500,111
------------ ---------- -------- -------------
------------ ---------- -------- -------------
12.625% Cumulative Redeemable
Preferred Stock:
Series A.......................... 15,000 1,528 16,528
Series B.......................... 60,000 6,113 66,113
------------ ---------- -------------
75,000 7,641 82,641
------------ ---------- -------------
------------ ---------- -------------
</TABLE>

The 12.625% Cumulative Redeemable Preferred Stock must be exchanged into
subordinated notes due on January 10, 2001 at the rate of $100 per share once
the Company meets certain financial ratios. To the extent not previously
exchanged, the Company is required to apply up to $2 million on January 10, 2000
to redeem the 12.625% Cumulative Redeemable Preferred Stock plus an amount
sufficient to redeem any 12.625% Cumulative Redeemable Preferred Stock received
as dividends thereon. To the extent shares still remain outstanding, the Company
is required to redeem the remaining shares on January 10, 2001.

As of September 30, 1994, after giving effect to the recapitalization of the
Company, the buyback of the Series D 8% Cumulative Convertible Preferred Stock,
the concurrent contribution of common shares by FRC to the Company, the
preferred stock dividends declared in the year ended September 30, 1994, and
assuming conversion of all of the 8% Cumulative Convertible Preferred Stock into
common

F-40
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) RECAPITALIZATION--(CONTINUED)

stock, and no issuance of any option shares, the investors would have the
following equity interests and voting percentages on most matters:

EQUITY VOTING
PERCENTAGE PERCENTAGE
---------- ----------
Petro............................................... 29.3% 44.0%
Holdings............................................ 22.6 33.9
FRC................................................. 14.7 22.1
Prudential.......................................... 33.4 --
---------- ----------
100.0% 100.0%
---------- ----------
---------- ----------

Combining Petro's interest with its ownership interest in Holdings, Petro's
equity interest would increase to 33.3%, but its voting interest would remain at
44.0%.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.

Inventories

Inventories are stated at the lower of cost or market following the moving
weighted average method, which approximates first-in, first-out cost. The
components of inventory were as follows at the dates indicated:

SEPTEMBER 30,
------------------------
1993 1994
---------- ----------
Propane gas............................... $4,982,284 $2,936,331
Appliances and equipment.................. 1,463,009 1,841,676
---------- ----------
$6,445,293 $4,778,007
---------- ----------
---------- ----------

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the depreciable assets (generally thirty years for
buildings and five to thirty years for equipment) using the straight-line
method.

Intangible Assets

Beginning in October 1992, the excess of cost over the fair value of net
assets acquired is being amortized using the straight-line method over 10 years.
Prior to October 1992, such assets were being amortized over 40 years. The
effect of the change in 1993 was to increase amortization expense by $1,160,000.
Other intangible assets, principally covenants not to compete, capitalized
consulting costs and customer lists are being amortized over their estimated
useful lives, ranging from one to ten years. Deferred charges, representing
costs associated with the issuance of the Company's debt, are being amortized
over the lives of the related debt.

F-41
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

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

Customer Credit Balances

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

Cash Equivalents

For the purpose of determining cash equivalents used in the preparation of
the Consolidated Statements of Cash Flows, the Company considers all highly
liquid investments with a maturity of three months or less, when purchased, to
be cash equivalents.

Income Taxes

The Company files a consolidated Federal income tax return with its
subsidiaries. Deferred income taxes are provided to reflect the tax effects of
temporary differences between financial and tax reporting. Effective October 1,
1993, the Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109). (see note 6).

Basis of Presentation

Certain reclassifications have been made to the 1992 and 1993 financial
statements to conform to the 1994 presentation.

(4) ACQUISITIONS

The Company expanded its operations in the retail propane gas business by
making several acquisitions during the fiscal years ended September 30, 1992,
1993 and 1994. The consideration for these acquisitions was approximately
$1,207,000, $61,000, and $760,000, respectively. The acquisitions were accounted
for under the purchase method of accounting and the purchase prices have been
allocated to the assets and liabilities acquired based on their respective fair
market values on the dates of acquisition. The purchase prices in excess of the
fair values of net assets acquired were classified as intangibles in the
Consolidated Balance Sheets. The results of operations of the respective
acquired companies have been included in the Consolidated Statements of
Operations from the dates of acquisition.

F-42
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT AND REVOLVING CREDIT LOANS

Long-term debt consists of the following:

SEPTEMBER 30,
---------------------------
1993 1994
------------ -----------
Revolving credit facility(a)................... $ 6,808,704 $ 4,000,000
Acquisition loan(a)............................ -- 700,000
11.56% Senior Notes(b)......................... 45,000,000 30,675,000
12.625% Senior Subordinated Participating
Notes(b)..................................... 40,000,000 7,500,000
Senior Reset Term Notes(c)..................... 20,000,000 20,000,000
Term loan agreement(d)......................... 12,125,000 9,325,000
Other liabilities(e)........................... 6,287,259 1,440,610
Other notes payable(e)......................... 1,333,920 737,686
Obligations under capital leases (see note
8)........................................... 634,334 551,152
------------ -----------
132,189,217 74,929,448
Less current maturities and revolving credit
loans...................................... 8,197,953 4,766,063
------------ -----------
$123,991,264 $70,163,385
------------ -----------
------------ -----------

- ------------

<TABLE>
<C> <S>
(a) Under the terms of the restated and amended Credit Agreement as of December 21, 1993,
the Company may borrow up to $20 million to finance working capital needs under a
revolving credit facility which expires on June 30, 1996. Amounts borrowed under the
revolving credit facility are subject to a 30 day clean up requirement each year.
Interest on borrowings is payable monthly and is based upon either the Eurodollar Rate
(as defined below) plus 2 1/4% or the Alternate Base Rate (as defined below) plus 1/4%,
at the Company's option.

The Eurodollar Rate is the prevailing rate in the Interbank Eurodollar Market adjusted
for reserve requirements, if any. At September 30, 1994, this rate was 4.9%. The
Alternate Base Rate is the higher of (i) the prime or base rate of The First National
Bank of Boston or (ii) the Federal Funds Rate plus 1/2%. At September 30, 1994, the
prime rate was 7.8% and the Federal Funds Rate was 5.0%.

As of September 30, 1993, and 1994, outstanding revolving credit loans aggregated
$6,808,704 and $4,000,000. In addition, as of September 30, 1993 and 1994, the credit
facility provided $2,648,816 and $2,438,816 in letters of credit, respectively.

The Credit Agreement also provides for a revolving credit acquisition facility under
which the Company may borrow up to $20 million to fund acquisitions of propane
companies. This acquisition facility expires on June 30, 1996 and the Company has the
option to convert this facility into a term loan, payable in 36 consecutive monthly
installments commencing on July 1, 1996, the acquisition loan conversion date. Interest
on the borrowings is payable monthly and is based upon either the Eurodollar Rate plus
2 1/2% on loans made before the acquisition loan conversion date and plus 3% on loans
made after the acquisition loan conversion date or the Alternate Base Rate plus 1/2% on
loans made before the acquisition loan conversion date and plus 1% on loans made after
the acquisition loan conversion date, at the Company's option. As of September 30,
1994, $700,000 was borrowed to fund an acquisition completed during fiscal 1994.

Under the terms of the Credit Agreement, as amended, the Company is restricted as to
the declaration and distribution of dividends and is also required to maintain certain
financial and operational ratios. The amounts borrowed under the Credit Agreement are
secured by certain assets of the Company. The Company pays a commitment fee equal to
1/2% of the unused portion of the bank facilities.
</TABLE>

F-43
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT AND REVOLVING CREDIT LOANS--(CONTINUED)
<TABLE>
<C> <S>
(b) On January 10, 1989, the Company issued $85,000,000 of notes (the "Note Agreements") to
Prudential for cash. The Note Agreements consisted of $45,000,000 of 11.56% Senior
Notes due in six consecutive annual installments of $7,500,000 commencing January 10,
1994; $30,000,000 of 12.625% Senior Subordinated Participating Notes, Series A, due in
six consecutive annual installments of $4,250,000 commencing January 10, 1995, with a
final installment of $4,500,000 due on January 10, 2001; and $10,000,000 of 12.625%
Senior Subordinated Participating Notes, Series B, due in six consecutive annual
installments of $1,500,000 commencing January 10, 1995, with a final installment of
$1,000,000 due on January 10, 2001.

The Series A and Series B Senior Subordinated Participating Notes bore additional
interest aggregating to the greater of (a) $487,500 or 2.5% of the first $33,500,000 of
the Company's operating profit (as defined) for each of the fiscal years ended
September 30, 1991 through 1999 and (b) $622,400 or 3.19% of the first $33,500,000 of
the Company's operating profit (as defined) for the fiscal year ended September 30,
2000. This participating interest feature on the Notes was eliminated in connection
with the recapitalization.

As part of the recapitalization (see note 2), the Company exchanged in direct order of
maturity, $15,000,000 of Series A 12.625% Senior Subordinated Participating Notes for
150,000 shares of Series B 8% Cumulative Convertible Preferred Stock, the entire
$10,000,000 of Series B 12.625% Senior Subordinated Participating Notes for 100,000
shares of Series D 8% Cumulative Convertible Preferred Stock, and in inverse order of
maturity, $1,500,000 of Series A 12.625% Senior Subordinated Participating Notes for
15,000 shares of Series A 12.625% Cumulative Redeemable Preferred Stock and $6,000,000
of Series A 12.625% Senior Subordinated Participating Notes for 60,000 shares of Series
B 12.625% Cumulative Redeemable Preferred Stock.

Additionally, the Company was also allowed to prepay $14,325,000 of the 11.56% Senior
Notes in direct order of their maturity. The remaining 1995 payment of $675,000 and
part of the 1996 payment of $1,325,000 were deferred such that the 1997, 1998 and 1999
payments were increased from $7,500,000 per year to $8,166,667 per year.

Under the terms of the Note Agreements, as amended at various dates, the Company is
restricted as to the declaration and distribution of dividends and is also required to
maintain certain financial and operational ratios. The amounts borrowed under the
11.56% Senior Notes and the 12.625% Senior Subordinated Participating Notes are secured
by substantially all of the Company's assets.

(c) On February 28, 1991, the Company issued $20,000,000 in Senior Reset Term Notes (the
"Notes") to Prudential for cash. The Notes were due in semi-annual installments of
$2,500,000 which were to commence August 28, 1994. The Company, at various dates,
amended the terms of the notes and as a result, the payments of principal are now
$2,500,000 on August 28, 1999, $5,000,000 on February 28, 2000, August 28, 2000 and
February 28, 2001, respectively and $2,500,000 on August 28, 2001.

Interest on the notes was based on the Treasury rate in effect on the issuance date,
which under the terms of the note agreement, was scheduled to be adjusted to the then
current Treasury rate on the "Reset Date", February 28, 1994. Prior to the
recapitalization, the rate was based on the 2.25 year Treasury rate plus 3.75%. In
connection with the recapitalization, the notes were amended such that the interest
rate became the 6.5 year Treasury rate plus 3.30%. On February 28, 1994, the notes were
reset and the rate was reduced from 10.72% to 9.11%.

Under the terms of the Notes, as amended, the Company is restricted as to the
declaration and distribution of dividends and is also required to maintain certain
financial and operational ratios. The amounts borrowed under the Notes are secured by
substantially all of the Company's assets.
</TABLE>

F-44
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT AND REVOLVING CREDIT LOANS--(CONTINUED)
<TABLE>
<C> <S>
(d) In March 1991, the Company entered into a Term Loan Agreement (the "Term Loan") with
PruSupply, Inc. which provided a $20,000,000 facility. The Company amended the Term
Loan at various dates such that the Term Loan was to be repaid in nineteen consecutive
quarterly installments of $875,000, which commenced in May 1991, with a final payment
of $3,375,000 due at maturity in February 1996. The Term Loan bears interest at the one
month London Interbank Offered Rate ("LIBOR") plus 2.7%.

As part of the recapitalization, the Term Loan was amended to allow for the prepayment
of $1,925,000 on December 23, 1993. In addition, the Company paid $875,000 that had
been deferred. This agreement was further amended such that the remaining required
payments on these notes will be $4,325,000 in 1996 and $5,000,000 in 1997.

Under the terms of the Term Loan, as amended, the Company is restricted as to the
declaration and distribution of dividends and is also required to maintain certain
financial and operational ratios. The amounts outstanding under the Term Loan are
secured by substantially all of the Company's assets.

(e) In connection with certain acquisitions, the Company was required to pay, over a
several year period, an aggregate of $6,287,259 as of September 30, 1993, and
$1,440,610 as of September 30, 1994, pursuant to certain covenant not-to-compete
agreements and consulting payments. In addition, the Company had obligations of
$1,333,920 at September 30, 1993 and $737,686 at September 30, 1994 of notes payable to
former owners.

In December 1992, the Prior Shareholders purchased from a third party the Company's
obligation to pay $5,500,000 of consulting and non-competition payments due in equal
installments of $2,750,000 in November 1992 and November 1993. The November 1992
payment was initially deferred until June 1993, however, in March 1993, $1,420,000 of
this payment was exchanged for 1,420 shares of newly issued 8% Cumulative Convertible
Preferred Shares of the Company. The balance of the June 1993 payment, $4,080,000, was
deferred. In December 1993, as part of the recapitalization (see note 2), the Company
exchanged the 1,420 shares of newly issued 8% Cumulative Convertible Preferred Shares
and the $4,080,000 deferred amount (the balance of the purchased payments) plus accrued
interest, for 5,000 shares of Series E 8% Cumulative Convertible Preferred Stock and
230.895 shares of Class A Common Stock.
</TABLE>

As of September 30, 1994, the annual maturities of long-term debt,
borrowings under the revolving credit agreement and the acquisition loan are set
forth in the following table:

1995................................................. $ 4,766,063
1996................................................. 11,814,759
1997................................................. 13,652,044
1998................................................. 10,343,708
1999................................................. 15,008,420
Thereafter........................................... 19,344,454
-----------
$74,929,448
-----------
-----------

As of September 30, 1994, the Company was in compliance with all borrowing
agreement covenants, as amended.

F-45
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES

The income tax provision (benefit) shown in the accompanying Consolidated
Statements of Operations consists of the components set forth below:

YEAR ENDED SEPTEMBER 30,
-----------------------------------
1992 1993 1994
----------- -------- --------
Federal:
Deferred............................... $(1,489,055) $ -- $ --
State:
Current................................ $ 203,837 $270,727 $284,700
Deferred............................... (8,785) (13,700) 15,300
----------- -------- --------
195,052 257,027 $300,000
----------- -------- --------
$(1,294,003) $257,027 $300,000
----------- -------- --------
----------- -------- --------

A federal income tax benefit was recorded in 1992 as a result of reversing
previously recorded federal deferred income tax liabilities. No federal income
tax benefits were recorded as a result of the losses for 1993 or 1994. State tax
expense was recorded each year in jurisdictions where the Company had to pay
taxes and where net operating loss carryforwards or carrybacks are not
recognized.

Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
This statement requires that deferred income taxes be recorded following the
liability method of accounting and adjusted periodically when income tax rates
change. Adoption of the new Statement did not have any significant effect on the
Company's financial condition or results of operations, since the Company did
not carry any material deferred income tax accounts on its balance sheet at
September 30, 1993 and any net deferred tax assets set up as a result of
applying SFAS No. 109 have been fully reserved.

Under SFAS No. 109, as of October 1, 1993, the Company had total deferred
tax assets of approximately $35.8 million subject to a valuation allowance of
approximately $10.6 million. With the recapitalization in December 1993 (see
note 2), the Company's NOL's were limited for purposes of general carryforward
availability and otherwise limited for specified carryforward purposes since the
recapitalization constituted a change in control for income tax reporting
purposes. The Company believes that it has sufficient tax strategies available
that will enable it to utilize most of its NOL carryforwards.

F-46
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES--(CONTINUED)

The components of and changes in the net deferred taxes and the changes in
the related valuation allowance for the year ended September 30, 1994 were as
follows:

<TABLE><CAPTION>
DEFERRED
OCTOBER 1, BENEFIT SEPTEMBER 30,
1993 (EXPENSE) 1994
------------ ------------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards................. $ 28,798,684 $ 2,655,318 $ 31,454,002
Accounts receivable
reserves.................... 243,476 (66,473) 177,003
Intangibles, principally due
to differences in
amortization................ 6,489,063 (520,629) 5,968,434
Other......................... 263,799 (121,753) 142,046
------------ ------------ -------------
35,795,022.. 1,946,463 37,741,485
Valuation allowance............. (10,584,168) (780,229) (11,364,397)
------------ ------------ -------------
Total deferred tax assets... 25,210,854 1,166,234 26,377,088
------------ ------------ -------------
Deferred tax liabilities:
Assets held for sale,
principally due
to differences in
amortization
and depreciation............ (312,321) 312,321 --
Property and equipment,
principally
due to differences in
depreciation................ (25,119,933) (1,493,855) (26,613,788)
------------ ------------ -------------
Total deferred tax
liabilities............... (25,432,254) (1,181,534) (26,613,788)
------------ ------------ -------------
Net deferred tax liability...... $ (221,400) $ (15,300) $ (236,700)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

At September 30, 1994, the Company had approximately $92.5 million of
Federal net operating loss (NOL) carryforwards available to offset future
taxable income. Such NOL's expire in the years 2004 through 2009.

(7) EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan which provides benefits for all eligible
non-union employees. Subject to IRS limitations, the 401(k) plan provides for
each employee to contribute from 1% to 15% of compensation with the Company
contributing a matching amount of each employee's contribution up to a maximum
of 3% of compensation. Aggregate Company contributions made to the 401(k) plan
during fiscal 1992, 1993, and 1994 were $537,703, $313,652, and $312,925
respectively.

The Company also makes monthly contributions on behalf of its union
employees to a union sponsored defined benefit pension plan. The amount charged
to expense was $202,545, $198,206, and $207,107 in fiscal 1992, 1993 and 1994,
respectively.

F-47
<PAGE>
STAR GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) LEASE COMMITMENTS

The Company has entered into noncancellable capital lease agreements with
former owners of acquired businesses for certain premises and related equipment.
These leases contain bargain purchase options, exercisable on the lease
termination dates. Amortization of premises and equipment under capital leases
is included in depreciation expense. The Company has also entered into operating
leases for office space, trucks and other equipment.

The future minimum rental commitments at September 30, 1994 under leases
having an initial or remaining noncancellable term of one year or more are as
follows:

CAPITAL OPERATING
LEASES LEASES
-------- ----------
1995................................................ $157,476 $1,200,000
1996................................................ 138,351 800,000
1997................................................ 80,976 600,000
1998................................................ 80,976 200,000
1999................................................ 80,976 200,000
Thereafter.......................................... 425,121 800,000
-------- ----------
Total minimum lease payments........................ 963,876 $3,800,000
----------
----------
Less amount representing interest................... 412,724
--------
Present value of net minimum rentals................ $551,152
--------
--------

The Company incurred rent expense of $3,586,450, $4,174,689, and $3,451,376
in 1992, 1993 and 1994, respectively.

(9) IMPAIRMENT OF LONG-LIVED ASSETS

During fiscal 1993, in connection with the recapitalization (see note 2),
and the impending sales of Federal and Highway (see note 1), the Company
reviewed the carrying values of its long-lived assets and identifiable
intangible assets for possible impairment. The Company determined, based on
expected future cash flows and the estimated fair values of certain operations,
that it would not be able to recover the carrying values of some of these
assets. Accordingly, as of September 30, 1993, the Company recorded a write-off
of approximately $33 million representing the estimated impairment to its long-
lived assets.

(10) SUBSEQUENT EVENTS

On November 17, 1994, in an effort to focus on its core profitable business,
the Company sold all of its retail propane operations located in the Southeast
portion of the United States for $13,250,000 in cash. The consideration received
from the sale approximates the net book value of the assets sold and therefore,
no material gain or loss was recognized.

The Company applied a portion of the proceeds from the sale to reduce
outstanding principal and accrued interest on its 11.56% Senior Notes and Term
Loan in the amount of $3,382,539 and $602,310, respectively. In addition, the
Company redeemed the remaining outstanding shares of the Series D 8% Cumulative
Convertible Preferred Stock from Prudential amounting to $5,091,011. As a result
of the redemption, FRC has agreed to return 20.693 shares of Common stock (see
note 2) held by them, as a contribution to the capital of the Company. The
remainder of the proceeds were used by the Company for general operating
purposes.

F-48
<PAGE>
PRO FORMA FINANCIAL STATEMENTS

The following Pro Forma Statement of Operations for the year ended December
31, 1993 is derived from the Company's audited consolidated financial statements
for the year ended December 31, 1993. The Pro Forma Balance Sheet and Statements
of Operations at and for the nine and twelve months ended September 30, 1994 are
derived from the unaudited financial statements of the Company at and for the
nine and twelve months ended September 30, 1994, which include all adjustments
(consisting of only normal recurring accruals) that, in the opinion of
management, are necessary for a fair presentation of such data. The Pro Forma
Financial Statements do not purport to represent what the Company's financial
position or results of operations would have been if the events described
therein had occurred on the dates specified, nor are they intended to project
the Company's financial position or results of operations for any future period.
The Pro Forma Financial Statements should be read in conjunction with the
Consolidated Financial Statements, and the Notes thereto, appearing elsewhere
herein.

The following transactions are referenced in the Pro Forma Financial
Statements (collectively, the "Pro Forma Adjustments"):

(a) the "Heating Oil Acquisitions," which consist of the acquisition by
the Company of nine individually insignificant distributorships during 1993
(the "1993 Acquisitions"), six individually insignificant and one
significant distributorships during the nine months ended September 30, 1994
(the "1994 Nine Month Acquisitions") and two individually insignificant
distributorships subsequent to September 30, 1994 (the "1994 Fourth Quarter
Acquisitions");

(b) the "Star Gas Transactions," which consist of the $16 million
investment in Star Gas made in December 1993 (the "1993 Star Gas
Investment"), the repayment of Star Gas debt with a portion of a capital
contribution and the conversion of debt and preferred stock of Star Gas to
equity of Star Gas by certain of Star Gas' investors in December 1993 (the
"Star Gas Recapitalization") and the acquisition of the remaining voting
stock of Star Gas in December 1994 (the "Star Gas Acquisition");

(c) the "Prior Note Offerings," which consist of the issuance (i) in
March 1993 of $50 million of 10 1/8% Subordinated Notes due 2003 and the use
of a portion of the proceeds therefrom to repurchase $24.9 million of
subordinated debt of the Company (the "10 1/8% Note Offering") and (ii) in
February 1994 of $75 million of 9 3/8% Subordinated Debentures due 2006, the
use of a portion of the proceeds therefrom to repurchase $50 million of
notes of the Company and the release of a $20 million collateral account
securing such notes (the "9 3/8% Note Offering").

(d) the "Offerings," which consist of the offering by the Company of
$125 million of % Senior Subordinated Notes due 2005 at an assumed
interest rate of 11 1/2% (the "Debenture Offering") and 2.5 million shares
of Class A Common Stock at an assumed price of $9.00 per share (the "Common
Stock Offering") and the use of the net proceeds therefrom to (i) purchase
$63.7 million of long-term debt of Star Gas and $19.8 million of preferred
stock of Star Gas (the "Star Gas Refinancing"), (ii) redeem $12.8 million of
long-term debt of the Company (the "Note Repurchase"), (iii) repurchase 1.5
million shares of the Company's Class A Common Stock (the "Common Stock
Repurchase") and (iv) repay $4.0 of Star Gas working capital borrowings
(collectively, the "Use of Proceeds").

P-1
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1994
(IN THOUSANDS)

The following pro forma balance sheet at September 30, 1994 gives effect to
the 1994 Fourth Quarter Acquisitions, the Star Gas Acquisition, the Debenture
Offering, the Common Stock Offering and the Use of Proceeds, as if each such
transaction had occurred on September 30, 1994.

<TABLE><CAPTION>
1994
PETROLEUM HEAT FOURTH QUARTER PRO FORMA
AND POWER CO., INC. ACQUISITIONS(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 17,055 $ (2,455) $ 4,487 $ (3,827)(3)
Accounts receivable............................... 43,687 8,172
Inventories....................................... 14,198 563 3,919
Other current assets.............................. 7,676 1,734
-------- ------- ------------ -----------
Total current assets............................ 82,616 (1,892) 18,312 (3,827)
Property plant and equipment--net.................. 33,647 611 92,255 13,356(4)
Intangibles--net................................... 102,693 2,634 16,579 1,132(4)

Other assets....................................... 425
Investment in Star Gas Corporation................. 14,757 25,923(3)
(40,680)(4)
-------- ------- ------------ -----------
$ 234,138 $ 1,353 $127,146 $ (4,096)
-------- ------- ------------ -----------
-------- ------- ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Working capital borrowings........................ $ 4,000
Current maturities of preferred stock and long
term debt....................................... $ 4,200 767
Accounts payable.................................. 8,551 2,876
Customer credit balances.......................... 27,091 $ 495 3,286
Unearned service contract revenue................. 13,171 108
Accrued expenses.................................. 21,246 4,047
-------- ------- ------------
Total current liabilities....................... 74,259 603 14,976
Long-term debt and notes payable................... 51,452 750 65,613
Senior subordinated notes payable..................
Supplemental benefits payable and other payables... 1,637 643
Pension plan obligation............................ 7,060
Subordinated notes and debentures payable.......... 167,632
-------- ------- ------------
Total liabilities............................... 302,040 1,353 81,232
-------- ------- ------------
Cumulative redeemable exchangeable preferred
stock............................................ 16,666 8,264
-------- ------- ------------
Non-voting preferred stock of Star Gas............. $ 11,458(4)
-------- ------- ------------ -----------
Stockholders' equity (deficiency).................. (84,568) 37,650 22,096(3)
(37,650)(4)
-------- ------- ------------ -----------
$ 234,138 $ 1,353 $127,146 $ (4,096)
-------- ------- ------------ -----------
-------- ------- ------------ -----------
</TABLE>

- -----------------------
(1) Adjustment reflects the acquisition and purchase price allocation in
connection with the 1994 Fourth Quarter Acquisitions.

(2) Derived from the Star Gas consolidated September 30, 1994 balance sheet,
adjusted for the sale of the Star Gas Southeast operations, which were sold
in November 1994, and the use of the proceeds therefrom. Also includes an
individually insignificant acquisition by Star Gas in November 1994.

(3) Reflects a cash payment of $3.8 million and the issuance of approximately
2.5 million shares of the Company's Class A Common Stock in connection with
the Star Gas Acquisition.

(4) Reflects the preliminary allocation of the excess of the purchase price over
the book value of Star Gas in connection with the Star Gas Acquisition, as
well as the exchange by Star Gas Holdings of voting preferred stock for
non-voting preferred stock.

P-2
<PAGE>

<TABLE><CAPTION>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
$ 15,260 $ 120,300(5) $ 18,718 $ 20,800(10) $ 39,518
(85,072)(6)
(14,268)(7)
(13,502)(8)
(4,000)(9)
-----------
51,859 51,859 51,859
18,680 18,680 18,680
9,410 9,410 9,410
-------- ----------- -------- ----------- ---------
95,209 3,458 98,667 20,800 119,467
139,869 139,869 139,869
123,038 4,700(5) 127,238 127,238
(425)(6)
(75)(7)
425 425 425

-------- ----------- -------- ----------- ---------
$358,541 $ 7,658 $366,199 $ 20,800 $386,999
-------- ----------- -------- ----------- ---------
-------- ----------- -------- ----------- ---------
$ 4,000 $ (4,000)(9)
4,967 $ 4,967 $ 4,967
11,427 11,427 11,427
30,872 30,872 30,872
13,279 13,279 13,279
25,293 25,293 25,293
-------- ----------- -------- ---------
89,838 (4,000) 85,838 85,838
117,815 (63,650)(6) 47,783 47,783
(6,382)(7)
125,000(5) 125,000 125,000
2,280 2,280 2,280
7,060 7,060 7,060
167,632 (6,381)(7) 161,251 161,251
-------- ----------- -------- ---------
384,625 44,587 429,212 429,212
-------- ----------- -------- ---------
24,930 (8,264)(6) 16,666 16,666
-------- ----------- -------- ---------
11,458 (11,458)(6)
-------- ----------- -------- ---------
(62,472) (2,125)(6) (79,679) $ 20,800(10) (58,879 )
(1,580)(7)
(13,502)(8)
-------- ----------- -------- ----------- ---------
$358,541 $ 7,658 $366,199 $ 20,800 $386,999
-------- ----------- -------- ----------- ---------
-------- ----------- -------- ----------- ---------
</TABLE>

- -----------------------
(5) Reflects the Debenture Offering, net of estimated offering expenses of $4.7
million, with net proceeds to the Company of $120.3 million, including
approximately $3.5 million in cash and principal amount of Debentures, the
proceeds of which are not required for the Use of Proceeds.

(6) Reflects the Star Gas Refinancing and the related extraordinary loss
representing the premium paid on the early retirement of Star Gas debt and
the writeoff of deferred debt issuance cost in connection with such debt.

(7) Reflects the Note Repurchase and the related extraordinary loss
representing the premium paid on the early retirement of such debt.

(8) Reflects the Common Stock Repurchase.

(9) Reflects the repayment of Star Gas working capital borrowings.

(10) Reflects the Common Stock Offering, net of estimated offering expenses of
$1.7 million, with net proceeds to the Company of $20.8 million.

P-3
<PAGE>
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P-4
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)

The following pro forma statement of operations for the year ended December
31, 1993 is derived from the Company's financial statements for the year ended
December 31, 1993, adjusted to give effect to the Heating Oil Acquisitions, the
Star Gas Transactions, the Prior Note Offerings and the Offerings, as if each
such transaction had occurred on January 1, 1993; provided, however, that if
both the Debenture Offering and the Common Stock Offering are consummated, the
pro forma data do not give effect to approximately $1.9 million of interest
expense on, or the use of, approximately $16.7 million of proceeds of the
Debenture Offering, the proceeds of which are not required for acquisitions or
refinancings.

The results of operations of the acquired distributorships are based on
their individual fiscal year ends. The combination of the acquired
distributorships on their individual fiscal year bases, rather than the
Company's fiscal year, does not produce a materially different effect. The
acquisitions of the distributorships and Star Gas have been accounted for as
purchases. The unaudited statements of operations of the individually
insignificant distributorships and for Star Gas for the year ended December 31,
1993 include all adjustments (consisting of only normal recurring adjustments)
which, in the opinion of management, are necessary for a fair presentation of
the results of operations.

P-5
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)

<TABLE><CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO., INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
Net sales............................................... $ 538,526 $ 75,149 $ 102,397
Cost of sales........................................... 366,809 50,954 47,532
--------------- -------- -----------
Gross profit.......................................... 171,717 24,195 54,865
Operating expenses...................................... 123,280 16,490 36,891 $(2,884)(3)
Amortization of customer lists and deferred charges..... 28,731 6,042 667(4)
Depreciation and amortization of plant and equipment.... 5,933 851 5,725 633(4)
Provision for supplemental benefit...................... 264
Impairment of long-lived assets......................... 33,913
--------------- -------- -----------
Operating Income...................................... 13,509 6,854 (27,706)
Interest expense--net................................... 20,508 15,843 (7,694)(5)
3,748(6)
Other income (expenses)................................. (165)
--------------- -------- -----------
Income (loss) before income taxes..................... (7,164) 6,854 (43,549)
Income taxes............................................ 400 180
--------------- -------- -----------
Net income (loss)..................................... $ (7,564) $ 6,854 $ (43,729)
--------------- -------- -----------
--------------- -------- -----------
Net income (loss) per common share(9):
Class A Common Stock.................................. $ (.53)
Class B Common Stock.................................. 1.88
Class C Common Stock.................................. (.53)
Weighted average number of common shares outstanding:
Class A Common Stock.................................. 18,993 2,489
Class B Common Stock.................................. 217
Class C Common Stock.................................. 2,545
</TABLE>

- ------------------------

(1) Represents the results of the distributorships acquired in the 1993
Acquisitions from January 1, 1993 to their dates of acquisition by the
Company. Results of such distributorships from the dates of acquisition to
December 31, 1993 are included in the Company's December 31, 1993
consolidated results. The 1993 results of the distributorships acquired in
the 1994 Nine Month Acquisitions and the 1994 Fourth Quarter Acquisitions
are also included in their entirety in this column.

(2) Represents the 1993 results of Star Gas, excluding certain operations sold
and including operations acquired prior to the Star Gas Acquisition.

(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:

<TABLE>
<S> <C>
Salaries and related costs.................................................... $2,273
Other......................................................................... 611
------
$2,884
------
------
</TABLE>

The above costs represent the salaries and related costs of employees of
certain distributorships acquired during 1993 and 1994 and of Star Gas.
These employees were not employed by the Company when the distributorships
and Star Gas were acquired and the Company was able to integrate the
businesses without incurring any incremental costs.

(4) Adjustment of amortization of customer lists and deferred charges and
depreciation and amortization of plant and equipment, as applicable, to
reflect an annual charge in accordance with the Company's accounting
policies.

(5) Reflects decreased interest expense of Star Gas as a result of the Star Gas
Recapitalization.

(6) Reflects increased interest expense as a result of the Prior Note Offerings.
If the Prior Note Offerings had occurred on January 1, 1993, the Company
would have recorded a $3.8 million extraordinary loss as the result of the
early retirement of debt.

P-6
<PAGE>

<TABLE><CAPTION>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
$716,072 $716,072 $ 716,072
465,295 465,295 465,295
- -------- -------- ---------
250,777 250,777 250,777
173,777 173,777 173,777
35,440 35,440 35,440
13,142 13,142 13,142
264 264 264
33,913 33,913 33,913
- -------- -------- ---------
(5,759) (5,759) (5,759)
32,405 5,405(7) 37,810 (1,553)(8) 36,257
(165) (165) (165)
- -------- -------- ---------
(38,329) (43,734) (42,181)
580 580 580
- -------- -------- ---------
$(38,909) $(44,314) $ (42,761)
- -------- -------- ---------
- -------- -------- ---------
$ (1.85)
1.88
(1.85)
21,482 (1,522) 2,500 22,460
217 217
2,545 2,545
</TABLE>

- ------------------------

(7) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$3.2 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase and the Star Gas Refinancing had
occurred on January 1, 1993, the Company would have recorded a $4.3 million
extraordinary loss as the result of the early retirement of such debt.

(8) If both the Debenture Offering and the Common Stock Offering are
consummated, there will be an additional $13.5 million of proceeds from the
Debenture Offering which will not be required for the Use of Proceeds. This
adjustment reflects the elimination of interest expense relating to such
Debenture Offering proceeds.

(9) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the year ended December 31, 1993, after adjusting the net
loss for preferred stock dividends of $3.4 million. The pro forma net income
(loss) per common share has been computed using the average number of
outstanding common shares for the year ended December 31, 1993, plus
approximately 3.5 million common shares assumed to have been issued on
January 1, 1993, after adjusting the pro forma net loss for preferred stock
dividends of $3.1 million.

P-7
<PAGE>
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P-8
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

The following pro forma statement of operations for the nine months ended
September 30, 1994 is derived from the Company's financial statements for the
nine months ended September 30, 1994, adjusted to give effect to the 1994 Nine
Month Acquisitions, the 1994 Fourth Quarter Acquisitions, the Star Gas
Acquisition, the 9 3/8% Note Offering, the Debenture Offering, the Common Stock
Offering and the Use of Proceeds, as if each such transaction had occurred on
January 1, 1993: provided, however, that if both the Debenture Offering and the
Common Stock Offering are consummated, the pro forma data do not give effect to
approximately $1.4 million of interest expense on, or the use of, approximately
$16.7 million of proceeds of the Debenture Offering, the proceeds of which are
not required for acquisitions or refinancings.

The unaudited statements of operations of the Company, the distributorships
acquired and Star Gas for the nine months ended September 30, 1994 include all
adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the results of
operations. Because of the seasonality of the home heating oil and propane
businesses, nine-month results are not indicative of the results to be expected
for a full year.

P-9
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE><CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO. INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS

<S> <C> <C> <C> <C>
Net sales.................................................. $385,291 $ 32,248 $69,251
Cost of sales.............................................. 257,240 21,301 30,960
-------------- -------- -----------
Gross profit............................................. 128,051 10,947 38,291
Operating expenses......................................... 91,908 5,163 26,650 $ (428)(3)
Amortization of customer lists and deferred charges........ 19,466 3,082 461(4)
Depreciation and amortization of plant and equipment....... 4,308 431 5,200 (564)(4)
Provision for supplemental benefit......................... 209
-------------- -------- -----------
Operating Income......................................... 12,160 5,353 3,359
Interest expense--net...................................... 16,721 5,753 907(5)
Other income (expenses).................................... 83 126
Share of loss of Star Gas.................................. (1,243) 1,243(6)
-------------- -------- -----------
Income (loss) before income taxes........................ (5,721) 5,353 (2,268)
Income taxes............................................... 425 218
-------------- -------- -----------
Net income (loss)........................................ $ (6,146) $ 5,353 $(2,486)
-------------- -------- -----------
-------------- -------- -----------
Net income (loss) per common share(9):
Class A Common Stock..................................... $ (.45)
Class B Common Stock..................................... 1.10
Class C Common Stock..................................... (.45)
Weighted average number of common shares outstanding:
Class A Common Stock..................................... 18,993 2,489
Class B Common Stock..................................... 196
Class C Common Stock..................................... 2,545
</TABLE>

- ------------------------
(1) Represents the results of the distributorships acquired in the 1994 Nine
Month Acquisitions from January 1, 1994 to their dates of acquisition by the
Company. Results of such distributorships from the dates of acquisition to
September 30, 1994 are included in the Company's September 30, 1994
consolidated results. The nine-month results of the distributorships
acquired in the 1994 Fourth Quarter Acquisitions are also included in their
entirety in this column.

(2) Represents the results of operations of Star Gas for the nine months ended
September 30, 1994, excluding certain operations sold and including
operations acquired prior to the Star Gas Acquisition.

(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:

<TABLE>
<S> <C>
Salaries and related costs...................................................... $388
Other........................................................................... 40
----
$428
----
----
</TABLE>

The above costs represent the salaries and related costs of employees of
certain distributorships acquired during 1994 and of Star Gas. These
employees were not employed by the Company when the distributorships and
Star Gas were acquired and the Company was able to integrate the businesses
without incurring any incremental costs.

(5) Reflects increased interest expense as a result of the 9 3/8% Note Offering.
If the 9 3/8% Note Offering had occurred on January 1, 1993, the Company
would have recorded a $2.3 million extraordinary loss as a result of the
early retirement of debt.

(6) Reversal of the share of loss of Star Gas for the nine months ended
September 30, 1994 since Star Gas is assumed to have been 100% acquired on
January 1, 1993 (see Note 2 above).

P-10
<PAGE>

<TABLE><CAPTION>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
$ 486,790 $486,790 $ 486,790
309,501 309,501 309,501
--------- -------- ---------
177,289 177,289 177,289
123,293 123,293 123,293
23,009 23,009 23,009
9,375 9,375 9,375
209 209 209
--------- -------- ---------
21,403 21,403 21,403
23,381 $ 3,981(7) 27,362 (1,165)(8) 26,197
209 209 209
--------- -------- ---------
(1,769) (5,750) (4,585)
643 643 643
--------- -------- ---------
$ (2,412) $ (6,393) $ (5,228)
--------- -------- ---------
--------- -------- ---------
$ (.35)
1.10
(.35)
21,482 (1,522) 2,500 22,460
196 196
2,545 2,545
</TABLE>

- ------------------------
(7) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$3.2 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase and the Star Gas Refinancing had
occurred on January 1, 1993, the Company would have recorded a $4.3 million
extraordinary loss as the result of the early retirement of such debt.

(9) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the nine-months ended September 30, 1994, after adjusting
the net loss for preferred stock dividends of $3.3 million. The pro forma
net income (loss) per common share has been computed using the average
number of outstanding common shares for the nine-months ended September 30,
1994, plus approximately 3.5 million common shares assumed to have been
issued on January 1, 1993, after adjusting the pro forma net loss for
preferred stock dividends of $3.3 million.

P-11
<PAGE>
This page intentionally left blank.

P-12
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

The following pro forma statement of operations for the twelve months ended
September 30, 1994 is derived from the Company's financial statements for the
twelve months ended September 30, 1994, adjusted to give effect to the 1994 Nine
Month Acquisitions, the 1994 Fourth Quarter Acquisitions, the Star Gas
Transactions, the 9 3/8% Note Offering, the Debenture Offering, the Common Stock
Offering and the Use of Proceeds, as if each such transaction had occurred on
October 1, 1993: provided, however, that if both the Debenture Offering and the
Common Stock Offering are consummated, the pro forma data do not give effect to
approximately $1.9 million of interest expense on, or the use of, approximately
$16.7 million of proceeds of the Debenture Offering, the proceeds of which are
not required for acquisitions or refinancings.

The unaudited statements of operations of the Company the distributorships
acquired and Star Gas for the twelve months ended September 30, 1994 include all
adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the results of
operations.

P-13
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE><CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO., INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
Net sales................................................. $ 546,434 $ 48,438 $ 101,351
Cost of sales............................................. 361,682 32,940 45,299
--------------- -------- -----------
Gross profit............................................ 184,752 15,498 56,052
Operating expenses........................................ 126,008 8,307 36,037 $ (947)(3)
Amortization of customer lists and deferred charges....... 25,824 4,164 882(4)
Depreciation and amortization of plant and equipment...... 5,872 689 6,628 (448)(4)
Provision for supplemental benefit........................ 280
--------------- -------- -----------
Operating income........................................ 26,768 6,502 9,223
Interest expense--net..................................... 22,082 9,514 (1,621)(5)
2,002(6)
Other income (expenses)................................... (53) (740)
Share of loss of Star Gas................................. (1,243) 1,243(7)
--------------- -------- -----------
Income (loss) before income taxes....................... 3,390 6,502 (1,031)
Income taxes.............................................. 607 300
--------------- -------- -----------
Net income (loss)....................................... $ 2,783 $ 6,502 $ (1,331)
--------------- -------- -----------
--------------- -------- -----------
Net income (loss) per common share(10):
Class A Common Stock.................................... $ (.04)
Class B Common Stock.................................... 1.57
Class C Common Stock.................................... (.04)
Weighted average number of common shares outstanding:
Class A Common Stock.................................... 18,993 2,489
Class B Common Stock.................................... 201
Class C Common Stock.................................... 2,545
</TABLE>

- ------------------------

(1) Represents the results of the distributorships acquired in the 1994 Nine
Month Acquisitions from October 1, 1993 to their dates of acquisition by the
Company. There were no fourth quarter 1993 acquisitions. Results of such
distributorships from the dates of acquisition to September 30, 1994 are
included in the Company's twelve months ended September 30, 1994
consolidated results. The twelve-month results of the distributorships
acquired in the 1994 Fourth Quarter Acquisitions are also included in their
entirety in this column.

(2) Represents the results of operations of Star Gas for the year ended
September 30, 1994, excluding certain operations sold and including
operations acquired prior to the Star Gas Acquisition.

(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:

<TABLE>
<S> <C>
Salaries and related cost....................................................... $947
----
----
</TABLE>

(5) Reflects decreased interest expense as a result of the Star Gas
Recapitalization.

(6) Reflects increased interest expense as a result of the 9 3/8% Note Offering.
If the 9 3/8% Note Offering had occurred on October 1, 1993, the Company
would have recorded a $1.3 million extraordinary loss as the result of the
early retirement of debt.

(7) Reversal of the share of loss of Star Gas for the twelve months ended
September 30, 1994, since Star Gas is assumed to have been 100% acquired on
October 1, 1993 (see Note 2 above)

P-14
<PAGE>

<TABLE><CAPTION>
DEBENTURE STOCK
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENT SUBTOTAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
$696,223 $696,223 $ 696,223
439,921 439,921 439,921
- -------- -------- ---------
256,302 256,302 256,302
169,405 169,405 169,405
30,870 30,870 30,870
12,741 12,741 12,741
280 280 280
- -------- -------- ---------
43,006 43,006 43,006
31,977 $5,326(8) 37,303 (1,553)(9) 35,750
(793) (793) (793)
- -------- -------- ---------
10,236 4,910 6,463
907 907 907
- -------- -------- ---------
$ 9,329 $ 4,003 $ 5,556
- -------- -------- ---------
- -------- -------- ---------
$ 0.07
1.57
0.07
21,482 (1,522) 2,500 22,460
201 201
2,545 2,545
</TABLE>

- ------------------------

(8) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$3.2 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase and the Star Gas Refinancing had
occurred on October 1, 1993, the Company would have recorded a $4.2 million
extraordinary loss as the result of the early retirement of such debt.

(9) If both the Debenture Offering and the Common Stock Offering are
consummated, there will be an additional $13.5 million of proceeds from the
Debenture Offering which will not be required for the Use of Proceeds. This
adjustment reflects the elimination of interest expense relating to such
Debenture Offering proceeds.

(10) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the twelve months ended September 30, 1994, after
adjusting the net income (loss) for preferred stock dividends of $3.3
million. The pro forma net income (loss) per common share has been computed
using the average number of outstanding common shares for the twelve months
ended September 30, 1994, plus approximately 3.5 million common shares
assumed to have been issued on October 1, 1993 after adjusting the pro
forma net income for preferred stock dividends of $3.3 million.

P-15

<PAGE>

============================== ==============================

No dealer, salesperson or
other person has been $125,000,000
authorized to give information
or to make any representation PETRO
not contained in this Petroleum Heat
Prospectus, and, if given or and Power Co., Inc.
made, such information or
representation must not be
relied upon as having been
authorized by the Company or
the Underwriters. This
Prospectus does not constitute __% Senior Subordinated
an offer to sell or the Debentures due 2005
solicitation of an offer to
buy any security other than
the Debentures offered hereby,
nor does it constitute an
offer to sell or the
solicitation of an offer to
buy any of the Debentures to
any person in any jurisdiction
in which it is unlawful to
make such an offer or
solicitation to such person.
Neither the delivery of this
Prospectus nor any sale made
hereunder shall under any
circumstances create any
implication that the
information contained herein
is correct as of any date
subsequent to the date hereof.

______________________________

TABLE OF CONTENTS

Page ------------------------------
---- PROSPECTUS
Available Information . . . . ------------------------------
Certain Definitions . . . . .
Prospectus Summary . . . . .
The Company . . . . . . . . .
Common Stock Offering . . . .
Exchange Offer . . . . . . .
Risk Factors . . . . . . . . Donaldson, Lufkin & Jenrette
Use of Proceeds . . . . . . . Securities Corporation
Capitalization . . . . . . .
Selected Financial and Other
Data . . . . . . . . . . . . Bear, Stearns & Co. Inc.
Management's Discussion and
Analysis of Results PaineWebber Incorporated

of Operations and
Financial Condition . . .
Business . . . . . . . . . . ___________, 1995
Management . . . . . . . . .
Description of Debentures . .
Description of Other
Indebtedness and
Redeemable Preferred Stock
Underwriting . . . . . . . .
Legal Matters . . . . . . . .
Experts . . . . . . . . . . .
Incorporation of Documents by
Reference . . . . . . . . . .
Index to Financial Statements
F-1
Pro Forma Financial
Statements . . . . . . . P-1

<PAGE>

SUBJECT TO COMPLETION, DATED DECEMBER 23, 1994

PROSPECTUS 3,000,000 Shares
, 1995
PETROLEUM HEAT AND POWER CO., INC.

Class A Common Stock

Of the 3,000,000 shares of Class A common stock, $0.10 par value (the
"Class A Common Stock"), of Petroleum Heat and Power Co., Inc. (the "Company"),
offered hereby (the "Common Stock Offering"), 2,500,000 shares are being sold
by the Company and 500,000 shares are being sold by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of the shares by the Selling Stockholders.

The authorized common stock of the Company consists of the Class A Common
Stock, Class B Common Stock and Class C Common Stock. Each share of Class A
Common Stock is entitled to one vote per share and each share of Class C Common
Stock is entitled to ten votes per share on all matters submitted to a vote of
the stockholders. The Class B Common Stock is non-voting, except as otherwise
required by law or as specifically provided by the Restated Articles of
Incorporation of the Company. See "Description of Capital Stock."

The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "HEAT." On December 20, 1994, the last reported sale price of the Class
A Common Stock on the Nasdaq National Market was $8 5/8 per share. The Class B
Common Stock and Class C Common Stock are not publicly traded.

Concurrent with the Common Stock Offering, the Company is offering $125
million aggregate principal amount of its % Senior Subordinated Debentures
due 2005 (the "Debentures") to the public (the "Debenture Offering" and,
together with the Common Stock Offering, the "Offerings"). See "Debenture
Offering." In addition, the Company expects to offer to holders of $125
million principal amount of its outstanding subordinated indebtedness the right
to exchange such indebtedness for additional Debentures (the "Exchange Offer").
Consummation of the Common Stock Offering is not contingent upon consummation
of the Debenture Offering or the Exchange Offer, and there can be no assurance
that the Debenture Offering or the Exchange Offer will be consummated.

See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE><CAPTION>
- -----------------------------------------------------------------------------------------------
Underwriting Proceeds to the
Price Discounts Proceeds to the Selling
to the Public and Commissions(1) Company(2) Stockholders
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share . . . . . . . . . $ $ $ $
Total(3) . . . . . . . . . $ $ $ $
- -----------------------------------------------------------------------------------------------
<FN>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Class A Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
the Underwriters exercise such option in full, the total Price to the
Public, Underwriting Discounts and Commissions, Proceeds to the Company
and Proceeds to the Selling Stockholders will be $______, $______, $______
and $______, respectively. See "Underwriting."
</TABLE>

The shares are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
certain prior conditions, including the right of the Underwriters to reject any
order in whole or in part. It is expected that delivery of the shares will be
made in New York, New York on or about , 1994.

Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc. PaineWebber Incorporated
Securities Corporation

<PAGE>

IN CONNECTION WITH THE COMMON STOCK OFFERING, THE UNDERWRITERS MAY OVER-
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF
THE CLASS A COMMON STOCK AND OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE
THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY
BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

THE OFFERING

Class A Common Stock Offered

By the Company . . . . . . 2,500,000 shares
By the Selling Stockholders
500,000 shares
----------------
Total . . . . . . . . . . 3,000,000 shares

Class A Common Stock to be
Outstanding after the Common
Stock Offering(1) . . . . . . 22,480,097 shares

Class B Common Stock to be
Outstanding after the Common
Stock Offering . . . . . . . 25,963 shares

Class C Common Stock to be
Outstanding after the Common
Stock Offering . . . . . . . 2,597,519 shares

Use of Proceeds . . . . . . . The net proceeds to the Company
from the Offerings are estimated
to be $141.1 million. The
Company intends to use (i)
approximately $98.6 million of
such proceeds to purchase $63.7
million principal amount of
long-term debt of Star Gas, all
outstanding shares of preferred
stock of Star Gas not owned by
Petro and 1,521,316 shares of
the Company's Class A Common
Stock, (ii) approximately $4.0
million of such proceeds to
repay working capital borrowings
of Star Gas and (iii)
approximately $14.3 million of
such proceeds to redeem $12.8
million principal amount of
notes of the Company. The
balance of the net proceeds,
approximately $24.2 million,
will be used for working capital
purposes and, until applied,
will be used to reduce the
amounts outstanding under the
Company's acquisition and
working capital facilities. See
"Use of Proceeds."

Nasdaq Trading Symbol . . . . HEAT

Debenture Offering and
Exchange Offer . . . . . . . Concurrent with the Common Stock
Offering, the Company is
offering $125 million aggregate
principal amount of the
Debentures to the public. See
"Debenture Offering." In
addition, the Company expects to
offer to holders of $125 million
principal amount of its
outstanding subordinated
indebtedness the right to
exchange such indebtedness for
additional Debentures. The
Common Stock Offering is not
contingent upon consummation of
the Debenture Offering or the
Exchange Offer, and there can be
no assurance that the Debenture
Offering or the Exchange Offer
will be consummated.

- ------------------------------
(1) Excludes 159,000 shares of Common Stock issuable upon exercise of vested
options which have not yet been exercised. Assumes that the proceeds of
the Common Stock Offering are used to purchase 1,521,316 shares of Class A
Common Stock. See "Use of Proceeds."

3
<PAGE>

SUMMARY DATA
(In thousands)

<TABLE><CAPTION>
Operating Data: Other Data:

| Gallons of
| Home
| Heating Oil
Depreciation | and
Year Ended Gross and Net Income | Retail Propane
December 31, Net Sales Profit Amortization(1) (loss) | Sold EBITDA(2) NIDA(3)
------------ --------- ------ --------------- ------------ | -------------- --------- ---------
<S> <C> <C> <C> <C> |<C> <C> <C>
1980 . . . . . . $ 84,582 $ 11,938 $ 1,542 $1,407 | 59,399 $ 3,581 $ 2,949
1981 . . . . . . 125,946 17,229 1,336 1,612 | 72,653 4,351 2,947
1982 . . . . . . 168,061 28,370 2,595 3,690 | 104,583 9,713 6,285
1983 . . . . . . 159,794 33,806 3,633 4,723 | 123,019 13,560 8,357
1984 . . . . . . 245,249 50,323 7,069 4,165 | 180,998 19,756 11,234
1985 . . . . . . 283,493 59,241 11,016 1,427 | 212,183 19,106 12,443
1986 . . . . . . 279,889 81,843 15,131 4,116 | 255,319 30,274 19,247
1987 . . . . . . 354,508 96,444 20,782 194 | 317,380 30,557 20,976
1988 . . . . . . 462,150 133,601 27,151 1,565 | 414,535 44,470 28,717
1989 . . . . . . 541,521 139,343 32,093 (4,287) | 449,040 40,076 27,573
1990 . . . . . . 567,414 132,383 36,313 (29,267) | 398,989 26,307 4,639
1991 . . . . . . 523,243 144,471 35,575 (16,562) | 385,557 40,036 15,744
1992 . . . . . . 512,430 161,489 34,394 (4,389) | 423,354 51,325 27,721
1993 . . . . . . 538,526 171,717 34,664 (8,431) | 443,487 48,437 23,176
Twelve months |
ended September |
30, 1994 |
Actual . . . . . 546,434 184,752 31,696 2,128 | 458,563 58,745 32,031
Pro Forma(4) . . 696,223 256,302 43,611 5,556 | 584,807 86,897 46,106
<FN>
_________________________

(1) Depreciation and amortization includes depreciation and amortization of plant and equipment and amortization of customer
lists and deferred charges.

(2) EBITDA means as operating income before depreciation, amortization and other non-cash charges.

(3) NIDA means as net income (loss), plus depreciation, amortization and other non-cash charges, less dividends accrued on

preferred stock, excluding net income (loss) derived from investments accounted for by the equity method, except to the
extent of any cash dividends received by the Company.
</TABLE>

4
<PAGE>

(4) The Pro Forma Operating and Other Data for the twelve months ended
September 30, 1994, represent the historical financial data derived from
the Company's financial statements for the twelve months ended September
30, 1994, adjusted to give effect to the Pro Forma Adjustments, including
the Heating Oil Acquisitions, the Star Gas Transactions, the Prior Note
Offerings and the Offerings. See the Pro Forma Financial Statements
contained elsewhere herein.

Balance Sheet Data:

At September 30, 1994
---------------------

As
Actual Adjusted(1)

Cash . . . . . . . . . . . . . . . . . . . . $ 17,055 $ 39,518
Working Capital . . . . . . . . . . . . . . . 8,357 33,629
Total assets . . . . . . . . . . . . . . . . 234,138 386,999
Total long-term debt . . . . . . . . . . . . 219,084 334,034
Redeemable preferred stock (excluding current
maturities) . . . . . . . . . . . . . . . . 16,666 16,666
Stockholders' equity deficiency . . . . . . . (84,568) (58,879)

(1) As adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions and the Offerings;
provided, however, that the as adjusted data include approximately $24.3
million of working capital provided by the Offerings that is not required
for the stated uses. See the Pro Forma Financial Statements contained
elsewhere herein.

5
<PAGE>

DEBENTURE OFFERING

Concurrent with the Common Stock Offering, the Company is offering $125
million aggregate principal amount of its __% Senior Subordinated Debentures
due 2005. The Common Stock Offering and the Debenture Offering are not
contingent upon each other and there can be no assurance that the Debenture
Offering will be consummated.

6
<PAGE>

[Additional Risk Factors]

Stockholders' Deficiency and Dividend Policy

At September 30, 1994, the Company's stockholders' deficiency was $84.6
million. This deficiency resulted from the net losses in prior periods and the
Company's policy of paying cash dividends based on NIDA rather than net income.
The Company's present policy is to pay common stock dividends at an annual rate
of at least 30% of NIDA. To the extent that the Company continues to pay such
dividends and to incur net losses, the stockholders' deficiency will continue
to increase. Under Minnesota law, the Company is prohibited from paying
dividends to its shareholders if the Company is unable to pay its debts in the
ordinary course of business after making such payment. Although the Company
fully expects in the future to be able to pay all its debts in the ordinary
course of business, if it were determined by a court that the Company
nevertheless paid dividends at a time when it was unable to pay its debts when
due, an unpaid creditor might be able to recover some or all such dividends
from the Company's shareholders if the court were to find that the Company paid
such dividends with the intent to hinder, delay or defraud creditors.

Minnesota Anti-Takeover Provisions

Minnesota law requires approval by a majority vote of the shareholders of
the Company prior to any acquisition of voting stock of the Company (from a
person other than the Company, and other than in connection with certain
mergers and exchanges to which the Company is a party or certain cash offers
approved by a committee of disinterested directors) resulting in the beneficial
ownership by such acquiring person of 20% or more of the voting stock then
outstanding. In general, shares acquired in the absence of such approval are
denied voting rights and are redeemable at their then fair market value by the
Company within 30 days after the acquiring person has failed to give a timely
information statement to the Company or the date the shareholders voted not to
grant voting rights to the acquiring person's shares. In addition, Minnesota
law generally prohibits any business combination by the Company with any
shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of the disinterested members of the Board of Directors
of the Company before the interested shareholder's share acquisition date.
These provisions may have the effect of delaying, deferring and preventing a
change of control of the Company.

7
<PAGE>

DIVIDEND POLICY

Petro has as one of its primary financial objectives a policy of paying
dividends on its Common Stock and to increase such dividends to reflect
improvements in the Company's financial performance. Pursuant to this
objective, the Company has recently adopted a policy of paying annual dividends
of at least 30% of NIDA. It is also the Company's objective to have
consistency in dividends. As a result, the Company will not necessarily
increase or decrease dividends based on what it considers to be temporary
increases or decreases in NIDA.

The Company is currently paying quarterly dividends on its Class A and Class
C Common Stock at an annual rate of $.55 per share. The Company has
historically paid dividends on January 2, April 1, July 1 and October 1 of each
year. It is expected that the Company's next dividend will be paid on April 1,
1995 to Shareholders of Record on March 15, 1995. Since 1989, the Company has
declared average aggregate cash dividends on its Common Stock equal to
approximately 35% of NIDA.

The Company reviews its dividend policy from time to time in light of the
Company's results of operations, financial condition, capital needs, future
projects and other facts deemed relevant by the Board of Directors. While the
Board of Directors may vary the dividend policy to reduce or eliminate
dividends, the approval of the Class C Common Stockholders is required to
reduce dividends lower than the level established by a shareholders' agreement.

In 1989, 1990, 1991, 1992, and 1993, the Company had no current earnings and
profits for federal income tax purposes. Since the Company had no accumulated
earnings and profits at the end of these years, dividends paid were treated as
returns of capital, to the extent of the recipient's adjusted basis in the
stock, and not as taxable dividends to recipients. Future dividends will be
treated as returns of capital, to the extent such dividends do not exceed a
recipient's adjusted basis in the stock, or, in any other case, as gain from
the sale or exchange of property (which gain would be long-term capital gain
provided the stock is held as a capital asset for more than one year), to the
extent that the Company has neither current nor accumulated earnings and
profits in the years such dividends are paid or that dividends paid in a
particular year are in excess of current or accumulated earnings and profits in
that year.

Under the terms of the Company's currently outstanding indebtedness, the
Company may not pay any dividend nor make a distribution on its capital stock
if the amount expended for such purpose after December 31, 1987 exceeds the sum
of (a) 50% of the aggregate Cash Flow (as defined) of the Company accrued on a
cumulative basis for each of the fiscal years subsequent to December 31, 1986
and (b) the aggregate net proceeds, including the fair value and property other
than cash, received by the Company from the issue or sale of capital stock of
the Company after July 1, 1987. The terms of the Company's Credit Agreement,
along with the terms of its 10 1/8% Notes and 9 3/8% Debentures, include
similar restrictions which limit the aggregate amount of dividends the Company
may pay. The terms of the Company's Debentures which are being offered
pursuant to the Debenture Offering will contain similar restrictions. See
"Certain Indebtedness." Under the most restrictive of these restrictions, and
after giving effect to the Pro Forma Adjustments (assuming the receipt of $20.8
million of net proceeds from the Common Stock Offering and the application of
approximately $13.5 million of such net proceeds to repurchase 1,521,316 shares
of Class A Common Stock), $39.9 million would have been available as of
September 30, 1994 for dividends or distributions in respect of the Company's
capital stock.

8
<PAGE>

The Company may pay dividends on the Class A Common Stock and Class C Common
Stock only upon paying all current and cumulative dividends on the Redeemable
Preferred Stock. The Company has paid all current and cumulative dividends on
such stock. The Company believes that it has sufficient liquidity to meet all
dividend requirements on the Redeemable Preferred Stock and to pay dividends on
the Class A Common Stock and the Class C Common Stock in accordance with its
dividend policy as set forth above.

While many states have statutes requiring that dividends may be paid only
out of certain forms of "surplus," this is not the case under Minnesota law.
Minnesota law provides that a corporation may make a distribution to its
shareholders if the board of directors determines, in good faith, that the
corporation is able to pay its debts in the ordinary course of business after
making the distribution. The Company has always paid its debts in the ordinary
course of its business and expects to be able to do so in the future.
Accordingly, the Minnesota restriction should not have any material adverse
effect on the Company's ability to pay dividends in accordance with the
Company's dividend policy.

9
<PAGE>

DILUTION

The deficiency in net tangible book value of the Company at September 30, 1994
was $187.4 million or $8.69 per share of Common Stock then outstanding. Net
tangible book value per share is determined by dividing the net tangible book
value of the Company (tangible assets less liabilities and the liquidation
preferences of the Redeemable Preferred Stock and Class B Common Stock) by the
number of outstanding shares of Common Stock. After giving effect to the Pro
Forma Adjustments described in the Pro Forma Financial Statements, the pro
forma deficiency in net tangible book value of Common Stock at September 30,
1994 would have been $186.3 million or $7.44 per share. This represents an
immediate increase in net tangible book value of $1.25 per share to present
holders of Common Stock and an immediate dilution of net tangible book value of
$16.44 per share to purchasers of shares of Class A Common Stock in the
Offering. The following table illustrates this per share dilution:

Assumed public offering price . . . . . . $9.00

Deficiency in net tangible book value
per share at September 30, 1994 . . $8.69

Increase per share attributable to the
Offerings and Pro Forma Adjustments . . 1.25
------

Pro forma deficiency in net tangible book
value per share after the Pro Forma
Adjustments . . . . . . . . . . . . . . . 7.44
----

Dilution to new investors . . . . . . . . $16.44
======

10
<PAGE>

PRICE RANGE OF CLASS A COMMON STOCK

The Company's Class A Common Stock is traded on the Nasdaq National Market
under the symbol "HEAT." The high and low per share price of the Class A
Common Stock and dividends declared on the Class A Common Stock since the
initial public offering of the Class A Common Stock on July 29, 1992 were as
follows:

Price Range Dividends
of Common Stock Declared Per Share
--------------- ------------------
High Low
Year Ended December
31, 1992:

3rd Quarter . . . . $12 3/4 $10 1/2 $0.0703

4th Quarter . . . . 12 5/8 10 1/4 0.1125

Year Ended December
31, 1993:

1st Quarter . . . . $10 3/4 $8 1/4 $0.1125

2nd Quarter . . . . 11 1/4 8 1/4 0.1375

3rd Quarter . . . . 9 7 3/4 0.1375

4th Quarter . . . . 10 7 3/4 0.1375

Year Ended December
31, 1994:

1st Quarter . . . . $9 1/4 $3 1/8 $0.1375

2nd Quarter . . . . 3 5/8 6 3/4 0.1375

3rd Quarter . . . . 9 1/2 6 5/8 0.1375

4th Quarter . . . . 9 1/4 8 1/4 0.1375

The last sale price of the Class A Common Stock on December 20, 1994 was
$8 5/8 per share. As of December 20, 1994, the Company had 111 shareholders
of record of its Class A Common Stock. In addition, the Company declared a
quarterly dividend of $0.1375 per share of Class A Common which will be paid
on January 3, 1995 to holders of record as of December 15, 1994.

The Company's Class B Common Stock was listed on The American Stock Exchange
from December 1986 until August 31, 1994. See "Price Range of Class B Common
Stock." The Company's Class C Common Stock currently is not, and has not been
prior to the date hereof, listed on a national exchange, and there is no
established public trading market for the Class C Common Stock.

11
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company of the Common Stock Offering are estimated
to be approximately $20.8 million ($24.6 million if the Underwriters' over-
allotment option is exercised in full), assuming a public offering price of
$9.00 per share and after deducting underwriting discounts and commissions and
estimated offering expenses. The net proceeds from the sale of the Debentures
are estimated to be approximately $120.3 million, after deducting underwriting
discounts and commissions and estimated offering expenses. The Company intends
to use (i) approximately $98.6 million of such proceeds to purchase $63.7
million principal amount of long-term debt of Star Gas, all outstanding shares
of preferred stock of Star Gas not owned by Petro and 1,521,316 shares of the
Company's Class A Common Stock, (ii) approximately $4.0 million of such
proceeds to repay working capital borrowings of Star Gas and (iii)
approximately $14.3 million of such proceeds to redeem $12.8 million principal
amount of notes of the Company. The balance of the net proceeds, approximately
$24.2 million, will be available to the Company for working capital purposes
and, until applied, will be used to reduce the amounts outstanding under the
Company's acquisition and working capital facilities.

In the event that the Debenture Offering is not consummated, the Company
would use approximately $13.5 million of the net proceeds of the Common Stock
Offering to repurchase 1,521,316 shares of its Class A Common Stock, and would
use the balance for general corporate purposes. The Company currently does not
have an agreement, however, to repurchase such shares if it does not also
purchase the $63.7 million of Star Gas debt. If the Debenture Offering is not
consummated and the Company is unable to reach an acceptable agreement to
repurchase such shares, the Company would use approximately $14.3 million of
the net proceeds of the Common Stock Offering to redeem $12.8 million principal
amount of notes of the Company, and would use the balance for general corporate
purposes.

12
<PAGE>

CAPITALIZATION

At September 30, 1994
-------------------------
(dollars in thousands)
Actual Pro Forma As Adjusted
Short-term obligations:
Working capital borrowings(1) . $ -- $4,000 $ --
Current maturities of long-term
debt . . . . . . . . . . . . . 33 800 800
Current maturities of Redeemable
Preferred Stock(2) . . . . . . 4,167 4,167 4,167
----- ------ ------
Total short-term obligations $4,200 $8,967 $4,967
====== ====== ======

Long-term debt:
Senior notes . . . . . . . . . $42,632 $42,632 $36,250
Other senior long-term debt(1) 8,820 11,533 11,533
__% Senior Subordinated
Debentures(3) . . . . . . . . . -- --- 125,000
Subordinated notes . . . . . . 42,632 42,632 36,251
10 1/8% Subordinated Notes(3) . 50,000 50,000 50,000
9 3/8% Subordinated
Debentures(3) . . . . . . . . . 75,000 75,000 75,000
Debt of Star Gas(4) . . . . . . -- 63,650 --
------- ------- -------
Total long-term debt . . . 219,084 285,447 334,034
------- ------- -------

Redeemable preferred stock:
Cumulative redeemable
exchangeable preferred
stock, 409,722 shares
authorized, 208,332 shares
outstanding, of which 41,667
are reflected as current(2) . 16,666 16,666 16,666
Preferred stock of Star Gas . . . -- 19,722 --
Stockholders' equity (deficiency):
Preferred stock, 5,000,000
shares authorized, none
outstanding . . . . . . . . . . --- --- ---
Class A Common Stock, 40,000,000
shares authorized, 18,992,579,
21,482,205 and 22,460,889
shares outstanding . . . . . 1,899 2,148 2,246
Class B Common Stock, 6,500,000
shares authorized, 25,963
shares outstanding . . . . . 3 3 3
Class C Common Stock, 5,000,000
shares authorized, 2,545,139
shares outstanding . . . . . 255 255 255
Additional paid-in capital . . 51,094 72,941 80,141
Deficit(5) . . . . . . . . . . (132,005) (132,005) (135,710)
Note receivable from stockholder (1,280) (1,280) (1,280)
Minimum pension liability
adjustment . . . . . . . . . (4,534) (4,534) (4,534)
-------- -------- --------
Total stockholders' equity
(deficiency) . . . . . . . (84,568) (62,472) (58,879)
-------- --------- --------
Total capitalization . . $151,182 $259,363 $291,821
======== ======== ========

13
<PAGE>

- ---------------------------

(3) Does not give effect to the Exchange Offer.

14
<PAGE>

SELECTED FINANCIAL AND OTHER DATA

15
<PAGE>
<TABLE><CAPTION>

Year Ended December 31,

Operating income (loss) . . . 7,983 (10,006) 4,461 14,957 13,509 (5,759)
Interest expense--net . . . . . . 17,915 20,900 20,728 18,622 20,508 36,257
Other income (expense)--net . . . 2,568 (228) (45) (324) (165) (165)
Share of loss of Star Gas . . . . -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Income (loss) before income taxes
and extraordinary item . . . . (7,364) (31,134) (16,312) (3,989) (7,164) (42,181)
Income taxes (benefit) . . . . . (3,077) (1,867) 250 400 400 580
------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item . . . . . . . . . . . . . (4,287) (29,267) (16,562) (4,389) (7,564) (42,761)
Extraordinary item . . . . . . . -- -- -- -- (867) --
------- ------- ------- ------- ------- -------
Net income (loss) . . . . . . $(4,287) $(29,267) $(16,562) $(4,389) $(8,431) $(42,761)
======= ======== ======== ======== ======== =========
Net income (loss) applicable
to Common Stock . . . . . . $(4,287) ($30,624) ($19,855) ($8,842) ($11,798) ($46,128)
========== ========= ========= ======== ========= =========
Net Income (loss) per common share
Class A Common Stock $(0.77) $(2.81) $(1.64) $(0.81) $(0.57) $(1.85)
Class B Common Stock 1.83 1.70 0.31 1.14 1.88 1.88
Class C Common Stock (0.77) (2.81) (1.64) (0.81) (0.57) (1.85)
<CAPTION>
Nine Months Ended
September 30,
Pro
Forma(1)
1993 1994 1994
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales . . . . . . . . . . . . $377,384 $385,291 $486,790
Cost of sales . . . . . . . . . . 262,368 257,240 309,501
------- -------- --------

Gross profit . . . . . . . . . 115,016 128,051 177,289
Operating expenses . . . . . . . 89,180 91,907 123,293

Operating income (loss) . . . (1,098) 12,159 21,403
Interest expense--net . . . . . . 15,147 16,721 26,197
Other income (expense)--net . . . (29) 84 209
Share of loss of Star Gas . . . . -- (1,243) --
-------- ------- ------
Income (loss) before income taxes
and extraordinary item . . . . (16,274) (5,721) (4,585)
Income taxes (benefit) . . . . . 218 425 643
------- ------ -------
Income (loss) before extraordinary
item . . . . . . . . . . . . . (16,492) (6,146) (5,228)
Extraordinary item . . . . . . . (867) (654) --
-------- -------- --------
Net income (loss) . . . . . . $(17,359) $(6,800) $(5,228)
========= ======== ========
Net income (loss) applicable
to Common Stock . . . . . . $(20,726) $(10,141) ($8,569)
========= ========= ========
Net Income (loss) per common share
Class A Common Stock $(0.98) $(0.48) $(0.35)
Class B Common Stock 1.41 1.10 1.10
Class C Common Stock (0.98) (0.48) (0.35)
</TABLE>

16
<PAGE>
<TABLE><CAPTION>

Year Ended December 31,

Pro Forma(1)
1989 1990 1991 1992 1993 1993
---- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA(2) . . . . . . . . . . . $40,076 $26,307 $40,036 $51,325 $48,437 $77,000
NIDA (3) . . . . . . . . . . . 27,573 4,639 15,744 27,721 23,176 36,677
Gallon of home heating oil
and propane sold . . . . . 449,040 398,989 385,557 423,354 443,487 579,221
Cash Dividend declared per Common
Share:
Class A Common Stock . . . . . $0.16 $0.08 $ -- $0.18 $0.53 $0.53
Class B Common Stock . . . . . 1.83 1.70 0.31 1.14 1.88 1.88
Class C Common Stock . . . . . 0.16 0.08 -- 0.18 0.53 0.53

Weighted average number of common
shares outstanding:
Class A Common Stock . . . . . 10,181 10,181 10,181 12,854 18,993 22,460
Class B Common Stock . . . . . 3,034 3,034 3,034 2,447 217 217
Class C Common Stock . . . . . 2,545 2,545 2,545 2,545 2,545 2,545

<CAPTION>
Nine Months Ended
September 30,
Pro
Forma(1)
1993 1994 1994
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Other Data:
EBITDA(2) . . . . . . . . . . . $25,836 $36,144 $53,996
NIDA (3) . . . . . . . . . . . 7,025 15,880 24,820
Gallon of home heating oil
and propane sold . . . . . 307,247 322,323 417,142
Cash Dividend declared per Common
Share:
Class A Common Stock . . . . . $0.39 $0.41 $0.41
Class B Common Stock . . . . . 1.41 1.10 1.10
Class C Common Stock . . . . . 0.39 0.41 0.41

Weighted average number of common
shares outstanding:
Class A Common Stock . . . . . 18,993 18,993 22,460
Class B Common Stock . . . . . 217 196 201
Class C Common Stock . . . . . 2,545 2,545 2,545
</TABLE>

- ------------------------------

(1) The Pro Forma Statement of Operations and Other Data represent the
historical data derived from the Company's financial statements for 1993,
adjusted to give effect to the Pro Forma Adjustments, including the
Heating Oil Acquisitions, the Star Gas Transactions, the Prior Note
Offerings and the Offerings. See the Pro Forma Financial Statements
contained elsewhere herein.

(2) EBITDA means operating income before depreciation, amortization and other
non-cash charges.

(3) NIDA means net income (loss), plus depreciation, amortization and other
non-cash charges, less dividends accrued on preferred stock, excluding net
income (loss) derived from investments accounted for by the equity method,
except to the extent of any cash dividends received by the Company.

17
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The table below sets forth certain information regarding beneficial
ownership of the Company's capital stock by each director of the Company, each
beneficial owner of, or institutional investment manager exercising investment
discretion with respect to, 5% or more of the outstanding shares of capital
stock, all directors and officers as a group and each person whose shares of
Class A Common Stock are being offered hereby.

<TABLE><CAPTION>
Percent of Total Shares Percent of Total
Number of Shares (1) Prior to the Offering of Class A After the Offering(1) Percent
--------------------- --------------------- of
Common Total
Stock Voting
Name Class A Class C Class A Class C to be Sold Class A Class C Power
---- ------- ------- ------- ------- ---------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Phillip Ean Cohen
120 Broadway
New York, NY 10271 679,262 113,423 3.16 4.37

Thomas J. Edelman
595 Madison Avenue
New York, NY 10022 593,049(2) 129,019 2.76 4.97

Audrey L. Sevin
P.O. Box 1467
Stamford, CT 06904 926,507 212,668 4.31 8.19

Irik P. Sevin
P.O. Box 1457
Stamford, CT 06904 911,611 201,641 4.24 7.76

Estate of Malvin P. Sevin (3)
P.O. Box 1457
Stamford, CT 06904 970,963 265,048 4.52 10.20

Wolfgang Traber (4)(5)(6)
450 Park Avenue
New York, NY 10022 821,572(6) 307,755 3.82 11.85

Richard O'Connell
P.O. Box 1457
Stamford, CT 06904 1,330,846 302,461 6.19 11.64

Paul Biddelman
P.O. Box 1457
Stamford, CT 06904 2,386 -- -- --

Hubertus Langen (4)(7) 750,221 307,755 3.49 11.85

</TABLE>

18
<PAGE>
<TABLE><CAPTION>
Percent of Total Shares Percent of Total
Number of Shares (1) Prior to the Offering of Class A After the Offering(1) Percent
--------------------- --------------------- of
Common Total
Stock Voting
Name Class A Class C Class A Class C to be Sold Class A Class C Power
---- ------- ------- ------- ------- ---------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barcel Corporation (4) 695,151 151,231 3.23 5.82

Max Warburg (4) 174,540 38,481 .81 1.48

Prudential Insurance Company
of America
3 Gateway Center
100 Mulberry Street
Newark, NJ 07102-4077 1,521,316 --- 7.08 ---

The Airlie Group L.P.
201 Main Street, Suite 3200
Fort Worth, TX 76102 1,052,864 --- 4.90 ---

All officers and directors as
a group (15 persons) 6,411,596 1,521,316 29.82 60.49

</TABLE>
_______________________________

(1) Assumes that the Underwriters' over-allotment option is not exercised.
For purposes of this table, a person or group is deemed to have
"beneficial ownership" of any shares which such person has the right to
acquire within 60 days after the date of this Prospectus. For purposes
of calculating the percentage of outstanding shares held by each person
named above, any shares which such person has the right to acquire within
60 days after the date of the Prospectus are deemed to be outstanding,
but not for the purpose of calculating the percentage ownership of any
other person.

(2) Includes 100,000 shares owned by Mr. Edelman's wife.

(3) Audrey Sevin is Executrix and the primary beneficiary of the estate of
Malvin P. Sevin.

(4) These shares are owned of record by Deltec Securities Corp., 535 Madison
Avenue, New York, NY which has the power to vote the shares under
discretionary account arrangements. Such voting power may be revoked at
any time by the beneficial owner.

(5) Includes 100,000 shares of Class A Common Stock and 298,717 shares of
Class C Common Stock owned by Tortosa GmbH of which Mr. Traber may be
deemed to be the beneficial owner.

(6) Includes 75,000 shares of Class A Common Stock owned by Mr. Traber's wife.

(7) Includes 100,000 shares of Class A Common Stock and 298,717 shares of
Class C Common Stock owned by Tortosa GmbH of which Mr. Langen may be
deemed to be the beneficial owner.

19
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 40,000,000 shares of
Class A Common Stock ($0.10 par value), 6,500,000 shares of Class B Common
Stock ($0.10 par value), 5,000,000 shares of Class C Common Stock ($0.10 par
value), 250,000 shares of Cumulative Redeemable Exchangeable Preferred Stock
($0.10 par value) ("1989 Preferred Stock"), and 5,000,000 shares of Preferred
Stock ($0.10 par value) ("Preferred Stock").

At the date of this Prospectus, there are 21,482,205 shares of Class A Common
Stock, 25,963 shares of Class B Common Stock, 2,597,519 shares of Class C
Common Stock and 208,332 shares of 1989 Preferred Stock issued and outstanding.
No shares of Preferred Stock are outstanding.

The following description of the terms of the Class A Common Stock, Class B
Common Stock and Class C Common Stock and the 1989 Preferred Stock is not
complete and is subject to and qualified in its entirety by reference to the
Company's restated and amended articles of incorporation (the "Restated
Articles of Incorporation"), a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

Common Stock

The holders of Class A Common Stock, Class B Common Stock and Class C Common
Stock have identical rights and privileges except as set forth below. Holders
of shares of Common Stock have no preemptive rights, rights to maintain their
respective percentage ownership interests in the Company or other rights to
subscribe for additional shares of the company, except that no additional
shares of Class B Common Stock may be issued without the consent of the holders
of more than 50% of the outstanding shares of the Class B Common Stock. The
Restated Articles of Incorporation provide that if the Board of Directors of
the Company approves a merger with an entity that is not controlled by the
holders of Class A Common Stock or their affiliates, each share of Class B
Common Stock is automatically converted into one share of Class A Common Stock.
The shares of Common Stock outstanding after the Common Stock Offering,
including the shares of Class A Common Stock to be issued hereby, when paid for
and issued, will be fully paid and nonassessable.

Dividends

Holders of shares of Class A Common Stock and Class C Common Stock are
entitled to share pro rata in such dividends, if any, as may be declared by the
board of Directors of the Company out of funds legally available therefor;
provided, however, that no dividends may be paid on any class of Common Stock
until all dividends have been paid or declared and set apart and all mandatory
redemption requirements have been satisfied on the 1989 Preferred Stock.

Holders of Class B Common Stock were formerly entitled to receive, as and
when declared by the Board of Directors, special dividends per share equal to
.000001666% per share (as adjusted) of the cash flow of the Company (as defined
in the Company's Restated Articles of Incorporation) for its prior fiscal year
(the "Special Dividends").

In July 1994, the Company exercised its right to terminate the Special
Dividends on the Class B Common Stock, effective August 31, 1994. The
Company's Restated Articles of Incorporation provide that when the Company
terminates the Special Dividends, the holders of Class B Common Stock have the
right to require the Company to purchase their shares at $17.50 per share plus
all accrued and unpaid Special Dividends through the termination date ($0.2763
per share for the period July 1, 1994 through August 31, 1994).

20
<PAGE>

As of August 31, 1994, 190,938 shares of Class B Common Stock were
repurchased for approximately $3.3 million. The remaining Class B Common
Stockholders will not be paid any dividends until the aggregate amount of
dividends paid on all other classes of stock exceeds the Common Stock
Allocation (defined as the Company's cash flow for each fiscal year after
December 31, 1985, on a cumulative basis, minus all Special Dividends paid or
accrued). At December 31, 1993 the Common Stock Allocation amounted to
approximately $100.2 million. After the Common Stock Allocation has been
satisfied, each share of Class B Common Stock will participate equally with
each share of Class A Common Stock and Class C Common Stock with respect to all
dividends.

Voting Rights

The holders of Class A Common Stock shall be entitled to one vote per share
and the holders of Class C Common Stock shall be entitled to ten votes per
share upon all matters submitted for a vote to the shareholders of the Company.
Except when required by Minnesota law and in certain special circumstances
described in the Restated Articles of Incorporation, the holders of Class B
Common Stock are not entitled to vote. Generally, the action of the majority
of the votes evidenced by the shares of all classes voting as a single class
represented at a meeting of the shareholders and entitled to vote is sufficient
for actions that require a vote of the shareholders. The Restated Articles of
Incorporation of the Company do not provide for cumulative voting.

Restrictions of Transfer of Class C Common Stock

The Shareholders' Agreement provides that the consideration per share which
may be received by a holder of Class C Common Stock upon a sale of shares of
Class C Common Stock may not exceed the average of the last reported sales
prices per share of the Class A Common Stock for the 90 trading days preceding
the date of such sale as reported on the Nasdaq National Market, and that any
premium above such consideration will inure to the benefit of the Company. In
addition, the Shareholders' Agreement provides that the above provisions may
not be modified without the consent of the holders of 80% of the issued and
outstanding shares of Class A Common Stock, including shares issued pursuant to
the Common Stock Offering. The Restated Articles of Incorporation of the
Company provide that any transfer of a share of Class C Common Stock (i) to any
person who is not a signatory to the Shareholders' Agreement or (ii) to any
person after the date on which the Shareholders' Agreement is for any reason no
longer in effect, will automatically result in the conversion of such share
into a share of Class A Common Stock. The purpose and effect of the transfer
restrictions and the pricing restriction is to permit the existing shareholders
to continue to elect a majority of the Company's Board of Directors and to
direct most corporation actions after the completion of the Common Stock
Offering, as well as to ensure that holders of Class C Common Stock will not
receive a control premium on any disposition of their shares.

Preferred Stock

The Company is authorized to issue 5,000,000 shares of Preferred Stock, in
classes or series with such rights and preferences as the Board of Directors of
the Company may determine, including voting rights, redemption rights, dividend
rates, liquidation preferences and conversion rights (subject to the rights of
the holders of other outstanding capital stock). There are no shares of
Preferred Stock outstanding.

21
<PAGE>

1989 Preferred Stock

The Company has outstanding 208,332 shares of 1989 Preferred Stock, of which
41,667 shares are classified as Series A, 41,667 shares are classified as
Series B and 124,998 shares are classified as Series C. The holders of the
Series A, Series B and Series C 1989 Preferred Stock are entitled to receive,
as and when declared by the Board of Directors, annual dividends at the rate of
$14.00, $13.84 and $14.61 per share, respectively. The shares of 1989 Preferred
Stock are exchangeable, in whole or in part, at the option of the Company, for
subordinated notes of the Company, subject to meeting certain debt incurrence
tests. Commencing on August 1, 1994 and on August 1 of each year thereafter, so
long as any of the shares of 1989 Preferred Stock remain outstanding, one-sixth
of the number of originally issued shares of each series of 1989 Preferred
Stock, less the number of shares of such series previously exchanged for notes,
must be redeemed in cash, with the final redemption of the remaining
outstanding shares on August 1, 1999. The redemption price of the 1989
Preferred Stock is $100 per share plus all accrued and unpaid dividends to the
redemption date. Except for dividends on the Company's Class B Common Stock, no
dividends may be declared or paid on any other capital stock of the Company
during any fiscal year until the Company has paid or declared and set apart all
dividends and satisfied the mandatory redemption requirements on all
outstanding shares of 1989 Preferred Stock. The 1989 Preferred Stock has no
voting rights, except as may be provided by law.

Liquidation Preferences

In the event of any complete liquidation, dissolution or winding up of the
business of the Company, each share of Class B Common Stock would be entitled
to a distribution equal to $5.70 per share, as adjusted, before any
distribution is made with respect to any other class of stock of the Company.
Thereafter, each share of 1989 Preferred Stock would be entitled to a
distribution equal to $100 per share plus accrued and unpaid dividends.
Thereafter, each share of the Class A Common Stock Class B Common Stock and
Class C Common Stock would participate equally in all liquidating
distributions.

Transfer Agent and Registrar

The transfer agent and registrar for shares of the Class A Common Stock and
Class B Common Stock is Chemical Bank.

Minnesota Anti-Takeover Provisions

Section 302A.671, Minnesota Statutes, applies, with certain exceptions, to
any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party or certain cash offers approved by a committee of
disinterested directors) resulting in the beneficial ownership of 20% or more
of the voting stock then outstanding. Section 302A.671 requires approval of
any such acquisitions by a majority vote of the shareholders of the Company
prior to its consummation. In general, shares acquired in the absence of such
approval are denied voting rights and are redeemable at their then fair market
value by the Company within 30 days after the acquiring person has failed to
give a timely information statement to the Company or the date the shareholders
voted not to grant voting rights to the acquiring person's shares.

Section 302A.673, Minnesota Statutes, generally prohibits any business
combination by the Company with any shareholder which purchases 10% or more of
the Company's voting shares (an "interested shareholder") within four years
following such interested shareholder's share acquisition date, unless the
business combination is approved by a committee of the disinterested members of
the Board of Directors of the Company before the interested shareholder's share
acquisition date.

22
<PAGE>

PRICE RANGE OF CLASS B COMMON STOCK

The Class B Common Stock was listed on the American Stock Exchange ("Amex")
from December 1986 until August 31, 1994 under the symbol "PHP." The Class B
Common Stock was removed from listing on the Amex on August 31, 1994 following
the termination of the Special Dividends. The high and low per share price of
the Class B Common Stock and dividends declared on the Class B Common Stock for
the periods indicated below (through August 31, 1994) were as follows:

Price Range Dividends
of Common Stock Paid Per Share
---------------
High Low

Year Ended December
31, 1992:

1st Quarter . . . . $12 1/4 $9 7/8 $0.2858

2nd Quarter . . . . 16 1/4 10 1/4 0.2858

3rd Quarter . . . . 17 1/2 14 1/2 0.2858

4th Quarter . . . . 17 1/4 15 1/8 0.2858

Year Ended December
31, 1993:

1st Quarter . . . . $19 1/4 $15 3/4 $0.4700

2nd Quarter . . . . 22 1/2 17 3/8 0.4700

3rd Quarter . . . . 20 3/4 19 3/4 0.4700

4th Quarter . . . . 20 1/2 19 1/2 0.4700

Year Ended December
31, 1994:

1st Quarter . . . . $30 1/4 $19 1/2 $0.4100

2nd Quarter . . . . 28 18 1/2 0.4100

As of December 20, 1994, the Company had 41 shareholders of record of its
Class B Common Stock.

23
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc. and PaineWebber
Incorporated, as representatives (the "Representatives") of the several
underwriters (collectively, the "Underwriters"), the Underwriters have agreed
to purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have agreed to sell to the Underwriters, the
respective number of shares of Class A Common Stock set forth in the table
below:

Number
Underwriter of Shares

Donaldson, Lufkin & Jenrette Securities Corporation .
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . .
PaineWebber Incorporated . . . . . . . . . . . . . .
---------

Total 3,000,000
=========

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent. The Underwriting Agreement also
provides that the Company will indemnify the Underwriters and their controlling
persons against certain liabilities and expenses, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof. The nature of the Underwriters' obligations under
the Underwriting Agreement is such that they are required to purchase all of
the Class A Common Stock if any of the Class A Common Stock is purchased.

The Underwriters propose to offer the Class A Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $____ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $_____ per share. After the initial public
offering of the Class A Common Stock, the offering price and other selling
terms may be changed by the Underwriters.

The Company and the Selling Stockholders have granted an option to the
Underwriters, exercisable for 30 days from the date of this Prospectus, to
purchase up to 450,000 additional shares of Class A Common Stock on the same
terms and conditions as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, incurred in the sale of the Class A Common Stock. To the
extent that the Underwriters exercise such options, each of the Underwriters
will become obligated, subject to certain conditions, to purchase the same
proportion of such additional shares as the number set forth opposite each such
Underwriter's name above bears to 3,000,000.

The Company and certain officers and directors, who beneficially own an
aggregate of __________ shares of Class A Common Stock, have agreed not to
sell, offer to sell or otherwise dispose of any shares of Class A Common Stock,
or any security convertible into or exercisable or exchangeable for any shares
of Class A Common Stock, for a period of 120 days after the date of this
Prospectus without the prior written consent of the Representatives.

In January 1994, DLJ acted as underwriter of the Company's 9-3/8% Debentures,
for which it received customary discounts and commissions, and as advisor to
the Company in connection with a consent solicitation, for which it received
customary fees. In addition, the Representatives are acting as underwriters in
connection with the Debenture Offering, for which they will receive customary
discounts and commissions, and DLJ is acting as advisor to the Company in
connection with the Exchange Offer, for which it will receive customary fees.

24
<PAGE>
PRO FORMA FINANCIAL STATEMENTS

The following transactions are referenced in the Pro Forma Financial
Statements (collectively, the "Pro Forma Adjustments"):

P-1
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
1994
PETROLEUM HEAT FOURTH QUARTER PRO FORMA
AND POWER CO., INC. ACQUISITIONS(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 17,055 $ (2,455) $ 4,487 $ (3,827)(3)
Accounts receivable............................... 43,687 8,172
Inventories....................................... 14,198 563 3,919
Other current assets.............................. 7,676 1,734
-------- ------- ------------ -----------
Total current assets............................ 82,616 (1,892) 18,312 (3,827)
Property plant and equipment--net.................. 33,647 611 92,255 13,356(4)
Intangibles--net................................... 102,693 2,634 16,579 1,132(4)

- -----------------------
(1) Adjustment reflects the acquisition and purchase price allocation in
connection with the 1994 Fourth Quarter Acquisitions.

(3) Reflects a cash payment of $3.8 million and the issuance of approximately
2.5 million shares of the Company's Class A Common Stock in connection with
the Star Gas Acquisition.

P-2
<PAGE>

<TABLE>
<CAPTION>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA

<S> <C> <C> <C> <C>
$ 15,260 $ 20,800(5) $ 22,558 $ 120,300(7) $ 39,518
(13,502)(6) (85,072)(8)
(14,268)(9)
(4,000)(10)
51,859 51,859 51,859
18,680 18,680 18,680
9,410 9,410 9,410
-------- ----------- -------- ----------- ---------
95,209 7,298 102,507 16,960 119,467
139,869 139,869 139,869
123,038 123,038 4,700(7) 127,238
(425)(8)
(75)(9)
425 425 425

-------- ----------- -------- ----------- ---------
$358,541 $ 7,298 $365,839 $ 21,160 $386,999
-------- ----------- -------- ----------- ---------
-------- ----------- -------- ----------- ---------
$ 4,000 $ 4,000 $ (4,000)(10)
4,967 4,967 $ 4,967
11,427 11,427 11,427
30,872 30,872 30,872
13,279 13,279 13,279
25,293 25,293 25,293
-------- -------- ----------- ---------
89,838 89,838 (4,000) 85,838
117,815 117,815 (63,650)(8) 47,783
(6,382)(9)
125,000(7) 125,000
2,280 2,280 2,280
7,060 7,060 7,060
167,632 167,632 (6,381)(9) 161,251
-------- -------- ----------- ---------
384,625 384,625 44,587 429,212
-------- -------- ----------- ---------
24,930 24,930 (8,264)(8) 16,666
-------- -------- ----------- ---------
11,458 11,458 (11,458)(8)
-------- -------- ----------- ---------
(62,472) $ 20,800(5) (55,174) (2,125)(8) (58,879)
(13,502)(6) (1,580)(9)
-------- ----------- -------- ----------- ---------
$358,541 $ 7,298 $365,839 $ 21,160 $386,999
-------- ----------- -------- ----------- ---------
-------- ----------- -------- ----------- ---------
</TABLE>

- -----------------------
(5) Reflects the Common Stock Offering, net of estimated offering expenses of
$1.7 million, with net proceeds to the Company of $20.8 million.

(6) Reflects the Common Stock Repurchase.

(7) Reflects the Debenture Offering, net of estimated offering expenses of $4.7
million, with net proceeds to the Company of $120.3 million, including
approximately $17.0 million in cash and principal amount of Debentures, the
proceeds of which are not required for the Use of Proceeds.

(8) Reflects the Star Gas Refinancing and the related extraordinary loss
representing the premium paid on the early retirement of Star Gas debt and
the writeoff of deferred debt issuance cost in connection with such debt.

(9) Reflects the Note Repurchase and the related extraordinary loss
representing the premium paid on the early retirement of such debt.

(10) Reflects the repayment of Star Gas working capital borrowings.

P-3
<PAGE>
This page intentionally left blank.

P-4
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)

P-5
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO., INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS

<S> <C> <C> <C> <C>
Net sales............................................... $ 538,526 $ 75,149 $ 102,397
Cost of sales........................................... 366,809 50,954 47,532
--------------- -------- -----------
Gross profit.......................................... 171,717 24,195 54,865
Operating expenses...................................... 123,280 16,490 36,891 $(2,884)(3)
Amortization of customer lists and deferred charges..... 28,731 6,042 667(4)
Depreciation and amortization of plant and equipment.... 5,933 851 5,725 633(4)
Provision for supplemental benefit...................... 264
Impairment of long-lived assets......................... 33,913
--------------- -------- -----------
Operating Income...................................... 13,509 6,854 (27,706)
Interest expense--net................................... 20,508 15,843 (7,694)(5)
3,748(6)
Other income (expenses)................................. (165)
--------------- -------- -----------
Income (loss) before income taxes..................... (7,164) 6,854 (43,549)
Income taxes............................................ 400 180
--------------- -------- -----------
Net income (loss)..................................... $ (7,564) $ 6,854 $ (43,729)
--------------- -------- -----------
--------------- -------- -----------
Net income (loss) per common share(8):
Class A Common Stock.................................. $ (.53)
Class B Common Stock.................................. 1.88
Class C Common Stock.................................. (.53)
Weighted average number of common shares outstanding:
Class A Common Stock.................................. 18,993 2,489
Class B Common Stock.................................. 217
Class C Common Stock.................................. 2,545
</TABLE>

- ------------------------

(2) Represents the 1993 results of Star Gas, excluding certain operations sold
and including operations acquired prior to the Star Gas Acquisition.

(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:

The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1993 and 1994 and of Star Gas. These employees
were not employed by the Company when the distributorships and Star Gas were
acquired and the Company was able to integrate the businesses without
incurring any incremental costs.

(5) Reflects decreased interest expense of Star Gas as a result of the Star Gas
Recapitalization.

P-6
<PAGE>

<TABLE>
<CAPTION>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA

- ------------------------

(7) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$16.7 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase and the Star Gas Refinancing had
occurred on January 1, 1993, the Company would have recorded a $4.3 million
extraordinary loss as the result of the early retirement of such debt.

(8) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the year ended December 31, 1993, after adjusting the net
loss for preferred stock dividends of $3.4 million. The pro forma net income
(loss) per common share has been computed using the average number of
outstanding common shares for the year ended December 31, 1993, plus
approximately 3.5 million common shares assumed to have been issued on
January 1, 1993, after adjusting the pro forma net loss for preferred stock
dividends of $3.1 million.

P-7
<PAGE>
This page intentionally left blank.

P-8
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

P-9
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO. INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS
<S> <C> <C> <C> <C>
Net sales.................................................. $385,291 $ 32,248 $69,251
Cost of sales.............................................. 257,240 21,301 30,960
-------------- -------- -----------
Gross profit............................................. 128,051 10,947 38,291
Operating expenses......................................... 91,908 5,163 26,650 $ (428)(3)
Amortization of customer lists and deferred charges........ 19,466 3,082 461(4)
Depreciation and amortization of plant and equipment....... 4,308 431 5,200 (564)(4)
Provision for supplemental benefit......................... 209
-------------- -------- -----------
Operating Income......................................... 12,160 5,353 3,359
Interest expense--net...................................... 16,721 5,753 907(5)
Other income (expenses).................................... 83 126
Share of loss of Star Gas.................................. (1,243) 1,243(6)
-------------- -------- -----------
Income (loss) before income taxes........................ (5,721) 5,353 (2,268)
Income taxes............................................... 425 218
-------------- -------- -----------
Net income (loss)........................................ $ (6,146) $ 5,353 $(2,486)
-------------- -------- -----------
-------------- -------- -----------
Net income (loss) per common share(8):
Class A Common Stock..................................... $ (.45)
Class B Common Stock..................................... 1.10
Class C Common Stock..................................... (.45)
Weighted average number of common shares outstanding:
Class A Common Stock..................................... 18,993 2,489
Class B Common Stock..................................... 196
Class C Common Stock..................................... 2,545
</TABLE>

(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:

The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1994 and of Star Gas. These employees were not
employed by the Company when the distributorships and Star Gas were acquired
and the Company was able to integrate the businesses without incurring any
incremental costs.

(6) Reversal of the share of loss of Star Gas for the nine months ended
September 30, 1994 since Star Gas is assumed to have been 100% acquired on
January 1, 1993 (see Note 2 above).

P-10
<PAGE>

<TABLE>
<CAPTION>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS PRO FORMA

- ------------------------
(7) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$16.7 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase and the Star Gas Refinancing had
occurred on January 1, 1993, the Company would have recorded a $4.3 million
extraordinary loss as the result of the early retirement of such debt.

(8) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the nine-months ended September 30, 1994, after adjusting
the net loss for preferred stock dividends of $3.3 million. The pro forma
net income (loss) per common share has been computed using the average
number of outstanding common shares for the nine-months ended September 30,
1994, plus approximately 3.5 million common shares assumed to have been
issued on January 1, 1993, after adjusting the pro forma net loss for
preferred stock dividends of $3.3 million.

P-11
<PAGE>
This page intentionally left blank.

P-12
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

P-13
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
PETROLEUM
HEAT AND DISTRIBUTORSHIPS PRO FORMA
POWER CO., INC. ACQUIRED(1) STAR GAS(2) ADJUSTMENTS

<S> <C> <C> <C> <C>
Net sales................................................. $ 546,434 $ 48,438 $ 101,351
Cost of sales............................................. 361,682 32,940 45,299
--------------- -------- -----------
Gross profit............................................ 184,752 15,498 56,052
Operating expenses........................................ 126,008 8,307 36,037 $ (947)(3)
Amortization of customer lists and deferred charges....... 25,824 4,164 882(4)
Depreciation and amortization of plant and equipment...... 5,872 689 6,628 (448)(4)
Provision for supplemental benefit........................ 280
--------------- -------- -----------
Operating income........................................ 26,768 6,502 9,223
Interest expense--net..................................... 22,082 9,514 (1,621)(5)
2,002(6)
Other income (expenses)................................... (53) (740)
Share of loss of Star Gas................................. (1,243) 1,243(7)
--------------- -------- -----------
Income (loss) before income taxes....................... 3,390 6,502 (1,031)
Income taxes.............................................. 607 300
--------------- -------- -----------
Net income (loss)....................................... $ 2,783 $ 6,502 $ (1,331)
--------------- -------- -----------
--------------- -------- -----------
Net income (loss) per common share(9):
Class A Common Stock.................................... $ (.04)
Class B Common Stock.................................... 1.57
Class C Common Stock.................................... (.04)
Weighted average number of common shares outstanding:
Class A Common Stock.................................... 18,993 2,489
Class B Common Stock.................................... 201
Class C Common Stock.................................... 2,545
</TABLE>

- ------------------------

(2) Represents the results of operations of Star Gas for the year ended
September 30, 1994, excluding operations sold and including operations
acquired prior to the Star Gas Acquisition.

(3) Elimination of general and administrative expenses of the acquired
distributorships and of Star Gas which do not have a continuing impact on
income from continuing operations as follows:

<TABLE>
<S> <C>
Salaries and related cost....................................................... $947
----
----
</TABLE>

The above costs represent the salaries and related costs of employees of certain
distributorships acquired during 1994 and of Star Gas. These employees were not
employed by the Company when the distributorships and Star Gas were acquired
and the Company was able to integrate the businesses without incurring any
incremental costs.

(5) Reflects decreased interest expense as a result of the Star Gas
Recapitalization.

(7) Reversal of the share of loss of Star Gas for the twelve months ended
September 30, 1994, since Star Gas is assumed to have been 100% acquired on
October 1, 1993 (see Note 2 above)

P-14
<PAGE>

<TABLE>
<CAPTION>
STOCK DEBENTURE
OFFERING OFFERING
PRO FORMA PRO FORMA
SUBTOTAL ADJUSTMENTS SUBTOTAL ADJUSTMENT PRO FORMA

- ------------------------

(8) Reflects the net increase in interest expense as a result of a portion of
the Debentures issued in the Debenture Offering, the proceeds of which are
required for the Use of Proceeds. Excludes interest expense on, and use of,
$16.7 million of the Debentures, the proceeds of which are not required for
such purposes. If the Note Repurchase and the Star Gas Refinancing had
occurred on October 1, 1993, the Company would have recorded a $4.2 million
extraordinary loss as the result of the early retirement of such debt.

(9) The net income (loss) per common share has been computed, utilizing the
three class method, based upon the weighted average number of outstanding
common shares for the twelve months ended September 30, 1994, after
adjusting the net income (loss) for preferred stock dividends of $3.3
million. The pro forma net income (loss) per common share has been computed
using the average number of outstanding common shares for the twelve months
ended September 30, 1994, plus approximately 3.5 million common shares
assumed to have been issued on October 1, 1993 after adjusting the pro forma
net income for preferred stock dividends of $3.3 million.

P-15

<PAGE>
==============================
No dealer, salesperson or
other individual has been
authorized to give information
or to make any representation
other than those contained in
this Prospectus in connection
with the offering made hereby.
If given or made, such
information or representation
must not be relied upon as
having been authorized by the
Company or the Underwriters.
This Prospectus does not
constitute an offer to sell or
the solicitation of an offer
to buy any securities offered
hereby in any jurisdiction in
which or to any person to whom
it is unlawful to make such
offer or solicitation.
Neither the delivery of this
Prospectus nor any sale made
hereunder shall under any
circumstances create any
implication that the
information contained herein
is correct as of any date
subsequent to the date hereof.
______________________________

TABLE OF CONTENTS

Page
----
Available Information . . . .
Certain Definitions . . . . .
Prospectus Summary . . . . .
The Company . . . . . . . . .
Debenture Offering . . . . .
Risk Factors . . . . . . . .
Dividend Policy . . . . . . .
Dilution . . . . . . . . . .
Price Range of Class A Common
Stock . . . . . . . . . . .
Use of Proceeds . . . . . . .
Capitalization . . . . . . .
Selected Consolidated
Financial Data . . . . . .
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations . . . . . . . .
Business . . . . . . . . . .
Management . . . . . . . . .
Principal and Selling
Stockholders . . . . . . .
Description of Capital Stock
Description of Certain
Indebtedness . . . . . . .
Price Range of Class B Common
Stock . . . . . . . . . . .
Underwriting . . . . . . . .
Legal Matters . . . . . . . .
Experts . . . . . . . . . . .
Incorporation of Certain
Documents by Reference . .
Index to Consolidated
Financial Statements . . . .
Proforma Financial Statements
==============================

3,000,000 Shares

PETRO

Petroleum Heat
and Power Co., Inc.

Class A Common Stock

------------------------------
PROSPECTUS
------------------------------

Donaldson, Lufkin & Jenrette
Securities Corporation

Bear, Stearns & Co. Inc.

PaineWebber Incorporated

___________, 1995

==============================
<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution

SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . $______
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . $______
Printing and engraving . . . . . . . . . . . . . . . . . . . . . . . $______
Accountants' fees and expenses . . . . . . . . . . . . . . . . . . . $______
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . $______
Trustee's fees and expenses . . . . . . . . . . . . . . . . . . . . . $______
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . $______
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . $______
-------

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $______
=======
Item 15. Indemnification of Directors and Officers

Section 302A.521 of the Minnesota Business Corporation Act (the "MBCA")
provides mandatory and exclusive standards for indemnification, although the
Articles of Incorporation or by-laws of a corporation can specifically limit
the statutory indemnification. Minnesota law generally provides that a
corporation shall indemnify a person made or threatened to be made a party to a
proceeding by reason of such person's official capacity as an officer, director
or employee of the corporation, against judgments, penalties, fines, including,
without limitation, excise taxes assessed against such person with respect to
an employee benefit plan, settlements, and reasonable expenses, including
attorney's fees and disbursements, incurred by that person in connection with
the proceeding, if such person (a) has not been indemnified by another entity
for the same proceedings and in connection with the same acts or omission; (b)
acted in good faith; (c) received no improper personal benefit; (d) in the case
of a criminal proceeding, had no reason to believe such person's conduct was
unlawful; and (e) in connection with the acts or omissions in question, the
person reasonably believed that such person's conduct was in the best interests
of the corporation (or, in the case of a question of improper personal benefit,
believed that the conduct was not opposed to the best interests of the
corporation; or in the case of an employee benefit plan, believed that the
conduct was in the best interests of the participants or beneficiaries of the
employee benefit plan).

Section 302A.521 of the MBCA further provides that if an officer, director or
employee is made or threatened to be made a party to a proceeding in such
person's official capacity, such person is entitled, upon written request to
the corporation, to payment or reimbursement by the corporation of reasonable
expenses incurred by such person in advance of the final disposition of the
proceeding (a) upon receipt by the corporation of a written confirmation by
such person of such person's good faith belief that the criteria for
indemnification set forth under Minnesota law have been satisfied, an
undertaking by such person to repay all amounts paid or reimbursed by the
corporation if it is ultimately determined that the criteria for
indemnification have not been satisfied, and (b) after a determination that the
facts then known to those making the determination would not preclude
indemnification under Minnesota law.

Finally, Section 302A.521 of the MBCA provides that a corporation's Articles
of Incorporation or by-laws may prohibit indemnification or advances or may
impose conditions on such indemnification or advance, as long as those
conditions apply equally to all persons or to all persons with a given class.

II-1
<PAGE>

Registrant's Restated Articles of Incorporation, as amended, contains the
limitation of liability provision set forth below:

"ARTICLE VIII--A director of the corporation shall not be personally liable
to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 302A.559 of the Minnesota
Business Corporation Act or Section 80A.23 of the Minnesota Securities law,
or (iv) for any transaction from which the director derived an improper
personal benefit. If the Minnesota Business Corporation Act is hereafter
amended to authorize any further limitation of the liability of a director,
then the liability of a director of the corporation shall be eliminated or
limited to the fullest extent permitted by the Minnesota Business Corporation
Act, as amended. No amendment to or repeal of this Article VIII shall apply
to or have any effect on the liability or alleged liability of any director
of the corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal."

Registrant's by-laws, as amended, contains the indemnification provision set
forth below:

"Section 8.01. The corporation shall indemnify all officers and directors
of the corporation, for such expenses and liabilities, in such manner, under
such circumstances, and to such extent as permitted by Minnesota Statutes
Section 302A.521, as now enacted or hereafter amended. Unless otherwise
approved by the Board of Directors, the corporation shall not indemnify or
advance expenses to any employee of the corporation who is not otherwise
entitled to indemnification pursuant to the prior sentence of this Section
8.01."

Item 16. Exhibits

Exhibit
No. Description of Exhibit
- ------- ----------------------

1 --Form of Underwriting Agreement. (9)
4.1 --Indenture, dated as of April 1, 1993, between the Company and Chemical
Bank, as trustee, including Form of Notes. (8)
4.2 --Indenture, dated as of October 1, 1985 between the Company and
Manufacturers Hanover Trust Company, as trustee, including Form of
Notes. (3)
4.3 --Restated and Amended Articles of Incorporation, as amended, and
Articles of Amendment thereto. (2)
4.4 --Certificate of Designation creating a series of preferred stock
designated as Cumulative Redeemable Exchangeable 1991 Preferred Stock
and Certificate of Amendment relating thereto. (6)
4.5 --Certificate of Designation creating a series of preferred stock
designated as Cumulative Redeemable 1991 Preferred Stock. (6)
4.6 --Form of Indenture between the Company and [____________], as trustee,
including Form of Debentures. (9)
4.7 --Certificate of Designation creating a series of Preferred Stock
designated as Cumulative Redeemable Exchangeable 1993 Preferred Stock.
(10)

II-2
<PAGE>

Exhibit
No. Description of Exhibit
- ------- ----------------------
5 --Opinion of Phillips, Nizer, Benjamin, Krim & Ballon. (9)
10.1 --Amended and Restated Credit Agreement dated as of December 31, 1992
among the Company, Maxwhale Corp., certain banks party thereto and
Chemical Bank. (8)
10.2 --Pension Plan, as amended, of Petroleum Heat and Power Co., Inc. (2)
10.3 --Savings Plan, as amended of Petroleum Heat and Power Co., Inc. (2)
10.4 --Supplemental Executive Retirement Plan of Petroleum Heat and Power
Co., Inc. (2)
10.5 --Lease dated July 15, 1981 with respect to offices and garage located
at 477 West John Street and 5 Alpha Plaza, Hicksville, New York. (4)
10.6 --Lease dated February 15, 1982,(4) First Amendment dated February 14,
1986, and Second Amendment dated July 1, 1989, with respect to offices,
garage and terminal located at 818 Michigan Avenue, N.E., Washington,
D.C. (2)
10.7 --Lease dated June 26, 1989 with respect to offices and garage located
at 40 Lee Burbank Highway, Revere, Massachusetts. (2)
10.8 --Lease dated December 1, 1985 with respect to office and garage located
at 3600-3620 19th Avenue, Astoria, New York. (3)
10.9 --Lease dated November 1, 1985 with respect to office and garage located
at 522 Grand Blvd., Westbury, New York. (5)
10.10 --Lease dated June 5, 1986 with respect to office and garage located at
2541 Richmond Terrace Co., Staten Island, New York. (5)
10.11 --Lease dated July 31, 1986 with respect to office and garage located at
71 Day Street, Norwalk, Connecticut. (5)
10.12 --Lease dated July 9, 1984 with respect to office located at 1245
Westfield Avenue, Clark, New Jersey. (5)
10.13 --Lease dated April 5, 1991 with respect to office and garage located at
10 Spring Street, New Milford, Connecticut. (2)
10.14 --Lease dated October 26, 1990 with respect to office and garage located
at 1 Coffey Street, Brooklyn, New York. (2)
10.15 --Lease dated February 6, 1990 with respect to office and garage located
at 62 Oakland Avenue and 64 Oakland Avenue, East Hartford, Connecticut.
(2)
10.16 --Lease dated July 29, 1988 and Addendum to lease dated August 1, 1988
with respect to office, garage and terminal located at 224 North Main
Street, Southampton, New York. (2)
10.17 --Lease dated April 1, 1988 with respect to office and garage located at
171 Ames Court, Plainview, New York. (2)
10.18 --Lease dated August 12, 1988 with respect to office and garage located
at 326 South Second Street, Emmaus, Pennsylvania. (2)
10.19 --Lease dated July 15, 1990, Addendum to lease dated July 27, 1990 and
Second Addendum to lease dated November 30, 1990, with respect to
office and garage located at 212 Elm Street, North Haven, Connecticut.
(2)
10.20 --Lease dated August 14, 1989 with respect to office and garage located
at foot of South Street, Oyster Bay, New York. (2)
10.21 --Lease and Addendum to lease dated September 26, 1990 with respect to
office and garage located at 930 Park Avenue, Lakewood, New Jersey. (2)
10.22 --Lease dated December 1, 1990 with respect to garage located at 10
Coffey Street, Brooklyn, New York. (2)
10.23 --Lease dated May 9, 1991 with respect to office and garage located at
260 Route 10 East, Whippany, New Jersey. (2)

II-3

<PAGE>

Exhibit
No. Description of Exhibit
- ------- ----------------------
10.24 --Lease dated June 1, 1987 with respect to garage located at 817
Pennsylvania Avenue, Linden, New Jersey. (2)
10.25 --Lease dated June 1, 1989 with respect to office and garage located at
2 Selleck Street, Stamford, Connecticut. (2)
10.26 --Lease dated April 28, 1992 with respect to office and garage located
at 8087-8107 Parston Drive, Forestville, Maryland. (8)
10.27 --Demand Promissory Notes of Thomas J. Edelman in favor of Petro, Inc.
in the amounts of $500,000 and $100,000 dated April 15, 1985 and May
17, 1985, respectively, and Pledge and Security Agreement, as amended,
made by Thomas J. Edelman in favor of Petro, Inc. dated April 15, 1986.
(5)
10.28 --Letter dated June 5, 1985 with respect to redemption of 55,250 shares
of common stock of Petroleum Heat and Power Co., Inc. from Thomas J.
Edelman and promissory note of Petroleum Heat and Power Co., Inc. in
the amount of $884,000 in favor of Thomas J. Edelman, dated June 6,
1985. (3)
10.29 --Option dated October 18, 1984 granted to Irik P. Sevin to purchase
64,000 shares of common stock of Petroleum Heat and Power Co., Inc. (3)
10.30 --Form of Equipment Lease and related documentation dated as of October
21, 1983 relating to vehicle leasing transaction between Atlas Oil
Corporation and various equipment lessors. (3)
10.31 --Form of Equipment Lease and related documentation dated as of March 2,
1985 relating to vehicle leasing transaction between Petro, Inc. and
various equipment lessors. (3)
10.32 --Agreement dated October 22, 1986 relating to purchase of 64,000 shares
of Class A Common Stock by Irik P. Sevin. (5)
10.33 --Agreement dated December 2, 1986 relating to stock options granted to
Malvin P. Sevin. (5)
10.34 --Agreement dated December 2, 1986 relating to stock options granted to
Irik P. Sevin. (5)
10.35 --Agreements dated December 28, 1987 and March 6, 1989 relating to stock
options granted to Irik P. Sevin and Malvin P. Sevin. (2)
10.37 --Subordinated Note Agreement relating to $60 million Subordinated Notes
due October 1, 1998 issued to John Hancock Mutual Life Insurance
Company and other Investors (the "Hancock Note Agreement"). (2)
10.38 --Note Agreement, dated as of January 15, 1991, relating to $12.5
million Subordinated Notes due January 15, 2001, between the Company
and Connecticut General Life Insurance Company (the "Connecticut
General Note Agreement").(2)
10.39 --Purchase Agreement, dated as of September 1, 1991, between the Company
and United States Leasing International, relating to purchase of
159,722 shares of the 1991 Preferred Stock (the "US Leasing Purchase
Agreement"). (2)
10.40 --Purchase Agreement, dated as of August 1, 1989, between the Company
and John Hancock Mutual Life Insurance Company and The Northwestern
Mutual Life Insurance Company, relating to the purchase of the 1989
Preferred Stock (the "Hancock/Northwestern Purchase Agreement"). (2)
10.41 --Agreement dated as of November 1, 1992 relating to stock options
granted to George Leibowitz. (8)
10.42 --Letter Agreement dated March 15, 1993 relating to the Credit
Agreement. (8)
10.43 --Lease dated June 17, 1993 with respect to office facilities located at
2187 Atlantic Street in Stamford Connecticut. (10)
10.44 --Note dated December 31, 1993, in the amount of $1,559,827, due
December 31, 1994, from Irik P. Sevin to the Company. (10)
10.45 --Agreement dated December 1993 relating to stock options granted to
Malvin P. Sevin. (10)

II-4

<PAGE>

Exhibit
No. Description of Exhibit
- ------- ----------------------
10.46 --Purchase Agreement, dated as of December 21, 1993, among Star Gas
Holdings, Inc., First Reserve Secured Energy Assets Fund, L.P. American
Gas & Oil Investors, AmGo II, AmGo III, FRC Star Gas, Inc., Star Gas
and the Company. (11)
10.47 --Option from Star Gas to the Company, dated as of December 21, 1993.
(11)
10.48 --Shareholder Put/Call Agreement, dated as of December 21, 1993, among
the Company, the Other Investors and Prudential. (11)
10.49 --Shareholders' Agreement, dated as of December 21, 1993, among the
Company, the Other Investors and Prudential. (11)
10.50 --Management Services Agreement, dated as of December 21, 1993, between
the Company and Star Gas. (11)
10.51 --First Amendment to the Company's 10 1/8% Subordinated Notes Indenture
dated as of January 12, 1994. (10)
10.52 --Form of First Amendment to the US Leasing Purchase Agreement. (10)
10.53 --Form of Third Amendment to the Connecticut General Note Agreement.
(10)
10.54 --Form of Second Amendment to the Hancock Note Agreement. (10)
10.55 --Form of First Amendment to the Hancock/Northwestern Purchase
Agreement. (10)
10.56 --Form of Fourth Amendment dated January 21, 1994 to the Second Amended
and Restated Credit Agreement. (10)
10.57 --Employment Agreement dated July 21, 1994 with Thomas Isola (13)
10.58 --Agreement entered into as of the 7th day of December, 1994, among the
Company, PruSupply,
Inc. and the Prudential Insurance Company of America. (2)
11.0 --Computation of Per Share Earnings. (1)
12.0 --Computation of Ratio of Earnings to Fixed Charges. (1)
24.1 --Consent of KPMG Peat Marwick (1).
24.2 --Consent of Ernst & Young. (1)
24.3 --Consent of Phillips, Nizer, Benjamin, Krim & Ballon (included in
Exhibit 5).
24.4 --Consent of Sansiveri, Ryan, Sullivan & Co.
25.0 --Power of Attorney (included on page II-7 hereof).
26.0 --Statement of Eligibility of Trustee on Form T-1 of [---------------]
(separately bound)(9)

- ---------------
(1) Filed herewith.

(2) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-
48051, and incorporated herein by reference.

(3) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-99794,
and incorporated herein by reference.
(4) Filed as Exhibits to Registration Statement on Form S-1, File No. 2-88526,
and incorporated herein by reference.

(5) Filed as Exhibits to Registration Statement on Form S-1, File No. 33-9088,
and incorporated herein by reference.

II-5

<PAGE>

(6) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 2-88526, and incorporated herein by
reference.

(7) Filed as Exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 2-88526, and incorporated herein by
reference.
(8) Filed as Exhibits to the Company's Registration Statement on Form S-2,
File No. 33-58034, and incorporated herein by reference.

(9) To be filed by Amendment.

(10) Filed as Exhibits to the Registration Statement on Form S-2, File No. 33-
72354, and incorporated herein by reference.
(11) Filed as Exhibits to the Company's Periodic Report on Form 8-K filed on
January 4, 1994, File No. 2-88526, and incorporated herein by reference.

(12) Filed as Exhibits to the Company's Periodic Report on Form 8-K, dated
December, 1994.

(13) Filed as an Exhibit to the Company's Period Report on Form 10-Q for the
quarter ended September 1994.

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is therefor unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction, the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.

II-6

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of New York, State of New
York, on the 22nd of December, 1994.

PETROLEUM HEAT AND POWER CO., INC.
By: /s/ IRIK P. SEVIN
-------------------------------------
President, Chairman of the Board
Chief Executive Officer and Chief
Financial and Accounting Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints IRIK P. SEVIN, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him and
in his name, place or stead, in any and all capacities, to sign the within
Registration Statement relating to the offering of $125,000,000 of Subordinated
Debentures and 3,450,000 shares of Class A Common Stock of Petroleum Heat and
Power Co., Inc. and any and all amendments to said Registration Statement, and
to file the same, with all exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

/s/ IRIK P. SEVIN President, Chairman of the December 22, 1994
- ---------------------------- Board, Chief Executive
Irik P. Sevin Officer, Financial and
Accounting Officer and
Director

/s/ AUDREY L. SEVIN Secretary and Director December 22, 1994
- ----------------------------
Audrey L. Sevin

Director December , 1994
- ----------------------------
Phillip E. Cohen

/s/ Thomas J. Edelman Director December 22, 1994
- ----------------------------
Thomas J. Edelman

/s/ Wolfgang Traber Director December 22, 1994
- ----------------------------
Wolfgang Traber

/s/ Richard O'Connell Director December 22, 1994
- ----------------------------
Richard O'Connell

/s/ Max Warburg Director December 22, 1994
- ----------------------------
Max Warburg

Director December , 1994
- ----------------------------
Paul Biddelman

II-7

EXHIBIT 11
PETROLEUM HEAT AND POWER CO., INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE

<TABLE><CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1991 1992 1993 1993 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Loss.......................... $(16,562,565) $ (4,389,365) $ (8,431,294) $(17,359,300) $ (6,800,300)
Preferred dividends............... (3,269,000) (4,258,000) (3,321,153) (3,321,123) (3,340,446)
Accretion of Redeemable Preferred
Stock........................... (23,083) (194,740) (45,873) (45,873) --
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
stock........................... (19,854,648) (8,842,105) (11,798,320) (20,726,296) (10,140,746)
------------ ------------ ------------ ------------ ------------
Common stock dividends
Class A Common Stock............. -- 3,156,707 9,971,104 7,359,627 7,834,440
Class B Common Stock............. 951,501 2,714,946 407,772 305,829 237,788
Class C Common Stock............. -- 465,251 1,336,198 986,241 1,049,871
------------ ------------ ------------ ------------ ------------
951,501 6,336,904 11,715,074 8,651,697 9,122,099
------------ ------------ ------------ ------------ ------------
Undistributed net loss(1)......... $(20,806,149) $(15,179,009) $(23,513,394) $(29,377,993) $(19,262,845)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding
Class A Common Stock............. 10,180,558 12,854,266 18,992,579 18,992,579 18,992,579
Class B Common Stock............. 3,034,060 2,447,473 216,901 216,901 195,919
Class C Common Stock............. 2,545,139 2,545,139 2,545,139 2,545,139 2,545,139
------------ ------------ ------------ ------------ ------------
15,759,757 17,846,878 21,754,619 21,754,619 21,733,637
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings (loss) per common share
Class A Common Stock
Distributed.................... $ -- $ 0.18 $ 0.52 $ 0.39 $ 0.41
Undistributed(1)............... (1.64) (0.99) (1.09) (1.37) (0.89)
------------ ------------ ------------ ------------ ------------
$ (1.64) $ (0.81) $ (0.57) $ (0.98) $ (0.48)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Class B Common Stock
Distributed.................... $ 0.31 $ 1.14 $ 1.88 $ 1.41 $ 1.10
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Class C Common Stock
Distributed.................... $ -- $ 0.18 $ 0.52 $ 0.39 $ 0.41
Undistributed.................. (1.64) (0.99) (1.09) (1.37) (0.89)
------------ ------------ ------------ ------------ ------------
$ (1.64) $ (0.81) $ (0.57) $ (0.98) $ (0.48)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>

- ------------

(1) All of the undistributed net loss has been allocated to the Class A Common
Stock and Class C Common Stock since the Class B Common Stock cannot
participate in any additional dividends until the aggregate amount of
dividends paid on Class A Common Stock and Class C Common Stock exceeds the
Common Stock Allocation (as defined in the Company's Restated Articles of
Incorporation to mean the Company's cash flow for each fiscal year after
December 31, 1993, an additional $100.2 million would be required to be paid
as dividends on the Class A Common Stock and Class C Common Stock to reach
the Common Stock Allocation.

EXHIBIT 12

PETROLEUM HEAT AND POWER CO., INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS, EXCEPT RATIO)

<TABLE><CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- ------------------
1989 1990 1991 1992 1993 1993 1994
------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before
income taxes, equity
interest and
extraordinary item...... $(7,364) $(31,134) $(16,312) $(3,989) $(7,164) $(16,274) $(4,478)
Add:
Interest expense........ 19,596 21,926 21,916 20,205 22,156 16,501 18,056
Interest component of
rent expense.......... 1,493 1,596 1,639 1,483 1,781 1,292 1,440
------- -------- -------- ------- ------- -------- -------
$13,725 $ (7,612) $ 7,243 $17,699 $16,773 $ 1,519 $15,018
------- -------- -------- ------- ------- -------- -------
------- -------- -------- ------- ------- -------- -------
Fixed charges:
Interest expense.......... $19,596 $ 21,926 $ 21,916 $20,205 $22,156 $ 16,501 $18,056
Interest component of rent
expense................. 1,493 1,596 1,639 1,483 1,781 1,292 1,440
------- -------- -------- ------- ------- -------- -------
$21,089 $ 23,522 $ 23,555 $21,688 $23,937 $ 17,793 $19,496
------- -------- -------- ------- ------- -------- -------
------- -------- -------- ------- ------- -------- -------
Ratio....................... * * * * * * *
------- -------- -------- ------- ------- -------- -------
------- -------- -------- ------- ------- -------- -------
</TABLE>

- ------------

* Ratio is less than 1:1. Deficiencies are $7,364, $31,134, $16,312, $3,989,
$7,164, $16,274 and $4,478 for the years ended December 31, 1989, 1990, 1991,
1992 and 1993 and the nine months ended September 30, 1993 and 1994,
respectively.

EXHIBIT 24.1

ACCOUNTANTS' CONSENT

The Stockholders and Board of Directors of
PETROLEUM HEAT AND POWER CO., INC.:

We consent to the use of our reports relating to the consolidated
financial statements and financial statement schedules of Petroleum Heat and
Power Co., Inc. and to the consolidated financial statements of Star Gas
Corporation included and incorporated by reference herein and to the reference
to our firm under the headings "Selected Financial and Other Data" and
"Experts" in the Prospectuses.

KPMG PEAT MARWICK LLP

New York, New York
December 23, 1994

Exhibit 24.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and the use
of our report dated December 3, 1992 except for Note 5, as to which the date is
April 1, 1993, with respect to the consolidated statement of operations,
shareholders' equity and cash flows of Star Gas Corporation and subsidiaries
for the year ended September 30, 1992 in the Registration Statement (Form S-2)
and related prospectus of Petroleum Heat and Power Co., Inc. for the
registration of $125,000,000 Subordinated Debentures and 3,450,000 shares of
Class A Common Stock.

ERNST & Y0UNG LLP
December 22, 1994

EXHIBIT 24.4

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in this Registration Statement of
our report on the financial statements of the Fuel Oil and Liquid Propane
Divisions of DeBlois Oil Company as of and for the years ended December 31,
1993 and 1992 and to the reference made to us under the caption "Experts" in
the Prospectuses.

Sansiveri, Ryan, Sullivan & Co.

December 23, 1994