2008-08-19 23:58:03 -

- Fitch Ratings has affirmed the ratings for Star Gas Partners, L.P. (Star Gas) as follows:

--Issuer Default Rating (IDR) 'B';

--Outstanding 10.25% senior unsecured notes due 2013, co-issued with its special purpose financing subsidiary Star Gas Finance Company (the notes), 'B+/RR3'.

The notes have a Recovery Rating (RR) of 'RR3'. The Rating Outlook is Stable. Approximately $173 million of notes remain outstanding.

Star Gas has performed according to Fitch's expectation during its current fiscal year through June 30, 2008 despite a challenging operating environment characterized by high commodity prices, increased customer conservation and margin pressures. While many of these challenges will remain for fiscal 2009, Star Gas has positioned itself to operate the business under

these conditions and is generating sufficient cash flow to maintain its current rating and meet the company's financial obligations, which include resuming distributions on its limited partner units in October 2008. Fitch projects fiscal 2008 EBITDA of approximately $52 million, debt-to-EBITDA of approximately 3.4 times (x) and interest coverage of 3.7x. In addition the company should have ample liquidity going into the 2008-2009 heating season with a projected zero balance on its Petroleum Heat and Power Company (Petro) subsidiary bank facility and over $90 million of cash on hand in September.

The primary rating concerns are the company's liquidity position and its ability to operate in a historically high commodity price environment. Heating oil spot prices increased 40% during the heating season (October through March) and on average, heating oil prices were 58% higher during the 2007-2008 heating season than the prior year. While heating oil prices have fallen off the $4.08 per gallon high, current spot prices are still over 50% higher than this time last year. As an oil retailer, Star Gas attempts to pass on heating oil cost increases to its consumers and has, on average, been successful in doing so. In fact, Star Gas was able to increase its gross margin slightly during the most recent heating season versus the prior year even in a difficult operating environment. Despite its ability to maintain its margin, Star Gas' financial performance is affected by high commodity costs through increased customer conservation, accelerated natural gas conversions, an inability to stem attrition and the increased use of its Petro working capital facility to finance working capital needs during the heating season. During the 2006-2007 heating season Star Gas did not access its bank lines to fund working capital needs due to a strong cash balance and a more favorable operating environment. During this past heating season, Star Gas did access bank borrowings in order to finance increased accounts receivables and inventories during a sharp increase in heating oil prices while maintaining a comfortable margin with respect to borrowing base availability.

As a means of determining whether Star Gas has sufficient liquidity to manage through a further increase in commodity prices, Fitch performed a 24 month sensitivity which projected working capital needs and assumed no additional margin growth, no improvement in attrition and additional customer conservation. Under this scenario, Star Gas would have sufficient liquidity to finance working capital needs with heating oil prices of $5.00 per gallon. If high prices resulted in increased attrition/conservation it would provide short-term liquidity relief as working capital deficits would be reduced during the season but would have more serious long-term effects on the company's cash flow generation and credit profile, which would have to be evaluated at that time.

Over the past two years Petro has made efforts to move customers away from fixed price contracts to capped or ceiling pricing. With the bulk of its protected customers on capped pricing, Petro should benefit from increased pricing flexibility. Petro also manages a more conservative hedging policy and reviews its customer base nightly to make certain its pricing commitments are appropriately hedged on a daily basis. Hedging is an automatic program rather than discretionary which adds a significant amount of control and helps to minimize risk. In a rising commodity price environment, collateral postings to cover margin calls on swap agreements are a credit concern. However, the company has partially mitigated this risk by entering into a reverse hedge on its physical inventory position where the collateral requirements have in inverse relationship to that of the swaps. While this transaction does not eliminate the overall risk to liquidity from the hedging program is does mitigate it to some extent.

At the end of fiscal 2004 the company announced the suspension of its distribution payments. As part of its recapitalization, the company was relieved of its distribution commitments through October 2008 which has led to the improved liquidity and substantial cash position. Fitch believes Star Gas will generate sufficient operating cash flow to cover its distribution requirement even in a moderate stress environment. Should cash flows prove insufficient in the short term, Star Gas' relatively strong cash balances would allow the company to mange through a temporary downturn in the heating oil market. However, if stress conditions continued it would affect the company's ability to maintain distributions over the long term.

With Petro's bank facilities maturing in December 2009, Star Gas is faced with refinancing risk. While it is too early to assess whether refinancing the facility would be an issue, it is an event risk that will be closely monitored. Fitch believes the company maintains a good relationship with its bank group and the parties have been able to work through difficult situations in the past including expanding the in-season upper limits of its working capital facility by an additional $50 million in December 2007.

The rating for the senior unsecured notes reflects its subordinated position to the Petro credit facility. Fitch's Recovery Rating for the outstanding notes, a relative indicator of creditor recovery on a given obligation in the event of a default, is unchanged at 'RR3'. 'RR3' indicates an estimated recovery level of between 50% and 70% in event of a default.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Joseph Sorce, +1-312-368-3161 (Chicago)
Ralph Pellecchia, +1-212-908-0586 (New York)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)