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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(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, 2007

OR



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

For the transition period fromto.

Commission file number: 000-51304



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INERGY HOLDINGS, L.P.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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
|Common Units representing limited partnership interests |  | The NASDAQ Global Select National Market 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:    None



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

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 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
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. ̈

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.

Large accelerated filer ̈Accelerated filer  x                        Non-accelerated filer ̈

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

The aggregate market value of the 8,884,740 common units of the registrant held by non-affiliates computed by reference to the $48.61 closing price of such
common units on November 1, 2007, was approximately $431.9 million. The aggregate market value of the 5,339,063 common units of the registrant held by non-affiliates computed by reference to the $45.52 closing price of such common units on
March 31, 2007, the last business day of the registrants most recently completed second fiscal quarter, was approximately $243.0 million. As of November 19, 2007, the registrant had 20,209,016 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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



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GUIDE TO READING THIS REPORT

The following information should help you understand some of the conventions used in this report.



| |  |  | Throughout this report,
| | - |  | -----------------------

(1) when we use the terms we, us, our company, Holdings, or Inergy Holdings, L.P., we are referring either to Inergy Holdings, L.P., the registrant itself, or to Inergy Holdings,
L.P. and its operating subsidiaries collectively, as the context requires. The wholly owned subsidiaries of Inergy Holdings, L.P. are Inergy Partners, LLC (Partners), Inergy GP, LLC (GP), and IPCH Acquisition Corp.
(IPCHA).

(2) when we use the terms Inergy, or Inergy, L.P., we are referring to Inergy
L.P., and its wholly owned subsidiaries. Inergy, L.P. is a controlled subsidiary of Inergy Holdings, L.P.

(3) when we use
the term Inergy Propane, we are referring to Inergy Propane, LLC itself, or to Inergy Propane, LLC and its operating subsidiaries collectively, as the context requires. Inergy Propane, LLC is a wholly owned subsidiary of Inergy, L.P.

(4) when we use the term finance company, we are referring to Inergy Finance Corp., a subsidiary of Inergy,
L.P., formed on September 21, 2004.

(5) when we use the term general partner, we are referring to Inergy
Holdings GP, LLC.



| |  |  | Our general partner is responsible for the management of our company and its operations are governed by a board of directors. Our general partner does not have
economic rights to allocations or distributions from our company and does not receive a management fee, but it is reimbursed for expenses incurred on our behalf.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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INERGY HOLDINGS, L.P.

INDEX TO ANNUAL REPORT ON FORM 10-K



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | Page
|         |  | PART I                                                                                                          |  |     
|         |  |                                                                                                                
|Item 1.  |  | Business                                                                                                        |  | 1   
|         |  |                                                                                                                
|Item 1A. |  | Risk Factors                                                                                                    |  | 18  
|         |  |                                                                                                                
|Item 1B. |  | Unresolved Staff Comments                                                                                       |  | 38  
|         |  |                                                                                                                
|Item 2.  |  | Properties                                                                                                      |  | 38  
|         |  |                                                                                                                
|Item 3.  |  | Legal Proceedings                                                                                               |  | 39  
|         |  |                                                                                                                
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 39  
|         |  |                                                                                                                
|         |  | PART II                                                                                                         |  |     
|         |  |                                                                                                                
|Item 5.  |  | Market for the Registrants Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities |  | 40  
|         |  |                                                                                                                
|Item 6.  |  | Selected Financial Data                                                                                         |  | 41  
|         |  |                                                                                                                
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 43  
|         |  |                                                                                                                
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 64  
|         |  |                                                                                                                
|Item 8.  |  | Financial Statements and Supplementary Data                                                                     |  | 66  
|         |  |                                                                                                                
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 66  
|         |  |                                                                                                                
|Item 9A. |  | Controls and Procedures                                                                                         |  | 66  
|         |  |                                                                                                                
|Item 9B. |  | Other Information                                                                                               |  | 67  
|         |  |                                                                                                                
|         |  | PART III                                                                                                        |  |     
|         |  |                                                                                                                
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                          |  | 68  
|         |  |                                                                                                                
|Item 11. |  | Executive Compensation                                                                                          |  | 71  
|         |  |                                                                                                                
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters                   |  | 79  
|         |  |                                                                                                                
|Item 13. |  | Certain Relationships, Related Transactions and Director Independence                                           |  | 81  
|         |  |                                                                                                                
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 84  
|         |  |                                                                                                                
|         |  | PART IV                                                                                                         |  |     
|         |  |                                                                                                                
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                      |  | 85  



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PART I

Item 1. Business.

Recent Developments

On October 4, 2007, Inergy acquired the assets of Riverside Oil and Gas Company headquartered in Chestertown, New York. At the time of the acquisition, Riverside Oil and Gas delivered retail propane to
approximately 3,800 customers.

On October 5, 2007, Inergy acquired the membership interests of Arlington Storage Company, LLC (ASC). ASC
is the majority owner and operator of the Steuben Gas Storage Company (Steuben), which owns a natural gas storage facility located in Steuben County, New York, with approximately 6.2 bcf of working gas capacity, maximum withdrawal
capacity of 60 MMcf/day and maximum injection capability of 30 MMcf/day. In addition to Steuben, ASC owns the development rights to the Thomas Corners storage project (Thomas Corners). Thomas Corners is also located in Steuben County,
and, upon completion, will have a working gas capacity of approximately 5.7 bcf and maximum withdrawal and injection capabilities of 100 MMcf/day and 50 MMcf/day, respectively. Inergy expects the Thomas Corners project to be developed and
commercially operational by fall of 2009.

General

Inergy Holdings, L.P.

Our cash-generating assets consist of our partnership interests, including incentive distribution rights in Inergy,
L.P. (NASDAQ: NRGY), a publicly traded Delaware limited partnership, which operates a rapidly growing, geographically diverse retail and wholesale propane supply, marketing and distribution business. In addition to Inergys retail and wholesale
propane business, Inergy also owns and operates a growing midstream operation including a natural gas storage facility (Stagecoach), a liquefied petroleum gas (LPG) storage facility and a natural gas liquids (NGL)
business.

Our primary objective is to increase distributable cash flow to our unitholders through our ownership of partnership interests in Inergy. Our
incentive distribution rights in Inergy 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 increasing cash distributions to us. In addition,
we may elect to make additional investments in Inergy which would increase our ownership interest in Inergy. The proceeds of such investments may be used by Inergy to pursue its growth strategy.

Inergys primary objective is to increase distributable cash flow to its unitholders. Inergy has primarily grown through acquisitions of retail propane and certain
midstream operations. Inergy further intends to pursue its growth objectives through acquisitions of both propane and midstream operations, internally generated expansion, and measures aimed at increasing the profitability of existing operations.

Our aggregate partnership interests in Inergy as of September 30, 2007, 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 0.9% general partner interest in Inergy;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 4,706,689 Inergy common units, representing an aggregate limited partner interest in Inergy of approximately 9.4%; 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our cash flows consist of distributions from Inergy on the partnership interests we own. Inergy is required by its
partnership agreement to distribute all of its cash on hand at the end of each quarter, less reserves established by its managing general partner in its sole discretion to provide for the proper conduct of Inergys business or to provide for
future distributions. While we, like Inergy, are structured as a limited partnership, our capital structure and cash distribution policy differ materially from those of Inergy. Most notably, our general partner does not have an economic interest in
us and is not entitled to receive any distributions from us and our capital structure does not include incentive distribution rights. Therefore, our distributions are allocated exclusively to our common units, which is our only class of security
outstanding.

The incentive distribution rights entitle us to receive an increasing percentage of cash distributed by Inergy as certain target distribution
levels are reached. They generally entitle us to receive 13.0% of all cash distributed in a quarter after each Inergy unit has received $0.33 for that quarter, 23.0% of all cash distributed after each Inergy unit has received $0.375 for that quarter
and 48.0% of all cash distributed after each Inergy unit has received $0.45 for that quarter. For the quarter ended September 30, 2007, Inergy declared a distribution of $0.595 per unit, which resulted in our company receiving approximately
$11.4 million in distributions comprised of approximately $2.8 million from the limited partnership units we own of Inergy, approximately $0.4 million from our 0.9% non-managing general partner interest in Inergy and approximately $8.2 million from
the incentive distribution rights of Inergy.

On October 25, 2007, we declared a quarterly distribution on our common units of $0.535 per limited
partner unit, or $2.14 per limited partner unit on an annualized basis.

The address of our principal executive offices is Two Brush Creek Boulevard, Suite
200, Kansas City, Missouri, 64112 and our telephone number at this location is 816-842-8181. Our common units trade on the NASDAQ Global Select National Market under the symbol NRGP. We electronically file certain documents with the SEC.
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (as appropriate), along with any related amendments and supplements. From time-to-time, we also may file registration and related statements pertaining
to equity or debt offerings. You may read and download our SEC filings over the internet from several commercial document retrieval services as well as at the SECs website at www.sec.gov. You may also read and copy our SEC filings at the
SECs public reference room located at 100 F. Street, N.E., Washington, D.C. 20549. Please call the SEC 1-800-SEC-0330 for further information concerning the public reference room and any applicable copy charges. In addition, our SEC filings
are available at no cost after the filing thereof on our website at www.inergypropane.com. Please note that any internet addresses provided in this Form 10-K are for information purposes only and are not intended to be hyperlinks. Accordingly, no
information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.

Inergy, L.P.

Inergy, L.P., a publicly traded Delaware limited partnership, was formed on March 7, 2001 but did not conduct operations until the closing of its initial public
offering on July 31, 2001. Inergy owns and operates, principally through its operating company, Inergy Propane, LLC, a rapidly growing, geographically diverse retail and wholesale propane supply, marketing and distribution business. Inergy also
operates a growing midstream business that includes the Stagecoach natural gas storage facility, an LPG storage facility and an NGL business.

Inergy
believes it is the fifth largest propane retailer in the United States, excluding cooperatives, based on retail propane gallons sold. For the fiscal year ended September 30, 2007, Inergy sold approximately 362.2 million gallons of propane
to retail customers and sold approximately 383.9 million gallons of propane to wholesale customers. Inergys propane business includes the retail marketing, sale and distribution of propane, including the sale and lease of propane supplies
and equipment, to residential, commercial, industrial and agricultural customers. Inergy markets its propane products under various regional brand names. As of November 1, 2007, Inergy serves approximately 700,000 retail customers in 28 states
from 321 customer service centers which have



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an aggregate of approximately 32.2 million gallons of above-ground propane storage. In addition to its retail propane business, Inergy operates a
wholesale supply, marketing and distribution business, providing propane procurement, transportation and supply and price risk management services to its customer service centers, as well as to independent dealers, multistate marketers,
petrochemical companies, refinery and gas processors and a number of other NGL marketing and distribution companies in 40 states, primarily in the Midwest, Northeast and Southeast.

Inergy also owns and operates a midstream operation including the following assets:



| |  |  | the Stagecoach natural gas storage facility, a high performance, multi-cycle natural gas storage facility with approximately 26.25 bcf of working gas capacity, a
maximum withdrawal capability of 500 MMcf/day, and a maximum injection capability of 250 MMcf/day. Located 150 miles northwest of New York City, the Stagecoach facility is among the closest natural gas storage facilities to the northeastern United
States market. Stagecoach is connected to Tennessee Gas Pipeline Companys 300-Line. The facility is fee-based and is currently 100% committed primarily with investment grade-rated companies with term contracts that have a weighted average
maturity extending to August 2014.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an NGL business in Bakersfield, California, which includes natural gas processing, NGL fractionation, NGL rail and truck terminals, bulk storage, trucking and
marketing operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Bath Storage Facility, an LPG storage facility with a 1.4 million barrel salt cavern storage facility located near Bath, New York, approximately 210 miles
northwest of New York City and 60 miles from Inergys Stagecoach facility. The facility is supported by both rail and truck terminals capable of loading/unloading 15  17 rail cars per day and 15 truck transports per day.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Inergy has grown primarily through acquisitions. Since its predecessors inception in November 1996 through September 30,
2007, Inergy has acquired the assets and liabilities of 72 companies for an aggregate purchase price of approximately $1.5 billion, including working capital, assumed liabilities and acquisition costs. The acquisitions include the assets and
liabilities of 11 propane companies and 2 midstream companies acquired during fiscal 2007 for an aggregate purchase price, net of cash acquired, of approximately $98.9 million.

The following chart sets forth information about each business Inergy acquired during the fiscal year ended September 30, 2007, and through the date of this filing:



|                                     |  |                                                 |  |                   
|------------------------------------ |  | ----------------------------------------------- |  | ------------------
|Acquisition Date                     |  | Company                                         |  | Location          
|October 2006                         |  | Bath Storage Facility                           |  | Bath, NY          
|October 2006                         |  | Columbus Butane Company, Inc.                   |  | Columbus, MS      
|October 2006                         |  | Hometown Propane, Inc.                          |  | Campbell, NY      
|November 2006                        |  | Mideastern Oil Company, Inc.                    |  | Salisbury, MD     
|December 2006                        |  | Sunbelt Energy of Florida, LLC                  |  | Jacksonville, FL  
|December 2006                        |  | Stevens Gas Service, Inc.                       |  | Essex Junction, VT
|February 2007                        |  | South Lateral Pipeline                          |  | Tioga County, NY  
|May 2007                             |  | F&S Oil Company                                 |  | Waterbury, CT     
|July 2007                            |  | Brent & Selma retail propane locations          |  | Selma, AL         
|August 2007                          |  | Quality Propane, Inc.                           |  | Tallahassee, FL   
|August 2007                          |  | Bay Cities Gas Corporation                      |  | Tampa, FL         
|September 2007                       |  | Prince Oil Company, Inc. (d/b/a Valley Propane) |  | Christiansburg, VA
|September 2007                       |  | DeCock Bottled Gas & Oil Company                |  | Escanaba, MI      
|                                     |  |                                                
|Acquisitions afterSeptember 30, 2007 |  |                                                 |  |                   
|October 2007                         |  | Riverside Gas & Oil Company                     |  | Chestertown, NY   
|October 2007                         |  | Arlington Storage Company, LLC                  |  | Steuben County, NY



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Industry Background and Competition

Propane

Propane, a by-product of natural gas processing and petroleum refining, is a clean-burning energy source
recognized for its transportability and ease of use relative to alternative stand-alone energy sources. Inergys retail propane business consists principally of transporting propane to its customer service centers and other distribution areas
and then to tanks located on its customers premises. Retail propane falls into four broad categories: residential, industrial, commercial, and agricultural. Residential customers use propane primarily for space and water heating. Industrial
customers use propane primarily as fuel for forklifts and stationary engines, to fire furnaces, as a cutting gas, in mining operations and in other process applications. Commercial customers, such as restaurants, motels, laundries and commercial
buildings, use propane in a variety of applications, including cooking, heating and drying. In the agricultural market, propane is primarily used for tobacco curing, crop drying, poultry brooding and weed control.

Propane is extracted from natural gas or oil wellhead gas at processing plants or separated from crude oil during the refining process. Propane is normally transported
and stored in a liquid state under moderate pressure or refrigeration for ease of handling in shipping and distribution. When the pressure is released or the temperature is increased, it is usable as a flammable gas. Propane is colorless and
odorless; an odorant is added to allow its detection. Propane is clean-burning, producing negligible amounts of pollutants when consumed.

The retail
market for propane is seasonal because it is used primarily for heating in residential and commercial buildings. Approximately 70% of Inergys retail propane volume is sold during the peak heating season from October through March.
Consequently, sales and operating profits are generated mostly in the first and fourth calendar quarters of each calendar year.

Propane competes primarily
with natural gas, electricity and fuel oil as an energy source, principally on the basis of price, availability and portability. Propane is more expensive than natural gas on an equivalent BTU basis in locations served by natural gas, but serves as
an alternative to natural gas in rural and suburban areas where natural gas is unavailable or portability of product is required. Historically, the expansion of natural gas into traditional propane markets has been inhibited by the capital costs
required to expand pipeline and retail distribution systems. Although the extension of natural gas pipelines tends to displace propane distribution in areas affected, Inergy believes that new opportunities for propane sales arise as more
geographically remote neighborhoods are developed. Propane is generally less expensive to use than electricity for space heating, water heating, clothes drying and cooking. Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent than propane and natural gas, primarily because of the cost of converting to fuel oil. The costs associated with switching from appliances that use fuel oil to appliances that use propane are a
significant barrier to switching. By contrast, natural gas can generally be substituted for propane in appliances designed to use propane as a principal fuel source.

In addition to competing with alternative energy sources, Inergy competes with other companies engaged in the retail propane distribution business. Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service, multi-state propane marketers, smaller local independent marketers and farm cooperatives. Based on industry publications, Inergy believes that the 10 largest retailers account for
approximately 40% of the total retail sales of propane in the United States, and that no single marketer has a greater than 10% share of the total retail market in the United States. Most of Inergys customer service centers compete with
several marketers or distributors. Each customer service center operates in its own competitive environment because retail marketers tend to locate in close proximity to customers. Inergys typical customer service center generally has an
effective marketing radius of approximately 25 miles, although in certain rural areas the marketing radius may be extended by a satellite location.

The
ability to compete effectively further depends on the reliability of service, responsiveness to customers and the ability to maintain competitive prices. Inergy believes that its safety programs, policies and procedures are more comprehensive than
many of its smaller, independent competitors and give Inergy a competitive advantage



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over such retailers. Inergy also believes that its service capabilities and customer responsiveness differentiate it from many of these smaller competitors.
Inergys employees are on call 24-hours and seven-days-a-week for emergency repairs and deliveries.

Retail propane distributors typically price
retail usage based on a per gallon margin over wholesale costs. As a result, distributors generally seek to maintain their operating margins by passing costs through to customers, thus insulating themselves from volatility in wholesale propane
prices.

The propane distribution industry is characterized by a large number of relatively small, independently owned and locally operated distributors.
Each year, a significant number of these local distributors have sought to sell their business for reasons that include, among others, retirement and estate planning. In addition, the propane industry faces increasing environmental regulations and
escalating capital requirements needed to acquire advanced, customer-oriented technologies. Primarily as a result of these factors, the industry is undergoing consolidation, and Inergy, as well as other national and regional distributors, have been
active consolidators in the propane market. In recent years, an active, competitive market has existed for the acquisition of propane assets and businesses. Inergy expects this acquisition market to continue for the foreseeable future.

The wholesale propane business is highly competitive. Inergys competitors in the wholesale business include producers and independent regional wholesalers.
Inergy believes that its wholesale supply and distribution business provides it with a stronger regional presence and a reasonably secure, efficient supply base, and positions it well for expansion through acquisitions.

Midstream

Inergy owns, as part of its midstream operations, a
high-performance, multi-cycle natural gas storage facility (Stagecoach) in New York that it acquired in August 2005. Inergy also owns a natural gas liquids business in California, which includes natural gas processing, NGL fractionation, NGL rail
and truck terminals, bulk storage, trucking and marketing operations, and a 1.4 million barrel salt cavern liquefied petroleum gas storage facility near Bath, New York. Inergy believes these businesses complement its existing propane operations
and provide it with added long-term strategic benefits.

Natural Gas Storage Business

According to the Energy Information Administrations 2007 report Natural Gas Consumption Overview, natural gas supplies approximately 23% of U.S. energy, generating about 26.4% of electric power, supplying
heat to over half of all U.S. homes and providing over 35% of all primary energy for U.S. industries. In recent years, the market for natural gas has experienced increasingly volatile prices, due in part to the following factors:



| |  |  | weather-related demand shifts;
| | - |  | ------------------------------



| |  |  | infrastructure constraints;
| | - |  | ---------------------------



| |  |  | trading impacts on short-term energy markets; and
| | - |  | -------------------------------------------------



| |  |  | supply, demand and other factors affecting alternative fuels.
| | - |  | -------------------------------------------------------------

Underground natural gas storage facilities are a critical component of the North American natural gas transmission and distribution system. They provide an essential reliability cushion against unexpected disruptions
in supply, transportation or markets, and allow for the warehousing of gas to meet expected seasonal and daily variability in demand. According to the Energy Information Administration, U.S. natural gas consumption is expected to grow at a compound
annual growth rate of approximately 1.0% through 2020.

Most forecasts of North American natural gas supply and demand suggest a continuation of trends
that will result in increased demand for natural gas storage capacity. Seasonal and weather sensitive demand sectors (residential and commercial heating demand and gas-fired power generation demand) have been growing and are expected to



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continue to do so, while the less seasonal industrial demand has been declining. Natural gas supply, meanwhile, has become almost entirely non-seasonal,
requiring greater reliance on natural gas storage to respond to demand variability. On average, total North American natural gas consumption levels are approximately 40% higher in the winter months than summer months primarily due to the
requirements of residential and commercial market sectors. These markets are very temperature sensitive with demand being highly variable both on a seasonal and a daily basis thus requiring that storage be capable of providing high maximum daily
deliverability on the coldest days when storage due to infrastructure constraints provides as much as 50% of the markets total requirement. Analysis has shown that seasonal winter demand has continued to show steady growth even though warmer
winter temperature trends have muted the full impact of this increasing demand. Gas storage has facilitated the creation of a natural gas industry that is characterized by a production profile that is largely non-seasonal and a consumption profile
that is highly seasonal and weather sensitive. Natural gas storage is essential in reallocating this inherent supply and demand imbalance.

In the natural
gas storage business, there are significant barriers to entry, particularly in depleted reservoir storage such as the Stagecoach facility. Barriers include:

Geology: rock quality, depth, containment and reservoir size heavily influence development opportunities;

Geography: proximity to existing pipeline infrastructure, surface development, and complicated land ownership all combine to
further increase the difficulty in developing and operating natural gas storage facilities;

Specialized skills:
finding and retaining qualified and skilled natural gas storage professionals is a challenge in todays competitive job market in the oil & gas sectors due to the specialized nature of the skills required; and

Development costs: costs for new natural gas storage capacity development have continued to increase.

Although there are significant barriers to entry within the natural gas storage industry, competition is robust. Competition for natural gas storage is primarily based
on location, connectivity, and the ability to deliver natural gas in a timely and reliable manner. Inergys natural gas storage facility competes with other means of natural gas storage, including other depleted reservoir facilities, salt
cavern storage facilities, and liquefied natural gas and pipelines.

Storage capacity is held by a wide variety of market participants for a variety of
purposes such as:

Reliability: local distribution companies (LDCs) hold the bulk of capacity and tend
to use it in a manner relatively insensitive to gas prices, injecting gas into storage during the summer to meet fairly well-defined inventory targets, and withdrawing it in winter to meet peak load requirements while retaining a sufficient cushion
of inventory to meet worst-case, late winter demands. For such customers with an obligation to serve core end use markets, the value of storage may be significantly greater than the price differential between winter and summer gas. LDCs will pay the
price to secure the natural gas storage they need up to the cost of alternatives (i.e., long haul pipeline capacity or above-ground storage).

Efficiency: pipeline operators use storage capacity for system balancing requirements and to manage maintenance schedules, as well as to provide storage services to shippers on their systems. Producers use
capacity to minimize production fluctuations and to manage market commitments. Power generators use storage capacity to provide swing capability for their plants that experience high daily and even hourly variability of requirements.

Arbitrage: energy merchants and other trading entities use storage for gas price arbitrage purposes, buying and injecting gas at
times of low gas prices and withdrawing at times of higher prices as driven by the fundamentals of the natural gas market.



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The value of natural gas storage is a reflection of its critical role in providing the North American natural gas market
with a degree of supply reliability, flexibility, and seasonal and daily demand balancing.

NGL Business

In general, natural gas produced at the wellhead contains, along with methane, various NGLs. This rich natural gas in its raw form is usually not acceptable
for transportation in the nations major natural gas pipeline systems or for commercial use as a fuel. Inergys natural gas processing operation, located in Bakersfield, CA, separates, for the most part, the NGLs from the methane, and
delivers the methane to the local natural gas pipelines. The NGLs are retained for further processing within Inergys fractionation facility.

NGL
fractionation facilities separate mixed NGL streams into discrete NGL products: ethane, propane, normal butane, isobutane, and natural gasoline. The three primary sources of mixed NGLs fractionated in the United States are (i) domestic natural
gas processing plants, (ii) domestic crude oil refineries, and (iii) imports of butane and propane mixtures. The mixed NGLs delivered from domestic natural gas processing plants and crude oil refineries to our NGL fractionation facility
are typically transported by NGL pipelines and, to a lesser extent, by railcar and truck.

NGL products (ethane, propane, normal butane, isobutane and
natural gasoline) are typically used as raw materials by the petrochemical industry, feedstocks by refiners in the production of motor gasoline and by industrial and residential users as fuel. Ethane is primarily used in the petrochemical industry
as feedstock for ethylene production, one of the basic building blocks for a wide range of plastics and other chemical products. Propane is used both as a petrochemical feedstock in the production of ethylene and propylene and as a heating, engine
and industrial fuel. Normal butane is used as a petrochemical feedstock in the production of ethylene and butadiene (a key ingredient of synthetic rubber), as a blendstock for motor gasoline and to derive isobutane through isomerization. Isobutane
is fractionated from mixed butane (a mixed stream of normal butane and isobutane) or produced from normal butane through the process of isomerization, principally for use in refinery alkylation to enhance the octane content of motor gasoline, in the
production of iso-octane, and in the production of propylene oxide. Natural gasoline, a mixture of pentanes and heavier hydrocarbons, is primarily used as a blendstock for motor gasoline or as a petrochemical feedstock.

Inergys NGL business encounters competition from fully integrated oil companies, and independent NGL market participants. Each of Inergys competitors has
varying levels of financial and personnel resources, and competition generally revolves around price, service and location. The majority of Inergys NGL processing and fractionation activities are processing mixed NGL streams for third-party
customers and to support its NGL marketing activities under fee-based arrangements. These fees (typically in cents per gallon) are subject to adjustment for changes in certain fractionation expenses, including natural gas fuel costs. Inergys
integrated midstream energy asset system affords it flexibility in meeting customers needs. While many companies participate in the natural gas processing business, few have a presence in significant downstream activities such as NGL
fractionation and transportation, and NGL marketing as Inergy does. Inergys competitive position and presence in these downstream businesses allows it to extract incremental value while offering customers enhanced services, including
comprehensive service packages.

Business Strategy

Our
business strategy is to increase distributable cash flow to our unitholders through our ownership of partnership interests in Inergy. Our incentive distribution rights in Inergy 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 increasing cash distributions to us.



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Inergys Business Strategy

Inergys primary objective is to increase distributable cash flow for its unitholders, while maintaining the highest level of commitment and service to its customers. Inergy has engaged and will continue to
engage in its objectives of further growth through acquisitions both in its propane and midstream operations, internally generated expansion, and measures aimed at increasing the profitability of its existing operations.

Competitive Strengths

Inergy intends to pursue this objective by
capitalizing on what it believes are its competitive strengths as follows:

Proven Acquisition Expertise

Since Inergys predecessors inception and through September 30, 2007, Inergy has acquired and successfully integrated 72 companies68 propane
companies and 4 midstream businesses. Inergys executive officers and key employees, who together average more than 15 years experience in the propane and midstream energy-related industries, have developed business relationships with retail
propane owners and businesses as well as midstream industry participants throughout the United States. These significant industry contacts have enabled Inergy to negotiate most of its acquisitions on an exclusive basis. Inergy believes that this
acquisition expertise should allow it to continue to grow through strategic and accretive acquisitions. Inergys acquisition program will continue to seek:



| |  |  | businesses that generate distributable cash flow that is accretive to Inergy common unitholders on a per unit basis;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | propane and midstream businesses in attractive market areas;
| | - |  | ------------------------------------------------------------



| |  |  | propane businesses with established names with reputations for customer service and reliability;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | propane businesses with high concentration of propane sales to residential customers;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | midstream businesses that generate predictable, stable fee-based cash flow streams;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | midstream businesses with organic growth opportunities or strategic regional enhancement; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | retention of key employees in acquired businesses.
| | - |  | --------------------------------------------------

Management Experience

Our senior management team has extensive experience in the propane and midstream energy industry. Our management team
has a proven track record of enhancing the value of our partnership, through the acquisition, integration and optimization of the businesses we own and operate.

Flexible Financial Structure

Inergy has a $350 million revolving credit facility for acquisitions and a $75 million revolving working
capital facility. These facilities include a provision which allows us to utilize up to $200 million of combined borrowing capacity for working capital as needed during the winter heating season. Inergy believes its available capacity under these
facilities combined with its ability to fund acquisitions through the issuance of additional partnership interests will provide a flexible financial structure that will facilitate its acquisition strategy.

Propane Business Strengths

Focus on High Percentage of Retail
Sales to Residential Customers

Inergys retail propane operations concentrate on sales to residential customers. Residential customers tend to
generate higher margins and are generally more stable purchasers than other customers. For the fiscal year ended



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September 30, 2007, sales to residential customers represented approximately 69% of Inergys retail propane gallons sold. Although overall demand
for propane is affected by weather and other factors, Inergy believes that residential propane consumption is not materially affected by general economic conditions because most residential customers consider home space heating to be an essential
purchase. In addition, Inergy owns nearly 90% of the propane tanks located at its customers homes. In many states, fire safety regulations restrict the refilling of a leased tank solely to the propane supplier that owns the tank. These
regulations, which require customers to switch propane tanks when they switch suppliers, help enhance the stability of Inergys customer base because of the inconvenience and costs involved with switching tanks and suppliers.

Regionally Branded Operating Structure

Inergy believes that its
success in maintaining customer stability and its low cost operating structure at its customer service centers results from Inergys decentralized operation under established, locally recognized trade names. Inergy attempts to capitalize on the
reputation of the companies it acquires by retaining their local brand names and employees, thereby preserving the goodwill of the acquired business and fostering employee loyalty and customer retention. Inergy expects its local branch management to
continue to manage its marketing programs, new business development, customer service and customer billing and collections. Inergy believes that its employee incentive programs encourage efficiency and allow it to control costs at the corporate and
field levels.

Operations in Attractive Propane Markets

A majority of Inergys propane operations are concentrated in attractive propane market areas, where natural gas distribution is not cost-effective, margins are relatively stable, and tank control is relatively high. Inergy intends to
pursue acquisitions in similar attractive markets.

Comprehensive Propane Logistics and Distribution Business

One of Inergys distinguishing strengths is its propane procurement and distribution expertise and capabilities. For the fiscal year ended September 30, 2007,
Inergy delivered approximately 383.9 million gallons of propane on a wholesale basis to our various customers. These operations are significantly larger on a relative basis than the wholesale operations of most publicly-traded propane
businesses. Inergy also provides transportation services to these distributors through its fleet of transport vehicles, and price risk management services to its customers through a variety of financial and other instruments. The presence of
Inergys trucks serving its wholesale customers allows Inergy to take advantage of various pricing and distribution inefficiencies that exist in the market from time to time. Inergy believes its wholesale business enables it to obtain valuable
market intelligence and awareness of potential acquisition opportunities. Because Inergy sells on a wholesale basis to many residential and commercial retailers, Inergy has an ongoing relationship with a large number of businesses that may be
attractive acquisition opportunities for it. Inergy believes that it will have an adequate supply of propane to support its growing retail operations at prices that are generally available only to large wholesale purchasers. This purchasing scale
and resulting expertise also helps Inergy avoid shortages during periods of tight supply to an extent not generally available to other retail propane distributors.

Midstream Business Strengths

Strategically Located Assets

Inergys assets are situated close to or within demand based market areas, which positions Inergy well to leverage the services it offers to its customers relative to its competitors. Inergy owns and operates
natural gas storage operations approximately 200 miles northwest of New York City. These assets are among the closest natural gas storage facilities to the New York City market and have the capability of delivering gas to this market as well as
other Northeast and Mid-Atlantic market centers. Inergy also owns and operates an NGL operation in



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Bakersfield, California, strategically situated between the major refining centers of Los Angeles and San Francisco. Inergy believes there are opportunities
to further leverage its geographic location, expand its current asset base and to enhance the platform of services it offers to its customers that will further enhance the value and profitability of these assets.

Ability to Leverage Industry Relationships

Inergys management
team has extensive industry relationships and they have been successful in leveraging these relationships with both new and existing customers of the midstream operations into profitable opportunities to further grow Inergys operations.

Stable Cash Flows

Inergys midstream operations
consist predominantly of fee-based services that generate stable cash flows. Inergys Stagecoach operations are 100% fee-based with a weighted average contract maturity which extends to August 2014. These contracts are with investment-grade
rated customers such as large east coast utilities and major gas marketing firms. The weighted average maturity of Stagecoach contracts extends to August 2014. In addition, Inergys West Coast NGL operations are also primarily fee-based and
have little exposure to fluctuations in commodity prices. Inergy believes that this further adds to its stable cash flow and enhances its access to the capital markets.



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Operations

Inergys operations reflect two reportable segments: propane operations and midstream operations.

Propane Operations

Retail Propane

Customer Service Centers

As of November 1, 2007, Inergy distributed propane to approximately 700,000 retail customers from 321 customer service centers in 28 states. Inergy markets propane
primarily in rural areas, but also has a significant number of customers in suburban areas where energy alternatives to propane such as natural gas are generally not available. Inergy markets its propane primarily in the eastern half of the United
States through its customer service centers using multiple regional brand names. The following table shows Inergys customer service centers by state:



|               |  |                                
|-------------- |  | -------------------------------
|State          |  | Number ofCustomerServiceCenters
|Alabama        |  | 46                             
|Arkansas       |  | 2                              
|Connecticut    |  | 4                              
|Florida        |  | 23                             
|Georgia        |  | 5                              
|Illinois       |  | 4                              
|Indiana        |  | 22                             
|Kentucky       |  | 1                              
|Maine          |  | 5                              
|Maryland       |  | 8                              
|Massachusetts  |  | 4                              
|Michigan       |  | 34                             
|Mississippi    |  | 35                             
|New Hampshire  |  | 3                              
|New Jersey     |  | 4                              
|New York       |  | 11                             
|North Carolina |  | 9                              
|Ohio           |  | 26                             
|Oklahoma       |  | 3                              
|Pennsylvania   |  | 9                              
|Rhode Island   |  | 1                              
|South Carolina |  | 2                              
|Tennessee      |  | 10                             
|Texas          |  | 26                             
|Vermont        |  | 8                              
|Virginia       |  | 4                              
|West Virginia  |  | 3                              
|Wisconsin      |  | 9                              
|               |  |                                
|Total          |  | 321                            
|               |  |                                

From its customer service centers, Inergy also sells, installs and services equipment related to its propane
distribution business, including heating and cooking appliances. Typical customer service centers consist of an office and service facilities, with one or more 12,000 to 30,000 gallon bulk storage tanks. Some of Inergys customer service
centers also have an appliance showroom. Inergy has several satellite facilities that typically contain only large capacity storage tanks.



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Customer Deliveries

Retail deliveries of propane are usually made to customers by means of Inergys fleet of bobtail and rack trucks. Propane is pumped from the bobtail truck, which generally holds 2,500 to 3,000 gallons, into a stationary storage tank at
the customers premises. The capacity of these tanks ranges from 100 gallons to 1,200 gallons, with a typical tank having a capacity of 100 to 300 gallons in milder climates and 500 to 1,000 gallons in colder climates. Inergy also delivers
propane to retail customers in portable cylinders, which typically have a capacity of five to thirty-five gallons. These cylinders typically are picked up by Inergy and replenished at its distribution locations, then returned to the retail customer.
To a limited extent, Inergy also delivers propane to certain customers in larger trucks known as transports, which have an average capacity of approximately 10,000 gallons. These customers include industrial customers, large-scale heating accounts
and large agricultural accounts.

During the fiscal year ended September 30, 2007, Inergy delivered approximately half of its propane volume to retail
customers and half to wholesale customers. Inergys retail volume sold to residential, industrial and commercial, and agricultural customers were as follows:



| |  |  | approximately 69% to residential customers;
| | - |  | -------------------------------------------



| |  |  | approximately 22% to industrial and commercial customers; and
| | - |  | -------------------------------------------------------------



| |  |  | approximately 9% to agricultural customers.
| | - |  | -------------------------------------------

No
single retail customer accounted for more than 1% of Inergys revenue during the fiscal year ended September 30, 2007.

Approximately half of
Inergys residential customers receive their propane supply under an automatic delivery program. Under the automatic delivery program, Inergy delivers propane to its heating customers approximately six times during the year. Inergy determines
the amount of propane delivered based on weather conditions and historical consumption patterns. Inergys automatic delivery program eliminates the customers need to make an affirmative purchase decision, promotes customer retention by
ensuring an uninterrupted supply and enables Inergy to efficiently route deliveries on a regular basis. Inergy promotes this program by offering level payment billing, discounts, fixed price options and price caps. In addition, Inergy provides
emergency service 24 hours a day, seven days a week, 52 weeks a year.

Seasonality

The retail propane business is seasonal with weather conditions significantly affecting demand for propane. Inergy believes that the geographic diversity of its areas of operations helps to minimize its exposure to
regional weather. Although overall demand for propane is affected by climate, changes in price and other factors, Inergy believes its residential and commercial business to be relatively stable due to the following characteristics:



| |  |  | residential and commercial demand for propane has been relatively unaffected by general economic conditions due to the largely non-discretionary nature of most
propane purchases by Inergys customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | loss of customers to competing energy sources has been low;
| | - |  | -----------------------------------------------------------



| |  |  | the tendency of customers to remain with Inergy due to the product being delivered pursuant to a regular delivery schedule and to Inergys ownership of
approximately 90% of the storage tanks utilized by its customers; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inergys ability to offset customer losses through a combination of acquisitions and to a lesser extent, sales to new customers in existing markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

Since home heating usage is the most sensitive to temperature, residential customers account for the greatest usage variation due to
weather. Variations in the weather in one or more regions in which Inergy operates can significantly affect the total volumes of propane it sells and the margins it realizes and, consequently, its results



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of operations. Inergy believes that sales to the commercial and industrial markets, while affected by economic patterns, are not as sensitive to variations
in weather conditions as sales to residential and agricultural markets.

Transportation Assets and Maintenance

Inergys transportation assets are operated by L&L Transportation, LLC, a wholly owned subsidiary of Inergy Propane, LLC. The transportation of propane requires
specialized equipment. Propane trucks carry specialized steel tanks that maintain the propane in a liquefied state. As of September 30, 2007, Inergy owned a fleet of approximately 143 tractors, 625 transports, 1,192 bobtail and rack trucks and
714 other service vehicles. In addition to supporting its retail and wholesale propane operations, Inergys fleet is also used to deliver butane and ammonia for third parties and to distribute natural gasoline for various processors and
refiners.

Inergy owns truck fabrication and maintenance facilities located in Indiana and Ohio. Inergy also has a trucking operation located in California
as part of its NGL business. Inergy believes that its ability to build and maintain the trucks it uses in its propane operations significantly reduces the costs Inergy would otherwise incur in purchasing and maintaining its fleet of trucks.

Pricing Policy

Inergys pricing policy is an
essential element in its successful marketing of propane. Inergy bases its pricing decisions on, among other things, prevailing supply costs, local market conditions and local management input. Inergy relies on its regional management to set prices
based on these factors. Inergys local managers are advised regularly of any changes in the posted prices of its propane suppliers. Inergy believes its propane pricing methods allow it to respond to changes in supply costs in a manner that
protects its customer base and gross margins. In some cases, however, Inergys ability to respond quickly to cost increases could cause its retail prices to rise more rapidly than those of its competitors, possibly resulting in a loss of
customers.

Billing and Collection Procedures

Inergy
retains its customer billing and account collection responsibilities at the local level. Inergy believes that this decentralized approach is beneficial for a number of reasons:



| |  |  | customers are billed on a timely basis;
| | - |  | ---------------------------------------



| |  |  | customers are more likely to pay a local business;
| | - |  | --------------------------------------------------



| |  |  | cash payments are received faster; and
| | - |  | --------------------------------------



| |  |  | local personnel have current account information available to them at all times in order to answer customer inquiries.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

Trademarks and Trade Names

Inergy uses a variety of trademarks and
trade names which it owns, including Inergy and Inergy Services. Inergy believes that its strategy of retaining the names of the companies it has acquired has maintained the local identification of such companies and has been
important to the continued success of the acquired businesses. Inergys most significant tradenames that it operates under are Arrow Gas, Blue Flame, Bradley Propane, Burnwell Gas, Country
Gas, Dowdle Gas, Gaylord Gas, Hancock Gas, Highland Propane, Hoosier Propane, Independent Propane, Maingas, McCracken, Modern Gas,
Moulton Gas Service, Northwest Energy, Ohio Gas, Pearl Gas, Pro Gas, Pulver Gas, United Propane, and Tru-Gas. Inergy regards its trademarks, trade names
and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products.



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Wholesale Supply, Marketing and Distribution Operations

Inergy currently provides wholesale supply, marketing and distribution services to independent dealers, multi-state marketers, petrochemical companies, refinery and gas
processors and a number of other NGL marketing and distribution companies, primarily in the Midwest and Southeast. While its wholesale supply, marketing and distribution operations accounted for approximately 28% of total revenue, this business
represented approximately 4% of Inergys gross profit during the fiscal year ended September 30, 2007.

Marketing and Distribution

Because of the size of its wholesale operations, one of Inergys distinguishing strengths is its procurement and distribution expertise and
capabilities. This is partly the result of the unique background of Inergys management team, which has significant experience in the procurement aspects of the propane business. Inergy also offers transportation services to these distributors
through its fleet of transport trucks and price risk management services to its customers through a variety of financial and other instruments. Inergys wholesale supply, marketing and distribution business provides Inergy with an additional
income stream as well as extensive market intelligence and acquisition opportunities. In addition, these operations provide Inergy with more secure supplies and better pricing for its customer service centers. Moreover, the presence of Inergys
trucks across the Midwest and Southeast allows it to take advantage of various pricing and distribution inefficiencies that exist in the market from time to time.

Supply

Inergy obtains a substantial majority of its propane from domestic suppliers, with its remaining propane requirements provided by
Canadian suppliers. During the fiscal year ended September 30, 2007, a majority of Inergys sales volume was purchased pursuant to contracts that have a term of one year; the balance of Inergys sales volume was purchased on the spot
market. The percentage of Inergys contract purchases varies from year to year. Supply contracts generally provide for pricing in accordance with posted prices at the time of delivery or the current prices established at major storage points,
and some contracts include a pricing formula that typically is based on such market prices. Some of these agreements provide maximum and minimum seasonal purchase guidelines.

Three suppliers, ExxonMobil Oil Corp. (13%), BP Amoco Corp. (12%) and Sunoco, Inc. (12%), accounted for approximately 37% of propane purchases during the past fiscal year. Inergy believes that contracts with
these suppliers will enable it to purchase most of its supply needs at market prices and ensure adequate supply. No other single supplier accounted for more than 10% of propane purchases in the current year.

Propane generally is transported from refineries, pipeline terminals, storage facilities and marine terminals to Inergys approximate 650 storage facilities. Inergy
accomplishes this by using its transports and contracting with common carriers, owner-operators and railroad tank cars. Inergys customer service centers and satellite locations typically have one or more 12,000 to 30,000 gallon storage tanks,
which are generally adequate to meet customer usage requirements for seven days during normal winter demand. Additionally, Inergy leases underground storage facilities from third parties under annual lease agreements.

Inergy engages in risk management activities in order to reduce the effect of price volatility on its product costs and to help insure the availability of propane during
periods of short supply. Inergy is currently a party to propane forward and option contracts with various third parties to purchase and sell propane at fixed prices in the future. Inergy monitors these activities through enforcement of its risk
management policy.



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Midstream Operations

Natural Gas Storage Operations

Stagecoach was acquired on August 9, 2005 and is a high performance, multi-cycle natural gas storage
facility with approximately 26.25 bcf of working storage capacity of natural gas, maximum withdrawal capability of 500 MMcf/day, and maximum injection capability of 250 MMcf/day. Located approximately 150 miles northwest of New York City, the
Stagecoach facility is currently connected to Tennessee Gas Pipeline Companys 300 Line and is a significant participant in the northeast United States natural gas distribution system. On September 1, 2007, Inergy placed into full
commercial service an expansion of its Stagecoach facility, which increased its working storage capacity of natural gas to approximately 26.25 bcf through the addition of approximately 13.0 bcf of storage to its existing 13.25 bcf working storage
capacity. The Stagecoach facility, including the expansion storage capacity is 100% contracted with predominantly investment-grade rated customers such as large east coast utility companies and major gas marketing firms. As of September 30,
2007, the total capital invested in the Stagecoach facility including the initial acquisition and associated expansion capital was approximately $335.6 million. Stagecoach is also expected to construct a pipeline interconnect with the proposed
Millennium Pipeline which will enhance and further diversify Inergys supply sources and provide interruptible wheeling opportunities to its shipper community.

West Coast NGL Operations

Inergys NGL business, located near Bakersfield, California, currently provides
natural gas gathering/processing, liquids processing and fractionation, rail and truck terminal throughput, propane storage, natural gas liquids transportation, and purchase and sale of LPG purity products. The facility includes a 10,000 barrel per
day NGL fractionation plant, a 25 million cubic feet per day natural gas processing plant, approximately 6 million gallons of NGL storage and state of the art rail and trucking terminals. This facility is supported by predominantly fee
based contracts. Inergy has announced a significant capital expansion of this facility, including the construction of additional refrigerated NGL storage capacity and the installation of a butane isomerization unit to convert normal butane into
isobutane for use by west coast refiners in gasoline blending. Inergy expects this expansion to be in commercial service by the fall of 2008.

Bath LPG
Storage Facility

Inergys Bath LPG storage facility is a 1.4 million barrel salt cavern storage facility located near Bath, New York,
approximately 210 miles northwest of New York City and approximately 60 miles from the Stagecoach facility. The facility is supported by both rail and truck terminals capable of loading and unloading 15-17 rail cars per day and 15 truck transports
per day. The facility is currently fully contracted in butane and propane storage.

For more information on Inergys reportable business segments, see
Note 14 to the Consolidated Financial Statements.

Employees

We have no employees. However, as of November 1, 2007, Inergy had 2,880 full-time employees and 91 part-time employees. Of the 2,971 employees, 113 were general and administrative and 2,858 were operational. Of the operational
employees, 153 were members of labor unions. Inergy believes that its relationship with its employees is satisfactory.

Government Regulation

National Fire Protection Association Pamphlets No. 54 and No. 58, which establish rules and procedures governing the safe handling of
propane, or comparable regulations, have been adopted as the law in substantially



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all of the states in which Inergy operates. In some states these laws are administered by state agencies, and in others they are administered on a county or
municipal level. Regarding the transportation of propane, ammonia and butane by truck, Inergy is subject to regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation. Inergy conducts ongoing training programs to help ensure that its operations are in compliance with applicable regulations. Inergy maintains various permits that are necessary to
operate some of its facilities, some of which may be material to its operations. Inergys management believes that the procedures currently in effect at all of its facilities for the handling, storage and distribution of propane and the
transportation of ammonia and butane are consistent with industry standards and are in compliance in all material respects with applicable laws and regulations.

Inergys midstream operations are subject to federal, state and local regulatory authorities. Specifically, Inergys Stagecoach natural gas storage facility and related assets are subject to the regulation of the Federal Energy
Regulatory Commission, or FERC.

Under the Natural Gas Act of 1938 (NGA), FERC has authority to regulate gas transportation services in
interstate commerce, including storage services. FERCs authority to regulate those services includes the rates charged for the services, terms and conditions of service, certification and construction of new facilities, the extension or
abandonment of services and facilities, the maintenance of accounts and records, the acquisition and disposition of facilities, the initiation and discontinuation of services, relationships with affiliated entities, and various other matters.
Natural gas companies may not charge rates that, upon review by the FERC, are found to be unjust, unreasonable, or unduly discriminatory. In addition, the FERC prohibits natural gas companies from unduly preferring or unreasonably discriminating
against any person with respect to pipeline transportation rates or terms and conditions of service. The rates and terms and conditions for such services are found in the FERC-approved tariff of Central New York Oil and Gas Company, LLC
(CNYOG), Inergys regulated subsidiary and owner of the Stagecoach facility. Pursuant to the NGA, existing interstate transportation and storage rates may be challenged by complaint and are subject to prospective change by FERC.
Additionally, rate increases proposed by the regulated pipeline or storage provider may be challenged by protest and such proposed increases may ultimately be rejected by FERC. CNYOG currently holds authority from FERC to charge and collect
market-based rates for services it provides at the Stagecoach facility. There can be no guarantee that CNYOG will be allowed to continue to operate under such a rate structure for the remainder of the Stagecoach facilitys operating life. Any
successful complaint or protest against rates charged for Stagecoach storage and related services, or CNYOGs loss of market-based rate authority, could have an adverse impact on Inergys revenues.

In addition, the Stagecoach facilitys market-based rate authority would be subject to further review if it acquires transportation facilities or additional storage
capacity, if Inergy or one of its affiliates provides storage or transportation services in the same market area or acquires an interest in another storage field that can link Inergys facilities to the market area or if Inergy or one of its
affiliates acquire an interest in or is acquired by an interstate pipeline.

There can be no assurance that FERC will continue to pursue its approach of
pro-competitive policies as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity, transportation and storage facilities. Any successful complaint or protest
against such rates or loss of market-based rate authority could have an adverse impact on Inergys revenues associated with providing storage services.

In August, 2005, Congress enacted legislation that, among other matters, amends the NGA to make it unlawful for any entity to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of
natural gas or the purchase or sale of transportation services, including storage services such as those provided by the Stagecoach facility, subject to FERC regulation, in contravention of rules prescribed by the FERC. On January 20, 2006, the
FERC issued rules implementing this provision. The rules make it unlawful for any entity, in connection with the purchase or sale of natural gas subject to the jurisdiction of the FERC, or the



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purchase or sale of FERC-regulated transportation services, directly or indirectly, to use or employ any device, scheme or artifice to defraud; to make any
untrue statement of material fact or omit to make any such statement necessary to make the statements made not misleading; or to engage in any act or practice that operates as a fraud or deceit upon any entity. The new legislation also amends the
NGA to give the FERC authority to impose civil penalties for violations of the NGA up to $1,000,000 per day per violation. The new anti-manipulation rule does not apply to activities that relate only to intrastate or other non-jurisdictional sales,
gas processing, or gathering, but does apply to activities of interstate gas pipelines and storage providers, as well as otherwise non-jurisdictional entities, such as gas processors, to the extent the activities are conducted in connection
with gas sales, purchases or transportation subject to FERC jurisdiction. It therefore reflects an expansion of the FERCs NGA enforcement authority.

Certain aspects of Inergys midstream operations are also subject to the Pipeline Safety Act of 2002, as amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006, which provides guidelines in the area of
testing, education, training and communication. In addition to pipeline integrity tests, pipeline and storage companies are required to implement a qualification program to make certain that employees are properly trained. The United States
Department of Transportation has approved Inergys qualification program. Inergy believes that it is in substantial compliance with these requirements and has integrated appropriate aspects of the law into its Operator Qualification Program,
which is in place and functioning.

Additionally, Inergy is subject to stringent federal, state and local environmental, health and safety laws and
environmental regulations governing its operations. These laws and regulations impose limitations on the discharge and emission of pollutants and establish standards for the handling of solid and hazardous wastes. Applicable laws include the
Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Clean Air Act, the Occupational Safety and Health Act, the Emergency Planning and Community Right to Know Act,
the Clean Water Act and comparable state or local statutes. CERCLA, also known as the Superfund law, imposes joint and several liability without regard to fault or the legality of the original conduct on certain classes of persons that
are considered to have contributed to the release or threatened release of a hazardous substance into the environment. While propane is not a hazardous substance within the meaning of CERCLA, other chemicals used in Inergys operations may be
classified as hazardous substances. Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties, the imposition of remedial liabilities and the issuance of injunctions restricting or
prohibiting Inergys activities. Inergy has not received any notices that it has violated these environmental laws and regulations in any material respect and it has not otherwise incurred any material liability or capital expenditure
thereunder.

For acquisitions that involve the purchase of real estate, Inergy conducts due diligence investigations to assess whether any material or
waste has been sold from, or stored on, or released or spilled from any of that real estate prior to its purchase. This due diligence includes questioning the seller, obtaining representations and warranties concerning the sellers compliance
with environmental laws and performing site assessments. During these due diligence investigations, Inergys employees, and, in certain cases, independent environmental consulting firms, review historical records and databases and conduct
physical investigations of the property to look for evidence of contamination, compliance violations and the existence of underground storage tanks.

Recent scientific studies have suggested that emissions of certain gases, commonly referred to as greenhouse gas and including methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of fuels
such as propane and natural gas, may be contributing to warming of the Earths atmosphere. In response to such studies, the U.S. Congress is actively considering legislation to reduce emissions of greenhouse gases. In addition, at least 17
states have already taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Also, as a result of the U.S.
Supreme Courts decision on April 2, 2007 in Massachusetts, et al. v. EPA, the U.S. Environmental Protection Agency or EPA may be required to regulate greenhouse gas emissions from mobile sources (e.g., cars and
trucks) even if Congress does not adopt new legislation



17



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specifically addressing emissions of greenhouse gases. The Courts holding in Massachusetts that greenhouse gases fall under the federal Clean
Air Acts definition of air pollutant may also result in future regulation of greenhouse gas emissions from stationary sources under certain Clean Air Act programs. Passage of climate control legislation or other regulatory
initiatives by Congress or various states of the U.S. or the adoption of regulations by the EPA or analogous state agencies that restrict emissions of greenhouse gases in areas in which Inergy conducts business could have an adverse affect on its
operations and demand for its services.

In addition, the Department of Homeland Security Appropriations Act of 2007 requires the Department of Homeland
Security or DHS to issue regulations establishing risk-based performance standards for the security of chemical and industrial facilities, including oil and gas facilities that are deemed to present high levels of security
risk. The DHS issued an interim final rule in April 2007 regarding risk-based performance standards to be attained pursuant to the act and the DHS is currently adopting an Appendix A to the interim rules that establish the chemicals of concern
and their respective threshold quantities that will trigger compliance with the interim rules.

Future developments, such as stricter environmental, health
or safety laws and regulations, or more stringent enforcement of existing requirements could affect Inergys operations. Inergy does not anticipate that its compliance with or liabilities under environmental, health and safety laws and
regulations, including CERCLA, will require any material increase in its capital expenditures or otherwise have a material adverse effect on Inergy. To the extent that any environmental liabilities, or environmental, health or safety laws, or
regulations are made more stringent, there can be no assurance that Inergys results of operations will not be materially and adversely affected.

Item 1A. Risk Factors.

Risks Inherent in Our Dependence on Distributions from Inergy, L.P.

Our only cash-generating assets are our partnership interests in Inergy, L.P., and our cash flow is therefore completely dependent upon the ability of Inergy to
make distributions to its partners.

The amount of cash that Inergy can distribute to its partners each quarter, including us, principally depends
upon the amount of cash Inergy generates from its operations, which amounts of cash will fluctuate from quarter to quarter based on, among other things:



| |  |  | the temperatures in Inergys operating areas;
| | - |  | ---------------------------------------------



| |  |  | the cost to Inergy of the propane it buys for resale;
| | - |  | -----------------------------------------------------



| |  |  | the level of competition from other propane companies, natural gas storage providers and natural gas processors; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | other energy providers and the prevailing economic conditions.
| | - |  | --------------------------------------------------------------

In addition, the actual amount of cash Inergy will have available for distribution will depend on other factors, some of which are beyond its control, including:



| |  |  | the level of capital expenditures Inergy makes;
| | - |  | -----------------------------------------------



| |  |  | the cost of acquisitions or expansions, if any;
| | - |  | -----------------------------------------------



| |  |  | debt service requirements;
| | - |  | --------------------------



| |  |  | fluctuations in working capital needs;
| | - |  | --------------------------------------



| |  |  | restrictions on distributions contained in Inergys credit facility and senior notes;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Inergys ability to borrow under its working capital facility to make distributions;
| | - |  | ------------------------------------------------------------------------------------



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| |  |  | prevailing economic conditions; and
| | - |  | -----------------------------------



| |  |  | the amount, if any, of cash reserves established by Inergys managing general partner in its discretion for the proper conduct of business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

If Inergy reduced its per unit distribution, we would have less cash available for distribution and would probably be required to reduce
our per unit distribution. Furthermore, the amount of cash that Inergy has available for distribution depends primarily upon its cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of
profitability, which will be affected by non-cash items. As a result, Inergy may be able to make cash distributions during periods when Inergy records losses and may not be able to make cash distributions during periods when Inergy records net
income.

To the extent we purchase additional units from Inergy, our rate of growth may be reduced.

Our business strategy includes supporting the growth of Inergy by purchasing Inergy securities or lending funds to Inergy to provide funding for the acquisition of a
business or asset or for an internal growth project. To the extent we purchase common units, the rate of our distribution growth may be reduced, at least in the short term, as less of our cash distributions will come from our ownership of Inergy
incentive distribution rights, which distributions increase at a faster rate than those of our other securities.

The managing general partner of
Inergy has the ability to limit or modify the incentive distributions we are entitled to receive in order to facilitate the growth strategy of Inergy.

We hold incentive distribution rights in Inergy that 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. A substantial portion of the cash flows we receive from Inergy is provided by these incentive distributions. There may be instances in which the amount of cash we receive from the incentive distributions could limit
Inergys growth through acquisitions or expansions. This is because a potential acquisition or expansion might not be accretive to Inergys unitholders as a result of the significant portion of the cash flows attributable to such
acquisition or expansion which would be paid as incentive distributions to us. By limiting the level of incentive distributions in connection with a particular acquisition, expansion or issuance of units of Inergy, the cash flows associated with
that acquisition or expansion could be accretive to Inergys unitholders as well as substantially beneficial to us. Accordingly, in order to facilitate acquisitions and expansions by Inergy, the managing general partner of Inergy may elect to
limit the incentive distributions we are entitled to receive in all instances or with respect to a particular acquisition, expansion or unit issuance contemplated by Inergy. In doing so, the board of directors of the managing general partner would
be required to consider both its fiduciary obligations to investors in Inergy as well as to us as its sole member. Our partnership agreement specifically permits our general partner to authorize the managing general partner of Inergy to limit or
modify the incentive distribution rights held by us without approval by our unitholders, if our general partner determines that such limitation or modification does not adversely affect our limited partners in any material respect. If distributions
on the incentive distribution rights were reduced for the benefit of the Inergy common units, the total amount of cash distributions we would receive from Inergy, and therefore the amount of cash distributions we could pay to our unitholders, would
be reduced.

A reduction in Inergys distributions will disproportionately affect the amount of cash distributions to which we are currently
entitled.

Our ownership of the incentive distribution rights in Inergy entitles us to receive our pro rata share of specified percentages of total
cash distributions made by Inergy with respect to any particular quarter only in the event that Inergy distributes more than $0.33 per unit for such quarter. As a result, the holders of Inergys common units have a priority over the holders of
Inergys incentive distribution rights to the extent of cash distributions by Inergy up to and including $0.33 per unit for any quarter.



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Our incentive distribution rights entitle us to receive increasing percentages, up to 48%, of all cash distributed by
Inergy. Because the incentive distribution rights currently participate at the maximum 48% target cash distribution level in all distributions made by Inergy above the current distribution level, future growth in distributions we receive from Inergy
will not result from an increase in the target cash distribution level associated with the incentive distribution rights.

Furthermore, a decrease in the
amount of distributions by Inergy to less than $0.45 per common unit per quarter would reduce our percentage of the incremental cash distributions above $0.375 per common unit per quarter from 48% to 23%. As a result, any such reduction in quarterly
cash distributions from Inergy would have the effect of disproportionately reducing the amount of all distributions that we receive from Inergy based on our ownership interest in the incentive distribution rights in Inergy as compared to cash
distributions we receive from Inergy on our approximate 0.9% general partner interest in Inergy and our Inergy common units.

The amount of cash
distributions from Inergy that we will be able to distribute to unitholders will be reduced by general and administrative expenses and debt service, and reserves that our general partner believes prudent to maintain for the proper conduct of our
business and for future distributions.

Before we can pay distributions to our unitholders, we must first pay or reserve funds for our expenses,
including debt service. We may also establish reserves for future distributions during periods of limited cash flows. In addition, we may reserve funds to meet the right of our wholly owned subsidiary, Inergy Partners, LLC, to maintain its
approximate 0.9% general partner interest in Inergy by making a capital contribution to Inergy when Inergy issues additional Inergy common units.

Risks
Inherent in Inergy, L.P.s Business

Because we are substantially dependent on the distributions we receive from Inergy, risks to Inergys
operations are also risks to us. We have set forth below risks to Inergys business and operations, the occurrence of which could negatively impact Inergys financial performance and decrease the amount of cash it is able to distribute to
us.

If Inergy does not continue to make acquisitions on economically acceptable terms, its future financial performance will be limited.

Due to increased competition from alternative energy sources the propane industry is not a growth industry. In addition, as a result of long-standing
customer relationships that are typical in the retail home propane industry, the inconvenience of switching tanks and suppliers and propanes higher cost as compared to other energy sources, Inergy may have difficulty in increasing its retail
customer base other than through acquisitions. Therefore, while Inergys operating objectives include promoting internal growth, its ability to grow will depend principally on acquisitions. Inergys future financial performance depends on
its ability to continue to make acquisitions at attractive prices. We cannot assure our unitholders that Inergy will be able to continue to identify attractive acquisition candidates in the future or that it will be able to acquire businesses on
economically acceptable terms. In particular, competition for acquisitions in the propane business has intensified and become more costly. Inergy may not be able to grow as rapidly as it expects through its acquisition of additional businesses for
various reasons, including the following:



| |  |  | Inergy will use its cash from operations primarily to service its debt and for distributions to unitholders and reinvestment in its business. Consequently, the
extent to which Inergy is unable to use cash or access capital to pay for additional acquisitions may limit its growth and impair its operating results. Further, Inergy is subject to certain debt incurrence covenants under its bank credit agreement
and the indentures that govern its 6.875% senior notes due 2014 and 8.25% senior notes due 2016 that may restrict its ability to incur additional debt to finance acquisitions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although Inergy intends to use its own securities as acquisition currency, some prospective sellers may not be willing to accept its securities as consideration.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Inergy will use cash for capital expenditures related to infrastructure expansions such as the Stagecoach expansion project, which will reduce its cash available to
pay for additional acquisitions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Moreover, acquisitions involve potential risks, including:



| |  |  | Inergys ability to integrate the operations of recently acquired businesses,
| | - |  | -----------------------------------------------------------------------------



| |  |  | the diversion of managements attention from other business concerns,
| | - |  | ---------------------------------------------------------------------



| |  |  | customer or key employee loss from the acquired businesses, and
| | - |  | ---------------------------------------------------------------



| |  |  | a significant increase in Inergys indebtedness.
| | - |  | ------------------------------------------------

Inergys growth strategy includes acquiring entities with lines of business that are distinct and separate from its existing operations which could subject Inergy to additional business and operating risks.

Consistent with Inergys announced growth strategy and its acquisition of the Stagecoach assets, Inergy may acquire assets that have operations in new and distinct
lines of business from its existing operations, including midstream assets. Integration of new business segments is a complex, costly and time-consuming process and may involve assets in which Inergy has limited operating experience. Failure to
timely and successfully integrate acquired entities new lines of business with Inergys existing operations may have a material adverse effect on its business, financial condition or results of operations. The difficulties of integrating
new business segments with existing operations include, among other things:



| |  |  | operating distinct business segments that require different operating strategies and different managerial expertise;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | the necessity of coordinating organizations, systems and facilities in different locations;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | integrating personnel with diverse business backgrounds and organizational cultures; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | consolidating corporate and administrative functions.
| | - |  | -----------------------------------------------------

In addition, the diversion of Inergys attention and any delays or difficulties encountered in connection with the integration of the new business segments, such as unanticipated liabilities or costs, could harm its existing business,
results of operations, financial condition or prospects. Furthermore, new lines of business will subject Inergy to additional business and operating risks which could have a material adverse effect on its financial condition or results of
operations.

Inergy may be unable to successfully integrate its recent acquisitions.

One of Inergys primary business strategies is to grow through acquisitions. We cannot assure our unitholders that Inergy will successfully integrate acquisitions
into its operations or that it will achieve the desired profitability from its acquisitions. Failure to successfully integrate these substantial acquisitions could adversely affect Inergys operations. The difficulties of combining the acquired
operations include, among other things:



| |  |  | operating a significantly larger combined organization and integrating additional retail and wholesale distribution operations to Inergys existing supply,
marketing and distribution operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | coordinating geographically disparate organizations, systems and facilities;
| | - |  | ----------------------------------------------------------------------------



| |  |  | integrating personnel from diverse business backgrounds and organizational cultures;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | consolidating corporate technological and administrative functions;
| | - |  | -------------------------------------------------------------------



| |  |  | integrating internal controls, compliance under the Sarbanes-Oxley Act of 2002 and other corporate governance matters;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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| |  |  | the diversion of managements attention from other business concerns;
| | - |  | ---------------------------------------------------------------------



| |  |  | customer or key employee loss from the acquired businesses;
| | - |  | -----------------------------------------------------------



| |  |  | a significant increase in Inergys indebtedness; and
| | - |  | ----------------------------------------------------



| |  |  | potential environmental or regulatory liabilities and title problems.
| | - |  | ---------------------------------------------------------------------

In addition, Inergy may not realize all of the anticipated benefits from its acquisitions, such as cost savings and revenue enhancements, for various reasons, including difficulties integrating operations and
personnel, higher costs, unknown liabilities and fluctuations in markets.

Inergys indebtedness may limit its ability to borrow additional
funds, make distributions to its unitholders, or capitalize on acquisition or other business opportunities, in addition to impairing its ability to fulfill its debt obligation under its senior notes.

As of September 30, 2007, Inergy had approximately $710 million of total outstanding indebtedness. Inergys leverage, various limitations in its credit
facility, other restrictions governing its indebtedness and the indentures governing Inergys senior notes may reduce its ability to incur additional indebtedness, to engage in some transactions and to capitalize on acquisition or other
business opportunities.

Inergys indebtedness and other financial obligations could have important consequences to unitholders. For example, they
could:



| |  |  | make it more difficult for Inergy to make distributions to its unitholders;
| | - |  | ---------------------------------------------------------------------------



| |  |  | impair Inergys ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general partnership purposes or
other purposes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | result in higher interest expense in the event of increases in interest rates since some of Inergys debt is, and will continue to be, at variable rates of
interest;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | have a material adverse effect on Inergy if it fails to comply with financial and restrictive covenants in its debt agreements and an event of default occurs as a
result of that failure that is not cured or waived;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require Inergy to dedicate a substantial portion of its cash flow to payments of Inergys indebtedness and other financial obligations, thereby reducing the
availability of Inergys cash flow to fund working capital, capital expenditures and other general partnership requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit Inergys flexibility in planning for, or reacting to, changes in its business and the propane industry; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | place Inergy at a competitive disadvantage compared to its competitors that have proportionately less debt.
| | - |  | -----------------------------------------------------------------------------------------------------------

If Inergy is unable to meet its debt service obligations and other financial obligations, it could be forced to restructure or refinance its indebtedness and other
financial transactions, seek additional equity capital or sell its assets. Inergy may then be unable to obtain such financing or capital or sell its assets on satisfactory terms, if at all.

A change of control of Inergys managing general partner could result in Inergy facing substantial repayment obligations under its credit facility.

In addition, Inergys bank credit agreement and the indentures governing its senior notes contain provisions relating to change of control of
Inergys managing general partner, the partnership, and Inergys operating company. If these provisions are triggered, Inergys outstanding bank indebtedness may become due. In such an event, there is no assurance that Inergy would be
able to pay the indebtedness, in which case the lenders would



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have the right to foreclose on Inergys assets, which would have a material adverse affect on Inergy. There is no restriction on the ability of
Inergys general partners to enter into a transaction which would trigger the change of control provisions.

Restrictive covenants in the
agreements governing Inergys indebtedness may reduce its operating flexibility.

The indentures governing Inergys outstanding senior
notes and agreements governing Inergys revolving credit facilities and other future indebtedness contain or may contain various covenants limiting Inergys ability and the ability of specified subsidiaries of Inergy to, among other
things:



| |  |  | pay distributions on, redeem or repurchase Inergys equity interests or redeem or repurchase Inergys subordinated debt;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | make investments;
| | - |  | -----------------



| |  |  | incur or guarantee additional indebtedness or issue preferred securities;
| | - |  | -------------------------------------------------------------------------



| |  |  | create or incur certain liens;
| | - |  | ------------------------------



| |  |  | enter into agreements that restrict distributions or other payments from Inergys restricted subsidiaries to Inergy;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | consolidate, merge or transfer all or substantially all of Inergys assets;
| | - |  | ---------------------------------------------------------------------------



| |  |  | engage in transactions with affiliates;
| | - |  | ---------------------------------------



| |  |  | create unrestricted subsidiaries; and
| | - |  | -------------------------------------



| |  |  | create non-guarantor subsidiaries.
| | - |  | ----------------------------------

These
restrictions could limit Inergys ability and the ability of its subsidiaries to obtain future financings, make needed capital expenditures, withstand a future downturn in Inergys business or the economy in general, conduct operations or
otherwise take advantage of business opportunities that may arise. Inergys bank credit agreement contains covenants requiring it to maintain specified financial ratios and satisfy other financial conditions. Inergy may be unable to meet those
ratios and conditions. Any future breach of these covenants and Inergys failure to meet any of those ratios and conditions could result in a default under the terms of Inergys bank credit agreement, which could result in the acceleration
of Inergys debt and other financial obligations. If Inergy were unable to repay these amounts, the lenders could initiate a bankruptcy proceeding or liquidation proceeding or proceed against the collateral.

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

Inergys operations are subject to all operating hazards and risks incident to handling, storing, transporting and providing customers with combustible products
such as propane and natural gas. As a result, Inergy has been, and likely will be, a defendant in legal proceedings and litigation arising in the ordinary course of business. Inergy maintains insurance policies with insurers in such amounts and with
such coverages and deductibles as it believes are reasonable and prudent. However, Inergys insurance may not be adequate to protect it from all material expenses related to potential future claims for personal injury and property damage. In
addition, the occurrence of a serious accident, whether or not Inergy is involved, may have an adverse effect on the publics desire to use its products.

Inergys operations are subject to compliance with environmental laws and regulations that can adversely affect Inergys results of operations and financial condition.

Inergys operations are subject to stringent environmental laws and regulations of federal, state, and local authorities. Such environmental laws and regulations
impose numerous obligations, including the acquisition of



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permits to conduct regulated activities, the incurrence of capital expenditures to comply with applicable laws, and restrictions on the generation, handling,
treatment, storage, disposal, and transportation of certain materials and wastes. Failure to comply with such environmental laws and regulations can result in the assessment of substantial administrative, civil, and criminal penalties, the
imposition of remedial liabilities and even the issuance of injunctions restricting or prohibiting Inergys activities. Certain environmental laws impose strict, joint and several liability for costs required to clean up and restore sites where
hazardous substances have been disposed or otherwise released. In the course of Inergys operations, materials or wastes may have been spilled or released from properties owned or leased by Inergy or on or under other locations where these
materials or wastes have been taken for disposal. In addition, many of the properties owned or leased by Inergy were previously operated by third parties whose management, disposal, or release of materials and wastes was not under Inergys
control. Accordingly, Inergy may be liable for the costs of cleaning up or remediating contamination arising out of its operations or as a result of activities by others who previously occupied or operated on properties now owned or leased by
Inergy. It is also possible that adoption of stricter environmental laws and regulations or more stringent interpretation of existing environmental laws and regulations in the future could result in additional costs or liabilities to Inergy as well
as the industry in general.

Cost reimbursements due Inergys managing general partner may be substantial and will reduce the cash available for
principal and interest on Inergys outstanding indebtedness.

Inergy reimburses its managing general partner and its affiliates, including
officers and directors of its managing general partner, for all expenses they incur on Inergys behalf. The reimbursement of expenses could adversely affect Inergys ability to make payments of principal and interest on our outstanding
indebtedness. Inergys managing general partner has sole discretion to determine the amount of these expenses. In addition, Inergys managing general partner and its affiliates provide Inergy with services for which Inergy is charged
reasonable fees as determined by Inergys managing general partner in its sole discretion.

Failure to maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act could cause Inergy to incur additional expenditures of time and financial resources.

Inergy has completed the process of documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of its internal controls over financial reporting and a report by its independent registered public accounting firm on its controls over financial reporting. If, in the future, Inergy fails to maintain the adequacy of its internal
controls, as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that it has effective internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause Inergy to incur substantial expenditures of management time and financial resources to identify and correct any such
failure.

Risks Related to Inergys Propane Operations

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.

Weather conditions have a significant impact on the demand for propane because Inergys customers depend on propane principally for heating purposes. As a result,
warm weather conditions will adversely impact Inergys operating results and financial condition. Actual weather conditions can substantially change from one year to the next. Furthermore, warmer than normal temperatures in one or more regions
in which Inergy operates can significantly decrease the total volume of propane it sells. Consequently, Inergys operating results may vary significantly due to actual changes in temperature. During seven of the last ten fiscal years
temperatures were significantly warmer than normal in Inergys areas of operation (based on the 30-year average consisting of years



24



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1976 through 2005 published by the National Oceanic and Atmospheric Administration). We believe that Inergys results of operations during these periods
were adversely affected as a result of this warm weather.

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

The propane industry is a margin-based business in which gross profits depend on the
excess of sales prices over supply costs. As a result, Inergys profitability is sensitive to changes in wholesale prices of propane caused by changes in supply or other market conditions. When there are sudden and sharp increases in the
wholesale cost of propane, Inergy may not be able to pass on these increases to its customers through retail or wholesale prices. Propane is a commodity and the price Inergy pays for it can fluctuate significantly in response to changes in supply or
other market conditions. Inergy has no control over supply or market conditions. In addition, the timing of cost pass-throughs can significantly affect margins. Sudden and extended wholesale price increases could reduce Inergys gross profits
and could, if continued over an extended period of time, reduce demand by encouraging its retail customers to conserve or convert to alternative energy sources.

The highly competitive nature of the retail propane business could cause Inergy to lose customers or affect its ability to acquire new customers, thereby reducing its revenues.

Inergy has competitors and potential competitors who are larger and have substantially greater financial resources than it does, which may provide them with some
advantages. Also, because of relatively low barriers to entry into the retail propane business, numerous small retail propane distributors, as well as companies not engaged in retail propane distribution, may enter Inergys markets and compete
with it. Most of Inergys propane retail branch locations compete with several marketers or distributors. The principal factors influencing competition with other retail marketers are:



| |  |  | price;
| | - |  | ------



| |  |  | reliability and quality of service;
| | - |  | -----------------------------------



| |  |  | responsiveness to customer needs;
| | - |  | ---------------------------------



| |  |  | safety concerns;
| | - |  | ----------------



| |  |  | long-standing customer relationships;
| | - |  | -------------------------------------



| |  |  | the inconvenience of switching tanks and suppliers; and
| | - |  | -------------------------------------------------------



| |  |  | the lack of growth in the industry.
| | - |  | -----------------------------------

We can make no
assurances that Inergy will be able to compete successfully on the basis of these factors. If a competitor attempts to increase market share by reducing prices, Inergy may lose customers, which would reduce its revenues.

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

Most of Inergys total volume purchases are made under supply contracts that have a term of one year, are subject to annual renewal, and provide various pricing
formulas. Three of Inergys suppliers, ExxonMobil Oil Corp. (13%), Amoco Corp. (12%) and Sunoco, Inc. (12%), accounted for approximately 37% of propane purchases during the fiscal year ended September 30, 2007. In the event that
Inergy is unable to purchase propane from its significant suppliers, Inergys failure to obtain alternate sources of supply at competitive prices and on a timely basis may hurt its ability to satisfy customer demand, reduce its revenues and
adversely affect its results of operations.



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

Competition from other energy sources, including natural gas and electricity, has been increasing as a result of reduced regulation of many utilities,
including natural gas and electricity. Propane is generally not competitive with natural gas in areas where natural gas pipelines already exist because natural gas is a less expensive source of energy than propane. The gradual expansion of natural
gas distribution systems and availability of natural gas in many areas that previously depended upon propane could 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.

Historically, a substantial portion of the propane purchased to support Inergys operations has originated at Conway, Kansas, Hattiesburg, Mississippi and Mont
Belvieu, Texas and has been shipped to it through major common carrier pipelines. Any significant interruption in the service at these storage facilities or on the common carrier pipelines Inergy uses would adversely affect its ability to obtain
propane.

If Inergy is not able to sell propane that it has purchased through wholesale supply agreements to either its own retail propane customers
or to other retailers and wholesalers, the results of its operations would be adversely affected.

Inergy currently is party to propane supply
contracts and expects to enter into additional propane supply contracts which require it to purchase substantially all the propane production from certain refineries. Inergys inability to sell the propane supply in its own propane distribution
business, to other retail propane distributors or to other propane wholesalers would have a substantial adverse impact on its operating results and could adversely impact its capital liquidity.

Energy efficiency and new technology may reduce the demand for propane and adversely affect Inergys operating results.

Increased conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces and other heating devices,
have adversely affected the demand for propane by retail customers. Future conservation measures or technological advances in heating, conservation, energy generation or other devices might reduce demand for propane and adversely affect
Inergys operating results.

Due to Inergys limited asset diversification, adverse developments in its propane business could adversely
affect Inergys operating results and reduce its ability to make distributions to its unitholders.

Inergy relies substantially on the revenues
generated from its propane business. Due to Inergys limited asset diversification, an adverse development in this business would have a significantly greater impact on Inergys financial condition and results of operations than if it
maintained more diverse assets.

Risks Related to Inergys Midstream Operations

Federal, state or local regulatory measures could adversely affect Inergys business.

Inergys
operations are subject to federal, state and local regulatory authorities. Specifically, Inergys Stagecoach natural gas storage facility and related assets are subject to the regulation of the Federal Energy Regulatory Commission, or FERC.

Under the Natural Gas Act of 1938 (NGA), FERC has authority to regulate Inergys natural gas facilities that provide natural gas pipeline
transportation services in interstate commerce, including storage services. FERCs



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authority to regulate those services includes the rates charged for the services, terms and conditions of service, certification and construction of new
facilities, the extension or abandonment of services and facilities, the maintenance of accounts and records, the acquisition and disposition of facilities, the initiation and discontinuation of services, relationships with affiliated entities, and
various other matters. Natural gas companies may not charge rates that, upon review by FERC, are found to be unjust and unreasonable or unduly discriminatory. In addition, the FERC prohibits natural gas companies from unduly preferring or
unreasonably discriminating against any person with respect to pipeline transportation rates or terms and conditions of service. The rates and terms and conditions for interstate services provided by Steuben are found in Steubens FERC-approved
tariff. The rates and terms and conditions for interstate services provided by Stagecoach are found in the FERC-approved tariff of Central New York Oil and Gas Company, LLC (CNYOG), Inergys regulated subsidiary and owner of the
Stagecoach facility.

Pursuant to the NGA, existing interstate transportation and storage rates may be challenged by complaint and are subject to
prospective change by FERC. Additionally, rate increases proposed by the regulated pipeline or storage provider may be challenged by protest and such increases may ultimately be rejected by FERC. CNYOG currently holds authority from FERC to charge
and collect market-based rates for services it provides at the Stagecoach facility. There can be no guarantee that CNYOG will be allowed to continue to operate under such a rate structure for the remainder of the Stagecoach facilitys operating
life. Any successful complaint or protest against rates charged for Stagecoach storage and related services, or CNYOGs loss of market-based rate authority, could have an adverse impact on Inergys revenues.

In addition, the Stagecoach facilitys market-based rate authority would be subject to further review if it acquires transportation facilities or additional storage
capacity, if Inergy or one of its affiliates provides storage or transportation services in the same market area or acquires an interest in another storage field that can link Inergys facilities to the market area or if Inergy or one of its
affiliates acquire an interest in or is acquired by an interstate pipeline.

There can be no assurance that FERC will continue to pursue its approach of
pro-competitive policies as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity, transportation and storage facilities. Any successful complaint or protest
against Inergys rates or loss of our market-based rate authority could have an adverse impact on Inergys revenues associated with providing storage services. Failure to comply with applicable regulations under the NGA, Natural Gas Policy
Act of 1978, Pipeline Safety Act of 1968 and certain other laws, and with implementing regulations associated with these laws could result in the imposition of administrative and criminal remedies and civil penalties of up to $1,000,000 per day, per
violation.

Inergys storage business depends on neighboring pipelines to transport natural gas.

Inergys Stagecoach natural gas storage business depends on the Tennessee Gas Pipeline Companys 300-Line, currently the only pipeline to which it is
interconnected. This pipeline is owned by parties not affiliated with Inergy. Any interruption of service on the pipeline or lateral connections or adverse change in the terms and conditions of service could have a material adverse effect on
Inergys ability, and the ability of Inergys customers, to transport natural gas to and from Inergys facilities and have a corresponding material adverse effect on Inergys storage revenues. In addition, the rates charged by
the interconnected pipelines for transportation to and from Inergys facilities affect the utilization and value of our storage services. Significant changes in the rates charged by these pipelines or the rates charged by other pipelines with
which the interconnected pipelines compete could also have a material adverse effect on Inergys storage revenues.



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Inergy expects to derive a significant portion of its revenues from the Stagecoach facility from three customers,
and the loss of one or more of these customers could result in a significant loss of revenues and cash flow.

Inergy expects to derive a significant
portion of its revenues and cash flow in connection with the Stagecoach facility from its largest three customers comprised of Consolidated Edison Company, New Jersey Resources, and New Jersey Natural Gas. The loss, nonpayment, nonperformance or
impaired creditworthiness of one or more of these customers could have a material adverse effect on Inergys business, results of operations and financial condition.

Inergy competes with other natural gas storage companies and services that can substitute for storage services.

Inergys principal competitors in its natural gas storage market include other storage providers including among others Dominion Resources, Inc., NiSource Inc., and El Paso Corporation. These major natural gas transmission companies
have existing storage facilities connected to their systems that compete with certain of Inergys facilities. FERC has adopted policy that favors authorization of new storage projects, and there are numerous natural gas storage options in the
New York/Pennsylvania geographic market. Pending and future construction projects, if and when brought on line, may also compete with the Stagecoach facility. Such projects may include FERC-certificated storage expansions and greenfield construction
projects. Inergy also competes with the numerous alternatives to storage available to customers, including pipeline balancing/no-notice services, seasonal/swing services provided by pipelines and marketers, and on-system LNG facilities.

Expanding Inergys business by constructing new midstream assets subjects Inergy to risks.

One of the ways Inergy may grow its business is through the expansion of its existing storage facilities, such as the current Stagecoach expansion project. The
construction of additional storage facilities or new pipeline interconnects involves numerous regulatory, environmental, political and legal uncertainties beyond Inergys control and may require the expenditure of significant amounts of
capital. If Inergy undertakes these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, Inergys revenues may not increase immediately upon the expenditure of funds on a particular project. For instance,
if Inergy builds a new midstream asset, the construction will occur over an extended period of time, and Inergy will not receive material increases in revenues until after the project is placed in service. Moreover, Inergy may construct facilities
to capture anticipated future growth in production and/or demand in a region in which such growth does not materialize. As a result, new facilities may not be able to attract enough throughput to achieve Inergys expected investment return,
which could adversely affect Inergys results of operations and financial condition.

Inergy may not be able to retain existing customers or
acquire new customers, which would reduce Inergys revenues and limit our future profitability.

The renewal or replacement of existing
contracts with Inergys customers at rates sufficient to maintain current revenues and cash flows depends on a number of factors beyond Inergys control, including competition from other pipelines and storage providers, and the price of,
and demand for, natural gas in the markets Inergy serves. The inability of Inergys management to renew or replace its current contracts as they expire and to respond appropriately to changing market conditions could have a negative effect on
Inergys profitability.

The fees charged by Inergy to third parties under transmission, transportation and storage agreements may not escalate
sufficiently to cover increases in costs and the agreements may not be renewed or may be suspended in some circumstances.

Inergys costs may
increase at a rate greater than the rate that the fees Inergy charges to third parties increase pursuant to our contracts with them. Furthermore, third parties may not renew their contracts with Inergy.



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Additionally, some third parties obligations under their agreements with Inergy may be permanently or temporarily reduced upon the occurrence of
certain events, some of which are beyond Inergys control, including force majeure events wherein the supply of either natural gas, are curtailed or cut off. Force majeure events include (but are not limited to) revolutions, wars, acts of
enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of Inergys equipment or facilities or those of third parties. If the escalation of fees is
insufficient to cover increased costs, if third parties do not renew or extend their contracts with Inergy or if any third party suspends or terminates its contracts with Inergy, Inergys financial results would be negatively impacted.

Inergys business would be adversely affected if operations at any of its facilities were interrupted.

Inergys operations are dependent upon the infrastructure that it has developed, including, storage facilities and various means of transportation. Any significant
interruption at these facilities or pipelines or Inergys or its customers inability to transmit natural gas to or from these facilities or pipelines for any reason would adversely affect Inergys results of operations.

Risks Inherent in an Investment in Us

We are largely
dependent on Inergy, L.P. for our growth. As a result of the fiduciary obligations of Inergys managing general partner, which is our wholly owned subsidiary, to the unitholders of Inergy, our ability to pursue business opportunities
independently will be limited.

We currently intend to grow primarily through the growth of Inergy. While we are not precluded from pursuing
business opportunities independent of Inergy, Inergys managing general partner, which is our wholly owned subsidiary, has fiduciary duties to Inergy unitholders which would make it difficult for us to engage in any business activity that is
competitive with Inergy. Those fiduciary duties are applicable to us because we control the managing general partner through our ability to elect all of its directors. While there may be circumstances in which these fiduciary duties may be satisfied
while allowing us to pursue business opportunities independent of Inergy, we expect such opportunities to be limited. Accordingly, we may be unable to diversify our sources of revenue in order to increase cash distributions to our unitholders.

A substantial portion of our partnership interests in Inergy are restricted and some are not publicly traded, which may limit our ability to sell
these interests as well as interests in other subsidiaries that we own.

We own 4,706,689 Inergy common units, all of which are unregistered and
restricted securities, within the meaning of Rule 144 under the Securities Act of 1933. We therefore face restrictions on the volume of Inergy common units we can sell in any three-month period. In addition, our investment in Inergys general
partners and our ability to sell such interests is limited because there is no market for them.

Cost reimbursements due our general partner may be
substantial and will reduce our cash available for distribution to holders of our common units.

Prior to making any distribution on our common
units, we reimburse our general partner for expenses it incurs on our behalf. The reimbursement of expenses could adversely affect our ability to pay cash distributions to holders of our common units. Our general partner has sole discretion to
determine the amount of these expenses. In addition, our general partner and its affiliates may perform other services for us for which we will be charged fees as determined by our general partner.

The President and Chief Executive Officer of our general partner effectively controls us and Inergy through his control of our general partner and Inergys
managing general partner.

The president and chief executive officer of both our general partner and Inergys managing general partner owns an
economic interest of 56.4% in our general partner and has voting control of our general partner. He therefore



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controls our general partner and through it, the managing general partner of Inergy and may be able to influence unitholder votes. Control over these
entities gives our president and chief executive officer substantial control over our and Inergys business and operations.

The control of our
general partner may be transferred to a third party, and that party could replace our current management team, in each case without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, there is no restriction in our
partnership agreement on the ability of the owners of our general partner to transfer their ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of
directors and officers of our general partner with its own choices and to control the decisions taken by the board of directors and officers.

Our
unitholders cannot easily remove our general partner.

Unlike the holders of common stock in a corporation, our unitholders have only limited voting
rights on matters affecting our business and, therefore, limited ability to influence managements decisions regarding our business. Our unitholders did not elect our general partner or the directors of our general partner and will have no
right to elect our general partner or the directors of our general partner on an annual or other continuing basis in the future.

Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed except upon the vote of
the holders of at least 662/3% of the outstanding units voting together as a single class. Because
affiliates of our general partner own more than one-third of our outstanding units, our general partner currently cannot be removed without the consent of our general partner and its affiliates.

Our unitholders voting rights are further restricted by the provision in our partnership agreement stating that any units held by a person that owns 20% or more of
any class of units then outstanding, other than our general partner and its affiliates, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire
information about our operations, as well as other provisions limiting our unitholders ability to influence the manner or direction of our management.

As a result of these provisions, the price at which our common units trade may be lower because of the absence or reduction of a takeover premium in the trading price.

Inergys unitholders have the right to remove Inergys general partner with the approval of the
holders of 66 2/3% of all units, which would cause us to lose our general partner interest in Inergy and the ability to manage Inergy.

We currently manage Inergy through Inergy GP, LLC, Inergys managing general partner and our wholly owned
subsidiary. Inergys partnership agreement, however, gives unitholders of Inergy the right to remove the managing general partner of Inergy upon the affirmative vote of holders of 66 2/ 3% of Inergys
outstanding units. If Inergy GP, LLC were removed as managing general partner of Inergy, Inergy Partners, LLC, Inergys non-managing general partner and our wholly owned subsidiary, would receive cash or common units in exchange for its
approximate 0.9% general partner interest and Inergy GP, LLC would lose its ability to manage Inergy. While the common units or cash we would receive are intended under the terms of Inergys partnership agreement to fully compensate us in the
event such an exchange is required, the value of these common units or investments we make with the cash over time may not be equivalent to the value of the general partner interest had we retained it.



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Inergy may issue additional Inergy common units, which may increase the risk that Inergy will not have sufficient
available cash to maintain or increase the per Inergy unit distribution level.

Inergy has wide latitude to issue additional Inergy common units,
including Inergy common units that rank senior to the incentive distributions rights as to quarterly cash distributions, on the terms and conditions established by Inergys managing general partner. The payment of distributions on these
additional Inergy common units may increase the risk that Inergy will be unable to maintain or increase the per Inergy unit distribution level.

If
in the future we cease to manage and control Inergy through our direct and indirect ownership of the general partner interests in Inergy, we may be deemed to be an investment company under the Investment Company Act of 1940.

If we cease to manage and control Inergy and are deemed to be an investment company under the Investment Company Act of 1940, we would either have to register as an
investment company under the Investment Company Act of 1940, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment
company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or
engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates.

Restrictions
in our credit facility could limit our ability to make distributions to our unitholders.

Our credit facility contains covenants limiting our
ability to incur indebtedness, grant liens, engage in transactions with affiliates and make distributions to our unitholders. This facility also contains covenants requiring us to maintain certain financial ratios. We are prohibited from making any
distribution to unitholders if such distribution would cause an event of default or otherwise violate a covenant under this facility.

We may issue
an unlimited number of limited partner interests without the consent of our unitholders, which will dilute a unitholders ownership interest in us and may increase the risk that we will not have sufficient available cash to maintain or increase our
per unit distribution level.

Our general partner may cause us to issue an unlimited number of limited partner interests of any type, on terms and
conditions established by our general partner, without unitholder approval. Such issuances may occur in connection with acquisitions or capital improvements by us or by Inergy or as a result of grants made under our Long Term Incentive Plan.

The issuance of additional common units or other equity securities of equal rank will have the following effects:



| |  |  | our unitholders proportionate ownership interest in us will decrease;
| | - |  | ----------------------------------------------------------------------



| |  |  | the amount of cash available for distribution on each common unit may decrease;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the relative voting strength of each previously outstanding common unit may be diminished;
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| |  |  | the ratio of taxable income to distributions may increase; and
| | - |  | --------------------------------------------------------------



| |  |  | the market price of the common units may decline.
| | - |  | -------------------------------------------------

Furthermore, our partnership agreement does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time.



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Our cash distribution policy limits our ability to grow.

Because we distribute all of our available cash, our growth may not be as rapid as businesses that reinvest their available cash to expand ongoing operations. In fact,
our growth initially will be completely dependent upon Inergys ability to increase its quarterly distribution per unit because currently our only cash-generating assets are partnership interests in Inergy. If we issue additional units or incur
debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse
results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse affect on our financial results and the market price of our common units.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual review and evaluation of our internal control systems, and
attestation of these systems by our independent auditors. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the market price of our common units. In addition, to the extent we or our independent registered public accounting firm identify a significant deficiency in our internal control over financial
reporting, the resources and costs required to remediate such deficiency could have an adverse impact on our future results of operations.

Risks
Related to Conflicts of Interest

Although we control Inergy through our ownership of its managing general partner, Inergys managing general
partner owes fiduciary duties to Inergy and Inergys unitholders, which may conflict with our interests.

Conflicts of interest exist and may
arise in the future as a result of the relationships between us and our affiliates, including Inergys managing general partner, on the one hand, and Inergy and its limited partners, on the other hand. The directors and officers of Inergy GP,
LLC have fiduciary duties to manage Inergy in a manner beneficial to us, its owner. At the same time, the managing general partner has a fiduciary duty to manage Inergy in a manner beneficial to Inergy and its limited partners. The board of
directors of Inergy GP, LLC will resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

For example, conflicts of interest may arise in the following situations:



| |  |  | the allocation of shared overhead expenses to Inergy and us;
| | - |  | ------------------------------------------------------------



| |  |  | the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and Inergy, on the other hand;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the determination of the amount of cash to be distributed to Inergys partners and the amount of cash to be reserved for the future conduct of Inergys
business;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the determination of whether Inergy should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital projects, repay
indebtedness, meet working capital needs, pay distributions to Inergys partners or otherwise;
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| |  |  | the determination of the terms and purchase price applicable to any class of units sold in a private placement between us and Inergy; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any decision we make in the future to engage in business activities independent of Inergy.
| | - |  | ------------------------------------------------------------------------------------------



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The fiduciary duties of our general partners officers and directors may conflict with those of Inergy GP,
LLC, Inergys managing general partner.

Conflicts of interest may arise because of the relationships between Inergy GP, LLC, Inergy and us.
Our general partners directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. Simultaneously, a majority of our general partners directors and all of its officers are also
directors and officers of Inergy GP, LLC, Inergys managing general partner, and have fiduciary duties to manage the business of Inergy in a manner beneficial to Inergy and Inergys unitholders. The resolution of these conflicts may not
always be in our best interest or that of our unitholders.

Our general partner has conflicts of interest and limited fiduciary responsibilities to
us, which may allow it to favor its own interests to the detriment of our unitholders.

Our general partner owns a non-economic general partner
interest in us and certain officers and directors of our general partner and certain officers and directors of the managing general partner of Inergy own an approximate 56.04% limited partner interest in us. In addition, certain officers of our
general partner and certain officers and directors of the managing general partner of Inergy own approximately 78.73% of our general partner.

Conflicts of
interest may arise between our general partner and us. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others,
the following situations:

Conflicts Relating to Control:



| |  |  | our general partner is allowed to take into account the interests of parties other than us, including Inergy and its affiliates and any other businesses acquired in
the future, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to our unitholders for actions that,
without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under
applicable state law;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates;
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| |  |  | our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and
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| |  |  | our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business. These reserves also
affect the amount of cash available for distribution.
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Conflicts Relating to Costs:



| |  |  | our general partner determines the amount and timing of investment transactions, asset purchases and sales, capital expenditures, borrowings, issuance of additional
partnership securities and reserves, each of which can affect the amount of cash that is distributed to our unitholders;
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| |  |  | our general partner determines which of the costs incurred by our general partner and its affiliates are reimbursable by us; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and
reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our general partner may not be fully reimbursed for the use of its officers and employees by Inergys managing
general partner.

Our general partner shares officers and administrative personnel with Inergys managing general partner to operate both our
business and Inergys business. In that case, our general partners officers, who are also the officers of Inergys managing general partner, allocate, in their reasonable and sole discretion, the time its employees spend on our
behalf and on behalf of Inergy. These allocations may not necessarily be the result of arms-length negotiations between Inergys managing general partner and our general partner. Although our general partner intends to be reimbursed for its
employees activities, due to the nature of the allocations, this reimbursement may not exactly match the actual time and overhead spent.

Our
partnership agreement contains provisions that reduce the remedies available to unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner. It will be difficult for a unitholder to challenge a
resolution of a conflict of interest by our general partner or by its conflicts committee.

Whenever our general partner makes a determination or
takes or declines to take any other action in its capacity as our general partner, it will be obligated to act in good faith, which means it must reasonably believe that the determination or other action is in our best interests. Whenever a
potential conflict of interest exists between us and our general partner, our general partner may resolve such conflict of interest. If our general partner determines that its resolution of the conflict of interest is on terms no less favorable to
us than those generally being provided to or available from unrelated third parties or is fair and reasonable to us, taking into account the totality of the relationships between us and our general partner, then it shall be presumed that in making
this determination, our general partner acted in good faith. A unitholder seeking to challenge this resolution of the conflict of interest would bear the burden of overcoming such presumption. This is different from the situation with Delaware
corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair.

Furthermore, if our general partner obtains the approval of our conflicts committee, the resolution will be conclusively deemed to be fair and reasonable to us and not a
breach by our general partner of any duties it may owe to us or our unitholders. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of independent directors would merely
shift the burden of demonstrating unfairness to the plaintiff. As a result, unitholders will effectively not be able to challenge a decision by the conflicts committee.

Unlike Inergy and most other master limited partnerships, which require at least two independent members of the conflicts committee, our partnership agreement provides that a conflicts committee may be comprised of
one or more directors. If we establish a conflicts committee with only one director, your interests may not be as well served as if we had a conflicts committee with at least two independent directors. A single member committee would not have the
benefit of discussion with and input from other independent directors.

Our general partner has a limited call right that may require unitholders to
sell common units at an undesirable time or price.

If at any time more than 85% of the outstanding common units are owned by our general partner
and its affiliates, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price
not less than their then-current market price. As a result, our unitholders may be required to sell common units at an undesirable time or price and may not receive any return on their investment. A unitholder may also incur a tax liability upon a
sale of common units.



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Tax Risks to Our Common Unitholders

The tax treatment of publicly traded partnerships is subject to potential legislative, judicial or administrative changes. If we or Inergy were treated as a corporation for federal income tax purposes, or if
legislation is passed that may preclude us from qualifying for treatment as a partnership, or if we or Inergy were to become subject to a material amount of entity-level taxation for state tax purposes, then our cash available for distribution to
our unitholders would be substantially reduced.

The value of our investment in Inergy depends largely on Inergy being treated as a partnership for
federal income tax purposes, which requires that 90% or more of Inergys gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Internal Revenue Code. Inergy may not meet this requirement or
current law may change so as to cause, in either event, Inergy to be treated as a corporation for federal income tax purposes or otherwise subject to federal income tax. Moreover, the anticipated after-tax benefit of an investment in our common
units depends largely on our being treated as a partnership for federal income tax purposes.

If we or Inergy were treated as a corporation for federal
income tax purposes, we or Inergy would pay federal income tax on our taxable income at the corporate tax rate. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would
flow through to us. As a result, there would be a material reduction in our anticipated cash flow and distributions to our unitholders, likely causing a substantial reduction in the value of our units.

Current law may change, causing us or Inergy to be treated as a corporation for federal income tax purposes or otherwise subjecting us or Inergy to entity level
taxation. In response to recent public offerings of interests of private equity funds and hedge funds, Congress is considering changes to Internal Revenue Code section 7704(d) (definition of qualifying income). We are unable to predict whether
legislation will be enacted or have any impact on us.

Because of widespread state budget deficits and other reasons, several states are evaluating ways to
subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. For instance, Inergy will be subject to a new entity-level tax on the portion of its income that is generated in Texas
beginning in 2007. Imposition of such a tax upon us or Inergy as an entity will reduce, our cash available for distribution to our unitholders.

Inergys partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects Inergy to taxation as a corporation or otherwise subjects Inergy to entity-level taxation for
federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that law on Inergy. Likewise, if we or Inergy is subjected to any such form of an
entity-level taxation the cash available for distribution to our unitholders will be reduced.

If the IRS contests the federal income tax positions
we or Inergy take, the market for our common units or Inergy units may be adversely impacted, and the costs of any contest will reduce cash available for distribution to our unitholders.

The IRS may adopt positions that differ from the positions we or Inergy take. It may be necessary to resort to administrative or court proceedings to sustain some or all
of the positions we or Inergy take. A court may disagree with some or all of the positions we or Inergy take. Any contest with the IRS may materially and adversely impact the market for our common units or Inergy units and the price at which they
trade. In addition, the cost of any contest between Inergy and the IRS will result in a reduction in cash available for distribution to Inergy unitholders and thus indirectly by us, as a unitholder and as the owner of the general partners of Inergy.
Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.



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Our unitholders may be required to pay taxes on income from us even if they do not receive any cash distributions
from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income, which could be different in amount than the
cash we distribute, our unitholders are required to pay any federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive cash distributions from us. Our unitholders may not
receive cash distributions from us equal to their share of our taxable income or even equal to the tax liability that results from the taxation of their share of our taxable income.

Tax gain or loss on disposition of our common units could be more or less than expected.

A unitholder who
sells common units will recognize a gain or loss equal to the difference between the amount realized and his adjusted tax basis in those common units. Prior distributions to a unitholder in excess of the total net taxable income allocated to that
unitholder, which decreased the tax basis in that unitholders common unit, will, in effect, become taxable income to that unitholder if the common unit is sold at a price greater than that unitholders tax basis in that common unit, even
if the price is less than the original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to that unitholder. In addition, if a unitholder sells units, the unitholder may incur a tax
liability in excess of the amount of cash received from the sale.

Tax-exempt entities, regulated investment companies and foreign persons face
unique tax issues from owning common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities,
including employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including
individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to such a unitholder. Distributions to non-U.S. persons will be reduced by withholding taxes imposed at the highest effective
applicable tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.

The sale or exchange of 50% or more of our capital and profits interests within a twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our
capital and profits within a twelve-month period. Likewise, Inergy will be considered to have terminated its partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in Inergys capital
and profits within a twelve-month period. A termination would, among other things, result in the closing of our or Inergys taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our
taxable income for the year in which the termination occurs. Thus, if this occurs our unitholders will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated as a percentage of the cash
distributed to unitholders with respect to that period. Although the amount of increase cannot be estimated because it depends upon numerous factors including the timing of the termination, the amount could be material. Our termination, or the
termination of Inergy, currently would not affect our classification, or the classification of Inergy, as a partnership for federal income tax purposes, but instead, we or Inergy would be treated as a new partnership for tax purposes. If treated as
a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred.

Our
unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of investing in our common units.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including foreign taxes, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes
that are imposed by



36



---

the various jurisdictions in which we or Inergy do business or own property and in which they do not reside. We and Inergy own property and conduct business
in numerous states in the United States. Unitholders may be required to file state and local income tax returns and pay state and local income taxes in many or all of the jurisdictions in which we or Inergy do business or own property. Further,
unitholders may be subject to penalties for failure to comply with those requirements. It is our unitholders responsibility to file all United States federal, state, local and foreign tax returns.

Inergy has adopted certain valuation methodologies and monthly conventions that may result in a shift of income, gain, loss and deduction between us and the public
unitholders of Inergy. The IRS may challenge this treatment, which could adversely affect the value of Inergys common units and our common units.

When we or Inergy issue additional units or engage in certain other transactions, Inergy determines the fair market value of its assets and allocates any unrealized gain or loss attributable to such assets to the capital accounts of
Inergys public unitholders and us. The adopted methodology may be viewed as understating the value of Inergys assets. In that case, there may be a shift of income, gain, loss and deduction between certain Inergy public unitholders and
us, which may be unfavorable to such Inergy unitholders. Moreover, subsequent purchasers of our common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to Inergys intangible assets and a
lesser portion allocated to Inergys tangible assets. The IRS may challenge the adopted valuation methods, or our or Inergys allocation of the Section 743(b) adjustment attributable to Inergys tangible and intangible assets,
and allocations of income, gain, loss and deduction between us and certain of Inergys public unitholders.

A successful IRS challenge to these
methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders or Inergy unitholders. It also could affect the amount of gain on the sale of common units by our unitholders or Inergys
unitholders and could have a negative impact on the value of our common units or those of Inergy or result in audit adjustments to the tax returns of our or Inergys unitholders without the benefit of additional deductions.

We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment,
which could result in a unitholder owing more tax and may adversely affect the value of the common units.

To maintain the uniformity of the
economic and tax characteristics of our common units, we have adopted certain depreciation and amortization positions that may not conform with all aspects of existing Treasury Regulations. These positions may result in an understatement of
deductions and an overstatement of income to our unitholders. For example, we do not amortize certain goodwill assets, the value of which has been attributed to certain of our outstanding units. A subsequent holder of those units may be entitled to
an amortization deduction attributable to that goodwill under Internal Revenue Code Section 743(b). But, because we cannot identify these units once they are traded by the initial holder, we do not allocate any subsequent holder of a unit any
such amortization deduction. This approach may understate deductions available to those unitholders who own those units and may result in those unitholders believing that they have a higher tax basis in their units than would be the case if the IRS
strictly applied certain Treasury Regulations. This, in turn, may result in those unitholders reporting less gain or more loss on a sale of their units than would be the case if the IRS strictly applied certain Treasury Regulations.

The IRS may challenge the manner in which we calculate our unitholders basis adjustment under Section 743(b). If so, because neither we nor a unitholder can
identify the units to which this issue relates once the initial holder has traded them, the IRS may assert adjustments to all unitholders selling units within the period under audit as if all unitholders owned such units.

A successful IRS challenge to this position or other positions Inergy may take could adversely affect the amount of taxable income or loss allocated to Inergys
unitholders. It also could affect the gain from a unitholders sale



37



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of common units and could have a negative impact on the value of the common units or result in audit adjustments to Inergys unitholders tax
returns without the benefit of additional deductions.

We prorate our items of income, gain, loss and deduction between transferors and transferees
of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of
income, gain, loss and deduction among our unitholders.

Under the terms of our Partnership Agreement, we prorate our items of income, gain, loss
and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method
may not be permitted under Treasury Regulations. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We do not own or lease any properties. However, as of November 1, 2007, Inergy owned 219 of its
321 retail propane customer service centers and leased the remaining centers. For more information concerning the location of Inergys customer service centers, see Retail Propane under Item 1. Inergy leases its Kansas City,
Missouri headquarters. Inergy leases underground storage facilities with an aggregate capacity of approximately 52.2 million gallons of propane at nine locations under annual lease agreements. Inergy also leases capacity in several pipelines
pursuant to annual lease agreements.

Tank ownership and control at customer locations are important components to Inergys retail propane operations
and customer retention. As of September 30, 2007, Inergy owned the following:



| |  |  | approximately 1,300 bulk storage tanks at approximately 650 locations with typical capacities of 12,000 to 30,000 gallons,
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately 630,000 stationary customer storage tanks with typical capacities of 100 to 1,200 gallons, and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | approximately 155,000 portable propane cylinders with typical capacities of up to 35 gallons.
| | - |  | ---------------------------------------------------------------------------------------------

Inergy believes that it has satisfactory title or valid rights to use all of its material properties. Although some of these properties are subject to liabilities and
leases, liens for taxes not yet due and payable, encumbrances securing payment obligations under non-competition agreements entered in connection with acquisitions and immaterial encumbrances, easements and restrictions, Inergy does not believe that
any of these burdens will materially interfere with its continued use of these properties in Inergys business, taken as a whole. Inergys obligations under its credit facility are secured by liens and mortgages on Inergys real and
personal property.

In addition, Inergy believes that it has, or is in the process of obtaining, all required material approvals, authorizations, orders,
licenses, permits, franchises and consents of, and has obtained or made all required material registrations, qualifications and filings with, the various state and local governmental and regulatory authorities that relate to ownership of its
properties or the operation of its business.



38



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Item 3. Legal Proceedings.

We are not a party to any litigation. However, Inergys operations are subject to all
operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing for use by consumers of combustible liquids such as propane. As a result, at any given time Inergy is a defendant in various legal proceedings
and litigation arising in the ordinary course of business. Inergy maintains insurance policies with insurers in amounts and with coverages and deductibles as the managing general partner believes are reasonable and prudent. However, Inergy cannot
assure you that this insurance will be adequate to protect it from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of the holders of our
common units during the fourth quarter of the fiscal year ended September 30, 2007.



39



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PART II

Item 5. Market for Registrants Common Equity, Related Unitholder Matters, and Issuer Purchases of Equity Securities.

Since June 21, 2005 our common units representing limited partner interests have been traded on NASDAQs Global Select National Market under the symbol NRGP. The following table sets forth the range of high and low bid
prices of the common units, as reported by NASDAQ, as well as the amount of cash distributions declared per common unit for the periods indicated.



|                   |  |     |       |      |   |                          |  |   |      
|------------------ |  | --- | ----- | ---- | - | ------------------------ |  | - | -----
|Quarters Ended:    |  | Low |       | High |   | CashDistributionPer Unit
|Fiscal 2007:       |  |     |       |      |   |                          |  |   |      
|September 30, 2007 |  | $   | 41.84 |      | $ | 53.75                    |  | $ | 0.535
|June 30, 2007      |  |     | 45.50 |      |   | 56.09                    |  |   | 0.510
|March 31, 2007     |  |     | 38.35 |      |   | 46.28                    |  |   | 0.480
|December 31, 2006  |  |     | 32.80 |      |   | 41.88                    |  |   | 0.400
|                   |  |     |      
|Fiscal 2006:       |  |     |       |      |   |                          |  |   |      
|September 30, 2006 |  | $   | 30.15 |      | $ | 34.89                    |  | $ | 0.375
|June 30, 2006      |  |     | 30.35 |      |   | 35.90                    |  |   | 0.350
|March 31, 2006     |  |     | 33.00 |      |   | 37.10                    |  |   | 0.320
|December 31, 2005  |  |     | 33.00 |      |   | 37.94                    |  |   | 0.290
|                   |  |     |      
|Fiscal 2005:       |  |     |       |      |   |                          |  |   |      
|September 30, 2005 |  | $   | 27.00 |      | $ | 35.00                    |  | $ | 0.270
|June 30, 2005(a)   |  |     | 27.00 |      |   | 31.25                    |  |   | 0.015

---

|(a) | Cash distribution per unit for the quarter ended June 30, 2005 was prorated for the number of days we
were public.
|--- | ------------------------------------------------------------------------------------------------------------------

As of November 19, 2007, we had issued and outstanding 20,209,016 common units, which were held by approximately 2,386
unitholders of record.

Our company makes quarterly distributions to its limited partners within approximately 50 days after the end of each fiscal quarter
in an aggregate amount equal to its available cash (as defined) for such quarter. Available cash generally means, with respect to each fiscal quarter, all cash on hand at the end of the quarter less the amount of cash that the general partner
determines in its reasonable discretion is necessary or appropriate to:



| |  |  | provide for the proper conduct of our business,
| | - |  | -----------------------------------------------



| |  |  | comply with applicable law, any of our debt instruments, or other agreements, or
| | - |  | --------------------------------------------------------------------------------



| |  |  | provide funds for distributions to unitholders for any one or more of the next four quarters,
| | - |  | ---------------------------------------------------------------------------------------------

plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Working
capital borrowings are generally borrowings that are made under Inergys working capital facility and in all cases are used solely for working capital purposes or to pay distributions to partners. The full definition of available cash is set
forth in our partnership agreement, which is incorporated by reference herein as an exhibit to this report. For a discussion of restrictions on our ability to distribute cash, please see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.

There is no guarantee that we will pay a quarterly distribution on our common units in any quarter,
and we will be prohibited from making any distributions to unitholders if it would cause an event of default under our credit facility. The information concerning restrictions on distributions required by this Item 5 is incorporated herein by



40



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reference to Managements Discussion and Analysis of Financial Condition and Results of Operations Description of Credit Facilities
under Item 7 and Note 6 to our Consolidated Financial Statements.

The following table sets forth in tabular format, a summary of our companys
equity compensation plan information as of September 30, 2007:

Equity Compensation Plan Information



|                                                           |  |                                                                                       |  |                                                                       |       |                                                                                                                                       |          
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                              |  | Number ofsecurities to beissued uponexercise ofoutstandingoptions, warrantsand
rights |  | Weighted-averageexerciseprice ofoutstandingoptions,warrantsand rights |       | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))
|                                                           |  | (a)                                                                                   |  | (b)                                                                   |       | (c)                                                                                                                                  
|Equity compensation plans approved by security holders     |  |                                                                                      |  | $                                                                     |      |                                                                                                                                       |         
|Equity compensation plans not approved by security holders |  | 670,000                                                                               |  |                                                                       | 24.90 |                                                                                                                                       | 1,320,984
|                                                           |  |                                                                                       |  |                                                                       |       |                                                                                                                                       |          
|Total                                                      |  | 670,000                                                                               |  | $                                                                     | 24.90 |                                                                                                                                       | 1,320,984
|                                                           |  |                                                                                       |  |                                                                       |       |                                                                                                                                       |          

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 consolidated financial data as of and for the years ended September 30, 2007, 2006, 2005, 2004 and 2003 are derived from our audited financial
statements. These financial statements include the results of operations of Inergys acquisitions from the effective date of the respective acquisitions.

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.



41



---

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.



|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | ---- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                     |  | Years Ended September 30,           |        
|                                                                                                                                     |  | 2007                                |         |   | 2006 |   |         | 2005 |  |   | 2004    |      |  | 2003 |       
|                                                                                                                                     |  | (in millions, except per unit data) |        
|Statement of Operations Data:                                                                                                        |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Revenues                                                                                                                             |  | $                                   | 1,483.1 |   |      | $ | 1,390.2 |      |  | $ | 1,051.9 |      |  | $    | 483.2  |      |  | $ | 363.7  |  
|Cost of product sold (excluding depreciation and amortization as shown below)                                                        |  |                                     | 1,021.7 |   |      |   | 990.4   |      |  |   | 724.2   |      |  |      | 359.1  |      |  |   | 267.0  |  
|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Gross profit                                                                                                                         |  |                                     | 461.4   |   |      |   | 399.8   |      |  |   | 327.7   |      |  |      | 124.1  |      |  |   | 96.7   |  
|Expenses:                                                                                                                            |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Operating and administrative                                                                                                         |  |                                     | 253.0   |   |      |   | 249.5   |      |  |   | 197.6   |      |  |      | 81.3   |      |  |   | 59.5   |  
|Depreciation and amortization                                                                                                        |  |                                     | 83.4    |   |      |   | 76.8    |      |  |   | 50.4    |      |  |      | 21.1   |      |  |   | 13.8   |  
|Loss on disposal of assets                                                                                                           |  |                                     | 8.0     |   |      |   | 11.5    |      |  |   | 0.7     |      |  |      | 0.2    |      |  |   | 0.1    |  
|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Operating income                                                                                                                     |  |                                     | 117.0   |   |      |   | 62.0    |      |  |   | 79.0    |      |  |      | 21.5   |      |  |   | 23.3   |  
|Other income (expense):                                                                                                              |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Interest expense, net                                                                                                                |  |                                     | (54.4   | ) |      |   | (55.8   | )    |  |   | (36.1   | )    |  |      | (7.9   | )    |  |   | (9.9   | )
|Interest expense related to write-off of deferred financing costs                                                                    |  |                                     |        |   |      |   |        |      |  |   | (7.6    | )(b) |  |      | (1.2   | )(c) |  |   |       |  
|Interest expense related to make whole premium charge                                                                                |  |                                     |        |   |      |   |        |      |  |   |        |      |  |      | (18.0  | )(c) |  |   |       |  
|Interest income related to swap value received                                                                                       |  |                                     |        |   |      |   |        |      |  |   |        |      |  |      | 1.0    | (c)  |  |   |       |  
|Other income                                                                                                                         |  |                                     | 1.9     |   |      |   | 0.8     |      |  |   | 0.3     |      |  |      | 0.1    |      |  |   | 0.1    |  
|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Income (loss) before gain on issuance of units in Inergy, L.P., income taxes and interest of non-controlling partners in Inergy,
L.P |  |                                     | 64.5    |   |      |   | 7.0     |      |  |   | 35.6    |      |  |      | (4.5   | )    |  |   | 13.5   |  
|Gain on issuance of units in Inergy, L.P. (Note 9)                                                                                   |  |                                     | 80.6    |   |      |   |        |      |  |   |        |      |  |      |       |      |  |   |       |  
|Provision for income taxes                                                                                                           |  |                                     | (6.5    | ) |      |   | (0.6    | )    |  |   | (0.5    | )    |  |      | (0.2   | )    |  |   | (0.5   | )
|Interest of non-controlling partners in Inergy, L.P.s net (income) loss                                                             |  |                                     | (36.0   | ) |      |   | 8.0     |      |  |   | (26.8   | )    |  |      | 4.8    |      |  |   | (10.0  | )
|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Net income                                                                                                                           |  | $                                   | 102.6   |   |      | $ | 14.4    |      |  | $ | 8.3     |      |  | $    | 0.1    |      |  | $ | 3.0    |  
|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Net income applicable to limited partners units                                                                                     |  | $                                   | 102.6   |   |      | $ | 14.4    |      |  | $ | 8.3     |      |  | $    | 0.1    |      |  | $ | 3.0    |  
|                                                                                                                                     |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Net income per limited partner unit:                                                                                                 |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Basic                                                                                                                                |  | $                                   | 5.13    |   |      | $ | 0.72    |      |  | $ | 0.49    |      |  | $    | 0.01   |      |  | $ | 0.24   |  
|Diluted                                                                                                                              |  | $                                   | 5.06    |   |      | $ | 0.71    |      |  | $ | 0.48    |      |  | $    | 0.00   |      |  | $ | 0.19   |  
|Weighted average limited partners units outstanding (in thousands):                                                                 |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Basic                                                                                                                                |  |                                     | 20,003  |   |      |   | 20,000  |      |  |   | 17,140  |      |  |      | 12,550 |      |  |   | 12,373 |  
|Diluted                                                                                                                              |  |                                     | 20,258  |   |      |   | 20,167  |      |  |   | 17,186  |      |  |      | 16,090 |      |  |   | 16,090 |  
|Balance Sheet Data (end of period):                                                                                                  |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Net property, plant and equipment                                                                                                    |  | $                                   | 820.7   |   |      | $ | 723.5   |      |  | $ | 732.0   |      |  | $    | 215.3  |      |  | $ | 157.2  |  
|Total assets                                                                                                                         |  |                                     | 1,763.4 |   |      |   | 1,646.8 |      |  |   | 1,510.3 |      |  |      | 511.7  |      |  |   | 373.4  |  
|Total debt, including current portion                                                                                                |  |                                     | 742.2   |   |      |   | 690.0   |      |  |   | 587.8   |      |  |      | 153.3  |      |  |   | 131.1  |  
|Partners capital (deficiency)(a)                                                                                                    |  |                                     | 50.9    |   |      |   | (18.7   | )    |  |   | (6.7    | )    |  |      | (34.8  | )    |  |   | 2.2    |  
|                                                                                                                                     |  |                                     |         |   |     
|Other Financial Data:                                                                                                                |  |                                     |         |   |      |   |         |      |  |   |         |      |  |      |        |      |  |   |        |  
|Net cash provided by operating activities                                                                                            |  |                                     | 163.5   |   |      |   | 99.9    |      |  |   | 84.1    |      |  |      | 30.9   |      |  |   | 33.6   |  
|Net cash used in investing activities                                                                                                |  |                                     | (187.8  | ) |      |   | (210.9  | )    |  |   | (840.7  | )    |  |      | (97.6  | )    |  |   | (34.2  | )
|Net cash provided by financing activities                                                                                            |  |                                     | 20.1    |   |      |   | 113.5   |      |  |   | 763.8   |      |  |      | 63.1   |      |  |   | 4.2    |  

---

|(a) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



42



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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;
| | - |  | ----------------



| |  |  | 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.



43



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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 the Stagecoach natural gas storage facility in Tioga County, New York, an NGL business in Bakersfield, California and an LPG storage facility near Bath, New York. 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, 2007, Inergy has acquired 72
propane companies and 4 midstream businesses, for an aggregate purchase price of approximately $1.5 billion, including working capital, assumed liabilities and acquisition costs. 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, 2007, 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 0.9% general partner interest in Inergy;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 4,706,689 Inergy common units, representing an aggregate limited partner interest in Inergy of approximately 9.4%; 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 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) loss. 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.

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 generally highest from November through April when customers pay for propane purchased during the six-month peak heating season of October through March.

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



44



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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 how weather impacts 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 1977 through 2007. 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 consistent with our operational structure and then on a partnership-wide basis.

The retail 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 its 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 has maintained historically high costs in 2006 and 2007, 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 to remain so for the foreseeable future and accordingly expect 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.



45



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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 consolidated statements of operations:



| |  |  | Our recognition of gain on issuance of units in Inergy. In accordance with Staff Accounting Bulletin No. 51, in certain circumstances, we can
recognize an increase in the value of our investment in Inergy when Inergy issues additional common units to third parties at a unit price that exceeds the current carrying value of our investment in Inergy common units. This gain recognition,
however, is not permitted if Inergy sells a class of equity securities that has distribution rights over any other class of equity interests. Since Inergy had both subordinated and special units, we could not recognize the gains until these units
converted to common units, and as such, we had previously reflected these deferred gains from issuance of Inergy common units as a minority interest in our financial statements. As of April 25, 2007, all subordinated and special units had
converted to common units, resulting in our recognition of all previously deferred gains during the quarter ended June 30, 2007. On a prospective basis, this gain will be recognized as income in the period in which the sale to third parties
occurs. Historically, Inergy has grown through acquisitions funded in part through the issuance of equity. Because we expect Inergys acquisition and related financing activity to continue for the foreseeable future, it is likely that we will
continue to recognize gains as a result of future equity issuances by Inergy.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provision for Income Taxes. Our provision for income taxes is primarily related to cash flows received by IPCH Acquisition Corp., a wholly owned
subsidiary of the Company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2007, we owned an approximate 9.4% limited partner interest in Inergy together with a 0.9% non-managing general partner interest; and the non-affiliated
unitholders owned an 89.7% limited partner interest in Inergy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal Year Ended September 30, 2007 Compared to Fiscal Year
Ended September 30, 2006

The following table summarizes the consolidated income statement components for the fiscal years ended September 30,
2007 and 2006, respectively (in millions):



|                                                                                                                   |  |                         |         |   |        |   |         |            |  |       |            |  |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ------ | - | ------- | ---------- |  | ----- | ---------- |  | ------ | -
|                                                                                                                   |  | Year EndedSeptember 30, |         |   | Change |  
|                                                                                                                   |  | 2007                    |         |   | 2006   |   |         | In Dollars |  |       | Percentage | 
|Revenue                                                                                                            |  | $                       | 1,483.1 |   |        | $ | 1,390.2 |            |  | 92.9  |            |  | 6.7    | %
|Cost of product sold                                                                                               |  |                         | 1,021.7 |   |        |   | 990.4   |            |  | 31.3  |            |  | 3.2    |  
|                                                                                                                   |  |                         |         |   |        |   |         |            |  |       |            |  |        |  
|Gross profit                                                                                                       |  |                         | 461.4   |   |        |   | 399.8   |            |  | 61.6  |            |  | 15.4   |  
|Operating and administrative expenses                                                                              |  |                         | 253.0   |   |        |   | 249.5   |            |  | 3.5   |            |  | 1.4    |  
|Depreciation and amortization                                                                                      |  |                         | 83.4    |   |        |   | 76.8    |            |  | 6.6   |            |  | 8.6    |  
|Loss on disposal of assets                                                                                         |  |                         | 8.0     |   |        |   | 11.5    |            |  | (3.5  | )          |  | (30.4  | )
|                                                                                                                   |  |                         |         |   |        |   |         |            |  |       |            |  |        |  
|Operating income                                                                                                   |  |                         | 117.0   |   |        |   | 62.0    |            |  | 55.0  |            |  | 88.7   |  
|Interest expense, net                                                                                              |  |                         | (54.4   | ) |        |   | (55.8   | )          |  | 1.4   |            |  | 2.5    |  
|Other income                                                                                                       |  |                         | 1.9     |   |        |   | 0.8     |            |  | 1.1   |            |  | 137.5  |  
|                                                                                                                   |  |                         |         |   |        |   |         |            |  |       |            |  |        |  
|Income before gain on issuance of units in Inergy, income taxes and interest of non-controlling partners in Inergy |  |                         | 64.5    |   |        |   | 7.0     |            |  | 57.5  |            |  | 821.4  |  
|Gain on issuance of units in Inergy                                                                                |  |                         | 80.6    |   |        |   |        |            |  | 80.6  |            |  | 100.0  |  
|Provision for income taxes                                                                                         |  |                         | (6.5    | ) |        |   | (0.6    | )          |  | (5.9  | )          |  | (983.3 | )
|Interest of non-controlling partners in Inergys net (income) loss                                                 |  |                         | (36.0   | ) |        |   | 8.0     |            |  | (44.0 | )          |  | (550.0 | )
|                                                                                                                   |  |                         |         |   |        |   |         |            |  |       |            |  |        |  
|Net income                                                                                                         |  | $                       | 102.6   |   |        | $ | 14.4    |            |  | 88.2  |            |  | 612.5  | %
|                                                                                                                   |  |                         |         |   |        |   |         |            |  |       |            |  |        |  



46



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The following table summarizes revenues, including associated volume of gallons sold, for the years ended
September 30, 2007 and 2006, respectively (in millions):



|                                     |  |                         |         |        |         |           |                         |         |        |  |      |   |      |       |         |       |         |      |  |     |  
|------------------------------------ |  | ----------------------- | ------- | ------ | ------- | --------- | ----------------------- | ------- | ------ |  | ---- | - | ---- | ----- | ------- | ----- | ------- | ---- |  | --- | -
|                                     |  | Revenues                |         |        | Gallons |          
|                                     |  | Year EndedSeptember 30, |         | Change |         |           | Year EndedSeptember 30, |         | Change | 
|                                     |  | 2007                    |         | 2006   |         | InDollars |                         | Percent |        |  | 2007 |   | 2006 |       | InUnits |       | Percent |     
|Retail propane                       |  | $                       | 733.2   |        | $       | 701.1     |                         | $       | 32.1   |  | 4.6  | % |      | 362.2 |         | 360.3 |         | 1.9  |  | 0.5 | %
|Wholesale propane                    |  |                         | 417.2   |        |         | 371.2     |                         |         | 46.0   |  | 12.4 |   |      | 383.9 |         | 365.3 |         | 18.6 |  | 5.1 |  
|Other retail                         |  |                         | 168.8   |        |         | 164.8     |                         |         | 4.0    |  | 2.4  |   |      |      |         |      |         |     |  |    |  
|Storage, fractionation and midstream |  |                         | 163.9   |        |         | 153.1     |                         |         | 10.8   |  | 7.1  |   |      |      |         |      |         |     |  |    |  
|                                     |  |                         |         |        |         |           |                         |         |        |  |      |   |      |       |         |       |         |      |  |     |  
|Total                                |  | $                       | 1,483.1 |        | $       | 1,390.2   |                         | $       | 92.9   |  | 6.7  | % |      | 746.1 |         | 725.6 |         | 20.5 |  | 2.8 | %
|                                     |  |                         |         |        |         |           |                         |         |        |  |      |   |      |       |         |       |         |      |  |     |  

Volume. During fiscal 2007, Inergy sold 362.2 million retail gallons of propane compared to
360.3 million retail gallons of propane during fiscal 2006. This 1.9 million gallon net increase was driven by retail propane acquisitions, which contributed an increase of approximately 19.7 million retail gallons during fiscal 2007,
partially offset by a 17.8 million gallon decline in comparable sales volumes. The 17.8 million decrease in comparable retail gallons sold was due to several factors, including lower volumes resulting from the sale of certain branches
during the fourth quarter of fiscal year 2006, expected volume losses from recent acquisitions and customer conservation arising from the increasing cost of propane. These factors that resulted in a decrease in comparable sales were partially offset
by higher volumes related to the colder weather experienced during fiscal 2007. Although it was 7% warmer than normal during fiscal 2007, it was approximately 3% colder than fiscal 2006.

Wholesale gallons delivered increased 18.6 million gallons, or 5.1%, to 383.9 million gallons in fiscal 2007 from 365.3 million gallons in fiscal 2006. The increase was primarily attributable to
increased sales volumes to new customers and increased sales volumes to existing customers.

The total natural gas liquid gallons sold or processed by our
West Coast NGL operations increased 30.2 million gallons, or 18.9%, to 190.3 million gallons in fiscal 2007 from 160.1 million gallons in fiscal 2006. This increase was attributable to the addition of natural gas liquid marketing and
processing contracts in fiscal 2007. Stagecoach had 13.25 bcf of working gas storage capacity for the first six months in fiscal 2007, 17.45 bcf of working gas storage capacity for the following five months and 26.25 bcf of working gas storage
capacity during September 2007. Stagecoach had 13.25 bcf of working gas storage capacity throughout fiscal 2006. Stagecoachs storage services were 100% contracted during each of the periods noted above.

Revenues. Revenues in fiscal 2007 were $1,483.1 million, an increase of approximately $92.9 million, or 6.7% from $1,390.2 million in fiscal 2006.

Revenues from retail propane sales were $733.2 million for the year ended September 30, 2007, an increase of $32.1 million, or 4.6%, compared to $701.1 million for
the year ended September 30, 2006. These higher retail propane revenues were primarily the result of $39.0 million of acquisition-related sales and an increase of $27.7 million related to the higher average selling price of propane. Partially
offsetting these increases in retail propane revenue was a $34.6 million decline resulting from lower volume sales at our existing locations as discussed above.

Revenues from wholesale propane sales were $417.2 million in fiscal 2007, an increase of $46.0 million or 12.4%, from $371.2 million in fiscal 2006. Approximately $27.1 million of this increase was attributable to the higher sales price of
propane and the remaining $18.9 million attributable to higher sales volumes to new and existing customers. The higher selling price in our wholesale division in 2007 compared to 2006 is the result of the higher cost of propane.

Revenues from other retail sales, primarily distillates, service, rental, appliance sales and transportation services, were $168.8 million in fiscal 2007, an increase of
$4.0 million, or 2.4% from $164.8 million in fiscal 2006. This



47



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increase was primarily related to $4.2 million of acquisition-related sales and a $2.1 million increase in transportation sales. These increases were
partially offset by a $2.3 million decline related to other products and services, primarily appliances and rental sales.

Revenues from storage,
fractionation and other midstream activities were $163.9 million in fiscal 2007, an increase of $10.8 million or 7.1% from $153.1 million in fiscal 2006. Approximately $13.9 million of this increase was due to the acquisition of the Bath LPG Storage
Facility, the Stagecoach Phase II expansion placed into partial service in April 2007 and full service in September 2007, and increased contractual rates on the Stagecoach Storage Facility. In addition, revenues from our West Coast NGL operations
were $4.4 million higher as a result of increased transportation and processing activities. Partially offsetting the above increases was a net $7.5 million decline in revenues due to expected changes in the variety of natural gas liquid products
sold.

Cost of Product Sold. Retail propane cost of product sold was $419.3 million for the year ended September 30, 2007, a $1.1 million
decrease as compared to $420.4 million for the year ended September 30, 2006. Retail propane cost of goods sold includes a $0.6 million non-cash gain and a $20.0 million non-cash charge for fiscal 2007 and 2006, respectively, arising from
derivative contracts associated with retail propane fixed price contracts. Excluding the impact of these non-cash items, retail propane cost of goods sold increased approximately $19.5 million during fiscal 2007 as compared to fiscal 2006. This
$19.5 million increase was driven by higher costs of $23.2 million associated with acquisitions and an increase of $16.0 million resulting from an approximate 4% higher average per gallon cost of propane. These factors, which increased retail
propane cost of product sold, were partially offset by lower volume sales at our existing locations as discussed above, which reduced costs by $19.7 million.

Wholesale propane cost of product sold in fiscal 2007 was $400.7 million, an increase of $41.4 million or 11.5%, from wholesale cost of product sold of $359.3 million in 2006. Contributing to these higher costs was an approximate $23.1
million increase due to the higher average cost of propane and the remaining $18.3 million due to higher volumes sold to new and existing customers.

Other
retail cost of product sold was $100.0 million for the year ended September 30, 2007, an increase of $0.4 million from $99.6 million for the year ended September 30, 2006. This increase was primarily due to cost of goods sold related to
acquisitions of $0.9 million and a $1.5 million increase in transportation costs, partially offset by a $2.0 million decline in costs for other products and services, primarily appliances sales.

Storage, fractionation and other midstream cost of product sold was $101.7 million, a decrease of $9.4 million, or 8.5%, from $111.1 million in fiscal 2006. Of this $9.4
million decrease, $9.1 million was related to the lower cost of product sold associated with the expected changes in variety of natural gas liquid product sold. Additionally, a $1.9 million decrease was primarily attributable to lower transportation
expense associated with the acquisition of the Stagecoach South Lateral. These decreases were partially offset by a $1.6 million increase from increased transportation and processing activities from our West Coast NGL operations.

Our 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, delivery vehicle costs
consisting of fuel costs, repair and maintenance and lease expense, and depreciation on tanks being rented to customers. Costs associated with delivery vehicles approximated $66.0 million and $62.4 million in 2007 and 2006, respectively. In
addition, the depreciation expense associated with the delivery vehicles and customer tanks is reported within depreciation and amortization expense and amounted to $30.8 million and $30.7 million in 2007 and 2006, respectively. Since we include
these costs in our 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 $313.9 million in fiscal 2007 compared to $280.7 million in fiscal 2006. This $33.2 million, or 11.8%, increase was
attributable to several factors, including a $15.8 million increase



48



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due to acquisitions and an $11.7 million increase related to a higher cash margin per gallon. The increase in cash margin per gallon was primarily the result
of our ability to raise selling prices in certain markets in excess of the increased cost of propane. Also contributing to higher gross profit was the $20.6 million decrease in cost of product sold relating to the change in non-cash charges from
derivative contracts associated with retail fixed price sales contracts. These factors that contributed to a higher gross profit were partially offset by a decline in retail gallon sales at existing locations as discussed above, resulting in a
decrease in gross profit of $14.9 million.

Wholesale propane gross profit was $16.5 million in fiscal 2007 compared to $11.9 million in fiscal 2006, an
increase of $4.6 million or 38.7%. Approximately $4.0 million of this increase was the result of a higher margin per gallon from our existing business and the remaining $0.6 million due to increased wholesale volumes from our new and existing
business. The improved margin per gallon is primarily the result of a higher average selling price in excess of our increased cost of propane.

Other
retail gross profit was $68.8 million for the year ended September 30, 2007 compared to $65.2 million for the year ended September 30, 2006. This $3.6 million, or 5.5%, increase was due primarily to acquisitions and higher transportation,
distillate and rental sales, which together resulted in an increase to other retail gross profit of approximately $6.2 million. These increases were partially offset by a combined decrease in gross profit for appliance sales and other retail
services of approximately $2.6 million.

Storage, fractionation and other midstream gross profit was $62.2 million in fiscal 2007 compared to $42.0 million
in fiscal 2006, an increase of $20.2 million, or 48.1%. Approximately $15.8 million of this increase was due to the acquisition of the Bath LPG Storage Facility, the Stagecoach Phase II expansion placed into partial service in April 2007 and full
service in September 2007, and increased contractual rates on the Stagecoach Storage Facility. Additionally, $4.4 million relates to increases in transportation, processing activities and natural gas liquids gross profit at our West Coast NGL
operations.

Operating and Administrative Expenses. Operating and administrative expenses were $253.0 million in fiscal 2007 compared to $249.5
million in fiscal 2006. This $3.5 million increase in operating expenses was primarily the result of higher expenses of approximately $11.5 million arising from acquisitions, partially offset by lower expenses of approximately $5.7 million due to
integration efficiencies and lower variable expenses as a result of lesser volumes sold at existing locations. Also partially offsetting the increase was a one-time charge in 2006 of $2.3 million for long-term incentive compensation related to the
conversion of Inergys subordinated units to common units.

Depreciation and Amortization. Depreciation and amortization increased to $83.4
million in fiscal 2007 from $76.8 million in fiscal 2006, with the change primarily a result of acquisitions and the expansion of our midstream segment.

Loss on Disposal of Assets. Loss on sale of assets decreased to $8.0 million in fiscal 2007 compared to $11.5 million in fiscal 2006. The losses recognized in fiscal 2007 and 2006 include unrealized losses of approximately $6.2
million and $6.6 million, respectively, related to assets held for sale, which have been written down to their estimated selling price. In addition, we had realized losses in fiscal 2007 and 2006 of approximately $1.8 million and $4.9 million,
respectively. These assets, both those sold and those held for sale, consist primarily of vehicles, tanks and real estate deemed to be excess, redundant or underperforming assets. These assets were identified primarily as a result of the integration
of the larger retail propane acquisitions closed since November 2004 as Inergy focused on eliminating duplicity in vehicles, operations, tanks and real estate.

Interest Expense. Interest expense decreased to $54.4 million in fiscal 2007 compared to $55.8 million in fiscal 2006. This $1.4 million decline resulted from $15.4 million in lower average debt outstanding and more capitalized
interest during fiscal 2007 partially offset by a higher overall average interest rate in 2007 (7.71%) compared to 2006 (7.36%). During fiscal 2007 and 2006, we capitalized $3.1 million and $0.4 million, respectively, of interest related to
certain capital improvement projects at our West Coast NGL and Stagecoach facilities as further described below in Liquidity and Sources of CapitalCapital Resource Activities.



49



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Gain on Issuance of Units in Inergy. As discussed above, during the quarter ended June 30, 2007, we
recognized all previously deferred gains resulting from issuances of additional Inergy common units at a price per unit greater than our equivalent carrying value. As such, a gain of approximately $80.6 million was recognized during fiscal 2007, and
no such gain was recorded in fiscal 2006.

Provision for Income Taxes. The provision for income taxes is primarily related to certain of our
corporate subsidiaries and certain state taxes related to Inergy that have been classified as income taxes in the accompanying consolidated financial statements, due to the nature of the tax. The provision for income taxes increased to $6.5 million
in the year ended September 30, 2007 from $0.6 million in 2006. The provision for income taxes of $6.5 million in the year ended September 30, 2007 is composed of $1.7 million of current income tax expense together with $4.8 million of
deferred income tax expense. The 2006 provision for income taxes of $0.6 million is composed of $1.9 million of current income tax expense and a deferred income tax benefit of $1.3 million.

Interest of Non-controlling Partners in Inergys Net Income. We recorded expense of $36.0 million in the year ended September 30, 2007, as compared
to income of $8.0 million in 2006 associated with the interests of non-controlling partners in Inergy. The $44.0 million change resulted primarily from a $57.2 million increase in Inergys net income, which had the effect of increasing the
interest of non-controlling partners in Inergys net income. Also contributing to the change was a $9.1 million increase in incentive distribution rights received by the Company from Inergy, to which the non-controlling partners are not
entitled, together with an approximate $4.1 million increase in other related income from minority interests in Inergy.

Net Income. Net income
increased to $102.6 million for the year ended September 30, 2007 from $14.4 million in 2006. The $88.2 million increase in net income was primarily attributable to the gain recognition of $80.6 million on the issuance of Inergy units together
with a higher gross profit at Inergy in fiscal 2007. Partially offsetting these increases in net income was the decrease in income related to the interest of non-controlling partners in Inergys net income, as well as increases in operating and
administrative expenses and depreciation and amortization.

Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30,
2005

The following table summarizes the consolidated income statement components for the fiscal years ending September 30, 2006 and 2005,
respectively (in millions):



|                                                                              |  |                         |         |   |        |   |         |           |  |   |            |   |  |       |  
|----------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ------ | - | ------- | --------- |  | - | ---------- | - |  | ----- | -
|                                                                              |  | Year EndedSeptember 30, |         |   | Change |  
|                                                                              |  | 2006                    |         |   | 2005   |   |         | InDollars |  |   | Percentage |  
|Revenue                                                                       |  | $                       | 1,390.2 |   |        | $ | 1,051.9 |           |  | $ | 338.3      |   |  | 32.2  | %
|Cost of product sold                                                          |  |                         | 990.4   |   |        |   | 724.2   |           |  |   | 266.2      |   |  | 36.8  |  
|                                                                              |  |                         |         |   |        |   |         |           |  |   |            |   |  |       |  
|Gross profit                                                                  |  |                         | 399.8   |   |        |   | 327.7   |           |  |   | 72.1       |   |  | 22.0  |  
|Operating and administrative expenses                                         |  |                         | 249.5   |   |        |   | 197.6   |           |  |   | 51.9       |   |  | 26.3  |  
|Depreciation and amortization                                                 |  |                         | 76.8    |   |        |   | 50.4    |           |  |   | 26.4       |   |  | 52.4  |  
|Loss on disposal of assets                                                    |  |                         | 11.5    |   |        |   | 0.7     |           |  |   | 10.8       |   |  | *     |  
|                                                                              |  |                         |         |   |        |   |         |           |  |   |            |   |  |       |  
|Operating income                                                              |  |                         | 62.0    |   |        |   | 79.0    |           |  |   | (17.0      | ) |  | (21.5 | )
|Interest expense, net                                                         |  |                         | (55.8   | ) |        |   | (36.1   | )         |  |   | (19.7      | ) |  | (54.6 | )
|Write-off of deferred financing cost                                          |  |                         |        |   |        |   | (7.6    | )         |  |   | 7.6        |   |  | 100.0 |  
|Other income                                                                  |  |                         | 0.8     |   |        |   | 0.3     |           |  |   | 0.5        |   |  | 166.7 |  
|                                                                              |  |                         |         |   |        |   |         |           |  |   |            |   |  |       |  
|Income before income taxes and interest of non-controlling partners in Inergy |  |                         | 7.0     |   |        |   | 35.6    |           |  |   | (28.6      | ) |  | (80.3 | )
|Provision for income taxes                                                    |  |                         | (0.6    | ) |        |   | (0.5    | )         |  |   | (0.1       | ) |  | (20.0 | )
|Interest of non-controlling partners in Inergys net (income) loss            |  |                         | 8.0     |   |        |   | (26.8   | )         |  |   | 34.8       |   |  | 129.9 |  
|                                                                              |  |                         |         |   |        |   |         |           |  |   |            |   |  |       |  
|Net income                                                                    |  | $                       | 14.4    |   |        | $ | 8.3     |           |  | $ | 6.1        |   |  | 73.5  | %
|                                                                              |  |                         |         |   |        |   |         |           |  |   |            |   |  |       |  

---

|* | Not meaningful
|- | --------------



50



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The following table summarizes revenues, including associated volume of gallons sold, for the years ending
September 30, 2006 and 2005, respectively (in millions):



|                                     |  |                         |         |        |         |           |                         |         |        |  |      |   |      |       |         |       |  |         |   |  |      |  
|------------------------------------ |  | ----------------------- | ------- | ------ | ------- | --------- | ----------------------- | ------- | ------ |  | ---- | - | ---- | ----- | ------- | ----- |  | ------- | - |  | ---- | -
|                                     |  | Revenues                |         |        | Gallons |          
|                                     |  | Year EndedSeptember 30, |         | Change |         |           | Year EndedSeptember 30, |         | Change | 
|                                     |  | 2006                    |         | 2005   |         | InDollars |                         | Percent |        |  | 2006 |   | 2005 |       | InUnits |       |  | Percent |  
|Retail propane                       |  | $                       | 701.1   |        | $       | 526.5     |                         | $       | 174.6  |  | 33.2 | % |      | 360.3 |         | 318.4 |  | 41.9    |   |  | 13.2 | %
|Wholesale propane                    |  |                         | 371.2   |        |         | 325.1     |                         |         | 46.1   |  | 14.2 |   |      | 365.3 |         | 391.3 |  | (26.0   | ) |  | (6.6 | )
|Other retail                         |  |                         | 164.8   |        |         | 123.3     |                         |         | 41.5   |  | 33.7 |   |      |      |         |      |  |        |   |  |     |  
|Storage, fractionation and midstream |  |                         | 153.1   |        |         | 77.0      |                         |         | 76.1   |  | 98.8 |   |      |      |         |      |  |        |   |  |     |  
|                                     |  |                         |         |        |         |           |                         |         |        |  |      |   |      |       |         |       |  |         |   |  |      |  
|Total                                |  | $                       | 1,390.2 |        | $       | 1,051.9   |                         | $       | 338.3  |  | 32.2 | % |      | 725.6 |         | 709.7 |  | 15.9    |   |  | 2.2  | %
|                                     |  |                         |         |        |         |           |                         |         |        |  |      |   |      |       |         |       |  |         |   |  |      |  

Volume. During fiscal 2006, Inergy sold 360.3 million retail gallons of propane, an increase of
41.9 million gallons, or 13.2%, from the 318.4 million retail gallons sold in fiscal 2005. The increase in retail sales volume was principally due to the retail propane acquisitions, which combined resulted in a 99.9 million gallon
increase. This increase was partially offset by an approximate 58.0 million gallon decline in comparable sales. We believe this is due primarily to a combination of warmer weather and conservation by our customers due to an approximate 19.4%
higher propane cost per gallon in our retail operations in 2006 (excluding the $20.0 million non-cash loss on derivative contracts discussed below) to $1.11 per gallon compared with $0.93 per gallon in 2005 (excluding the $19.4 million non-cash gain
on derivative contracts). Our 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 we operate and
varying uses of propane (i.e. space heating, cooking and other applications), among others. Although the weather was approximately 6% warmer in fiscal 2006 as compared to fiscal 2005 (and approximately 10% warmer than normal) in our retail areas of
operations, we experienced erratic weather during the winter months of fiscal 2006 including the months of December 2005 and January 2006, which were approximately 9% colder and 26% warmer, respectively, than the previous years winter, while
the month of March 2006 was 16% warmer than the month of March 2005.

Wholesale gallons delivered decreased 26.0 million gallons, or 6.6%, to
365.3 million gallons in fiscal 2006 from 391.3 million gallons in fiscal 2005. The decrease was primarily attributable to decreased sales volumes of approximately 32.5 million gallons to new and existing customers due to the warmer
weather in 2006 in our wholesale areas of operations. This decrease was partially offset by an increase from acquisition-related volume, which accounted for 6.5 million gallons.

The total natural gas liquid gallons sold or processed by our West Coast NGL operations increased 10.2 million gallons, or 6.8%, to 160.1 million gallons in fiscal 2006 from 149.9 million gallons in
fiscal 2005. This increase was attributable to the addition of natural gas liquid marketing and processing contracts in fiscal 2006. Stagecoach had 13.25 bcf of working gas storage capacity in fiscal 2006 and 2005 which was 100% contracted on
average in fiscal 2006 and 85% contracted on average from the date of acquisition (August 9, 2005) to September 30, 2005.

Revenues. Revenues
in fiscal 2006 were $1,390.2 million, an increase of approximately $338.3 million, or 32.2% from $1,051.9 million in fiscal 2005.

Revenues from retail
propane sales were $701.1 million in fiscal 2006, an increase of $174.6 million, or 33.2%, from $526.5 million in fiscal 2005. This increase was primarily the result of $189.2 million of sales related to acquisitions together with an increase of
approximately $92.9 million due to higher selling prices of propane due to the higher cost of propane in 2006. These increases were partially offset by a $107.5 million decline in revenues as a result of lower retail volume sales at our existing
locations.



51



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Revenues from wholesale propane sales were $371.2 million in fiscal 2006, an increase of $46.1 million or 14.2%, from
$325.1 million in fiscal 2005. Approximately $72.6 million of this increase was attributable to the higher sales price of propane and approximately $6.9 million was attributable to acquisition-related volume. These increases were offset by a
decrease of $33.4 million attributable to lower sales volumes to new and existing customers due primarily to warmer weather in the wholesale areas of operations. The higher selling price in our wholesale division in 2006 compared to 2005 is the
result of the higher cost of propane.

Revenues from other retail sales, primarily service, appliance, transportation and distillates, were $164.8 million
in fiscal 2006, an increase of $41.5 million or 33.7% from $123.3 million in fiscal 2005. This increase was primarily due to acquisitions, which contributed approximately $38.5 million of this increase.

Revenues from storage, fractionation and other midstream activities were $153.1 million in fiscal 2006, an increase of $76.1 million or 98.8% from $77.0 million in
fiscal 2005. Approximately $37.8 million of this increase was due to increased volumes and sales price of natural gas liquids at our West Coast NGL operations, approximately $36.0 million of this increase was due to the August 2005 acquisition of
the Stagecoach natural gas storage facility and approximately $2.3 million of the increase was due to other changes in Stagecoach revenues and other changes at our West Coast NGL operations related to fractionation, transportation and terminaling
revenues.

Cost of Product Sold. Retail propane cost of product sold in fiscal 2006 was $420.4 million, an increase of $145.8 million or 53.1%, from
$274.6 million in fiscal 2005. Approximately $79.2 million of this increase was attributable to the approximate 19.4% per gallon higher average cost of propane in our retail division. Retail propane product costs included a non-cash derivative
charge of $20.0 million in 2006 related to fixed price retail propane contracts whereas 2005 retail propane product cost was net of a $19.4 million non-cash derivative gain on those contracts. A net additional increase of approximately $111.3
million of retail propane product cost is a result of retail propane acquisition-related volume offset by a $64.7 million decrease due to lower volumes from existing locations.

Wholesale propane cost of product sold in fiscal 2006 was $359.3 million, an increase of $40.5 million or 12.7%, from wholesale cost of product sold of $318.8 million in 2005. Contributing to these higher costs was an
approximate $66.1 million increase due to the higher average cost of propane and an approximate $7.1 million increase was a result of acquisition-related volume. These increases were partially offset by a $32.7 million decline due to lower volumes
sold in our wholesale propane areas of operations.

Other cost of product was $99.6 million, an increase of $27.8 million, from other retail cost of
product of $71.8 in fiscal 2005. Approximately $20.8 million of the increase was attributable to acquisitions and $7.0 million was attributable to other volume variances, primarily increased distillate costs.

Storage, fractionation and other midstream cost of product sold was $111.1 million, an increase of $52.1 million, or 88.3%, from $59.0 million in fiscal 2005.
Approximately $36.6 million of this increase was due to higher volumes and cost of natural gas liquids at the West Coast NGL operations, approximately $13.9 million was due to the acquisition of the Stagecoach natural gas storage facility and
approximately $1.6 million of the increase was due to other changes in Stagecoach cost of sales and other changes at our West Coast NGL operations cost of sales related to fractionation, transportation and terminaling revenues.

Our 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, delivery vehicle costs
consisting of fuel costs, repair and maintenance and lease expense, and depreciation on tanks being rented to customers. Costs associated with delivery vehicles approximated $62.4 million and $45.6 million in 2006 and 2005, respectively. In
addition, the depreciation expense associated with the delivery vehicles is reported within depreciation and amortization expense and



52



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amounted to $15.3 million and $10.8 million in 2006 and 2005, respectively. Depreciation expense associated with tanks being rented to customers amounted to
$15.4 million and $10.7 million in 2006 and 2005, respectively. Since we include these costs in our 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 $280.7 million in fiscal 2006 compared
to $251.9 million in fiscal 2005, an increase of $28.8 million, or 11.4%. Fiscal 2006 gross profit was negatively impacted by a $20.0 million non-cash derivatives charge while fiscal 2005 retail propane gross profit included a $19.4 million non-cash
derivatives gain. Excluding these non-cash items, retail propane gross profit increased $68.2 million to $300.7 million in fiscal 2006 from $232.5 million in fiscal 2005. This $68.2 million increase was attributable to higher retail gallons sold as
a result of acquisitions, which accounted for an increase of approximately $77.9 million, and improved gross profit per gallon which contributed approximately $32.6 million toward the increase. Both of these increases were partially offset by lesser
retail gallon sales at existing locations resulting in a decrease in gross profit of approximately $42.3 million. The decreased gallon sales are discussed above while the increase in margin per gallon is primarily the result of our ability to
increase our selling prices in certain markets in excess of our increased cost of propane.

Wholesale propane gross profit was $11.9 million in fiscal 2006
compared to $6.3 million in fiscal 2005, an increase of $5.6 million or 88.9%. Approximately $6.4 million of this increase was the result of a higher margin per gallon from our existing business, partially offset by a $0.8 million decrease in
wholesale volumes from our existing business. The improved margin per gallon is primarily the result of our ability to increase our selling prices in certain markets in excess of our increased cost of propane.

Other retail gross profit was $65.2 million in fiscal 2006 compared to $51.5 million in fiscal 2005, an increase of $13.7 million, or 26.6%, due primarily to
acquisition-related increases partially offset by lesser distillate volume sales and higher distillate costs, described above. In addition, decreases in service revenues and transportation revenues consistent with decreased retail propane volume
sales contributed to this decrease in other retail gross profit.

Storage, fractionation and other midstream gross profit was $42.0 million in fiscal 2006
compared to $18.0 million in fiscal 2005, an increase of $24.0 million, or 133.3%. This increase was due primarily to the Stagecoach acquisition which accounted for $22.1 million of the increase. In addition, approximately $1.3 million of the
increase was due to the increased volume and margin of natural gas liquids and an additional $0.6 million was due to other Stagecoach margins and other changes at our West Coast NGL operations margins related to fractionation, transportation and
terminaling revenues.

Operating and Administrative Expenses. Operating and administrative expenses increased $51.9 million, or 26.3%, to $249.5
million in fiscal 2006 as compared to $197.6 million in fiscal 2005. Higher costs related to acquisitions, which accounted for approximately $59.5 million of this increase, were partially offset by a $7.6 million decline in operating expenses from
existing operations. The resulting net increases in our operating and administrative expenses were primarily increases in personnel expenses of $28.0 million, general operating expenses of $15.4 million including insurance, professional services and
facility costs, and increased vehicle costs of $8.5 million.

Depreciation and Amortization. Depreciation and amortization increased $26.4 million,
or 52.4%, to $76.8 million in fiscal 2006 from $50.4 million in fiscal 2005 primarily as a result of a higher asset base due to Inergys retail propane acquisitions.

Loss on Disposal of Assets. Loss on sale of assets increased to $11.5 million in fiscal 2006 compared to $0.7 million in fiscal 2005. The loss recognized in fiscal 2006 includes an unrealized loss of
approximately $6.6 million related to assets held for sale at September 30, 2006, which have been written down to their estimated



53



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selling price, in addition to realized losses of approximately $4.9 million. These assets, both those sold and those held for sale, consist primarily of
vehicles, tanks and real estate deemed to be excess, redundant or underperforming assets. These assets were identified as a result of the integration of the larger retail propane acquisitions closed since November 2004 as Inergy focused on
eliminating duplicity in vehicles, operations, tanks and real estate.

Interest Expense and Write-off of Deferred Financing Costs. Interest expense
increased $19.7 million, or 54.6%, to $55.8 million in fiscal 2006 as compared to $36.1 million in fiscal 2005. Interest expense increased primarily due to an increase of $212.6 million in average debt outstanding in 2006 compared to 2005 primarily
as a result of net borrowings for acquisitions at Inergy, and an approximate 100 basis points higher average interest rate in 2006 (7.36%) compared to 2005 (6.36%). During the fiscal year ended September 30, 2005, we recorded a charge of
$7.6 million as a result of the write-off of deferred financing costs associated with the repayment of both our and Inergys previously existing credit agreement and Inergys 364-day facility.

Provision for Income Taxes. The provision for income taxes is primarily related to certain of our corporate subsidiaries and certain state taxes related to
Inergy that have been classified as income taxes in the accompanying consolidated financial statements, due to the nature of the tax. The provision for income taxes increased to $0.6 million in the year ended September 30, 2006 from $0.5
million in 2005. The provision for income taxes of $0.6 million in the year ended September 30, 2006 is composed of $1.9 million of current income tax expense and $1.3 million of deferred income tax benefit. The 2005 provision for income taxes
of $0.5 million is composed of $1.3 million of current income tax expense and a deferred income tax benefit of $0.8 million.

Interest of
Non-controlling Partners in Inergys Net (Income) Loss. We recorded income of $8.0 million in the year ended September 30, 2006, as compared to an expense of $26.8 million in 2005 associated with the interests of non-controlling
partners in Inergy. The $34.8 million change resulted primarily from a $28.8 million decrease in Inergys net income, which had the effect of reducing the interest of non-controlling partners in Inergys net income. Also contributing to
the change was a $10.3 million increase in incentive distribution rights received by the Company from Inergy, to which the non-controlling partners are not entitled, partially offset by a $4.3 million decline in other related income from minority
interests in Inergy.

Net Income. Net income increased to $14.4 million for the year ended September 30, 2006 from $8.3 million in 2005.
The increase in net income was primarily attributable to a $34.8 million increase in income related to the interest of non-controlling partners in Inergys net income as well as a higher gross profit at Inergy during 2006. Partially offsetting
these increases in net income were increases in operating and administrative expenses, non-cash expenses, interest expense, income taxes and loss on disposal of assets, all discussed above.

Liquidity and Sources of Capital

Capital Resource Activities

On July 31, 2006, we filed a shelf registration statement (File No. 333-136200) for the periodic sale of up to $200 million of common units.
Pursuant to the shelf registration statement, we are permitted to issue these securities from time to time for general partnership purposes, which may include debt repayment, future acquisitions, capital expenditures, purchases of limited
partnership units of Inergy, L.P. and additions to working capital. In May 2007, we sold 1,500,000 common units in a public offering and received net proceeds of approximately $75.5 million. Immediately following the closing of this offering, we
redeemed from certain of our original investors, including certain members of our management, 1,500,000 common units for a per unit amount equal to the net proceeds per common unit we received in this offering before expenses. We immediately
canceled the common units we redeemed from the original investors so that they are no longer outstanding. There is approximately $124.2 million remaining available under this shelf registration statement. No further partnership securities have been
offered under the shelf registration except as described above.



54



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On March 23, 2006, Inergys shelf registration statement (File No. 333-132287) was declared effective by
the Securities and Exchange Commission for the periodic sale by Inergy of up to $1.0 billion of common units, partnership securities and debt securities, 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 uses identified in a prospectus supplement. In June 2006 and
February 2007, Inergy issued 4,312,500 common units (which included 562,500 common units issued as result of the underwriters exercising their over-allotment provision) and 3,450,000 common units (which included 450,000 common units issued as result
of the underwriters exercising their over-allotment provision), respectively. There is approximately $792.1 million remaining available under this shelf registration statement. No further partnership securities or debt securities have been offered
under the shelf registration except as described above.

Inergy has identified growth projects related to its Stagecoach and West Coast NGL midstream
businesses that are expected to require a total capital investment of approximately $268 million. Of this amount, Inergy has invested approximately $90.7 million toward completion of these projects through September 30, 2007, primarily on the
Stagecoach expansion. On September 1, 2007, the Phase II expansion project was placed into full commercial operation, which increased Inergys total working gas capacity to 26.25 bcf from 13.25 bcf . The expanded facility is 100%
contracted with long term firm storage contracts that commenced upon full commercial operation. Stagecoach is also expected to construct a pipeline to interconnect with the proposed Millennium Pipeline, which will enhance and further diversify
Inergys supply sources and provide interruptible wheeling services to the shipper community. The West Coast project consists of the construction of a butane isomerization unit and related ancillary facilities, as well as the expansion of
butane storage capacity. The isomerization unit is projected to have a capacity of 10,000 barrels per day and provide isobutane supplies to refiners or wholesale distributors for gasoline blending. This project is subject to regulatory approval by
state and county agencies and is expected to be in service by July 2008.

Cash Flows and Contractual Obligations

Net operating cash inflows were $163.5 million and $99.9 million for fiscal years ending September 30, 2007 and 2006, respectively. The $63.6 million increase in
operating cash flows was primarily attributable to increases in net income, interest of non-controlling partners in Inergys net income and net assets from price risk management activities. Partially offsetting these increases to operating cash
flows was a decrease in working capital balances and the recognition of the non-cash gains on issuances of units in Inergy in fiscal 2007.

Net investing
cash outflows were $187.8 million and $210.9 million for the fiscal years ending September 30, 2007 and 2006, respectively. We funded acquisitions of $99.6 million in 2007 compared to $187.2 million in 2006, a decrease of $87.6 million.
Additionally, deferred acquisition costs decreased $0.3 million in fiscal year 2007 compared to fiscal year 2006 and proceeds from sale of assets increased $1.6 million. These reductions in net investing cash outflows were partially offset by an
increase of $66.4 million in capital expenditures.

Net financing cash inflows were $20.1 million and $113.5 million for the fiscal years ending
September 30, 2007 and 2006, respectively. Net financing cash inflows were primarily impacted by $99.6 million and $187.2 million of Inergys acquisitions financed in 2007 and 2006, respectively. The lesser acquisitions financed in 2007
versus 2006 were the primary reason for a $46.6 million period to period decrease in proceeds from the issuance of long-term debt, net of payments on long-term debt, and a $22.9 million decrease in proceeds from the issuance of Inergy common units.
Net financing cash inflows were also impacted by an $18.3 million period to period increase in distributions to non-controlling partners in Inergy and a $10.4 million increase in distributions, partially offset by a $5.0 million decrease in the
payments for deferred financing costs.

At September 30, 2007 and 2006, we had goodwill of $365.3 million and $339.7 million, respectively,
representing approximately 21% of total assets in each year. This goodwill is primarily attributable to Inergys acquisitions.



55



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At September 30, 2007, we were in compliance with all debt covenants to our credit facilities.

The following table summarizes our Companys obligations as of September 30, 2007 (in millions):



|                                                                                           |  |       |         |                 |   |           |  |           |       |               |   |       |  |   |      
|------------------------------------------------------------------------------------------ |  | ----- | ------- | --------------- | - | --------- |  | --------- | ----- | ------------- | - | ----- |  | - | -----
|                                                                                           |  | Total |         | Less than1 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) |  | $     | 1,123.9 |                 | $ | 112.1     |  | $         | 109.9 |               | $ | 151.4 |  | $ | 750.5
|Amount of principal and interest to be paid on other long-term obligations                 |  |       | 8.8     |                 |   | 3.5       |  |           | 5.3   |               |   |      |  |   |     
|Future minimum lease payments under noncancelable operating leases                         |  |       | 23.1    |                 |   | 6.7       |  |           | 9.0   |               |   | 4.4   |  |   | 3.0  
|Fixed price purchase commitments                                                           |  |       | 292.4   |                 |   | 291.8     |  |           | 0.6   |               |   |      |  |   |     
|Standby letters of credit                                                                  |  |       | 26.6    |                 |   | 26.1      |  |           | 0.1   |               |   | 0.4   |  |   |     
|Purchase commitments of identified growth projects(b)                                      |  |       | 37.9    |                 |   | 37.9      |  |           |      |               |   |      |  |   |     
|                                                                                           |  |       |         |                 |   |           |  |           |       |               |   |       |  |   |      
|Total contractual obligations                                                              |  | $     | 1,512.7 |                 | $ | 478.1     |  | $         | 124.9 |               | $ | 156.2 |  | $ | 753.5
|                                                                                           |  |       |         |                 |   |           |  |           |       |               |   |       |  |   |      

---

|(a) | $228.0 million of our long-term debt, including interest rate swaps, is variable interest rate debt at prime
rate or LIBOR plus an applicable spread. These rates plus their applicable spreads were between 7.00% and 7.51% at September 30, 2007. These rates have been applied for each period presented in the table.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Identified growth projects related to the Stagecoach and West Coast NGL midstream assets.
|--- | -----------------------------------------------------------------------------------------

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.

Description of Credit Facilities

Holdings

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. 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.

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 Inergy Partners, LLC. The prime rate and LIBOR plus the applicable spreads were 7.51% at September 30, 2007 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.

Inergy

On
December 17, 2004, Inergy 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 (Acquisition Facility). The Credit Agreement accrues interest at either prime rate or LIBOR plus applicable spreads, resulting in interest rates
between 7.0% and 7.2% at September 30, 2007.



56



---

At September 30, 2007, borrowings outstanding under the Credit Agreement were $71.0 million, including $40.0 million
under the Acquisition Facility and $31.0 million under the Working Capital Facility. In October 2006, Inergy amended the Credit Agreement with existing lenders primarily to increase the effective amount of working capital borrowing capacity
available to us under the two facilities from $150 million to $200 million utilizing capacity under the acquisition credit facility for working capital needed during the winter heating season. Other terms, conditions, and covenants remained
materially unchanged. The Credit Agreement is guaranteed by each of Inergys domestic subsidiaries.

During each fiscal year beginning October 1,
the outstanding balance of the Working Capital Facility must be reduced to $10.0 million or less for a minimum of 30 consecutive days during the period commencing March 1 and ending September 30 of each calendar year. Inergy met this
provision of the Credit Agreement on March 30, 2007.

At Inergys option, loans under the 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 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 equipment) to reduce borrowings under the 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 Acquisition Facility and then under the Working Capital Facility.

In addition, the 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 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 Credit Agreement or enter into any permitted
junior debt that contains negative covenants more restrictive than those of the 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;
| | - |  | -------------------------------------------------------------------------------------------------------------



57



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



| |  |  | modify 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;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Inergys $200 million 8.25% senior notes due March 1, 2016 that were issued on January 11, 2006;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | 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 Credit Agreement.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | there is no default under the 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 Credit Agreement; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other than in connection with the 6.875% and 8.25% senior notes and other substantially similar debt, the debt does not contain covenants more restrictive than
those in the Credit Agreement.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The 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 Credit Agreement) for the four fiscal
quarters most recently ended must be no greater than 5.25 to 1.0 for any period of two consecutive fiscal quarters immediately following an acquisition with a purchase price in excess of $100 million and 4.75 to 1.0 at all other times.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ratio of Inergys consolidated EBITDA to consolidated interest expense (as defined in the 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 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 Agreement or any ancillary document related to the credit
facility 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 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.
| | - |  | --------------------------------------------------------------------------



58



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Senior Unsecured Notes

2016 Senior Notes

On January 11, 2006, Inergy and its wholly owned subsidiary, Inergy Finance Corp (Finance Corp. and
together with Inergy, the Issuers), issued $200 million aggregate principal amount of 8.25% senior unsecured notes due 2016 (the 2016 Senior Notes) in a private placement to eligible purchasers.

The 2016 Senior Notes contain covenants similar to the 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 2016 Senior Notes represent senior unsecured obligations of Inergy and rank pari passuin right of payment with all other present and future senior indebtedness of Inergy. The
2016 Senior Notes are jointly and severally guaranteed by all of Inergys current domestic subsidiaries and have certain call features which allow Inergy to redeem the notes at specified prices based on date redeemed.

On May 18, 2006, Inergy completed an offer to exchange its existing 8.25% 2016 Senior Notes for $200 million of 8.25% senior notes due 2016 (the 2016 Exchange
Notes) that are registered and do not carry transfer restrictions, registration rights and provisions for additional interest. The 2016 Exchange Notes did not provide us with any additional proceeds and satisfied our obligations under the
registration rights agreement.

Before March 1, 2009, Inergy may, at any time or from time to time, redeem up to 35% of the aggregate principal amount
of the 2016 Senior Notes with the net proceeds of a public or private equity offering at 108.25% 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 150 days of the date of the closing of such equity offering.

The 2016 Senior
Notes are redeemable, at Inergys option, in whole or in part, at any time on or after March 1, 2011, 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 |  
|2011                |  | 104.125    | %
|2012                |  | 102.750    | %
|2013                |  | 101.375    | %
|2014 and thereafter |  | 100.000    | %

2014 Senior Notes

On December 22, 2004, the Issuers completed a private placement of $425 million in aggregate principal amount of the Issuers 6.875% senior unsecured notes due 2014 (the 2014 Senior Notes). Inergy used the net proceeds
from the 2014 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 applied to the Acquisition Facility.

The 2014 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 2014 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 2014 Senior Notes rank senior in right of payment to all of Inergys future subordinated indebtedness.



59



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The 2014 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.

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

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 2014 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 2014 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    | %

Recent Accounting Pronouncements

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155) amends SFAS 133, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It also establishes a requirement to evaluate
securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. We adopted SFAS 155 for all financial instruments acquired or
issued on or after October 1, 2006. We have evaluated the impact of SFAS 155 and determined that it does not have a material effect on our consolidated financial statements in the current year as well as all prior years considered.

Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), provides guidance on the quantification of prior year misstatements. SAB 108 requires that registrants use both the income statement (roll-over) approach and the balance sheet (iron curtain) approach when
evaluating the materiality of a misstatement and contains guidance for correcting the errors under this dual approach. SAB 108 was required to be adopted by us for the fiscal year ended September 30, 2007. We have evaluated the impact of this
bulletin and determined that it does not have a material effect on our consolidated financial statements in the current year as well as all prior years considered.

SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154) is a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial



60



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Statements. SFAS 154 applies to all voluntary changes in accounting principle and changes the accounting for and a reporting of a change in accounting
principle. SFAS 154 requires retrospective application to the prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 was required to be adopted by us for the fiscal year ended
September 30, 2007. We have evaluated the impact of SFAS 154 and determined that it does not have a material effect on our consolidated financial statements in the current year as well as all prior years considered.

EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross
Versus Net Presentation) requires companies to disclose their policy regarding the presentation of tax receipts. The scope of this guidance includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing
transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes (gross receipts taxes are excluded). An entity is not required to reevaluate its existing policies related to taxes
assessed by a governmental authority as a result of this consensus. In addition, for any such taxes that are reported on a gross basis, an entity should disclose the amounts of those taxes in interim and annual financial statements for each period
for which an income statement is presented if those amounts are significant. We have adopted the consensus reached in this EITF for the fiscal year ended September 30, 2007. We have evaluated the impact of EITF 06-3 and determined that its
impact is not material to our consolidated financial statements. Our accounting policy is to record taxes assessed by governmental authorities on a net basis.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) was issued in February 2007 to permit entities to choose to measure many financial instruments and certain other
items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is required to be
adopted by the Company for the fiscal year ended September 30, 2009. We are evaluating the potential financial statement impact of SFAS 159 to our consolidated financial statements.

SFAS No. 157, Fair Value Measurements (SFAS 157) was issued in September 2006 to define fair value, establish a framework for measuring fair value according to generally accepted
accounting principles, and expand disclosures about fair value measurements. SFAS 157 is required to be adopted by the Company for the fiscal year ended September 30, 2009. We are evaluating the potential financial statement impact of SFAS 157
to our consolidated financial statements.

FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 provides a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on
derecognition, classification, treatment of interest and penalties, and disclosure. FIN 48 is required to be adopted by us for the fiscal year ended September 30, 2008. We are evaluating the potential financial statement impact of FIN 48 to our
consolidated financials 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 propane and heating oil 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 estimated 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, primarily resulting from variability in supply and demand, are recorded either through current earnings or as other
comprehensive income, depending on the type of transaction.



61



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On the date the derivative contract is entered into, Inergy generally designates specific derivatives as either a hedge
of the fair value of a recognized asset or liability (fair value hedge), or a hedge of a forecasted transaction (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 or 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
recognize 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. 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. Any ineffective portion of the fair value hedges is recognized as cost of product sold in the current period. Inergy recognized a net gain of $0.1 million in the year ended September 30, 2007,
related to the ineffective portion of its fair value hedging instruments. In addition, for the year ended September 30, 2007, Inergy recognized a net gain of $1.0 million related to the portion of fair value hedging instruments that it excluded
from its assessment of hedge effectiveness.

Inergy also enters into derivative financial instruments that qualify as cash flow hedges, which hedge the
exposure of variability in expected future cash flows predominantly attributable to forecasted purchases to supply fixed price sale contracts. These derivatives are recorded on the balance sheet at fair value as price risk management assets or
liabilities. The effective portion 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. Inergys accumulated other comprehensive income (loss) was $9.2 million and $(16.6) million at September 30, 2007 and 2006, respectively.

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 later of the time the 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 later of 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 storage services are provided.

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 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 reporting units and determined no impairment existed as of September 30, 2007.

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



62



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of by sale and it broadens the presentation of discontinued operations to include more disposal transactions. The value of assets to be disposed of is
estimated at the date a commitment to dispose the asset is made.

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 medical claims, workers compensation claims, general, product and vehicle liability, and
environmental exposures. 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. At September 30, 2007
and 2006, Inergys self-insurance reserves were $13.2 million and $11.2 million, respectively.

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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

See Item 1ARisk Factors for further discussion of factors that could impact our business.



63



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Together with Inergy, we have long-term debt and revolving lines of credit subject to the risk of loss associated with movements in interest rates. At September 30,
2007, we had floating rate obligations totaling approximately $228.0 million including amounts borrowed under our credit agreements and interest rate swaps, which convert a portion of Inergys fixed rate senior unsecured notes due 2014 to
floating rate debt. The floating rate obligations expose us to the risk of increased interest expense in the event of increases in short-term interest rates.

If the floating rate were to fluctuate by 100 basis points from September 2007 levels, our combined interest expense would change by a total of approximately $2.3 million per year.

Commodity Price, Market and Credit Risk

Inherent in Inergys
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. Inergy takes an active role in managing and controlling market and credit risk and has established control procedures, which are reviewed on an
ongoing basis. Inergy monitors market risk through a variety of techniques, including daily reporting of the portfolios position to senior management. Inergy attempts to minimize credit risk exposure through credit policies and periodic
monitoring procedures as well as through customer deposits, letters of credit and entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate. The
counterparties associated with assets from price risk management activities as of September 30, 2007 and 2006 were propane retailers, resellers, energy marketers and dealers.

The propane industry is a margin-based business in which gross profits depend on the excess of sales prices over supply costs. As a result, Inergys profitability will be sensitive to changes in
wholesale prices of propane caused by changes in supply or other market conditions. When there are sudden and sharp increases in the wholesale cost of propane, Inergy may not be able to pass on these increases to its customers through retail or
wholesale prices. Propane is a commodity and the price Inergy pays for it can fluctuate significantly in response to supply or other market conditions. Inergy has no control over supply or market conditions. In addition, the timing of cost
pass-throughs can significantly affect margins. Sudden and extended wholesale price increases could reduce Inergys gross profits and could, if continued over an extended period of time, reduce demand by encouraging its retail customers to
conserve or convert to alternative energy sources.

Inergy engages in hedging and risk management transactions, including various types of forward
contracts, options, swaps and future contracts, to reduce the effect of price volatility on Inergys product costs, protect the value of its inventory positions, 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 Inergy has a matching purchase commitment from its wholesale customers. However, Inergy may experience net unbalanced positions from time to time which it believes
to be immaterial in amount. In addition to Inergys ongoing policy to maintain a balanced position, for accounting purposes Inergy is required, on an ongoing basis, to track and report the market value of its derivative portfolio.



64



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Notional Amounts and Terms

The notional amounts and terms of these financial instruments include the following at September 30, 2007 and 2006 (in millions):



|                                         |  |                  |  |                     |  |                  |  |                    
|---------------------------------------- |  | ---------------- |  | ------------------- |  | ---------------- |  | -------------------
|                                         |  | September 30,   
|                                         |  | 2007             |  | 2006               
|                                         |  | Fixed PricePayor |  | Fixed PriceReceiver |  | Fixed PricePayor |  | Fixed PriceReceiver
|Propane, crude and heating oil (barrels) |  | 5.0              |  | 4.8                 |  | 8.0              |  | 7.5                
|Natural gas (MMBTUs)                    |  | 7.9              |  | 7.9                 |  | 5.5              |  | 5.4                

Notional amounts reflect the volume of transactions, but do not accurately measure our exposure to market or
credit risks.

Fair Value

The fair value of the
derivatives and inventory exchange contracts related to price risk management activities as of September 30, 2007 and September 30, 2006 was assets of $55.0 million and $46.2 million, respectively, and liabilities of $49.6 million and
$49.0 million, respectively. All intercompany transactions have been appropriately eliminated.

The net change in unrealized gains and losses related to
all price risk management activities, including wholesale inventory accounted for under a fair value hedge and deferred gains and losses accounted for under a cash flow hedge, for the years ended September 30, 2007, 2006 and 2005 of $23.9
million, $(39.5) million, and $24.1 million, respectively, are included in cost of product sold in the accompanying consolidated statements of operations or are deferred in our Accumulated Other Comprehensive Income and interest of non-controlling
partners in Inergy, L.P. in the accompanying consolidated balance sheets. Included in the $23.9 million above is $9.9 million which is deferred in our Accumulated Other Comprehensive Income and interest of non-controlling partners in Inergy, L.P.,
$16.6 million due to the reversal of the balance sheet items recorded in the year ended September 30, 2006, and changes in fair value of other price risk management activities. Included in the above $(39.5) million is $(19.4) million due to the
reversal of the non-cash gain recorded in the year ended September 30, 2005, and changes in fair value of other price risk management activities, including $(16.6) million which is deferred in our Accumulated Other Comprehensive Income and
interest of non-controlling partners in Inergy, L.P. at September 30, 2006. Included in the above $24.1 million is a non-cash gain of $19.4 million related to derivative contracts maturing in the following year and changes in fair value of
other price risk management activities. The market prices used to value these transactions reflect managements best estimate considering various factors including closing exchange and over-the-counter quotations, recent transactions, time
value and volatility factors underlying the commitments.

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, 2007 and 2006 where settlement has not yet occurred (in millions):



|                                                                                  |  |                         |       |   |      |   |      |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ---- | -
|                                                                                  |  | Year EndedSeptember 30, |      
|                                                                                  |  | 2007                    |       |   | 2006 |  
|Net fair value gain (loss) of contracts outstanding at beginning of year          |  | $                       | (2.8  | ) |      | $ | 8.8  |  
|Initial recorded value of new contracts entered into during the year              |  |                         | 1.4   |   |      |   |     |  
|Net change in physical exchange contracts                                         |  |                         | (2.0  | ) |      |   | (0.6 | )
|Change in fair value of contracts attributable to market movement during the year |  |                         | 20.6  |   |      |   | (4.4 | )
|Realized gains                                                                    |  |                         | (11.8 | ) |      |   | (6.6 | )
|                                                                                  |  |                         |       |   |      |   |      |  
|Net fair value of contracts outstanding at end of year                            |  | $                       | 5.4   |   |      | $ | (2.8 | )
|                                                                                  |  |                         |       |   |      |   |      |  



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Inergy uses observable market values for determining the fair value of its trading instruments. In cases where actively
quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis. Inergys risk
management department regularly compares valuations to independent sources and models.

Of the outstanding unrealized gain (loss) as of September 30,
2007 and 2006, $5.5 million and $(2.7) million have or will mature within 12 months, respectively. Contracts with a maturity of greater than one year were $(0.1) million at September 30, 2007 and 2006.

Sensitivity Analysis

A theoretical change of 10% in the underlying
commodity value would result in no significant change in the market value of the contracts as there were approximately 0.2 million gallons of net unbalanced positions at September 30, 2007.

Item 8. Financial Statements and Supplementary Data.

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

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

We maintain controls and procedures designed to provide a reasonable assurance that
information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC, and that
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation was performed under the
supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, management, including the Chief Executive Officer and the Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of
September 30, 2007 at the reasonable assurance level. There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) of the Exchange Act) or in other factors during the fiscal year
covered by this report that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting.

Managements Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, pursuant to Exchange Act Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance to management and our board of directors regarding the preparation and fair
presentation of published financial statements in accordance with generally accepted accounting principles.

Management recognizes that there are inherent
limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.



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Managements assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the operations resulting from the 13 acquisitions (collectively the Acquisitions) which were acquired during fiscal 2007 and are included in the 2007 consolidated financial statements. The financial reporting systems of the
Acquisitions were integrated into the companys financial reporting systems throughout 2007. Therefore, the company did not have the practical ability to perform an assessment of their internal controls in time for this current year end. The
company fully expects to include the Acquisitions in next years assessment. The Acquisitions constituted $98.5 million and $23.6 million in total assets and revenues, respectively, in the consolidated financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of
the companys internal control over financial reporting as of September 30, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based upon our assessment, we conclude that, as of September 30, 2007, our internal control over financial reporting is effective, in all material respects, based upon those criteria.

Our independent registered public accounting firm, Ernst & Young LLP, issued an attestation report dated November 26, 2007 on the effectiveness of our
internal control over financial reporting, which is included herein.

Item 9B. Other Information.

None.



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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Our General Partner Manages Inergy Holdings, L.P.

Inergy Holdings GP, LLC, our general partner, manages our operations and activities. Our general
partner is not elected by our unitholders and will not be subject to re-election on a regular basis in the future. Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than 662/3% of the outstanding units, including units held by the general
partner and its affiliates, and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of the general partner is also subject to the approval of a successor general partner by the vote of the holders of a majority
of the outstanding common units. Unitholders do not directly or indirectly participate in our management or operation. Our general partner owes a fiduciary duty to the unitholders. Our general partner is liable, as a general partner, for all of our
debts (to the extent not paid from our assets), except for specific nonrecourse indebtedness or other obligations. Our general partner intends to incur indebtedness or other obligations that are nonrecourse whenever we incur such indebtedness or
other obligations.

Directors and Executive Officers

The following table sets forth certain information with respect to the executive officers and members of the board of directors of our general partner, Inergy Holdings GP, LLC. Executive officers and directors will
serve until their successors are duly appointed or elected.



|                       |  |     |  |                                                         
|---------------------- |  | --- |  | --------------------------------------------------------
|Name                   |  | Age |  | Position with our General Partner                       
|John J. Sherman        |  | 52  |  | President, Chief Executive Officer and Director         
|Phillip L. Elbert      |  | 49  |  | President and Chief Operating OfficerPropane Operations
|R. Brooks Sherman, Jr. |  | 42  |  | Executive Vice President and Chief Financial Officer    
|Laura L. Ozenberger    |  | 49  |  | Senior Vice PresidentGeneral Counsel and Secretary     
|Warren H. Gfeller      |  | 55  |  | Director                                                
|Arthur B. Krause       |  | 66  |  | Director                                                
|Richard T. OBrien     |  | 53  |  | Director                                                

John J. Sherman has served as President, Chief Executive Officer and a director of Inergy Holdings GP, LLC
since April 2005 and has also served as President, Chief Executive Officer and a director of Inergy GP, LLC since March 2001, and of Inergys predecessor from 1997 until July 2001. Prior to joining Inergys predecessor, he was a vice
president with Dynegy Inc. from 1996 through 1997. He was responsible for all downstream propane marketing operations, which at the time were the countrys largest. From 1991 through 1996, Mr. Sherman was the president of LPG Services
Group, Inc., a company he co-founded and grew to become one of the nations largest wholesale marketers of propane before Dynegy acquired LPG Services in 1996. From 1984 through 1991, Mr. Sherman was a vice president and member of the
management committee of Ferrellgas, which is one of the countrys largest retail propane marketers.

Phillip L. Elbert has served as President
and Chief Operating Officer  Propane Operations since September 2007 and Executive Vice PresidentPropane Operations of Inergy Holdings GP, LLC since February 2006 and has also served as Executive Vice PresidentPropane Operations
and director of Inergy GP, LLC since March 2001. He joined Inergys predecessor as Executive Vice PresidentOperations in connection with its acquisition of the Hoosier Propane Group in January 2001. Mr. Elbert joined the Hoosier
Propane Group in 1992 and was responsible for overall operations, including Hoosiers retail, wholesale, and transportation divisions. From 1987 through 1992, he was employed by Ferrellgas, serving in a number of management positions relating
to retail, transportation and supply. Prior to joining Ferrellgas, he was employed by Buckeye Gas Products, a large propane marketer, from 1981 to 1987.



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R. Brooks Sherman, Jr. (no relation to Mr. John Sherman) has served as Executive Vice President and Chief
Financial Officer since September 2007 and Senior Vice President and Chief Financial Officer of Inergy Holdings GP, LLC since April 2005. He has also served as Senior Vice President since September 2002 and Chief Financial Officer of Inergy GP, LLC
since March 2001. Mr. Sherman previously served as Vice President from March 2001 until September 2002. He joined Inergys predecessor in December 2000 as Vice President and Chief Financial Officer. From 1999 until joining Inergys
predecessor, he served as chief financial officer of MCM Capital Group. From 1996 through 1999, Mr. Sherman was employed by National Propane Partners, a publicly traded master limited partnership, first as its controller and chief accounting
officer and subsequently as its chief financial officer. From 1995 to 1996, Mr. Sherman served as chief financial officer for Berthel Fisher & Co. Leasing Inc. and prior to 1995, Mr. Sherman was in public accounting with
Ernst & Young and KPMG Peat Marwick.

Laura L. Ozenberger has served as Senior Vice PresidentGeneral Counsel and Secretary since
September 2007 and Vice PresidentGeneral Counsel and Secretary of Inergy Holdings GP, LLC since April 2005 and has also served as Vice PresidentGeneral Counsel and Secretary of Inergy GP, LLC since February 2003. From 1990 to 2003,
Ms. Ozenberger worked for Sprint Corporation. While at Sprint, Ms. Ozenberger served in a number of management roles in the Legal and Finance departments. Prior to 1990, Ms. Ozenberger was in a private legal practice.

Warren H. Gfeller has been a member of Inergy Holdings GP, LLCs board of directors since April 2005 and has been a member of Inergy GP, LLCs board of
directors since March 2001. He was a member of Inergys predecessors board of directors since January 2001 until July 2001. He has engaged in private investments since 1991. From 1984 to 1991, Mr. Gfeller served as president and
chief executive officer of Ferrellgas, Inc., a retail and wholesale marketer of propane and other natural gas liquids. Mr. Gfeller began his career with Ferrellgas in 1983 as an executive vice president and financial officer. Prior to joining
Ferrellgas, Mr. Gfeller was the Chief Financial Officer of Energy Sources, Inc. and a CPA at Arthur Young & Co. He also serves as a director of Zapata Corporation and Chairman of the board of directors of Duckwall-ALCO Stores, Inc.

Arthur B. Krause has been a member of Inergy Holdings GP, LLCs board of directors since April 2005 and has been a member of Inergy GP,
LLCs board of directors since May 2003. Mr. Krause retired from Sprint Corporation in 2002, where he served as Executive Vice President and Chief Financial Officer from 1988 to 2002. He was President of United Telephone-Eastern Group from
1986 to 1988. From 1980 to 1986, he was Senior Vice President of United Telephone System. He also serves as a director of Westar Energy.

Richard T.
OBrien has been a member of Inergy Holdings GP, LLCs board of directors since May 2006. Mr. OBrien currently serves as the President and Chief Executive Officer of Newmont Mining Corporation, one of the worlds
largest gold producers, based in Denver, Colorado. From April 2001 until September 2005, Mr. OBrien served as the Executive Vice President and Chief Financial Officer of AGL Resources, a natural gas distributor headquartered in Atlanta,
Georgia.

Independent Directors

Messrs. Gfeller,
Krause and OBrien qualify as independent in accordance with the published listing requirements of the NASDAQ Global Select National Market. The NASDAQ independence definition includes a series of objective tests, such as that the
director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, as further required by the NASDAQ rules, the board of directors has made a subjective determination as to each
independent director that no relationships exist which, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.



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Board Committees

Audit Committee

Our general partners board of directors has established an audit committee. The members of the audit committee must
meet the independence standards established by the NASDAQ Global Select National Market. Members of the audit committee are Warren H. Gfeller, Arthur B. Krause and Richard T. OBrien. The board of directors of our general partner has determined
that Mr. Gfeller is (i) independent under applicable NASDAQ rules and (ii) an audit committee financial expert based upon the experience stated in his biography. The audit committees primary responsibilities are to monitor:
(a) the integrity of our financial reporting process and internal control system; (b) the independence and performance of the independent registered public accounting firm; and (c) the disclosure controls and procedures established by
management.

Conflicts Committee

Our general
partners board of directors has the ability to establish a conflicts committee under our partnership agreement. The conflicts committee will consist of one or more members and will be charged with reviewing specific matters that our general
partners board of directors believes may involve conflicts of interest. A conflicts committee will determine if the resolution of any conflict of interest submitted to it is fair and reasonable to us. In addition to satisfying certain other
requirements, the members of the conflicts committee must meet the independence standards for service on an audit committee of a board of directors, which standards are established by the NASDAQ Global Select National Market. Any matters approved by
the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our unitholders, and not a breach by us of any duties we may owe to our unitholders.

Compensation Committee

Our general partners board of directors
has established a compensation committee of at least two independent directors. The compensation committee will oversee compensation decisions and benefits for the officers of our general partner and will administer our Long Term Incentive Plan and
the Employee Unit Purchase Plan described below. Members of the Compensation Committee are Arthur B. Krause and Warren H. Gfeller.

Other Committees

Our general partners board of directors may establish other committees from time to time to facilitate our management.

Election of our Directors

Our general partners limited
liability company agreement establishes a board of directors that will be responsible for the oversight of our business and operations. Our general partners board of directors will be elected by a voting member majority, as defined in the
limited liability company agreement. For so long as John Sherman and his permitted transferees own 33% of our general partner, Mr. Sherman and such transferees will comprise the voting member majority and will be the only voting member of our
general partner. Accordingly, Mr. Sherman and his permitted transferees will have the authority to elect all of the directors of our general partner.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our
companys directors and executive officers, and persons who own more than 10% of any class of equity securities of our company registered under Section 12 of the Exchange Act, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership in such securities and other equity securities of our company.



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Securities and Exchange Commission regulations require directors, executive officers and greater than 10% unitholders to furnish our company with copies of
all Section 16(a) reports they file. To our knowledge, based solely on review of the reports furnished to us and written representations that no other reports were required during fiscal year ended September 30, 2007, all section 16(a)
filing requirements applicable to our directors, executive officers and greater than 10% unitholders, were met.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons
performing similar functions, as well as to all of our other employees. This code of ethics may be found on our website at www.inergypropane.com.

Item 11. Executive Compensation.

Compensation Discussion and Analysis

Introduction

We do not directly employ any of the persons responsible
for managing our business. Inergy Holdings GP, LLC, our general partner, manages our operations and activities, and its board of directors and executive officers make decisions on our behalf. All of our executive officers also serve in the same
capacities as executive officers of Inergy GP, LLC, the managing general partner of Inergy, and the compensation of the named executive officers discussed below reflects total compensation for services to all Inergy entities. These
shared officers receive no salary, benefits or other cash compensation for their service to us. However, as discussed in greater detail below, from time to time they do receive awards of equity in us pursuant to the Inergy Holdings Long
Term Incentive Plan.

For more information about Inergy GP, LLCs compensation philosophy and policies please refer to the Compensation Discussion and
Analysis in the Annual Report on Form 10-K of Inergy, L.P. filed contemporaneously herewith.

Long-Term Incentive Plan

As mentioned above, our executive officers may receive awards pursuant the Inergy Holdings Long Term Incentive Plan. These awards are designed to promote the achievement
of our primary long-term strategic business objective of increasing distributable cash flow and increasing unitholder value. The Inergy Holdings Long Term Incentive Plan is designed to align the economic interests of our executive officers and
directors with those of our common unitholders and to provide an incentive to our executive officers for continuous employment with Inergys managing general partner and its affiliates. Long-term incentive compensation is based upon the common
units representing limited partnership interests in us and may consist of unit options, restricted units or phantom units.

We do not make systematic
annual awards to the executive officers. In deciding when to grant awards to our executive officers, we take into account prior awards under the Inergy Long Term Incentive Plan. Generally, we believe that a two- to five-year grant cycle under either
the Inergy Long Term Incentive Plan or Inergy Holdings Long Term Incentive Plan (and complete vesting over five years) provides a balance between a meaningful retention period and a visible, reachable reward for the executive officers. New awards
are generally synchronized with the remaining time-vesting requirements of outstanding awards in a manner designed to encourage extended retention of the executive officers.

Prior equity awards were made under the Inergy Long Term Incentive Plan in fiscal 2002 and under the Inergy Holdings Long Term Incentive Plan in fiscal 2005. Accordingly, consistent with our general policy of



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coordinating equity awards with Inergy on a two- to five-year cycle, no long-term incentive plan awards were granted to any of the executive officers during
the fiscal year ended September 30, 2007. However, on October 1, 2007 we granted restricted units of Inergy Holdings, L.P. as follows: R. Brooks Sherman (35,000), Phillip L. Elbert (50,000), and Laura L. Ozenberger (25,000). Due to John
Shermans significant ownership in us and in Inergy, L.P., he has requested that he receive no awards of restricted units or options.

Other
Compensation Related Matters

Retirement and Health Benefits

We do not offer any health, welfare or retirement programs to our executive officers. All such benefits are provided by Inergy.

Perquisites
and Other Compensation

We do not provide perquisites or other personal benefits to any of our executive officers.

Severance Benefits

The Inergy Holdings Long Term Incentive Plan
provides for accelerated vesting triggered upon a change of control.

Compensation Committee Report

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have
recommended that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended September 30, 2007.

Arthur B. Krause

Warren H. Gfeller

Members of the
Compensation Committee



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Summary Compensation Table

All of our executive officers serve in the same capacities as executive officers of Inergy GP, LLC, the managing general partner of Inergy. All of the information in the following table with respect to compensation of
our executive officers describes the total compensation earned for the year ended September 30, 2007 by those officers in all capacities for us, Inergy GP, LLC and their respective subsidiaries. In this report, we refer to these four
individuals as the named executive officers.



|                                                                            |  |             |  |            |  |          |  |                    |  |                                         |  |                             |  |          
|--------------------------------------------------------------------------- |  | ----------- |  | ---------- |  | -------- |  | ------------------ |  | --------------------------------------- |  | --------------------------- |  | ---------
|Name and Principal Position                                                 |  | Fiscal Year |  | Salary ($) |  | Bonus($) |  | OptionAwards($)(1) |  | Non-EquityIncentive PlanCompensation($) |  | All OtherCompensation($)(2) |  | Total ($)
|John. J. Sherman President and Chief Executive Officer                      |  | 2007        |  | 300,000    |  |         |  |                   |  | 300,000                                 |  | 7,888                       |  | 607,888  
|                                                                            |  |             |  |            |  |          | 
|R. Brooks Sherman, Jr. Executive Vice President and Chief Financial Officer |  | 2007        |  | 200,000    |  |         |  | 12,316             |  | 200,000                                 |  | 6,060                       |  | 418,376  
|                                                                            |  |             |  |            |  |          | 
|Phillip L. Elbert President and Chief Operating OfficerPropane Operations  |  | 2007        |  | 240,000    |  |         |  | 20,859             |  | 240,000                                 |  | 3,690                       |  | 504,549  
|                                                                            |  |             |  |            |  |          | 
|Laura L. Ozenberger Senior Vice President, General Counsel and Secretary    |  | 2007        |  | 175,000    |  | 25,000   |  | 16,225             |  | 175,000                                 |  | 5,944                       |  | 397,169  

---

|(1) | The amounts included in the Option Awards columns reflect the dollar amount of compensation
expense recognized with respect to awards from the Inergy Long Term Incentive Plan for the fiscal year ended September 30, 2007, in accordance with SFAS 123(R) and thus include amounts attributable to awards granted in and prior to fiscal 2007.
Assumptions used in the calculation of these amounts are discussed in Note 2 to our Consolidated Financial Statements. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that will be recognized
by the named executive officers. The material terms of our outstanding LTIP awards to our executive officers are described in Compensation Discussion and AnalysisLong-Term Incentive Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Consists of matching contributions to Inergys 401(k) Plan for each named executive officer and
Inergys payment for the benefit of the named executive officers under its group term life insurance policy The partnership does not provide perquisites and other personal benefits exceeding a total value of $10,000 to any named executive
officer.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Grants of Plan Based Awards Table

The following table provides information concerning each grant of an award made by Inergy to our named executive officers in the last completed fiscal year under any plan, including awards that have been transferred. No equity awards were
granted to any of the named executive officers in fiscal 2007.



|                       |  |                                                                |  |           |  |              
|---------------------- |  | -------------------------------------------------------------- |  | --------- |  | -------------
|                       |  | Estimated Future Payouts UnderNon-Equity Incentive Plan Awards
|Name                   |  | Threshold($)                                                   |  | Target($) |  | Maximum($)(1)
|John J. Sherman        |  | 0                                                              |  | 300,000   |  | 300,000      
|R. Brooks Sherman, Jr. |  | 0                                                              |  | 200,000   |  | 200,000      
|Phillip L. Elbert      |  | 0                                                              |  | 240,000   |  | 240,000      
|Laura L. Ozenberger    |  | 0                                                              |  | 175,000   |  | 175,000      

---

|(1) | The Maximum amount may be increased by the discretion of the Compensation Committee.
|--- | --------------------------------------------------------------------------------------

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

The following is a discussion of other material factors necessary to an understanding of the information disclosed in the Summary Compensation Table.



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Employment Agreements

The named executive officers have not entered into employment agreements with our general partner. However, the following named executive officers have entered into employment agreements with Inergy GP, LLC, the managing general partner of
Inergy, L.P.:



| |  |  | John J. Sherman, President and Chief Executive Officer;
| | - |  | -------------------------------------------------------



| |  |  | R. Brooks Sherman, Jr., Executive Vice PresidentChief Financial Officer;
| | - |  | -------------------------------------------------------------------------



| |  |  | Phillip L. Elbert, President and Chief Operating OfficerPropane Operations; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | Laura L. Ozenberger, Senior Vice PresidentGeneral Counsel and Secretary;
| | - |  | -------------------------------------------------------------------------

The following is a summary of the material provisions of these employment agreements, each of which is incorporated by reference herein as an exhibit to this report.

All of these employment agreements are substantially similar, with certain material exceptions as set forth below. The employment agreements are for terms of
approximately three or five years. During the fiscal year, the annual salaries for these individuals are as follows:



| |  |  | John J. Sherman$300,000*
| | - |  | -------------------------



| |  |  | R. Brooks Sherman, Jr.$200,000*
| | - |  | --------------------------------



| |  |  | Phillip L. Elbert$240,000*
| | - |  | ---------------------------



| |  |  | Laura L. Ozenberger$175,000*
| | - |  | -----------------------------

---

|* | Effective October 1, 2007 annual salaries were increased as follows: $350,000, $225,000, $275,000 and $200,000 for John J. Sherman, R. Brooks Sherman, Phillip L. Elbert, and
Laura L. Ozenberger, respectively.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These employees are reimbursed for all expenses in accordance with Inergys policies. They are also
eligible for fringe benefits normally provided to other employees of Inergy.

All of the individuals are each eligible for annual performance bonuses
(non-equity incentive plan awards) from Inergy upon meeting certain established criteria for each year during the term of his or her employment.

Unless
waived by the managing general partner of Inergy, in order for any of these individuals to receive any benefits under (i) the Inergy Long Term Incentive Plan and Inergy Holdings Long Term Incentive Plan, or (ii) the performance bonus, the
individual must have been continuously employed by the managing general partner of Inergy or one of our affiliates from the date of his or her employment agreement up to the date for determining eligibility to receive such amounts.

Each employment agreement contains confidentiality and noncompetition provisions. Also, each employment agreement contains a disclosure and assignment of inventions
clause that requires the employee to disclose the existence of any invention and assign such employees right in such invention to the managing general partner of Inergy.

With respect to each of the named executive officers, in the event such persons employment is terminated by Inergy without cause, Inergy will be required to continue making payments to such person for the
remainder of the term of such persons employment agreement.

Inergy Long Term Incentive Plan

Inergys managing general partner sponsors the Inergy Long Term Incentive Plan for its directors, consultants and employees and the employees and consultants of its
affiliates who perform services for us. The plan is



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administered by the compensation committee of the managing general partners board of directors of Inergy. On September 11, 2007, the compensation
committee approved an amendment to the Inergy Long Term Incentive Plan increasing the aggregate number of common units that may be issued under the plan from 1,735,100 to 5,000,000 and eliminated the limitation on the number of common units that may
be issued pursuant to phantom unit awards.

Unit Options

The Inergy Long Term Incentive Plan currently permits, and the managing general partner of Inergy has made, grants of options covering common units. Unit options will have an exercise price equal to the fair market value of the units on the
date of grant. In general, unit options, as reflected in the table, will become exercisable over a five-year period. In addition, the unit options will become exercisable upon a change of control of the managing general partner or Inergy. The unit
options will expire after 10 years.

Upon exercise of a unit option, Inergys managing general partner will acquire common units in the open market,
or directly from Inergy or any other person, or use common units already owned by the managing general partner of Inergy, or any combination of the foregoing. The managing general partner of Inergy will be entitled to reimbursement by Inergy for the
difference between the cost incurred by the managing general partner in acquiring these common units and the proceeds received by the managing general partner from an optionee at the time of exercise. Thus, the cost of the unit options will be borne
by Inergy. If Inergy issues new common units upon exercise of the unit options, the total number of common units outstanding will increase and the managing general partner of Inergy will pay Inergy the proceeds it received from the optionee upon
exercise of the unit options. The unit option plan has been designed to furnish additional compensation to employees and directors of Inergy and to align their economic interests with those of Inergys common unitholders.

Termination and Amendment

The managing general partners board
of directors of Inergy in its discretion may terminate the Inergy Long Term Incentive Plan at any time with respect to any common units for which a grant has not yet been made. The managing general partners board of directors of Inergy also
has the right to alter or amend the Inergy Long Term Incentive Plan or any part of the plan from time to time, including increasing the number of common units with respect to which awards may be granted subject to unitholder approval as required by
the exchange upon which the common units are listed at that time. However, no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.

Inergy Holdings Long Term Incentive Plan

Our general partner
sponsors the Inergy Holdings Long Term Incentive Plan for our directors, consultants and employees and the employees and consultants of its affiliates who perform services for us. The plan is administered by the compensation committee of our general
partners board of directors.

Unit Options

The
Inergy Holdings Long Term Incentive Plan currently permits, and our general partner has made, grants of options covering common units. Unit options will 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 five-year period. In addition, the unit options will become exercisable upon a change of control of Inergys managing general. Generally, unit options will expire after 10 years.

Upon exercise of a unit option, our general partner will acquire common units in the open market, or directly from us or any other person, or use common
units already owned by our general partner, or any combination of the foregoing. Our general partner will be entitled to reimbursement by us for the difference between the cost



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incurred by our general partner in acquiring these common units and the proceeds received by our general partner from an optionee at the time of exercise. If
we issue new common units upon exercise of the unit options, the total number of common units outstanding will increase and our general partner will pay us the proceeds it received from the optionee upon exercise of the unit options. The unit option
plan has been designed to furnish additional compensation to employees and directors and to align their economic interests with those of our common unitholders.

Termination and Amendment

Our general partners board of directors in its discretion may terminate the Inergy Holdings Long Term
Incentive Plan at any time with respect to any common units for which a grant has not yet been made. Our general partners board of directors also has the right to alter or amend the Inergy Holdings Long Term Incentive Plan or any part of the
plan from time to time, including increasing the number of common units with respect to which awards may be granted subject to unitholder approval as required by the exchange upon which our common units are listed at that time. However, no change in
any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.

Outstanding Equity
Awards at Fiscal Year-End Table

The following table summarizes the options outstanding as of September 30, 2007 for the named executive officers.
The table includes unit options of Inergy, L.P. (NASDAQ: NRGY) granted under the Inergy Long Term Incentive Plan and unit options of Inergy Holdings, L.P. (NASDAQ: NRGP) granted under the Inergy Holdings Long Term Incentive Plan. As of
September 30, 2007, there have been no unit awards to any of the named executive officers. There were no equity awards to the named executive officers under either plan in the fiscal year ended September 30, 2007.



|                       |  |                                                        |  |               |                         |  |                      |     |  |       |  |         
|---------------------- |  | ------------------------------------------------------ |  | ------------- | ----------------------- |  | -------------------- | --- |  | ----- |  | --------
|Name                   |  | Security                                               |  | Option Awards
|                       |  | Number of Securities UnderlyingUnexercised Options (#) |  |               | OptionExercise Price($) |  | OptionExpirationDate
|                       |  | Exercisable                                            |  |               | Unexercisable           |  |                      |    
|John J. Sherman        |  |                                                       |  |              |                         |  |                     |     |  |      |  |        
|R. Brooks Sherman, Jr. |  | NRGY                                                   |  | 20,000        | (1)                     |  |                     |     |  | 14.72 |  | 08/30/12
|                       |  | NRGP                                                   |  |              |                         |  | 40,000               | (3) |  | 22.50 |  | 06/19/15
|Phillip L. Elbert      |  | NRGY                                                   |  |              |                         |  |                     |     |  |      |  |        
|                       |  | NRGP                                                   |  |              |                         |  | 40,000               | (4) |  | 22.50 |  | 06/19/15
|Laura L. Ozenberger    |  | NRGY                                                   |  |              |                         |  | 50,000               | (2) |  | 15.70 |  | 02/09/13
|                       |  | NRGP                                                   |  |              |                         |  | 40,000               | (3) |  | 22.50 |  | 06/19/15

---

|(1) | Option vested in full on August 30, 2007 (5 years from the grant date).
|--- | -----------------------------------------------------------------------

|(2) | Option will vest in full on February 10, 2008 (5 years from the grant date).
|--- | ----------------------------------------------------------------------------

|(3) | Option will vest as follows: 10,000 on June 20, 2008, 10,000 on June 20, 2009 and
20,000 June 20, 2010.
|--- | -------------------------------------------------------------------------------------------------------

|(4) | Option will vest in full on June 20, 2010 (5 years from the grant date).
|--- | ------------------------------------------------------------------------

Option Exercises and Stock Vested Table

In the fiscal year ended
September 30, 2007, there were no unit options exercised or units vested under either plan by any of our named executive officers.

Pension
Benefits Table

We do not offer any pension benefits.

Nonqualified Deferred Compensation Table

We have no non-qualified deferred compensation plans.



76



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Potential Payments Upon a Change in Control or Termination

Employment Agreements

Under the named executive officers employment
agreement with Inergy, Inergy may be required to pay certain amounts upon the employment termination of the named executive officer in certain circumstances. Upon the termination of employment of a named executive officer without Cause, the
employment agreements entered into between Inergy GP, LLC and each of the named executive officers provide for salary continuation at the rate in effect at termination of the employee through the remaining term of the employment agreement.
Consequently, no severance is payable in the event of any termination (i) as a result of death, disability, or legal incompetence, (ii) as a result of Inergy GP, LLC ceasing to carry on its business without assigning the employment agreement, (iii)
as a result of Inergy GP, LLC becoming bankrupt, (iv) for Cause or (v) by the employee for any or no reason. For purposes of the employment agreements:

Cause will generally be determined to have occurred in the event the:



| |  |  | employee has failed to perform his or her duties as an employee of Inergy GP, LLC, to perform any obligation under the employment agreement or to observe and abide
by Inergy GP, LLCs policies and decisions, provided that Inergy GP, LLC has given employee reasonable notice of that failure and employee is unsuccessful in correcting that failure or in preventing its reoccurrence;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee has refused to comply with specific directions of his/her supervisor or other superior, provided that such directions are consistent with the
employees position of employment;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee has engaged in misconduct that is injurious to Inergy GP, LLC or any subsidiary, parent or affiliate of Inergy GP, LLC;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee has been convicted of, or has entered a plea of nolo contendere to, any crime involving the theft or willful destruction of money or other property, any
crime involving moral turpitude or fraud, or any crime constituting a felony;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee has engaged in acts or omissions against Inergy GP, LLCor any subsidiary, parent or affiliate of Inergy GP, LLC constituting dishonesty, breach of
fiduciary obligation, or intentional wrongdoing or misfeasance; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee has used alcohol or drugs on the job, or has engaged in excessive absenteeism from the performance of his duties as Inergy GP, LLCs employee, other
than for reasons of illness.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If a termination of a named executive officer by Inergy GP, LLC without Cause were to have occurred as of
September 30, 2007, our named executive officers would have been entitled to the following:



| |  |  | John J. Sherman would have received $875,000, representing base salary for the remaining 35 months of the term of his employment agreement (payable bi-monthly in
arrears). For two years following the termination of Mr. Shermans employment he will continue to be subject to the non-competition provisions of his employment agreement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | R. Brooks Sherman, Jr. would have received $550,000, representing base salary for the remaining 33 months of the term of his employment agreement (payable
bi-monthly in arrears). For two years following termination of Mr. Shermans employment he will continue to be subject to the non-competition provisions of his employment agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phillip L. Elbert would have received $540,000, representing base salary for the remaining 27 months of the term of his employment agreement (payable bi-monthly in
arrears). In addition to receiving severance payments upon a termination of employment without Cause, Mr. Elbert is entitled to the same benefits if he terminates his employment for Good Reason which is defined as (i) Inergy GP, LLC
requiring, as a condition of employees employment, that employee commit a felony or engage in conduct that is a crime under the Securities Act of 1933, as amended, or the Securities Exchange Act of
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



77



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| | 1934, as amended; and (ii) employee being required by Inergy GP, LLC to be based at any office or location that is more than 35 miles from the location where
employee was employed immediately preceding the date of the voluntary or involuntary termination of employees employment. For up to two years following termination of Mr. Elberts employment he will continue to be subject to the
non-competition provisions of his employment agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Laura L. Ozenberger would have received $160,417 representing base salary for the remaining 11 months of the term of her employment agreement (payable bi-monthly in
arrears). Effective October 1, 2007, Ms. Ozenberger and Inergy GP, LLC entered into a new Employment Agreement with a three year term with an annual base salary of $200,000. A three year severance benefit at Ms. Ozenbergers base salary in
effect as of September 30, 2007, would equal $525,000. For two years following termination of employment Ms. Ozenberger will continue to be subject to the non-competition provisions of her employment agreement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Inergy Long Term Incentive Plan and Inergy Holdings Long Term Incentive Plan

Upon a change in control, all unit options and restricted units shall automatically vest and become payable or exercisable, as the case may be, in full and any restricted periods or performance criteria shall terminate or be deemed to have
been achieved at the maximum level. For purposes of the Inergy Long Term Incentive Plan and Inergy Holdings Long Term Incentive Plan, a change in control means, and shall be deemed to have occurred upon one of the following events: (i)
any sale, lease, exchange or other transfer (in one or a series of related transactions) of all or substantially all of the assets of Inergy Partners, LLC or Inergy, L.P. to any person or its affiliates, other than Inergy GP, LLC, the Partnership or
any of their affiliates, or (ii) any merger, reorganization, consolidation or other transaction pursuant to which more than 50% of the combined voting power of the equity interests in Inergy GP, LLC or Inergy Partners, LLC ceases to be controlled by
Inergy Holdings, L.P.

If a change in control were to have occurred as of September 30, 2007, all awards held by the named executive officers under
the Inergy Long Term Incentive Plan as well as the Inergy Holdings Long Term Incentive Plan would have automatically vested and become exercisable, as follows:



|                       |  |                                                     |  |                                                             |  |                                                             |  |                                                                     |  |             
|---------------------- |  | --------------------------------------------------- |  | ----------------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ------------
|Name                   |  | Option Awardsunder theInergy LongTerm IncentivePlan |  | Exercise PricePer Shareunder the LongTerm IncentivePlan ($) |  | Option Awardsunder theInergyHoldings LongTerm IncentivePlan |  | Exercise PricePer Shareunder theHoldings LongTerm IncentivePlan ($) |  | Total ($)(1)
|John J. Sherman        |  |                                                    |  |                                                            |  |                                                            |  |                                                                    |  | 0           
|R. Brooks Sherman, Jr. |  |                                                    |  |                                                            |  | 40,000                                                      |  | 22.50                                                               |  | 987,200     
|Phillip L. Elbert      |  |                                                    |  |                                                            |  | 40,000                                                      |  | 22.50                                                               |  | 987,200     
|Laura L. Ozenberger    |  | 50,000                                              |  | 15.70                                                       |  | 40,000                                                      |  | 22.50                                                               |  | 1,755,700   
|Carl A. Hughes         |  |                                                    |  |                                                            |  | 30,000                                                      |  | 22.50                                                               |  | 740,400     

---

|(1) | Amounts included in the Total column are calculated by subtracting the per share exercise price
under the options from the closing per share price of our common units on September 28, 2007 ($47.18) or the closing per share price of the common units of Inergy ($31.07), as applicable, and multiplying the difference by the number of units
subject to the option.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



78



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Director Compensation Table

The following table sets forth the cash and non-cash compensation earned for the year ended September 30, 2007 by each person who served as a non-employee director of Inergy Holdings GP, LLC.



|                   |  |                               |  |                      |  |                    |  |                             |  |         
|------------------ |  | ----------------------------- |  | -------------------- |  | ------------------ |  | --------------------------- |  | --------
|Name               |  | Fees Earnedor Paid inCash ($) |  | UnitAwards($)(1) (2) |  | OptionAwards($)(1) |  | All OtherCompensation($)(3) |  | Total($)
|Warren H. Gfeller  |  | 39,000                        |  | 3,586                |  | 4,343              |  | 503                         |  | 47,432  
|Arthur B. Krause   |  | 36,000                        |  | 3,586                |  | 4,343              |  | 503                         |  | 44,432  
|Richard T. OBrien |  | 34,000                        |  |                     |  | 10,094             |  |                            |  | 44,094  

---

|(1) | The amounts included in the Unit Awards and Option Awards columns reflect the dollar
amount of compensation expense we recognized with respect to these awards for the fiscal year ended September 30, 2007, in accordance with SFAS 123(R) and thus include amounts attributable to awards granted in and prior to fiscal 2007.
Assumptions used in the calculation of these amounts are discussed in Note 2 to our Consolidated Financial Statements. These amounts reflect our accounting expense for these awards, and do not correspond to the actual value that will be recognized
by the directors.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As of September 30, 2007, Messrs. Gfeller and Krause each owned 508 restricted units and Messrs. Gfeller, Krause
and OBrien each owned 20,000 unit options.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Dollar value of distributions paid on restricted units during the fiscal year ended September 30, 2007.
|--- | -------------------------------------------------------------------------------------------------------

Compensation of Directors

An
officer of our general partner who also serves as director will not receive additional compensation. Each director receives cash compensation of $25,000 per year for attending our regularly scheduled quarterly board meetings. Each non-employee
director also receives $1,000 for each special meeting of the board of directors attended. Non-employee directors receive $1,000 per compensation, audit, or conflicts committee meeting attended. The chairman of the audit committee receives an annual
fee of $5,000 per year and the chairman of the compensation committee receives an annual fee of $1,000 per year. In addition, at the second anniversary of appointment, each non-employee will receive restricted units under the Inergy Holdings Long
Term Incentive Plan equal to $25,000 in value. On April 27, 2007, Messrs. Gfeller and Krause each received 508 restricted units under the Inergy Holdings Long Term Incentive Plan. These units vest ratably over three years beginning one year
from the grant date. Each non-employee director is reimbursed for out-of-pocket expenses in connection with attending meetings of the board of directors or committees. Each director is fully indemnified for actions associated with being a director
to the extent permitted under Delaware law. Messrs. Krause and Gfeller also receive compensation for their service on the board of directors of Inergy GP, LLC, which is not reflected in the table above.

Compensation Committee Interlocks and Insider Participation

The
compensation committee of the board of directors of our managing general partner oversees the compensation of our executive officers. Arthur B. Krause and Warren H. Gfeller serve as the members of the compensation committee, and neither of them was
an officer or employee of our company or any of its subsidiaries during fiscal 2007.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.

Inergy
Holdings, L.P.

The following table sets forth certain information as of November 1, 2007, regarding the beneficial ownership of our units by:



| |  |  | each person who beneficially owned more than 5% of such units then outstanding,
| | - |  | -------------------------------------------------------------------------------



| |  |  | each of the named executive officers of our general partner,
| | - |  | ------------------------------------------------------------



79



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| |  |  | each of the directors of our general partner, and
| | - |  | -------------------------------------------------



| |  |  | all of the directors and executive officers of our general partner and the managing general partner of Inergy as a group.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

All information with respect to beneficial ownership has been furnished by the respective directors, officers or 5% or more unitholders, as the case may be.



|                                                                                                                                                              |  |            |  |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ------- | -
|Name of Beneficial Owner(1):                                                                                                                                  |  | Units      |  | Percent |  
|                                                                                                                                                              |  |           
|John J. Sherman(2)                                                                                                                                            |  | 7,931,482  |  | 39.25   | %
|David G. Dehaemers, Jr.                                                                                                                                       |  | 1,020,698  |  | 5.05    | %
|Phillip L. Elbert(3)                                                                                                                                          |  | 905,732    |  | 4.48    | %
|William C. Gautreaux(4)                                                                                                                                       |  | 1,072,179  |  | 5.31    | %
|Andrew L. Atterbury                                                                                                                                           |  | 1,079,304  |  | 5.34    | %
|Carl A. Hughes(5)                                                                                                                                             |  | 956,792    |  | 4.73    | %
|R. Brooks Sherman, Jr.                                                                                                                                        |  | 397,558    |  | 1.97    | %
|Laura L. Ozenberger                                                                                                                                           |  | 29,838     |  | *       |  
|Warren H. Gfeller                                                                                                                                             |  | 5,562      |  | *       |  
|Arthur B. Krause                                                                                                                                              |  | 5,508      |  | *       |  
|Richard T. OBrien                                                                                                                                            |  |           |  |        |  
|Robert A. Pascal                                                                                                                                              |  | 12,500     |  | *       |  
|Robert D. Taylor                                                                                                                                              |  |           |  |        |  
|All directors and executive officers of our general partner and directors and executive officers of Inergys managing general partner as
a group (11 persons) |  | 11,324,276 |  | 56.04   | %

---

|* | Less than 1%
|- | ------------

|(1) | The address of each person listed above is Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri 64112.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Mr. Sherman may be deemed to beneficially own (i) the 7,681,431 common units held by the John J.
Sherman Revocable Trust dated May 4, 1994, of which Mr. Sherman serves as the trustee, (ii) the 249,395 common units held by the John J. Sherman 2005 Grantor Retained Annuity Trust I under trust indenture dated March 31, 2005, of
which Mr. Sherman serves as co-trustee, and (iii) Mr. Sherman holds 655 units through the Employee Unit Purchase Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr. Elbert may be deemed to beneficially own (i) 694,831 common units held by the Philip L. Elbert Revocable
Trust dated May 17, 2001 of which Mr. Elbert is the Trustee, (ii) the 120,675 common units held by the Phillip L. Elbert 2005 Grantor Retained Annuity Trust under trust indenture dated March 31, 2005, of which Mr. Elbert
serves as co-trustee, (iii) the 20,113 common units held by the Charles W. Elbert Trust under trust indenture dated March 31, 2005, of which Mr. Elbert serves as co-trustee, and (iv) the 20,113 common units held by the Lauren E.
Elbert Trust under trust indenture dated March 31, 2005, of which Mr. Elbert serves as co-trustee.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Mr. Gautreaux may be deemed to beneficially own (i) the 843,796 common units held by the William C. Gautreaux
Revocable Trust dated March 8, 2004, of which Mr. Gautreaux serves as the trustee, and (ii) the 120,675 common units held by the William C. Gautreaux 2005 Grantor Retained Annuity Trust under trust indenture dated March 31, 2005,
of which Mr. Gautreaux serves as co-trustee.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. Hughes may be deemed to beneficially own (i) the 695,442 common units held by the Carl A. Hughes Revocable
Trust dated September 13, 2002, of which Mr. Hughes serves as the trustee, and (ii) the 241,350 common units held by the Carl A. Hughes 2005 Grantor Retained Annuity Trust under trust indenture dated March 31, 2005, of which
Mr. Hughes serves as co-trustee.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2007, no units were pledged by directors or named executive officers.



80



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Inergy Holdings GP, LLC

The following table shows the beneficial ownership of Inergy Holdings GP, LLC, as of November 1, 2007.



|                                                                                                                                                              |  |                               |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | -
|Name of Beneficial Owner(1)                                                                                                                                   |  | BeneficialOwnershipPercent(2) |  
|John J. Sherman(3)                                                                                                                                            |  | 56.40                         | %
|David G. Dehaemers, Jr.                                                                                                                                       |  | 7.27                          | %
|Phillip L. Elbert                                                                                                                                             |  | 6.09                          | %
|Paul E. McLaughlin                                                                                                                                            |  | 7.10                          | %
|Andrew L. Atterbury                                                                                                                                           |  | 7.00                          | %
|William C. Gautreaux(4)                                                                                                                                       |  | 6.90                          | %
|Carl A. Hughes(5)                                                                                                                                             |  | 6.67                          | %
|R. Brooks Sherman, Jr.                                                                                                                                        |  | 2.57                          | %
|Laura L. Ozenberger                                                                                                                                           |  |                              |  
|Warren H. Gfeller                                                                                                                                             |  |                              |  
|Arthur B. Krause                                                                                                                                              |  |                              |  
|Richard T. OBrien                                                                                                                                            |  |                              |  
|Robert A. Pascal                                                                                                                                              |  |                              |  
|Robert D. Taylor                                                                                                                                              |  |                              |  
|All directors and executive officers of our general partner and directors and executive officers of Inergys managing general partner as
a group (11 persons) |  | 78.73                         | %

---

|(1) | The address of each person listed above is Two Brush Creek Boulevard, Suite 200, Kansas City,
Missouri 64112.
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Voting rights currently attach only to Mr. John Shermans ownership interest. In the event Mr. John
Shermans ownership fails to exceed 33%, the remaining owners of our general partner will acquire voting rights in proportion to their ownership interest.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr. Sherman may be deemed to beneficially own all of the common units held by the John J. Sherman Revocable Trust
dated May 4, 1994, of which Mr. Sherman serves as the trustee.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Mr. Gautreaux may be deemed to beneficially own all of the common units held by the William C. Gautreaux Revocable
Trust dated March 8, 2004, of which Mr. Gautreaux serves as the trustee.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. Hughes may be deemed to beneficially own all of the common units held by the Carl A. Hughes Revocable Trust
dated September 13, 2002, of which Mr. Hughes serves as the trustee.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13. Certain Relationships, Related Transactions and Director Independence.

Our Relationship with Inergy

General.Our cash-generating assets consist of our partnership interests, including incentive distribution rights, in Inergy. Our incentive
distribution rights in Inergy 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.

Our aggregate partnership interests 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 0.9% general partner interest in Inergy;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 4,706,689 Inergy common units, representing an aggregate limited partner interest in Inergy of approximately 9.4%; 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Relationship with
Inergys General Partners

Inergy GP, LLC, Inergys managing general partner, manages the operations and activities of Inergy. Inergy
Partners, LLC, Inergys non-managing general partner, owns an approximate 0.9% general partner interest in Inergy.



81



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Distributions and payments are made by Inergy to its non-managing general partner and its affiliates in connection with
the ongoing operations of Inergy. These distributions and payments are determined by and among affiliated entities and are not the result of arms length negotiations.

Cash distributions from Inergy are generally made approximately 99% to Inergy unitholders, including affiliates of its managing general partner as holders of Inergy common units, and approximately 1% to its
non-managing general partner. In addition, if distributions exceed the target levels in excess of the minimum quarterly distribution, we are entitled to receive increasing percentages of the distributions, up to a maximum of 48.0% of the
distributions above the highest target level.

Assuming Inergy has sufficient available cash to pay the full minimum quarterly distribution on all of its
outstanding units for four quarters, its general partner and its affiliates would receive a distribution of approximately $0.6 million on the approximate 0.9% general partner interest and a distribution of approximately $6.2 million on their common
units.

Inergys managing general partner and its affiliates do not receive any management fee or other compensation for the management of Inergy. Its
managing general partner and its affiliates are reimbursed, however, for direct and indirect expenses incurred on Inergys behalf. For the fiscal years ended September 30, 2007, 2006 and 2005 the expense reimbursement to Inergys
managing general partner and its affiliates was approximately $6.6 million, $8.7 million, and $3.0 million, respectively, with the reimbursement related primarily to personnel costs.

If Inergys managing general partner withdraws in violation of Inergys partnership agreement or is removed for cause, a successor general partner has the option to buy the general partner interests and
incentive distribution rights of Inergy from the non-managing general partner of Inergy for a cash price equal to fair market value. If Inergys managing general partner withdraws or is removed under any other circumstances, Inergys
non-managing general partner has the option to require the successor general partner to buy its general partner interests and incentive distribution rights for a cash price equal to fair market value.

If either of these options is not exercised, the general partner interests and incentive distribution rights of Inergy will automatically convert into common units of
Inergy equal to the fair market value of those interests. In addition, Inergy will be required to pay the departing general partner for expense reimbursements.

Upon Inergys liquidation, the partners, including Inergys non-managing general partner, will be entitled to receive liquidating distributions according to their particular capital account balances.

Indemnification of Directors and Officers

Under our limited
partnership agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by Delaware law, from and against all losses, claims, damages or similar events any director or officer, or while serving as a director or
officer, any person who is or was serving as a tax matters member or as a director, officer, tax matters member, employee, partner, manager, fiduciary or trustee of our partnership or any of our affiliates. Additionally, we will indemnify to the
fullest extent permitted by law, from and against all losses, claims, damages or similar events any person who is or was an employee (other than an officer) or agent of our partnership.

Any indemnification under our limited partnership agreement will only be out of our assets. We are authorized to purchase insurance against liabilities asserted against and expenses incurred by persons for our
activities, regardless of whether we would have the power to indemnify the person against liabilities under our limited partnership agreement.



82



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Related Party Transactions Involving Inergy

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. Five of these leases are with United Propane, three of the leases are with Pascal Enterprises, Inc. and two with Robert A. Pascal. Each of these leases provides for an initial five-year term, and is renewable 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. On May 1, 2005 this lease was renewed and the monthly base rent was reduced to $12,500.

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 and after our board of directors obtained an opinion as to fairness from an independent
financial advisor, on August 9, 2005, we entered into the Special Unit Purchase Agreement with Inergy. We purchased 769,941 Inergy special units for $25 million in cash from Inergy. These units were not entitled to current cash distributions,
but would convert to Inergy common units at a special conversion ratio upon the Phase II expansion becoming commercially operational. On August 25, 2007, the Special Units were converted into 919,349 common units as a result of the commercial
operation of the Phase II expansion of the Stagecoach Natural Gas Storage Facility.

On occasion, Holdings reimburses Inergy for expenses paid on our
behalf. At September 30, 2007, Holdings had an amount due to Inergy of $0.1 million. At September 30, 2006, Holdings did not have an amount due to Inergy.

Review, Approval or Ratification of Transactions with Related Persons

Our board of directors has adopted a Related
Person Transactions Policy. Under this Policy, any related person transaction may be entered into or continue only if approved as provided below.

Related
person transactions that in the discretion of the general partner require approval of the conflicts committee in accordance with our Partnership Agreement may be approved only by the conflicts committee. Related person transactions that in the
discretion of the general partner do not require approval of the conflicts committee in accordance with our Partnership Agreement may be entered into or continue only if the related person transaction is in the normal course of our business and is
(a) on terms no less favorable to us than those generally being provided to or available from unrelated third parties or (b) fair to us, taking into account the totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to us), then our Chief Executive Officer has authority to approve the transaction applying the criteria specified our Partnership Agreement. Any other related person transaction may be
approved in one of the following two ways. First, the general partner may seek approval of the conflicts committee. If the general partner does not seek approval of the conflicts committee, the transaction may be approved by an independent committee
of the board of directors (either the audit committee or a special committee) applying the criteria in our Partnership Agreement.

Material Provisions
of Our General Partners Limited Liability Company Agreement.

Our general partners management and operations are governed by its limited
liability company agreement. The limited liability company agreement establishes a board of directors that will be responsible for the oversight of our business and operations. Our general partners board of directors will be elected by a
voting member



83



---

majority, as defined in the limited liability company agreement. For so long as John J. Sherman and his trusts and their permitted transferees own at least
33% of the original ownership interests held by our owners prior to our initial public offering, Mr. John Shermans revocable trust will comprise the voting member majority and will be the only voting member of our general partner.
Accordingly, Mr. John Sherman will have the authority to elect all of the directors of our general partner, as well as vote on any other actions required to be presented to the owners of our general partner. If Mr. John Shermans
ownership fails to exceed 33% of the original ownership interests, the remaining owners of our general partner will acquire voting rights in proportion to their ownership interest of such original ownership interests. Further, these owners will lose
their voting rights in proportion to any sales of original ownership interests in us. Our general partner and the owners of our general partner, whether or not voting, have a right of first refusal to purchase any interests in our general partner
proposed to be sold to a third party. In addition, in the event Mr. John Sherman elects to sell his interest in our general partner, Mr. John Sherman will have the right to cause all other members of our general partner to sell their
interests on the same terms. Likewise, if Mr. John Sherman elects to sell his interest in our general partner, all other members of our general partner will also have the ability to participate in the sale on the same terms.

Restrictions on the Ability of Certain Executive Officers and Certain Unitholders who Beneficially Own More than 5% of Our Outstanding Units

Various agreements among certain executive officers and certain unitholders (including certain executive officers of our general partner and the managing general partner
of Inergy) restrict their ability to transfer their interests in us. We hold a right of first refusal on the transfer of the interests in us by these executive officers and these certain unitholders.

Item 14. Principal Accountant Fees and Services.

The following table presents fees billed for professional audit
services rendered by Ernst & Young LLP for the audit of our and Inergys annual financial statements and for other services rendered for the years ended September 30, 2007 and 2006 (in millions):.



|                                        |  |      |     |      |   |    
|--------------------------------------- |  | ---- | --- | ---- | - | ---
|For the fiscal year ended September 30, |  | 2007 |     | 2006
|Inergy Holdings, L.P.:                  |  |      |     |      |   |    
|Audit fees(1)                           |  | $    | 0.2 |      | $ | 0.2
|Audit-related fees(2)                   |  |      |    |      |   |   
|                                        |  |      |     |      |   |    
|Total                                   |  | $    | 0.2 |      | $ | 0.2
|                                        |  |      |     |      |   |    
|Inergy, L.P.                            |  |      |     |      |   |    
|Audit fees(1)                           |  | $    | 2.1 |      | $ | 2.9
|Audit-related fees(2)                   |  |      | 0.1 |      |   | 0.1
|                                        |  |      |     |      |   |    
|Total                                   |  | $    | 2.2 |      | $ | 3.0
|                                        |  |      |     |      |   |    

---

|(1) | Audit fees consist of assurance and related services that are reasonably related to the performance of the audit or
review of our financial statements. This category includes fees related to the review of our quarterly and other SEC filings and services related to internal control assessments.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related fees consist of due diligence fees associated with acquisition transactions, financial accounting and
reporting consultations and benefit plan audits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Following the establishment of the audit committee of our general partner, the audit
committee reviewed and approved all audit and non-audit services provided to us by Ernst & Young during fiscal year 2007 prior to the commencement of such services. For information regarding the audit committees pre-approval policies
and procedures related to the engagement by us of an independent accountant, see our audit committee charter on our website at www.inergypropane.com.



84



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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 90.



| | 2. | Financial Statement Schedules:
| | -- | ------------------------------

Schedule
I: Parent Only Financial Statements located on page 128

Schedule II: Valuation and Qualifying Accounts located on page 130

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.



85



---

| | 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)                                                                                                        
|      | 
|*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 dated as of July 22, 2005 among Inergy Holdings, L.P., IPCH Acquisition Corp. and Enterprise Bank and Trust (incorporated herein by reference to Exhibit 10.1 to Inergy Holdings,
L.P.s Quarterly Report on Form 10-Q filed on August 9, 2006)                                                                



86



---

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|*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)                                                      
|       | 
|*10.3A |  | Amendment to the 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 10.2 to Inergy, L.P.s
Form 8-K filed on November 14, 2005)                                                       
|       | 
|*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)                                                                                                                                                                                                                                                                                                                
|       | 
|*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 |  | Inergy Long Term Incentive Plan (as amended and restated January 1, 2006) (incorporated herein by reference to Exhibit 10.2 to Inergy, L.P.s Form 8-K filed on February 14,
2006)***                                                                                                                                                                                                                                                                                                                                                     
|       | 
|*10.11 |  | 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)                                                                                                                                                                                                                                                                                                                                                 
|       | 
|*10.12 |  | 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)                                                                                                                                                                                                                                                                                                                             
|       | 
|*10.13 |  | 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)                                                                                                                                                                                                                                                                                                       



87



---

|        |  |                                                                                                                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|*10.14  |  | 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)                                                            
|        | 
|*10.15  |  | 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)***                                                                                
|        | 
|*10.16  |  | 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)
|        | 
|*10.17  |  | 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)                                         
|        | 
|*10.18  |  | Registration Rights Agreement dated January 17, 2006, 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 Form 8-K filed on January 18, 2006)         
|        | 
|*10.19  |  | Indenture dated as of January 17, 2006 among Inergy, L.P., Inergy Finance Corp., the Guarantors named therein and US Bank National Association (incorporated herein by reference to Exhibit 4.2 to
Inergy L.P.s Form 8-K filed on January 18, 2006)                                
|        | 
|*10.20  |  | 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)                                       
|        | 
|*10.21  |  | Common Unit Purchase Agreement (incorporated by reference to Exhibit 10.1 to Inergy Holdings, L.P.s Current Report on Form 8-K filed on May 25, 2007)                                                                                                                              
|        | 
|**10.22 |  | Form of Restricted Unit Award Agreement ***                                                                                                                                                                                                                                         
|        | 
|*10.23  |  | Summary of Non-Employee Director Compensation (incorporated herein by reference to Exhibit 10.1 to Inergy Holdings, L.P.s Current Report on Form 8-K filed on February 14,
2006)***                                                                                                
|        | 
|*14.1   |  | Inergy Holdings Code of Business Ethics and Conduct (incorporated herein by reference to Exhibit 14.1 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.                                                                                                                                                                                                                                       
|        | 
|**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                                                                                                                               
|        | 
|**99.1  |  | Audited balance sheet of Inergy Holdings GP, LLC                                                                                                                                                                                                                                    

---

|* | Previously filed
|- | ----------------

|** | Filed herewith
|-- | --------------

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



88



---

| | (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.



89



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Inergy Holdings, L.P. and Subsidiaries

Consolidated Financial Statements

September 30, 2007 and 2006 and each of the

Three Years in the Period Ended

September 30, 2007

Contents



|                                                                             |  |   
|---------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm                      |  | 91
|                                                                             | 
|Report of Independent Registered Public Accounting Firm on Internal Controls |  | 92
|                                                                             | 
|Audited Consolidated Financial Statements:                                   |  |   
|                                                                             | 
|Consolidated Balance Sheets                                                  |  | 93
|                                                                             | 
|Consolidated Statements of Operations                                        |  | 94
|                                                                             | 
|Consolidated Statements of Partners Capital                                 |  | 95
|                                                                             | 
|Consolidated Statements of Cash Flows                                        |  | 96
|                                                                             | 
|Notes to Consolidated Financial Statements                                   |  | 98



90



---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Unitholders of Inergy Holdings, L.P.

We have audited the accompanying consolidated balance sheets of Inergy Holdings, L.P. and Subsidiaries (the Company) as of September 30, 2007 and
2006, and the related consolidated statements of operations, partners capital, and cash flows for each of the three years in the period ended September 30, 2007. Our audits also included the financial statement schedules listed in the
Index at Item 15(a). These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedules 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 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, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information set forth
therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of
Inergy Holdings, L.P. and Subsidiaries internal control over financial reporting as of September 30, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission and our report dated November 26, 2007 expressed an unqualified opinion thereon.

/s/ ERNST
& YOUNG LLP

Kansas City, Missouri

November 26,
2007



91



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Report of Independent Registered Public Accounting Firm on Internal Controls

The Board of Directors and Unitholders of Inergy
Holdings, L.P.

We have audited Inergy Holdings, L.P. and Subsidiaries internal control over financial reporting as of September 30, 2007, based
on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Inergy Holdings, L.P. and Subsidiaries management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.

We conducted
our audit 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 effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Managements Report on Internal Control over Financial Reporting, managements assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the internal controls of its 2007 acquisitions, which are included in the 2007 consolidated financial statements of Inergy Holdings, L.P. and Subsidiaries and constituted
$98.5 million and $23.6 million in total assets and revenues, respectively. Our audit of internal control over financial reporting of Inergy Holdings, L.P. and Subsidiaries also did not include an evaluation of the internal control over financial
reporting of its 2007 acquisitions.

In our opinion, Inergy Holdings, L.P. and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the 2007 consolidated financial statements of Inergy Holdings, L.P. and Subsidiaries and our report dated November 26, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Kansas City,
Missouri

November 26, 2007



92



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Inergy Holdings, L.P. and Subsidiaries

Consolidated Balance Sheets

(in millions, except unit information)



|                                                                                                                                        |  |               |         |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | ------- | -
|                                                                                                                                        |  | September 30, |        
|                                                                                                                                        |  | 2007          |         | 2006 |  
|Assets                                                                                                                                  |  |               |         |      |   |         |  
|Current assets:                                                                                                                         |  |               |         |      |   |         |  
|Cash                                                                                                                                    |  | $             | 7.9     |      | $ | 12.1    |  
|Accounts receivable, less allowance for doubtful accounts of $3.4 million and $2.9 million at September 30, 2007 and 2006, respectively |  |               | 112.2   |      |   | 99.5    |  
|Inventories (Note 4)                                                                                                                    |  |               | 100.5   |      |   | 108.1   |  
|Assets from price risk management activities                                                                                            |  |               | 55.0    |      |   | 46.2    |  
|Prepaid expenses and other current assets                                                                                               |  |               | 23.8    |      |   | 30.0    |  
|                                                                                                                                        |  |               |         |      |   |         |  
|Total current assets                                                                                                                    |  |               | 299.4   |      |   | 295.9   |  
|                                                                                                                                        |  |              
|Property, plant and equipment (Note 4)                                                                                                  |  |               | 1,000.3 |      |   | 847.9   |  
|Less: accumulated depreciation                                                                                                          |  |               | 179.6   |      |   | 124.4   |  
|                                                                                                                                        |  |               |         |      |   |         |  
|Property, plant and equipment, net                                                                                                      |  |               | 820.7   |      |   | 723.5   |  
|                                                                                                                                        |  |              
|Intangible assets (Note 4):                                                                                                             |  |               |         |      |   |         |  
|Customer accounts                                                                                                                       |  |               | 238.8   |      |   | 226.0   |  
|Other intangible assets                                                                                                                 |  |               | 117.1   |      |   | 110.6   |  
|                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                        |  |               | 355.9   |      |   | 336.6   |  
|Less: accumulated amortization                                                                                                          |  |               | 79.0    |      |   | 52.9    |  
|                                                                                                                                        |  |               |         |      |   |         |  
|Intangible assets, net                                                                                                                  |  |               | 276.9   |      |   | 283.7   |  
|                                                                                                                                        |  |              
|Goodwill                                                                                                                                |  |               | 365.3   |      |   | 339.7   |  
|Other assets                                                                                                                            |  |               | 1.1     |      |   | 4.0     |  
|                                                                                                                                        |  |               |         |      |   |         |  
|Total assets                                                                                                                            |  | $             | 1,763.4 |      | $ | 1,646.8 |  
|                                                                                                                                        |  |               |         |      |   |         |  
|                                                                                                                                        |  |              
|Liabilities and partners capital                                                                                                       |  |               |         |      |   |         |  
|Current liabilities:                                                                                                                    |  |               |         |      |   |         |  
|Accounts payable                                                                                                                        |  | $             | 100.4   |      | $ | 81.5    |  
|Accrued expenses                                                                                                                        |  |               | 61.7    |      |   | 63.0    |  
|Customer deposits                                                                                                                       |  |               | 73.9    |      |   | 98.0    |  
|Liabilities from price risk management activities                                                                                       |  |               | 49.6    |      |   | 49.0    |  
|Current portion of long-term debt (Note 6)                                                                                              |  |               | 57.5    |      |   | 16.9    |  
|                                                                                                                                        |  |               |         |      |   |         |  
|Total current liabilities                                                                                                               |  |               | 343.1   |      |   | 308.4   |  
|                                                                                                                                        |  |              
|Long-term debt, less current portion (Note 6)                                                                                           |  |               | 684.7   |      |   | 673.1   |  
|Other long-term liabilities                                                                                                             |  |               | 7.7     |      |   | 11.8    |  
|Deferred income taxes                                                                                                                   |  |               | 20.6    |      |   | 15.8    |  
|Interest of non-controlling partners in Inergy, L.P.                                                                                    |  |               | 656.4   |      |   | 656.4   |  
|                                                                                                                                        |  |              
|Partners capital (Note 9):                                                                                                             |  |               |         |      |   |         |  
|Common unitholders (20,009,016 and 20,000,000 units issued and outstanding as of September 30, 2007 and 2006,
respectively)             |  |               | 49.2    |      |   | (18.0   | )
|Accumulated other comprehensive income (loss)                                                                                           |  |               | 1.7     |      |   | (0.7    | )
|                                                                                                                                        |  |               |         |      |   |         |  
|Total partners capital (deficiency)                                                                                                    |  |               | 50.9    |      |   | (18.7   | )
|                                                                                                                                        |  |               |         |      |   |         |  
|Total liabilities and partners capital                                                                                                 |  | $             | 1,763.4 |      | $ | 1,646.8 |  
|                                                                                                                                        |  |               |         |      |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



93



---

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Operations

(in millions, except per unit data)



|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                               |  | Year Ended September 30, |        
|                                                                                                                               |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Revenue:                                                                                                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|Propane                                                                                                                        |  | $                        | 1,150.4 |   |      | $ | 1,072.3 |      |  | $ | 851.6   |  
|Other                                                                                                                          |  |                          | 332.7   |   |      |   | 317.9   |      |  |   | 200.3   |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                                                                                               |  |                          | 1,483.1 |   |      |   | 1,390.2 |      |  |   | 1,051.9 |  
|Cost of product sold (excluding depreciation and amortization as shown below):                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Propane                                                                                                                        |  |                          | 820.0   |   |      |   | 779.7   |      |  |   | 593.4   |  
|Other                                                                                                                          |  |                          | 201.7   |   |      |   | 210.7   |      |  |   | 130.8   |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                                                                                               |  |                          | 1,021.7 |   |      |   | 990.4   |      |  |   | 724.2   |  
|Gross profit                                                                                                                   |  |                          | 461.4   |   |      |   | 399.8   |      |  |   | 327.7   |  
|Expenses:                                                                                                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating and administrative                                                                                                   |  |                          | 253.0   |   |      |   | 249.5   |      |  |   | 197.6   |  
|Depreciation and amortization                                                                                                  |  |                          | 83.4    |   |      |   | 76.8    |      |  |   | 50.4    |  
|Loss on disposal of assets                                                                                                     |  |                          | 8.0     |   |      |   | 11.5    |      |  |   | 0.7     |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating income                                                                                                               |  |                          | 117.0   |   |      |   | 62.0    |      |  |   | 79.0    |  
|Other income (expense):                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Interest expense, net                                                                                                          |  |                          | (54.4   | ) |      |   | (55.8   | )    |  |   | (36.1   | )
|Write-off of deferred financing costs                                                                                          |  |                          |        |   |      |   |        |      |  |   | (7.6    | )
|Other income                                                                                                                   |  |                          | 1.9     |   |      |   | 0.8     |      |  |   | 0.3     |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Income before gain on issuance of units in Inergy, L.P., income taxes and interest of non-controlling partners in Inergy, L.P. |  |                          | 64.5    |   |      |   | 7.0     |      |  |   | 35.6    |  
|Gain on issuance of units in Inergy, L.P.                                                                                      |  |                          | 80.6    |   |      |   |        |      |  |   |        |  
|Provision for income taxes                                                                                                     |  |                          | (6.5    | ) |      |   | (0.6    | )    |  |   | (0.5    | )
|Interest of non-controlling partners in Inergy, L.P.s net (income) loss                                                       |  |                          | (36.0   | ) |      |   | 8.0     |      |  |   | (26.8   | )
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                                     |  | $                        | 102.6   |   |      | $ | 14.4    |      |  | $ | 8.3     |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income applicable to limited partners units                                                                               |  | $                        | 102.6   |   |      | $ | 14.4    |      |  | $ | 8.3     |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income per limited partner unit:(1)                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                                                                                          |  | $                        | 5.13    |   |      | $ | 0.72    |      |  | $ | 0.49    |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Diluted                                                                                                                        |  | $                        | 5.06    |   |      | $ | 0.71    |      |  | $ | 0.48    |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Weighted average limited partners units outstanding (in thousands):(1)                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic                                                                                                                          |  |                          | 20,003  |   |      |   | 20,000  |      |  |   | 17,140  |  
|Dilutive units                                                                                                                 |  |                          | 255     |   |      |   | 167     |      |  |   | 46      |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Diluted                                                                                                                        |  |                          | 20,258  |   |      |   | 20,167  |      |  |   | 17,186  |  
|                                                                                                                               |  |                          |         |   |      |   |         |      |  |   |         |  

---

|(1) | Adjusted to give effect to the conversion transaction.
|--- | ------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements.



94



---

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Partners Capital

(in millions)



|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|------------------------------------------------------------------------ |  | -------------------------------- | ----- | - | ------------------------------------------ | - | ---- | --------------------------------- |  | - | ----- | -
|                                                                         |  | PartnersCommonInterest(Deficit) |       |   | AccumulatedOtherComprehensiveIncome (Loss) |   |      | TotalPartnersCapital(Deficiency) | 
|Balance at September 30, 2004                                            |  | $                                | (35.0 | ) |                                            | $ | 0.2  |                                   |  | $ | (34.8 | )
|Net proceeds from issuance of common units                               |  |                                  | 80.0  |   |                                            |   |     |                                   |  |   | 80.0  |  
|Redemption of Partners interest                                         |  |                                  | (3.0  | ) |                                            |   |     |                                   |  |   | (3.0  | )
|Partner contributions                                                    |  |                                  | 5.6   |   |                                            |   |     |                                   |  |   | 5.6   |  
|Distributions                                                            |  |                                  | (63.4 | ) |                                            |   |     |                                   |  |   | (63.4 | )
|Comprehensive income:                                                    |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Net income                                                               |  |                                  | 8.3   |   |                                            |   |     |                                   |  |   | 8.3   |  
|Unrealized gain on derivative instruments                                |  |                                  |      |   |                                            |   | 0.7  |                                   |  |   | 0.7   |  
|Change in unrealized gain (loss) on investments in marketable securities |  |                                  |      |   |                                            |   | (0.2 | )                                 |  |   | (0.2  | )
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Comprehensive income                                                     |  |                                  |       |   |                                            |   |      |                                   |  |   | 8.8   |  
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Balance at September 30, 2005                                            |  |                                  | (7.5  | ) |                                            |   | 0.7  |                                   |  |   | (6.8  | )
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Distributions                                                            |  |                                  | (24.9 | ) |                                            |   |     |                                   |  |   | (24.9 | )
|Comprehensive income:                                                    |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Net income                                                               |  |                                  | 14.4  |   |                                            |   |     |                                   |  |   | 14.4  |  
|Unrealized loss on derivative instruments                                |  |                                  |      |   |                                            |   | (1.4 | )                                 |  |   | (1.4  | )
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Comprehensive income                                                     |  |                                  |       |   |                                            |   |      |                                   |  |   | 13.0  |  
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Balance at September 30, 2006                                            |  |                                  | (18.0 | ) |                                            |   | (0.7 | )                                 |  |   | (18.7 | )
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Net proceeds from issuance of common units                               |  |                                  | 75.5  |   |                                            |   |     |                                   |  |   | 75.5  |  
|Redemption of partners interests                                        |  |                                  | (75.8 | ) |                                            |   |     |                                   |  |   | (75.8 | )
|Net proceeds from common unit options exercised                          |  |                                  | 0.2   |   |                                            |   |      |                                   |  |   | 0.2   |  
|Distributions                                                            |  |                                  | (35.3 | ) |                                            |   |     |                                   |  |   | (35.3 | )
|Comprehensive income:                                                    |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Net income                                                               |  |                                  | 102.6 |   |                                            |   |     |                                   |  |   | 102.6 |  
|Unrealized gain on derivative instruments                                |  |                                  |      |   |                                            |   | 2.4  |                                   |  |   | 2.4   |  
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Comprehensive income                                                     |  |                                  |       |   |                                            |   |      |                                   |  |   | 105.0 |  
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  
|Balance at September 30, 2007                                            |  | $                                | 49.2  |   |                                            | $ | 1.7  |                                   |  | $ | 50.9  |  
|                                                                         |  |                                  |       |   |                                            |   |      |                                   |  |   |       |  

The accompanying notes are an integral part of these consolidated financial statements.



95



---

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Cash Flows

(in millons)



|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Year Ended September 30, |       
|                                                                                  |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|Operating activities                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                        | 102.6  |   |      | $ | 14.4   |      |  | $ | 8.3    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |        |   |      |   |        |      |  |   |        |  
|Depreciation                                                                      |  |                          | 59.7   |   |      |   | 54.6   |      |  |   | 37.3   |  
|Amortization                                                                      |  |                          | 23.7   |   |      |   | 22.1   |      |  |   | 13.1   |  
|Amortization of deferred financing costs                                          |  |                          | 2.5    |   |      |   | 2.3    |      |  |   | 2.0    |  
|Write-off of deferred financing costs                                             |  |                          |       |   |      |   |       |      |  |   | 7.6    |  
|Unit-based compensation charges                                                   |  |                          | 0.7    |   |      |   | 0.6    |      |  |   |       |  
|Provision for doubtful accounts                                                   |  |                          | 3.3    |   |      |   | 3.6    |      |  |   | 2.0    |  
|Loss on disposal of assets                                                        |  |                          | 8.0    |   |      |   | 11.5   |      |  |   | 0.7    |  
|Gain on issuance of units in Inergy, L.P.                                         |  |                          | (80.6  | ) |      |   |       |      |  |   |       |  
|Interest of non-controlling partners in Inergy, L.P.s net income (loss)          |  |                          | 36.0   |   |      |   | (8.0   | )    |  |   | 26.8   |  
|Deferred income taxes                                                             |  |                          | 4.8    |   |      |   | (1.4   | )    |  |   | (0.8   | )
|Net assets (liabilities) from price risk management activities                    |  |                          | 17.6   |   |      |   | (10.4  | )    |  |   | (10.0  | )
|Changes in operating assets and liabilities, net of effects from acquisitions:    |  |                          |        |   |      |   |        |      |  |   |        |  
|Accounts receivable                                                               |  |                          | (16.6  | ) |      |   | 4.7    |      |  |   | (19.7  | )
|Inventories                                                                       |  |                          | 8.4    |   |      |   | 28.4   |      |  |   | (34.7  | )
|Prepaid expenses and other current assets                                         |  |                          | 6.2    |   |      |   | (5.7   | )    |  |   | (0.1   | )
|Other assets (liabilities)                                                        |  |                          | 3.0    |   |      |   | (0.7   | )    |  |   | (0.2   | )
|Accounts payable                                                                  |  |                          | 13.8   |   |      |   | (47.4  | )    |  |   | 19.3   |  
|Accrued expenses                                                                  |  |                          | (5.5   | ) |      |   | 12.4   |      |  |   | 14.0   |  
|Customer deposits                                                                 |  |                          | (24.1  | ) |      |   | 18.9   |      |  |   | 18.5   |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                          | 163.5  |   |      |   | 99.9   |      |  |   | 84.1   |  
|                                                                                  |  |                          |       
|Investing activities                                                              |  |                          |        |   |      |   |        |      |  |   |        |  
|Acquisitions, net of cash acquired                                                |  |                          | (99.6  | ) |      |   | (187.2 | )    |  |   | (810.2 | )
|Purchases of property, plant and equipment                                        |  |                          | (100.9 | ) |      |   | (34.5  | )    |  |   | (34.1  | )
|Deferred acquisition costs incurred                                               |  |                          | (0.4   | ) |      |   | (0.7   | )    |  |   | (0.6   | )
|Proceeds from sale of assets                                                      |  |                          | 13.1   |   |      |   | 11.5   |      |  |   | 4.2    |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash used in investing activities                                             |  |                          | (187.8 | ) |      |   | (210.9 | )    |  |   | (840.7 | )

The accompanying notes are an integral part of these consolidated financial statements.



96



---

Inergy Holdings, L.P. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in millions)



|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | -------- | -
|                                                                                                 |  | Year Ended September 30, |       
|                                                                                                 |  | 2007                     |        |   | 2006 |   |        | 2005 | 
|Financing activities                                                                             |  |                          |        |   |      |   |        |      |  |   |          |  
|Proceeds from the issuance of long-term debt                                                     |  | $                        | 434.0  |   |      | $ | 735.3  |      |  | $ | 1,716.0  |  
|Principal payments on long-term debt                                                             |  |                          | (388.3 | ) |      |   | (643.0 | )    |  |   | (1,302.7 | )
|Net proceeds from issuance of Inergy, L.P. common units                                          |  |                          | 104.5  |   |      |   | 127.4  |      |  |   | 410.6    |  
|Net proceeds from issuance of common units                                                       |  |                          | 75.5   |   |      |   |       |      |  |   | 80.0     |  
|Redemption of partners interests                                                                |  |                          | (75.8  | ) |      |   |       |      |  |   | (3.0     | )
|Distributions to non-controlling partners in Inergy, L.P.                                        |  |                          | (98.6  | ) |      |   | (80.3  | )    |  |   | (51.9    | )
|Distributions                                                                                    |  |                          | (35.3  | ) |      |   | (24.9  | )    |  |   | (63.4    | )
|Deferred financing costs incurred                                                                |  |                          |       |   |      |   | (5.0   | )    |  |   | (24.3    | )
|Net proceeds from unit options exercised of Inergy, L.P.                                         |  |                          | 3.9    |   |      |   | 4.0    |      |  |   |         |  
|Net proceeds from unit options exercised                                                         |  |                          | 0.2    |   |      |   |       |      |  |   |         |  
|Net proceeds from partners contributions                                                        |  |                          |       |   |      |   |       |      |  |   | 5.6      |  
|Purchase of subordinated units in Inergy, L.P.                                                   |  |                          |       |   |      |   |       |      |  |   | (3.1     | )
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Net cash provided by financing activities                                                        |  |                          | 20.1   |   |      |   | 113.5  |      |  |   | 763.8    |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Effect of foreign exchange rate changes on cash                                                  |  |                          |       |   |      |   |       |      |  |   | 0.1      |  
|                                                                                                 |  |                          |       
|Net increase (decrease) in cash                                                                  |  |                          | (4.2   | ) |      |   | 2.5    |      |  |   | 7.3      |  
|Cash at beginning of period                                                                      |  |                          | 12.1   |   |      |   | 9.6    |      |  |   | 2.3      |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Cash at end of period                                                                            |  | $                        | 7.9    |   |      | $ | 12.1   |      |  | $ | 9.6      |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Supplemental disclosure of cash flow information                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Cash paid during the year for interest                                                           |  | $                        | 55.4   |   |      | $ | 52.9   |      |  | $ | 30.2     |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Cash paid during the year for taxes                                                              |  | $                        | 1.4    |   |      | $ | 1.1    |      |  | $ | 1.7      |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Supplemental schedule of noncash investing and financing activities                              |  |                          |        |   |      |   |        |      |  |   |          |  
|Additions to covenants not to compete through the issuance of noncompete obligations             |  | $                        | 5.5    |   |      | $ | 9.6    |      |  | $ | 7.9      |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Net change to property, plant and equipment through accounts payable and accrued expenses        |  | $                        | 0.5    |   |      | $ | 4.1    |      |  | $ |         |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Increase (decrease) in the fair value of long-term debt and related interest rate swap liability |  | $                        | 1.1    |   |      | $ | (2.0   | )    |  | $ | 1.6      |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Goodwill related to the conversion of Inergy, L.P. special units                                 |  | $                        | 10.8   |   |      | $ |       |      |  | $ |         |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Change in unrealized investment holding gain                                                     |  | $                        |       |   |      | $ |       |      |  | $ | (0.2     | )
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Partner notes payable issued in connection with the payment of distributions                     |  | $                        |       |   |      | $ |       |      |  | $ | 15.0     |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|Acquisitions, net of cash acquired:                                                              |  |                          |        |   |      |   |        |      |  |   |          |  
|Current assets                                                                                   |  | $                        | 0.4    |   |      | $ | 32.4   |      |  | $ | 76.7     |  
|Property, plant and equipment                                                                    |  |                          | 76.5   |   |      |   | 29.7   |      |  |   | 520.2    |  
|Intangible assets                                                                                |  |                          | 13.4   |   |      |   | 77.9   |      |  |   | 130.9    |  
|Goodwill                                                                                         |  |                          | 14.9   |   |      |   | 83.8   |      |  |   | 171.1    |  
|Other assets                                                                                     |  |                          |       |   |      |   | 0.2    |      |  |   | 2.4      |  
|Current liabilities                                                                              |  |                          | (5.6   | ) |      |   | (36.8  | )    |  |   | (91.1    | )
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  
|                                                                                                 |  | $                        | 99.6   |   |      | $ | 187.2  |      |  | $ | 810.2    |  
|                                                                                                 |  |                          |        |   |      |   |        |      |  |   |          |  

The accompanying notes are an integral part of these consolidated financial statements.



97



---

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Organization and Basis of Presentation

Organization

Inergy Holdings, L.P. (formerly Inergy Holdings, LLC) (the Company or Holdings) 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 has no operations of its own but 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 0.9% 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. Inergy 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 Inergy Propane, 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 Inergy Propane.

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 Inergys business. These costs, which totaled approximately $6.6 million, $8.7 million and $3.0 million for the years ended September 30, 2007, 2006 and 2005, respectively, include
compensation and benefits paid to officers and employees of Inergy GP, LLC and its affiliates.

As of September 30, 2007, Holdings owns an aggregate
10.3% interest in Inergy, inclusive of ownership of the Non-Managing General Partner and Managing General Partner. This ownership is comprised of an approximate 0.9% general partnership interest and a 9.4% limited partnership interest. The Company
also owns all of the incentive distribution rights provided for in the Inergy partnership agreement, which entitles Holdings to receive increasing percentages, up to 48%, of any cash distributed by Inergy in excess of $0.33 per unit in any quarter.

Nature of Operations

Inergy is engaged primarily in
the sale, distribution, storage, marketing, trading, processing and fractionation 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 primarily concentrated in the Midwest, Northeast, and South regions of the United States.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Inergy Holdings,
L.P., its wholly owned subsidiaries, Inergy Partners, LLC (Partners), Inergy GP, LLC (GP), IPCH Acquisition Corp.



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Notes to Consolidated Financial Statements(Continued)



(IPCHA) and its controlled subsidiary, Inergy. IPCHA is a subsidiary created as a result of transactions with Inergy. 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 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.

Reclassifications and Restatements

Certain
prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income. On May 19, 2006, the Company restated its consolidated financial statements for the fiscal years ended
September 30, 2005, 2004 and 2003 to defer recorded non-cash gains on the limited partnership units of Inergy it owns 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). These restated financial statements were filed with the SEC on May 19, 2006 on Form 10-K/A. The changes have no prior, current or future impact on the cash
available for distributions to unitholders.

Note 2. Accounting Policies

Financial Instruments and 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 transaction.

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. 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. Any ineffective portion of the fair value hedges is recognized as cost of product sold in the current period. Inergy recognized a net gain of $0.1 million in the year ended September 30, 2007,
related to the ineffective portion of its fair value hedging instruments. In addition, for the year ended September 30, 2007, Inergy recognized a net gain of $1.0 million related to the portion of fair value hedging instruments that it excluded
from its assessment of hedge effectiveness.

Inergy also enters into derivative financial instruments that qualify as cash flow hedges, which hedge the
exposure of variability in expected future cash flows predominantly attributable to forecasted purchases to supply fixed price sale contracts. These derivatives are recorded on the balance sheet at fair value as price risk management assets or
liabilities. The effective portion of the gain or loss on these cash flow hedges is recorded in



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Notes to Consolidated Financial Statements(Continued)



other comprehensive income in partners capital and reclassified into earnings in the same period in which the hedge transaction affects earnings. Any
ineffective portion of the gain or loss is recognized as cost of product sold in the current period. The Companys Accumulated other comprehensive income (loss) for its investment in Inergy was $1.7 million and $(0.7) million at
September 30, 2007 and 2006, respectively.

The cash flow impact of derivative 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 later of 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 later of 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 storage services are provided.

Expense Classification

Cost of product 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 the Company other than those described above in cost of product sold and depreciation and amortization. Certain of Inergys operating and administrative expenses and depreciation and amortization are incurred in the distribution of
its product sales but are not included in cost of product sold. These amounts were $96.8 million, $93.1 million and $67.1 million during the years ended September 30, 2007, 2006, and 2005, respectively.

Credit Risk and Concentrations

Inergy is both a retail and wholesale
supplier of propane gas. Inergy 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 are based on specific identification and historical collection results and have generally been within managements expectations.

Inergy enters into netting agreements with certain wholesale customers to mitigate its credit risk. As a result of adopting EITF 04-13 in the year ended September 30, 2006, appropriate receivables and payables
are reflected at a net balance.

Three suppliers, ExxonMobil Oil Corp. (13%), BP Amoco Corp. (12%) and Sunoco, Inc. (12%), accounted for approximately
37% of propane purchases during the past fiscal year. Inergy believes that contracts with these suppliers will enable it to purchase most of its supply needs at market prices and ensure 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
Inergys revenues are derived from sources within the United States, and all of its long-lived assets are located in the United States.

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.



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Notes to Consolidated Financial Statements(Continued)



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. Wholesale propane and other liquids inventories are designated under a fair value hedge program and are consequently marked to market. All wholesale propane and other liquids inventories being hedged and carried at market value
at September 30, 2007 and 2006 amount to $59.5 million and $67.8 million, respectively. Inventories for midstream operations are stated at the lower of cost or market determined using the first-in-first-out method.

Shipping and Handling Costs

Shipping and handling costs are recorded
as part of cost of product 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 

Inergy reviews its long-lived assets for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), 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. Inergy has determined that no impairment exists as of September 30, 2007. See Note 4 for a discussion of assets held for sale at September 30, 2007 and 2006.

Identifiable Intangible Assets

The Company has recorded certain
identifiable intangible assets, including customer accounts, covenants not to compete, trademarks, deferred financing costs and deferred acquisition costs. Customer accounts, covenants not to compete, and trademarks have arisen from the various
acquisitions by Inergy. Deferred financing costs represent financing costs incurred in obtaining financing and are being amortized over the term of the related debt. Deferred acquisition costs represent costs incurred on acquisitions that Inergy is
actively pursuing. 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.



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



|                         |  |       
|------------------------ |  | ------
|                         |  | Years 
|Customer accounts        |  | 15    
|Covenants not to compete |  | 2  10
|Deferred financing costs |  | 1  10

Trademarks have been assigned an indefinite economic life and are not being amortized, but are subject to an
annual impairment evaluation.

Estimated amortization, including amortization of deferred financing costs reported as interest expense, for the next five
years ending September 30, is as follows (in millions):



|                          |  |   |     
|------------------------- |  | - | ----
|Year Ending September 30, |  |  
|2008                      |  | $ | 25.1
|2009                      |  |   | 24.4
|2010                      |  |   | 22.6
|2011                      |  |   | 21.7
|2012                      |  |   | 21.0

Goodwill

Goodwill is recognized pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS 142) for various acquisitions by Inergy as the excess of the cost of the
acquisitions over the fair value of the related net assets at the date of acquisition. Under SFAS 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, Inergy identified four reporting units. 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 on a specific identification basis. 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.

Inergy has completed the impairment test for each of its reporting units and determined that no impairment existed as of September 30, 2007.

Income Taxes

The earnings of the Company, its limited liability
subsidiaries and Inergy 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 Inergy
and the limited liability subsidiaries. Federal and state income taxes are provided on the earnings of the subsidiaries incorporated as taxable entities (IPCHA and Services). These corporations account for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes (SFAS 109). SFAS 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



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Notes to Consolidated Financial Statements(Continued)



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.

Taxes Collected from Customers and Remitted to Governmental Authorities

The Company accounts for the collection and remittance of all taxes on a net tax basis. As a result, these amounts are not reflected in the consolidated statements of
operations.

Customer Deposits

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

Computer Software Costs

The Company includes in property, plant and equipment costs associated with the acquisition of computer software.
Inergy amortizes computer software costs on a straight-line basis over expected periods of benefit, which generally are five years.

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 $735.3 million and $679.6 million as of September 30, 2007 and 2006, respectively.
See Note 5 for the fair value of Inergys derivative financial instruments.

Comprehensive Income (Loss)

Comprehensive income includes net income and other comprehensive income, which can include, but is not limited to, foreign currency translation adjustments and unrealized
gains and losses on derivative financial instruments. Accumulated other comprehensive income (loss) at September 30, 2007, 2006 and 2005 was $1.7 million, $(0.7) million and $0.7 million, respectively, and consisted entirely of unrealized gains
(losses) on derivative instruments.

Pursuant to SFAS 133, Inergy records the effective portion of the unrealized 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. Gains are recognized at the dates cash investments are made unless the third-party investors are entitled to a preferential return on their investments.



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Notes to Consolidated Financial Statements(Continued)



Income Per Unit

The Company calculates basic net income per limited partner unit by dividing net income applicable to partners common interest, after considering priority distributions, by the weighted average number of units outstanding. Diluted net
income per limited partner unit is computed by dividing net income, after considering priority distributions, by the weighted average number of units outstanding and the effect of dilutive units granted under the Long Term Incentive Plan.

Accounting for Unit-Based Compensation

The Company
and Inergy each have a unit-based employee compensation plan, which are accounted for under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
123R), 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 (APB 25), and amends SFAS
No. 95, Statement of Cash Flows.SFAS 123(R) requiresall share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

The Company adopted SFAS 123(R) on October 1, 2005 using the modified prospective method. Under the modified prospective method, compensation cost is recognized
beginning with the effective date (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to effective date of SFAS 123(R) that remain unvested as of the effective date. Under
this method, SFAS 123(R) applies to new awards and to awards modified, repurchased, or cancelled after the adoption date of October 1, 2005. The compensation cost for the portion of awards for which the requisite service has not been rendered
that are outstanding as of October 1, 2005 will be recognized as the requisite service is rendered. The compensation cost for that portion of awards is based on the fair value of those awards as of the grant-date and was calculated for pro
forma disclosures under SFAS 123. The compensation cost for those earlier awards is attributed to periods beginning on or after October 1, 2005 using the attribution method that was used under SFAS 123.

The amount of compensation expense recorded by Inergy under the provisions of SFAS 123(R) during the years ended September 30, 2007 and 2006 was approximately $0.7
million and $0.6 million, respectively. The compensation expense for the years ended September 30, 2007 and 2006 includes approximately $0.3 million of unit-based compensation expense for Holdings.

The following table illustrates the effect on net income and net income per limited partner unit as if the Company had applied the fair value recognition provision of
SFAS No. 123(R) to unit-based employee compensation for the year ended September 30, 2005. For purposes of pro forma disclosures, the estimated fair value of an option is amortized to expense over the options vesting period (in
millions, except per unit data):



|                                                                                                         |  |      |     
|-------------------------------------------------------------------------------------------------------- |  | ---- | ----
|                                                                                                         |  | 2005
|Net income applicable to limited partner units as reported                                               |  | $    | 8.3 
|Deduct: Total unit-based employee compensation expense determined under fair value method for all awards |  |      | 0.1 
|                                                                                                         |  |      |     
|Pro forma net income                                                                                     |  | $    | 8.2 
|                                                                                                         |  |      |     
|Pro forma net income per limited partner unit                                                            |  |      |     
|Basicas reported                                                                                        |  | $    | 0.49
|Basicpro forma                                                                                          |  | $    | 0.48
|Dilutedas reported                                                                                      |  | $    | 0.48
|Dilutedpro forma                                                                                        |  | $    | 0.48



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Notes to Consolidated Financial Statements(Continued)



Segment Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 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 131 defines operating 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 131, Inergy examined the way it organizes its business internally for making operating decisions and
assessing business performance. See Note 14 for disclosures related to the Companys propane and midstream segments.

Recently Issued Accounting
Pronouncements

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) was issued in
February 2007 to permit entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. SFAS 159 is required to be adopted by Inergy for the fiscal year ended September 30, 2009. The Company is evaluating the potential financial statement impact of SFAS 159 to
its consolidated financial statements.

SFAS No. 157, Fair Value Measurements (SFAS 157) was issued in September 2006 to
define fair value, establish a framework for measuring fair value according to generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS 157 is required to be adopted by Inergy for the fiscal year ended
September 30, 2009. The Company is evaluating the potential financial statement impact of SFAS 157 to its consolidated financial statements.

SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155) amends SFAS 133, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It also establishes a requirement to evaluate securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. The Company has adopted SFAS 155 for all financial instruments acquired or issued on or after
October 1, 2006. The adoption of SFAS 155 has not had a material effect on the consolidated financial statements in the current year as well as all prior years considered.

Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), provides guidance on
the quantification of prior year misstatements. SAB 108 requires that registrants use both the income statement (roll-over) approach and the balance sheet (iron curtain) approach when evaluating the materiality of a misstatement and contains
guidance for correcting the errors under this dual approach. The Company has adopted SAB 108 for the fiscal year ended September 30, 2007, which did not have a material effect on the consolidated financial statements in the current year as well
as all prior years considered.

SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154) is a replacement of APB
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle and changes the accounting for and
a reporting of a change in accounting principle. SFAS 154 requires retrospective application to the prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. The Company has adopted SFAS 154
for the fiscal year ended September 30, 2007, which did not have a material effect on the consolidated financial statements in the current year as well as all prior years considered.



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Notes to Consolidated Financial Statements(Continued)



EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be
Presented in the Income Statement (That Is, Gross Versus Net Presentation) requires companies to disclose their policy regarding the presentation of tax receipts. The scope of this guidance includes any tax assessed by a governmental authority
that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes (gross receipts taxes are excluded). An entity is not required to
reevaluate its existing policies related to taxes assessed by a governmental authority as a result of this consensus. In addition, for any such taxes that are reported on a gross basis, an entity should disclose the amounts of those taxes in interim
and annual financial statements for each period for which an income statement is presented if those amounts are significant. The Company has early adopted the consensus reached in this EITF for the fiscal year ended September 30, 2007, which
did not have a material effect on the consolidated financial statements in the current year as well as all prior years considered.

FASB Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 provides a recognition threshold and measurement attribute for the recognition and measurement of a tax
position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure. FIN 48 is required to be adopted by the Company for the fiscal year ended
September 30, 2008. The Company is evaluating the potential financial statement impact of FIN 48 to our consolidated financials statements.

Note
3. Acquisitions

During the fiscal year ended September 30, 2007, Inergy made 13 acquisitions, including Columbus Butane Company, Inc., Hometown
Propane, Inc., Quality Propane, Inc., Bay Cities Gas Corporation, Prince Oil Company, Inc., DeCock Bottled Gas & Appliance, Inc. and the propane assets of five other retail locations. Inergy also acquired a natural gas liquids storage
facility located near Bath, New York (the Bath Storage Facility), and completed the acquisition of the 24-mile lateral pipeline (South Lateral Pipeline) connecting its Stagecoach natural gas storage facility to Tennessee Gas
Pipeline Companys Line 300. The aggregate purchase price of these 13 acquisitions, net of cash acquired, was approximately $98.9 million. The purchase price allocation for these acquisitions has been prepared on a preliminary basis pending
final asset valuation and asset rationalization, and changes are expected when additional information becomes available.Changes to final asset valuation of prior fiscal year acquisitions have been included in the Companys consolidated
financial statements but are not material.

Regulation S-X of the Securities and Exchange Commission requires that for any significant subsidiary, which is
defined as any significant business combination or disposition of assets, pro-forma information must be disclosed. None of the fiscal 2007 acquisitions were, individually or in the aggregate, considered a significant subsidiary. Therefore, no
pro-forma results from operations are provided.

As a result of the fiscal 2007 acquisitions, Inergy acquired $14.4 million of goodwill and $19.5 million
of intangible assets, consisting of the following (in millions):



|                        |  |   |     
|----------------------- |  | - | ----
|Customer accounts       |  | $ | 12.8
|Non-compete agreements  |  |   | 6.7 
|                        |  |   |     
|Total intangible assets |  | $ | 19.5

The weighted average amortization period of amortizable intangible assets acquired during the year ended
September 30, 2007, is approximately 10 years.

During the fourth quarter of 2007, Inergy finalized its purchase price allocation of the fair value of
the Bath Storage Facilitys assets based on certain third party information. The Company recorded a purchase price

adjustment which increased the fair
value of its fixed assets (including land and wells) and accumulated



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Notes to Consolidated Financial Statements(Continued)



depreciation by $14.4 million and $0.9 million, respectively, decreased goodwill, non-compete agreements and accumulated amortization by $12.4 million, $3.2
million and $0.3 million respectively, and increased customer accounts by $1.2 million.

Note 4. Certain Balance Sheet Information

Inventories

Inventories consist of the following at
September 30, 2007 and 2006, respectively (in millions):



|                               |  |      |       |      |   |      
|------------------------------ |  | ---- | ----- | ---- | - | -----
|                               |  | 2007 |       | 2006
|Propane gas and other liquids  |  | $    | 88.5  |      | $ | 96.1 
|Appliances, parts and supplies |  |      | 12.0  |      |   | 12.0 
|                               |  |      |       |      |   |      
|                               |  | $    | 100.5 |      | $ | 108.1
|                               |  |      |       |      |   |      

Property, Plant and Equipment

Property, plant and equipment consists of the following at September 30, 2007 and 2006, respectively (in millions):



|                                   |  |      |         |      |   |      
|---------------------------------- |  | ---- | ------- | ---- | - | -----
|                                   |  | 2007 |         | 2006
|Tanks and plant equipment          |  | $    | 619.2   |      | $ | 578.4
|Land and buildings                 |  |      | 233.9   |      |   | 135.5
|Vehicles                           |  |      | 97.7    |      |   | 89.3 
|Construction in process            |  |      | 27.7    |      |   | 24.7 
|Office furniture and equipment     |  |      | 21.8    |      |   | 20.0 
|                                   |  |      |         |      |   |      
|                                   |  |      | 1,000.3 |      |   | 847.9
|Less: accumulated depreciation     |  |      | 179.6   |      |   | 124.4
|                                   |  |      |         |      |   |      
|Property, plant and equipment, net |  | $    | 820.7   |      | $ | 723.5
|                                   |  |      |         |      |   |      

Depreciation expense totaled $59.7 million, $54.6 million, and $37.3 million for the years ended
September 30, 2007, 2006 and 2005, respectively.

At September 30, 2007 and 2006, Inergy capitalized interest of $3.1 million and $0.4 million,
respectively, related to certain Midstream asset expansion projects.

As discussed in Note 3, the Company recorded a purchase price adjustment in the
fourth quarter of 2007 related to the Bath Storage Facility acquisition which increased the value of fixed assets and accumulated depreciation by $14.4 million and $0.9 million, respectively. In the fourth quarter of 2006, the Company recorded a
purchase price adjustment related to the Stagecoach acquisition which decreased the value of fixed assets and accumulated depreciation by $84.4 million and $4.3 million, respectively.

The property, plant and equipment balances above at September 30, 2007 and 2006 include approximately $8.5 million and $6.8 million, respectively, of propane operations assets deemed held for sale under the
provisions of SFAS 144. These assets were identified primarily during the fourth quarters of 2007 and 2006 as a result of the integration of the larger retail propane acquisitions closed since November 2004 as Inergy has focused on eliminating
redundant operations, primarily tanks and equipment, vehicles and certain real estate. As a result, the carrying value of these assets was reduced to their estimated recoverable value less anticipated disposition costs, resulting in losses of
approximately $6.2 million and $6.6 million for the years ended September 30, 2007 and 2006, respectively. The $6.2 million and $6.6 million charges are included as components of operating income as losses on disposal of assets. When aggregated
with other realized losses, such amounts totaled $8.0 million and $11.5 million, respectively.



107



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Intangible Assets

Intangible assets consist of the following at September 30, 2007 and 2006, respectively (in millions):



|                                                              |  |      |       |   |      |   |       |  
|------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                              |  | 2007 |       |   | 2006 |  
|Customer accounts                                             |  | $    | 238.8 |   |      | $ | 226.0 |  
|(accumulated amortizationcustomer accounts)                  |  |      | (48.6 | ) |      |   | (33.7 | )
|Covenants not to compete                                      |  |      | 60.9  |   |      |   | 54.2  |  
|(accumulated amortizationcovenants not to compete)           |  |      | (22.6 | ) |      |   | (14.6 | )
|Deferred financing and other costs                            |  |      | 23.4  |   |      |   | 23.6  |  
|(accumulated amortizationdeferred financing and other costs) |  |      | (7.8  | ) |      |   | (4.6  | )
|Trademarks                                                    |  |      | 32.8  |   |      |   | 32.8  |  
|                                                              |  |      |       |   |      |   |       |  
|Total intangible assets, net                                  |  | $    | 276.9 |   |      | $ | 283.7 |  
|                                                              |  |      |       |   |      |   |       |  

Amortization and interest expense associated with the above described intangible assets at September 30,
2007, 2006 and 2005 amounted to $26.2 million, $24.3 million and $14.8 million, respectively.

Note 5. Price Risk Management and Financial Instruments

Commodity Derivative Instruments and Price Risk Management

Inergy, through its wholesale operations, sells propane to energy related businesses and may use a variety of financial and other instruments including forward contracts involving physical delivery of propane. In addition, Inergy manages
its own commodity risks using forward physical and futures contracts. Inergy 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.

As discussed in Note 2, all of these financial instruments
are accounted for under SFAS 133. Inergy has entered into 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 Inergys attempts to maintain a balanced portfolio of derivative financial instruments and inventory positions in terms of notional amounts.

Notional Amounts and Terms

The notional amounts and terms of these financial instruments include the following at
September 30, 2007 and 2006 (in millions):



|                                         |  |                  |  |                     |  |                  |  |                    
|---------------------------------------- |  | ---------------- |  | ------------------- |  | ---------------- |  | -------------------
|                                         |  | September 30,   
|                                         |  | 2007             |  | 2006               
|                                         |  | Fixed PricePayor |  | Fixed PriceReceiver |  | Fixed PricePayor |  | Fixed PriceReceiver
|Propane, crude and heating oil (barrels) |  | 5.0              |  | 4.8                 |  | 8.0              |  | 7.5                
|Natural gas (MMBTUs)                    |  | 7.9              |  | 7.9                 |  | 5.5              |  | 5.4                

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



108



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Fair Value

The
fair value of the derivatives and inventory exchange contracts related to price risk management activities as of September 30, 2007 and September 30, 2006 was assets of $55.0 million and $46.2 million, respectively, and liabilities of
$49.6 million and $49.0 million, respectively.

Inergy uses observable market values for determining the fair value of its trading instruments. In cases
where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis.
Inergys risk management department regularly compares valuations to independent sources and models.

The net change in unrealized gains and losses
related to all price risk management activities, including wholesale inventory accounted for under a fair value hedge and deferred gains and losses accounted for under a cash flow hedge, for the years ended September 30, 2007, 2006 and 2005 of
$23.9 million, $(39.5) million, and $24.1 million, respectively, are included in cost of product sold in the accompanying consolidated statements of operations or are deferred in the Companys Accumulated Other Comprehensive Income and interest
of non-controlling partners in Inergy, L.P. in the accompanying consolidated balance sheets. Included in the $23.9 million above is $9.9 million which is deferred in the Companys Accumulated Other Comprehensive Income and interest of
non-controlling partner in Inergy, L.P., $16.6 million due to the reversal of the balance sheet items recorded in the year ended September 30, 2006, and changes in fair value of other price risk management activities. Included in the above
$(39.5) million is $(19.4) million due to the reversal of the non-cash gain recorded in the year ended September 30, 2005, and changes in fair value of other price risk management activities, including $(16.6) million which is deferred in the
Companys Accumulated Other Comprehensive Income and interest of non-controlling partners in Inergy, L.P. at September 30, 2006. Included in the above $24.1 million is a non-cash gain of $19.4 million related to derivative contracts
maturing in the following year and changes in fair value of other price risk management activities. The market prices used to value these transactions reflect managements best estimate considering various factors including closing exchange and
over-the-counter quotations, recent transactions, time value and volatility factors underlying the commitments.

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, 2007 and 2006 where settlement has not yet occurred (in millions):



|                                                                                  |  |                         |       |   |      |   |      |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ---- | -
|                                                                                  |  | Year EndedSeptember 30, |      
|                                                                                  |  | 2007                    |       |   | 2006 |  
|Net fair value gain (loss) of contracts outstanding at beginning of year          |  | $                       | (2.8  | ) |      | $ | 8.8  |  
|Initial recorded value of new contracts entered into during the year              |  |                         | 1.4   |   |      |   |     |  
|Net change in physical exchange contracts                                         |  |                         | (2.0  | ) |      |   | (0.6 | )
|Change in fair value of contracts attributable to market movement during the year |  |                         | 20.6  |   |      |   | (4.4 | )
|Realized gains                                                                    |  |                         | (11.8 | ) |      |   | (6.6 | )
|                                                                                  |  |                         |       |   |      |   |      |  
|Net fair value of contracts outstanding at end of year                            |  | $                       | 5.4   |   |      | $ | (2.8 | )
|                                                                                  |  |                         |       |   |      |   |      |  

Of the outstanding unrealized gain (loss) as of September 30, 2007 and 2006, $5.5 million and $(2.7) million
have or will mature within 12 months, respectively. Contracts with a maturity of greater than one year were $(0.1) million at September 30, 2007 and 2006.

During the years ended September 30, 2007, 2006, and 2005, Inergy recognized a net gain of $0.1 million and less than $0.1 million, and a net loss of $0.2 million, respectively, related to the ineffective portion of its fair



109



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



value commodity hedging instruments and a net gain of $1.0 million, and a net loss of $0.4 million and $0.6 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.

The total amount of deferred cash flow hedge gains
recorded in Inergys other comprehensive income as of September 30, 2007 in the amount of $9.2 million is expected to be reclassified to future earnings predominantly within the next twelve months, contemporaneously with the timing that
related physical purchase of the underlying commodity affect earnings. During the years ended September 30, 2007 and 2006, there was no material ineffectiveness related to cash flow hedges. The total amount of deferred cash flow hedge losses
recorded in Inergys other comprehensive income as of September 30, 2006 in the amount of $16.6 million was reclassified to earnings during the fiscal year ended September 30, 2007, none of which was related to forecasted transactions
that were no longer considered probable of occurring. 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
Inergys 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. Inergy takes an active role in managing and controlling market and credit risk and has established control procedures, which are
reviewed on an ongoing basis. Inergy monitors market risk through a variety of techniques, including daily reporting of the portfolios position to senior management. Inergy attempts to minimize credit risk exposure through credit policies and
periodic monitoring procedures as well as through customer deposits, letters of credit and entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed
appropriate. The counterparties associated with assets from price risk management activities as of September 30, 2007 and 2006 were propane retailers, resellers, energy marketers and dealers.

Note 6. Long-Term Debt

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



|                                                                                                     |  |               |       |      |   |      
|---------------------------------------------------------------------------------------------------- |  | ------------- | ----- | ---- | - | -----
|                                                                                                     |  | September 30,
|                                                                                                     |  | 2007          |       | 2006
|Inergy credit agreement                                                                              |  | $             | 71.0  |      | $ | 22.7 
|Inergy senior unsecured notes                                                                        |  |               | 622.4 |      |   | 621.4
|Inergy obligations under noncompetition agreements and notes to former owners of businesses acquired |  |               | 16.8  |      |   | 15.6 
|Holdings bank facility                                                                               |  |               | 7.0   |      |   | 5.3  
|Holdings term loan                                                                                   |  |               | 25.0  |      |   | 25.0 
|                                                                                                     |  |               |       |      |   |      
|                                                                                                     |  |               | 742.2 |      |   | 690.0
|Less current portion                                                                                 |  |               | 57.5  |      |   | 16.9 
|                                                                                                     |  |               |       |      |   |      
|                                                                                                     |  | $             | 684.7 |      | $ | 673.1
|                                                                                                     |  |               |       |      |   |      



110



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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. In addition, the Term Loan is guaranteed by IPCHA. The proceeds from this loan were used to acquire 769,941 special units in Inergy 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.

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 Holdings and a $5 million working capital revolver for IPCHA. The maturity
date of the Bank Facility is July 22, 2008 and is collateralized by certain of our interests in Inergy. In addition, the Bank Facility is guaranteed by Partners. The prime rate and LIBOR plus the applicable spreads were 7.51% at
September 30, 2007 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.

Inergys Credit Agreement

On December 17, 2004, Inergy 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 (the Working Capital Facility) and a $350 million revolving acquisition facility (the Acquisition Facility). The Credit Agreement
carries terms, conditions and covenants substantially similar to the 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 Inergys domestic subsidiaries. In October 2006, Inergy amended the Credit Agreement with
existing lenders primarily to increase the effective amount of working capital borrowing capacity available to us under the two facilities from $150 million to $200 million utilizing capacity under the acquisition credit facility for working capital
needed during the winter heating season. Other terms, conditions, and covenants remained materially unchanged. The Credit Agreement is guaranteed by each of Inergys domestic subsidiaries.

Inergy is required to reduce the principal outstanding on the Working Capital Facility to $10 million or less for a minimum of 30 consecutive days during the period
commencing March 1 and ending September 30. As such, $10 million of the outstanding balance at September 30, 2007 and 2006 have been classified as a long-term liability in the accompanying consolidated balance sheets. At
September 30, 2007, the balance outstanding under the Credit Agreement was $71.0 million, including $40.0 million under the Acquisition Facility and $31.0 million under the Working Capital Facility. At September 30, 2006, borrowings under
the Credit Agreement were $22.7 million under the Working Capital Facility. The prime rate and LIBOR plus the applicable spreads were between 7.0% and 7.2% at September 30, 2007, and between 7.08% and 8.50% at September 30, 2006, for all
outstanding debt under the Credit Agreement.

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 $327.4 million and
$369.4 million at September 30, 2007 and 2006, respectively. Outstanding standby letters of credit under the Credit Agreement amounted to $26.6 million and $32.9 million at September 30, 2007 and 2006, respectively.



111



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Notes to Consolidated Financial Statements(Continued)



At September 30, 2007, the Company was in compliance with all of its debt covenants.

Senior Unsecured Notes

2016 Senior Notes

On January 11, 2006, Inergy and its wholly owned subsidiary, Inergy Finance Corp (Finance Corp. and together with Inergy, the Issuers),
issued $200 million aggregate principal amount of 8.25% senior unsecured notes due 2016 (the 2016 Senior Notes) in a private placement to eligible purchasers. The 2016 Senior Notes contain covenants similar to the 2014 Senior Notes.
Inergy used the net proceeds of the offering to repay outstanding indebtedness under its revolving acquisition credit facility. The 2016 Senior Notes represent senior unsecured obligations of Inergy and rank pari passuin right of payment
with all other present and future senior indebtedness of Inergy. The 2016 Senior Notes are jointly and severally guaranteed by all of Inergys current domestic subsidiaries and have certain call features which allow Inergy to redeem the notes
at specified prices based on the date redeemed as described below.

On May 18, 2006, Inergy completed an offer to exchange its existing 8.25% 2016
Senior Notes for $200 million of 8.25% senior notes due 2016 (the 2016 Exchange Notes) that are registered and do not carry transfer restrictions, registration rights and provisions for additional interest. The 2016 Exchange Notes did
not provide Inergy with any additional proceeds and satisfied our obligations under the registration rights agreement.

Before March 1, 2009, Inergy
may, at any time or from time to time, redeem up to 35% of the aggregate principal amount of the 2016 Senior Notes with the net proceeds of a public or private equity offering at 108.25% 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 150 days of the date of the closing of such equity offering.

The 2016 Senior Notes are redeemable, at Inergys option, in whole or in part, at any time on or after March 1, 2011, 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 |  
|2011                |  | 104.125    | %
|2012                |  | 102.750    | %
|2013                |  | 101.375    | %
|2014 and thereafter |  | 100.000    | %

2014 Senior Notes

On December 22, 2004, the Issuers completed a private placement of $425 million in aggregate principal amount of 6.875% senior unsecured notes due 2014 (the 2014 Senior Notes). The 2014 Senior Notes contain covenants
similar to the Credit Agreement. The net proceeds were used to repay outstanding indebtedness.

The 2014 Senior Notes represent senior unsecured
obligations and rank pari passu in right of payment with all of Inergys other present and future senior indebtedness. The 2014 Senior Notes are jointly and severally guaranteed by all current domestic subsidiaries and have certain call
features, which allow Inergy to redeem the 2014 Senior Notes at specified prices based on the date redeemed as described below.

On October 26, 2005,
Inergy completed an offer to exchange the 2014 Senior Notes for $425 million of 6.875% senior notes due 2014 (the 2014 Exchange Notes) that are registered and do not carry transfer restrictions,



112



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



registration rights and provisions for additional interest. The 2014 Exchange Notes did not provide Inergy with any additional proceeds and satisfied its
obligations under the registration rights agreement.

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 2014 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 2014 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    | %

Inergy is party to five 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 unsecured notes due 2014 and contain call
provisions consistent with the underlying senior unsecured notes, require the counterparty to pay the Company an amount based on the stated fixed interest rate due every six months. In exchange, Inergy 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 0.92% and 2.20% applied to the same notional amount of $125 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. At September 30, 2007, Inergy had recorded an approximate
$2.5 million reduction in the fair market value of the related senior unsecured notes with a corresponding change in the fair value of its interest rate swaps, which are recorded in other long-term liabilities.

Notes Payable and Other Obligations

Non-interest bearing obligations
due under noncompetition agreements and other note payable agreements consist of agreements between Inergy and certain sellers of retail propane companies acquired from fiscal years 1999 through 2007 with payments due through 2017 and imputed
interest ranging from 3.5% to 9.0%. Noninterest-bearing obligations consist of $20.4 million and $19.1 million in total payments due under agreements, less unamortized discount based on imputed interest of $3.7 million and $3.5 million at
September 30, 2007 and 2006, respectively. Additionally, Inergy has a long-term obligation related to a long-term asset management agreement for certain transportation services provided to one of Inergys subsidiaries. The unpaid balance
of this obligation was $8.2 million at September 30, 2007.



113



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The aggregate amounts of principal to be paid on the outstanding long-term debt and other long-term obligations
during the next five years ending September 30 and thereafter are as follows (in millions):



|                                 |  |                  |     |                                |   |      
|-------------------------------- |  | ---------------- | --- | ------------------------------ | - | -----
|                                 |  | OtherObligations |     | Long-term debtand NotesPayable
|2008                             |  | $                | 3.1 |                                | $ | 57.5 
|2009                             |  |                  | 5.1 |                                |   | 3.1  
|2010                             |  |                  |    |                                |   | 2.5  
|2011                             |  |                  |    |                                |   | 52.3 
|2012                             |  |                  |    |                                |   | 1.4  
|Thereafter                       |  |                  |    |                                |   | 625.4
|                                 |  |                  |     |                                |   |      
|Total debt and other obligations |  | $                | 8.2 |                                | $ | 742.2
|                                 |  |                  |     |                                |   |      

Note 7. Leases

Inergy has certain noncancelable operating leases, mainly for office space and vehicles, which expire at various times over the next ten years. Certain of these leases contain terms that provide that the rental payment be indexed to
published information.

Future minimum lease payments under noncancelable operating leases for the next five years ending September 30 and thereafter
consist of the following (in millions):



|                             |  |   |     
|---------------------------- |  | - | ----
|Year Ending September 30,    |  |  
|2008                         |  | $ | 6.7 
|2009                         |  |   | 5.1 
|2010                         |  |   | 3.9 
|2011                         |  |   | 2.6 
|2012                         |  |   | 1.8 
|Thereafter                   |  |   | 3.0 
|                             |  |   |     
|Total minimum lease payments |  | $ | 23.1
|                             |  |   |     

Rent expense for operating leases for the years ending September 30, 2007, 2006, and 2005 totaled $9.7
million, $9.6 million, and $7.9 million, respectively.

Inergy has certain related party leases as discussed in Note 13.



114



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Notes to Consolidated Financial Statements(Continued)



Note 8. Income Taxes

The provision for income taxes for the years ended September 30, 2007, 2006, and 2005 consists of the following (in millions):



|                           |  |                          |     |      |   |      |      |  |   |      |  
|-------------------------- |  | ------------------------ | --- | ---- | - | ---- | ---- |  | - | ---- | -
|                           |  | Year Ended September 30, |    
|                           |  | 2007                     |     | 2006 |   |      | 2005 | 
|Current:                   |  |                          |     |      |   |      |      |  |   |      |  
|Federal                    |  | $                        | 0.9 |      | $ | 1.1  |      |  | $ | 1.1  |  
|State                      |  |                          | 0.8 |      |   | 0.8  |      |  |   | 0.2  |  
|                           |  |                          |     |      |   |      |      |  |   |      |  
|Total current              |  |                          | 1.7 |      |   | 1.9  |      |  |   | 1.3  |  
|                           |  |                          |    
|Deferred:                  |  |                          |     |      |   |      |      |  |   |      |  
|Federal                    |  |                          | 4.3 |      |   | (1.1 | )    |  |   | (0.7 | )
|State                      |  |                          | 0.5 |      |   | (0.2 | )    |  |   | (0.1 | )
|                           |  |                          |     |      |   |      |      |  |   |      |  
|Total deferred             |  |                          | 4.8 |      |   | (1.3 | )    |  |   | (0.8 | )
|                           |  |                          |     |      |   |      |      |  |   |      |  
|Provision for income taxes |  | $                        | 6.5 |      | $ | 0.6  |      |  | $ | 0.5  |  
|                           |  |                          |     |      |   |      |      |  |   |      |  

The effective rate differs from the statutory rate because the income tax provision for the years ended
September 30, 2007, 2006 and 2005, relates to taxable income of the corporations as discussed in Note 2.

Deferred income taxes related to IPCHA
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,
2007 and 2006 are as follows (in millions):



|                                              |  |               |       |   |      |   |       |  
|--------------------------------------------- |  | ------------- | ----- | - | ---- | - | ----- | -
|                                              |  | September 30, |      
|                                              |  | 2007          |       |   | 2006 |  
|Deferred tax assets:                          |  |               |       |   |      |   |       |  
|NOL carryforward                              |  | $             | 0.4   |   |      | $ | 0.9   |  
|                                              |  |               |       |   |      |   |       |  
|                                              |  |               | 0.4   |   |      |   | 0.9   |  
|Deferred tax liabilities:                     |  |               |       |   |      |   |       |  
|Basis difference in stock of acquired company |  |               | (21.0 | ) |      |   | (16.7 | )
|                                              |  |               |       |   |      |   |       |  
|                                              |  |               | (21.0 | ) |      |   | (16.7 | )
|                                              |  |               |       |   |      |   |       |  
|Net deferred tax liability                    |  | $             | (20.6 | ) |      | $ | (15.8 | )
|                                              |  |               |       |   |      |   |       |  

The net operating loss carryforward of $1.2 million fully expires by September 30, 2020.

Note 9. Partners Capital

The partners of the Company receive a
portion of the distributions earned. Distributions paid by the Company to its partners amounted to $35.3 million, $24.9 million and $63.4 million for the years ended September 30, 2007, 2006 and 2005, respectively, or $1.77, $1.23, and $3.70
per unit, respectively, for the periods to which these distributions relate.

The Companys capital is comprised primarily of its equity in Inergy and
the Companys ability to make distributions is contingent upon the distributions it receives from Inergy. While Inergy distributes all available cash, its capital is not all available for distribution.



115



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Notes to Consolidated Financial Statements(Continued)



Common Unit Offerings

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.

In May 2007, the Company sold 1,500,000 common units in a public offering. Immediately following the closing of this offering, the Company redeemed from certain of its original investors, including certain members of
its management, 1,500,000 common units for a per unit amount equal to the net proceeds per common unit the Company received in this offering before expenses. The Company immediately canceled the common units it redeemed from the original investors
so that they are no longer outstanding.

Gain on Issuance of Units in Inergy

On April 25, 2007, the Inergy special units that were issued in August 2005 to Inergy Holdings, L.P. were converted into 919,349 common units as a result of the commercial operation of the Phase II expansion of
the Stagecoach Natural Gas Storage Facility. Upon this conversion, Inergy no longer had a class of equity securities that had distribution rights over any other class of equity interests. As a result, according to Staff Accounting Bulletin
No. 51, the Company recognized the previously deferred gains resulting from issuances of Inergy common units to third parties at a unit price that exceeded the current carrying value of the Companys investment in Inergy common units.
Accordingly, the Company recorded a gain of approximately $80.6 million, which is reflected as a separate item in our consolidated statements of operations.

Note 10. Long Term Incentive Plan

Inergy Holdings, L.P. Long Term Incentive Plan

The Companys general partner sponsors the Inergy Holdings Long Term Incentive Plan (Holdings LTIP) 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 Holdings LTIP consists of four components: restricted units, phantom units, unit appreciation rights and unit options. The Company
has not granted phantom units or unit appreciation rights under the Holdings LTIP as of September 30, 2007. The Holdings LTIP permits the grant of awards covering an aggregate of 2,000,000 units. Through September 30, 2007, we have granted
an aggregate of 772,500 unit options and 1,016 restricted units pursuant to the Holdings LTIP. The Holdings LTIP 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 participates
in distributions and vests over a period of time yet during such time is subject to forfeiture. The compensation committee may 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 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.



116



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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 Holdings LTIP. 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 Holdings LTIP 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,
at the discretion of the compensation committee, in cash. The Company has not granted unit appreciation rights under the Holdings LTIP. 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, at 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.

Distribution Equivalent Rights.

The compensation committee may, in its discretion, grant distribution equivalent rights (DERs) with respect to awards other than restricted units. DERs
entitle the participant to receive cash equal to the amount of any cash distributions made by the Company during the period the Award is outstanding. Payment of a DER may be subject to the same vesting terms as the Award to which it relates.

Unit Options

Unit options issued under the Holdings
LTIP have an exercise price equal to the fair market value of the units on the date of the grant. In general, unit options granted under the Holdings LTIP 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 provide otherwise.



117



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



A summary of the Companys unit option activity for the years ended September 30, 2007, 2006 and 2005 is as
follows:



|                                  |  |                          |  |                               |  |                
|--------------------------------- |  | ------------------------ |  | ----------------------------- |  | ---------------
|                                  |  | Range of Exercise Prices |  | Weighted-AverageExercisePrice |  | Number of Units
|Outstanding at September 30, 2004 |  |                         |  |                              |  |               
|Granted                           |  | $22.50  $33.45          |  | $23.38                        |  | 690,000        
|Exercised                         |  |                         |  |                              |  |               
|Canceled                          |  | $22.50                   |  | $22.50                        |  | 40,000         
|                                  |  |                          |  |                               |  |                
|Outstanding at September 30, 2005 |  | $22.50  $33.45          |  | $23.44                        |  | 650,000        
|Granted                           |  | $31.91  $35.35          |  | $33.89                        |  | 62,500         
|Exercised                         |  |                         |  |                              |  |               
|Canceled                          |  | $22.50  $33.51          |  | $23.95                        |  | 38,000         
|                                  |  |                          |  |                               |  |                
|Outstanding at September 30, 2006 |  | $22.50  $35.35          |  | $24.38                        |  | 674,500        
|Granted                           |  | $34.43  $50.85          |  | $39.73                        |  | 20,000         
|Exercised                         |  | $22.50                   |  | $22.50                        |  | 8,000          
|Canceled                          |  | $22.50                   |  | $22.50                        |  | 16,500         
|                                  |  |                          |  |                               |  |                
|Outstanding at September 30, 2007 |  | $22.50  $50.85          |  | $24.90                        |  | 670,000        
|                                  |  |                          |  |                               |  |                
|Exercisable at September 30, 2007 |  |                          |  |                               |  |               
|                                  |  |                          |  |                               |  |                

Information regarding options outstanding and exercisable as of September 30, 2007 is as follows:



|                         |  |                    |  |                                                |  |                                  |       |                     |   |                               |  
|------------------------ |  | ------------------ |  | ---------------------------------------------- |  | -------------------------------- | ----- | ------------------- | - | ----------------------------- | -
|                         |  | Outstanding        |  | Exercisable                                   
|Range of Exercise Prices |  | OptionsOutstanding |  | Weighted-AverageRemainingContractedLife(years) |  | Weighted- Average Exercise Price |       | Options Exercisable |   | Weighted-AverageExercisePrice
|$22.50                   |  | 525,000            |  | 7.7                                            |  | $                                | 22.50 |                     |  |                               | 
|$29.15                   |  | 12,500             |  | 7.8                                            |  |                                  | 29.15 |                     |  |                               | 
|$30.52  $35.60          |  | 125,000            |  | 8.3                                            |  |                                  | 33.20 |                     |  |                               | 
|$40.69  $45.77          |  | 2,500              |  | 9.9                                            |  |                                  | 44.98 |                     |  |                               | 
|$45.78  $50.85          |  | 5,000              |  | 9.6                                            |  |                                  | 49.28 |                     |  |                               | 
|                         |  |                    |  |                                                |  |                                  |       |                     |   |                               |  
|                         |  | 670,000            |  | 7.9                                            |  | $                                | 24.90 |                     |  |                               | 
|                         |  |                    |  |                                                |  |                                  |       |                     |   |                               |  

The weighted-average remaining contract life for options outstanding at September 30, 2007 was approximately
eight years. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option pricing model using the assumptions outlined in the table below. Expected volatility was based on a combination of historical and
implied volatilities of the Companys stock over a period at least as long as the options expected term. The expected life represents the period of time that the options granted are expected to be outstanding. The risk-free rate is based
on the applicable U.S. Treasury yield curve in effect at the time of the grant of the share options.



|                                               |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                               |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Weighted average fair value of options granted |  | $    | 7.34  |   |      | $ | 6.31  |      |  | $ | 2.61  |  
|Expected volatility                            |  |      | 0.234 |   |      |   | 0.244 |      |  |   | 0.167 |  
|Distribution yield                             |  |      | 4.3   | % |      |   | 4.1   | %    |  |   | 4.0   | %
|Expected life of option in years               |  |      | 5     |   |      |   | 5     |      |  |   | 5     |  
|Risk-free interest rate                        |  |      | 4.2   | % |      |   | 4.9   | %    |  |   | 3.9   | %



118



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Notes to Consolidated Financial Statements(Continued)



The aggregate intrinsic value of options outstanding at September 30, 2007 was $15.3 million. The aggregate
intrinsic value of unit options exercised during the year ended September 30, 2007 was $0.2 million. Aggregate intrinsic value represents the positive difference between the Companys closing stock price on the last trading day of the
fiscal period, which was $47.70 on September 28, 2007, and the exercise price multiplied by the number of options outstanding.

Inergy Holdings,
L.P. Unit Purchase Plan

The Companys general partner sponsors a common unit purchase plan for its employees and the employees of its affiliates.
The common unit purchase plan permits participants to purchase common units in market transactions from the Company, the general partner or any other person at the end of each fiscal quarter. The Company has reserved 100,000 of its common units for
purchase under the common unit purchase plan. As determined by the compensation committee, the 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 common units. The general partner has also agreed to pay the brokerage commissions, transfer taxes and other transaction fees associated with a participants purchase of the Companys common units under
the plan. The maximum amount that a participant may elect to have withheld from his or her salary or cash base pay with respect to common unit purchases in any calendar year may not exceed 10% of his or her base salary or wages for the year. The
common units purchased on behalf of a participant under the common 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 common units prior to the end of
this one-year holding period, the participant will be ineligible to participate in the common unit purchase plan again until the one-year anniversary of the date of such sale. The Companys common unit purchase plan is intended to serve as a
means for encouraging participants to invest in its common units. Common units purchased through the unit purchase plan for the fiscal years ended September 30, 2007 and 2006 were 2,667 units and 837 units, respectively.

Inergy, L.P. Long Term Incentive Plan

Inergys managing general
partner sponsors the Long Term Incentive Plan (Inergy LTIP) for its employees, consultants, and directors and the employees of its affiliates that perform services for Inergy. The Inergy LTIP currently permits the grant of awards
covering an aggregate of 5,000,000 Inergy common units, which can be granted in the form of unit options, phantom units and/or restricted units. 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 Inergy LTIP and are presented as grants in the table below, all units granted under the plan will vest in accordance with
the Unit Option Agreements, which typically provide that unit options begin vesting five years from the anniversary date of the applicable grant date. Shares issued as a result of unit option exercises are newly issued shares.

Restricted Units

A restricted unit is a common unit that
participates in distributions and vests over a period of time yet during such time is subject to forfeiture. The compensation committee may make grants of restricted units 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 of the managing general partner of Inergy. If a grantees employment, consulting arrangement 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.



119



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Inergy intends the restricted units 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 Inergy will receive no cash remuneration for the units.

During the 2006 fiscal year, the compensation committee granted 58,756 restricted units. During the current fiscal year, the compensation committee has granted an
additional 69,520 restricted units. The majority of the restricted units are 100% vested on the fifth anniversary of the grant date, subject to the provisions as outlined in the restricted unit award agreement. Some of these units are subject to the
achievement of certain specified performance objectives and failure to meet the performance objectives will result in forfeiture and cancellation of the restricted units. Inergy recognizes expense on these units each quarter by multiplying the
closing price of Inergys common units on the date of grant by the number of units granted, and expensing that amount over the vesting period.

The
compensation expense recorded by Inergy related to these restricted stock awards was $0.4 million and less than $0.1 million for the years ended September 30, 2007 and 2006, respectively.

Unit Options

Unit options issued under the Inergy LTIP have an
exercise price equal to the fair market value of the units on the date of the grant. In general, unit options will expire after 10 years and are subject to vesting periods as outlined in the unit option agreement. 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.

A
summary of Inergys unit option activity for the years ended September 30, 2007, 2006, and 2005, is as follows:



|                                  |  |                         |                |                               |   |                 |  |          
|--------------------------------- |  | ----------------------- | -------------- | ----------------------------- | - | --------------- |  | ---------
|                                  |  | Range of ExercisePrices |                | Weighted-AverageExercisePrice |   | Number of Units
|Outstanding at September 30, 2004 |  | $                       | 1.92  $24.71  |                               | $ | 13.79           |  | 1,115,064
|Granted                           |  | $                       | 27.14  $31.32 |                               | $ | 28.90           |  | 95,500   
|Exercised                         |  |                         |               |                               |   |                |  |         
|Canceled                          |  | $                       | 10.00  $27.14 |                               | $ | 16.80           |  | 103,000  
|                                  |  |                         |                |                               |   |                 |  |          
|Outstanding at September 30, 2005 |  | $                       | 1.92  $31.32  |                               | $ | 14.81           |  | 1,107,564
|Granted                           |  | $                       | 26.20  $26.51 |                               | $ | 26.27           |  | 6,500    
|Exercised                         |  | $                       | 1.92  $16.87  |                               | $ | 11.39           |  | 355,600  
|Canceled                          |  | $                       | 15.34  $27.14 |                               | $ | 18.75           |  | 46,500   
|                                  |  |                         |                |                               |   |                 |  |          
|Outstanding at September 30, 2006 |  | $                       | 8.19  $31.32  |                               | $ | 16.37           |  | 711,964  
|Granted                           |  |                         |               |                               |   |                |  |         
|Exercised                         |  | $                       | 8.19  $27.14  |                               | $ | 11.89           |  | 325,464  
|Canceled                          |  | $                       | 13.75  $20.13 |                               | $ | 19.54           |  | 56,000   
|                                  |  |                         |                |                               |   |                 |  |          
|Outstanding at September 30, 2007 |  | $                       | 13.75  $31.32 |                               | $ | 20.25           |  | 330,500  
|                                  |  |                         |                |                               |   |                 |  |          
|Exercisable at September 30, 2007 |  | $                       | 13.75  $14.95 |                               | $ | 14.68           |  | 68,000   
|                                  |  |                         |                |                               |   |                 |  |          



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Notes to Consolidated Financial Statements(Continued)



Information regarding options outstanding and exercisable as of September 30, 2007 is as follows:



|                         |  |                    |  |                                                |  |                                  |       |                     |        |                               |   |      
|------------------------ |  | ------------------ |  | ---------------------------------------------- |  | -------------------------------- | ----- | ------------------- | ------ | ----------------------------- | - | -----
|                         |  | Outstanding        |  | Exercisable                                   
|Range of Exercise Prices |  | OptionsOutstanding |  | Weighted-AverageRemainingContractedLife(years) |  | Weighted- Average Exercise Price |       | Options Exercisable |        | Weighted-AverageExercisePrice
|$12.53  $15.66          |  | 108,000            |  | 4.7                                            |  | $                                | 14.82 |                     | 68,000 |                               | $ | 14.68
|$15.66  $18.79          |  | 78,000             |  | 5.5                                            |  |                                  | 16.12 |                     |       |                               |   |     
|$18.79  $21.92          |  | 25,000             |  | 6.0                                            |  |                                  | 20.96 |                     |       |                               |   |     
|$21.92  $25.06          |  | 30,000             |  | 6.5                                            |  |                                  | 23.94 |                     |       |                               |   |     
|$25.06  $28.19          |  | 30,000             |  | 7.4                                            |  |                                  | 26.95 |                     |       |                               |   |     
|$28.19  $31.32          |  | 59,500             |  | 7.8                                            |  |                                  | 29.97 |                     |       |                               |   |     
|                         |  |                    |  |                                                |  |                                  |       |                     |        |                               |   |      
|                         |  | 330,500            |  | 5.9                                            |  | $                                | 20.25 |                     | 68,000 |                               | $ | 14.68
|                         |  |                    |  |                                                |  |                                  |       |                     |        |                               |   |      

The weighted-average remaining contract lives for options outstanding and exercisable at September 30, 2007
were approximately six years and four years, respectively. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option pricing model using the assumptions outlined in the table below. Expected volatility was
based on a combination of historical and implied volatilities of Inergys stock over a period at least as long as the options expected term. The expected life represents the period of time that the options granted are expected to be
outstanding. The risk-free rate is based on the applicable U.S. Treasury yield curve in effect at the time of the grant of the share options.



|                                               |  |       |   |  |      |       |   |      |   |       |  
|---------------------------------------------- |  | ----- | - |  | ---- | ----- | - | ---- | - | ----- | -
|                                               |  | 2007  |   |  | 2006 |       |   | 2005 |  
|Weighted average fair value of options granted |  |      |   |  | $    | 1.28  |   |      | $ | 1.36  |  
|Expected volatility                            |  | 0.231 |   |  |      | 0.167 |   |      |   | 0.158 |  
|Distribution yield                             |  | 7.4   | % |  |      | 8.0   | % |      |   | 7.0   | %
|Expected life of option in years               |  | 5     |   |  |      | 5     |   |      |   | 5     |  
|Risk-free interest rate                        |  | 4.2   | % |  |      | 4.6   | % |      |   | 3.5   | %

The aggregate intrinsic values of options outstanding and exercisable at September 30, 2007 were $3.8 million
and $1.2 million, respectively. The aggregate intrinsic value of unit options exercised during the year ended September 30, 2007 was $5.9 million. Aggregate intrinsic value represents the positive difference between Inergys closing stock
price on the last trading day of the fiscal period, which was $31.62 on September 28, 2007, and the exercise price multiplied by the number of options outstanding.

As of September 30, 2007, there was $4.4 million of total unrecognized compensation cost related to unvested share-based compensation awards granted to employees under the restricted stock and unit option plans,
including approximately $1.8 million related to Holdings unvested share-based compensation awards. That cost is expected to be recognized over a five-year period.

Inergy, L.P. Unit Purchase Plan

Inergy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 common units in market transactions from Inergy, the general partners or any other person. All purchases made have been in market transactions, although the plan allows Inergy
to issue additional units. Inergy 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



121



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



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 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 common units. Units purchased through the unit purchase plan by Inergy and
its employees for the fiscal years ended September 30, 2007, 2006, and 2005 were 8,681 units, 12,159 units, and 10,496 units, respectively.

Note
11. Employee Benefit Plans

A 401(k) plan is available to all of Inergys employees after meeting certain requirements. The plan permits employees
to make contributions up to 75% of their salary, up to statutory limits, which was $15,500 in 2007. The plan provides for matching contributions by Inergy for employees completing one year of service of at least 1,000 hours. Aggregate matching
contributions made by Inergy were $1.9 million, $1.8 million, and $1.2 million in 2007, 2006, and 2005, respectively.

Of Inergys 2,971 employees,
approximately 5% are subject to collective bargaining agreements. For the years ended September 30, 2007, 2006 and 2005, Inergy made contributions on behalf of its union employees to union sponsored defined benefit plans of $2.6 million, $2.6
million and $1.5 million, respectively.

Note 12. Commitments and Contingencies

Inergy periodically enters into agreements with suppliers to purchase fixed quantities of propane, distillates, natural gas and liquids at fixed prices. At September 30, 2007, the total of these firm purchase
commitments was approximately $292.4 million and the purchases associated with these commitments will occur over the course of the next year. Inergy also enters into non-binding agreements with suppliers to purchase quantities of propane,
distillates, natural gas and liquids at variable prices at future dates at the then prevailing market prices.

Inergy has entered into certain purchase
commitments in connection with the identified growth projects related to the Stagecoach and West Coast NGL midstream assets. At September 30, 2007, the total of these firm purchase commitments was approximately $37.9 million and the purchases
associated with these commitments will occur over the course of the next year.

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

Inergy 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 medical claims, 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. At September 30, 2007 and 2006, Inergys self-insurance
reserves were $13.2 million and $11.2 million, respectively.



122



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Notes to Consolidated Financial Statements(Continued)



Note 13. 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. Five of these leases are with United Propane, three of the leases are with Pascal Enterprises, Inc. and two with Robert A. Pascal. Each of these leases provides for an initial five-year term, and is renewable 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 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. On May 1, 2005 this lease was renewed and the monthly base rent was reduced to $12,500.

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 Company purchased from Inergy 769,941 special units for $25 million in cash using funds from a bank loan. On April 25, 2007, these units converted to 919,349 Inergy common units as a result of the commercial operation of the Phase
II expansion of the Stagecoach Natural Gas Storage Facility. Since Inergy, L.P. is consolidated in the financial statements of Inergy Holdings, L.P., 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 Inergy special units that allows for the
registered resale of these units. On February 10, 2006, Inergy filed a shelf registration statement with the SEC for the resale of the common units issuable upon conversion of the special units. The shelf registration statement has not yet been
declared effective by the SEC.

On occasion, Holdings reimburses Inergy for expenses paid on Holdings behalf and Inergy reimburses Holdings for
expenses it incurs on behalf of Holdings. At September 30, 2007, Inergy had $0.1 million due from Holdings. No amount was due from Holdings at September 30, 2006.

Note 14. Segments

The Companys financial statements reflect two operating and reportable segments: propane
operations and midstream operations. 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 marketing and price risk management services to other users, retailers and resellers of propane. The Companys midstream operations include storage of natural gas for third parties, fractionation of natural gas
liquids, processing of natural gas, and the distribution of natural gas liquids. Results of operations for acquisitions that occurred during the year ended September 30, 2006 are included in the propane segment.

The identifiable assets associated with each reportable segment 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.



123



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Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Revenues, gross profit, identifiable assets and goodwill for each of the Companys reportable segments are
presented below (in millions):



|                                                    |  |                               |       |                     |   |                        |  |   |                 |   |       |   |      |  |   |        
|--------------------------------------------------- |  | ----------------------------- | ----- | ------------------- | - | ---------------------- |  | - | --------------- | - | ----- | - | ---- |  | - | -------
|                                                    |  | Year Ended September 30, 2007
|                                                    |  | PropaneOperations             |       | MidstreamOperations |   | IntersegmentOperations |  |   | CorporateAssets |   | Total
|Retail propane revenues                             |  | $                             | 733.2 |                     | $ |                       |  | $ |                |   |       | $ |     |  | $ | 733.2  
|Wholesale propane revenues                          |  |                               | 393.8 |                     |   | 23.4                   |  |   |                |   |       |   |     |  |   | 417.2  
|Storage, fractionation and other midstream revenues |  |                               |      |                     |   | 164.4                  |  |   | (0.5            | ) |       |   |     |  |   | 163.9  
|Transportation revenues                             |  |                               | 12.3  |                     |   |                       |  |   |                |   |       |   |     |  |   | 12.3   
|Propane-related appliance sales revenues            |  |                               | 23.0  |                     |   |                       |  |   |                |   |       |   |     |  |   | 23.0   
|Retail service revenues                             |  |                               | 16.7  |                     |   |                       |  |   |                |   |       |   |     |  |   | 16.7   
|Rental service and other revenues                   |  |                               | 24.7  |                     |   |                       |  |   |                |   |       |   |     |  |   | 24.7   
|Distillate revenues                                 |  |                               | 92.1  |                     |   |                       |  |   |                |   |       |   |     |  |   | 92.1   
|Gross profit                                        |  |                               | 398.3 |                     |   | 63.1                   |  |   |                |   |       |   |     |  |   | 461.4  
|Identifiable assets                                 |  |                               | 187.1 |                     |   | 25.6                   |  |   |                |   |       |   |     |  |   | 212.7  
|Goodwill                                            |  |                               | 268.8 |                     |   | 85.7                   |  |   |                |   |       |   | 10.8 |  |   | 365.3  
|Property, plant and equipment                       |  |                               | 672.4 |                     |   | 319.1                  |  |   |                |   |       |   | 8.8  |  |   | 1,000.3
|                                                    | 
|                                                    |  | Year Ended September 30, 2006
|                                                    |  | PropaneOperations             |       | MidstreamOperations |   | IntersegmentOperations |  |   | CorporateAssets |   | Total
|Retail propane revenues                             |  | $                             | 701.1 |                     | $ |                       |  | $ |                |   |       | $ |     |  | $ | 701.1  
|Wholesale propane revenues                          |  |                               | 351.7 |                     |   | 19.5                   |  |   |                |   |       |   |     |  |   | 371.2  
|Storage, fractionation and other midstream revenues |  |                               |      |                     |   | 153.5                  |  |   | (0.4            | ) |       |   |     |  |   | 153.1  
|Transportation revenues                             |  |                               | 10.1  |                     |   |                       |  |   |                |   |       |   |     |  |   | 10.1   
|Propane-related appliance sales revenues            |  |                               | 23.7  |                     |   |                       |  |   |                |   |       |   |     |  |   | 23.7   
|Retail service revenues                             |  |                               | 16.7  |                     |   |                       |  |   |                |   |       |   |     |  |   | 16.7   
|Rental service and other revenues                   |  |                               | 22.5  |                     |   |                       |  |   |                |   |       |   |     |  |   | 22.5   
|Distillate revenues                                 |  |                               | 91.8  |                     |   |                       |  |   |                |   |       |   |     |  |   | 91.8   
|Gross profit                                        |  |                               | 357.4 |                     |   | 42.4                   |  |   |                |   |       |   |     |  |   | 399.8  
|Identifiable assets                                 |  |                               | 192.3 |                     |   | 15.3                   |  |   |                |   |       |   |     |  |   | 207.6  
|Goodwill                                            |  |                               | 265.8 |                     |   | 73.9                   |  |   |                |   |       |   |     |  |   | 339.7  
|Property, plant and equipment                       |  |                               | 654.7 |                     |   | 185.4                  |  |   |                |   |       |   | 7.8  |  |   | 847.9  
|                                                    | 
|                                                    |  | Year Ended September 30, 2005
|                                                    |  | PropaneOperations             |       | MidstreamOperations |   | IntersegmentOperations |  |   | CorporateAssets |   | Total
|Retail propane revenues                             |  | $                             | 526.5 |                     | $ |                       |  | $ |                |   |       | $ |     |  | $ | 526.5  
|Wholesale propane revenues                          |  |                               | 305.5 |                     |   | 19.6                   |  |   |                |   |       |   |     |  |   | 325.1  
|Storage, fractionation and other midstream revenues |  |                               |      |                     |   | 77.0                   |  |   |                |   |       |   |     |  |   | 77.0   
|Transportation revenues                             |  |                               | 11.1  |                     |   |                       |  |   |                |   |       |   |     |  |   | 11.1   
|Propane-related appliance sales revenues            |  |                               | 11.2  |                     |   |                       |  |   |                |   |       |   |     |  |   | 11.2   
|Retail service revenues                             |  |                               | 14.8  |                     |   |                       |  |   |                |   |       |   |     |  |   | 14.8   
|Rental service and other revenues                   |  |                               | 14.2  |                     |   |                       |  |   |                |   |       |   |     |  |   | 14.2   
|Distillate revenues                                 |  |                               | 72.0  |                     |   |                       |  |   |                |   |       |   |     |  |   | 72.0   
|Gross profit                                        |  |                               | 308.9 |                     |   | 18.8                   |  |   |                |   |       |   |     |  |   | 327.7  
|Identifiable assets                                 |  |                               | 196.3 |                     |   | 21.0                   |  |   |                |   |       |   |     |  |   | 217.3  
|Goodwill                                            |  |                               | 233.9 |                     |   | 22.7                   |  |   |                |   |       |   |     |  |   | 256.6  
|Property, plant and equipment                       |  |                               | 563.1 |                     |   | 235.1                  |  |   |                |   |       |   | 6.6  |  |   | 804.8  



124



---

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Note 15. Quarterly Financial Data (Unaudited)

Inergys 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. Summarized unaudited quarterly financial data is presented below (in millions, except per unit information):



|                                               |  |               |       |          |   |         |  |   |              |   |  |   |       |  
|---------------------------------------------- |  | ------------- | ----- | -------- | - | ------- |  | - | ------------ | - |  | - | ----- | -
|                                               |  | Quarter Ended |      
|                                               |  | December 31   |       | March 31 |   | June 30 |  |   | September 30 |  
|Fiscal 2007                                    |  |               |       |          |   |         |  |   |              |   |  |   |       |  
|Revenues                                       |  | $             | 408.3 |          | $ | 553.6   |  | $ | 247.7        |   |  | $ | 273.5 |  
|Gross profit(a)                                |  |               | 129.7 |          |   | 184.3   |  |   | 76.7         |   |  |   | 70.7  |  
|Operating income (loss)                        |  |               | 42.8  |          |   | 98.9    |  |   | (8.8         | ) |  |   | (15.9 | )
|Net income (loss)                              |  |               | 7.1   |          |   | 12.2    |  |   | 79.4         |   |  |   | 3.9   |  
|Net income (loss) per limited partner unit:    |  |               |       |          |   |         |  |   |              |   |  |   |       |  
|Basic                                          |  | $             | 0.36  |          | $ | 0.61    |  | $ | 3.97         |   |  | $ | 0.19  |  
|Diluted                                        |  | $             | 0.35  |          | $ | 0.60    |  | $ | 3.91         |   |  | $ | 0.19  |  
|                                               |  |               |       |         
|Fiscal 2006                                    |  |               |       |          |   |         |  |   |              |   |  |   |       |  
|Revenues                                       |  | $             | 450.9 |          | $ | 477.7   |  | $ | 216.3        |   |  | $ | 245.3 |  
|Gross profit(a)                                |  |               | 113.1 |          |   | 152.1   |  |   | 66.1         |   |  |   | 68.5  |  
|Operating income (loss)                        |  |               | 23.9  |          |   | 75.8    |  |   | (19.5        | ) |  |   | (18.2 | )
|Net income (loss)                              |  |               | 3.7   |          |   | 9.0     |  |   | (0.3         | ) |  |   | 2.0   |  
|Net income (loss) per limited partner unit:(b) |  |               |       |          |   |         |  |   |              |   |  |   |       |  
|Basic                                          |  | $             | 0.19  |          | $ | 0.45    |  | $ | (0.02        | ) |  | $ | 0.10  |  
|Diluted                                        |  | $             | 0.19  |          | $ | 0.45    |  | $ | (0.02        | ) |  | $ | 0.10  |  

---

|(a) | During 2006, gross profit reflects a non-cash loss associated with derivative contracts of approximately $20.0 million,
of which $19.4 million is the reversal of the non-cash gain recorded in the quarter ended September 30, 2005, and an additional $0.6 million reflects a non-cash loss associated with derivative contracts which will reverse over the subsequent
two quarters as the physical gallons are delivered to retail customers
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The accumulation of basic and diluted net income (loss) per limited partner unit does not total the amount for the
fiscal year due to changes in ownership percentages throughout the year.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 16. Issuance of Subsidiary Units

On March 23, 2006, Inergys shelf registration statement (File No. 333-132287) was declared effective by the Securities and Exchange Commission for the
periodic sale by Inergy of up to $1.0 billion of common units, partnership securities and debt securities, 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 uses identified in a prospectus supplement.

In June 2006, Inergy issued 4,312,500 common units, under the shelf registration statement, in a public offering, which included 562,500 common units issued as result of the underwriters exercising their
over-allotment provision. The issuance of these common units resulted in net proceeds of approximately $102.7 million, after deducting underwriters discounts, commissions and other offering expenses. These proceeds were partially used to repay
indebtedness under Inergys Credit Agreement with the remainder used to fund capital expenditures made in connection with internal growth projects related to Inergys midstream assets.



125



---

Inergy Holdings, L.P. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In February 2007, Inergy issued 3,450,000 common units, under the shelf registration statement, which included
450,000 common units issued as a result of the underwriters exercising their over-allotment provision. The issuance of these common units resulted in net proceeds of approximately $104.5 million, after deducting underwriters discounts,
commissions and other offering expenses. The net proceeds from this offering were used to repay indebtedness under Inergys Credit Agreement.

Note
17. Distributions from Inergy, L.P.

Quarterly Distributions of Available Cash

Inergy 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 Inergys business, or to provide funds for distributions with respect to any one or more of
the next four fiscal quarters.

Distributions by Inergy in an amount equal to 100% of its Available Cash will generally be made 99% to the common and
subordinated unitholders and approximately 1% 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 had 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.

Inergy 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. Inergy made distributions to unitholders, including the non-managing general partner, totaling $136.8 million, $107.6 million, and $67.8 million for the years ended September 30,
2007, 2006, and 2005, respectively, or $2.28, $2.14, and $1.91 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 Inergy in excess of $0.33 per unit in any
quarter. In addition, the Company and its subsidiaries own 4,706,689 common units, which approximates a 9.4% limited partner interest.

Note 18.
Subsequent Events

On October 4, 2007, Inergy acquired the assets of Riverside Oil and Gas Company headquartered in Chestertown, New York.
Riverside Oil and Gas delivers retail propane to approximately 3,800 customers.

On October 5, 2007, Inergy acquired the membership interests of
Arlington Storage Company, LLC (ASC). ASC is the majority owner and operator of the Steuben Gas Storage Company (Steuben), which owns a natural gas storage facility located in Steuben County, New York. In addition to Steuben,
ASC owns the development rights to the Thomas Corners storage project, also located in Steuben County.

On November 14, 2007 a quarterly distribution
of $0.535 per limited partner unit was paid to unitholders of record on November 7, 2007 with respect to the fourth fiscal quarter of 2007, which totaled $10.8 million.



126



---

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: November 28, 2007 |  | 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                                                                                                                                                      
|November 28, 2007 |  | /s/    JOHN J. SHERMAN John J. Sherman, President, Chief Executive Officer and Director (Principal Executive
Officer)                                                    
|                  | 
|November 28, 2007 |  | /s/    R. BROOKS SHERMAN,
JR. R. Brooks Sherman, Jr., Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|                  | 
|November 28, 2007 |  | Warren H. Gfeller, Director                                                                                                                                              
|                  | 
|November 28, 2007 |  | /s/    ARTHUR B. KRAUSE Arthur B. Krause, Director                                                                                                                       
|                  | 
|November 28, 2007 |  | /s/    RICHARD T.
OBRIEN Richard T. OBrien, Director                                                                                                                   



127



---

Schedule I

Inergy Holdings, L.P.

Parent Only

Balance Sheets

(in millions, except unit information)



|                                                                                                                            |  |               |      |      |   |       |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | ---- | - | ----- | -
|                                                                                                                            |  | September 30, |     
|                                                                                                                            |  | 2007          |      | 2006 |  
|Assets                                                                                                                      |  |               |      |      |   |       |  
|Current assets:                                                                                                             |  |               |      |      |   |       |  
|Cash and cash equivalents                                                                                                   |  | $             | 0.1  |      | $ |      |  
|Prepaid expenses and other current assets                                                                                   |  |               | 0.2  |      |   | 0.1   |  
|                                                                                                                            |  |               |      |      |   |       |  
|Total current assets                                                                                                        |  |               | 0.3  |      |   | 0.1   |  
|Intangible assets, net                                                                                                      |  |               | 0.1  |      |   | 0.2   |  
|Goodwill                                                                                                                    |  |               | 7.3  |      |   | 7.3   |  
|Investment in subsidiaries                                                                                                  |  |               | 70.8 |      |   | 0.9   |  
|Notes receivable due from related parties                                                                                   |  |               | 3.1  |      |   | 3.2   |  
|                                                                                                                            |  |               |      |      |   |       |  
|Total assets                                                                                                                |  | $             | 81.6 |      | $ | 11.7  |  
|                                                                                                                            |  |               |      |      |   |       |  
|Liabilities and partners capital                                                                                           |  |               |      |      |   |       |  
|Current liabilities:                                                                                                        |  |               |      |      |   |       |  
|Accrued interest                                                                                                            |  | $             | 0.2  |      | $ | 0.2   |  
|Other accrued expenses                                                                                                      |  |               |     |      |   |      |  
|Current portion of long-term debt                                                                                           |  |               | 29.2 |      |   |       |  
|                                                                                                                            |  |               |      |      |   |       |  
|Total current liabilities                                                                                                   |  |               | 29.4 |      |   | 0.2   |  
|Long-term debt                                                                                                              |  |               |     |      |   | 28.9  |  
|Notes payable due to related parties                                                                                        |  |               | 1.3  |      |   | 1.3   |  
|Partners capital                                                                                                           |  |               |      |      |   |       |  
|Common unitholders (20,009,016 and 20,000,000 units issued and outstanding as of September 30, 2007 and 2006,
respectively) |  |               | 50.7 |      |   | (18.7 | )
|Accumulated other comprehensive income (loss)                                                                               |  |               | 0.2  |      |   |      |  
|                                                                                                                            |  |               |      |      |   |       |  
|Total partners capital (deficiency)                                                                                        |  |               | 50.9 |      |   | (18.7 | )
|                                                                                                                            |  |               |      |      |   |       |  
|Total liabilities and partners capital                                                                                     |  | $             | 81.6 |      | $ | 11.7  |  
|                                                                                                                            |  |               |      |      |   |       |  



128



---

Schedule I

Inergy Holdings, L.P.

Parent Only

Statements of Operations

(in millions)



|                                          |  |                          |       |   |      |   |      |      |  |   |      |  
|----------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                          |  | Year Ended September 30, |      
|                                          |  | 2007                     |       |   | 2006 |   |      | 2005 | 
|Equity in earnings of subsidiaries        |  | $                        | 104.7 |   |      | $ | 17.8 |      |  | $ | 11.4 |  
|Expenses:                                 |  |                          |       |   |      |   |      |      |  |   |      |  
|Operating and administrative              |  |                          | 0.8   |   |      |   | 1.4  |      |  |   | 0.5  |  
|Amortization                              |  |                          |      |   |      |   |     |      |  |   | 0.1  |  
|                                          |  |                          |       |   |      |   |      |      |  |   |      |  
|Operating income                          |  |                          | 103.9 |   |      |   | 16.4 |      |  |   | 10.8 |  
|Other income (expense):                   |  |                          |       |   |      |   |      |      |  |   |      |  
|Gain on issuance of units in Inergy, L.P. |  |                          | 0.9   |   |      |   |     |      |  |   |     |  
|Write-off of deferred financing costs     |  |                          |      |   |      |   |     |      |  |   | (0.6 | )
|Interest expense, net                     |  |                          | (2.2  | ) |      |   | (2.0 | )    |  |   | (1.9 | )
|                                          |  |                          |       |   |      |   |      |      |  |   |      |  
|Net income                                |  | $                        | 102.6 |   |      | $ | 14.4 |      |  | $ | 8.3  |  
|                                          |  |                          |       |   |      |   |      |      |  |   |      |  



129



---

Schedule II

Inergy Holdings, L.P. and Subsidiaries

Valuation and Qualifying Accounts

(in millions)



|                                |  |                              |     |                            |   |                            |  |                        |     |  |                       |      |   |  |   |    
|------------------------------- |  | ---------------------------- | --- | -------------------------- | - | -------------------------- |  | ---------------------- | --- |  | --------------------- | ---- | - |  | - | ---
|Year ended September 30,        |  | Balance atbeginningof period |     | Chargedto costsandexpenses |   | OtherAdditions(recoveries) |  | Deductions(write-offs) |     |  | Balanceat endofperiod
|Allowance for doubtful accounts |  |                              |     |                            |   |                            |  |                        |     |  |                       |      |   |  |   |    
|2007                            |  | $                            | 2.9 |                            | $ | 3.3                        |  | $                      | 0.5 |  | $                     | (3.3 | ) |  | $ | 3.4
|2006                            |  |                              | 2.4 |                            |   | 3.6                        |  |                        | 0.9 |  |                       | (4.0 | ) |  |   | 2.9
|2005                            |  |                              | 1.1 |                            |   | 2.0                        |  |                        | 0.1 |  |                       | (0.8 | ) |  |   | 2.4



130