UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number: 000-51304

INERGY HOLDINGS, L.P.

(Exact name of registrant as specified in its charter)

Delaware	43-1792470
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri 64112

(Address of principal executive offices) (Zip Code)

(816) 842-8181

(Registrant’s telephone number including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange on Which Registered
None	N/A

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Units representing limited partnership interests

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act.  Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer: in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No x

The aggregate market value of the 5,380,859 common units of the registrant held by non-affiliates computed by reference to the $36.38 closing price of such common units on November 1, 2005, was approximately $195.8 million. As of November 1, 2005, the registrant had 20,000,000 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the indicated parts of this report: None.

INERGY HOLDINGS, L.P.

INDEX TO ANNUAL REPORT ON FORM 10-K/A

		Page
PART II
Item 6.	Selected Financial Data	1
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 8.	Financial Statements and Supplementary Data	22
PART IV
Item 15.	Exhibits and Financial Statement Schedules	23

Explanatory Note

This Amendment No. 1 on Form 10-K/A is being filed to reflect the deferral of the previously-recorded, non-cash gains on the limited partnership units of Inergy, L.P. we own in our audited financial statements for the fiscal years ended September 30, 2003, 2004, and 2005, based on the application of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 51 (“SAB 51”), “Accounting for Sales of Stock by a Subsidiary”, as discussed in Note 18 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.—Note 18. Restatements.”

After consultation with our independent accountants, we previously-recognized non-cash gains equal to the increase in the value of our investment in Inergy, L.P. when Inergy, L.P. issued additional common units to third parties at a unit price that exceeded the current carrying value of our investment in Inergy, L.P. These non-cash gains amounted to $24.8 million, $10.4 million and $5.2 million in fiscal years 2005, 2004 and 2003, respectively. The changes have no prior, current, or future impact on cash available for distributions to our unitholders.

SAB 51 permits a parent company to recognize a gain and adjust the carrying value of its ownership of a subsidiary when the subsidiary sells additional equity interests in a public or private offering, in certain circumstances. However, in light of clarification provided in a speech by SEC staff, gain recognition under SAB 51 does not apply when the subsidiary is a partnership that sells a class of equity securities that has distribution rights over any other class of equity interests. Accordingly, we will reflect the proceeds from issuance of Inergy, L.P. common units as a minority interest in our financial statements; and any gain that may be recognized will be recorded at such time as all Inergy, L.P. subordinated and special units have converted to common units.

This Amendment No. 1 on Form 10-K/A amends and restates only Item 6 “Selected Financial Data”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Item 8 “Financial Statements and Supplementary Data” and Item 15 “Exhibits and Financial Statement Schedules” of the original Form 10-K. The remaining items are not amended hereby. Except for the foregoing amended information, the Form 10-K/A continues to describe conditions as of the date of the original Form 10-K and we have not updated the disclosure contained herein to reflect events that occurred subsequently. Accordingly, the Form 10-K/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-K, including any amendments of those filings.

We are also filing contemporaneously with this Form 10-K/A, our amended quarterly reports on Form 10-Q/A for the quarterly periods ended December 31, 2005 and March 31, 2006.

Item 6. Selected Financial Data.

The following table sets forth selected consolidated financial data for Inergy Holdings, L.P., in each case for the periods and as of the dates indicated. The selected historical statement of operations and cash flow data for the years ended September 30, 2005, 2004, 2003 and 2002 and the balance sheet data as of September 30, 2005, 2004, and 2003 are derived from our audited financial statements. The selected historical statement of operations and cash flow data for the year ended September 30, 2001 and balance sheet data as of September 30, 2002 and 2001, are derived from our unaudited financial statements. These financial statements include the results of operations of Inergy’s acquisitions from the effective date of the respective acquisitions. The unaudited financial statements include all adjustments, consisting of normal, recurring accruals, which we consider necessary for fair presentation of the financial position and results of operations for these periods.

We have no separate operating activities apart from those conducted by Inergy, and our cash flows consist of distributions from Inergy on the partnership interests we own. Accordingly, the selected historical consolidated financial data set forth in the following table primarily reflects the operating activities and results of operations of Inergy. Since we control the managing general partner of Inergy, we reflect our ownership interest in Inergy on a consolidated basis, which means that our financial results are combined with Inergy’s financial results and the results of our other subsidiaries. The interest owned by non-controlling partners in Inergy is reflected as a liability on our balance sheet and the non-controlling partner’s share of income for Inergy is reflected as an expense in our results of operations.

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We derived the data in the following table from, and it should be read together with and is qualified in its entirety by reference to, the historical consolidated financial statements and the accompanying notes included in this report. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7. Certain financial information presented below has been restated as further described in footnote 18 to the consolidated financial statements.

	Years Ended September 30,
	2005 Restated			2004 Restated			2003 Restated			2002 Restated			2001 Restated
	(in thousands except per unit data)
Revenues	$	1,050,136		$	482,496		$	363,365		$	208,700		$	223,139
Cost of product sold (excluding depreciation and amortization as shown below)		724,223	(c)		359,053			267,010			134,999			182,582
Gross profit		325,913			123,443			96,355			73,701			40,557
Expenses:
Operating and administrative(a)		197,582			81,388			59,424			45,315			23,501
Depreciation and amortization		50,413			21,089			13,843			11,444			6,532
Operating income		77,918			20,966			23,088			16,942			10,524
Other income (expense):
Interest expense		(36,061	)		(7,917	)		(9,947	)		(8,366	)		(6,670	)
Interest expense related to write-off of deferred financing costs		(7,585	)(d)		(1,216	)(e)		—			(585	)		—
Interest expense related to make whole premium charge		—			(17,949	)(e)		—			—			—
Interest income related to swap value received		—			949	(e)		—			—			—
Gain (loss) on sale of property, plant and equipment		(679	)		(203	)		(91	)		151			37
Finance charges		1,817			704			339			115			290
Other		251			117			86			140			168
Income (loss) before income taxes and interest of non-controlling partners in Inergy’s net income		35,661			(4,549	)		13,475			8,397			4,349
Provision for income taxes		(501	)		(201	)		(442	)		(367	)		—
Interest of non-controlling partners in Inergy’s net (income) loss		(26,831	)		4,827			(10,041	)		(5,936	)		1,298
Net income	$	8,329		$	77		$	2,992		$	2,094		$	5,647
Net income applicable to partners’ common interest	$	8,329		$	77		$	2,992		$	2,094		$	5,647
Net income per limited partner unit—
Basic	$	0.49		$	0.01		$	0.24		$	0.15		$	0.35
Diluted	$	0.48		$	0.00		$	0.19		$	0.13		$	0.35
Weighted average limited partner units outstanding—
Basic		17,140			12,550			12,373			13,789			16,090
Diluted		17,186			16,090			16,090			16,090			16,090
Balance Sheet Data (end of period):
Net property, plant and equipment	$	727,443		$	215,253		$	157,201		$	124,550		$	70,043
Total assets		1,510,318			511,741			373,370			296,146			157,256
Total debt, including current portion		587,840			153,253			131,127			124,596			54,132
Partner’s capital (deficiency)(b)		(6,745	)		(34,816	)		2,227			389			3,210
Other Financial Data:
Net cash provided by operating activities		84,165			31,132			33,572			7,426			4,647
Net cash used in investing activities		(840,761	)		(97,830	)		(34,239	)		(94,034	)		(64,260	)
Net cash provided by financing activities		763,806			63,052			4,217			85,211			62,014

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^(a) The historical financial statements include non-cash charges related to amortization of deferred compensation of $234,000 for the year ended September 30, 2001.

^(b) We were formed as a Delaware limited liability company in November 1996. On April 28, 2005, Inergy Holdings, LLC converted from a Delaware limited liability company into a Delaware limited partnership and changed its name to Inergy Holdings, L.P.

^(c) Includes a $19.4 million non-cash gain on derivative financial instruments.

^(d) Reflects amounts recognized as expense in the year ended September 30, 2005, incurred in connection with the retirement of Inergy’s 364-day credit facility used to fund a portion of the Star Gas Propane Acquisition, and deferred financing costs written off with the retirement of Inergy’s previous credit facility.

^(e) Reflects amounts recognized in the year ended September 30, 2004 incurred in connection with the early repayment of $85.0 million of senior secured notes. Such amounts were related to the write-off of $1.2 million of deferred financing costs, a make whole premium charge of $17.9 million and $0.9 million gain from cancellation of the related interest rate swaps.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains forward-looking statements concerning the financial condition, results of operations, plans, objectives, future performance and business of our company and its subsidiaries. These forward-looking statements include:

• statements that are not historical in nature, but not limited to, our belief that our acquisition expertise should allow us to continue to grow through acquisitions; our belief that we will have adequate propane supply to support our retail operations; and our belief that our diversification of suppliers will enable us to meet supply needs, and

• statements preceded by, followed by or that contain forward-looking terminology including the words “believe,” “expect,” “may,” “will,” “should,” “could,” “anticipate,” “estimate,” “intend” or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• weather conditions;

• price and availability of propane, and the capacity to transport to market areas;

• the ability to pass the wholesale cost of propane through to our customers;

• costs or difficulties related to the integration of the business of our company and its acquisition targets may be greater than expected;

• governmental legislation and regulations;

• local economic conditions;

• the demand for high deliverability natural gas storage capacity in the Northeast;

• the availability of natural gas and the price of natural gas to the consumer compared to the price of alternative and competing fuels;

• our ability to successfully implement our business plan for the natural gas storage facility (Stagecoach);

• labor relations;

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• environmental claims;

• competition from the same and alternative energy sources;

• operating hazards and other risks incidental to transporting, storing, and distributing propane;

• energy efficiency and technology trends;

• interest rates; and

• large customer defaults.

We have described under “Factors That May Affect Future Results of Operations, Financial Condition or Business” additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that we have not identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speaks only as of the date it was made.

General

Our cash-generating assets consist of our partnership interests, including incentive distribution rights, in Inergy, L.P., a publicly traded Delaware limited partnership, which operates a rapidly growing, geographically diverse retail and wholesale propane supply, marketing and distribution business. Inergy also owns a natural gas storage facility in Tioga County, New York and an NGL business in Bakersfield, California. Our primary objective is to increase distributable cash flow to our unitholders through our ownership of partnership interests in Inergy. Our incentive distribution rights entitle us to receive an increasing percentage of total cash distributions made by Inergy as it reaches certain target distribution levels and have resulted in significantly increasing cash distributions to us.

Inergy’s primary objective is to increase distributable cash flow to its unitholders. Inergy has primarily grown through acquisitions of retail propane operations. Since the inception of Inergy’s predecessor in 1996 through September 30, 2005, Inergy has acquired 47 propane companies and two midstream businesses. Inergy further intends to pursue its growth objectives through, among other things, future acquisitions, maintaining a high percentage of retail sales to residential customers, operating in attractive markets and focusing its operations under established, locally recognized trade names.

Our aggregate partnership interests as of September 30, 2005, in Inergy consist of the following:

• a 100% ownership interest in each of the managing general partner of Inergy, which manages Inergy’s business and affairs, and the non-managing general partner of Inergy, which owns an approximate 1.2% general partner interest in Inergy;

• 1,717,551 Inergy Common Units, 1,093,865 Inergy senior subordinated units and 975,924 Inergy junior subordinated units, representing an aggregate limited partner interest in Inergy of approximately 9.5%; and

• 769,941 Inergy special units, which are not entitled to a current distribution and will convert into Inergy Common Units representing limited partnership interests in Inergy at a specified conversion rate upon the commercial operation of the Stagecoach expansion project as previously described; and

• all of the incentive distribution rights in Inergy which entitle us to receive increasing percentages, up to a maximum of 48.0%, of any cash distributed by Inergy as certain target distribution levels are reached in excess of $0.33 per Inergy unit in any quarter.

Since we control the managing general partner of Inergy, we reflect our ownership interest in Inergy on a consolidated basis, which means that our financial results are combined with Inergy’s financial results and the results of our other subsidiaries. The limited partner interests in Inergy not owned by affiliates of the managing

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general partner are reflected as an expense in our results of operations. We have no separate operating activities apart from those conducted by Inergy, and our cash flows consist of distributions from Inergy on the partnership interests we own. Our consolidated results of operations principally reflect the results of operations of Inergy, and also include our gains on the issuance of Inergy Common Units, provision for income taxes and interest of non-controlling partners in Inergy’s net income. Accordingly, the discussion of our financial position and results of operations in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the operating activities and results of operations of Inergy. The historical results of our operations do not reflect the incremental expenses we expect to incur as a result of being a public entity.

Since the inception of Inergy’s predecessor in November 1996 through September 30, 2005, Inergy has acquired 49 companies for an aggregate purchase price of approximately $1.2 billion, including working capital, assumed liabilities and acquisition costs.

The retail propane distribution business is largely seasonal due to propane’s primary use as a heating source in residential and commercial buildings. As a result, cash flows from operations are highest from November through April when customers pay for propane purchased during the six-month peak heating season of October through March. Inergy generally experiences net losses in the six-month, off season of April through September.

Because a substantial portion of Inergy’s propane is used in the weather-sensitive residential markets, the temperatures realized in its areas of operations, particularly during the six-month peak heating season, have a significant effect on Inergy’s financial performance. In any given area, warmer-than-normal temperatures will tend to result in reduced propane use, while sustained colder-than-normal temperatures will tend to result in greater propane use. Therefore, Inergy uses information on normal temperatures in understanding how historical results of operations are affected by temperatures that are colder or warmer than normal and in preparing forecasts of future operations, which are based on the assumption that normal weather will prevail in each of its operating regions. “Heating degree days” are a general indicator of weather impacting propane usage and are calculated for any given period by adding the difference between 65 degrees and the average temperature of each day in the period (if less than 65 degrees).

In determining actual and normal weather for a given period of time, Inergy compares the actual number of heating degree days for such period to the average number of heating degree days for a longer, historical time period assumed to more accurately reflect the average normal weather, in each case as such information is published by the National Oceanic and Atmospheric Administration, for each measuring point in each of its regions. When Inergy discusses “normal” weather in its results of operations presented below, Inergy is referring to a 30-year average consisting of the years 1976 through 2005. Inergy then calculates weighted averages, based on retail volumes attributable to each measuring point, of actual and normal heating degree days within each region. Based on this information, Inergy calculates a ratio of actual heating degree days to normal heating degree days, first on a regional basis and then on a partnership-wide basis.

The propane business is a “margin-based” business where the level of profitability is largely dependent on the difference between sales prices and product cost. The unit cost of propane is subject to volatile changes as a result of product supply or other market conditions. Propane unit cost changes can occur rapidly over a short period of time and can impact margins as sales prices may not change as rapidly. There is no assurance that Inergy will be able to fully pass on product cost increases, particularly when product costs increase rapidly. Inergy has generally been successful in passing on higher propane costs to Inergy’s customers and has historically maintained or increased its gross margin per gallon in periods of rising costs. In periods of increasing costs, Inergy has experienced a decline in its gross profit as a percentage of revenues. In periods of decreasing costs, Inergy has experienced an increase in its gross profit as a percentage of revenues. Propane is a by-product of crude oil refining and natural gas processing and, therefore, its cost tends to correlate with the price fluctuations of these underlying commodities. The price of crude oil and natural gas has maintained historically high costs in 2004 and to date in 2005, and propane has also been at historically high costs. As such, our selling prices have been at higher levels in order to attempt to maintain our historical gross margin per gallon. We expect the historical high cost of crude oil and natural gas to remain so for the foreseeable future and accordingly expect

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both our propane costs and our selling prices to remain at higher levels. Retail sales generate significantly higher margins than wholesale sales, and sales to residential customers generally generate higher margins than sales to Inergy’s other retail customers.

Inergy believes its wholesale supply, marketing and distribution business complements its retail distribution business. Through Inergy’s wholesale operations, it distributes propane and also offers price risk management services to propane retailers, resellers and other related businesses as well as energy marketers and dealers, through a variety of financial and other instruments, including:

• forward contracts involving the physical delivery of propane;

• swap agreements which require payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for propane; and

• options, futures contracts on the New York Mercantile Exchange and other contractual arrangements.

Inergy engages in derivative transactions to reduce the effect of price volatility on its product costs and to help ensure the availability of propane during periods of short supply. Inergy attempts to balance its contractual portfolio by purchasing volumes only when it has a matching purchase commitment from its wholesale customers. However, Inergy may experience net unbalanced positions from time to time.

Results of Operations

The results of operations discussed below principally reflect the activities of Inergy. Because our financial statements represent the consolidated results of Inergy, our financial statements are substantially similar to Inergy’s. The primary differences in our financial statements include the following amounts in the income statement:

• Provision for Income Taxes. Our provision for income taxes is primarily related to cash flows received by certain of our wholly owned corporate subsidiaries.

• Interest of non-controlling partners in Inergy’s net (income) loss. We adjust our net income by excluding the cash flows distributed on Inergy limited partner units that are not directly or indirectly owned by us. At September 30, 2005, we owned an approximate 9.5% limited partner interest in Inergy together with a 1.2% non-managing general partner interest; and the non-affiliated unitholders owned an 89.3% limited partner interest in Inergy.

Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004

Volume. During fiscal 2005, Inergy sold 318.4 million retail gallons of propane, an increase of 177.7 million gallons, or 126%, from the 140.7 million retail gallons sold in fiscal 2004. The increase in retail sales volume was principally due to the December 2004 acquisition of Star Gas and 5 other retail propane companies acquired by Inergy in fiscal 2005, which combined resulted in a 197.5 million gallon increase. This increase was partially offset by an approximate 19.8 million gallon decline in comparable sales which Inergy believes is due primarily to a combination of warmer weather and conservation by Inergy’s customers due to an approximate 24% higher propane cost in our retail operations (excluding the $19.4 million non-cash gain on derivative contracts discussed below) to $0.93 per gallon on average in 2005 compared with $0.75 per gallon in 2004. Inergy’s retail gallon sales will not fluctuate from year to year on a linear basis with the change in weather in our areas of operations. Reasons for this include comparability of geographic areas in which Inergy operates and varying uses of propane (i.e. space heating, cooking and other applications), among others. Although the weather was only approximately 1% warmer in fiscal 2005 as compared to fiscal 2004 (and approximately 6% warmer than normal) in Inergy’s retail areas of operations, we experienced erratic weather during the winter months of fiscal 2005 including the months of January and February of 2005 being approximately 12% and 15% warmer, respectively, than the same months of 2004 while the month of March 2005 was 28% colder than the month of March 2004.

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Wholesale gallons delivered increased 23.0 million gallons, or 6%, to 391.3 million gallons in fiscal 2005 from 368.3 million gallons in fiscal 2004. This increase was primarily attributable to acquisition-related volume, which accounted for 13.2 million gallons of this increase. Additionally, increased sales volumes to new and existing customers, partially offset by the warmer weather in 2005 in Inergy’s wholesale areas of operations, accounted for a net increase of 9.8 million gallons.

The fractionation and throughput gallons of NGLs in Inergy’s NGL business located in Bakersfield, CA increased 40.1 million gallons, or 35%, to 154.9 million gallons in fiscal 2005 from 114.8 million gallons in fiscal 2004. These increases were all primarily attributable to increased sales volumes to new and existing customers. From August 9, 2005, the date of the Stagecoach acquisition, the 13.6 Bcf of working gas capacity at Stagecoach was 85% contracted on average during that period.

Revenues. Revenues in fiscal 2005 were $1.05 billion, an increase of approximately $567.5 million, or 118%, from $482.5 million in fiscal 2004.

Revenues from retail propane sales were $526.5 million in fiscal 2005, an increase of $330.2 million, or 168%, from $196.3 million in fiscal 2004. This increase was primarily the result of $327.9 million of sales related to the Star Gas acquisition and other acquisitions together with an increase of approximately $36.4 million due to higher selling prices of propane due to the higher cost of propane in 2005 at Inergy. These increases were partially offset by a $34.1 million decline in revenues as a result of lower retail volume sales at Inergy’s existing locations as discussed above.

Revenues from wholesale propane sales were $325.1 million in fiscal 2005, an increase of $90.2 million or 38%, from $234.9 million in fiscal 2004. Approximately $71.1 million of this increase was attributable to the higher cost of propane, approximately $14.7 million was attributable to acquisition-related volume, and $4.4 million was attributable to volume increases generated in Inergy’s wholesale propane operations. The higher selling price in Inergy’s wholesale division in 2005 compared to 2004 is the result of the higher cost of propane.

Revenues from other retail sales, primarily service, appliance, transportation, and distillates, were $121.5 million in fiscal 2005, an increase of $99.7 million or 457% from $21.8 million in fiscal 2004. This increase was primarily due to Inergy’s acquisition of Star Gas, which contributed approximately $90.2 million of this increase.

Revenues from storage, fractionation and other midstream activities were $77.0 million in fiscal 2005, an increase of $47.5 million or 161% from $29.5 million in fiscal 2004. Approximately $43.7 million of this increase was due to increased volumes and sales prices of natural gas, butane, and isobutane at Inergy’s West Coast operations. Approximately $3.8 million of this increase was due to Inergy’s acquisition of the Stagecoach natural gas storage facility.

Cost of Product Sold. Retail propane cost of product sold in fiscal 2005 was $275.3 million, an increase of $170.2 million or 162%, from $105.1 million in fiscal 2004. Approximately $25.2 million of this increase was attributable to the higher average cost of propane (excluding the non-cash gain on derivative contracts discussed below) in Inergy’s retail division and a net additional increase of approximately $164.4 million as a result of retail propane acquisition-related volume described above in excess of the lesser volumes from Inergy’s existing locations. These increases were offset by a non-cash gain on derivative contracts of $19.4 million which will reverse in the first two quarters of fiscal 2006 as the physical gallons are delivered to retail customers.

Wholesale propane cost of product sold in fiscal 2005 was $317.8 million, an increase of $88.7 million or 39%, from wholesale cost of product sold of $229.1 million in 2004. Approximately $70.0 million of this increase was a result of the higher average cost of product, approximately $14.4 million of this increase was a result of Inergy’s acquisition-related volume, and approximately $4.3 million of this increase was the result of higher volumes experienced in Inergy’s wholesale propane areas of operations.

Other retail cost of product was $71.8 million, an increase of $64.7 million, from other retail cost of product of $7.1 million in fiscal 2004. This increase was primarily due to Inergy’s acquisition-related volume.

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Fractionation, storage, and other midstream cost of product sold was $59.3 million, an increase of $41.5 million, or 234%, from $17.8 million in fiscal 2004. Approximately $40.8 million of this increase was due to higher volumes and cost of natural gas, butane, and isobutane at Inergy’s west coast NGL operations, and approximately $0.7 million was due to acquisition-related volume from Inergy’s Stagecoach natural gas storage facility.

Inergy’s retail cost of product sold consists primarily of tangible products sold including all propane, distillates and other natural gas liquids sold and all propane-related appliances sold. Other costs incurred in conjunction with the distribution of these products are included in operating and administrative expenses and consist primarily of wages to delivery personnel and delivery vehicle costs consisting of fuel costs, repair and maintenance and lease expense. These costs approximated $45.6 million and $23.5 million in 2005 and 2004, respectively. In addition, the depreciation expense associated with the delivery vehicles is reported within depreciation and amortization expense and amounted to $10.8 million and $4.7 million in 2005 and 2004, respectively. Since Inergy includes these costs in its operating and administrative expenses rather than in cost of product sold, our results may not be comparable to other entities in our lines of business if they include these costs in cost of product sold.

Gross Profit. Retail propane gross profit was $251.2 million in fiscal 2005 compared to $91.2 million in fiscal 2004, an increase of $160.0 million, or 175%. This increase was primarily attributable to an increase in retail gallons sold primarily as a result of acquisitions at Inergy, which accounted for approximately $142.8 million, an increase attributable to a non-cash gain of $19.4 million on derivative contracts discussed above, as well as an increase in margin per gallon, which resulted in an increase of approximately $11.3 million. These increases were partially offset by lower retail propane gross profit of approximately $13.5 million at Inergy’s existing locations as a result of lower volume sales discussed above. The increase in margin per gallon is primarily the result of Inergy’s ability to increase its selling prices in certain markets in excess of its increased cost of propane.

Wholesale propane gross profit was $7.3 million in fiscal 2005 compared to $5.8 million in fiscal 2004, an increase of $1.5 million or 26%. Approximately $1.1 million of this increase was a result of increased margin per gallon from Inergy’s existing business with the balance of the increase attributable to acquisition-related volume and increased wholesale volumes from Inergy’s existing business.

Other retail gross profit was $49.7 million in fiscal 2005 compared to $14.7 million in fiscal 2004, an increase of $35.0 million, or 238%. This increase was due primarily to Inergy’s acquisition-related volume.

Fractionation, storage, and other midstream gross profit was $17.7 million in fiscal 2005 compared to $11.7 million in fiscal 2004, an increase of $6.0 million, or 51%. This increase was due primarily to acquisition-related volume of $3.2 million and $2.8 million due to increased volumes and margins to existing customers at Inergy.

Operating and Administrative Expenses. Operating and administrative expenses increased $116.2 million, or 143%, to $197.6 million in fiscal 2005 as compared to $81.4 million in fiscal 2004. The increase in our operating and administrative expenses were primarily attributable to Inergy’s acquisition-related costs, including increases in personnel expenses of $70.6 million, general operating expenses of $33.0 million including insurance, professional services and facility costs, and increased vehicle costs of $12.6 million.

Depreciation and Amortization. Depreciation and amortization increased $29.3 million, or 139%, to $50.4 million in fiscal 2005 from $21.1 million in fiscal 2004 as a result of Inergy’s retail propane acquisitions and the acquisition of the Stagecoach natural gas storage facility.

Interest Expense. Interest expense increased $28.2 million, or 357%, to $36.1 million in fiscal 2005 as compared to $7.9 million in fiscal 2004. Interest expense increased primarily due to an increase of $392.1 million in average debt outstanding in 2005 compared to 2004 primarily as a result of net borrowings for acquisitions at Inergy, and an approximate 1.4% higher average interest rate in 2005 compared to 2004.

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Interest Expense and Income related to Make Whole Premium Charge, Write-off of Deferred Financing Costs, and Swap Value Received. During the fiscal year ended September 30, 2005, a charge of $7.6 million was recorded as a result of the write-off of deferred financing costs associated with the repayment of both our and Inergy’s previously existing credit agreements and Inergy’s 364-day facility. During the fiscal year ended September 30, 2004, Inergy repaid in full its $85.0 million senior secured notes before their scheduled maturity dates. As such, Inergy was required to pay an additional amount of approximately $17.9 million as a make whole payment, which was recorded as a charge to earnings in the quarter ended March 31, 2004. Inergy used proceeds from its January 2004 common unit offering and borrowings from its bank credit facility for this repayment. In addition, Inergy also recorded a charge to earnings of approximately $1.2 million in the quarter ended March 31, 2004, to write-off deferred financing costs associated with the senior secured notes. Partially offsetting these charges was a $0.9 million gain from the cancellation of interest rate swap agreements also associated with Inergy’s senior secured notes.

Provision for Income Taxes. The provision for income taxes is primarily related to certain of our corporate subsidiaries. The provision for income taxes increased to $0.5 million in the year ended September 30, 2005 from $0.2 million in 2004. The provision for income taxes of $0.5 million in the year ended September 30, 2005 is composed of $1.3 million of current income tax and a deferred income tax benefit of $0.8 million. The 2004 provision for income taxes of $0.2 million is composed of $1.8 million of current income tax expense partially offset by $1.6 million of deferred income tax benefit.

Interest of Non-controlling Partners in Inergy’s Net (Income) Loss. We recorded an expense of $26.8 million in the year ended September 30, 2005, as compared to income of $4.8 million in 2004 associated with the interests of non-controlling partners in Inergy. The $31.6 million increase in expense is primarily the result of higher net income reported by Inergy of $38.6 million in the year ended September 30, 2005 as compared to a loss of $4.6 million in 2004.

Net Income. Net income increased to $8.3 million for the year ended September 30, 2005 from $0.1 million in 2004. The increase in net income was primarily attributable to increases in Inergy’s retail and wholesale gross profit, partially offset by increases in operating and administrative expenses, depreciation and amortization, and interest expense, all primarily the result of acquisitions, and by higher expenses reported for the interest in non-controlling partners in Inergy’s net income and the provision for income taxes.

Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003

Volume. During fiscal 2004, Inergy sold 140.7 million retail gallons of propane, an increase of 21.0 million gallons, or 18%, from the 119.7 million retail gallons sold in fiscal 2003. The increase in retail sales volume was principally due to the acquisition of sixteen retail propane companies acquired in fiscal 2004, which combined resulted in a 35.2 million gallon increase. This increase was partially offset by an approximate 14.2 million gallon decline in sales due to a combination of warmer weather and conservation by Inergy’s customers due to an approximate 14% higher propane cost in its retail operations to $0.75 per gallon on average in 2004 compared with $0.66 in 2003. The weather was approximately 12% warmer in fiscal 2004 as compared to fiscal 2003 in Inergy’s retail areas of operations, and approximately 6% warmer than normal.

Inergy’s wholesale gallons delivered increased 83.6 million gallons, or 29%, to 368.3 million gallons in fiscal 2004 from 284.7 million gallons in fiscal 2003. This increase was primarily attributable to a net increase of 47.2 million gallons in Inergy’s sales volumes in its existing operations partially offset by the warmer weather in 2004 in Inergy’s wholesale areas of operations. The remaining balance of the increase of 36.4 million gallons was attributable to acquisition-related volume increases in wholesale sales volumes through Inergy’s NGL business in Bakersfield, California acquired in fiscal 2004.

The fractionation and throughput gallons of NGLs in Inergy’s Bakersfield operations were 114.8 million gallons in fiscal 2004. There were no related sales in fiscal 2003

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Revenues. Revenues in fiscal 2004 were $482.5 million, an increase of approximately $119.1 million, or 33%, from $363.4 million in fiscal 2003.

Revenues from retail propane sales were $196.3 million in fiscal 2004, an increase of $42.9 million, or 28%, from $153.4 million in fiscal 2003. This increase was primarily the result of $47.5 million of sales related to Inergy’s sixteen retail propane acquisitions together with an increase of approximately $13.6 million due to higher selling prices of propane due to the higher cost of propane in 2004. These increases were partially offset by an $18.2 million decline in revenues as a result of lower retail volume sales at Inergy’s existing locations as discussed above and warmer weather in its retail propane areas of operations.

Revenues from wholesale propane sales were $234.9 million in fiscal 2004, an increase of $44.7 million or 24%, from $190.2 million in fiscal 2003. Approximately $28.0 million of this increase was attributable to volume increases from Inergy’s wholesale propane operations, and a $25.3 million increase related to the acquisition of Inergy’s NGL business in California. These increases were partially offset by an $8.6 million decline in revenues arising from a lower per gallon selling price of propane in Inergy’s wholesale division due to the lower cost of propane in addition to competitive pressure in certain markets.

Revenues from other retail sales, primarily service, appliance, transportation, and distillates, were $21.8 million in fiscal 2004, an increase of $2.0 million or 10% from $19.8 million in fiscal 2003. This increase was primarily due to acquisition-related growth at Inergy offset by lower comparable sales to new and existing customers at its existing locations as discussed above.

Revenues from storage, fractionation and other midstream activities were $29.5 million in fiscal 2004. This increase was due to the fiscal 2004 acquisition of Inergy’s NGL business in California.

Cost of Product Sold. Retail propane cost of product sold in fiscal 2004 was $105.1 million, an increase of $26.1 million or 33%, from $79.0 million in fiscal 2003. Approximately $10.4 million of this increase was attributable to the higher average cost of propane in Inergy’s retail division and a net additional increase of approximately $15.7 million as a result of retail propane acquisition-related volume described above in excess of the lesser volumes from Inergy’s existing locations.

Wholesale propane cost of product sold in fiscal 2004 was $229.1 million, an increase of $49.1 million or 27%, from wholesale cost of product sold of $180.0 million in 2003. Approximately $23.9 million of this increase was a result of the acquisition-related volume as a result of the acquisition of Inergy’s NGL business in California, and an increase of $28.1 million the result of higher volumes experienced in its wholesale propane areas of operations. These increases were partially offset by an average lower cost of product in Inergy’s wholesale division resulting in an approximate $2.9 million decrease in costs.

Other retail cost of product was $7.1 million, a decrease of $0.9 million, from other retail cost of product of $8.0 million in fiscal 2004. This net decrease was the result of acquisition-related volume, offset by lower volume sales to existing customers.

Fractionation, storage, and other midstream cost of product sold was $17.8 million, due to acquisition-related volume from Inergy’s NGL business in California. There were no such costs during fiscal 2003.

Inergy’s retail cost of product sold consists primarily of tangible products sold including all propane, distillates and other natural gas liquids sold and all propane-related appliances sold. Other costs incurred in conjunction with the distribution of these products are included in operating and administrative expenses and consist primarily of wages to delivery personnel and delivery vehicle costs consisting of fuel costs, repair and maintenance and lease expense. These costs approximated $23.5 million and $17.2 million in 2004 and 2003, respectively. In addition, the depreciation expense associated with the delivery vehicles is reported within depreciation and amortization expense and amounted to $4.7 million and $3.6 million in 2004 and 2003,

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respectively. Since Inergy includes these costs in its operating and administrative expenses rather than in cost of product sold, Inergy’s results may not be comparable to other entities in its lines of business if they include these costs in cost of product sold.

Gross Profit. Retail propane gross profit was $91.2 million in fiscal 2004 compared to $74.4 million in fiscal 2003, an increase of $16.8 million, or 23%. This increase was primarily attributable to an increase in Inergy’s retail gallons sold primarily as a result of acquisitions, which accounted for approximately $21.0 million, as well as an increase in margin per gallon, which resulted in an increase of approximately $3.2 million. These increases were partially offset by lower retail propane gross profit of approximately $7.4 million at Inergy’s existing locations as a result of lower volume sales and the deferral of purchases by its customers due to higher cost of propane in 2004 as compared to 2003 as discussed above. The increase in margin per gallon is primarily the result of Inergy’s ability to increase its selling prices in certain markets in excess of Inergy’s increased cost of propane.

Wholesale propane gross profit was $5.8 million in fiscal 2004 compared to $10.2 million in fiscal 2003, a decrease of $4.4 million or 43%. Approximately $5.7 million of this decrease was a result of decreased margin per gallon from Inergy’s existing business, offset by an increase of $1.3 million attributable to acquisition-related volume.

Other retail gross profit was $14.7 million in fiscal 2004 compared to $11.8 million in fiscal 2003, an increase of $2.9 million, or 26%. This increase was due primarily to Inergy’s acquisition-related volume.

Fractionation, storage, and other midstream gross profit was $11.7 million in fiscal 2004. This increase was due primarily to acquisition-related volume of Inergy’s NGL business in California.

Operating and Administrative Expenses. Operating and administrative expenses increased $22.0 million, or 37%, to $81.4 million in fiscal 2004 as compared to $59.4 million in fiscal 2003. The increase in Inergy’s operating and administrative expenses were primarily attributable to acquisition-related costs, including increases in personnel expenses of $13.4 million, general operating expenses of $5.9 million, including insurance, professional services and facility costs, and increased vehicle costs of $2.7 million.

Depreciation and Amortization. Depreciation and amortization increased $7.3 million, or 52%, to $21.1 million in fiscal 2004 from $13.8 million in fiscal 2003 as a result of retail propane acquisitions as well as the acquisition of Inergy’s NGL business in California in October of 2003.

Interest Expense. Interest expense decreased $2.0 million, or 20%, to $7.9 million in fiscal 2004 as compared to $9.9 million in fiscal 2003. Interest expense decreased primarily due to an approximate 2.14% lower average interest rate in 2004 compared to 2003, partially offset by an approximate $6.7 million increase in the average debt outstanding in 2004 compared to 2003 primarily as a result of net borrowings for acquisitions exceeding the utilization of net proceeds from Inergy’s common unit offerings for debt repayment.

Interest Expense and Income related to Make-Whole Premium Charge, Write-off of Deferred Financing Costs, and Swap Value Received. During the fiscal year ended September 30, 2004, Inergy repaid in full its $85.0 million senior secured notes before their scheduled maturity dates. As such, Inergy was required to pay an additional amount of approximately $17.9 million as a make-whole payment, which was recorded as a charge to earnings in the quarter ended March 31, 2004. Inergy used proceeds from its January 2004 common unit offering and borrowings from its bank credit facility for this repayment. In addition, Inergy also recorded a charge to earnings of approximately $1.2 million to write off deferred financing costs associated with the senior secured notes. Partially offsetting these charges was a $0.9 million gain from the cancellation of interest rate swap agreements also associated with the senior secured notes.

Provision for Income Taxes. Our provision for income taxes is primarily related to certain of our corporate subsidiaries. The 2004 provision for income taxes of $0.2 million is composed of $1.8 million of current income

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tax partially offset by a $1.6 million deferred income tax benefit. The 2003 provision for income taxes of $0.4 million is composed of $0.5 million of current income tax expense and $0.1 million of deferred income tax benefit.

Interest of Non-Controlling Partners in Inergy’s Net (Income) Loss. We recorded a gain of $4.8 million in 2004 and an expense of $10.0 million in 2003 associated with the interests of non-controlling partners in Inergy. The 2004 gain is recognized by us since Inergy incurred a net loss of $4.6 million in 2004, while the 2003 expense recognized as a result of Inergy’s net income of $13.5 million in 2003.

Net Income (Loss). Net income in 2004 was $0.1 million compared to net income of $3.0 million in fiscal 2003. The decrease in net income was partially the result of an increase in operating expenses of $22.0 million and an increase in interest expense of $16.2 million, driven primarily by the increased interest expense resulting from the make whole premium charge discussed above. Also contributing was higher depreciation and amortization expenses which increased $7.3 million to $21.1 million in fiscal 2004 from $13.8 million in fiscal 2003. These factors contributing to lower net income were partially offset by an increase of $14.8 million in the interests in non-controlling partners in Inergy’s net (income) loss to $4.8 million in fiscal 2004 from $(10.0) million in fiscal 2003, as a result of Inergy reporting a net loss in 2004 versus net income in 2003, as well as higher gross profit.

Liquidity and Sources of Capital

In June 2005, we issued 3,910,000 common units of Inergy Holdings, L.P. in our initial public offering for net proceeds of $80.0 million. The proceeds were used to repay borrowings under our credit agreement.

In December 2004, Inergy issued 3,568,139 Inergy Common Units to unrelated third parties resulting in proceeds of $91.0 million. These proceeds were utilized to partially fund the acquisition of Star Gas.

Also in December 2004, Inergy issued 4,400,000 Inergy Common Units in a public offering, resulting in proceeds of $121.3 million, net of underwriter’s discount, commission, and offering expenses. These funds were used to repay borrowings under Inergy’s credit agreement.

In January 2005, the underwriters of Inergy’s December 2004 Inergy Common Unit offering exercised their over-allotment provision and Inergy issued 660,000 Inergy Common Units in a follow-on offering, resulting in proceeds of approximately $17.9 million, net of underwriters’ discounts, commissions, and offering expenses. These funds were used to repay borrowings under Inergy’s credit agreement.

In September 2005, Inergy issued 6,500,000 Inergy Common Units to unrelated third parties resulting in net proceeds after underwriters’ discounts, commissions, and offering expenses of $180.4 million. These proceeds were obtained to repay borrowings under Inergy’s credit agreement which were incurred to make certain acquisitions, including the acquisition of the Stagecoach natural gas storage facility.

Cash flows provided by operating activities of $84.2 million in fiscal 2005 consisted primarily of the following: net income of $8.3 million; net non-cash charges of $78.6 million relating to the interest of non-controlling partners in Inergy’s net income of $26.8 million, depreciation and amortization of $50.4 million, a $(10.0) million net change from price risk management activities, $7.6 million in write-offs of deferred financing costs related to the repayment of both our and Inergy’s previously existing credit agreements, $(0.8) million in deferred income taxes, and $4.6 million of other non-cash charges; and a decrease in cash flows of $2.7 million associated with the changes in operating assets and liabilities. Net cash used related to changes in operating assets and liabilities was primarily due to the increase in accounts receivable and inventories due to acquisition-related growth and the seasonal nature of the business and increased wholesale inventory volumes. These declines were partially offset by cash provided from an increase in customer deposits as a result of acquisition-related activity, an increase in accounts payable due to greater propane purchases due to increased size and an increase in accrued expenses due to acquisition-related growth.

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Cash flows provided by operating activities of $31.1 million in fiscal 2004 consisted primarily of the following: net income of $0.1 million; net non-cash charges of $45.6 million principally relating to depreciation and amortization of $21.1 million, interest expense related to make whole premium charge of $17.9 million associated with the early repayment of Inergy’s senior secured notes, a net change from price risk management activities of $9.7 million, $(4.8) million of the interest of non-controlling partners in Inergy’s net loss and $1.7 million of other non-cash charges; and a decrease in cash flows of $14.6 million associated with the changes in operating assets and liabilities. The cash used related to changes in operating assets and liabilities was primarily due to an increase in propane inventory as a result of building inventory for the peak heating season and an increase in accounts receivable due to acquisition-related growth, the seasonal nature of the business and increased wholesale volumes, offset by an increase in accounts payable due to propane purchases.

Cash used in investing activities was $840.8 million in fiscal 2005 as compared to $97.8 million in fiscal 2004. Fiscal 2005 investing activities included a use of cash of $810.2 million, net of cash acquired, for Inergy’s acquisition of six retail propane companies and its natural gas storage facility. Fiscal 2004 investing activities included a use of cash of $85.2 million, net of cash acquired, for Inergy’s acquisition of sixteen retail propane companies and its NGL business in California. Additionally, in fiscal 2005 and 2004, we expended $34.1 million and $14.5 million, respectively, for additions of property, plant and equipment to accommodate our growing operations. Deferred acquisition costs of $0.6 million and $0.9 million were incurred in fiscal 2005 and 2004, respectively, related to costs incurred for prospective acquisitions. Proceeds from sale of property, plant and equipment of $4.1 million and $2.3 million were received in fiscal 2005 and 2004, respectively.

Cash provided by financing activities was $763.8 million in fiscal 2005 and $63.1 million in fiscal 2004. Cash provided by financing activities in fiscal 2005 and fiscal 2004 included net borrowings of $413.3 million and $20.8 million, respectively, under debt agreements, including borrowings and repayments of revolving working capital facilities and Inergy’s acquisition credit facility and the issuance of Inergy’s senior unsecured notes. In addition, net proceeds of approximately $80.0 million were received from the issuance of our common units in our initial public offering in 2005 and approximately $410.6 million and $113.2 million was provided through the issuance of Inergy Common Units in fiscal 2005 and 2004, respectively. Member contributions of $5.6 million in 2005 and $1.5 million in 2004 were received by us from owners prior to our initial public offering. Offsetting these cash sources were $51.9 million and $29.5 million of distributions paid to non-controlling partners of Inergy in fiscal 2005 and fiscal 2004, respectively, as well as $63.4 million and $21.5 million in distributions to our partners in fiscal 2005 and fiscal 2004, respectively. Deferred financing costs of $24.3 million and $0.2 million were incurred in fiscal 2005 and fiscal 2004, respectively, related to debt incurred to complete the acquisitions. Purchases of subordinated units of Inergy from third parties in fiscal 2005 and fiscal 2004 were $3.1 million and $1.0 million, respectively, and redemption of member interests in fiscal 2005 and fiscal 2004 were $3.0 million and $2.3 million, respectively. Additionally, the early repayment of Inergy’s senior secured notes in fiscal 2004 resulted in interest expense related to make whole premium payment to the lenders in the amount of $17.9 million.

At September 30, 2005 and 2004, we had goodwill of $256.6 million and $82.9 million, representing approximately 17% and 16% of total assets at each period, respectively. This goodwill is primarily attributable to Inergy’s acquisitions. Inergy expects recovery of the goodwill through future cash flows associated with these acquisitions.

At September 30, 2005, we were in compliance with all debt covenants to our credit facilities.

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The following table summarizes our long-term debt and operating lease obligations as of September 30, 2005, in thousands of dollars:

	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Aggregate amount of principal and interest to be paid on the outstanding long-term debt(a)	$	907,511	$	47,743	$	110,417	$	191,731	$	557,620
Future minimum lease payments under noncancelable operating leases		18,576		5,751		8,247		2,749		1,829
Fixed price purchase commitments		232,385		231,253		1,132		—		—
Standby letters of credit		22,007		21,307		700		—		—

^(a) $254.9 million of our long-term debt is variable interest rate debt at prime rate or LIBOR plus an applicable spread. These rates plus their applicable spreads were between 5.48% and 7.75% at September 30, 2005. These rates have been applied for each period presented in the table.

In addition to its fixed price purchase commitments, Inergy also had forward purchase energy contracts. As of September 30, 2005, Inergy’s total energy contracts had an outstanding net fair value of $8.8 million, as compared to a net fair value of $(6.6) million as of September 30, 2004. The net change of $15.4 million includes a net decrease in fair value of $4.7 million from energy contracts settled during the 2005 fiscal year period, an increase of $1.9 million from contracts acquired during fiscal year 2005, and a net increase of $18.2 million from other changes in fair value related to net unrealized gains on energy contracts still outstanding at the end of fiscal 2005. Of the outstanding fair value as of September 30, 2005, all energy contracts mature within fifteen months. In addition, at September 30, 2005, Inergy has committed to purchase approximately 70 million gallons of propane at future dates at the prevailing market price.

On September 28, 2004, Inergy’s shelf registration statement (File No. 333-118941) was declared effective by the SEC for the periodic sale of up to $625 million of Inergy Common Units, other partnership securities of Inergy and debt securities of Inergy, or any combination thereof. Pursuant to the shelf registration statement, Inergy is permitted to issue these securities from time to time for general business purposes, including debt repayment, future acquisitions, capital expenditures, and working capital, or for other potential purposes identified in a prospectus supplement. In December 2004 Inergy issued 5,060,000 Inergy Common Units and in separate transactions issued an additional 3,568,139 Inergy Common Units, representing limited partnership securities under the shelf registration statement. In addition in September 2005, Inergy issued 6,500,000 Inergy Common Units representing limited partnership securities under the shelf registration statement. There is approximately $189 million remaining available under this shelf. No further partnership securities or debt securities have been offered under the shelf registration except as described above.

We believe that anticipated cash from operations and borrowings under the credit facilities described below will be sufficient to meet our liquidity needs for the foreseeable future. If our plans or assumptions change or are inaccurate, or we make any acquisitions, we may need to raise additional capital. We may not be able to raise additional funds or may not be able to raise such funds on favorable terms.

Description of Credit Facility

On August 9, 2005, we entered into a $25 million term loan with a bank (“Term Loan”). The maturity date of the Term Loan is August 9, 2008, and is collateralized by certain of our interests in Inergy, L.P. In addition, the Term Loan is guaranteed by IPCH Acquisition Corp. and New Inergy Propane, LLC. The proceeds from this loan were used to acquire 769,941 special units in Inergy, L.P. in connection with the acquisition of the rights to the Phase II expansion project of the Stagecoach acquisition. The Term Loan contains several covenants which, among other things, require the maintenance of various financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions.

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On July 22, 2005, we executed a credit agreement (“Bank Facility”) with a bank. The Bank Facility consists of a $15 million working capital revolver for Inergy Holdings, L.P. and a $5 million working capital revolver for IPCH Acquisition Corp. The maturity date of the Bank Facility is July 22, 2008, and is collateralized by certain of our interests in Inergy, L.P. In addition, the Bank Facility is guaranteed by New Inergy Propane, LLC. The prime rate and LIBOR plus the applicable spreads were between 5.48% and 5.59% at September 30, 2005, for all outstanding debt under the Bank Facility. The Bank Facility contains several covenants which, among other things, require the maintenance of various financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions.

On April 28, 2005, we entered into a $69.0 million term loan with a bank. The maturity date of this term loan was December 31, 2005 and was collateralized by all of our interests in Inergy. In addition, this term loan was guaranteed by each of our wholly-owned subsidiaries. Borrowings under this term loan bore interest at our option at a floating rate equal to either the prime rate plus 1.50% or LIBOR (preadjusted for reserves) plus 2.50%. Borrowings under this term loan were used to refinance the credit agreement described below, to repurchase certain interests from our partners and to make distributions to our pre-initial public offering owners. On June 24, 2005, a portion of the proceeds from our 3,910,000 common unit initial public offering was used to repay all amounts borrowed under this term loan and this term loan was terminated.

Effective August 30, 2004, we executed a credit agreement with a bank. The credit agreement consisted of a $15 million term loan and a $5 million working capital revolver and had an original expiration of August 30, 2009. The obligation under the credit agreement was secured by certain common units, senior subordinated units and junior subordinated units in Inergy, L.P. held by us and our wholly owned subsidiaries. The credit agreement was also guaranteed by IPCH Acquisition Corp. and New Inergy Propane, LLC. On April 28, 2005, we retired all outstanding indebtedness on the credit agreement using the proceeds from the Term Loan.

On December 17, 2004, Inergy entered into a 5-Year Credit Agreement (the “5-Year Credit Agreement”) with its existing lenders in addition to others. The 5-Year Credit Agreement consists of a $75 million revolving working capital facility and a $350 million revolving acquisition facility. The 5-Year Credit Agreement expires in December 2009 and carries terms, conditions and covenants substantially similar to the previous credit agreement. The 5-Year Credit Agreement is secured by a first priority lien on substantially all of Inergy’s assets and those of its domestic subsidiaries and the pledge of all of the equity interests or membership interests in its domestic subsidiaries. In addition, the 5-Year Credit Agreement is guaranteed by each of Inergy’s domestic subsidiaries. The 5-Year Credit Agreement accrues interest at either prime rate or LIBOR plus applicable spreads, resulting in interest rates between 6.19% and 7.75% at September 30, 2005. At September 30, 2005, borrowings outstanding under the 5-Year Credit Agreement were $126.8 million, including $20 million under the revolving working capital facility. Of the outstanding credit facility balance of $126.8 million, $111.8 million is classified as long-term in the accompanying 2005 consolidated balance sheet. At November 1, 2005, the borrowings outstanding under the 5-Year Credit Agreement were $299.2 million, including $41.6 million under the revolving working capital facility.

During each fiscal year beginning October 1, the outstanding balance of the revolving working capital facility in the 5-Year Credit Agreement must be reduced to $5.0 million or less for a minimum of 30 consecutive days during the period commencing March 1 and ending September 30 of each calendar year.

At Inergy’s option, loans under the 5-Year Credit Agreement bear interest at either the prime rate or LIBOR (preadjusted for reserves), plus, in each case, an applicable margin. The applicable margin varies quarterly based on its leverage ratio. Inergy also pays a fee based on the average daily unused commitments under the 5-Year Credit Agreement.

Inergy is required to use 50% of the net cash proceeds (that are not applied to purchase replacement assets) from asset dispositions (other than the sale of inventory and motor vehicles in the ordinary course of business, sales of assets among Inergy and its domestic subsidiaries, and the sale or disposition of obsolete or worn-out

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equipment) to reduce borrowings under the 5-Year Credit Agreement during any fiscal year in which unapplied net cash proceeds are in excess of $50 million. Any such mandatory prepayments are first applied to reduce borrowings under the revolving acquisition facility and then under the revolving working capital facility.

In addition, the 5-Year Credit Agreement contains various covenants limiting the ability of Inergy and its subsidiaries to (subject to various exceptions), among other things:

• grant or incur liens;

• incur other indebtedness (other than permitted debt as defined in the 5-Year Credit Agreement);

• make investments, loans and acquisitions;

• enter into a merger, consolidation or sale of assets;

• enter into in any sale-leaseback transaction or enter into any new business;

• enter into any agreement that conflicts with the credit facility or ancillary agreements;

• make any change in its principles and methods of accounting as currently in effect, except as such changes are permitted by GAAP;

• enter into certain affiliate transactions;

• pay dividends or make distributions if we are in default under the credit agreement or in excess of available cash;

• permit operating lease obligations to exceed $20 million in any fiscal year;

• enter into any debt (other than permitted junior debt) that contains covenants more restrictive than those of the 5-Year Credit Agreement or enter into any permitted junior debt that contains negative covenants more restrictive than those of the 5-Year Credit Agreement;

• enter into hedge agreements that do not hedge or mitigate risks to which Inergy or its subsidiaries have actual exposure;

• enter into put agreements granting put rights with respect to equity interests of Inergy or its subsidiaries;

• prepay, redeem, defease or otherwise acquire any permitted junior debt or make certain amendments to permitted junior debt; and

• modify their respective organizational documents.

“Permitted junior debt” consists of:

• Inergy’s $425 million 6.875% senior notes due December 15, 2014 that were issued on December 22, 2004 (the “Senior Notes”);

• other debt that is substantially similar to the 6.875% senior notes; and

• other debt of Inergy and its subsidiaries that is either unsecured debt, or second lien debt that is subordinated to the obligations under the 5-Year Credit Agreement.

Permitted junior debt may be incurred under the 5-Year Credit Agreement so long as:

• there is no default under the 5-Year Credit Agreement;

• the ratio of Inergy’s total funded debt to consolidated EBITDA is less than 5.0 to 1.0 on a pro forma basis;

• the debt does not mature, and no installments of principal are due and payable on the debt, prior to the maturity date of the 5-Year Credit Agreement; and

• other than in connection with the 6.875% senior notes and other substantially similar debt, the debt does not contain covenants more restrictive than those in the 5-Year Credit Agreement.

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The 5-Year Credit Agreement contains the following financial covenants:

• the ratio of Inergy’s total funded debt (as defined in the Credit Agreement) to consolidated EBITDA (as defined in the 5-Year Credit Agreement) for the four fiscal quarters most recently ended must be no greater than 5.50 to 1.0 as of the end of the fiscal quarters ending December 31, 2004, March 31, 2005, June 30, 2005, and September 30, 2005 and no greater than 4.75 to 1.0 as of the end of each fiscal quarter thereafter.

• the ratio of Inergy’s senior secured funded debt (as defined in the 5-Year Credit Agreement) to consolidated EBITDA for the four fiscal quarters most recently ended determined as of the end of each fiscal quarter ending on and after December 31, 2005 for the period of four consecutive fiscal quarters ending with the end of such fiscal quarter must be no greater than 3.75 to 1.0.

• the ratio of Inergy’s consolidated EBITDA to consolidated interest expense (as defined in the 5-Year Credit Agreement), for the four fiscal quarters then most recently ended, must not be less than 2.5 to 1.0.

Each of the following is an event of default under the 5-Year Credit Agreement:

• default in payment of principal when due;

• default in payment of interest, fees or other amounts within three days of their due date;

• violation of specified affirmative and negative covenants;

• default in performance or observance of any term, covenant, condition or agreement contained in the credit facility or any ancillary document related to the 5-Year Credit Agreement for 30 days;

• specified cross-defaults;

• bankruptcy and other insolvency events of Inergy or its material subsidiaries;

• impairment of the enforceability or the validity of agreements relating to the 5-Year Credit Agreement;

• judgments exceeding $2.5 million (to the extent not covered by insurance) against Inergy or any of its subsidiaries are undischarged or unstayed for 30 consecutive days;

• certain defaults under ERISA that could reasonably be expected to result in a material adverse effect on Inergy; or

• the occurrence of certain change of control events with respect to Inergy.

On November 7, 2005, Inergy amended the 5-Year Credit Agreement with existing lenders to, among other changes, have the following impact to the credit provisions of the agreement:

• Lowered the applicable margin in the leverage-based pricing grid;

• Extended the maturity from December 17, 2009 to November 10, 2010;

• Increased to $75.0 million the effective amount of working capital borrowings available through the utilization of the acquisition revolver; and

• Other terms, conditions and covenants remained materially unchanged.

On January 11, 2006, Inergy, L.P. and its wholly owned subsidiary Inergy Finance Corporation issued $200 million aggregate principal amount of 8.25% senior unsecured notes due 2016 in a private placement to eligible purchasers. The senior unsecured notes contain covenants similar to Inergy’s existing senior unsecured notes due 2014. Inergy used the net proceeds of the offering to repay outstanding indebtedness under its revolving acquisition credit facility. The notes represent senior unsecured obligations of Inergy and rank pari passu in right of payment with all other present and future senior indebtedness of Inergy. The senior unsecured notes are jointly and severally guaranteed by all of Inergy’s current domestic subsidiaries. The notes have certain call features which allow Inergy to redeem the notes at specified prices based on date redeemed. In addition, on March 22, 2006, Inergy, L.P. and its wholly owned subsidiary, Inergy Finance Corporation, filed a registration statement on Form S-4 offering to exchange up to $200 million of the 8.25% senior unsecured notes due 2016 that have registered under the Securities Act of 1933 for an equal amount of the 8.25% senior unsecured notes due 2016 that have not been so registered. The registration statement on Form S-4 was declared effective by the SEC on April 12, 2006 and the exchange offer is currently ongoing.

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Senior Unsecured Notes

On December 22, 2004, Inergy and its wholly owned subsidiary, Inergy Finance Corp. (“Finance Corp.” and together with Inergy, the “Issuers”), completed a private placement of $425 million in aggregate principal amount of the Issuers’ 6.875% senior unsecured notes due 2014 (the “Senior Notes”). Inergy used the net proceeds from the $425 million private placement of Senior Notes to repay all amounts drawn under a 364-day credit facility, which was entered into in order to fund the acquisition of Star Gas and is no longer available to Inergy, with the $39.9 million remaining balance of the net proceeds being applied to the revolving acquisition credit facility.

The Senior Notes represent senior unsecured obligations of Inergy and rank pari passu in right of payment with all other present and future senior indebtedness of Inergy. The Senior Notes are effectively subordinated to all of Inergy’s secured indebtedness to the extent of the value of the assets securing the indebtedness and to all existing and future indebtedness and liabilities, including trade payables, of Inergy’s non-guarantor subsidiaries. The Senior Notes rank senior in right of payment to all of Inergy’s future subordinated indebtedness.

The Senior Notes are jointly and severally guaranteed by all of Inergy’s current domestic subsidiaries. The subsidiaries’ guarantees rank equally in right of payment with all of the existing and future senior indebtedness of our guarantor subsidiaries. The subsidiaries’ guarantees are effectively subordinated to all existing and future secured indebtedness of our guarantor subsidiaries to the extent of the value of the assets securing that indebtedness and to all existing and future indebtedness and other liabilities, including trade payables, of our non-guarantor subsidiaries (other than indebtedness and other liabilities owed to Inergy). The subsidiaries’ guarantees rank senior in right of payment to all of Inergy’s future subordinated indebtedness.

Before December 15, 2007, Inergy may, at any time or from time to time, redeem up to 35% of the aggregate principal amount of the Senior Notes with the net proceeds of a public or private equity offering at 106.875% of the principal amount of the Senior Notes, plus any accrued and unpaid interest, if at least 65% of the aggregate principal amount of the notes remains outstanding after such redemption and the redemption occurs within 120 days of the date of the closing of such equity offering.

The Senior Notes are redeemable, at Inergy’s option, in whole or in part, at any time on or after December 15, 2009, in each case at the redemption prices described in the table below, together with any accrued and unpaid interest to the date of the redemption.

Year	Percentage
2009	103.438	%
2010	102.292	%
2011	101.146	%
2012 and thereafter	100.000	%

On October 26, 2005, Inergy completed an offer to exchange its existing Senior Notes for $425 million of 6.875% senior notes due 2014 (the “Exchange Notes”) that are registered and do not carry transfer restrictions, registration rights and provisions for additional interest. The Exchange Notes did not provide us with any additional proceeds and satisfied Inergy’s obligations under the registration rights agreement.

On June 7, 2002, Inergy entered into a note purchase agreement with a group of institutional lenders pursuant to which it issued $85.0 million aggregate principal amount of senior secured notes with a weighted average interest rate of 9.07% and a weighted average maturity of 5.9 years. The funds from a public unit offering, together with net new borrowings under Inergy’s then-existing revolving credit facility were used to repay in full $85.0 million aggregate principal amount of senior secured notes, plus interest expense related to a make whole premium charge of approximately $17.9 million in January 2004. All interest rate swap agreements were cancelled in conjunction with the repayment of $85 million of senior secured notes. The interest expense

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related to the make whole premium charge of $17.9 million was recorded as a charge to earnings in the quarter ended March 31, 2004 together with the write-off of the $1.2 million deferred financing costs associated with the senior secured notes, partially offset by a $0.9 million gain from the cancellation of the interest rate swaps.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

A “modified retrospective” method, which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

On October 1, 2005, the Company adopted SFAS No. 123(R) using the modified-prospective method.

As permitted by SFAS No. 123, during the fiscal year ended September 30, 2005, the Company accounted for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The impact of adoption of SFAS No. 123(R) will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in footnotes to the consolidated financial statements. The adoption of SFAS No. 123(R)’s fair value method is not expected to have a significant impact on our results of operations or on our overall financial position.

SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, amends the existing standard that provides guidance on accounting for inventory costs and specifically clarifies that abnormal amounts of costs should be recognized as period costs. This statement is effective for the fiscal year beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material effect on the Company’s consolidated financial statements.

SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Further, the amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively. The adoption of SFAS No. 153 is not expected to have a material effect on the Company’s consolidated financial statements.

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SFAS No. 154, Accounting Changes and Error Corrections is a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 applies to all voluntary changes in accounting principle and changes the accounting for and a reporting of a change in accounting principle. Statement 154 requires retrospective application to the prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is effective for the accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies that the term conditional retirement obligation, as used in FASB Statement No. 143, Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing or method of settlement, or both, are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is required to be adopted by Inergy for the fiscal year ended September 30, 2006 and Inergy is currently assessing the impact on its financial statements.

Critical Accounting Policies

Accounting for Price Risk Management. Inergy utilizes certain derivative financial instruments to (i) manage its exposure to commodity price risk, specifically, the related change in the fair value of inventories, as well as the variability of cash flows related to forecasted transactions; (ii) to ensure adequate physical supply of commodity will be available; and (iii) manage its exposure to interest rate risk. Inergy records all derivative instruments on the balance sheet as either assets or liabilities measured at fair value under the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended. Changes in the fair value of these derivative financial instruments are recorded either through current earnings or as other comprehensive income, depending on the type of hedge transaction.

On the date the derivative contract is entered into, Inergy designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). Inergy documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Inergy uses regression analysis and the dollar offset method to assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that is has ceased to be a highly effective hedge, Inergy discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective hedge, Inergy continues to carry the derivative on the balance sheet at its fair value, and recognized changes in the fair value of the derivative through current-period earnings.

Inergy is party to certain commodity derivative financial instruments that are designated as hedges of selected inventory positions, and qualify as fair value hedges, as defined in SFAS 133. Inergy’s overall objective for entering into fair value hedges is to manage its exposure to fluctuations in commodity prices and changes in the fair market value of its inventories as well as to ensure an adequate physical supply will be available. These derivatives are recorded at fair value on the balance sheets as price risk management assets or liabilities and the related change in fair value is recorded to earnings in the current period as cost of product sold.

Inergy also enters into derivative financial instruments that qualify as cash flow hedges, which hedge the exposure of variability in expected future cash flows attributable to a particular risk. These derivatives are recorded on the balance sheet at fair value as price risk management assets or liabilities. The effective portion of

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the gain or loss on these cash flow hedges is recorded in other comprehensive income in partner’s capital and reclassified into earnings in the same period in which the hedge transaction closes. Any ineffective portion of the gain or loss is recognized as cost of product sold in the current period.

Furthermore, Inergy has elected to use the special hedge accounting rules in SFAS 133 and hedge the fair value of certain of its inventory positions, whereby the hedged inventory is marked to market. Inventories purchased under energy contracts subsequent to October 25, 2002, and not otherwise designated as being hedged are carried at the lower-of-cost or market.

The cash flow impact of financial instruments is reflected as cash flows from operating activities in the consolidated statements of cash flows.

Revenue Recognition. Sales of propane and other liquids are recognized in our financial statements at the time product is shipped or delivered to the customer. Gas processing and fractionation fees are recognized upon delivery of the product. Revenue from the sale of propane appliances and equipment is recognized at the time of sale or installation. Revenue from repairs and maintenance is recognized upon completion of the service. Revenue from storage contracts is recognized during the period in which it is earned.

Impairment of Long-Lived Assets. Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. Additionally, an acquired intangible asset should be separately recognized in our financial statements if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

Under the provisions of SFAS 142, we completed the valuation of each of our operating segments and determined no impairment existed as of September 30, 2005.

Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”)” modifies the financial accounting and reporting for long-lived assets to be disposed of by sale and it broadens the presentation of discontinued operations to include more disposal transactions. We implemented SFAS 144 beginning in the fiscal year ending September 30, 2003, with no material effect on our financial position, results of operations and cash flows.

Self Insurance. Inergy is insured by third parties, subject to varying retention levels of self-insurance, which management considers prudent. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims and general, product and vehicle liability. Losses are accrued based upon management’s estimates of the aggregate liability for claims incurred using certain assumptions followed in the insurance industry and based on past experience.

Factors That May Affect Future Results of Operations, Financial Condition or Business

• Inergy may not be able to generate sufficient cash from operations to allow it to pay the minimum quarterly distribution.

• Since weather conditions may adversely affect the demand for propane, Inergy’s financial condition and results of operations are vulnerable to, and will be adversely affected by, warm winters.

• If Inergy does not continue to make acquisitions on economically acceptable terms, Inergy’s future financial performance will be reliant upon internal growth and efficiencies.

• Inergy cannot assure you that it will be successful in integrating its recent acquisitions.

• Sudden and sharp propane price increases that cannot be passed on to customers may adversely affect Inergy’s profit margins.

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• Inergy’s indebtedness may limit its ability to borrow additional funds, make distributions to unitholders or capitalize on acquisition or other business opportunities.

• The highly competitive nature of the retail propane business could cause Inergy to lose customers, thereby reducing Inergy’s revenues.

• If Inergy is not able to purchase propane from its principal suppliers, its results of operations would be adversely affected.

• Competition from alternative energy sources may cause Inergy to lose customers, thereby reducing its revenues.

• Inergy’s business would be adversely affected if service at its principal storage facilities or on the common carrier pipelines it uses is interrupted.

• Terrorist attacks, such as the attacks that occurred on September 11, 2001, have resulted in increased costs, and future war or risk of war may adversely impact Inergy’s results of operations.

• Inergy is subject to operating and litigation risks that could adversely affect its operating results to the extent not covered by insurance.

• Inergy’s results of operations and financial condition may be adversely affected by governmental regulation and associated environmental regulatory costs.

• Energy efficiency and new technology may reduce the demand for propane.

• Due to Inergy’s lack of asset diversification, adverse developments in its propane business would reduce its ability to make distributions to its unitholders.

Item 8. Financial Statements and Supplementary Data.

Reference is made to the financial statements and report of independent registered public accounting firm included under Item 15 of this report.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Exhibits, Financial Statements and Financial Statement Schedules:

1. Financial Statements:

See Index Page for Financial Statements located on page 26.

2. Financial Statement Schedules:

Valuation and Qualifying Accounts

Other financial statement schedules have been omitted because they either are not required, are immaterial or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.

3. Exhibits:

*2.1	Purchase Agreement dated as of July 8, 2005, among Inergy Acquisition Company, LLC, Inergy Storage, Inc., Inergy Stagecoach II, LLC, Stagecoach Holding, LLC, Stagecoach Energy, LLC and Stagecoach Holding II, LLC (incorporated herein by reference to Exhibit 2.1 to Inergy Holdings, L.P.’s Form 8-K filed on July 12, 2005)
*3.1	Certificate of Conversion of Inergy Holdings, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy Holdings L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 29, 2005)
*3.2	Agreement of Limited Partnership of Inergy Holdings, L.P. (incorporated herein by reference to Exhibit 3.2 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on June 2, 2005)
*3.3	Certificate of Formation of Inergy Holdings GP, LLC (incorporated herein by reference to Exhibit 3.3 to Inergy Holdings L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 29, 2005)
*3.4	Limited Liability Company Agreement of Inergy Holdings GP, LLC (incorporated herein by reference to Exhibit 3.4 to Inergy Holdings L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on March 14, 2005)
*3.5	Certificate of Limited Partnership of Inergy Holdings, L.P. (incorporated herein by reference to Exhibit 3.5 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 29, 2005)
*3.6	Amended and Restated Agreement of Limited Partnership of Inergy Holdings, L.P. (incorporated herein by reference to Exhibit A to Inergy Holdings L.P.’s Prospectus (Registration No. 333-122466) filed on June 21, 2005)
*4.1	Specimen Certificate representing common units(filed as Exhibit 4.1 to the registrant’s Registration Statement on Form S-1 (Reg. No. 333-122466) and incorporated herein by reference).
*4.2	Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.2B to Inergy, L.P.’s Annual Report on Form 10-K filed on December 7, 2004)
*4.3	Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.2C to Inergy, L.P.’s Annual Report on Form 10-K filed on December 7, 2004)
*4.4	Amendment No. 2 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.’s Current Report on Form 8-K filed on January 24, 2005)

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*4.5	Registration Rights Agreement dated as of August 9, 2005 by and between Inergy, L.P. and Inergy Holdings, L.P (incorporated herein by reference to Exhibit 4.1 to Inergy Holdings, L.P.’s Current Report on Form 8-K filed on August 12, 2005)
*10.1	Inergy Holdings, L.P. Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 29, 2005)***
*10.2	Credit Agreement by and between Inergy Holdings, LLC and Enterprise Bank & Trust dated as of August 30, 2004 (incorporated herein by reference to Exhibit 10.2 to Inergy Holdings, L.P.’s Registration Statement on Form S-1 (Registration No. 333-122466) filed on February 2, 2005)
*10.3	5-Year Credit Agreement dated as of December 17, 2004, among Inergy, L.P., the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Lehman Commercial Paper, Inc. and Wachovia Bank, National Association, as Co-Syndication Agents, and Fleet National Bank and Bank of Oklahoma, National Association, as Co-Documentation Agents (incorporated herein by reference to Exhibit 10.1 to Inergy, L.P.’s Current Report on Form 8-K filed on December 22, 2004)
*10.4	Guaranty dated as of December 17, 2004 among Inergy Propane, LLC, L & L Transportation, LLC, Inergy Transportation, LLC, Inergy Sales & Service, Inc., Inergy Finance Corp., Inergy Acquisition Company, LLC, Stellar Propane Service, LLC and Inergy Gas, LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent for the benefit of the Holders of Secured Obligations under the Credit Agreements (incorporated herein by reference to Exhibit 10.3 to Inergy, L.P.’s Current Report on Form 8-K filed on December 22, 2004)
*10.5	Pledge and Security Agreement dated as of December 17, 2004 among Inergy, L.P. and the other Subsidiaries of Inergy, L.P. listed on the signature pages thereto, and JPMorgan Chase Bank, N.A., as administrative agent for the lenders party to the Credit Agreements (incorporated herein by reference to Exhibit 10.4 to Inergy, L.P.’s Current Report on Form 8-K filed on December 22, 2004)
*10.6	Trademark Security Agreement dated as of December 17, 2004 among Inergy, L.P. and the subsidiaries of Inergy, L.P. listed on the signature page attached thereto and JPMorgan Chase Bank, N.A., as administrative agent on behalf of itself and on behalf of the Holders of Secured Obligation under the Credit Agreements (incorporated herein by reference to Exhibit 10.5 to Inergy, L.P.’s Current Report on Form 8-K filed on December 22, 2004)
*10.7	Interest Purchase Agreement, dated November 18, 2004, among Star Gas Partners, L.P., Star Gas LLC, Inergy Propane, LLC and Inergy, L.P. (incorporated herein by reference to Exhibit 2.1 to Inergy, L.P.’s Current Report on Form 8-K filed on November 24, 2004)
*10.8	Registration Rights Agreement dated December 22, 2004, among Inergy, L.P., Inergy Finance Corp., the Guarantors named therein and the Initial Purchasers named therein (incorporated herein by reference to Exhibit 4.1 to Inergy, L.P.’s Current Report on Form 8-K filed on December 27, 2004)
*10.9	Indenture dated as of December 22, 2004, among Inergy, L.P., Inergy Finance Corp., the Guarantors named therein and US Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to Inergy, L.P.’s Current Report on Form 8-K filed on December 27, 2004)
*10.10	Form of 6.875% Senior Notes due 2014 (incorporated by reference to Exhibit 4.3 to Inergy, L.P.’s Current Report on Form 8-K filed on December 27, 2004)
*10.11	Inergy, L.P. Employee Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.6 to Inergy, L.P.’s Registration Statement on Form S-1/A filed on July 2, 2001)***
*10.12	Amendment to Inergy, L.P. Employee Long-Term Incentive Plan, adopted April 4, 2003 (incorporated herein by reference to Exhibit 10.1 to Inergy, L.P.’s Quarterly Report on Form 10-Q filed on May 12, 2003)***
*10.13	Promissory Note (incorporated herein by reference to Exhibit 10.13 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 11, 2005)

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*10.14	Form of Interest Purchase Agreement (incorporated herein by reference to Exhibit 10.14 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on March 14, 2005)
*10.15	Form of Inergy Holdings, L.P. Employee Unit Purchase Plan (incorporated herein by reference to Exhibit 10.15 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 11, 2005)
*10.16	First Amendment to Interest Purchase Agreement (incorporated herein by reference to Exhibit 10.16 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on April 11, 2005)
*10.17	Form of Unit Option Grant (incorporated herein by reference to Exhibit 10.17 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on June 2, 2005)***
*10.18	Unitholder Agreement dated as of April 14, 2005 among Inergy Holdings, LLC and the unitholders named therein (incorporated herein by reference to Exhibit 10.18 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on June 2, 2005)
*10.19	Credit Agreement among Inergy Holdings, LLC, the several parties thereto, Lehman Brothers and Lehman Commercial Paper, Inc., as syndication agent and administrative agent dated as of April 28, 2005 (incorporated herein by reference to Exhibit 3.2 to Inergy Holdings, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-122466) filed on June 13, 2005)
*10.20	Special Unit Purchase Agreement dated as of August 9, 2005 between Inergy, L.P. and Inergy Holdings, L.P. (incorporated herein by reference to Exhibit 10.1 to Inergy Holdings, L.P.’s Current Report on Form 8-K filed on August 12, 2005)
*10.21	Credit Agreement, dated as of August 9, 2005, between Inergy Holdings, L.P. and Southwest Bank of St. Louis (incorporated herein by reference to Exhibit 10.2 to Inergy Holdings, L.P.’s Current Report on Form 8-K filed on August 12, 2005)
*14.1	Inergy Holdings’ Code of Business Ethics and Conduct (incorporated herein by reference to Inergy Holdings, L.P.’s Annual Report on Form 10-K filed on December 19, 2005)
*21.1	List of subsidiaries of Inergy Holdings, L.P. (incorporated herein by reference to Inergy Holdings, L.P.’s Annual Report on Form 10-K filed on December 19, 2005)
**23.1	Consent of Ernst & Young LLP
**31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
**31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
**32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed

** Filed herewith

*** Management contracts or compensatory plans or arrangements required to be identified by Item 15(a).

(b) Exhibits.

See exhibits identified above under Item 15(a)3.

(c) Financial Statement Schedules.

See financial statement schedules identified above under Item 15(a)2.

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Inergy Holdings, L.P. and Subsidiaries

Consolidated Financial Statements

September 30, 2005 and 2004 and each of the

Three Years in the Period Ended

September 30, 2005

Contents

Report of Independent Registered Public Accounting Firm	27
Audited Consolidated Financial Statements
Consolidated Balance Sheets	28
Consolidated Statements of Operations	29
Consolidated Statements of Partners’ Capital	30
Consolidated Statements of Cash Flows	31
Notes to Consolidated Financial Statements	33

26

Report of Independent Registered Public Accounting Firm

The Board of Directors and Partners

Inergy Holdings, L.P. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Inergy Holdings, L.P. and Subsidiaries (the Company) as of September 30, 2005 and 2004, and the related consolidated statements of operations, partners’ capital, and cash flows for each of the three years in the period ended September 30, 2005. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inergy Holdings, L.P. and Subsidiaries at September 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2005 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As described in Note 18, the consolidated balance sheets of the Company as of September 30, 2005 and 2004 and the related consolidated statements of operations, partners’ capital and cash flows for each of the three years in the period ended September 30, 2005 have been restated to eliminate gains previously recognized on the sale of partnership units.

/s/ ERNST & YOUNG LLP

Kansas City, Missouri

December 8, 2005, except for Note 18

as to which the date is May 18, 2006

27

Inergy Holdings, L.P. and Subsidiaries

Consolidated Balance Sheets

	September 30,
	2005 Restated(1)			2004 Restated(1)
	(In Thousands)
Assets
Current assets:
Cash and cash equivalents	$	9,586		$	2,308
Accounts receivable, less allowance for doubtful accounts of $2,356 and $1,078 at September 30, 2005 and 2004, respectively		94,876			49,441
Inventories		122,387			56,404
Prepaid expenses and other current assets		23,231			5,499
Assets from price risk management activities		58,356			23,015
Total current assets		308,436			136,667
Property, plant and equipment:
Land and buildings		156,823			20,246
Office furniture and equipment		18,088			10,173
Vehicles		68,783			32,719
Tanks and plant equipment		556,505			189,519
		800,199			252,657
Less accumulated depreciation		(72,756	)		(37,404	)
Property, plant and equipment, net		727,443			215,253
Intangible assets (Note 2):
Covenants not to compete		30,606			11,498
Deferred financing costs		20,749			5,500
Deferred acquisition costs		725			104
Trademarks		32,845			2,500
Customer accounts		161,000			74,154
		245,925			93,756
Less accumulated amortization		(30,989	)		(17,398	)
Intangible assets, net		214,936			76,358
Goodwill		256,596			82,934
Other assets		2,907			529
Total assets	$	1,510,318		$	511,741
Liabilities and partners’ capital
Current liabilities:
Accounts payable	$	104,202		$	54,690
Accrued expenses		54,922			13,998
Customer deposits		68,567			15,977
Liabilities from price risk management activities		49,572			29,640
Current portion of long-term debt (Note 4)		17,931			25,017
Current portion of promissory notes		—			1,500
Total current liabilities		295,194			140,822
Long-term debt, less current portion (Note 4)		569,909			128,236
Long-term promissory notes		—			13,500
Other long-term liabilities		1,647			—
Deferred income taxes		17,215			17,998
Interest of non-controlling partners in Inergy, L.P		633,098			246,001
Partners’ capital (deficiency) (Note 8)
Common unitholders (20,000,000 and 12,550,000 units issued and outstanding as of September 30, 2005 and 2004, respectively)		(7,475	)		(35,015	)
Accumulated other comprehensive income		730			199
Total partners’ capital (deficiency)		(6,745	)		(34,816	)
Total liabilities and partners’ capital	$	1,510,318		$	511,741

⁽¹⁾ See Note 18

See accompanying notes.

28

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Operations

(In Thousands, Except Per Unit Data)

	Year Ended September 30,
	2005 Restated(1)			2004 Restated(1)			2003 Restated(1)
Revenue:
Propane	$	851,613		$	431,202		$	343,578
Other		198,523			51,294			19,787
		1,050,136			482,496			363,365
Cost of product sold (excluding depreciation and amortization as shown below)
Propane		593,148			334,231			258,986
Other		131,075			24,822			8,024
		724,223			359,053			267,010
Gross profit		325,913			123,443			96,355
Expenses:
Operating and administrative		197,582			81,388			59,424
Depreciation and amortization		50,413			21,089			13,843
Operating income		77,918			20,966			23,088
Other income (expense):
Interest expense, net		(36,061	)		(7,917	)		(9,947	)
Write-off of deferred financing costs		(7,585	)		(1,216	)		—
Make whole premium charge		—			(17,949	)		—
Swap value received		—			949			—
Gain (loss) on sale of property, plant and equipment		(679	)		(203	)		(91	)
Finance charges		1,817			704			339
Other		251			117			86
Income (loss) before income taxes and interest of non-controlling partners in Inergy, L.P.		35,661			(4,549	)		13,475
Provision for income taxes		(501	)		(201	)		(442	)
Interest of non-controlling partners in Inergy, L.P.’s net (income) loss		(26,831	)		4,827			(10,041	)
Net income	$	8,329		$	77		$	2,992
Total limited partners’ interest in net income	$	8,329		$	77		$	2,992
Net income per limited partner unit:(1)
Basic	$	0.49		$	0.01		$	0.24
Diluted	$	0.48		$	0.00		$	0.19
Weighted average limited partners’ units outstanding(2)
Basic		17,140			12,550			12,373
Diluted		17,186			16,090			16,090

⁽¹⁾ See Note 18

⁽²⁾ Adjusted to give effect to the conversion transaction.

See accompanying notes.

29

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Partners’ Capital

(In Thousands)

	Partners’ Common Interest/ (Deficit) Restated(1)			Accumulated Other Comprehensive Income Restated(1)			Total Partners’ Capital/ (Deficiency) Restated(1)
Balance at September 30, 2002	$	387		$	2		$	389
Distribution by the Company of Inergy, L.P. senior and junior subordinated units in exchange for a member’s common interest in the Company		(139	)		—			(139	)
Partners’ contributions		3,689			—			3,689
Partners’ distributions		(4,746	)		—			(4,746	)
Comprehensive income:
Net income		2,992			—			2,992
Unrealized gain on investments in marketable securities		—			42			42
Comprehensive income								3,034
Balance at September 30, 2003		2,183			44			2,227
Redemption of members’ interest		(2,250	)		—			(2,250	)
Partners’ contributions		1,500			—			1,500
Partners’ distributions		(36,525	)		—			(36,525	)
Comprehensive income:
Net income		77			—			77
Unrealized gain on investments in marketable securities		—			155			155
Comprehensive income								232
Balance at September 30, 2004		(35,015	)		199			(34,816	)
Net proceeds from issuance of Common Units		80,002			—			80,002
Redemption of Partner’s interest		(2,987	)					(2,987	)
Partner contributions		5,576			—			5,576
Partner distributions		(63,380	)		—			(63,380	)
Comprehensive income:
Net income		8,329			—			8,329
Unrealized gain on derivative instruments					730			730
Change in unrealized gain (loss) on investments in marketable securities					(199	)		(199	)
Comprehensive income								8,860
Balance at September 30, 2005	$	(7,475	)	$	730		$	(6,745	)

⁽¹⁾ See Note 18

See accompanying notes.

30

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

	Year Ended September 30,
	2005 Restated(1)			2004 Restated(1)			2003 Restated(1)
Operating activities
Net income	$	8,329		$	77		$	2,992
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		37,328			15,325			9,856
Amortization		13,085			5,764			3,987
Amortization of deferred financing costs		1,947			1,686			1,506
Write-off of deferred financing costs		7,585			1,216			—
Provision for doubtful accounts		1,966			214			719
Make whole premium charge		—			17,949			—
(Gain) loss on disposal of property, plant and equipment		679			201			91
Interest of non-controlling partners in Inergy, L.P.’s net income (loss)		26,831			(4,827	)		10,041
Deferred income taxes		(782	)		(1,596	)		(61	)
Net price risk management activities		(10,008	)		9,730			(7,757	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		(19,722	)		(23,157	)		(7,420	)
Inventories		(34,669	)		(19,048	)		7,038
Prepaid expenses and other current assets		(71	)		(912	)		(407	)
Other assets		(219	)		37			43
Accounts payable		19,378			24,603			6,998
Accrued expenses		13,997			(219	)		2,981
Customer deposits		18,511			4,089			2,965
Net cash provided by operating activities		84,165			31,132			33,572
Investing activities
Acquisitions, net of cash acquired		(810,159	)		(85,154	)		(26,063	)
Purchases of property, plant and equipment		(34,122	)		(14,521	)		(6,230	)
Deferred acquisition costs incurred		(621	)		(900	)		(2,094	)
Proceeds from sale of property, plant and equipment		4,141			2,245			720
Proceeds from sale of marketable securities					500
Purchase of marketable securities		—			—			(573	)
Other		—			—			1
Net cash used in investing activities		(840,761	)		(97,830	)		(34,239	)
Financing activities
Proceeds from issuance of long-term debt	$	1,716,040		$	388,467		$	174,794
Principal payments on long-term debt		(1,302,686	)		(367,644	)		(172,989	)
Deferred financing costs incurred		(24,284	)		(235	)		(821	)
Payment of make whole premium charge		—			(17,949	)		—
Purchase of subordinated units in Inergy, L.P.		(3,079	)		(1,026	)		(10	)
Net proceeds from partners’ contributions		5,576			1,500			3,689
Net proceeds from issuance of Common Units		80,002			—			—
Net proceeds from issuance of Common Units of Inergy, L.P.		410,554			113,219			23,339
Redemption of partners’ interest		(2,987	)		(2,250	)		—
Distributions to non-controlling partners in Inergy, L.P.		(51,950	)		(29,505	)		(19,039	)
Distributions		(63,380	)		(21,525	)		(4,746	)
Net cash provided by financing activities		763,806			63,052			4,217
Effect of foreign exchange rate changes on cash		68			18			9
Net increase (decrease) in cash		7,278			(3,628	)		3,559
Cash at beginning of year		2,308			5,936			2,377
Cash at end of year	$	9,586		$	2,308		$	5,936

⁽¹⁾ See Note 18

31

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(In Thousands)

	Year Ended September 30,
	2005 Restated(1)			2004 Restated(1)			2003 Restated(1)
Supplemental disclosure of cash flow information
Cash paid during the year for interest	$	30,152		$	6,257		$	8,706
Cash paid during the year for taxes		1,655			996			732
Supplemental schedule of noncash investing and financing activities
Additions to covenants not to compete through the issuance of noncompete obligations	$	7,881		$	2,569		$	1,953
Acquisitions through the issuances of Common Units and Senior Subordinated Units		—			—			45,100
Acquisition of retail propane companies through the assumption of seller debt		—			—			2,218
Increase (decrease) in the fair value of long-term debt and the related interest rate swap		(1,647	)		(316	)		556
Distributions declared to be paid subsequent to September 30, 2004		—			15,000			—
Change in unrealized investment holding gain		(199	)		155			42
Distribution by the Company of Inergy subordinated units in exchange for a member’s common interest in the Company		—			—			1,065
Partner notes payable issued in connection with the payment of distributions	$	15,000		$	—		$	—
Acquisitions, net of cash acquired:
Current assets	$	76,655		$	6,304		$	3,687
Property, plant and equipment		520,215			60,503			37,089
Intangible assets		138,799			19,079			21,164
Goodwill		171,152			11,531			18,473
Other assets		2,359			—			—
Current liabilities		(91,140	)		(9,694	)		(5,079	)
Non-compete liabilities		(7,881	)		(2,569	)		(1,953	)
Long-term debt		—			—			(2,218	)
Partner’s capital		—			—			(45,100	)
	$	810,159		$	85,154		$	26,063

⁽¹⁾ See Note 18

See accompanying notes.

32

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements

1. Accounting Policies (Restated—See Note 18)

Organization

Inergy Holdings, L.P. (formerly Inergy Holdings, LLC) (the Company) was formed on November 12, 1996 as a Delaware limited liability company. The Company shall exist as a separate legal entity until the cancellation of the certificate of conversion and the certificate of limited partnership as provided in the Delaware Revised Uniform Limited Partnership Act (the Delaware Act). The limited partners have no liability in excess of contributions to the Company. The general partner of the Company is Inergy Holdings GP, LLC. The Company is engaged in the investment in propane and other natural gas liquids companies. The voting partners of the Company holding the majority of the common interest conduct the business affairs of the Company. Inergy Partners, LLC, the non-managing general partner of Inergy, L.P. and holder of the approximate 1.2% general partner interest therein, and Inergy GP, LLC, the managing general partner of Inergy, L.P. (Inergy or the Partnership), are both wholly owned subsidiaries of the Company.

Inergy was formed on March 7, 2001 as a Delaware limited partnership. The Partnership and its subsidiary Inergy Propane, LLC (Inergy Propane or the Operating Company) were formed to acquire, own and operate the propane business and substantially all the assets and liabilities (other than a portion of the cash and deferred income tax liabilities) of Inergy Partners, LLC and subsidiaries. In addition, Inergy Sales and Service, Inc. (Services), a subsidiary of the Operating Company, was formed to acquire and operate the service work and appliance parts and sales business of Inergy Propane. The Partnership, the Operating Company, and Services are collectively referred to hereinafter as the Partnership Entities. In order to simplify the Partnership’s obligations under the laws of several jurisdictions in which the Partnership will conduct business, the Partnership’s activities are conducted primarily through the Operating Company.

Inergy is managed by Inergy GP, LLC. Pursuant to the Partnership Agreement, Inergy GP, LLC or any of its affiliates is entitled to reimbursement for all direct and indirect expenses incurred or payments it makes on behalf of Inergy and all other necessary or appropriate expenses allocable to Inergy or otherwise reasonably incurred by Inergy GP, LLC in connection with operating the Partnership’s business. These costs, which totaled approximately $3.0 million, $2.9 million and $2.1 million for the years ended September 30, 2005, 2004 and 2003, respectively, include compensation and benefits paid to officers and employees of Inergy GP, LLC and its affiliates.

The Company owns all of the “incentive distribution rights” provided for in Inergy L.P.’s partnership agreement, which entitles it to receive increasing percentages, up to 48%, of any cash distributed by the Partnership in excess of $0.33 per unit in any quarter. In addition, as of September 30, 2005, the Company and its subsidiaries own 1,717,551 Inergy Common Units, 1,093,865 senior subordinated units and 975,924 junior subordinated units, which on a combined basis approximate a 9.5% limited partner interest at September 30, 2005.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Inergy Holdings, L.P., its wholly owned subsidiaries, Inergy Partners, LLC (Partners), New Inergy Propane, LLC (NIP), Inergy GP, LLC (GP), IPCH Acquisition Corp. (IPCHA), Wilson Oil Company of Johnston County, Inc. (Wilson), Rolesville Oil & Gas Company, Inc. (Rolesville) and its controlled subsidiary Inergy, L.P. IPCHA, Wilson and Rolesville are all subsidiaries created as a result of transactions with Inergy, L.P. All significant intercompany transactions, including distribution income, and balances have been eliminated in consolidation.

Conversion Transaction

On April 28, 2005, the Company converted from a Delaware limited liability company (Inergy Holdings, LLC) to a Delaware limited partnership (Inergy Holdings, L.P.). The net income (loss) per limited partner unit

33

Inergy, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

and units outstanding presented in the consolidated statements of operations gives effect to the Company’s reorganization as a limited partnership as if it occurred at the beginning of the periods presented.

Nature of Operations

The Partnership conducts all of the business activities of the consolidated group and is engaged in the sale, distribution, storage, marketing and trading of propane, natural gas and other natural gas liquids. The retail market is seasonal because propane is used primarily for heating in residential and commercial buildings, as well as for agricultural purposes. Inergy’s operations are concentrated in the Midwest, Northeast, and Southeast regions of the United States.

Financial Instruments and Price Risk Management

The Partnership utilizes certain derivative financial instruments to (i) manage its exposure to commodity price risk, specifically, the related change in the fair value of inventories, as well as the variability of cash flows related to forecasted transactions; (ii) to ensure adequate physical supply of commodity will be available; and (iii) manage its exposure to interest rate risk. Inergy records all derivative instruments on the balance sheet as either assets or liabilities measured at fair value under the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended. Changes in the fair value of these derivative financial instruments are recorded either through current earnings or as other comprehensive income, depending on the type of hedge transaction. Gains and losses on derivative instruments designated as cash flow hedges are reported in other comprehensive income and reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions is recognized in current period earnings.

On the date the derivative contract is entered into, the Partnership designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The Partnership documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Partnership uses regression analysis and the dollar offset method to assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that is has ceased to be a highly effective hedge, Inergy discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective hedge, Inergy continues to carry the derivative on the balance sheet at its fair value, and recognized changes in the fair value of the derivative through current-period earnings.

The Partnership is party to certain commodity derivative financial instruments that are designated as hedges of selected inventory positions, and qualify as fair value hedges, as defined in SFAS No. 133. The Partnership’s overall objective for entering into fair value hedges is to manage its exposure to fluctuations in commodity prices and changes in the fair market value of its inventories as well as to ensure an adequate physical supply will be available. These derivatives are recorded at fair value on the balance sheets as price risk management assets or liabilities and the related change in fair value is recorded to earnings in the current period as cost of product sold.

The Partnership also enters into derivative financial instruments that qualify as cash flow hedges, which hedge the exposure of variability in expected future cash flows attributable to a particular risk. These derivatives are recorded on the balance sheet at fair value as price risk management assets or liabilities. The effective portion

34

Inergy, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

of the gain or loss on these cash flow hedges is recorded in other comprehensive income in partner’s capital and reclassified into earnings in the same period in which the hedge transaction closes. Any ineffective portion of the gain or loss is recognized as cost of product sold in the current period.

Furthermore, the Partnership has elected to use the special hedge accounting rules in SFAS No. 133 and hedge the fair value of certain of its inventory positions, whereby the hedged inventory is marked to market. Inventories purchased under energy contracts subsequent to October 25, 2002, and not otherwise designated as being hedged are carried at the lower-of-cost or market.

The cash flow impact of financial instruments is reflected as cash flows from operating activities in the consolidated statements of cash flows.

Revenue Recognition

Sales of propane and other liquids are recognized at the time product is shipped or delivered to the customer. Gas processing and fractionation fees are recognized upon delivery of the product. Revenue from the sale of propane appliances and equipment is recognized at the time of sale or installation. Revenue from repairs and maintenance is recognized upon completion of the service. Revenue from storage contracts is recognized during the period in which it is earned.

Expense Classification

Cost of products sold consists of tangible products sold including all propane and other natural gas liquids sold and all propane related appliances sold. Operating and administrative expenses consist of all expenses incurred by us other than those described above in cost of products sold and depreciation and amortization. Certain of our operating and administrative expenses and depreciation and amortization are incurred in the distribution of our product sales but are not included in cost of product sold. These were $56.4 million, $28.2 million and $20.8 million during the years ended September 30, 2005, 2004, and 2003, respectively.

Credit Risk and Concentrations

The Partnership is both a retail and wholesale supplier of propane gas. The Partnership generally extends unsecured credit to its wholesale customers in the United States and Canada. Credit is generally extended to retail customers through delivery into Company and customer owned propane gas storage tanks. Provisions for doubtful accounts receivable which are based on specific identification and historical collection results and have generally been within management’s expectations. Finance charges on trade receivables are generally recognized upon billing of customers.

Three suppliers, Sunoco, Inc. (15%), Dominion Transmission Inc. (13%), and Exxon Mobil Oil Corp.(13%), accounted for approximately 41% of propane purchases during the past fiscal year. Inergy believes that its contracts with these suppliers will enable it to purchase most of its supply needs at market prices and ensures adequate supply. No other single supplier accounted for more than 10% of propane purchases in the current year.

No single customer represents 10% or more of consolidated revenues. In addition, nearly all of the Partnership’s revenues are derived from sources within the United States, and all of its long-lived assets are located in the United States.

35

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of less than 3 months.

Inventories

Inventories for retail operations, which mainly consist of propane gas and other liquids, are stated at the lower of cost or market and are computed using the average-cost method or first-in, first-out basis. Wholesale propane inventories are stated at the lower of cost, determined by either using the average-cost method or market unless designated as being hedged by forward sales contracts. Wholesale propane inventories being hedged and carried at market at September 30, 2005 and 2004 amount to $85.8 million and $40.7 million, respectively.

Inventories consist of (in thousands):

	September 30, 2005		September 30, 2004
Propane gas and other liquids	$	114,660	$	53,295
Appliances, parts and supplies		7,727		3,109
	$	122,387	$	56,404

Shipping and Handling Costs

Shipping and handling costs are recorded as part of cost of products sold at the time product is shipped or delivered to the customer except as discussed in “Expense Classification”.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, as follows:

	Years
Buildings and improvements	25–40
Office furniture and equipment	3–10
Vehicles	5–10
Tanks and plant equipment	5–30

The Partnership reviews its long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such events or changes in circumstances are present, a loss is recognized if the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Partnership has determined that no impairment exists as of September 30, 2005.

36

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Identifiable Intangible Assets

Inergy has recorded certain identifiable intangible assets, including covenants not to compete, customer accounts, trademarks, deferred financing costs and deferred acquisition costs. Covenants not to compete, customer accounts and trademarks have arisen from the various acquisitions by Inergy and are discussed in Note 2. Deferred financing costs represent financing costs incurred in obtaining financing and are being amortized over the term of the debt. Deferred acquisition costs represent costs incurred on acquisitions that Inergy is actively pursuing, most of which relate to the acquisitions completed subsequent to year end, as discussed in Note 15. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

Intangible assets are amortized on a straight-line basis over their estimated economic lives, as follows:

	Years
Covenants not to compete	2–10
Deferred financing costs	1–10
Customer accounts	15
Trademarks	—

Trademarks have been assigned an indefinite life and are thereafter not being amortized. However, they are subject to an impairment evaluation explained below.

Estimated amortization, including amortization of deferred financing cost reported as interest expense, for the next five years ending September 30, in thousands of dollars is as follows:

2006	$	19,004
2007		16,134
2008		15,709
2009		13,938
2010		13,398

Goodwill

Goodwill is recognized pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142) from various acquisitions by the Partnership as discussed in Note 2. Under SFAS No. 142, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test.

In connection with the goodwill impairment evaluation, the reporting units are identified, which for the Company are the same as its operating segments, and the carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of the evaluation. To the extent a reporting unit’s carrying value exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the second step of the impairment test must be performed. In the second step, the implied fair value of the goodwill is determined by allocating the fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, “Business Combinations” to its carrying amount.

Under the provisions of SFAS No. 142, Inergy completed the valuation of each of its reporting units and determined no impairment existed as of September 30, 2005.

37

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Income Taxes

The earnings of the Company, its limited liability subsidiaries and the Partnership are included in the Federal and state income tax returns of the individual members or partners. As a result, no income tax expense has been reflected in the consolidated financial statements relating to the earnings of the Partnership and the limited liability subsidiaries. Federal and state income taxes are provided on the earnings of the subsidiaries incorporated as taxable entities (IPCHA, Wilson, Rolesville and Services). These corporations account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using expected rates in effect for the year in which differences are expected to reverse.

Net earnings for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and the financial reporting basis of assets and liabilities and the taxable income allocation requirements under the partnership agreement.

Customer Deposits

Customer deposits primarily represent cash received by the Partnership from wholesale and retail customers for propane purchased that will be delivered at a future date.

Fair Value

The carrying amounts of cash, accounts receivable and accounts payable approximate their fair value. Based on the estimated borrowing rates currently available to the Company for long-term debt with similar terms and maturities, the aggregate fair value of the Company’s long-term debt was approximately $588 million and $153 million as of September 30, 2005 and 2004, respectively. See Note 3 for the fair value of our derivative financial instruments.

Comprehensive Income (Loss)

Comprehensive income includes net income and other comprehensive income, which includes, but is not limited to, unrealized gains and losses on marketable securities.

Pursuant to SFAS 133, Inergy records deferred hedge gains and losses on its derivative financial instruments that qualify as cash flow hedges as other comprehensive income.

Interest of Non-controlling Partners in Inergy, L.P.

Cash investments by third parties are recorded as an increase in the interest of non-controlling partners in Inergy, L.P. in the consolidated balance sheets. There is no recognition of any gain at the dates cash investments are made as the third-party investors are entitled to a preferential return on their investments.

Accounting for Unit-Based Compensation

The Company and Inergy each have a long-term incentive plan. These plans are accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” for all periods presented and presents the fair value method pro forma disclosures required under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.” No percentage interest or unit-based employee compensation cost is reflected in net income (loss), as all options granted under the

38

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

plan had an exercise price equal to the market value of the underlying equities on the date of measurement. The following table illustrates the effect on net income (loss) as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to percentage interest or unit-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of an option is amortized to expense over the option’s vesting period. Pro forma information for each of the three years in the period ended September 30, 2005 is as follows (in thousands, except per unit data):

	2005		2004		2003
Net income as reported	$	8,329	$	77	$	2,992
Deduct: Total unit-based employee compensation expense determined under fair value method for all awards		123		37		36
Pro forma net income	$	8,206	$	40	$	2,956
Net income per limited partner unit
Basic—as reported	$	0.49	$	0.01	$	0.24
Diluted—as reported	$	0.48	$	0.00	$	0.19
Pro forma net income per limited partner unit
Basic	$	0.48	$	0.00	$	0.24
Diluted	$	0.48	$	0.00	$	0.18

Income Per Unit

Basic net income per limited partner unit is computed by dividing net income by the weighted average number of units outstanding. Diluted net income per limited partner unit is computed by dividing net income by the weighted average number of units outstanding and the dilutive effect of unit options granted under the long-term incentive plan. The following table presents the calculation of basic and dilutive income per limited partner unit (in thousands, except per unit data):

	Year Ended September 30,
	2005		2004		2003
Numerator:
Net income-basic and diluted	$	8,329	$	77	$	2,992
Denominator:
Weighted average limited partners’ units outstanding—basic		17,140		12,550		12,373
Effect of dilutive unit options outstanding		46		3,540		3,717
Weighted average limited partners’ units outstanding—dilutive		17,186		16,090		16,090
Net income per limited partner unit(a)
Basic	$	0.49	$	0.01	$	0.24
Diluted	$	0.48	$	0.00	$	0.19

^(a) When limited partners’ units outstanding are adjusted to give pro forma effect to excess distributions, basic and diluted net income per limited partner unit were $0.45 for the year ended September 30, 2005.

Segment Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131) establishes standards for reporting information about operating segments, as well as related disclosures about products and services, geographic areas, and major customers. Further, SFAS No. 131 defines operating

39

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and assessing performance. In determining reportable segments under the provisions of SFAS No. 131, the Company examined the way it organizes its business internally for making operating decisions and assessing business performance. See Note 13 for disclosures related to the company’s propane and midstream segments.

Recently Issued Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

SFAS No. 123(R) must be adopted no later than October 1, 2005. Early adoptions will be permitted in periods in which financial statements have not yet been issued. The Company will adopt SFAS No. 123(R) on October 1, 2005.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to effective date of SFAS No. 123(R) that remain unvested as of the effective date.

A “modified retrospective” method which includes the requirements of the modified prospective described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company will adopt SFAS No. 123(R) using the modified prospective method.

As permitted by SFAS No. 123, during the fiscal year ended September 30, 2005, the Company accounted for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. The impact of adoption of SFAS No. 123(R) will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1. The adoption of SFAS No. 123 (R)’s fair value method is not expected to have a significant impact on our results of operations or on our overall financial position.

SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, amends the existing standard that provides guidance on accounting for inventory costs and specifically clarifies that abnormal amounts of costs should be recognized as period costs. This statement is effective for the fiscal year beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material effect on the Company’s consolidated financial statements.

40

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Further, the amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively. The adoption of SFAS No. 153 is not expected to have a material effect on the Company’s consolidated financial statements.

SFAS No. 154, Accounting Changes and Error Corrections” is a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 applies to all voluntary changes in accounting principle and changes the accounting for and a reporting of a change in accounting principle. Statement 154 requires retrospective application to the prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is effective for the accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies that the term conditional retirement obligation, as used in FASB Statement No. 143, Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing or method of settlement, or both, are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is required to be adopted by Inergy for the fiscal year ended September 30, 2006 and Inergy is currently assessing the impact on its financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income.

2. Acquisitions (Restated—See Note 18)

During the fiscal year ended September 30, 2005, Inergy made seven acquisitions. In November 2004, the Partnership acquired the propane assets of Moulton Gas Service, Inc., headquartered in Wapakoneta, OH. In December 2004, the Partnership acquired Star Gas Propane, L.P. (“Star Gas”) headquartered in Stamford, CT and the propane assets of Northwest Propane, Inc, headquartered in Holly, MI. In May 2005, the Partnership acquired the assets of three other retail propane companies, and in August 2005 the Partnership acquired the Stagecoach natural gas storage facility. The aggregate purchase price for these acquisitions, net of cash acquired was $810.1 million. The operating results for all the fiscal 2005 acquisitions are included in our consolidated results of operations from the dates of acquisition through September 30, 2005.

The purchase price of Star Gas approximated $489.7 million, net of cash acquired. In connection with this acquisition, on December 17, 2004, Inergy entered into a 364-day credit facility and borrowed $375.0 million

41

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

under this facility to partially fund the acquisition. This 364-day credit facility was repaid using the net proceeds from the private placement of $425 million of senior unsecured notes as further described in Note 4. Inergy also issued 3,568,139 Common Units to unrelated third parties to partially fund the acquisition.

Stagecoach is a natural gas storage facility with approximately 13.6 Bcf of working gas capacity. In addition to the approximate $205 million purchase price for the in-service Stagecoach facility, Inergy has purchased the rights to the Phase II expansion project of Stagecoach for $25 million through the issuance of 769,941 Special Units to the Company (see Note 12). The Phase II expansion is expected to add approximately 13 Bcf of additional working gas capacity.

The allocation of the total consideration for the Star Gas and Stagecoach acquisitions is as follows (in millions):

	Star Gas Propane			Stagecoach
Current assets, net of cash acquired	$	54.6		$	4.6
Property, plant and equipment		276.4			200.5
Intangible assets		98.5			5.0
Goodwill		111.9			22.7
Other assets		1.4			1.0
Current liabilities		(52.0	)		(15.0	)
Non-compete liabilities		(1.1	)		0.0
	$	489.7		$	218.8

The purchase price allocation of Stagecoach has been prepared on a preliminary basis, and changes are expected when the appraisals are completed and additional information becomes available.

Intangible assets include $30.3 million of trademarks that are not subject to amortization. The weighted average amortization period of amortizable intangible assets acquired is approximately 15 years.

The following unaudited pro forma data summarizes the results of operations for the period indicated as if the Star Gas acquisition and the Stagecoach Natural Gas Facility had been completed as of October 1, 2004 and October 1, 2003, the beginning of the 2005 and 2004 fiscal years. Since both meet the criteria of a significant subsidiary. Pro forma information is not presented for other acquisitions as they do not qualify as significant subsidiaries. The pro forma data gives effect to actual operating results prior to the acquisition and adjustments to interest expense, customers’ account amortization expense and depreciation expense. These pro forma results are not necessarily indicative of the results for the periods presented, had the acquisitions actually occurred on October 1, 2004 and 2003 nor are they indicative of projected results for future periods.

	Year Ended September 30,
	2005		2004
	(in thousands, except per unit data)
Revenues	$	1,136,333	$	863,471
Net income (loss)		4,525		(2,280	)
Limited partners’ interest in net income		4,525		(2,280	)
Net income (loss) per limited partner unit:
Basic	$	0.26	$	(0.18	)
Diluted	$	0.26	$	(0.18	)

42

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

3. Price Risk Management and Financial Instruments

Commodity Derivative Instruments and Price Risk Management

The Partnership, through its wholesale operations, sells propane and offers price risk management services to energy related businesses through a variety of financial and other instruments including forward contracts involving physical delivery of propane. In addition, the Partnership manages its own trading portfolio using forward physical and futures contracts and attempts to balance its contractual portfolio in terms of notional amounts and timing of performance and delivery obligations. However, net unbalanced positions can exist or are established based on assessment of anticipated short-term needs or market conditions.

The price risk management services offered to propane users, retailers and resellers, and other related businesses utilize a variety of financial and other instruments including forward contracts involving physical delivery of propane, swap agreements, which require payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for propane, options and other contractual arrangements.

As discussed in Note 1, all of these financial instruments are accounted for under SFAS 133. The Partnership has entered into these derivative financial instruments to manage its exposure to fluctuations in commodity prices and to the variability of future cash flows. The effects of commodity price volatility have generally been mitigated by attempts to maintain a balanced portfolio of derivative financial instruments and inventory positions in terms of notional amounts and timing of performance.

Notional Amounts and Terms

The notional amounts and terms of these financial instruments at September 30, 2005 and 2004 include fixed price payor for 12.9 million and 4.9 million barrels, respectively, and fixed price receiver for 14.6 million and 6.5 million barrels, respectively.

Notional amounts reflect the volume of the transactions, but do not represent the amounts exchanged by the parties to the financial instruments. Accordingly, notional amounts do not accurately measure Inergy’s exposure to market or credit risks.

Fair Value

The fair value of all derivative instruments related to price risk management activities as of September 30, 2005 and 2004 was assets of $58.4 million and $23.0 million, respectively, and liabilities of $49.6 million and $29.6 million, respectively.

The net change in unrealized gains and losses related to all price risk management activities and propane based financial instruments for the years ended September 30, 2005, 2004 and 2003 of $24.1 million, $(1.2) million, and $0.8 million, respectively, are included in cost of product sold in the accompanying consolidated statements of operations. The Partnership recognized a non-cash gain of $19.4 million on price risk management activities and propane based financial instruments for the year ended September 30, 2005, no similar gain was recognized in the years ended September 30, 2004 and 2003.

43

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The following table summarizes the change in the unrealized fair value of energy contracts related to risk management activities for the years ended September 30, 2005 and 2004 where settlement has not yet occurred (in thousands of dollars):

	Year Ended September 30, 2005			Year Ended September 30, 2004
Net unrealized gains and (losses) in fair value of contracts outstanding at beginning of period	$	(6,626	)	$	3,104
Initial recorded value of new contracts entered into during the period		1,881			2,723
Other unrealized gains and (losses) recognized		18,197			(13,148	)
Less: realized gains and (losses) recognized		(4,668	)		695
Net unrealized gains and (losses) in fair value of contracts outstanding at end of period	$	8,784		$	(6,626	)

Of the outstanding unrealized gain (loss) as of September 30, 2005 and 2004, contracts with a maturity of less than one year totaled $8.8 million and $(6.6) million, respectively and contracts with a maturity of greater than one year were not significant in 2005. There were no contracts maturing in excess of fifteen months in 2005 and no contracts maturing in excess of one year in 2004.

During the years ended September 30, 2005, 2004, and 2003, the Partnership recognized a net loss of $0.8 million, $0.1 million, and $0.2 million, respectively, related to the ineffective portion of its fair value commodity hedging instruments and a net loss of $0.6 million, $1.0 million, and $0.5 million, respectively, related to the portion of the fair value commodity hedging instruments excluded from the assessment of hedge effectiveness. Changes in the fair value of derivative instruments that are not designated as hedges are recorded in current period earnings in accordance with SFAS 133.

As of September 30, 2005, the total amount of deferred net gains recorded in other comprehensive income is expected to be reclassified to future earnings, contemporaneously with the related physical purchase or delivery of the underlying commodity. During the year ended September 30, 2005, there was no ineffectiveness related to cash flow hedges and no amounts were reclassified to earnings from other comprehensive income in connection with forecasted transactions that were no longer considered probable of occurring. The net gain deferred in other comprehensive income at September 30, 2005 is expected to be reclassified into earnings in the next twelve months. Since a portion of these amounts is based on market prices at the current period end, actual amounts to be reclassified will differ and could vary materially as a result of changes in market conditions.

Market and Credit Risk

Inherent in the resulting contractual portfolio are certain business risks, including market risk and credit risk. Market risk is the risk that the value of the portfolio will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract. The Partnership monitors market risk through a variety of techniques, including daily reporting of the portfolio’s value to senior management. The Partnership provides for such risks at the time derivative financial instruments are adjusted to fair value and when specific risks become known. The Partnership attempts to minimize credit risk exposure through credit policies and periodic monitoring procedures as well as through customer deposits and letters of credit, as deemed appropriate. The counterparties associated with assets from price risk management activities as of September 30, 2005 and 2004 are generally propane users, retailers and resellers, and energy marketers and dealers.

44

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

4. Long-Term Debt

Long-term debt consisted of the following (in thousands):

	September 30,
	2005		2004
Inergy, L.P. credit agreement	$	126,800	$	132,153
Inergy, L.P. senior unsecured notes		423,352		—
Obligations under noncompetition agreements and notes to former owners of businesses acquired		9,579		5,446
Other		—		2
Inergy Holdings, L.P. bank facility		3,109		15,652
Inergy Holdings, L.P. term loan		25,000		—
		587,840		153,253
Less current portion		17,931		25,017
	$	569,909	$	128,236

On August 9, 2005, the Company entered into a $25 million term loan with a bank (“Term Loan”). The maturity date of the Term Loan is August 9, 2008 and is collateralized by certain of our interests in Inergy, L.P. In addition, the Term Loan is guaranteed by IPCH Acquisition Corp. and New Inergy Propane, LLC. The proceeds from this loan were used to acquire 769,941 special units in Inergy, L.P. in connection with the acquisition of the rights to the Phase II expansion project of the Stagecoach acquisition. The Bank Facility contains several covenants which, among other things, require the maintenance of various financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions.

On July 22, 2005, the Company executed a credit agreement (“Bank Facility”) with a bank. The Bank Facility consists of a $15 million working capital revolver for Inergy Holdings, L.P. and a $5 million working capital revolver for IPCH Acquisition Corp. The maturity date of the Bank Facility is July 22, 2008 and is collateralized by certain of our interests in Inergy, L.P. In addition, the Bank Facility is guaranteed by New Inergy Propane, LLC. The prime rate and LIBOR plus the applicable spreads were between 5.48% and 5.59% at September 30, 2005 for all outstanding debt under the Bank Facility. The credit agreement contains several covenants which, among other things, require the maintenance of various financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions.

On April 28, 2005, the Company entered into a $69.0 million term loan with a bank. The maturity date of this term loan was December 31, 2005 and was collateralized by all of our interests in Inergy. In addition, this term loan was guaranteed by each of our wholly-owned subsidiaries. Borrowings under this term loan bore interest at our option at a floating rate equal to either the prime rate plus 1.50% or LIBOR (preadjusted for reserves) plus 2.50%. Borrowings under this term loan were used to refinance the August 30, 2004 credit agreement described below, to repurchase certain interests from our partners and to make distributions to our pre-initial public offering owners. On June 24, 2005 a portion of the proceeds from the Company’s initial public offering of 3,910,000 common units was used to repay all amounts borrowed under this term loan and this Term Loan was terminated.

Effective August 30, 2004, the Company executed a credit agreement with a bank. This credit agreement consisted of a $15 million term loan and a $5 million working capital revolver and had an original expiration of

45

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

August 30, 2009. The obligation under this credit agreement was secured by certain common units, senior subordinated units and junior subordinated units in Inergy, L.P. held by the Company and its wholly owned subsidiaries. This credit agreement was also guaranteed by IPCH Acquisition Corp. and New Inergy Propane, LLC. The interest rate was 4.17% at September 30, 2004. On April 28, 2005, the Company retired all outstanding indebtedness on this credit agreement using the proceeds from the Term Loan.

On December 17, 2004, Inergy, L.P. entered into a 5-Year Credit Agreement (the “Credit Agreement”) with its existing lenders in addition to others. The Credit Agreement consists of a $75 million revolving working capital facility (“Working Capital Facility”) and a $350 million revolving acquisition facility (the “Acquisition Facility”). The Credit Agreement carries terms, conditions and covenants substantially similar to Inergy, L.P.’s previous credit agreement. The Credit Agreement is secured by a first priority lien on substantially all of Inergy’s assets and those of its domestic subsidiaries and the pledge of all of the equity interests or membership interests in its domestic subsidiaries. In addition, the Credit Agreement is guaranteed by each of the Partnership’s domestic subsidiaries. The Partnership has the option to use up to $25.0 million of available borrowing capacity from its Acquisition Facility for working capital purposes.

The Partnership is required to reduce the principal outstanding on the revolving working capital line of credit to $5 million or less for a minimum of 30 consecutive days during the period commencing March 1 and ending September 30. As such, $5 million and $4 million of the outstanding balance at September 30, 2005 and 2004, respectively, have been classified as a long-term liability in the accompanying consolidated balance sheets. At September 30, 2005, the balance outstanding under this credit agreement was $126.8 million, including $20 million under the Working Capital Facility. At September 30, 2004, borrowings under the previous credit facility were $132.2 million, including $26.4 million under the revolving working capital facility. The prime rate and LIBOR plus the applicable spreads were between 6.19% and 7.75% at September 30, 2005, and between 3.77% and 4.75% at September 30, 2004, for all outstanding debt under the respective credit agreements.

The Credit Agreement contains several covenants which, among other things, require the maintenance of various financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions. Unused borrowings under the Credit Agreement amounted to $276.2 million at September 30, 2005. Unused borrowings under the previous credit facility were $162.2 million at September 30, 2004.

On November 7, 2005, the Partnership amended the Credit Agreement with existing lenders to, among other changes, have the following impact to the credit provisions of the agreement:

• Lowered the applicable margin in the leverage-based pricing grid;

• Extended the maturity from December 17, 2009 to November 10, 2010;

• Increased to $75.0 million the effective amount of working capital borrowings available through the utilization of the Acquisition Facility; and

• Other terms, conditions, and covenants remained materially unchanged

In December 2004, the Partnership entered into a 364-day credit facility and borrowed $375.0 million under this facility. The borrowings under this facility were used to finance part of the Star Gas acquisition and related expenses. The 364-day credit facility was guaranteed by all of our domestic subsidiaries and was secured on an equal basis with its revolving credit facilities. The borrowings under this facility were permanently repaid with the net proceeds from our offering of senior unsecured notes and the 364-day facility was terminated. This resulted in the write-off of deferred financing costs associated with the 364-day facility of $5.5 million.

46

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Senior Unsecured Notes

On December 22, 2004, the Partnership and its wholly-owned subsidiary, Inergy Finance Corp., completed a private placement of $425 million in aggregate principal amount of 6.875% senior unsecured notes due 2014 (the “Senior Notes”). The Senior Notes contain covenants similar to the Credit Agreement. The net proceeds from the Senior Notes were used to repay all amounts drawn under the 364-day credit facility, with the $39.9 million balance of the net proceeds being applied to the Acquisition Facility.

The Senior Notes represent senior unsecured obligations and rank pari passu in right of payment with all of the Partnership’s other present and future senior indebtedness. The Senior Notes are jointly and severally guaranteed by all current domestic subsidiaries and have certain call features which allow the Partnership to redeem the Senior Notes at specified prices based on date redeemed.

Subsequently, on October 26, 2005, Inergy completed an offer to exchange its existing Senior Notes for $425 million of 6.875% senior notes due 2014 (the “Exchange Notes”) that are registered and do not carry transfer restrictions, registration rights and provisions for additional interest. The Exchange Notes did not provide us with any additional proceeds and satisfied our obligations under the registration rights agreement.

The Partnership is party to four interest rate swap agreements scheduled to mature in December 2014, each designed to hedge $25 million in underlying fixed rate senior unsecured notes, in order to manage interest rate risk exposure. These swap agreements, which expire on the same date as the maturity date of the related Senior Notes and contain call provisions consistent with the underlying Senior Notes, require the counterparty to pay the Partnership an amount based on the stated fixed interest rate due every six months. In exchange, the Partnership is required to make semi-annual floating interest rate payments on the same dates to the counterparty based on an annual interest rate equal to the 6 month LIBOR interest rate plus spreads between 1.95% and 2.20% applied to the same notional amount of $100 million. The swap agreements have been recognized as fair value hedges. Amounts to be received or paid under the agreements are accrued and recognized over the life of the agreements as an adjustment to interest expense. The Partnership recognized an approximate $1.6 million decrease in the fair market value of the related Senior Notes at September 30, 2005 with a corresponding decrease in the fair value of its interest rate swaps, which are recorded in other long term liabilities.

Notes Payable and Other Obligations

Noninterest-bearing obligations due under noncompetition agreements and other note payable agreements consist of agreements between the Partnership and the sellers of retail propane companies acquired from fiscal years 1999 through 2005 with payments due through 2014 and imputed interest ranging from 6.0% to 10.0%. Noninterest-bearing obligations consist of $11.5 million and $6.9 million in total payments due under agreements, less unamortized discount based on imputed interest of $1.9 million and $1.4 million at September 30, 2005 and 2004, respectively.

The aggregate amounts of principal to be paid on the outstanding long-term debt during the next five years ending September 30 and thereafter are as follows, in thousands of dollars:

2006	$	17,931
2007		2,175
2008		30,134
2009		923
2010		112,346
Thereafter		424,331
	$	587,840

47

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

In June 2002, Inergy Propane entered into a note purchase agreement with a group of institutional lenders pursuant to which it issued $85.0 million aggregate principal amount of senior secured notes with a weighted average interest rate of 9.07% and a weighted average maturity of 5.9 years. The funds from a public unit offering by Inergy, together with net new borrowings under a then-existing revolving credit facility were used to repay in full $85.0 million aggregate principal amount of senior secured notes, plus interest expense related to a make whole premium charge of approximately $17.9 million in January 2004. All interest rate swap agreements were cancelled in conjunction with the repayment of $85 million of senior secured notes. The interest expense related to the make whole premium charge of $17.9 million was recorded as a charge to earnings in the quarter ended March 31, 2004 together with the write-off of the $1.2 million deferred financing costs associated with the senior secured notes, partially offset by a $0.9 million gain from the cancellation of the interest rate swaps.

In August 2002, Inergy Propane entered into two interest rate swap agreements, each designed to hedge $10 million in underlying fixed rate senior secured notes, in order to manage interest rate risk exposure and reduce overall interest expense. In October 2002, Inergy Propane entered into three additional interest rate swap agreements each designed to hedge $5 million in underlying fixed rate senior secured notes. In January 2004, all interest rate swap agreements were cancelled in conjunction with the repayment of $85 million of senior secured notes.

5. Investments

The Company had investments in other marketable securities with a cost of $101,000 and $601,000 and a fair value of $300,000 and $645,000 at September 30, 2004 and 2003, respectively. The unrealized gain of $199,000 and $44,000 at September 30, 2004 and 2003, respectively, is reported as a component of partner’s capital. There were no investments in other marketable securities at September 30, 2005.

6. Leases

The Partnership has certain noncancelable operating leases, mainly for office space and vehicles, which expire at various times over the next ten years.

Future minimum lease payments under noncancelable operating leases for the next five years ending September 30 and thereafter consist of the following, in thousands of dollars:

	Year Ending September 30
2006	$	5,751
2007		4,657
2008		3,590
2009		1,947
2010		802
Thereafter		1,829
Total minimum lease payments	$	18,576

Rent expense for operating leases during 2005, 2004, and 2003 totaled $7.9 million, $4.5 million, and $2.8 million, respectively.

The Partnership has certain related party leases, discussed in Note 12, of real property payable to Pascal Enterprises and Robert A. Pascal. Robert A. Pascal is the sole shareholder of United Propane (now known as Bonavita, Inc.), Pascal Enterprises and United Leasing and is on Inergy’s managing general partner’s board of directors.

48

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

7. Income Taxes (Restated—See Note 18)

The provision for income taxes for the years ended September 30, 2005, 2004, and 2003 consists of the following, in thousands of dollars:

	Year Ended September 30,
	2005			2004			2003
Current:
Federal	$	1,092		$	1,380		$	395
State		191			417			108
Total current		1,283			1,797			503
Deferred:
Federal		(653	)		(1,383	)		20
State		(129	)		(213	)		(81	)
Total deferred		(782	)		(1,596	)		(61	)
Provision for income taxes	$	501		$	201		$	442

The effective rate differs from the statutory rate because the income tax provision for the years ended September 30, 2005, 2004 and 2003, relates to taxable income of the corporations as discussed in Note 1.

Deferred income taxes related to IPCHA, Wilson and Rolesville reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the deferred income taxes at September 30, 2005, September 30, 2004 and September 30, 2003 are as follows, in thousands of dollars:

	September 30,
	2005			2004			2003
Deferred tax assets:
NOL carryforward	$	1,285		$	1,728		$	2,171
		1,285			1,728			2,171
Deferred tax liabilities:
Basis difference in stock of acquired company		(18,500	)		(19,726	)		(21,765	)
		(18,500	)		(19,726	)		(21,765	)
Net deferred tax liability	$	(17,215	)	$	(17,998	)	$	(19,594	)

The net operating loss carryforwards of $3.8 million fully expire by September 30, 2020.

8. Partners’ Capital

The partners of the Company receive a portion of the distributions earned. Distributions paid by the Company to its partners amounted to $63.4 million, $21.5 million and $4.7 million for the years ended September 30, 2005, 2004 and 2003 respectively. On September 3, 2004, the Company declared a distribution of $15.0 million to be distributed in the form of promissory notes to its partners in November 2004. The promissory notes, which mature on November 15, 2014, are due in installments of $375,000 and bear interest at the rate of 3% annually. These notes were paid off in July 2005. This distribution is reflected in the balance sheet as a promissory note distribution payable as of September 30, 2004.

49

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Effective October 1, 2002, the Company received a cash contribution of $3.7 million in exchange for a 4% common percentage interest in the Company. The interest purchase agreement related to this purchase contained a redemption feature which could require the Company to redeem the interest upon the occurrence of certain limited events, at the amount contributed, subject to adjustment for distributions in excess of net income. These events are all within the control of the Company and, accordingly, the contribution has been reflected as members’ equity.

Effective March 31, 2003, NIP distributed 39,000 Inergy, L.P. senior subordinated units and 19,500 Inergy, L.P. junior subordinated units to Partners, which in turn distributed these units to the Company. The Company immediately distributed these units to a member in exchange for a 2% common membership percentage interest in the Company. The Company also has an option with this member to acquire a 1.2% common membership percentage interest in exchange for 75,000 Inergy, L.P. senior subordinated units and 37,500 Inergy, L.P. junior subordinated units. This option expired June 30, 2005.

Effective October 17, 2003, certain members of the Company redeemed 2.25% common membership percentage interests for $2.3 million.

Effective October 24, 2003, the Company received a cash contribution of $1.5 million in exchange for a 1.5% common membership percentage interest in the Company.

During November 2004, the Company received cash contributions of $5.6 million as a result of the exchange of employee options for membership interest agreements and the subsequent exercise of those agreements.

In April 2005, the Company exercised a call option to purchase a portion of a Partners’ interest for $3.0 million.

In June 2005, the Company issued 3,910,000 common units of Inergy Holdings, L.P. in its initial public offering for net proceeds of approximately $80.0 million.

9. Long-Term Incentive Plan

Inergy Holdings, L.P. Long-Term Incentive Plan

Our general partner sponsors the Inergy Holdings Long-Term Incentive Plan for the employees, directors and consultants of our general partner and employees, directors and consultants of our affiliates who perform services for the Company. The long-term incentive plan consists of four components: restricted units, phantom units, unit appreciation rights and unit options. The long-term incentive plan limits the aggregate number of units that may be delivered pursuant to awards to 2,000,000 units. Through September 30, 2005, the Company has granted an aggregate of 675,000 unit options outstanding pursuant to the long-term incentive plan. The plan is administered by the compensation committee of the board of directors of our general partner.

Restricted Units. A restricted unit is a common unit that vests over a period of time and that during such time is subject to forfeiture. The Company has not granted restricted units under the long-term incentive plan. In the future, the compensation committee may determine to make grants of restricted units under the plan to employees, directors and consultants containing such terms as the compensation committee determines. The compensation committee will determine the period over which restricted units granted to participants will vest. The compensation committee, in its discretion, may base its determination upon the achievement of specified financial objectives or other events. In addition, the restricted units will vest upon a Change in Control, as defined in the plan. Distributions made on restricted units may be subjected to the same vesting provisions as the

50

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

restricted unit. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s restricted units will be automatically forfeited unless, and to the extent, the compensation committee or the terms of the award agreement provide otherwise.

Phantom Units. A phantom unit entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, cash equivalent to the value of a common unit. The Company has not granted phantom units under the long-term incentive plan. The compensation committee will determine the period over which phantom units granted to employees and members of our board will vest. The committee, in its discretion, may base its determination upon the achievement of specified financial objectives or other events. In addition, the phantom units will vest upon a Change in Control. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s phantom units will be automatically forfeited unless, and to the extent, the compensation committee or the terms of the award agreement provide otherwise.

Unit Appreciation Rights. The long-term incentive plan permits the grant of unit appreciation rights. A unit appreciation right is an award that, upon exercise, entitles the participant to receive the excess of the fair market value of a unit on the exercise date over the exercise price established for the unit appreciation right. Such excess will be paid in common units or, in the discretion of the compensation committee, in cash. The Company has not granted unit appreciation rights under our long-term incentive plan. In the future, the compensation committee may determine to make grants of unit appreciation rights under the plan to employees and members of our board of directors containing such terms as the committee determines. Unit appreciation rights will have an exercise price that may be greater or less than the fair market value of the common units on the date of grant, in the discretion of the compensation committee. In general, unit appreciation rights granted will become exercisable over a period determined by the compensation committee. In addition, the unit appreciation rights will become exercisable upon a Change in Control. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s unvested unit appreciation rights will be automatically forfeited unless, and to the extent, the grant agreement or compensation committee provides otherwise.

Unit Options. The long-term incentive plan permits the grant of options covering common units. The compensation committee may make grants under the plan to employees, consultants and members of our board containing such terms as the committee determines. Unit options granted under the long-term incentive plan will generally have an exercise price equal to the fair market value of the units on the date of grant. In general, unit options granted will become exercisable over a period determined by the compensation committee. In addition, the unit options will become exercisable upon a Change in Control. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s unvested unit options will be automatically forfeited unless, and to the extent, the option agreement or the compensation committee provides otherwise.

A summary of the Company’s unit option activity for the year ended September 30, 2005 is as follows:

	Range of Exercise Prices		Weighted- Average Exercise Price		Number of Units
Outstanding at September 30, 2004		—		—	—
Granted	$	22.50-$33.45	$	23.33	715,000
Exercised		—		—	—
Canceled		$22.50	$	22.50	40,000
Outstanding at September 30, 2005	$	22.50-$33.45	$	23.40	675,000

51

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Information regarding options outstanding as of September 30, 2005 is as follows:

Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contracted Life (years)	Weighted Average Exercise Price
$  22.50–$  33.45	675,000	9.7	$	23.40

The weighted-average remaining contract life for options outstanding at September 30, 2005 is approximately 9.7 years. Pro forma information regarding net income and earnings per share, as required by SFAS No. 123, is included in Note 1. SFAS No. 123 requires the pro forma information be determined as if the Company has accounted for its employee unit options under the fair value method of that statement. As described below, the fair value accounting provided under SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee unit options. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:

	2005
Weighted average fair value of options granted	$	2.61
Expected volatility		0.167
Distribution yield		4.0	%
Expected life of option in years		5
Risk-free interest rate		3.9	%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected unit price volatility. Because Inergy’s employee unit options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee unit options.

Inergy, L.P. Long-Term Incentive Plan

The Partnership’s managing general partner sponsors the Partnership Long-Term Incentive Plan for its employees, consultants, and directors and the employees of its affiliates that perform services for the Partnership. The long-term incentive plan currently permits the grant of awards covering an aggregate of 1,735,100 Inergy Common Units, which can be granted in the form of unit options and/or restricted units; however, not more than 565,600 restricted units may be granted under the plan. With the exception of 56,000 unit options (exercise prices from $1.92 to $5.34) granted to non-executive employees in exchange for option grants made by the predecessor in fiscal 1999, all of which have been grandfathered into the long-term incentive plan and are presented as grants in the table below, all unit options and restricted units granted under the plan will vest no sooner than, and in the same proportion as, Senior Subordinated Units convert into Inergy Common Units as described in Note 17. The compensation committee of the managing general partner’s board of directors administers the plan.

Restricted Units

A restricted unit is a “phantom” unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit, or at the discretion of the compensation committee, cash equivalent to the value of a common unit. In general, restricted units granted to employees will vest three years from the date of grant and are subject to the vesting provisions described above in connection with the Subordination Period. In addition, the restricted units will become exercisable upon a change of control of the managing general partner or the Partnership.

52

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The restricted units are intended to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of the Common Units. Therefore, plan participants will not pay any consideration for the Common Units they receive, and the Partnership will receive no remuneration for the units.

As of September 30, 2005, there were no restricted units issued under the long-term incentive plan.

Unit Options

Unit options issued under the long-term incentive plan will generally have an exercise price equal to the fair market value of the units on the date of grant. In general, unit options will expire after 10 years and are subject to the vesting provisions described above in connection with the Subordination Period. In addition, most unit option grants made under the plan provide that the unit options will become exercisable upon a change of control of the managing general partner or Inergy. None of the outstanding unit options were exercisable at September 30, 2005.

A summary of the Partnership’s unit option activity for the years ended September 30, 2005, 2004, and 2003, is as follows:

	Range of Exercise Prices		Weighted- Average Exercise Price		Number of Units
Outstanding at September 30, 2002	$	1.92–$15.35	$	11.60	996,464
Granted	$	13.75–$20.13	$	16.53	308,000
Exercised		—		—	—
Canceled	$	10.00–$15.35	$	10.54	227,400
Outstanding at September 30, 2003	$	1.92–$20.13	$	13.10	1,077,064
Granted	$	20.96–$24.71	$	23.11	84,000
Exercised		—		—	—
Canceled	$	13.83–$15.35	$	14.51	46,000
Outstanding at September 30, 2004	$	1.92–$24.71	$	13.79	1,115,064
Granted	$	27.14–$31.32	$	28.81	100,500
Exercised		—		—	—
Canceled	$	10.00–$27.14	$	16.81	103,000
Outstanding at September 30, 2005	$	1.92–$31.32	$	14.87	1,112,564

Information regarding options outstanding as of September 30, 2005 is as follows:

Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contracted Life (years)	Weighted Average Exercise Price
$  1.92–$  8.19	25,564	5.8	$	2.37
$10.00–$11.00	475,500	5.7		10.81
$13.75–$16.90	391,000	7.1		15.20
$19.43–$24.14	125,000	8.1		21.09
$27.14–$31.32	95,500	9.5		28.90
	1,112,564	6.8	$	14.87

53

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The weighted-average remaining contract life for options outstanding at September 30, 2005 is approximately seven years. Pro forma information regarding net income and earnings per share, as required by SFAS No. 123, is included in Note 1. SFAS No. 123 requires the pro forma information be determined as if Inergy has accounted for its employee unit options under the fair value method of that statement. As described below, the fair value accounting provided under SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee unit options. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:

	2005			2004			2003
Weighted average fair value of options granted	$	1.36		$	1.41		$	1.97
Expected volatility		0.158			0.159			0.230
Distribution yield		7.0	%		6.9	%		7.5	%
Expected life of option in years		5			5			5
Risk-free interest rate		3.5	%		3.2	%		3.0	%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected unit price volatility. Because Inergy’s employee unit options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee unit options.

Inergy, L.P. Unit Purchase Plan

The Partnership’s managing general partner sponsors a unit purchase plan for its employees and the employees of its affiliates. The unit purchase plan permits participants to purchase Inergy Common Units in market transactions from the Partnership, the general partners or any other person. All purchases made have been in market transactions, although the plan allows the Partnership to issue additional units. The Partnership has reserved 100,000 units for purchase under the unit purchase plan. As determined by the compensation committee, the managing general partner may match each participant’s cash base pay or salary deferrals by an amount up to 10% of such deferrals and have such amount applied toward the purchase of additional units. The managing general partner has also agreed to pay the brokerage commissions, transfer taxes and other transaction fees associated with a participant’s purchase of Inergy Common Units. The maximum amount that a participant may elect to have withheld from his or her salary or cash base pay with respect to unit purchases in any calendar year may not exceed 10% of his or her base salary or wages for the year. Units purchased on behalf of a participant under the unit purchase plan generally are to be held by the participant for at least one year. To the extent a participant desires to sell or dispose of such units prior to the end of this one year holding period, the participant will be ineligible to participate in the unit purchase plan again until the one year anniversary of the date of such sale. The unit purchase plan is intended to serve as a means for encouraging participants to invest in Inergy Common Units. Units purchased through the unit purchase plan by the Partnership and its employees for the fiscal years ended September 30, 2005, 2004, and 2003 were 10,496 units, 9,518 units, and 10,277 units, respectively.

10. Employee Benefit Plans

A 401(k) profit-sharing plan is available to all of the Partnership’s employees who have completed 30 days of service. The plan permits employees to make contributions up to 75% of their salary, up to statutory limits, which was $14,000 in 2005. The plan provides for matching contributions by the Partnership for employees

54

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

completing one year of service of at least 1,000 hours. Aggregate matching contributions made by the Partnership were $1.2 million, $0.4 million, and $0.3 million in 2005, 2004, and 2003, respectively. For fiscal year 2005, the Partnership made contributions on behalf of its union employees to union sponsored defined benefit plans of $1.5 million. Contributions in 2004 and 2003 were not significant.

11. Commitments and Contingencies

The Partnership periodically enters into agreements to purchase fixed quantities of liquid propane and distillates at fixed prices with suppliers. At September 30, 2005, the total of these firm purchase commitments was approximately $169.8 million. The Partnership also enters into agreements to purchase quantities of liquid propane and distillates at variable prices with suppliers at future dates at the then prevailing market prices. At September 30, 2005, the quantity of these variable purchase commitments was approximately 70 million gallons.

At September 30, 2005, the Partnership was contingently liable for letters of credit outstanding totaling $22 million, which guarantees various transactions.

The Company is periodically involved in litigation proceedings. The results of litigation proceedings cannot be predicted with certainty; however, management believes that the Company does not have material potential liability in connection with these proceedings that would have a significant financial impact on its consolidated financial condition or results of operations.

The Partnership utilizes third-party insurance subject to varying retention levels of self-insurance, which management considers prudent. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims and general, product, vehicle, and environmental liability. Losses are accrued based upon management’s estimates of the aggregate liability for claims incurred using certain assumptions followed in the insurance industry and based on past experience.

To the extent they have not already been paid, certain employees are entitled to receive up to $1.7 million in aggregate of bonus payments at the end of the subordination periods of the Junior and Senior Subordinated Units. As these amounts will only become due if the employees remain employed by the Partnership, no amount has been accrued at September 30, 2005.

12. Related Party Transactions

In connection with Inergy’s acquisition of assets from United Propane, Inc. on July 31, 2003, Inergy entered into ten leases of real property formerly used by United Propane (now known as Bonavita, Inc.) in its business. Inergy entered into five of these leases with United Propane, three of these leases with Pascal Enterprises, Inc. and two of these leases with Robert A. Pascal. Each of these leases provides for an initial five-year term, and is renewable by Inergy for up to two additional terms of five years each. During the initial term of these leases, Inergy is required to make monthly rental payments totaling $59,167, of which $17,167 is payable to United Propane, $16,800 is payable to Pascal Enterprises, and $25,200 is payable to Mr. Pascal.

On May 1, 2004, Inergy Propane, LLC entered into a lease agreement with United Leasing, Inc. to lease a propane rail terminal known as the Curtis Bay Terminal for the base monthly rent of $15,000.

Robert A. Pascal is the sole shareholder of Bonavita, Inc., Pascal Enterprises and United Leasing and is on Inergy’s managing general partner’s board of directors.

In connection with the financing of Inergy’s Phase II expansion rights on its Stagecoach natural gas storage facility, on August 9, 2005 the Company entered into the Special Unit Purchase Agreement with Inergy. The

55

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Company purchased from Inergy 769,741 special units (the “Special Units”) for $25 million in cash using funds from a bank loan. These units are not entitled to current cash distributions, but are convertible to Inergy Common Units at a defined conversion ratio upon the Phase II expansion becoming commercially operational. The purchase price was based on the ten-day average closing price for the Inergy Common Units ending August 8, 2005. Since Inergy, L.P. is consolidated in the financial statements of Inergy Holdings, L.P., the Inergy Special Units eliminate in consolidation and only the $25 million term loan is presented in the financial statements.

On August 9, 2005, the Company also entered into a separate Registration Rights Agreement with Inergy relating to the Special Units that allows for the registered resale of the units. Pursuant to the Registration Rights Agreement, Inergy has agreed to file a shelf registration statement for the resale of the Common Units issuable upon conversion of the Special Units within 180 days after the issue date of the Special Units and to use commercially reasonable efforts to cause the shelf registration statement to be declared effective by the SEC within 240 days after the issue date.

On occasion, the Company reimburses Inergy for expenses paid on our behalf. At September 30, 2005, Inergy has a receivable from the Company of $280,368.

13. Segments

The Company’s financial statements reflect two operating and reportable segments: propane operations and midstream operations, which represents a change from retail and wholesale segments previously reported. The change was related to further diversification of the Company’s business profile and growth of the Company. The Company’s propane operations include propane sales to end users, the sale of propane-related appliances and service work for propane-related equipment, the sale of distillate products and wholesale distribution of propane and provide marketing and price risk management services to other users, retailers and resellers of propane. The Company’s midstream operations include storage of natural gas liquids for third parties, fractionation of natural gas liquids, processing of natural gas liquids, distribution of natural gas liquids, primarily from the Company’s Stagecoach business and NGL business. The Company’s President and Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM). The CODM evaluates performance and allocates resources based on revenues and gross profit of each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment revenues and profits associated with propane sales and other services between the propane and midstream segments have been eliminated.

The identifiable assets associated with each reportable segment reviewed by the CODM include accounts receivable and inventories. Goodwill is also presented for each segment. The net asset/liability from price risk management, as reported in the accompanying consolidated balance sheets, is related to the propane segment and is specifically reviewed by the CODM. The Company does not report property, plant and equipment, purchases of property, plant, and equipment, intangible assets, and depreciation and amortization by segment to the CODM.

56

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Revenues, gross profit, identifiable assets, and goodwill for each of Company’s reportable segments are presented below, in thousands of dollars. Certain reclassifications have been made to the 2004 and 2003 segment reporting to conform to the 2005 presentation.

	Year Ended September 30, 2005
	Propane Sales Operations		Midstream Sales Operations		Intersegment Eliminations		Total
Retail propane revenues	$	526,531	$	—	$	—	$	526,531
Wholesale propane revenues		305,457		19,625		—		325,082
Storage, fractionation and other midstream revenues		—		77,007		—		77,007
Transportation revenues		11,145		—		—		11,145
Propane-related appliance sales revenues		11,260		—		—		11,260
Retail service revenues		14,770		—		—		14,770
Rental service and other revenues		12,360		—		—		12,360
Distillate revenues		71,981		—		—		71,981
Gross profit		307,077		18,836		—		325,913
Identifiable assets		196,295		20,968		—		217,263
Goodwill		233,885		22,711		—		256,596
	Year Ended September 30, 2004
	Propane Sales Operations		Midstream Sales Operations		Intersegment Eliminations		Total
Retail propane revenues	$	196,312	$	—	$	—	$	196,312
Wholesale propane revenues		226,183		8,707		—		234,890
Storage, fractionation and other midstream revenues		—		29,486		—		29,486
Transportation revenues		7,649		—		—		7,649
Propane-related appliance sales revenues		4,803		—		—		4,803
Retail service revenues		3,428		—		—		3,428
Rental service and other revenues		3,716		—		—		3,716
Distillate revenues		2,212		—		—		2,212
Gross profit		111,056		12,387		—		123,443
Identifiable assets		97,196		8,649		—		105,845
Goodwill		82,934		—		—		82,934
	Year Ended September 30, 2003
	Propane Sales Operations		Midstream Sales Operations		Intersegment Eliminations		Total
Retail propane revenues	$	153,348	$	—	$	—	$	153,348
Wholesale propane revenues		190,230		—		—		190,230
Storage, fractionation and other midstream revenues		—		—		—		—
Transportation revenues		9,087		—		—		9,087
Propane-related appliance sales revenues		3,495		—		—		3,495
Retail service revenues		1,902		—		—		1,902
Rental service and other revenues		2,793		—		—		2,793
Distillate revenues		2,510		—				2,510
Gross profit		96,355		—		—		96,355
Identifiable Assets		58,320		—		—		58,320
Goodwill		69,352		—		—		69,352

57

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

14. Quarterly Financial Data (Unaudited) (Restated—See Note 18)

Summarized unaudited quarterly financial data is presented below. The propane business is seasonal due to weather conditions in its service areas. Propane sales to residential and commercial customers are affected by winter heating season requirements, which generally results in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either net losses or lower net income during the period from April through September of each year. Sales to industrial and agricultural customers are much less weather sensitive.

	Quarter Ended
	December 31		March 31(a)		June 30			September 30(b)
	(In Thousands of Dollars, except per unit information)
Fiscal 2005
Revenues	$	257,465	$	414,428	$	173,602		$	204,641
Gross profit		64,688		136,513		50,604			74,108
Operating income (loss)		21,003		64,621		(15,411	)		7,705
Net income (loss)		1,310		10,446		(4,824	)		1,397
Net income (loss) per limited partner unit:(c) (d)
Basic	$	0.09	$	0.64	$	(0.29	)	$	0.07
Diluted	$	0.08	$	0.64	$	(0.29	)	$	0.07
Fiscal 2004
Revenues	$	132,581	$	178,068	$	69,715		$	102,132
Gross profit		37,117		50,320		16,987			19,019
Operating income (loss)		12,099		25,152		(8,640	)		(7,645	)
Net income (loss)		1,969		86		(836	)		(1,142	)
Net income (loss) per limited partner unit:(c) (d)
Basic	$	0.14	$	0.01	$	(0.06	)	$	(0.08	)
Diluted	$	0.13	$	0.01	$	(0.06	)	$	(0.07	)

^(a) For the quarter ended March 31, 2004 operating income reflects a make whole premium charge of $17.9 million, the write-off of deferred financing cost of $1.2 million, and a benefit of $0.9 million relating to swap value received upon the cancellation of outstanding interest rate swap agreements.

^(b) For the quarter ended September 30, 2005 gross profit reflects a non-cash gain associated with derivative contracts of $19.4 million which will reverse over the subsequent two quarters as the physical gallons are delivered to retail customers.

^(c) The accumulation of 2005 and 2004 basic and diluted net income (loss) per limited partner unit does not total the respective amounts for the fiscal years ended 2005 and 2004 due to changes in ownership percentages throughout the respective years.

^(d) The amounts are adjusted to give effect to the Conversion Transaction described in Note 1. When limited partners’ units outstanding are adjusted to give pro forma effect to excess distributions, basic net income (loss) per limited partner unit was $0.09, $0.57 and $(0.27) for the quarters ended December 31, 2004, March 31, 2005 and June 30, 2005, respectively.

15. Subsequent Events

On October 3, 2005, the Partnership acquired the assets of Atlas Gas Products, Inc. (“Atlas”), headquartered in Costonia, OH. Atlas delivers propane to approximately 7,000 customers from three retail locations.

On October 4, 2005, the Partnership acquired the assets of Dowdle Gas, Inc. (“Dowdle”), headquartered in Columbus, MS, effective October 1, 2005. Dowdle delivers in excess of 50 million gallons of retail propane to approximately 120,000 customers in Alabama, Florida, Georgia, Mississippi, and Tennessee from sixty-nine retail locations.

58

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

On October 14, 2005, the Partnership acquired the assets of Graeber Brothers, Inc. (“Graeber”), located in northern Mississippi, effective October 4, 2005. Graeber delivers retail propane to approximately 14,000 customers from six retail locations which are contiguous with the acquisition of Dowdle.

The total consideration paid for these acquisitions was approximately $165.0 million including working capital, assumed liabilities and acquisitions costs.

On November 14, 2005, the Company paid a quarterly distribution of $0.27, or $1.08 on an annualized basis to unitholders of record on November 7, 2005, with respect to the fourth fiscal quarter of 2005. In addition to the $0.27 distribution, the Company also paid $0.015 per unit to unitholders of record on November 7, 2005, representing a prorated quarterly distribution for the period of the third fiscal quarter ended June 30, 2005, which the Company was a public company.

16. Issuance of Subsidiary Units (Restated—See note 18)

In March 2003, Inergy issued 1,610,000 Common Units in a public offering, resulting in proceeds of $23.3 million, net of underwriter’s discounts, commissions, and offering expenses. Inergy Partners, LLC contributed $0.5 million in cash to the Partnership. in conjunction with the issuance in order to maintain its 2% non-managing general partner interest.

In June 2003, Inergy issued 5,302 Common Units in conjunction with the acquisition of Phillips Propane, Inc. Inergy Partners, LLC contributed $2,000 in cash to the Partnership in conjunction with the issuance in order to maintain its 2% non-managing general partner interest.

In July 2003, Inergy issued 1,779,812 Common Units and 508,518 senior subordinated units to the owner of United Propane, Inc. in conjunction with the acquisition of substantially all the propane assets of United Propane, Inc. Inergy Partners, LLC contributed $0.9 million in cash to Inergy in conjunction with the issuance in order to maintain its 2% non-managing general partner interest.

In January 2004, Inergy issued 3,625,000 Common Units in a public offering, resulting in proceeds of $83.3 million, net of underwriter’s discounts, commissions, and offering expenses. Inergy Partners, LLC contributed $1.8 million in cash to Inergy in conjunction with the issuance in order to maintain its 2% non-managing general partner interest. These funds were used to repay borrowings under Inergy’s Credit Agreement.

In August 2004, Inergy issued 1,300,000 Common Units to Tortoise Energy Infrastructure Corporation resulting in proceeds of $29.9 million, net of offering expenses.

In December 2004, Inergy issued 3,568,139 Common Units to unrelated third parties resulting in proceeds of $91.0 million. These proceeds were used to partially fund the acquisition of Star Gas.

Also in December 2004, Inergy issued 4,400,000 Common Units in a public offering, resulting in proceeds of $121.3 million, net of underwriter’s discount, commission, and offering expenses. These funds were used to repay borrowings under Inergy’s Credit Agreement.

In January 2005, the underwriters of Inergy’s December 2004 4,400,000 Common Unit offering exercised their over-allotment provision and Inergy, L.P. issued 660,000 Common Units in a follow-on offering, resulting in proceeds of approximately $17.9 million, net of underwriters’ discounts, commissions, and offering expenses. These funds were used to repay borrowings under Inergy’s Credit Agreement.

59

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

In September 2005, Inergy issued 6,500,000 Common Units in a public offering, resulting in proceeds of $180.4 million, net of underwriter’s discount, commission, and offering expenses. These funds were used to repay borrowings under Inergy’s Credit Agreement.

In October 2005, the underwriters of the September 2005 6,500,000 Common Unit offering exercised a portion of their over-allotment provision and Inergy issued an additional 900,000 Common Units in a follow-on offering, resulting in proceeds of approximately $25.0 million, net of underwriters’ discounts, commissions, and offering expenses. These funds were used to repay borrowings under Inergy’s Credit Agreement.

17. Distributions from Inergy, L.P.

The amended and restated Agreement of Limited Partnership of Inergy, L.P. (Partnership Agreement) contains specific provisions for the allocation of net earnings and losses to each of the partners for purposes of maintaining the partner capital accounts.

The Partnership Agreement provides that during the Subordination Period (as defined below), the Partnership may issue up to 1,600,000 additional Common Units (excluding common units issued in connection with conversion of subordinated units into Common Units) or an equivalent number of securities ranking on a parity with the Common Units. During 2003, the Partnership issued 246,372 of such Common Units, thus the Partnership currently retains the ability to issue 1,353,628 additional Common Units under this provision. The Partnership Agreement also provides that an unlimited number of partnership interests junior to the Common Units may be issued without a Unitholder vote. The Partnership may also issue additional Common Units during the Subordination Period in connection with certain acquisitions or the repayment of certain indebtedness. After the Subordination Period, the Partnership Agreement authorizes the General Partner to cause the Partnership to issue an unlimited number of limited partner interests of any type without the approval of any Unitholders.

Quarterly Distributions of Available Cash

The Partnership is expected to make quarterly cash distributions of all of its Available Cash, generally defined as income (loss) before income taxes plus depreciation and amortization, less maintenance capital expenditures and net changes in reserves established by the General Partner for future requirements. These reserves are retained to provide for the proper conduct of the Partnership business, or to provide funds for distributions with respect to any one or more of the next four fiscal quarters.

Distributions by the Partnership in an amount equal to 100% of its Available Cash will generally be made 98.8% to the common and subordinated unitholders and 1.2% to the General Partner, subject to the payment of incentive distributions to the holders of Incentive Distribution Rights to the extent that certain target levels of cash distributions are achieved. To the extent there is sufficient Available Cash, the holders of Common Units have the right to receive the Minimum Quarterly Distribution ($0.30 per Unit), plus any arrearages, prior to any distribution of Available Cash to the holders of subordinated units. Common Units will not accrue arrearages for any quarter after the Subordination Period (as defined below) and subordinated units will not accrue any arrearages with respect to distributions for any quarter.

In general, the Subordination Period will continue indefinitely until the first day of any quarter beginning after June 30, 2006 for the Senior Subordinated Units and June 30, 2008 for the Junior Subordinated Units in which distributions of Available Cash equal or exceed the Minimum Quarterly Distribution on the Common Units and the Subordinated Units for each of the three consecutive four-quarter periods immediately preceding such date. On August 13, 2004, 1,656,684 Senior Subordinated Units were converted to Common Units and on

60

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

August 12, 2005, an additional 1,656,684 Senior Subordinated Units were converted. Prior to the end of the Subordination Period, 286,272 Junior Subordinated Units will convert to Common Units after June 30, 2006 and 286,272 Junior Subordinated Units will convert to Common Units after June 30, 2007, if distributions of Available Cash on the Common Units and Subordinated Units equal or exceed the Minimum Quarterly Distribution for each of the three consecutive four-quarter periods preceding such date. Upon expiration of the Subordination Period, all remaining Subordinated Units will convert to Common Units.

The Partnership is expected to make distributions of its Available Cash within 45 days after the end of each fiscal quarter ending December, March, June, and September to holders of record on the applicable record date. The Partnership made distributions to unitholders, including the non-managing general partner, amounting to $67.8 million, $37.4 million, and $25.2 million during the years ended September 30, 2005, 2004, and 2003, respectively, or $1.91, $1.60, and $1.45 per unit, respectively, for the periods to which these distributions relate.

The Company owns all of the “incentive distribution rights” provided for in Inergy L.P.’s partnership agreement, which entitles it to receive increasing percentages, up to 48%, of any cash distributed by the Partnership in excess of $0.33 per unit in any quarter. In addition, the Company and its subsidiaries own 1,717,551 Common Units, 1,093,865 senior subordinated units and 975,924 junior subordinated units which on a combined basis approximate a 9.5% limited partner interest.

18. Restatements

On May 18, 2006, the Board of Directors of Inergy Holdings GP, LLC, the general partner of the Company, concluded that it will defer the previously recorded non-cash gains on the limited partnership units of Inergy it owns and restate its consolidated financial statements for the fiscal years ended September 30, 2005, 2004 and 2003 based on the application of Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 51 “Accounting for Sales of Stock by a Subsidiary” (“SAB 51”). The changes have no prior, current or future impact on the cash available for distributions to unitholders.

SAB 51 permits a parent company to recognize a gain and adjust the carrying value of its ownership of a subsidiary when the subsidiary sells additional equity interests in a public or private offering, in certain circumstances. However, in light of clarification provided in a speech by SEC staff, gain recognition under SAB 51 does not apply when the subsidiary is a partnership that sells a class of equity securities that has distribution rights over any other class of equity interests. Accordingly, the Company will reflect the proceeds from issuance of Inergy common units as a minority interest in its financial statements; and any gain that may be recognized will be recorded at such time as all Inergy subordinated and special units have converted to common units.

61

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The restatement resulted in the following revisions to the consolidated financial statements presented herein as follows: (in thousands, except per unit amounts)

Consolidated Balance Sheets

	September 30,
	2005			2004
As Previously Reported
Liabilities and partners’ capital
Deferred income taxes	$	21,382		$	20,165
Interest of non-controlling partners in Inergy L.P.		568,278			205,951
Common unitholders		53,178			2,868
Total partners’ capital	$	53,908		$	3,067
Restated
Liabilities and partners’ capital
Deferred income taxes	$	17,215		$	17,998
Interest of non-controlling partners in Inergy L.P.		633,098			246,001
Common unitholders		(7,475	)		(35,015	)
Total partners’ capital (deficiency)	$	(6,745	)	$	(34,816	)

Consolidated Statements of Operations

	Year ended September 30,
	2005			2004			2003
As Previously Reported
Gain on issuance of units in Inergy, L.P.	$	24,769		$	10,431		$	5,241
Provision for income taxes		(2,500	)		(1,176	)		(869	)
Net income		31,099			9,533			7,806
Total limited partners’ interest in net income	$	31,099		$	9,533		$	7,806
Net income per limited partner unit
Basic	$	1.81		$	0.76		$	0.63
Diluted	$	1.81		$	0.59		$	0.49
Restated
Gain on issuance of units in Inergy, L.P.	$	—		$	—		$	—
Provision for income taxes		(501	)		(201	)		(442	)
Net income		8,329			77			2,992
Total limited partners’ interest in net income	$	8,329		$	77		$	2,992
Net income per limited partner unit
Basic	$	0.49		$	0.01		$	0.24
Diluted	$	0.48		$	0.00		$	0.19

62

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Consolidated Statements of Partners’ Capital

	Partners’ Common Interest (Deficit)			Total Partners’ Capital (Deficiency)
As Previously Reported
Balance at September 30, 2002	$	24,926		$	24,928
Distribution by the Company of Inergy, L.P. senior and junior subordinated units in exchange for a member’s common interest in the Company		(1,065	)		(1,065	)
Net income		7,806			7,806
Comprehensive income					7,848
Balance at September 30, 2003		30,610			30,654
Net income		9,533			9,533
Comprehensive income					9,688
Balance at September 30, 2004		2,868			3,067
Net income		31,099			31,099
Comprehensive income					31,630
Balance at September 30, 2005	$	53,178		$	53,908
Restated
Balance at September 30, 2002	$	387		$	389
Distribution by the Company of Inergy, L.P. senior and junior subordinated units in exchange for a member’s common interest in the Company		(139	)		(139	)
Net income		2,992			2,992
Comprehensive income					3,034
Balance at September 30, 2003		2,183			2,227
Net income		77			77
Comprehensive income					232
Balance at September 30, 2004		(35,015	)		(34,816	)
Net income		8,329			8,329
Comprehensive income					8,860
Balance at September 30, 2005	$	(7,475	)	$	(6,745	)

63

Inergy, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The restatement resulted in the following revisions to the notes to consolidated financial statements presented herein as follows: (in thousands, except per unit amounts)

Accounting Policies

Accounting for Unit-Based Compensation

	Year ended September 30,
	2005		2004		2003
As Previously Reported
Net income as reported	$	31,099	$	9,533	$	7,806
Deduct: Total unit-based employee compensation expense determined under fair value method for all awards		123		37		36
Pro forma net income	$	30,976	$	9,496	$	7,770
Net income per limited partner unit
Basic—as reported	$	1.81	$	0.76	$	0.63
Diluted—as reported	$	1.81	$	0.59	$	0.49
Pro forma net income per limited partner unit
Basic	$	1.81	$	0.76	$	0.63
Diluted	$	1.80	$	0.59	$	0.48
Restated
Net income as reported	$	8,329	$	77	$	2,992
Deduct: Total unit-based employee compensation expense determined under fair value method for all awards		123		37		36
Pro forma net income	$	8,206	$	40	$	2,956
Net income per limited partner unit
Basic—as reported	$	0.49	$	0.01	$	0.24
Diluted—as reported	$	0.48	$	0.00	$	0.19
Pro forma net income per limited partner unit
Basic	$	0.48	$	0.00	$	0.24
Diluted	$	0.48	$	0.00	$	0.18

64

Inergy, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Income per Unit

	Year ended September 30,
	2005		2004		2003
As Previously Reported
Numerator:
Net income—basic and diluted	$	31,099	$	9,533	$	7,806
Denominator:
Weighted average limited partners’ units outstanding—basic		17,140		12,550		12,373
Effect of dilutive unit options outstanding		46		3,540		3,717
Weighted average limited partners’ units outstanding—diluted		17,186		16,090		16,090
Net income per limited partner unit (a)
Basic	$	1.81	$	0.76	$	0.63
Diluted	$	1.81	$	0.59	$	0.49
(a)     When limited partners’ units outstanding are adjusted to give pro forma effect to excess distributions, basic and diluted net income per limited partner unit were $1.68 and $1.67, respectively, for the year ended September 30, 2005.
Restated
Numerator:
Net income—basic and diluted	$	8,329	$	77	$	2,992
Denominator:
Weighted average limited partners’ units outstanding—basic		17,140		12,550		12,373
Effect of dilutive unit options outstanding		46		3,540		3,717
Weighted average limited partners’ units outstanding—diluted		17,186		16,090		16,090
Net income per limited partner unit
Basic	$	0.49	$	0.01	$	0.24
Diluted	$	0.48	$	0.00	$	0.19

Acquisitions

Pro forma data

	Year ended September 30,
	2005		2004
As Previously Reported
Net income	$	27,295	$	7,176
Limited partners’ interest in net income (loss)	$	27,295	$	7,176
Net income (loss) per limited partner unit
Basic	$	1.59	$	0.57
Diluted	$	1.59	$	0.45
Restated
Net income (loss)	$	4,525	$	(2,280	)
Limited partners’ interest in net income (loss)	$	4,525	$	(2,280	)
Net income (loss) per limited partner unit
Basic	$	0.26	$	(0.18	)
Diluted	$	0.26	$	(0.18	)

65

Inergy, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Income Taxes

	Year ended September 30,
	2005			2004			2003
As Previously Reported
Deferred
Federal	$	1,136		$	(509	)	$	403
State		81			(112	)		(37	)
Total deferred		1,217			(621	)		366
Provision for income taxes	$	2,500		$	1,176		$	869
Restated
Deferred
Federal	$	(653	)	$	(1,383	)	$	20
State		(129	)		(213	)		(81	)
Total deferred		(782	)		(1,596	)		(61	)
Provision for income taxes	$	501		$	201		$	442

	Year ended September 30,
	2005			2004			2003
As Previously Reported
Deferred tax liabilities
Basis difference in stock of acquired company	$	(22,667	)	$	(21,893	)	$	(22,957	)
Net deferred tax liability	$	(21,382	)	$	(20,165	)	$	(20,786	)
Restated
Deferred tax liabilities
Basis difference in stock of acquired company	$	(18,500	)	$	(19,726	)	$	(21,765	)
Net deferred tax liability	$	(17,215	)	$	(17,998	)	$	(19,594	)

66

Inergy, L.P. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Quarterly Financial Data (unaudited)

	Quarter ended
	December 31,		March 31,		June 30,			September 30,
As Previously Reported
Fiscal 2005
Net income (loss)	$	15,137	$	11,343	$	(4,830	)	$	9,449
Net income (loss) per limited partner unit
Basic	$	1.06	$	0.69	$	(0.29	)	$	0.47
Diluted	$	0.94	$	0.69	$	(0.29	)	$	0.47
Fiscal 2004
Net income (loss)	$	1,864	$	7,745	$	(1,197	)	$	1,121
Net income (loss) per limited partner unit
Basic	$	0.13	$	0.54	$	(0.09	)	$	0.08
Diluted	$	0.12	$	0.48	$	(0.09	)	$	0.07
Restated
Fiscal 2005
Net income (loss)	$	1,310	$	10,446	$	(4,824	)	$	1,397
Net income (loss) per limited partner unit
Basic	$	0.09	$	0.64	$	(0.29	)	$	0.07
Diluted	$	0.08	$	0.64	$	(0.29	)	$	0.07
Fiscal 2004
Net income (loss)	$	1,969	$	86	$	(836	)	$	(1,142	)
Net income (loss) per limited partner unit
Basic	$	0.14	$	0.01	$	(0.06	)	$	(0.08	)
Diluted	$	0.13	$	0.01	$	(0.06	)	$	(0.07	)

67

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INERGY HOLDINGS, L.P.
	By	Inergy Holdings GP, LLC
		(its general partner)
Dated: May 19, 2006	By	/S/    JOHN J. SHERMAN
		John J. Sherman, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following officers and directors of Inergy Holdings GP, LLC, as general partner of Inergy Holdings, L.P., the registrant, in the capacities and on the dates indicated.

Date	Signature and Title
May 19, 2006	/S/    JOHN J. SHERMAN
	John J. Sherman, President, Chief Executive Officer and Director (Principal Executive Officer)
May 19, 2006	/S/    R. BROOKS SHERMAN, JR.
	R. Brooks Sherman, Jr., Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
May 19, 2006	/S/    WARREN H. GFELLER
	Warren H. Gfeller, Director
May 19, 2006	/S/    ARTHUR B. KRAUSE
	Arthur B. Krause, Director
	Richard T. O’Brien, Director

68

Schedule II

Inergy Holdings, L.P. and Subsidiaries

Valuation and Qualifying Accounts

(in thousands)

Year ended September 30,	Balance at beginning of period		Charged to costs and expenses		Other Additions (recoveries)		Deductions (write-offs)			Balance at end of period
Allowance for doubtful accounts
2005	$	1,078	$	1,966	$	87	$	(775	)	$	2,356
2004		997		214		1,125		(1,258	)		1,078
2003		927		719		96		(745	)		997

69