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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
 
FORM 10-K 
 
(Mark One) 
 
☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 	
 
For the fiscal year ended September 30, 2004 
 
OR 
 
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 	
 
For the transition period from                      to                     . 
 
Commission file number: 000-32453 
 
INERGY, L.P. 
(Exact name of registrant as specified in its charter) 

Delaware	 	43-1918951	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer Identification No.)	
 
Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri 64112 
(Address of principal executive offices) (Zip Code) 
 
(816) 842-8181 
(Registrant’s telephone number including area code) 
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 

Title of Each Class
	  	Name of Each Exchange on Which Registered
	
None	  	N/A	
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 
Common Units representing limited partnership interests 
(Title of Class) 
 
Indicate by check mark 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 ☒ 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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ☒ No ☐ 
 
The aggregate market value of the 14,452,706 Common Units of the registrant held by non-affiliates computed by reference to the $27.95 closing price of such Common Units on November 1, 2004, was approximately $404.0 million. The aggregate market value of the 12,055,305 Common Units of the registrant held by non-affiliates computed by reference to the $23.24 closing price of such Common Units on March 31, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $280.2 million. As of November 1, 2004, the registrant had 17,626,506 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,” “Inergy,” or “Inergy, L.P.,” we are referring either to Inergy, L.P., the registrant itself, or to Inergy, L.P. and its operating subsidiary collectively, as the context requires. 	
 
 	(2)	when we use the term “our predecessor,” we are referring to Inergy Partners, LLC, the entity that conducted our business before our initial public offering, which closed on July 31, 2001. Inergy, L.P. was formed as a Delaware limited partnership on March 7, 2001 and did not have operations until the closing of our initial public offering. Our predecessor commenced operations in November 1996. The discussion of our business throughout this report relates to the business operations of Inergy Partners, LLC before Inergy, L.P.’s initial public offering and of Inergy, L.P. thereafter. 	
 
 	(3)	when we use the term “operating company” or “Inergy Propane,” we are referring to Inergy Propane, LLC itself, or to Inergy Propane, LLC and its operating subsidiaries collectively, as the context requires. 	
 
 	(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 “managing general partner,” we are referring to Inergy GP, LLC. 	
 
 	(6)	when we use the term “non-managing general partner,” we are referring to Inergy Partners, LLC. 	
 
 	(7)	when we use the term “general partners,” we are referring to our managing general partner and our non-managing general partner. 	
 
•	We have a managing general partner and a non-managing general partner. Our managing general partner is responsible for the management of our company and its operations are governed by a board of directors. Our managing general partner does not have 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. Our non-managing general partner owns an approximate 2% non-managing general partner interest in our company. 	

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INERGY, L.P. 
 
INDEX TO ANNUAL REPORT ON FORM 10-K 

 	  	Page
	
PART I	  	 	
			
Item 1.	  	Business	  	2	
			
Item 2.	  	Properties	  	14	
			
Item 3.	  	Legal Proceedings	  	15	
			
Item 4.	  	Submission of Matters to a Vote of Security Holders	  	15	
		
PART II	  	 	
			
Item 5.	  	Market for the Registrant’s Common Equity and Related Unitholder Matters	  	16	
			
Item 6.	  	Selected Financial Data	  	18	
			
Item 7.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	21	
			
Item 7A.	  	Quantitative and Qualitative Disclosures about Market Risk	  	36	
			
Item 8.	  	Financial Statements and Supplementary Data	  	38	
			
Item 9.	  	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	  	38	
			
Item 9A.	  	Controls and Procedures	  	38	
			
Item 9B.	  	Other Information	  	39	
		
PART III	  	 	
			
Item 10.	  	Directors and Executive Officers of the Registrant	  	39	
			
Item 11.	  	Executive Compensation	  	43	
			
Item 12.	  	Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters	  	49	
			
Item 13.	  	Certain Relationships and Related Transactions	  	53	
			
Item 14.	  	Principal Accountant Fees and Services	  	54	
		
PART IV	  	 	
			
Item 15.	  	Exhibits, Financial Statement Schedules and Reports on Form 8-K	  	55	
 
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PART I 
 
Item 1.	Business. 	
 
Recent Developments 
 
On November 18, 2004, we executed a definitive agreement to purchase 100% partnership interests in Star Gas Propane, L.P., the propane operating partnership of Star Gas Partners, L.P. for approximately $475 million. Star Gas Propane currently serves approximately 345,000 customers from approximately 120 customer service centers in the Midwest, Northeast, Florida, and Georgia. Subject to antitrust clearance and customary closing conditions, the transaction is expected to close in the fourth quarter of calendar 2004. In order to finance the transaction, on November 18, 2004, we entered into a Commitment letter with J.P. Morgan Chase Bank, N.A., J.P. Morgan Securities, Inc., Lehman Commercial Paper Inc. and Lehman Brothers, Inc. for a $400 million 364-day credit facility and a $325 million five year credit facility, both of which would be secured by substantially all of our assets. The Commitment letter for the credit facilities contains a number of closing conditions. 
 
On November 15, 2004, we reached an agreement, in principal, to acquire the propane assets of Moulton Gas Service, Inc. headquartered in Wapakoneta, Ohio, which closed on November 30, 2004. In Moulton Gas’ fiscal year ended June 30, 2004, Moulton Gas delivered approximately 21 million gallons of retail propane to approximately 23,000 customers from 4 retail locations and 11 satellite plants in Ohio and provides further critical mass to Inergy’s strong presence in the Great Lakes region. 
 
General 
 
Inergy, L.P., a publicly traded Delaware limited partnership, was formed on March 7, 2001 but did not conduct operations until the closing of our initial public offering on July 31, 2001. We own and operate, principally through our operating company, Inergy Propane, LLC, a rapidly growing retail and wholesale propane supply, marketing and distribution business. Since our predecessor’s inception in November 1996 through September 30, 2004, we have acquired the assets and liabilities of 42 companies for an aggregate purchase price of approximately $400 million, including working capital, assumed liabilities and acquisition costs. These acquisitions include the assets and liabilities of 16 propane companies and a natural gas liquids (NGL) business acquired during fiscal 2004 for an aggregate purchase price of approximately $97 million. For the fiscal year ended September 30, 2004, we sold and physically delivered approximately 140.7 million gallons of propane to retail customers and approximately 368.3 million gallons of propane to wholesale customers. 
 
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 National Market under the symbol “NRGY”. We electronically file certain documents with the Securities and Exchange Commission (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 
 
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filings at the SEC’s public reference room located at Judiciary Plaza, 450 Fifth Street, N.W., 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 as soon as reasonably practicable 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. 
 
We believe we are the seventh largest propane retailer in the United States, based on retail propane gallons sold. Our retail 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. We market our propane products primarily under twelve regional brand names: Bradley Propane, Burnwell Gas, Country Gas, Gaylord Gas, Hancock Gas, Highland Propane, Hoosier Propane, Independent Propane Company (IPC), McCracken, Premier Propane, Pro Gas and United Propane. We serve approximately 275,000 retail customers in Arkansas, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and West Virginia from 147 customer service centers which have an aggregate of approximately 10.9 million gallons of above-ground propane storage capacity. In addition to our retail business, we operate a wholesale supply, marketing and distribution business, providing propane procurement, transportation and supply and price risk management services to our 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 37 states, primarily in the Midwest and Southeast. We also own, as part of our wholesale and supply operations, an NGL business in California, which includes natural gas processing, NGL fractionation, NGL rail and truck terminals, bulk storage, trucking and marketing operations. 
 
We have grown primarily through acquisitions of propane operations. Including our initial acquisition of McCracken Oil & Propane Company in 1996, and through September 30, 2004, we have completed 42 acquisitions in Arkansas, California, Canada, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, and Virginia. The following chart sets forth information about each business we acquired during the fiscal year ended September 30, 2004 and the one recent acquisition after September 30, 2004: 

Acquisition Date
	 	Company (1)
	 	Location

October 2003	 	EOTT, Inc. NGL Terminal Storage Processing	 	Bakersfield, CA	
			
October 2003	 	Smith Propane	 	La Crosse, VA	
			
October 2003	 	Peoples Gas and Appliance	 	Beaufont, SC	
			
November 2003	 	Pembroke Propane Gas Company, Inc.	 	Pembroke, GA	
 
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December 2003	 	Assets of Southeastern Retail Propane Company	 	MacClenny, FL	
			
December 2003	 	Assets of Southeastern Retail Propane Company	 	Thomasville, GA	
			
January 2004	 	Dorsey Propane Gas Co.	 	Nashville, GA	
			
February 2004	 	Direct Propane Incorporated	 	Norristown, PA	
			
March 2004	 	Premier	 	Richmond, VA	
			
March 2004	 	Hancock Propane Company, Inc.	 	Scotland Neck, NC	
			
April 2004	 	Hometown Propane Gas	 	Cabot, AR	
			
April 2004	 	Gaylord Gas, Inc.	 	Gaylord, MI	
			
May 2004	 	Burnwell Gas Corporation	 	Peekskill, NY	
			
June 2004	 	Petersen Propane Company	 	Hampshire, IL	
			
June 2004	 	Midland Gas Company, Inc.	 	Sumter, SC	
			
July 2004	 	Highland Propane Company	 	Roanoke, VA	
			
August 2004	 	Suburban Gas Service	 	Round Lake Beach, IL	
			
November 2004	 	Moulton Gas Service, Inc.	 	Wapakoneta, Ohio	

(1)	Name of acquired company or assets as of acquisition date. 	
 
Industry Background and Competition 
 
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. Our retail propane business consists principally of transporting propane to our customer service centers and other distribution areas and then to tanks located on our customers’ premises. Retail propane falls into three broad categories: residential, industrial and 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. 
 
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The retail market for propane is seasonal because it is used primarily for heating in residential and commercial buildings. Approximately 70% of our 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, we believe 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, we compete 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, we believe that the 10 largest retailers account for less than 36% 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 our 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. Our 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. We believe that our safety programs, policies and procedures are more comprehensive than many of our smaller, independent competitors and give us a competitive advantage over such retailers. We also believe that our service capabilities and customer responsiveness differentiate us from many of these smaller competitors. Our employees are on call 24-hours and seven-days-a-week for emergency repairs and deliveries. 
 
The wholesale propane business is highly competitive. Our competitors in the wholesale business include producers and independent regional wholesalers. We believe that our wholesale supply and distribution business provides us with a stronger regional presence and a reasonably secure, efficient supply base, and positions us well for expansion through acquisitions or start-up operations in new markets. 
 
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We also own, as part of our wholesale and supply operations, 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. We believe this business complements our existing U.S and Canadian wholesale and supply operations. 
 
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. During periods of sudden price increases in propane at the wholesale level, distributors may be unable or unwilling to pass entire cost increases through to customers. In these cases, significant decreases in per gallon margins may result. 
 
The propane distribution industry is characterized by a large number of relatively small, independently owned and operated local 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 we, 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. We expect this acquisition market to continue for the foreseeable future. 
 
Business Strategy 
 
Our primary objective is to increase distributable cash flow for our unitholders, while maintaining the highest level of commitment and service to our customers. We intend to pursue this objective by capitalizing on what we believe are our competitive strengths as follows: 
 
Proven Acquisition Expertise 
 
Since our predecessor’s inception and through September 30, 2004, we have acquired and successfully integrated 42 companies. Our executive officers and key employees, who average more than 15 years experience in the propane and energy-related industries, have developed business relationships with retail propane owners and businesses throughout the United States. These significant industry contacts have enabled us to negotiate most of our acquisitions on an exclusive basis. We believe that this acquisition expertise should allow us to continue to grow through strategic and accretive acquisitions. Our acquisition program will continue to seek: 
 
 	•	businesses that generate distributable cash flow that is accretive to Inergy common unitholders on a per unit basis; 	
 
 	•	businesses in geographical areas experiencing higher-than-average population growth; 	
 
 	•	businesses with established names with local reputations for customer service and reliability; 	
 
 	•	businesses with high concentration of propane sales to residential customers; and 	
 
 	•	retention of key employees in acquired businesses. 	
 
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Operations in High Growth Markets 
 
A majority of our operations are concentrated in higher-than-average population growth areas, where natural gas distribution is not cost effective. These markets have experienced strong economic growth which has spurred the development of sizable, low density and relatively affluent residential communities which are significant consumers of propane. We intend to pursue acquisitions in similar high growth markets. 
 
Regional Branding 
 
We believe that our success in maintaining customer stability at our customer service centers results from our operation under established, locally recognized trade names. We attempt to capitalize on the reputation of the companies we acquire by retaining their local brand names and employees, thereby preserving the goodwill of the acquired business and fostering employee loyalty and customer retention. We expect our local branch management to continue to manage our marketing programs, new business development, customer service and customer billing and collections. We believe that our employee incentive programs encourage efficiency and allow us to control costs at the corporate and field levels. 
 
High Percentage of Retail Sales to Residential Customers 
 
Our 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 September 30, 2004, sales to residential customers represented approximately 65% of our retail propane gallons sold. Although overall demand for propane is affected by weather and other factors, we believe 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, we own approximately 80% of the propane tanks located at our 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 our customer base because of the inconvenience and costs involved with switching tanks and suppliers. 
 
Internal Growth 
 
We consistently promote internal growth in our retail operations through a combination of marketing programs and employee incentives. We enjoy strong relationships with builders, mortgage companies and real estate agents which enable us to access customers as new residences are built. We also provide various financial incentives for customers who sign up for our automatic delivery program, including level payment, fixed price and price cap programs. We provide all customers with supply, repair and maintenance contracts and 24-hour customer service. In addition, we have employee bonus programs and other incentives that foster an entrepreneurial environment by rewarding employees who expand revenues by attracting new customers while controlling costs. We intend to continue to aggressively seek new customers 
 
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and promote internal growth through local marketing and service programs in our residential propane business. 
 
Strong Wholesale Supply, Marketing and Distribution Business 
 
One of our distinguishing strengths is our procurement and distribution expertise and capabilities. For the fiscal year ended September 30, 2004, we delivered approximately 368.3 million gallons of propane on a wholesale basis to independent dealers, multistate marketers, petrochemical companies, refinery and gas processors and a number of other NGL marketing and distribution companies. These operations are significantly larger on a relative basis than the wholesale operations of most publicly traded propane businesses. We also provide transportation services to these distributors through our fleet of transport vehicles, and price risk management services to our customers through a variety of financial and other instruments. The presence of our trucks serving our wholesale customers allows us to take advantage of various pricing and distribution inefficiencies that exist in the market from time to time. We believe our wholesale business enables us to obtain valuable market intelligence and awareness of potential acquisition opportunities. Because we sell on a wholesale basis to many residential and commercial retailers, we have an ongoing relationship with a large number of businesses that may be attractive acquisition opportunities for us. We believe that we will have an adequate supply of propane to support our growing retail operations at prices that are generally available only to large wholesale purchasers. This purchasing scale and resulting expertise also helps us avoid shortages during periods of tight supply to an extent not generally available to other retail propane distributors. 
 
We also own, as part of our wholesale and supply operations, an NGL business in California, which includes natural gas processing, NGL fractionation, NGL rail and truck terminals, bulk storage, trucking and marketing operations. We believe this business complements our existing U.S and Canadian wholesale and supply operations. 
 
Flexible Financial Structure 
 
We have a $225 million revolving credit facility for acquisitions and a $75 million revolving working capital facility. As of November 1, 2004, we had available capacity of approximately $119.3 million under our acquisition facility and approximately $32.3 million under our working capital facility. We believe our available capacity under these facilities combined with our ability to fund acquisitions through the issuance of additional partnership interests will provide us with a flexible financial structure that will facilitate our acquisition strategy. 
 
Operations 
 
Our operations reflect our two reportable segments; retail sales operations and wholesale sales operations. 
 
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Retail Operations 
 
Customer Service Centers 
 
We distribute propane to approximately 275,000 retail customers from 147 customer service centers in 17 states. We market propane primarily in rural areas, but also have a significant number of customers in suburban areas where energy alternatives to propane such as natural gas are generally not available. 
 
We market our propane primarily in the eastern half of the United States through our customer service centers using multiple regional brand names. The following table shows our customer service centers by state: 

State
	  	Number of
Customer
Service
Centers
	
Arkansas	  	4	
Florida	  	7	
Georgia	  	9	
Illinois	  	3	
Indiana	  	12	
Maryland	  	10	
Michigan	  	13	
North Carolina	  	11	
New York	  	2	
Ohio	  	7	
Oklahoma	  	6	
Pennsylvania	  	1	
South Carolina	  	3	
Tennessee	  	5	
Texas	  	44	
Virginia	  	7	
West Virginia	  	3	
 	  		
Total	  	147	

From our customer service centers, we also sell, install and service equipment related to our 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 our customer service centers also have an appliance showroom. We have several satellite facilities that typically contain only large capacity storage tanks. We have approximately 10.9 million gallons of above-ground propane storage capacity at our customer service centers and satellite locations. 
 
Customer Deliveries 
 
Retail deliveries of propane are usually made to customers by means of our fleet of bobtail and rack trucks. Propane is pumped from the bobtail truck, which generally holds 2,500 
 
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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. We also deliver propane to retail customers in portable cylinders, which typically have a capacity of five to thirty-five gallons. These cylinders are picked up by us and replenished at our distribution locations, then returned to the retail customer. To a limited extent, we also deliver 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, 2004, we delivered approximately 28% and 72% of our propane volume to retail and wholesale customers, respectively. Our retail volume sold to residential, industrial and commercial, and agricultural customers were as follows: 
 
 	•	approximately 65% to residential customers; 	
 
 	•	approximately 26% to industrial and commercial customers; and 	
 
 	•	approximately 9% to agricultural customers. 	
 
No single retail customer accounted for more than 1% of our revenue during the fiscal year ended September 30, 2004. 
 
Nearly 55% of our residential customers receive their propane supply under an automatic delivery program. Under the automatic delivery program, we deliver propane to our heating customers approximately six times during the year. We determine the amount of propane delivered based on weather conditions and historical consumption patterns. Our automatic delivery program eliminates the customer’s need to make an affirmative purchase decision, promotes customer retention by ensuring an uninterrupted supply and enables us to efficiently route deliveries on a regular basis. We promote this program by offering level payment billing, discounts, fixed price options and price caps. In addition, we provide emergency service 24 hours a day, seven days a week, 52 weeks a year. Approximately 80% of our retail propane customers lease their tanks from us. In most states, due to fire safety regulations, a leased tank may only be refilled by the propane distributor that owns that tank. The inconvenience and costs associated with switching tanks and suppliers greatly reduces a customer’s tendency to change distributors. Our tank lease programs are valuable to us from the standpoint of retaining customers and maintaining profitability. 
 
Seasonality 
 
The retail propane business is seasonal with weather conditions significantly affecting demand for propane. We believe that the geographic diversity of our areas of operations helps to minimize our exposure to regional weather. Although overall demand for propane is affected by climate, changes in price and other factors, we believe our residential and commercial business to be relatively stable due to the following characteristics: (i) 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 our customers, (ii) loss of customers to competing energy sources has been low, (iii) the tendency of our customers to remain with us due to the product being delivered pursuant to a regular delivery schedule and to our ownership 
 
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of approximately 80% of the storage tanks utilized by our customers and (iv) our ability to offset customer losses through a combination of acquisition and to a lesser extent internal growth of our customer base 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 we operate, however, can significantly affect the total volumes of propane we sell and the margins we realize and, consequently, our results of operations. We believe 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, Truck Fabrication and Maintenance 
 
Our transportation assets are operated by L&L Transportation, LLC, a wholly-owned subsidiary of our operating company. 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, 2004, we owned a fleet of approximately 67 tractors, 129 transports, 486 bobtail and rack trucks and 470 other service and pick-up trucks. In addition to supporting our retail and wholesale propane operations, our fleet is also used to deliver butane and ammonia for third parties and to distribute natural gas for various processors and refiners. 
 
We own truck fabrication and maintenance facilities located in Indiana, Florida, and Texas. We also have a trucking operation located in California as part of our NGL business. We believe that our ability to build and maintain the trucks we use in our propane operations significantly reduces the costs we would otherwise incur in purchasing and maintaining our fleet of trucks. 
 
Pricing Policy 
 
Our pricing policy is an essential element in our successful marketing of propane. We base our pricing decisions on, among other things, prevailing supply costs, local market conditions and local management input. We rely on our regional management to set prices based on these factors. Our local managers are advised regularly of any changes in the posted prices of our propane suppliers. We believe our propane pricing methods allow us to respond to changes in supply costs in a manner that protects our customer base and gross margins. In some cases, however, our ability to respond quickly to cost increases could cause our retail prices to rise more rapidly than those of our competitors, possibly resulting in a loss of customers. 
 
Billing and Collection Procedures 
 
We retain our customer billing and account collection responsibilities at the local level. We believe 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. 	
 
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Trademark and Tradenames 
 
We use a variety of trademarks and tradenames which we own, including “Inergy” and “Inergy Services.” We believe that our strategy of retaining the names of the companies we acquire has maintained the local identification of such companies and has been important to the continued success of the acquired businesses. Our most significant tradenames are “Bradley Propane,” “Burnwell Gas,” “Country Gas,” “Gaylord Gas,” “Hancock Gas,” “Highland Propane,” “Hoosier Propane,” “Independent Propane,” “McCracken,” “Premier Propane,” “Pro Gas”, and “United Propane.” We regard our trademarks, tradenames and other proprietary rights as valuable assets and believe that they have significant value in the marketing of our products. 
 
Wholesale Supply, Marketing and Distribution Operations 
 
We currently provide 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 our wholesale supply, marketing and distribution operations accounted for approximately 55% of total revenue, this business represented approximately 14% of our gross profit during the fiscal year ended September 30, 2004. 
 
Marketing and Distribution 
 
One of our distinguishing strengths is our procurement and distribution expertise and capabilities. Because of the size of our wholesale operations, we have developed significant procurement and distribution expertise. This is partly the result of the unique background of our management team, which has significant experience in the procurement aspects of the propane business. We also offer transportation services to these distributors through our fleet of transport trucks and price risk management services to our customers through a variety of financial and other instruments. Our wholesale supply, marketing and distribution business provides us with a relatively stable and growing income stream as well as extensive market intelligence and acquisition opportunities. In addition, these operations provide us with more secure supplies and better pricing for our customer service centers. Moreover, the presence of our trucks across the Midwest and Southeast allows us to take advantage of various pricing and distribution inefficiencies that exist in the market from time to time. 
 
During the fiscal year ended September 30, 2004, Amerigas Propane L.P. accounted for approximately 5% of our wholesale revenue. No other single wholesale customer accounted for more than 5% of our revenue for the same period. 
 
Supply 
 
We obtain a substantial majority of our propane from domestic suppliers, with our remaining propane requirements provided by Canadian suppliers. During the fiscal year ended September 30, 2004, a majority of our sales volume was purchased pursuant to contracts that have a term of one year; the balance of our sales volume was purchased on the spot market. The percentage of our 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 
 
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based on such market prices. Some of these agreements provide maximum and minimum seasonal purchase guidelines. 
 
Three suppliers, Sunoco, Inc. (18%), Dominion Transmission Inc. (12%), and Exxon Mobil Oil Corp. (11%), accounted for approximately 41% of propane purchases during the past fiscal year. We believe our contracts with these suppliers will enable us to purchase most of our supply needs at market prices and ensures adequate supply. No other single supplier accounted for more than 10% of our propane purchases in the current year. 
 
Propane generally is transported from refineries, pipeline terminals, storage facilities and marine terminals to our approximately 250 storage facilities. We accomplish this by using our transports and contracting with common carriers, owner-operators and railroad tank cars. Our customer service centers and satellite locations typically have one or more 12,000 to 30,000 gallon storage tanks, generally adequate to meet customer usage requirements for seven days during normal winter demand. Additionally, we lease underground storage facilities from third parties under annual lease agreements. 
 
We engage in risk management activities in order to reduce the effect of price volatility on our product costs and to help insure the availability of propane during periods of short supply. We are currently a party to propane futures transactions on the New York Mercantile Exchange and to forward and option contracts with various third parties to purchase and sell propane at fixed prices in the future. We monitor these activities through enforcement of our risk management policy. 
 
For more information on our reportable business segments, see Note 10 to our Consolidated Financial Statements. 
 
Employees 
 
As of November 1, 2004, we had 1,093 full-time employees of which 73 were general and administrative and 1,020 were operational employees. Additionally, we employed 43 part-time employees, of which 1 was general and administrative and 42 were operational employees. Sixteen of our employees are members of labor unions. We believe that our relationship with our employees is satisfactory. 
 
Government Regulation 
 
We are subject to various federal, state and local environmental, health and safety laws and regulations related to our propane business as well as those related to our ammonia and butane transportation operations. Generally, these laws impose limitations on the discharge and emission of pollutants and establish standards for the handling of solid and hazardous wastes. These laws generally 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 
 
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a hazardous substance within the meaning of CERCLA, other chemicals used in our operations may be classified as hazardous. The laws and regulations referred to above could result in the imposition of civil or criminal penalties in cases of non-compliance or the imposition of liability for remediation costs. We have not received any notices that we have violated these laws and regulations in any material respect and we have not otherwise incurred any material liability thereunder. 
 
For acquisitions that involve the purchase of real estate, we conduct due diligence investigations to attempt to determine whether any substance 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, our 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 hazardous substance contamination, compliance violations and the existence of underground storage tanks. 
 
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 all of the states in which we operate. 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, we are 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. We conduct ongoing training programs to help ensure that our operations are in compliance with applicable regulations. We maintain various permits that are necessary to operate some of our facilities, some of which may be material to our operations. Management believes that the procedures currently in effect at all of our 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. 
 
Future developments, such as stricter environmental, health or safety laws and regulations, could affect our operations. We do not anticipate that our compliance with or liabilities under environmental, health and safety laws and regulations, including CERCLA, will require any material increase in our capital expenditures or otherwise have a material adverse effect on us. 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 our results of operations will not be materially and adversely affected. 
 
Item 2.	Properties. 	
 
As of September 30, 2004, we owned 73 of our 147 customer service centers and leased the balance. We refer you to “Retail Operations” under Item 1 for more information concerning the location of our customer service centers. We lease our Kansas City, Missouri headquarters. We lease underground storage facilities with an aggregate capacity of approximately 48.6 million gallons of propane at ten locations under annual lease agreements. We also lease capacity in several pipelines pursuant to annual lease agreements. 
 
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Tank ownership and control at customer locations are important components to our operations and customer retention. As of September 30, 2004, we owned the following: 
 
 	•	approximately 455 bulk storage tanks at approximately 250 locations with typical capacities of 12,000 to 30,000 gallons, 	
 
 	•	approximately 230,000 stationary customer storage tanks with typical capacities of 100 to 1,200 gallons, and 	
 
 	•	approximately 50,000 portable propane cylinders with typical capacities of up to 35 gallons. 	
 
We believe that we have satisfactory title or valid rights to use all of our 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, we do not believe that any of these burdens will materially interfere with our continued use of these properties in our business, taken as a whole. Our obligations under our borrowings are secured by liens and mortgages on our real and personal property. 
 
In addition, we believe that we have, or are in the process of obtaining, all required material approvals, authorizations, orders, licenses, permits, franchises and consents of, and have 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 our properties or the operation of our business. 
 
Item 3.	Legal Proceedings. 	
 
Our 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 we are a defendant in various legal proceedings and litigation arising in the ordinary course of business. We maintain insurance policies with insurers in amounts and with coverages and deductibles as the managing general partner believes are reasonable and prudent. However, we cannot assure you that this insurance will be adequate to protect us 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. In addition, the occurrence of an explosion may have an adverse effect on the public’s desire to use our products. 
 
Item 4.	Submission of Matters to a Vote of Security Holders. 	
 
No matter was submitted to a vote of the holders of our company’s Common Units during the fourth quarter of the fiscal year ended September 30, 2004. 
 
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PART II 
 
Item 5.	Market for Registrant’s Common Equity and Related Unitholder Matters. 	
 
Since July 31, 2001 our company’s Common Units representing limited partner interests have been traded on Nasdaq’s National Market under the symbol “NRGY.” 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 paid per common unit for the periods indicated. All high and low bid prices of the Common Units as well as the amount of cash distributions paid per common unit for the periods below have been adjusted for the two-for-one split of the outstanding Limited Partnership units completed on January 12, 2004. 

Quarters Ended:
	  	Low
	  	High
	  	Cash
Distribution
Per Unit
	
Fiscal 2004:	  	 	 	  	 	 	  	 	 	
September 30, 2004	  	$	23.04	  	$	27.45	  	$	0.425	
June 30, 2004	  	 	19.80	  	 	24.28	  	 	0.415	
March 31, 2004	  	 	17.61	  	 	25.00	  	 	0.405	
December 31, 2003	  	 	20.51	  	 	25.00	  	 	0.395	
				
Fiscal 2003:	  	 	 	  	 	 	  	 	 	
September 30, 2003	  	$	18.55	  	$	21.13	  	$	0.385	
June 30, 2003	  	 	15.66	  	 	20.00	  	 	0.375	
March 31, 2003	  	 	14.16	  	 	16.44	  	 	0.365	
December 31, 2002	  	 	13.73	  	 	14.73	  	 	0.358	
				
Fiscal 2002:	  	 	 	  	 	 	  	 	 	
September 30, 2002	  	$	13.94	  	$	15.38	  	$	0.350	
June 30, 2002	  	 	14.70	  	 	17.55	  	 	0.338	
March 31, 2002	  	 	13.53	  	 	15.15	  	 	0.330	
December 31, 2001	  	 	11.53	  	 	14.33	  	 	0.313	
 
As of November 1, 2004, our company had issued and outstanding 17,626,506 Common Units, which were held by approximately 12,100 unitholders. In addition, as of that date our company had 5,478,568 Senior Subordinated Units representing limited partner interests which were held of record by 40 unitholders and 1,145,084 Junior Subordinated Units representing limited partner interests which were held of record by 16 unitholders. There is no established public trading market for our company’s subordinated units. 
 
Our company makes quarterly distributions to its partners within approximately 45 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 managing 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 and to our non-managing general partner for any one or more of the next four quarters, 	
 
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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 our 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 of Inergy, L.P., which is incorporated by reference herein as an exhibit to this report. 
 
During the subordination period referred to below, our Common Units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.30 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the Common Units from prior quarters, before any distributions of available cash from operating surplus may be made on any Junior or Senior Subordinated Units. The subordination period generally will not end earlier than June 30, 2006 with respect to the Senior Subordinated Units and June 30, 2008 with respect to the Junior Subordinated Units. There is no guarantee that we will pay the minimum quarterly distribution on the 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 reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operation— Description of Credit Facility” under Item 7 and Note 4 to our Consolidated Financial Statements. 
 
On August 13, 2004, after meeting the financial tests provided for in our partnership agreement, we completed the conversion of 1,656,684 Senior Subordinated Units into common units. The conversion of Senior Subordinated Units does not impact the amount of cash distributions paid or the total number of limited partnership units outstanding. 
 
On September 28, 2004, a shelf registration statement (File No. 333-118941) was declared effective by the SEC for the periodic sale by us of up to $625 million of Common Units, partnership securities and debt securities, or any combination thereof. No offerings of Common Units, partnership securities or debt securities under the shelf registration statement have been made since it was declared effective. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Sources of Capital” under Item 7. 
 
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The following table sets forth in tabular format, a summary of our company’s equity compensation plan information as of September 30, 2004: 
 
Equity Compensation Plan Information 

Plan category
	  	Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
	  	Weighted-average
exercise price of
outstanding
options, warrants
and rights
	  	Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
	
 	  	(a)	  	(b)	  	(c)	
Equity compensation plans approved by security holders	  	1,115,064	  	$	13.79	  	620,036	
Equity compensation plans not approved by security holders	  	—  	  	 	—  	  	—  	
 	  		  			  		
Total	  	1,115,064	  	$	13.79	  	620,036	

Item 6.	Selected Financial Data. 	
 
The following table sets forth selected consolidated financial data and other operating data of Inergy, L.P., and our predecessor, Inergy Partners, LLC. The selected historical consolidated financial data of Inergy Partners, LLC as of and for the year ended September 30, 2000 are derived from the audited consolidated financial statements of Inergy Partners, LLC. The selected historical consolidated financial data of Inergy, L.P. as of and for the years ended September 30, 2004, 2003, 2002 and 2001 are derived from the audited consolidated financial statements of Inergy Partners, LLC and Inergy, L.P. The historical consolidated financial data of Inergy Partners, LLC and Inergy, L.P. include the results of operations of the Hoosier Propane Group from January 1, 2001, the effective date of the acquisition, which closed on January 12, 2001, the results of operations of Pro Gas from November 1, 2001, the effective date of the acquisition, and the results of operations of Independent Propane Company from December 20, 2001, the effective date of the acquisition, the results of operations of United Propane, Inc. from July 31, 2003, the effective date of the acquisition. 
 
“EBITDA” shown in the table below is defined as income before income taxes, plus net interest expense (inclusive of write off of deferred financing costs, interest expense related to make whole premium charge, less gain from termination of interest rate swap agreement) and depreciation and amortization expense, less interest income. EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with generally accepted accounting principles as those items are used to measure operating performance, liquidity or ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make the minimum quarterly distribution and is presented solely as a 
 
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supplemental measure. EBITDA, as we define it, may not be comparable to EBITDA or similarly titled measures used by other corporations or partnerships. 
 
The data in the following table 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 tables should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7. 

 	  	Inergy L.P. and Predecessor (a)	 	
 	  	Years Ended September 30,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	 	2001
	 	 	2000
	 	
 	  	(in thousands except per unit data)	 	
Statement of Operations Data:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues	  	$	482,496	 	 	$	363,365	 	 	$	208,700	 	 	$	168,982	 	 	$	63,512	 	
Cost of product sold (excluding depreciation and amortization as shown below)	  	 	359,053	 	 	 	267,010	 	 	 	134,999	 	 	 	128,926	 	 	 	51,553	 	
 	  				 				 				 				 				
Gross profit	  	 	123,443	 	 	 	96,355	 	 	 	73,701	 	 	 	40,056	 	 	 	11,959	 	
Expenses:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating and administrative(b)	  	 	81,296	 	 	 	59,249	 	 	 	45,300	 	 	 	23,000	 	 	 	8,990	 	
Depreciation and amortization	  	 	21,089	 	 	 	13,843	 	 	 	11,444	 	 	 	6,532	 	 	 	2,286	 	
 	  				 				 				 				 				
Operating income	  	 	21,058	 	 	 	23,263	 	 	 	16,957	 	 	 	10,524	 	 	 	683	 	
Other income (expense):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	  	 	(7,878	)	 	 	(9,982	)	 	 	(8,365	)	 	 	(6,670	)	 	 	(2,740	)	
Interest expense related to write-off of deferred financing costs	  	 	(1,216	)	 	 	—  	 	 	 	(585	)	 	 	—  	 	 	 	—  	 	
Interest expense related to make whole premium charge	  	 	(17,949	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Interest income related to swap value received	  	 	949	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Gain (loss) on sale of property, plant and equipment	  	 	(203	)	 	 	(91	)	 	 	140	 	 	 	37	 	 	 	—  	 	
Finance charges	  	 	704	 	 	 	339	 	 	 	115	 	 	 	290	 	 	 	176	 	
Other	  	 	106	 	 	 	86	 	 	 	140	 	 	 	168	 	 	 	59	 	
 	  				 				 				 				 				
Income (loss) before income taxes	  	 	(4,429	)	 	 	13,615	 	 	 	8,402	 	 	 	4,349	 	 	 	(1,822	)	
Provision for income taxes	  	 	167	 	 	 	103	 	 	 	93	 	 	 	—  	 	 	 	7	 	
 	  				 				 				 				 				
Net income (loss)	  	$	(4,596	)	 	$	13,512	 	 	$	8,309	 	 	$	4,349	 	 	$	(1,829	)	
 	  				 				 				 				 				
Net income (loss) per limited partner unit:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	  	$	(0.26	)	 	$	0.77	 	 	$	0.61	 	 	$	(0.20	)(c)	 	 	 	 	
 	  				 				 				 				 	 	 	 	
Diluted	  	$	(0.26	)	 	$	0.76	 	 	$	0.60	 	 	$	(0.20	)(c)	 	 	 	 	
 	  				 				 				 				 	 	 	 	
Weighted average limited partners’ units outstanding:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	  	 	22,027	 	 	 	16,676	 	 	 	13,317	 	 	 	11,452	(c)	 	 	 	 	
 	  				 				 				 				 	 	 	 	
Diluted	  	 	22,027	 	 	 	16,942	 	 	 	13,520	 	 	 	11,452	(c)	 	 	 	 	
 	  				 				 				 				 	 	 	 	
Cash distributions per unit	  	$	1.60	 	 	$	1.45	 	 	$	1.28	 	 	 	—  	 	 	 	 	 	

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Balance Sheet Data (end of period):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current assets	  	$	136,610	 	 	$	73,953	 	 	$	70,016	 	 	$	36,920	 	 	$	22,199	 	
Total assets	  	 	503,819	 	 	 	362,393	 	 	 	288,232	 	 	 	155,653	 	 	 	68,924	 	
Long-term debt, including current portion	  	 	137,601	 	 	 	131,127	 	 	 	124,462	 	 	 	54,132	 	 	 	34,927	 	
Redeemable preferred members’ interest	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	10,896	 	
Members’ equity	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	2,972	 	
Partners’ capital	  	 	252,043	 	 	 	178,983	 	 	 	120,916	 	 	 	72,754	 	 	 	—  	 	
Other Financial Data:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
EBITDA (d) (unaudited)	  	$	42,754	 	 	$	37,440	 	 	$	28,796	 	 	$	17,551	 	 	$	3,204	 	
Net cash provided by (used in) operating activities	  	 	32,156	 	 	 	34,428	 	 	 	7,779	 	 	 	4,659	 	 	 	(222	)	
Net cash used in investing activities	  	 	(98,304	)	 	 	(34,488	)	 	 	(94,017	)	 	 	(64,025	)	 	 	(12,464	)	
Net cash provided by financing activities	  	 	64,858	 	 	 	1,491	 	 	 	86,155	 	 	 	60,164	 	 	 	13,907	 	
Maintenance capital expenditures(e) (unaudited)	  	 	1,368	 	 	 	1,039	 	 	 	1,556	 	 	 	1,901	 	 	 	283	 	
Other Operating Data (unaudited):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Retail propane gallons sold	  	 	140,742	 	 	 	119,697	 	 	 	88,515	 	 	 	46,750	 	 	 	18,112	 	
Wholesale propane gallons delivered	  	 	368,320	 	 	 	284,721	 	 	 	256,893	 	 	 	147,258	 	 	 	87,340	 	
Reconciliation of Net Income (Loss) to EBITDA:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	(4,596	)	 	$	13,512	 	 	$	8,309	 	 	$	4,349	 	 	$	(1,829	)	
Plus:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes	  	 	167	 	 	 	103	 	 	 	93	 	 	 	—  	 	 	 	7	 	
Interest expense	  	 	7,878	 	 	 	9,982	 	 	 	8,365	 	 	 	6,670	 	 	 	2,740	 	
Interest expense related to write-off of deferred financing costs	  	 	1,216	 	 	 	—  	 	 	 	585	 	 	 	—  	 	 	 	—  	 	
Interest expense related to make whole premium charge	  	 	17,949	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Interest income related to swap value received	  	 	(949	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Depreciation and amortization expense	  	 	21,089	 	 	 	13,843	 	 	 	11,444	 	 	 	6,532	 	 	 	2,286	 	
 	  				 				 				 				 				
EBITDA (d)	  	$	42,754	 	 	$	37,440	 	 	$	28,796	 	 	$	17,551	 	 	$	3,204	 	

(a)	Represents selected financial data of Inergy Partners, LLC and its subsidiaries prior to July 31, 2001 and Inergy, L.P. thereafter. 	
 
(b)	The historical financial statements include non-cash charges related to amortization of deferred compensation of $234,000, and $79,000 for the years ended September 30, 2001, and 2000, respectively. 	
 
(c)	Amounts relate to the net loss incurred by Inergy, L.P. and the weighted average limited partners’ units outstanding for the period from July 31, 2001 (the closing date of our initial public offering) through September 30, 2001. 	
 
(d)	EBITDA is defined as income before income taxes, plus net interest expense (inclusive of write off of deferred financing costs, interest expense related to make whole premium charge, less gain from termination of interest rate swap agreement) and depreciation and amortization expense, less interest income. EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with accounting principles generally accepted in the United States as those items are used to measure operating performance, liquidity or ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make the minimum quarterly distribution and is presented solely as a supplemental measure. EBITDA, as we define it, may not be comparable to EBITDA or similarly titled measures used by other corporations or partnerships. 	
 
(e)	Maintenance capital expenditures are defined as those capital expenditures which do not increase operating capacity or revenues from existing levels. 	
 
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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; 	
 
 	•	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. 
 
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General 
 
We are a Delaware limited partnership formed to own and operate a rapidly growing retail and wholesale propane supply, marketing and distribution business. For the fiscal year ended September 30, 2004, we sold approximately 140.7 million gallons of propane to retail customers and delivered approximately 368.3 million gallons of propane to wholesale customers. Our retail 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. In addition to our retail business, we operate a wholesale supply, marketing and distribution business, providing propane procurement, transportation, supply and price risk management services to our 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. 
 
The results of operations discussed below are those of Inergy, L.P. Audited financial statements for Inergy, L.P. are included elsewhere in this Form 10-K. 
 
Since the inception of our predecessor in November 1996 through September 30, 2004, we have acquired 42 companies for an aggregate purchase price of approximately $400 million, including working capital, assumed liabilities and acquisition costs. After year end, we entered into a definitive agreement to acquire 100% of the partnership interests in Star Gas Propane, L.P. for approximately $475 million. The transaction is expected to close in the fourth quarter of the calendar 2004. 
 
The retail distribution business is largely seasonal due to propane’s primary use as a heating source in residential and commercial buildings. As a result, cash flows from operations are highest from November through April when customers pay for propane purchased during the six-month peak heating season of October through March. We generally experience net losses in the six-month, off season of April through September. 
 
Because a substantial portion of our propane is used in the weather-sensitive residential markets, the temperatures realized in our areas of operations, particularly during the six-month peak heating season, have a significant effect on our 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, we use information on normal temperatures in understanding how historical results of operations are affected by temperatures that are colder or warmer than normal and in preparing forecasts of future operations, which we base on the assumption that normal weather will prevail in each of our regions. “Heating degree days” are a general indicator of weather impacting propane usage and are calculated for any given period by adding the difference between 65 degrees and the average temperature of each day in the period (if less than 65 degrees). 
 
In determining actual and normal weather for a given period of time, we compare the actual number of heating degree days for the 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 our regions. When we discuss “normal” weather in our results of operations presented below we are referring to a 30-year average 
 
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consisting of the years 1974 through 2003. We then calculate 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, we calculate a ratio of actual heating degree days to normal heating degree days, first on a regional basis and then on a partnership-wide basis. 
 
The propane business is a “margin-based” business where the level of profitability is largely dependent on the difference between sales prices and product cost. The unit cost of propane is subject to volatile changes as a result of product supply or other market conditions. Propane unit cost changes can occur rapidly over a short period of time and can impact margins as sales prices may not change as rapidly. There is no assurance that we will be able to fully pass on product cost increases, particularly when product costs increase rapidly. We have generally been successful in passing on higher propane costs to our customers and have historically maintained or increased our gross margin per gallon in periods of rising costs. In periods of increasing costs, we have experienced a decline in our gross profit as a percentage of revenues. In periods of decreasing costs, we have experienced an increase in our gross profit as a percentage of revenues. Retail sales generate significantly higher margins than wholesale sales, and sales to residential customers generally generate higher margins than sales to our other retail customers. 
 
We believe our wholesale supply, marketing and distribution business complements our retail distribution business. Through our wholesale operations, we distribute propane and also offer 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. 	
 
We engage in derivative transactions to reduce the effect of price volatility on our product costs and to help ensure the availability of propane during periods of short supply. We attempt to balance our contractual portfolio by purchasing volumes only when we have a matching purchase commitment from our wholesale customers. However, we may experience net unbalanced positions from time to time. 
 
Results of Operations 
 
Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003 
 
Volume. During fiscal 2004, Inergy, L.P. sold 140.7 million retail gallons of propane, an increase of 21.0 million gallons, or 18%, from the 119.7 million retail gallons sold in fiscal 2003. The increase in retail sales volume was principally due to the acquisition of sixteen retail 
 
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propane companies in fiscal 2004 in addition to the acquisition of four retail propane companies and five locations of a large regional distributor in the fourth fiscal quarter of 2003. Acquisition related volume accounted for approximately 35.2 million gallons of the increase, partially offset by approximately 14.2 million lesser gallon sales due to warmer weather and deferral of purchases by our customers due to an approximate 13% higher propane cost of $0.75 per gallon on average in 2004 compared to $0.66 in 2003. The weather was approximately 12% warmer in fiscal 2004 as compared to fiscal 2003 in our retail areas of operations, and approximately 6% warmer than normal. 
 
Wholesale gallons delivered increased 83.6 million gallons, or 29%, to 368.3 million gallons in fiscal 2004 from 284.7 million gallons in fiscal 2003. This increase was primarily attributable to increased sales volumes and to a lesser extent wholesale sales volumes through our NGL business, offset by the warmer weather in 2004 in our wholesale areas of operations. 
 
Revenues. Revenues in fiscal 2004 were $482.5 million, an increase of $119.1 million, or 33%, from $363.4 million of revenues in fiscal 2003. 
 
Revenues from retail sales were $218.1 million in fiscal 2004 (after elimination of sales to our wholesale operations), an increase of $45.0 million, or 26%, from $173.1 million in fiscal 2003. This increase is primarily a result of the acquisition-related volume increase, higher selling prices of propane due to the higher cost of propane in 2004, offset by warmer weather in fiscal 2004 as compared to fiscal 2003 in our retail areas of operations. In addition to retail propane sales, these revenues consist of transportation revenues, tank rentals, appliance sales and service income. 
 
Revenues from wholesale sales were $264.4 million (after elimination of sales to our retail operations) in fiscal 2004, an increase of $74.1 million or 39%, from $190.3 million in fiscal 2003. This increase was primarily attributable to the acquisition of our NGL business, the higher per gallon selling price of propane due to its higher cost and the volume increase generated in our wholesale propane operations. 
 
Cost of Product Sold. Retail cost of product sold in fiscal 2004 was $112.1 million, an increase of $25.1 million or 29%, from retail cost of product sold of $87.0 million in fiscal 2003. This increase was primarily attributable to the increase in the average cost of propane as described above and retail propane acquisition related volume. Wholesale cost of product sold in fiscal 2004 was $246.9 million, an increase of $66.9 million or 37%, from wholesale cost of product sold of $180.0 million in 2003. This increase was primarily related to the cost generated by our NGL business in California in fiscal 2004 as well as the increased volumes experienced in our wholesale propane areas of operations. 
 
Gross Profit. Retail gross profit was $106.0 million in fiscal 2004 compared to $86.1 million in fiscal 2003, an increase of $19.9 million, or 23%. This increase was primarily attributable to the increase in retail gallons sold primarily as a result of acquisitions which accounted for approximately $16.0 million of the increase as well as an increase in margin per gallon which amounted to an increase of approximately $3.2 million. The other $0.7 million is a result of an increase in other product sales, partially offset by the lesser retail propane volume sales as a result of the warmer weather in fiscal 2004 and the deferral of purchases by our customers due to 
 
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the higher cost of propane in 2004 as compared to 2003. Wholesale gross profit was $17.5 million (after elimination of gross profit attributable to our retail operations) in fiscal 2004 compared to $10.3 million in fiscal 2003, an increase of $7.2 million or 70%. This increase is primarily due to the gross profit generated by our NGL business in fiscal 2004 and increased wholesale volumes from our existing business, both partially offset by lesser margin per gallon from our existing business. 
 
Operating and Administrative Expenses. Operating and administrative expenses increased $22.1 million, or 37%, to $81.3 million in fiscal 2004 as compared to $59.2 million in fiscal 2003. The increase in our operating and administrative expenses were primarily attributable to increases in personnel expenses of $13.4 million, general operating expenses of $5.9 million including insurance, professional services and facility costs, and increased vehicle costs of $2.8 million resulting primarily from acquisitions. 
 
Depreciation and Amortization. Depreciation and amortization increased $7.3 million, or 52%, to $21.1 million in fiscal 2004 from $13.8 million in fiscal 2003 as a result of retail propane acquisitions as well as the acquisition of our NGL business in California in October of 2003. 
 
Interest Expense. Interest expense decreased $2.1 million, or 21%, to $7.9 million in fiscal 2004 as compared to $10.0 million in fiscal 2003. Interest expense decreased primarily due to a decrease in the average debt outstanding including the January 2004 early retirement of the $85.0 million senior secured notes, and lower average interest rates. The average debt outstanding in 2004 as compared to 2003 was a result of utilizing net proceeds from common unit offerings for the debt repayment. 
 
Interest Expense and Income related to Make Whole Premium Charge, Write-off of Deferred Financing Costs, and Swap Value Received. In January 2004, we repaid in full our $85.0 million senior secured notes before their scheduled maturity dates. As such, we were required to pay an additional amount of approximately $17.9 million as a make-whole payment which was recorded as a charge to earnings in the quarter ended March 31, 2004. We used proceeds from our January 2004 common unit offering and borrowings from our bank credit facility for this repayment. In addition, we also recorded a charge to earnings of approximately $1.2 million to write-off deferred financing costs associated with the senior secured notes. Partially offsetting these charges was a $0.9 million gain from the cancellation of interest rate swap agreements also associated with the senior secured notes. 
 
Net Income (loss). Net loss for fiscal 2004 was $4.6 million compared to net income of $13.5 million in fiscal 2003. The net loss is primarily a result of net charges of $18.2 million associated with the early retirement of the senior secured notes through an equity offering which together with higher operating expenses and higher depreciation and amortization as a result of acquisitions offset the increased gross profit. 
 
EBITDA. In fiscal 2004, income before interest, taxes, depreciation and amortization was $42.8 million compared to $37.4 million in fiscal 2003. The increase was primarily attributable to increased sales volumes and higher retail propane margins partially offset by an increase in operating and administrative expenses. EBITDA is defined as income before taxes, plus net 
 
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interest expense (inclusive of write-off of deferred financing costs, interest expense related to make whole premium charge, less gain from termination of interest rate swap agreement) and depreciation and amortization expense. EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with generally accepted accounting principles as those items are used to measure operating performance, liquidity or ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make the minimum quarterly distribution and is presented solely as a supplemental measure. EBITDA, as we define it, may not be comparable to EBITDA or similarly titled measures used by other corporations or partnerships. 

 	  	Year Ended
September 30,
	
 	  	2004
	 	 	2003
	
 	  	(in thousands)	
EBITDA:	  	 	 	 	 	 	 	
Net income (loss)	  	$	(4,596	)	 	$	13,512	
Interest expense, net	  	 	7,878	 	 	 	9,982	
Write off of deferred financing costs	  	 	1,216	 	 	 	—  	
Interest expense related to make whole premium charge	  	 	17,949	 	 	 	—  	
Interest income related to swap value received	  	 	(949	)	 	 	—  	
Provision for income taxes	  	 	167	 	 	 	103	
Depreciation and amortization	  	 	21,089	 	 	 	13,843	
 	  				 			
EBITDA	  	$	42,754	 	 	$	37,440	

Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002 
 
Volume. During fiscal 2003, Inergy, L.P. sold 119.7 million retail gallons of propane, an increase of 31.2 million gallons, or 35%, from the 88.5 million retail gallons sold in fiscal 2002. The increase in retail sales volume was principally due to the acquisition of four retail propane companies and five locations of a large regional distributor in the fourth fiscal quarter of 2003 in addition to two retail propane acquisitions in the first fiscal quarter of 2002. Acquisition related volume accounted for approximately 24.8 million gallons of the increase and the remaining 6.4 million gallons due to colder weather in our retail areas of operation. The weather was approximately 18% colder in fiscal 2003 as compared to fiscal 2002 in our retail areas of operations, and approximately 6% colder than normal. 
 
Wholesale gallons delivered increased 27.8 million gallons, or 11%, to 284.7 million gallons in fiscal 2003 from 256.9 million gallons in fiscal 2002. This increase was primarily attributable to growth of our existing wholesale operations and partially due to the colder weather in 2003 in our wholesale areas of operations. 
 
Revenues. Revenues in fiscal 2003 were $363.4 million, an increase of $154.7 million, or 74%, from $208.7 million of revenues in fiscal 2002. 
 
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Revenues from retail sales were $173.1 million in fiscal 2003 (after elimination of sales to our wholesale operations), an increase of $61.4 million, or 55%, from $111.7 million in fiscal 2002. This increase was primarily attributable to acquisition-related volume, higher selling prices of propane due to the higher cost of propane and volume increases at our existing locations primarily as a result of colder weather in fiscal 2003. In addition to retail propane sales, these revenues consist of retail propane sales, transportation revenues, tank rentals, appliance sales and service income. 
 
Revenues from wholesale sales were $190.3 million (after elimination of sales to our retail operations) in fiscal 2003, an increase of $93.3 million or 96%, from $97.0 million in fiscal 2002. This increase was primarily attributable to colder weather in 2003, thus higher wholesale volumes, and an increase in selling prices as a result of the higher cost of propane. 
 
Cost of Product Sold. Retail cost of product sold in fiscal 2003 was $87.0 million, an increase of $43.8 million or 101%, from retail cost of product sold of $43.2 million in fiscal 2002. This increase was primarily attributable to an increase in the average cost of propane, retail acquisition related volume and volume increases at our existing locations due to colder weather in fiscal 2003. Wholesale cost of product sold in fiscal 2003 was $180.0 million, an increase of $88.1 million or 96%, from wholesale cost of product sold of $91.9 million in 2002. This increase was primarily attributable to an increase in the average cost of propane and higher wholesale volume. 
 
Gross Profit. Retail gross profit was $86.1 million in fiscal 2003 compared to $68.6 million in fiscal 2002, an increase of $17.5 million, or 26%. This increase was primarily attributable to an increase in retail gallons sold due to acquisitions which accounted for approximately $12.9 million of the increase as well as an increase of approximately $6.5 million from existing locations due to the colder weather and an increase of $0.5 million from other product sales, partially offset by lower margins per gallon of approximately $(2.4) million. Wholesale gross profit was $10.3 million (after elimination of gross profit attributable to our retail operations) in fiscal 2003 compared to $5.1 million in fiscal 2002, an increase of $5.2 million or 102%. This increase was attributable to an increase in wholesale volume primarily due to the colder weather. 
 
Operating and Administrative Expenses. Operating and administrative expenses increased $13.9 million, or 31%, to $59.2 million in fiscal 2003 as compared to $45.3 million in fiscal 2002. The increase in our operating and administrative expenses were primarily attributable to an increase in personnel expenses of $7.9 million, general operating expenses of $4.7 million including insurance, professional services and facility costs and vehicle expenses of $1.3 million resulting primarily from acquisitions. 
 
Depreciation and Amortization. Depreciation and amortization increased $2.4 million, or 21%, to $13.8 million in fiscal 2003 from $11.4 million in fiscal 2002 primarily as a result of retail acquisitions. 
 
Interest Expense. Interest expense increased $1.0 million, or 12%, to $10.0 million in fiscal 2003 as compared to $9.0 million, including interest expense related to write-off of deferred financing costs of $0.6 million, in fiscal 2002. This increase is the result of the higher interest rates associated with the senior secured notes issued in June 2002 and higher average borrowings 
 
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outstanding during fiscal 2003 as compared to fiscal 2002 principally related to acquisition financing. 
 
Net Income. Net income increased $5.2 million, or 63%, to $13.5 million in fiscal 2003 from $8.3 million in fiscal 2002. This increase in net income was attributable to the increase in retail and wholesale gross profit, partially offset by increases in operating and administrative expenses, depreciation and amortization, and interest expense, all primarily the result of acquisitions. 
 
EBITDA. In fiscal 2003, income before interest, taxes, depreciation and amortization was $37.4 million compared to $28.8 million in fiscal 2002. The increase was primarily attributable to increased sales volumes partially offset by an increase in operating and administrative expenses. EBITDA is defined as income before taxes, plus interest expense and depreciation and amortization expense, less interest income. EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with generally accepted accounting principles as those items are used to measure operating performance, liquidity or ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make the minimum quarterly distribution and is presented solely as a supplemental measure. EBITDA, as we define it, may not be comparable to EBITDA or similarly titled measures used by other corporations or partnerships. 

 	  	Year Ended
September 30,
	
EBITDA (in thousands)
	  	2003
	  	2002
	
EBITDA:	  	 	 	  	 	 	
Net income	  	$	13,512	  	$	8,309	
Interest expense	  	 	9,982	  	 	8,365	
Interest expense related to write-off of deferred financing costs	  	 	—  	  	 	585	
Provision for income taxes	  	 	103	  	 	93	
Depreciation and amortization	  	 	13,843	  	 	11,444	
 	  			  			
EBITDA	  	$	37,440	  	$	28,796	

Liquidity and Sources of Capital 
 
In January 2004, Inergy, L.P. issued 3,625,000 Common Units in a public offering, resulting in proceeds of $83.3 million, net of underwriter’s discount, commission, and offering expenses. Inergy Partners, LLC contributed $1.8 million in cash to Inergy, L.P. in conjunction with the issuance in order to maintain its 2% non-managing general partner interest. These funds were used to repay borrowings under our credit agreement. 
 
In August 2004, Inergy, L.P. issued 1,300,000 Common Units to Tortoise Energy Infrastructure Corporation resulting in proceeds of $29.9 million, net of underwriter’s discount, commission, and offering expenses. 
 
Cash flows provided by operating activities of $32.2 million in fiscal 2004 consisted primarily of: net loss of $4.6 million; net non-cash charges of $42.4 million relating to depreciation and amortization of $21.1 million, interest expense related to make whole premium 
 
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charge of $17.9 million associated with the early repayment of the senior secured notes and $3.4 million of other non-cash charges; and a decrease in cash flows of $5.6 million associated with the changes in operating assets and liabilities, including net liabilities from price risk management activities. The cash used in the changes in operating assets and liabilities is primarily due to an increase in propane inventory as a result of building our inventory for the peak heating season and an increase in accounts receivable due to acquisition related growth, the seasonal nature of the business and increased wholesale volumes, offset by an increase in accounts payable due to propane purchases and an increase in net assets from price risk management activities which is consistent with the increase in wholesale inventory. Cash flows provided by operating activities of $34.4 million in fiscal 2003 consisted primarily of: net income of $13.5 million; net non-cash charges of $16.2 million, principally related to depreciation and amortization of $13.8 million and $2.4 million of other non-cash charges; and $4.7 million associated with the changes in operating assets and liabilities, including net liabilities from price risk management activities. The cash provided by the changes in operating assets and liabilities is primarily due to a decrease in propane inventory resulting from our decision to reduce physical position in our wholesale operations due to higher propane costs, and an increase in accounts payable due primarily to acquisition related growth. These changes were partially offset by the effects of working capital used by the reduction in price risk management liabilities, consistent with the reduction in wholesale propane inventories, and an increase in accounts receivable related to the growth of our retail and wholesale operations. 
 
Cash used in investing activities was $98.3 million in fiscal 2004 as compared to $34.5 million in fiscal 2003. Fiscal 2004 investing activities included a use of cash of $85.2 million, net of cash acquired, for the acquisition of sixteen retail propane companies and our NGL business in California. Fiscal 2003 investing activities included a use of cash of $25.9 million, net of cash acquired, for the acquisition of twelve retail propane companies. Additionally, in fiscal 2004 and 2003, we expended $14.5 million and $6.2 million, respectively for additions of property, plant and equipment to accommodate our growing operations. Deferred financing costs of $0.9 million and $3.0 million were incurred in fiscal 2004 and 2003, respectively, related to debt incurred to complete the acquisitions. 
 
Cash provided by financing activities was $64.9 million in fiscal 2004 and $1.5 million in fiscal 2003. Cash provided by financing activities in fiscal 2004 and fiscal 2003 included net borrowings of $5.2 million and $1.9 million, respectively, under debt agreements, including borrowings and repayments of our revolving working capital and acquisition credit facility and the early repayment in full of our senior secured notes in the second quarter of fiscal 2004. The early repayment of our senior secured notes resulted in interest expense related to make whole premium payment to the lenders in the amount of $17.9 million. In addition, net proceeds were received from the issuance of Common Units of $113.2 million and $23.3 million in fiscal 2004 and 2003, respectively. Offsetting these cash sources were $37.4 million and $25.2 million of distributions in fiscal 2004 and fiscal 2003, respectively. 
 
At September 30, 2004 and 2003, we had goodwill of $78.1 million and $64.5 million, representing approximately 16% and 18% of total assets, respectively. This goodwill is attributable to our acquisitions. We expect recovery of the goodwill through future cash flows associated with these acquisitions. 
 
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The following table summarizes our company’s long-term debt and operating lease obligations as of September 30, 2004, in thousands of dollars: 

 	  	Total
	  	Less than
1 year
	  	1-3 years
	  	4-5 years
	  	After
5 years
	
Aggregate amount of principal to be paid on the outstanding long-term debt	  	$	137,601	  	$	23,615	  	$	111,337	  	$	1,825	  	$	824	
Future minimum lease payments under noncancelable operating leases	  	 	14,887	  	 	5,072	  	 	6,715	  	 	2,810	  	 	290	
Fixed price purchase commitments	  	 	134,886	  	 	134,886	  	 	—  	  	 	—  	  	 	—  	
Standby letters of credit	  	 	5,645	  	 	5,645	  	 	—  	  	 	—  	  	 	—  	
 
As of September 30, 2004, total energy contracts had an outstanding net fair value, recorded as a (liability) of $(6.6) million, as compared to total energy contracts outstanding with a net fair value at September 30, 2003 of $3.1 million. The net change of $(9.7) million includes a net increase in fair value of $0.7 million from energy contracts settled during the 2004 fiscal year period, and a net decrease of $(10.4) million from other changes in fair value related to net unrealized gains on energy contracts still outstanding at the end of fiscal 2004. Of the outstanding fair value as of September 30, 2004, energy contracts with a maturity of less than one year totaled $(6.6) million, and there were no energy contracts maturing between one and two years. In addition, at September 30, 2004, the company has committed to purchase approximately 50 million gallons of propane at future dates at the prevailing market price. 
 
On September 28, 2004, our shelf registration statement (File No. 333-118941) was declared effective by the Securities and Exchange Commission for the periodic sale by us of up to $625 million of Common Units, partnership securities and debt securities, or any combination thereof. Pursuant to the shelf registration statement, we are 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. No offerings of partnership securities or debt securities under the shelf registration statement have been made since it was declared effective. 
 
After year end, Inergy entered into a definitive agreement to purchase 100% of the partnership interests in Star Gas Propane, L.P. for approximately $475 million. We expect to fund the acquisition initially through a combination of debt and equity. Permanent financing for this acquisition is expected to be put in place either prior to or shortly after the acquisition closing. 
 
We believe that anticipated cash from operations and borrowings under our amended and restated credit facility 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 
 
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acquisitions, we may need to raise additional capital. We may not be able to raise additional funds or may not be able to raise such funds on favorable terms. 
 
Description of Credit Facility 
 
Effective May 27, 2004, Inergy Propane, LLC executed an Amended and Restated Credit Agreement (the “Amended Facility”) with its existing lenders in addition to others. The Amended Facility consists of a $75 million revolving working capital facility and a $225 million revolving acquisition facility. The Amended Facility expires in July 2006 and carries terms, conditions and covenants substantially similar to the previous credit agreement. The Amended Facility is guaranteed by Inergy, L.P. and its subsidiary. The May 2004 amendment has similar interest terms to the previous credit agreement amended in July 2003, and accrues interest at either prime rate or LIBOR plus applicable spreads, resulting in interest rates of between 3.77% and 4.75% at September 30, 2004. At September 30, 2004, borrowings outstanding under the credit facility were $132.2 million, including $26.4 million under the revolving working capital facility. Of the outstanding credit facility balance of $132.2 million, $109.8 million is classified as long-term in the accompanying 2004 consolidated balance sheet. At November 1, 2004, the borrowings outstanding under the credit facility were $143.8 million, including $38.1 million under the revolving working capital facility. 
 
During each fiscal year beginning October 1, the outstanding balance of the revolving working capital facility must be reduced to $4.0 million or less for a minimum of 30 consecutive days during the period commencing March 1 and ending September 30 of each calendar year. 
 
The obligations under the credit facility are secured by first priority liens on all assets of Inergy Propane, LLC and its subsidiaries, the pledge of all of Inergy Propane’s equity interests in its subsidiaries and by a pledge of our membership interest in Inergy Propane. 
 
Indebtedness under the credit facility bears interest at the option of Inergy Propane at either prime rate or LIBOR (preadjusted for reserves), plus in each case, an applicable margin. The applicable margin varies quarterly based on Inergy Propane’s leverage ratio. Inergy Propane will incur a fee based on the average daily unused commitments under the credit facility. 
 
Inergy Propane is required to use 100% 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) to reduce borrowings under the credit facility during any fiscal year in which unapplied net cash proceeds are in excess of $10 million. Any such mandatory prepayments are applied first to reduce borrowings under the acquisition facility and then under the working capital facility. 
 
In addition, the credit facility contains various covenants limiting the ability of Inergy Propane and its subsidiaries to (subject to various exceptions), among other things: 
 
 	•	grant or incur liens; 	
 
 	•	incur other indebtedness (other than permitted debt); 	
 
 	•	make investments, loans and acquisitions; 	
 
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 	•	enter into a merger, consolidation or sale of assets; 	
 
 	•	enter into in any sale-leaseback transaction or enter into any new business; 	
 
 	•	issue or modify the terms of any equity or other securities, 	
 
 	•	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; 	
 
 	•	permit operating lease obligations to exceed $7.5 million in any fiscal year; 	
 
 	•	enter into any debt which contains covenants more restrictive than those of the credit facility; 	
 
 	•	enter into put agreements granting put rights with respect to equity interests of Inergy Propane or its subsidiaries; and 	
 
 	•	modify their respective organizational documents. 	
 
In addition, Inergy, L.P. is prohibited from incurring indebtedness except its guarantee of the credit facility. 
 
Furthermore, the credit facility contains the following financial covenants: 
 
 	•	the ratio of consolidated EBITDA (as defined in the credit facility) to consolidated interest expense (as defined in the credit facility) must be at least 2.5 to 1.0 for any fiscal quarter; and 	
 
 	•	the ratio of total funded debt (as defined in the credit facility) to consolidated EBITDA may not exceed 4.75 to 1.0; 	
 
 	•	the ratio of consolidated Inergy, L.P. total funded debt (as defined in the credit facility) to consolidated EBITDA may not exceed 5.00 to 1.0. 	
 
Each of the following is an event of default under the credit facility: 
 
 	•	default in payment of principal when due; 	
 
 	•	default in payment of interest, fees or other amounts within three days of their due date; 	
 
 	•	violation of specified affirmative and negative covenants; 	
 
 	•	default in performance or observance of any term, covenant, condition or agreement contained in the credit facility or ancillary agreements; 	
 
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 	•	specified cross-defaults; 	
 
 	•	bankruptcy and other insolvency events of Inergy Propane, its subsidiaries or Inergy, L.P.; 	
 
 	•	impairment of the enforceability or the validity of agreements relating to the credit facility; 	
 
 	•	judgments exceeding $2.5 million against Inergy Propane, its subsidiaries or Inergy, L.P. are undischarged or unstayed for 30 days; 	
 
 	•	certain change of control events; and 	
 
 	•	a condition or event occurs that could have a material adverse effect in the reasonable judgment of two-thirds of the credit facility lenders. 	
 
On June 7, 2002, we entered into a note purchase agreement with a group of institutional lenders pursuant to which it issued $85.0 million aggregate principal amount of senior secured notes with a weighted average interest rate of 9.07% and a weighted average maturity of 5.9 years. The senior secured notes consist of the following: $35.0 million principal amount of 8.85% senior secured notes with a 5-year maturity, $25.0 million principal amount of 9.10% senior secured notes with a 6-year maturity, and $25.0 million principal amount of 9.34% senior secured notes with a 7-year maturity. The senior secured notes have covenants similar to the credit agreement. The proceeds from the issuance of the senior secured notes were used to repay borrowings under our credit facilities to fund the Independent Propane Company and Pro Gas acquisitions earlier in fiscal 2002. 
 
The funds from a public unit offering, together with net new borrowings under the revolving credit facility were used to repay in full $85.0 million aggregate principal amount of senior secured notes, plus interest expense related to a make whole premium charge of approximately $17.9 million in January 2004. All interest rate swap agreements were cancelled in conjunction with the repayment of $85 million of senior secured notes. The interest expense related to the make whole premium charge of $17.9 million was recorded as a charge to earnings in the quarter ended March 31, 2004 together with the write-off of the $1.2 million deferred financing costs associated with the senior secured notes, partially offset by a $0.9 million gain from the cancellation of the interest rate swaps. 
 
Recent Accounting Pronouncements 
 
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. Interpretation No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interests or significant financial support provided to it. Interpretation No. 46 became effective for us on October 1, 2003 for variable interest entities created prior to February 1, 2003. The adoption of Interpretation No. 46 did not have a material impact on our consolidated financial statements. 
 
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SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for the fiscal year ending September 30, 2004. The adoption of SFAS No. 150 did not have a material effect on the Company’s consolidated financial statements. 
 
Critical Accounting Policies 
 
Accounting for Price Risk Management. Our wholesale operations, holds propane inventory, sells propane to various propane users, retailers, and resellers and offers price risk management services to these customers as part of our marketing and distribution operations. Our wholesale operations also sell propane to energy marketers and dealers and therefore we enter into fixed price forward purchase and sales contracts. Derivative financial instruments utilized in connection with these activities are accounted for using the mark-to-market method in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Our overall objective for entering into such derivative financial instruments, including those designated as fair value hedges of our inventory positions, is to manage our exposure to fluctuations in commodity prices and changes in the fair market value of our inventories as well as to ensure an adequate physical supply will be available. 
 
SFAS No. 133 requires recognition of all derivative instruments in the balance sheets and measures them at fair value. Beginning in December 2002, certain of our commodity derivative financial instruments have been designated as hedges of selected inventory positions, and qualify as fair value hedges, as defined in SFAS No. 133. For derivative instruments designated as hedges, we use regression analysis and the dollar offset method to formally assesses, both at the hedge contract’s inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in fair value of hedged items. Changes in the fair value of derivative instruments designated as fair value hedges are reported in the balance sheet as price risk management assets or liabilities. The ineffective portions of hedging derivatives are recognized immediately in cost of product sold. Changes in the fair value of derivative instruments that are not designated as hedges are recorded in current period earnings in accordance with SFAS No. 133. 
 
Furthermore, we have elected to use the special hedge accounting rules in SFAS No. 133 and hedge the fair value of certain of our inventory positions, whereby the hedged inventory is marked to market. Inventories purchased under energy contracts after October 25, 2002, and not otherwise designated as being hedged, as discussed above, are carried at the lower-of-cost or market. 
 
Revenue Recognition. Sales of propane and other liquids are recognized at the time product is shipped or delivered to the customer. Gas processing and fractionation fees are recognized upon delivery of the product. Revenue from the sale of propane appliances and 
 
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equipment is recognized at the time of sale or installation. Revenue from repairs and maintenance is recognized upon completion of the service. 
 
Impairment of Long-Lived Assets. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” 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 Statement No. 142, we completed the valuation of each of our reporting units and determined no impairment existed as of September 30, 2004. 
 
SFAS No. 144 modifies the financial accounting and reporting for long-lived assets to be disposed of by sale and it broadens the presentation of discontinued operations to include more disposal transactions. We implemented SFAS No. 144 beginning in the fiscal year ending July 31, 2003, with no material effect on our financial position, results of operations and cash flows. 
 
Self Insurance. We are insured by third parties, subject to varying retention levels of self-insurance, which management considers prudent. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims, 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. 
 
Factors That May Affect Future Results of Operations, Financial Condition or Business 
 
 	•	We may not be able to generate sufficient cash from operations to allow us to pay the minimum quarterly distribution. 	
 
 	•	Since weather conditions may adversely affect the demand for propane, our financial condition and results of operations are vulnerable to, and will be adversely affected by, warm winters. 	
 
 	•	If we do not continue to make acquisitions on economically acceptable terms, our future financial performance will be reliant upon internal growth and efficiencies. 	
 
 	•	We cannot assure you that we will be successful in integrating our recent acquisitions. 	
 
 	•	Sudden and sharp propane price increases that cannot be passed on to customers may adversely affect our profit margins. 	
 
 	•	Our indebtedness may limit our ability to borrow additional funds, make distributions to unitholders or capitalize on acquisition or other business opportunities. 	
 
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 	•	The highly competitive nature of the retail propane business could cause us to lose customers, thereby reducing our revenues. 	
 
 	•	If we are not able to purchase propane from our principal supplier, our results of operations would be adversely affected. 	
 
 	•	Competition from alternative energy sources may cause us to lose customers, thereby reducing our revenues. 	
 
 	•	Our business would be adversely affected if service at our principal storage facilities or on the common carrier pipelines we use is interrupted. 	
 
 	•	Terrorist attacks, such as the attacks that occurred on September 11, 2001, have resulted in increased costs, and future war or risk of war may adversely impact our results of operations. 	
 
 	•	We are subject to operating and litigation risks that could adversely affect our operating results to the extent not covered by insurance. 	
 
 	•	Our 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 our lack of asset diversification, adverse developments in our propane business would reduce our ability to make distributions to our unitholders. 	
 
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk. 	
 
Interest Rate Risk 
 
We have long-term debt and a revolving line of credit subject to the risk of loss associated with movements in interest rates. At September 30, 2004, we had floating rate obligations totaling approximately $132.2 million for amounts borrowed under our credit agreement. These 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 increase by 100 basis points from September 2004 levels, our combined interest expense would increase by a total of approximately $1.3 million per year. 
 
Commodity Price, Market and Credit Risk 
 
Inherent in our 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. We take an active role in managing and controlling market and credit risk and have established control procedures, which are reviewed on an ongoing basis. We monitor market risk through a variety of techniques, including daily reporting of the portfolio’s position to senior management. We 
 
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attempt to minimize credit risk exposure through credit policies and periodic monitoring procedures. The counterparties associated with assets from price risk management activities as of September 30, 2004 and 2003 were propane retailers, resellers and consumers and 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, our 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, we may not be able to pass on these increases to our customers through retail or wholesale prices. Propane is a commodity and the price we pay for it can fluctuate significantly in response to supply or other market conditions. We have 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 our gross profits and could, if continued over an extended period of time, reduce demand by encouraging our retail customers to conserve or convert to alternative energy sources. 
 
We engage in hedging transactions, including various types of forward contracts, options, swaps and future contracts, to reduce the effect of price volatility on our product costs, protect the value of our inventory positions, and to help ensure the availability of propane during periods of short supply. We attempt to balance our contractual portfolio by purchasing volumes only when we have a matching purchase commitment from our wholesale customers. However, we may experience net unbalanced positions from time to time which we believe to be immaterial in amount. In addition to our ongoing policy to maintain a balanced position, for accounting purposes we are required, on an ongoing basis, to track and report the market value of our purchase obligations and our sales commitments. 
 
Notional Amounts and Terms 
 
The notional amounts and terms of these financial instruments as of September 30, 2004 and 2003 include fixed price payor for 4.9 million and 3.0 million barrels of propane, respectively, and fixed price receiver for 6.5 million and 4.8 million barrels of propane, respectively. 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. 
 
Fair Value 
 
The fair value of the derivative financial instruments related to price risk management activities as of September 30, 2004 and 2003 was assets of $23.0 million and $8.9 million related to propane, respectively, and liabilities of $29.6 million and $5.8 million related to propane, respectively. All intercompany transactions have been appropriately eliminated. 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 net change in unrealized gains and losses related to all price risk management activities and propane based financial instruments for the years ended September 30, 2004, 2003 and 2002 of $(1.2) million, $0.8 million and $0.1 
 
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million, respectively, are included in cost of product sold in the accompanying consolidated statements of operations. 
 
The following table summarizes the change in the unrealized fair value of our energy contracts related to our risk management activities for the years ended September 30, 2004 and 2003 where settlement has not yet occurred (in thousands of dollars): 

 	  	Year Ended
September 30, 2004
	 	 	Year Ended
September 30, 2003
	 	
Net unrealized gains and (losses) in fair value of contracts outstanding at beginning of period	  	$	3,104	 	 	$	(4,653	)	
Initial recorded value of new contracts entered into during the period	  	 	2,723	 	 	 	—  	 	
Change in fair value of contracts attributable to market movement during the year	  	 	(13,148	)	 	 	4,479	 	
Realized (gains)/losses recognized	  	 	695	 	 	 	3,278	 	
 	  				 				
Net unrealized gains and (losses) in fair value of contracts outstanding at September 30, 2004 and 2003	  	$	(6,626	)	 	$	3,104	 	

Of the outstanding unrealized gain as of September 30, 2004, all contracts had a maturity of less than one year. 
 
Sensitivity Analysis 
 
A theoretical change of 10% in the underlying commodity value would result in an approximate $0.1 million change in the market value of the contracts as there were approximately 1.5 million gallons of net unbalanced positions at September 30, 2004. 
 
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 	
 
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC, and that information is accumulated and 
 
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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 the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s 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 the Company’s disclosure controls and procedures were adequate and effective as of September 30, 2004. 
 
There have been no changes in the Company’s internal controls over financial reporting (as defined in Rule 13(e)-15 or Rule 15d-15(f) of the Exchange Act) or in other factors during the Company’s fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting, and there have been no corrective actions with respect to significant deficiencies and material weaknesses in our internal controls. 
 
Item 9B.	Other Information 	
 
None. 
 
PART III 
 
Item 10.	Directors and Executive Officers of the Registrant. 	
 
Our Managing General Partner Manages Inergy, L.P. 
 
Inergy GP, LLC, our managing general partner, manages our operations and activities. Our managing general partner is not elected by our unitholders and will not be subject to re-election on a regular basis in the future. Our managing general partner may not be removed unless that removal is approved by the vote of the holders of not less than 66 2/3% of the outstanding units, including units held by the general partners and their affiliates, and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of the managing general partner is also subject to the approval of a successor managing general partner by the vote of the holders of a majority of the outstanding Common Units and subordinated units, voting as separate classes. Unitholders do not directly or indirectly participate in our management or operation. Our managing general partner owes a fiduciary duty to the unitholders. Our managing 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. Whenever possible, our managing general partner intends to incur indebtedness or other obligations that are nonrecourse. 
 
Our managing general partner may appoint two independent directors to serve on a conflicts committee to review specific matters which the 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 
 
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Nasdaq 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 partners, and not a breach by our managing general partner of any duties it may owe us or our unitholders. Two members of the board of directors also serve on a compensation committee, which oversees compensation decisions for the officers of Inergy GP, LLC as well as the compensation plans described below. The members of the compensation committee are Warren H. Gfeller and Arthur B. Krause. 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 outside auditors; and (c) the disclosure controls and procedures established by management. The members of the audit committee must meet the independence standards established by the Nasdaq national market. The members of the audit committee are Warren H. Gfeller and Arthur B. Krause. The board of directors of our managing general partner has determined that Mr. Gfeller is an audit committee financial expert based upon the experience stated in his biography. We believe that he is independent of management. 
 
As is commonly the case with publicly-traded limited partnerships, we are managed and operated by our officers and are subject to the oversight of the directors of our managing general partner. The board of directors of our managing general partner is presently composed of five directors. 
 
Inergy Holdings, LLC owns our non-managing general partner and our managing general partner. As the sole member of our managing general partner, Inergy Holdings has the power to elect our board of directors. 
 
In January 2001, a group of investors in our predecessor acquired the contractual right to elect one member of our board of directors until certain events occurred related to the subordination period of our senior subordinated units. Warren H Gfeller was the board designee of this investor group. Mr. Gfeller is affiliated with Clayton-Hamilton, LLC, and a member of this investor group. 
 
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 managing general partner. Executive officers and directors will serve until their successors are duly appointed or elected. 

Executive Officers and Directors
	  	Age
	    	Position with the Managing General Partner
	
John J. Sherman	  	49	    	President, Chief Executive Officer and Director	
			
Phillip L. Elbert	  	46	    	Executive Vice President - Operations and Director	
			
David G. Dehaemers, Jr.	  	44	    	Executive Vice President - Corporate Development	
			
R. Brooks Sherman, Jr.	  	39	    	Senior Vice President and Chief Financial Officer	
			
Dean E. Watson	  	46	    	Senior Vice President - Wholesale and Supply Logistics	
 
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Carl A. Hughes	  	50	    	Vice President - Business Development	
			
Laura L. Ozenberger	  	46	    	Vice President - General Counsel and Secretary	
			
Warren H. Gfeller	  	52	    	Director	
			
Arthur B. Krause	  	63	    	Director	
			
Robert A. Pascal	  	70	    	Director	
 
John J. Sherman. Mr. Sherman has served as President, Chief Executive Officer and a director of our managing general partner since March 2001, and of our predecessor from 1997 until July 2001. Prior to joining our 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. Mr. Elbert has served as Executive Vice President—Operations of our managing general partner since March 2001. He joined our predecessor as Executive Vice President—Operations in connection with our 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. 
 
David G. Dehaemers. Mr. Dehaemers has served as Executive Vice President – Corporate Development since September 2003. Prior to joining Inergy, Mr. Dehaemers served as the Vice President-Corporate Development of Kinder Morgan G.P., Inc. (the general partner of Kinder Morgan Energy Partners, L.P.) and Kinder Morgan, Inc. from 2000 until 2003. He served as Vice President and Chief Financial Officer of Kinder Morgan, Inc. from 1999 until 2000. He served as Vice President, Chief Financial Officer and Treasurer of Kinder Morgan G.P., Inc. from 1997 until 2000. 
 
R. Brooks Sherman, Jr. Mr. Brooks Sherman, Jr. (no relation to Mr. John Sherman) has served as Senior Vice President since September 2002 and Chief Financial Officer of our managing general partner since March 2001. Mr. Sherman previously served as Vice President from March 2001 until September 2002. He joined our predecessor in December 2000 as Vice President and Chief Financial Officer. From 1999 until joining our 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 
 
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prior to 1995, Mr. Sherman was in public accounting with Ernst & Young and KPMG Peat Marwick. 
 
Dean E. Watson. Mr. Watson has served as Senior Vice President of Wholesale, Supply Logistics & Transportation of our managing general partner since September 2002. From 1999 to 2002 he served as President and CEO of Texas Encore Materials. From 1982 to 1999, Mr. Watson worked for Koch Industries. While at Koch, Mr. Watson served in a variety of roles, including President and CEO of Koch Agriculture from 1995 to 1999, President of Koch Nitrogen Company from 1992 to 1995 and Vice President of Koch Carbon, Inc. from 1988 to 1990. 
 
Carl A. Hughes. Mr. Hughes has served as Vice President of Business Development of our managing general partner since March 2001. He joined our predecessor as Vice President of Business Development in 1998. From 1996 through 1998, he served as a regional manager for Dynegy Inc., responsible for propane activities in 17 Midwest and northeastern states. From 1993 through 1996, Mr. Hughes served as a regional marketing manager for LPG Services Group. From 1985 through 1992, Mr. Hughes was employed by Ferrellgas where he served in a variety of management positions. 
 
Laura L. Ozenberger. Ms. Ozenberger has served as Vice President—General Counsel & Secretary 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, including Assistant Corporate Secretary from 1996 through 2003. Prior to 1990, Ms. Ozenberger was in a private legal practice. 
 
Warren H. Gfeller. Mr. Gfeller has been a member of our managing general partner’s board of directors since March 2001. He was a member of our predecessor’s board of directors from 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 Duckwall-ALCO Stores, Inc. 
 
Arthur B. Krause. Mr. Krause has been a member of our managing general partner’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 and Callnet Enterprises, Inc. 
 
Robert A. Pascal. Mr. Pascal joined our managing general partner’s board of directors in July 2003, upon our acquisition of the assets of United Propane, Inc. As the owner and Chief Executive Officer of United Propane, he has 40 years of industry experience. 
 
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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. 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 company’s knowledge, based solely on review of the copies of such reports furnished to our company and written representations that no other reports were required, during the fiscal year ended September 30, 2004, all Section 16(a) filing requirements applicable to our directors, executive officers and greater than 10% unitholders were complied with. 
 
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. 	
 
Executive Compensation 
 
The following table sets forth for the periods indicated, the compensation paid or accrued (by Inergy, L.P., its predecessor and our managing general partner) to the chief executive officer of our managing general partner and four other executive officers for services rendered to Inergy, L.P. and its subsidiaries. In this report, we refer to these five individuals as the “named executive officers.” 
 
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Summary Compensation Table 

Name and Principal Position
	  	Fiscal
Year
	  	Annual Compensation
	  		  	Long Term
Compensation
Awards
	  	All Other
Compensation

	  		  		  		  		  		
	  		  	Salary (1)
	  	Bonus
	  	Other Annual
Compensation (2)
	  	Securities
Underlying
Options

	  		  		  		  		  		  		
John. J. Sherman
President and Chief
Executive Officer	  	2004
2003
2002	  	$
$
$	250,000
250,000
250,000	  	$
$
$	—  
150,000
150,000	  	$
$
$	—  
—  
—  	  	—  
—  
—  	  	$
$
$	—  
—  
—  	
							
Phillip L. Elbert
Executive Vice President
Operations	  	2004
2003
2002	  	$
$
$	200,000
200,000
200,000	  	$
$
$	125,000
100,000
100,000	  	$
$
$	—  
—  
—  	  	—  
—  
—  	  	$
$
$	—  
—  
—  	
							
David G. Dehaemers
Executive Vice President-
Corporate Development	  	2004
2003
2002	  	$
$
$	200,000
8,333
—  	  	$
$
$	—  
—  
—  	  	$
$
$	—  
—  
—  	  	—  
50,000
—  	  	$
$
$	—  
—  
—  	
							
R. Brooks Sherman, Jr.
Senior Vice President and
Chief Financial Officer	  	2004
2003
2002	  	$
$
$	170,000
170,000
143,750	  	$
$
$	50,000
100,000
75,000	  	$
$
$	—  
—  
—  	  	—  
—  
10,000	  	$
$
$	—  
—  
—  	
							
Dean E Watson
Senior Vice President-
Wholesale, Supply, Logistics &
Transportation	  	2004
2003
2002	  	$
$
$	180,000
180,000
15,000	  	$
$
$	—  
90,000
—  	  	$
$
$	—  
—  
—  	  	—  
—  
37,500	  	$
$
$	—  
—  
—  	
 
(1)	Salary for Mr. Dean Watson in fiscal 2002 represents the pro rata portion of his annual salary from the date of his employment with us on September 2, 2002. Salary for Mr. David Dehaemers in fiscal 2003 represents the pro rata portion of his annual salary from the date of his employment with us on September 16, 2003. 	
 
(2)	Excludes perquisites and other benefits, unless the aggregate amount of such compensation is equal to the lesser of $50,000 or 10% of the total annual salary and bonus reported for the named executive officer. 	
 
There were no grants of unit options to a named executive officer during fiscal 2004. 
 
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The following table sets forth information with respect to each named executive officer concerning the number and value of exercisable and unexercisable unit options held as of September 30, 2004. 
 
Aggregated Option/SAR Exercises in last Fiscal Year and September 30, 2004 Option Values 

Name
	  	Units
Acquired
on
Exercise
	  	Value
Realized
	  	Number of Securities
Underlying Unexercised
Options at September 30, 2004
	  	Value of Unexercised In-
the-Money Options at
September 30, 2004 (1)
	
	  		  		  	Exercisable
	  	Unexercisable
	  	Exercisable
	  	Unexercisable
	
John J. Sherman	  	—  	  	—  	  	—  	  	—  	  	—  	  	 	—  	
Phillip L. Elbert	  	—  	  	—  	  	—  	  	111,000	  	—  	  	$	1,813,740	
David G. Dehaemers	  	—  	  	—  	  	—  	  	50,000	  	—  	  	$	360,500	
R. Brooks Sherman, Jr.	  	—  	  	—  	  	—  	  	75,500	  	—  	  	$	1,159,270	
Dean E. Watson	  	—  	  	—  	  	—  	  	75,000	  	—  	  	$	951,750	

(1)	Based on the $27.34 per unit fair market value of our Common Units on September 30, 2004, the last trading day of fiscal 2004, less the option exercise price. 	
 
Employment Agreements 
 
The following named executive officers have entered into employment agreements with our company: 
 
 	•	John J. Sherman, President and Chief Executive Officer; 	
 
 	•	Phillip L. Elbert, Executive Vice President—Operations; 	
 
 	•	David G. Dehaemers, Executive Vice President—Corporate Development. 	
 
 	•	R. Brooks Sherman, Jr., Senior Vice President—Chief Financial Officer; 	
 
 	•	Dean E. Watson, Senior Vice President—Wholesale, Supply & Transportation; 	
 
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 exceptions as set forth below. The employment agreements are for terms of three or five years. The annual salaries for these individuals are as follows: 

•      John J. Sherman	  	$	250,000	
		
•      Phillip L. Elbert	  	$	200,000	
		
•      David G. Dehaemers	  	$	200,000	
		
•      R. Brooks Sherman, Jr	  	$	170,000	
		
•      Dean E. Watson	  	$	180,000	
 
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These employees are reimbursed for all expenses in accordance with the managing general partner’s policies. They are also eligible for fringe benefits normally provided to other members of executive management and any other benefits agreed to by the managing general partner. Each of these employees is eligible to participate in the Inergy Long Term Incentive Plan. 
 
With the exception of Mr. John Sherman and Mr. David Dehaemers, each of these individuals is entitled to performance bonuses upon our attaining certain levels of distributable cash flow on an annual basis for each year during the term of his employment. 
 
Some of the employment agreements provide for additional bonuses conditioned upon the conversion of subordinated units into Common Units. To the extent not already paid, Messrs. Brooks Sherman and Phillip Elbert will be entitled to bonuses in the amounts of $200,000 and $500,000, respectively, payable upon, and in the same proportion as the conversion of Senior and Junior Subordinated Units into Common Units. Mr. Watson will be entitled to a bonus in the amount of $400,000 payable upon Inergy paying four consecutive quarterly distributions to all unitholders in an amount equal to at least $0.90 per quarter. 
 
Finally, Mr. John Sherman may receive performance bonuses at the discretion of the board of directors and will be entitled to a bonus in the amount of $625,000 at the end of the subordination period for the Junior Subordinated Units. The subordination period generally will not end earlier than June 30, 2006 with respect to the Senior Subordinated Units and June 30, 2008 with respect to the Junior Subordinated Units. 
 
Unless waived by the managing general partner, in order for any of these individuals to receive any benefits under (i) the Inergy Long Term Incentive Plan, (ii) the performance bonus based on target distributable cash flow, or (iii) the bonus tied to the subordination period or meeting certain quarterly distribution amounts, the individual must have been continuously employed by the managing general partner or one of our affiliates from the date of his 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. 
 
With respect to Mr. John Sherman, Mr. Phillip Elbert, Mr. Brooks Sherman, and Mr. Dean Watson, in the event that the operating company terminates such person’s employment without cause, the operating company will be required to continue making payments to such person for the remainder of the term of such person’s employment agreement. 
 
With respect to Mr. Dehaemers, in the event that the operating company terminates his employment without cause, Mr. Dehaemers will be entitled to the lesser of $100,000 or the amount due for the remainder of the term of his employment agreement. 
 
In addition to their employment agreements, Mr. Phillip Elbert and Mr. Brooks Sherman each has entered into an option contract with Inergy Holdings under which Inergy Holdings has granted them the right and option to invest in Inergy Holdings. As of September 30, 2004, 
 
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Mr. Elbert and Mr. Sherman had the right to exercise an option for a percentage interest in Inergy Holdings equal to 7.6% and 3.6%, respectively, subject to adjustment. 
 
Pursuant to the partnership agreement, we will reimburse Inergy Holdings or its affiliates for all expenses of the employment of these individuals related to our activities. 
 
Long-Term Incentive Plan 
 
Our 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 summary of the long-term incentive plan contained herein does not purport to be complete but outlines its material provisions. The long-term incentive plan permits the grant of awards covering an aggregate of 1,735,100 Common Units which are granted in the form of unit options and/or restricted units; however not more than 565,000 restricted units may be granted under the plan. Through November 1, 2004, we have granted an aggregate of 1,115,064 unit options pursuant to the Inergy Long-Term Incentive Plan. We have not granted any restricted units pursuant to the Long-Term Incentive Plan. The plan is administered by the compensation committee of the managing general partner’s board of directors. 
 
Restricted Units. A restricted unit is a “phantom” unit that entitles the grantee to receive a common unit upon the vesting of the restricted unit, or in the discretion of the compensation committee, the cash equivalent to the value of a common unit. The compensation committee may make grants under the plan to employees and directors containing such terms as the compensation committee shall determine under the plan. In general, restricted units granted to employees will vest three years from the date of grant; provided, however, that restricted units will not vest before the conversion of any Senior Subordinated Units and will only vest upon, and in the same proportion as, the conversion of Senior Subordinated Units into Common Units. In addition, the restricted units will vest upon a change of control of the managing general partner or us. 
 
If a grantee’s employment 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 provides otherwise. Common Units to be delivered upon the vesting of restricted units may be Common Units acquired by the managing general partner in the open market, Common Units already owned by the managing general partner, Common Units acquired by the managing general partner directly from us or any other person or any combination of the foregoing. The managing general partner will be entitled to reimbursement by us for the cost incurred in acquiring Common Units. If we issue new Common Units upon vesting of the restricted units, the total number of Common Units outstanding will increase. Following the subordination period, the compensation committee, in its discretion, may grant tandem distribution equivalent rights with respect to restricted units. Distribution equivalent rights entitle the holder to receive “distributions” with respect to the restricted unit in the same amount as if the holder owned a common unit. 
 
We intend the issuance of the Common Units pursuant to the restricted unit portion of the long-term incentive plan 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. 
 
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Therefore, plan participants will not pay any consideration for the Common Units they receive, and we will receive no remuneration for such units. 
 
Unit Options. The long-term incentive plan currently permits, and our managing general partner has made, grants of options covering Common Units. Pursuant to the plan, the compensation committee determines which employees and directors shall be granted options and the number of units that will be granted to such individual. 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 period determined by the compensation committee. In addition, under most unit option grants, the unit options will become exercisable upon a change of control of the managing general partner or us. Generally, unit options will expire after 10 years. 
 
Upon exercise of a unit option, the managing 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 the managing general partner, or any combination of the foregoing. The managing general partner will be entitled to reimbursement by us 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 us. If we issue new Common Units upon exercise of the unit options, the total number of Common Units outstanding will increase and the managing 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 common unitholders. 
 
Termination and Amendment. The managing general partner’s board of directors in its discretion may terminate the 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 also has the right to alter or amend the 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. 
 
Unit Purchase Plan 
 
Our 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 us, our general partners or any other person. All purchases made have been in market transactions, although our plan allows us to issue additional units. We have reserved 100,000 units for purchase under the unit purchase plan. As determined by the compensation committee, the managing general partner may match each participant’s cash base pay or salary deferrals by an amount up to 10% of such deferrals and have such amount applied toward the purchase of additional units. The managing general partner has also agreed to pay the brokerage commissions, transfer taxes and other transaction fees associated with a participant’s purchase of 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 
 
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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 our Common Units. Units purchased through the unit purchase plan for the fiscal years ended September 30, 2004, 2003 and 2002 were 9,518 units 10,277, and 3,280 units, respectively. 
 
Reimbursement of Expenses of the Managing General Partner 
 
Our managing general partner does not receive any management fee or other compensation for its management of Inergy, L.P. Our managing general partner and its affiliates are reimbursed for expenses incurred on our behalf. These expenses include the costs of employee, officer and director compensation and benefits properly allocable to Inergy, L.P. and all other expenses necessary or appropriate to the conduct of the business of, and allocable to, Inergy, L.P. Our partnership agreement provides that our managing general partner will determine the expenses that are allocable to Inergy, L.P. in any reasonable manner determined by our managing general partner in its sole discretion. 
 
Compensation of Directors 
 
Officers of our managing general partner who also serve as directors will not receive additional compensation. Mr. Gfeller received an option under our long term incentive plan for 44,400 Common Units at an exercise price based on the initial public offering price. Upon joining the board of directors, Mr. Krause received an option under our long-term incentive plan for 40,000 Common Units at an exercise price equal to the closing trading price on the Nasdaq National Market of our Common Units on the grant date. In addition, each director receives cash compensation of $18,000 per year for attending our regularly scheduled quarterly board meetings. Each non-employee director receives $1,000 for each special meeting of the board of directors attended. Non-employee directors receive $500 per compensation or audit committee meeting attended and $1,000 per conflicts committee meeting attended. 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. 
 
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. Warren H. Gfeller and Arthur B. Krause 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 2004. 
 
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters. 	
 
The following table sets forth certain information as of November 1, 2004 regarding the beneficial ownership of our company’s units by: 
 
 	•	each person who then beneficially owned more than 5% of such units then outstanding, 	
 
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 	•	each of the named executive officers of our managing general partner, 	
 
 	•	all of the directors of our managing general partner, and 	
 
 	•	all of the directors and executive officers of our managing general partner 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)
	  	Common
Units
Beneficially
Owned
	  	Percentage
of Common
Units
Beneficially
Owned
	 	 	Senior
Subordinated
Units
Beneficially
Owned
	  	Percentage of
Senior
Subordinated
Units
Beneficially
Owned
	 	 	Junior
Subordinated
Units
Beneficially
Owned
	  	Percentage of
Junior
Subordinated
Units
Beneficially
Owned
	 	 	Percentage
of Total
Units
Beneficially
Owned (9)
	 	
Inergy Holdings, LLC (2)	  	1,243,388	  	7.1	%	 	1,459,836	  	26.6	%	 	975,924	  	85.2	%	 	15.2	%	
United Propane, Inc. (3) 
28 Floral Avenue
Key West, FL 33040	  	1,897,881	  	10.8	%	 	390,449	  	7.1	%	 	—  	  	—  	 	 	9.4	%	
								
Country Partners, Inc. (4)
4010 Highway 14
Crystal Lake, IL 60014	  	189,968	  	1.1	%	 	628,414	  	11.5	%	 	—  	  	—  	 	 	3.4	%	
								
KCEP Ventures II, L.P.
253 West 47th Street
Kansas City, MO 64112	  	183,636	  	1.0	%	 	607,272	  	11.1	%	 	—  	  	—  	 	 	3.3	%	
								
Tortoise Energy
Infrastructure	  	1,300,000	  	7.4	%	 	24,861	  	*	 	 	—  	  	—  	 	 	5.5	%	
								
DIL, Inc. (5)
P.O. Box 9
Kendallville, IN 46755	  	76,239	  	—  	 	 	516,673	  	9.4	%	 	—  	  	—  	 	 	2.8	%	
								
Rocky Mountain Mezzanine Fund (6)
1125 17th Street Suite
2260 Denver, CO 80202	  	112,292	  	*	 	 	371,344	  	6.8	%	 	—  	  	—  	 	 	2.0	%	
								
John J. Sherman Trust (7)	  	1,245,103	  	7.1	%	 	1,459,836	  	26.6	%	 	975,924	  	85.2	%	 	15.2	%	
								
Phillip L. Elbert (5)	  	21,788	  	—  	 	 	—  	  	—  	 	 	—  	  	—  	 	 	*	 	
								
David G. Dehaemers, Jr.	  	—  	  	—  	 	 	—  	  	—  	 	 	—  	  	—  	 	 	*	 	
								
R. Brooks Sherman, Jr.	  	2,979	  	*	 	 	230	  	*	 	 	—  	  	—  	 	 	*	 	
								
Dean E. Watson	  	1,199	  	*	 	 	—  	  	—  	 	 	—  	  	—  	 	 	*	 	
								
Carl A. Hughes	  	1,178	  	*	 	 	—  	  	—  	 	 	—  	  	—  	 	 	*	 	
								
Laura L. Ozenberger	  	717	  	*	 	 	384	  	*	 	 	—  	  	—  	 	 	*	 	
								
Warren H. Gfeller (8)	  	2,955	  	*	 	 	9,773	  	*	 	 	—  	  	—  	 	 	*	 	
								
Arthur B. Krause	  	—  	  	—  	 	 	—  	  	—  	 	 	—  	  	—  	 	 	*	 	
								
Robert A. Pascal (3)	  	1,897,881	  	10.8	%	 	390,449	  	7.1	%	 	—  	  	—  	 	 	9.4	%	
 	  		  			 		  			 		  			 			
All directors and executive officers as a group (10 persons)	  	3,173,800	  	18.0	%	 	1,860,672	  	34.0	%	 	975,924	  	85.2	%	 	24.8	%	

*	less than 1% 	
 
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(1)	Unless otherwise indicated, the address of each person listed above is: Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri 64112. All persons listed have sole voting power and investment power with respect to their units unless otherwise indicated. 	
 
(2)	Of the Senior and Junior Subordinated Units indicated as beneficially owned by Inergy Holdings 1,414,248 Senior Subordinated Units and 975,126 Junior Subordinated Units are held by New Inergy Propane, LLC, a wholly-owned subsidiary of Inergy Holdings and 45,588 Senior Subordinated Units and 798 Junior Subordinated Units are held by Inergy Holdings. Of the Common Units indicated as beneficially owned by Inergy Holdings, 447,660 units are held by New Inergy Propane, and 789,202 units are held by IPCH Acquisition Corp. a wholly-owned subsidiary of Inergy Holdings and 6,526 are held directly by Inergy Holdings. 	
 
(3)	United Propane, Inc. owns 1,897,881 Common Units and 390,449 Senior Subordinated Units. Mr. Pascal in his capacity as the sole shareholder of United Propane may be deemed to beneficially own these units. 	
 
(4)	Country Partners, Inc. (formerly Country Gas Company, Inc.) is controlled by Arlene Peterson and the estate of Leonard Peterson. 	
 
(5)	DIL, Inc. consists of Domex, Inc., Investors, Inc. and L&L Leasing, Inc., each of which was merged into DIL, Inc. (collectively, the “Hoosier Entities”). Each of Jerry Boman, Glen Cook and Wayne Cook own 31.8% of the Hoosier Entities. Mr. Elbert, one of our executive officers and directors, holds the remaining ownership interest in the Hoosier Entities. He disclaims beneficial ownership of the units held by the Hoosier Entities. 	
 
(6)	Edward C. Brown in his capacity as managing partner of Rocky Mountain Capital Partners, LLP, the general partner of Rocky Mountain Mezzanine Fund, may be deemed to beneficially own these units. Mr. Brown disclaims beneficial ownership of the units held by Rocky Mountain Mezzanine Fund. 	
 
(7)	Mr. Sherman through his trust holds an ownership interest in and has voting control of Inergy Holdings, as indicated in the following table, and therefore may be deemed to beneficially own the units held by Inergy Holdings. Additionally, Mr. Sherman holds 1,714 units through his purchases under the Employee Unit Purchase Plan. 	
 
(8)	Mr. Gfeller in his capacity as managing member of Clayton-Hamilton, LLC may be deemed to beneficially own 2,955 common units and 9,773 senior subordinated units held by Clayton-Hamilton. 	
 
(9)	The percentage of total units beneficially owned includes the approximate 2% implied units of the non-managing general partner. 	
 
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The following table shows the beneficial ownership as of November 1, 2004 of Inergy Holdings, LLC of the directors and named executive officers of the managing general partner. As reflected above, Inergy Holdings owns our managing general partner, non-managing general partner, the incentive distribution rights and, through subsidiaries, approximately 15% of our outstanding units. 

Name of Beneficial Owner (1)
	  	Inergy Holdings, LLC
Percent of Class (2)
	 	
John J. Sherman Trust (3)	  	65.8	%	
Phillip L. Elbert (4)	  	—  	 	
David G. Dehaemers, Jr.	  	1.5	%	
R. Brooks Sherman Jr. (5)	  	—  	 	
Dean E. Watson	  	—  	 	
Warren H. Gfeller	  	—  	 	
Arthur B. Krause	  	—  	 	
Robert A. Pascal	  	—  	 	
All directors and executive officers as a group (10 persons) (6)	  	74.5	%	

(1)	The address of each person listed above is Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri 64112. 	
 
(2)	The ownership of Inergy Holdings has not been certificated. Voting rights attach only to Mr. John Sherman’s ownership interest. In the event Mr. John Sherman’s ownership fails to exceed 50%, the remaining owners of Inergy Holdings will acquire voting rights in proportion to the ownership interest. 	
 
(3)	On September 9, 2004, John Sherman’s interest in Inergy Holdings, LLC was transferred to his trust “John J. Sherman Revocable Trust” dated May 4, 1994. 	
 
(4)	As of September 30, 2004, Mr. Phil Elbert held an option to acquire 7.6% of Inergy Holdings, which option is subject to the terms of the Inergy Holdings, LLC Employee Option Plan. The option vests fully on January 12, 2006 and upon a sale of control as defined in the plan. The option vests 20% each year in the event Mr. Elbert’s employment terminates as a result of his death, disability or termination without cause (as defined in Mr. Elbert’s employment agreement). Mr. Elbert’s option expires on January 12, 2011. In the event Mr. Elbert exercises his option, the respective ownership interests of the persons listed above will be reduced on a pro rata basis. 	
 
(5)	As of September 30, 2004, Mr. Brooks Sherman, Jr. held an option to acquire 3.6% of Inergy Holdings, which option is subject to the terms of the Inergy Holdings, LLC Employee Option Plan. The option vests fully on December 31, 2006 and upon a sale of control as defined in the plan. The option vests 20% each year in the event Mr. Sherman’s employment terminates as a result of his death, disability or termination without cause (as defined in Mr. Sherman’s employment agreement). Mr. Sherman’s option expires on September 11, 2012. In the event Mr. Sherman exercises his option, the respective ownership interests of the persons listed above will be reduced on a pro rata basis. 	
 
(6)	Our management holds a total interest of approximately 86.1% in Inergy Holdings, LLC. 	
 
We refer you to Item 5 of this report for certain information regarding securities authorized for issuance under equity compensation plans. 
 
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Item 13.	Certain Relationships and Related Transactions. 	
 
Related Party Transactions 
 
In connection with our acquisition of assets from United Propane, Inc. on July 31, 2003, we entered into ten leases of real property formerly used by United Propane in its business. We entered into five of these leases with United Propane, three of these leases with Pascal Enterprises, Inc. and two of these leases with Robert A. Pascal. Each of these leases provides for an initial five-year term, and is renewable by us for up to two additional terms of five years each. During the initial term of these leases we are 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 having an address of 3101 Shell Rd., Baltimore, Maryland 21226 for the base monthly rent of $15,000. 
 
Robert A. Pascal is the sole shareholder of United Propane, Pascal Enterprises and United Leasing and is on our managing general partner’s board of directors. 
 
Distributions and Payments to the Managing General Partner and the Non-managing General Partner 
 
Distributions and payments are made by us to our managing general partner and its affiliates in connection with the ongoing operation of Inergy, L.P. These distributions and payments were determined by and among affiliated entities and are not the result of arm’s length negotiations. 
 
Cash distributions will generally be made 98% to the unitholders, including affiliates of the managing general partner as holders of Common Units and Senior and Junior Subordinated Units, and approximately 2% to the non-managing general partner. In addition, if distributions exceed the target levels in excess of the minimum quarterly distribution, Inergy Holdings will be entitled to receive increasing percentages of the distributions, up to 48% of the distributions above the highest target level. 
 
Assuming we have sufficient available cash to pay the full minimum quarterly distribution on all of our outstanding units for four quarters, our non-managing general partner and its affiliates would receive a distribution of approximately $562,045 on the approximate 2% general partner interest and a distribution of approximately $4,414,978 on their Common, Senior Subordinated and Junior Subordinated Units. 
 
Our managing general partner and its affiliates will not receive any management fee or other compensation for the management of our company. Our managing general partner and its affiliates will be reimbursed, however, for direct and indirect expenses incurred on our behalf. For the fiscal years ended September 30, 2004, and 2003 the expense reimbursement to our managing general partner and its affiliates was approximately $2.9 and $2.1 million, respectively. 
 
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If our managing general partner withdraws in violation of the partnership agreement or is removed for cause, a successor general partner has the option to buy the general partner interests and incentive distribution rights from our non-managing general partner for a cash price equal to fair market value. If our managing general partner withdraws or is removed under any other circumstances, our 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 will automatically convert into Common Units equal to the fair market value of those interests. In addition, we will be required to pay the departing general partner for expense reimbursements. 
 
Upon our liquidation, the partners, including our non-managing general partner, will be entitled to receive liquidating distributions according to their particular capital account balances. 
 
Rights of our Managing General Partner and our Non-managing General Partner 
 
Inergy Holdings owns an aggregate 17% interest in us inclusive of ownership of all of our non-managing general partner and our managing general partner. Our managing general partner manages our operations and activities. 
 
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 annual financial statements and for other services for the years ended September 30, 2004 and 2003. 

For the fiscal year ended September 30,
	  	2004
	  	2003
	
 	  	(in thousands)	
Audit fees (1)	  	$	435	  	$	422	
Audit related fees (2)	  	 	33	  	 	193	
 	  			  			
Total	  	$	468	  	$	615	

(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. 	
 
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(2)	Audit-related fees consist of due diligence fees associated with acquisition transactions, financial accounting and reporting consultations and benefit plan audits. 	
 
The Audit Committee of our general partner reviewed and approved all audit and non-audit services provided to us by Ernst & Young during fiscal year 2004 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. 
 
PART IV 
 
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 	
 
 	(a)	Exhibits, Financial Statements and Financial Statement Schedules: 	
 
 	1.	Financial Statements: 	
 
See Index Page for Financial Statements located on page 60. 
 
 	2.	Financial Statement Schedules: 	
 
Valuation and Qualifying Accounts 
 
Other financial statement schedules have been omitted because they either are not required, are immaterial or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein. 
 
 	3.	Exhibits: 	

Exhibit
No.
	 	Description

    *3.1	 	Certificate of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.’s Registration Statement on Form S-1 (Registration No. 333-56976) filed on March 14, 2001)	
		
    *3.1A	 	Certificate of Correction of Certificate of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.’s Form 10-Q (Registration No. 000-32543) filed on May 12, 2003.)	
		
    *3.2	 	Form of Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.’s Registration Statement on Form S-1 (Registration No. 333-56976) filed on March 14, 2001)	
		
    *3.2A	 	Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.2A to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-89010) filed on June 13, 2002)	
 
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    *3.2B	 	Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P.	
		
    *3.2C	 	Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Inergy L.P.	
		
    *3.3	 	Certificate of Formation as relating to Inergy Propane, LLC, as amended (incorporated herein by reference to Exhibit 3.3 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
    *3.4	 	Third Amended and Restated Limited Liability Company Agreement of Inergy Propane, LLC, dated as of July 31, 2001 (incorporated herein by reference to Exhibit 3.4 to Inergy, L.P.’s Registration Statement on Form S-1 (Registration No. 333-89010 filed on May 24, 2002)	
		
    *3.5	 	Certificate of Formation of Inergy GP, LLC (incorporated herein by reference to Exhibit 3.5 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
    *3.6	 	Limited Liability Company Agreement of Inergy GP, LLC (incorporated herein by reference to Exhibit 3.6 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
    *3.7	 	Certificate of Formation as relating to Inergy Partners, LLC, as amended (incorporated herein by reference to Exhibit 3.7 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
    *3.8	 	Second Amended and Restated Limited Liability Company Agreement of Inergy Partners, LLC, dated as of July 31, 2001 (incorporated herein by reference to Exhibit 3.8 to Inergy, L.P.’s Registration Statement on Form S-1 (Registration No. 333-89010 filed on May 24, 2002)	
		
    *4.1	 	Specimen Unit Certificate for Senior Subordinated Units (incorporated herein by reference to Exhibit 4.1 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
    *4.2	 	Specimen Unit Certificate for Junior Subordinated Units (incorporated herein by reference to Exhibit 4.2 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
    *4.3	 	Specimen Unit Certificate for Common Units (incorporated herein by reference to Exhibit 4.3 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001.)	
		
  *10.1	 	Sixth Amended and Restated Credit Agreement by and among Inergy Propane, LLC and the lenders named therein, dated as of May 27, 2004	
 
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  *10.2	 	Securities Purchase Agreement by and among Inergy Partners, LLC and various investors, dated as of January 12, 2001 (incorporated herein by reference to Exhibit 10.3 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
  *10.3	 	Investor Rights Agreement by and among Inergy Partners, LLC and various investors, dated as of January 12, 2001 (incorporated herein by reference to Exhibit 10.4 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)	
		
  *10.4	 	Inergy Employee Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.6 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on July 2, 2001) ***	
		
  *10.4A	 	Amendment to Inergy Employee Long-Term Incentive Plan, adopted April 4, 2003. (incorporated herein by reference to Exhibit 10.1 to Inergy, L.P.’s Form 10-Q (Registration No. 000-32543) filed on May 12, 2003) ***	
		
  *10.5	 	Employment Agreement—John J. Sherman (incorporated herein by reference to Exhibit 10.8 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on July 2, 2001) ***	
		
  *10.6	 	Employment Agreement—Phillip L. Elbert (incorporated herein by reference to Exhibit 10.9 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on May 7, 2001) ***	
		
  *10.6A	 	First Amendment to Employment Agreement—Phillip L. Elbert (incorporated herein by reference to Exhibit 10.9A to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on July 20, 2001) ***	
		
  *10.7	 	Employment Agreement—Carl A. Hughes (incorporated herein by reference to Exhibit 10.10 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on July 2, 2001) ***	
		
  *10.8	 	Employment Agreement—William C. Gautreaux (incorporated herein by reference to Exhibit 10.12 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-56976) filed on July 2, 2001 ***	
		
  *10.9	 	Intercreditor and Collateral Agency Agreement entered into as of June 7, 2002, by and among Wachovia Bank, National Association, the lenders named therein and the noteholders named therein (incorporated herein by reference to Exhibit 10.19 to Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-89010) filed on June 13, 2002)	
		
  *10.10	 	Option Agreement by and between Phillip L. Elbert and Inergy Holdings, LLC, dated January 12, 2001 (incorporated herein by reference to Exhibit 10.19 to Inergy, L.P.’s Form 10-K (Registration No. 000-32453) filed on December 26, 2002)***	
 
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  *10.11	 	Employment Agreement – R. Brooks Sherman (incorporated herein by reference to Exhibit 10.20 to Inergy, L.P.’s Form 10-K (Registration No. 000-32453) filed on December 26, 2002)***	
		
  *10.12	 	Option Agreement by and between R. Brooks Sherman and Inergy Holdings, LLC, dated September 11, 2002 (incorporated herein by reference to Exhibit 10.21 to Inergy, L.P.’s Form 10-K (Registration No. 000-32453) filed on December 26, 2002) ***	
		
  *10.13	 	Employment Agreement – Dean E. Watson ***	
		
  *10.14	 	Amended and Restated Inergy Unit Purchase Plan	
		
**10.15	 	Employment Agreement – David G. Dehaemers, Jr. ***	
		
**12.1	 	Ratios of earnings to fixed charges	
		
  *14.1	 	Inergy’s Code of Business Conduct & Ethics	
		
**21.1	 	List of subsidiaries of Inergy, L.P.	
		
**23.1	 	Consent of Ernst & Young LLP	
		
**31.1	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
		
**31.2	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
		
**32.1	 	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
		
**32.2	 	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	

*	Previously filed 	
 
**	Filed herewith 	
 
***	Management contracts or compensatory plans or arrangements required to be identified by Item 15(a). 	
 
 	(b)	Reports on Form 8-K. Our company filed three reports on Form 8-K with the SEC during the three months ended September 30, 2004: 	
 
Form 8-K dated July 26, 2004, was filed with respect to Item 5 to report that we had increased the company’s quarterly cash distribution to $0.415 per limited 
 
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partner unit ($1.66 annually) for the quarter ended June 30, 2004. We also announced that 1,656,684 senior subordinated units would convert on a one-for-one basis to common units on August 13, 2004. 
 
Form 8-K dated August 11, 2004, was filed with respect to Items 7 and 12 to report our issuance of a press release dated August 10, 2004 announcing our financial results for the fiscal third quarter ended June 30, 2004. 
 
Form 8-K dated August 31, 2004, was filed with respect to Item 8 to report our sale of 1,300,000 common units to Tortoise Energy Infrastructure in a privately negotiated transaction. 
 
 	(c)	Exhibits. 	
 
See exhibits identified above under Item 15(a)3. 
 
 	(d)	Financial Statement Schedules. 	
 
See financial statement schedules identified above under Item 15(a)2. 
 
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Inergy, L.P. and Subsidiary 
Consolidated Financial Statements 
 
September 30, 2004 and 2003 and each of the 
Three Years in the Period Ended 
September 30, 2004 
 
Contents 

Report of Independent Registered Public Accounting Firm	  	61	
		
Audited Consolidated Financial Statements	  	 	
		
Consolidated Balance Sheets	  	62	
		
Consolidated Statements of Operations	  	64	
		
Consolidated Statements of Partners’ Capital	  	65	
		
Consolidated Statements of Cash Flows	  	66	
		
Notes to Consolidated Financial Statements	  	68	

Table of Contents
 
Report of Independent Registered Public Accounting Firm 
 
The Board of Directors and Partners 
Inergy, L.P. and Subsidiary 
 
We have audited the accompanying consolidated balance sheets of Inergy, L.P. and Subsidiary (the Partnership) as of September 30, 2004 and 2003, and the related consolidated statements of operations, partners’ capital, and cash flows for each of the three years in the period ended September 30, 2004. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. 
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, L.P. and Subsidiary at September 30, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 
 
/s/ ERNST & YOUNG LLP 
 
Kansas City, Missouri 
November 18, 2004 
 
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Inergy, L.P. and Subsidiary 
Consolidated Balance Sheets 

 	  	September 30,
	 	
 	  	2004
	 	 	2003
	 	
 	  	(In Thousands)	 	
Assets	  	 	 	 	 	 	 	 	
Current assets:	  	 	 	 	 	 	 	 	
Cash	  	$	2,256	 	 	$	3,528	 	
Accounts receivable, less allowance for doubtful accounts of $1,078,000 and $997,000 at September 30, 2004 and 2003, respectively	  	 	49,441	 	 	 	21,841	 	
Inventories	  	 	56,404	 	 	 	35,722	 	
Prepaid expenses and other current assets	  	 	5,494	 	 	 	3,957	 	
Assets from price risk management activities	  	 	23,015	 	 	 	8,905	 	
 	  				 				
Total current assets	  	 	136,610	 	 	 	73,953	 	
Property, plant and equipment:	  	 	 	 	 	 	 	 	
Land and buildings	  	 	20,246	 	 	 	14,265	 	
Office furniture and equipment	  	 	10,173	 	 	 	8,614	 	
Vehicles	  	 	32,719	 	 	 	21,986	 	
Tanks and plant equipment	  	 	189,519	 	 	 	135,040	 	
 	  				 				
 	  	 	252,657	 	 	 	179,905	 	
Less accumulated depreciation	  	 	(37,404	)	 	 	(22,704	)	
 	  				 				
Property, plant and equipment, net	  	 	215,253	 	 	 	157,201	 	
Intangible assets (Note 2):	  	 	 	 	 	 	 	 	
Covenants not to compete	  	 	11,498	 	 	 	8,752	 	
Deferred financing costs	  	 	5,242	 	 	 	7,994	 	
Deferred acquisition costs	  	 	104	 	 	 	849	 	
Customer accounts	  	 	74,154	 	 	 	59,951	 	
 	  				 				
 	  	 	90,998	 	 	 	77,546	 	
Less accumulated amortization	  	 	(17,398	)	 	 	(12,383	)	
 	  				 				
Intangible assets, net	  	 	73,600	 	 	 	65,163	 	
Goodwill	  	 	78,128	 	 	 	64,546	 	
Other	  	 	228	 	 	 	1,530	 	
 	  				 				
Total assets	  	$	503,819	 	 	$	362,393	 	

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Inergy, L.P. and Subsidiary 
Consolidated Balance Sheets (continued) 

 	  	September 30,
	 	
 	  	2004
	 	 	2003
	 	
 	  	(In Thousands)	 	
Liabilities and partners’ capital	  	 	 	 	 	 	 	 	
Current liabilities:	  	 	 	 	 	 	 	 	
Accounts payable	  	$	54,621	 	 	$	22,733	 	
Accrued expenses	  	 	13,937	 	 	 	11,919	 	
Customer deposits	  	 	15,977	 	 	 	11,830	 	
Liabilities from price risk management activities	  	 	29,640	 	 	 	5,801	 	
Current portion of long-term debt (Note 4)	  	 	23,615	 	 	 	12,449	 	
 	  				 				
Total current liabilities	  	 	137,790	 	 	 	64,732	 	
Long-term debt, less current portion (Note 4)	  	 	113,986	 	 	 	118,678	 	
Partners’ capital (Notes 2 and 8):	  	 	 	 	 	 	 	 	
Common unitholders (17,626,506 and 11,044,822 units issued and outstanding as of September 30, 2004 and 2003, respectively)	  	 	224,600	 	 	 	128,983	 	
Senior subordinated unitholders (5,478,568 and 7,135,252 units issued and outstanding as of September 30, 2004 and 2003, respectively)	  	 	25,352	 	 	 	46,703	 	
Junior subordinated unitholders (1,145,084 units issued and outstanding as of September 30, 2004 and 2003)	  	 	(2,296	)	 	 	(164	)	
Non-managing general partner	  	 	4,387	 	 	 	3,461	 	
 	  				 				
Total partners’ capital	  	 	252,043	 	 	 	178,983	 	
 	  				 				
Total liabilities and partners’ capital	  	$	503,819	 	 	$	362,393	 	

See accompanying notes. 
 
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Inergy, L.P. and Subsidiary 
Consolidated Statements of Operations 
(In Thousands Except Per Unit Data) 

 	  	Year Ended September 30,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
Revenue:	  	 	 	 	 	 	 	 	 	 	 	 	
Propane	  	$	431,202	 	 	$	343,578	 	 	$	192,122	 	
Other	  	 	51,294	 	 	 	19,787	 	 	 	16,578	 	
 	  				 				 				
 	  	 	482,496	 	 	 	363,365	 	 	 	208,700	 	
Cost of product sold (excluding depreciation and amortization as shown below)	  	 	359,053	 	 	 	267,010	 	 	 	134,999	 	
 	  				 				 				
Gross profit	  	 	123,443	 	 	 	96,355	 	 	 	73,701	 	
Expenses:	  	 	 	 	 	 	 	 	 	 	 	 	
Operating and administrative	  	 	81,296	 	 	 	59,249	 	 	 	45,300	 	
Depreciation and amortization	  	 	21,089	 	 	 	13,843	 	 	 	11,444	 	
 	  				 				 				
Operating income	  	 	21,058	 	 	 	23,263	 	 	 	16,957	 	
Other income (expense):	  	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	  	 	(7,878	)	 	 	(9,982	)	 	 	(8,365	)	
Interest expense related to write-off of deferred financing costs	  	 	(1,216	)	 	 	—  	 	 	 	(585	)	
Interest expense related to make whole premium charge	  	 	(17,949	)	 	 	—  	 	 	 	—  	 	
Interest income related to swap value received	  	 	949	 	 	 	—  	 	 	 	—  	 	
Gain (loss) on sale of property, plant and equipment	  	 	(203	)	 	 	(91	)	 	 	140	 	
Finance charges	  	 	704	 	 	 	339	 	 	 	115	 	
Other	  	 	106	 	 	 	86	 	 	 	140	 	
 	  				 				 				
Income (loss) before income taxes	  	 	(4,429	)	 	 	13,615	 	 	 	8,402	 	
Provision for income taxes	  	 	167	 	 	 	103	 	 	 	93	 	
 	  				 				 				
Net income (loss)	  	$	(4,596	)	 	$	13,512	 	 	$	8,309	 	
 	  				 				 				
Partners’ interest information	  	 	 	 	 	 	 	 	 	 	 	 	
Non-managing general partners’ interest in net income	  	$	1,182	 	 	$	617	 	 	$	166	 	
 	  				 				 				
Limited partners’ interest in net income (loss):	  	 	 	 	 	 	 	 	 	 	 	 	
Common unit interest	  	$	(3,664	)	 	$	6,820	 	 	$	3,391	 	
Senior subordinated unit interest	  	 	(1,814	)	 	 	5,190	 	 	 	4,052	 	
Junior subordinated unit interest	  	 	(300	)	 	 	885	 	 	 	700	 	
 	  				 				 				
Total limited partners’ interest in net income (loss)	  	$	(5,778	)	 	$	12,895	 	 	$	8,143	 	
 	  				 				 				
Net income (loss) per limited partner unit:	  	 	 	 	 	 	 	 	 	 	 	 	
Basic	  	$	(0.26	)	 	$	0.77	 	 	$	0.61	 	
Diluted	  	$	(0.26	)	 	$	0.76	 	 	$	0.60	 	
 	  				 				 				
Weighted average limited partners’ units outstanding:	  	 	 	 	 	 	 	 	 	 	 	 	
Basic	  	 	22,027	 	 	 	16,676	 	 	 	13,317	 	
Diluted	  	 	22,027	 	 	 	16,942	 	 	 	13,520	 	

See accompanying notes. 
 
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Inergy, L.P. and Subsidiary 
Consolidated Statements of Partners’ Capital 
(In Thousands) 

 	  	 	 	 	Partners’ Capital
	 	 	 	 	
 	  	Common
Unit
Capital
	 	 	Senior
Subordinated
Unit
Capital
	 	 	Junior
Subordinated
Unit
Capital
	 	 	Non-Managing
General
Partner and
Affiliate
	 	 	Total
Partners’
Capital
	 	
Balance at September 30, 2001	  	$	24,981	 	 	$	45,060	 	 	$	1,258	 	 	$	1,455	 	 	$	72,754	 	
Common Units issued in acquisition of retail propane companies	  	 	19,724	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	19,724	 	
Net proceeds from issuance of Common Units	  	 	35,350	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	35,350	 	
Contribution from non-managing general partner	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	976	 	 	 	976	 	
Distributions	  	 	(6,684	)	 	 	(7,820	)	 	 	(1,351	)	 	 	(342	)	 	 	(16,197	)	
Net income	  	 	3,391	 	 	 	4,052	 	 	 	700	 	 	 	166	 	 	 	8,309	 	
 	  				 				 				 				 				
Balance at September 30, 2002	  	 	76,762	 	 	 	41,292	 	 	 	607	 	 	 	2,255	 	 	 	120,916	 	
 	  				 				 				 				 				
Common and Senior Subordinated Units issued in acquisition of retail propane companies	  	 	35,100	 	 	 	10,000	 	 	 	—  	 	 	 	—  	 	 	 	45,100	 	
Net proceeds from issuance of Common Units	  	 	23,339	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	23,339	 	
Return and cancellation of Common Units originally issued in the IPC acquisition	  	 	(106	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(106	)	
Contribution from non-managing general partner	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,430	 	 	 	1,430	 	
Members’ distributions	  	 	(12,935	)	 	 	(9,783	)	 	 	(1,658	)	 	 	(841	)	 	 	(25,217	)	
Comprehensive income:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	 	6,820	 	 	 	5,190	 	 	 	885	 	 	 	617	 	 	 	13,512	 	
Foreign currency translation	  	 	3	 	 	 	4	 	 	 	2	 	 	 	—  	 	 	 	9	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 				
Comprehensive income	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	13,521	 	
 	  				 				 				 				 				
Balance at September 30, 2003	  	 	128,983	 	 	 	46,703	 	 	 	(164	)	 	 	3,461	 	 	 	178,983	 	
 	  				 				 				 				 				
Net proceeds from issuance of Common Units	  	 	113,219	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	113,219	 	
Contribution from non-managing general partner	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,791	 	 	 	1,791	 	
Senior Subordinated Units converted to Common Units	  	 	8,127	 	 	 	(8,127	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Members’ distributions	  	 	(22,076	)	 	 	(11,416	)	 	 	(1,833	)	 	 	(2,047	)	 	 	(37,372	)	
Comprehensive income:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	 	(3,664	)	 	 	(1,814	)	 	 	(300	)	 	 	1,182	 	 	 	(4,596	)	
Foreign currency translation	  	 	11	 	 	 	6	 	 	 	1	 	 	 	—  	 	 	 	18	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 				
Comprehensive income	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(4,578	)	
 	  				 				 				 				 				
Balance at September 30, 2004	  	$	224,600	 	 	$	25,352	 	 	$	(2,296	)	 	$	4,387	 	 	$	252,043	 	

See accompanying notes. 
 
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Inergy, L.P. and Subsidiary 
Consolidated Statements of Cash Flows 
(In Thousands) 

 	  	Year Ended September 30,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
Operating activities	  	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	(4,596	)	 	$	13,512	 	 	$	8,309	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Depreciation	  	 	15,325	 	 	 	9,856	 	 	 	8,070	 	
Amortization	  	 	5,764	 	 	 	3,987	 	 	 	3,374	 	
Amortization of deferred financing costs	  	 	1,686	 	 	 	1,506	 	 	 	1,253	 	
Write-off of deferred financing costs	  	 	1,216	 	 	 	—  	 	 	 	585	 	
Interest expense related to make whole premium charge	  	 	17,949	 	 	 	—  	 	 	 	—  	 	
Provision for doubtful accounts	  	 	214	 	 	 	719	 	 	 	451	 	
(Gain) loss on disposal of property, plant and equipment	  	 	201	 	 	 	91	 	 	 	(140	)	
Net assets (liabilities) from price risk management activities	  	 	9,730	 	 	 	(7,757	)	 	 	9,228	 	
Changes in operating assets and liabilities, net of effects from acquisitions:	  	 	 	 	 	 	 	 	 	 	 	 	
Accounts receivable	  	 	(23,157	)	 	 	(7,420	)	 	 	4,696	 	
Inventories	  	 	(19,048	)	 	 	7,038	 	 	 	(24,636	)	
Prepaid expenses and other current assets	  	 	(1,524	)	 	 	(73	)	 	 	(1,990	)	
Other assets	  	 	37	 	 	 	42	 	 	 	73	 	
Accounts payable	  	 	24,550	 	 	 	6,981	 	 	 	2,913	 	
Accrued expenses	  	 	(280	)	 	 	2,981	 	 	 	(2,188	)	
Customer deposits	  	 	4,089	 	 	 	2,965	 	 	 	(2,219	)	
 	  				 				 				
Net cash provided by operating activities	  	 	32,156	 	 	 	34,428	 	 	 	7,779	 	
Investing activities	  	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions, net of cash acquired	  	 	(85,154	)	 	 	(25,941	)	 	 	(84,759	)	
Purchases of property, plant and equipment	  	 	(14,521	)	 	 	(6,230	)	 	 	(6,385	)	
Deferred financing and acquisition costs incurred	  	 	(874	)	 	 	(3,037	)	 	 	(3,660	)	
Proceeds from sale of property, plant and equipment	  	 	2,245	 	 	 	720	 	 	 	775	 	
Other	  	 	—  	 	 	 	—  	 	 	 	12	 	
 	  				 				 				
Net cash used in investing activities	  	 	(98,304	)	 	 	(34,488	)	 	 	(94,017	)	
 
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Inergy, L.P. and Subsidiary 
Consolidated Statements of Cash Flows (continued) 
(In Thousands) 

 	  	Year Ended September 30,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
Financing activities	  	 	 	 	 	 	 	 	 	 	 	 	
Proceeds from issuance of long-term debt	  	$	372,407	 	 	$	174,794	 	 	$	421,237	 	
Principal payments on long-term debt	  	 	(367,238	)	 	 	(172,855	)	 	 	(355,211	)	
Payment of interest expense related to make whole premium charge	  	 	(17,949	)	 	 	—  	 	 	 	—  	 	
Contribution from non-managing general partner	  	 	1,791	 	 	 	1,430	 	 	 	976	 	
Net proceeds from issuance of Common Units	  	 	113,219	 	 	 	23,339	 	 	 	35,350	 	
Distributions	  	 	(37,372	)	 	 	(25,217	)	 	 	(16,197	)	
 	  				 				 				
Net cash provided by financing activities	  	 	64,858	 	 	 	1,491	 	 	 	86,155	 	
 	  				 				 				
Effect of exchange rate changes on cash	  	 	18	 	 	 	9	 	 	 	—  	 	
Net increase (decrease) in cash	  	 	(1,272	)	 	 	1,440	 	 	 	(83	)	
Cash at beginning of year	  	 	3,528	 	 	 	2,088	 	 	 	2,171	 	
 	  				 				 				
Cash at end of year	  	$	2,256	 	 	$	3,528	 	 	$	2,088	 	
 	  				 				 				
Supplemental disclosure of cash flow information	  	 	 	 	 	 	 	 	 	 	 	 	
Cash paid during the year for interest	  	$	6,251	 	 	$	8,705	 	 	$	6,722	 	
 	  				 				 				
Supplemental schedule of noncash investing and financing activities	  	 	 	 	 	 	 	 	 	 	 	 	
Additions to covenants not to compete through the issuance of noncompete obligations	  	$	2,569	 	 	$	1,953	 	 	$	1,934	 	
 	  				 				 				
Acquisitions of retail propane companies through the issuances of Common Units and Senior Subordinated Units	  	 	—  	 	 	$	45,100	 	 	$	19,724	 	
 	  				 				 				
Acquisition of retail propane companies through the assumption of seller debt	  	 	—  	 	 	$	2,218	 	 	$	1,661	 	
 	  				 				 				
Increase (decrease) in the fair value of senior secured notes and the related interest rate swap	  	$	(316	)	 	$	556	 	 	$	709	 	

See accompanying notes. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies 
 
Organization 
 
Inergy, L.P. (the Partnership or the company) was formed on March 7, 2001 as a Delaware limited partnership. The Partnership and its subsidiary Inergy Propane, LLC (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 (Inergy Partners and referred to subsequent to the initial public offering described below as the Non-managing General Partner). In addition, Inergy Sales and Service, Inc. (Services), a subsidiary of the Operating Company, was formed to acquire and operate the service, work and appliance parts and sales business of Inergy Partners. 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 conducts business, the Partnership’s activities are conducted through the Operating Company. 
 
The Partnership Entities consummated in July 2001, an initial public offering (the Offering) of 3,680,000 Common Units representing limited partner interests in the Partnership (the Common Units) for an offering price of $11.00 per Common Unit aggregating $40.5 million before approximately $6.2 million of underwriting discounts and commissions and other expenses related to the Offering. In conjunction with the Offering, an additional 4,012,912 Senior Subordinated Units were issued to holders of the certain redeemable Class A preferred interests of Inergy Partners, representing a 34.3% limited partner interest in the Partnership Entities. At the same time, the Operating Company assumed the Non-managing General Partner’s obligation under its funded debt in connection with the conveyance in July 2001 (the Partnership Conveyance) by Inergy GP, LLC (the Managing General Partner) and the Non-managing General Partner (together referred to as the General Partners), of substantially all of their assets and liabilities (excluding $1.9 million of cash and the deferred tax liabilities associated with the subsidiaries of Wilson Oil Company of Johnston County, Inc. (Wilson) and Rolesville Gas & Oil Company, Inc. (Rolesville)). 
 
Inergy, L.P. 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, L.P., and all other necessary or appropriate expenses allocable to Inergy, L.P. or otherwise reasonably incurred by Inergy GP, LLC in connection with operating the Inergy, L.P. business. These costs, which totaled approximately $2.9 million, $2.1 million, and $4.6 million for the years ended September 30, 2004, 2003, and 2002, respectively, include compensation and benefits paid to officers and employees of Inergy GP, LLC and its affiliates. 
 
The Non-managing General Partner owns an approximate 2% general partner interest in the Partnership. In addition, the Non-managing General Partner owns Senior Subordinated Units and Junior Subordinated Units through its wholly-owned subsidiary, New Inergy Propane, LLC, approximating an 11.5% limited partner interest. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
Inergy Holdings owns an aggregate 17% interest in us inclusive of ownership of all of our non-managing general partner and our managing general partner. 
 
Basis of Presentation 
 
The accompanying consolidated financial statements include the accounts of Inergy, L.P. and its subsidiary Inergy Propane, LLC as well as all of Inergy Propane’s wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 
 
Nature of Operations 
 
Inergy is engaged primarily in the sale, distribution, marketing, trading, processing and fractionation of propane 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 and Southeast regions of the United States. 
 
Financial Instruments and Price Risk Management 
 
Inergy, through its wholesale operations, holds propane inventory, sells propane to various propane users, retailers, and resellers and offers price risk management services to these customers as part of its marketing and distribution operations. Inergy’s wholesale operations also sell propane to energy marketers and dealers and therefore Inergy enters into fixed price forward purchase and sales contracts. Derivative financial instruments utilized in connection with these activities are accounted for using the mark-to-market method in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Inergy’s overall objective for entering into such derivative financial instruments, including those designated as fair value hedges of Inergy’s inventory positions, is to manage its exposure to fluctuations in commodity prices and changes in the fair market value of its inventories as well as to ensure an adequate physical supply will be available. 
 
SFAS No. 133 requires recognition of all derivative instruments in the balance sheets and measures them at fair value. Beginning in December 2002, certain of Inergy’s commodity derivative financial instruments have been designated as hedges of selected inventory positions, and qualify as fair value hedges, as defined in SFAS No. 133. For derivative instruments designated as hedges, Inergy uses regression analysis and the dollar offset method to formally assesses, both at the hedge contract’s inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in fair value of hedged items. Changes in the fair value of derivative instruments designated as fair value hedges are reported in the balance sheet as price risk management assets or liabilities. The ineffective portions of hedging derivatives are recognized immediately in cost of product sold. During the years ended September 30, 2004 and 2003, Inergy recognized a net loss of $0.1 million, and $0.2 million, respectively, related to the ineffective portion of its hedging instruments and a net 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
loss of $1.0 million, and $0.5 million, respectively, related to the portion of the hedging instruments Inergy excluded from its 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 No. 133. 
 
The cash flow impact of financial instruments is reflected as cash flows from operating activities in the consolidated statements of cash flows. 
 
Furthermore, Inergy has elected to use the special hedge accounting rules in SFAS No. 133 and hedge the fair value of certain of its inventory positions, whereby the hedged inventory is marked to market. Inventories purchased under energy contracts subsequent to October 25, 2002, and not otherwise designated as being hedged, as discussed above, are carried at the lower-of-cost or market. 
 
Revenue Recognition 
 
Sales of propane and other liquids are recognized at the time product is shipped or delivered to the customer. Gas processing and fractionation fees are recognized upon delivery of the product. Revenue from the sale of propane appliances and equipment is recognized at the time of sale or installation. Revenue from repairs and maintenance is recognized upon completion of the service. 
 
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 reflected in Inergy’s consolidated financial statements, are based on specific identification and historical collection results and have generally been within management’s expectations. Finance charges on trade receivables are generally recognized upon billing of customers. 
 
Furthermore, three suppliers, Sunoco, Inc. (18%), Dominion Transmission Inc. (12%), and Exxon Mobil Oil Corp.(11%), accounted for approximately 41% of propane purchases during the past fiscal year. We believe our contracts with these suppliers will enable us to purchase most of our supply needs at market prices and ensures adequate supply. No other single supplier accounted for more than 10% of our propane purchases in the current year. 
 
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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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
Inventories 
 
Inventories for retail operations, which mainly consist of liquid propane, are stated at the lower of cost, determined using the average-cost method, or market. Wholesale propane inventories are stated at the lower of cost, determined using the average-cost method, or market unless designated as being hedged by forward sales contracts, as discussed above. Wholesale propane inventories being hedged and carried at market at September 30, 2004 and 2003 amount to $40.7 million and $28.9 million, respectively. 
 
Inventories consist of (in thousands): 

 	  	September 30, 2004
	  	September 30, 2003
	
Propane gas and other liquids	  	$	53,295	  	$	32,247	
Appliances, parts and supplies	  	 	3,109	  	 	3,475	
 	  			  			
 	  	$	56,404	  	$	35,722	

Shipping and Handling Costs 
 
Shipping and handling costs are recorded as part of cost of products sold at the time product is shipped or delivered to the customer. 
 
Property, Plant, and Equipment 
 
Property, plant, and equipment are stated at cost. Depreciation is computed by the straight-line method over the assets’ estimated useful lives, 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 in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” for impairment 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, 2004. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
Intangible Assets 
 
Intangible assets are amortized on a straight-line basis over their estimated economic lives, as follows: 

 	  	Years
	
Covenants not to compete	  	2–10	
Deferred financing costs	  	1–7	
Customer accounts	  	15	
 
Estimated amortization, including amortization of deferred financing cost reported as interest expense, for the next five years ending September 30, in thousands of dollars is as follows: 

2005	  	$	7,594	
2005	  	 	6,626	
2007	  	 	5,950	
2008	  	 	5,890	
2009	  	 	5,453	
 
Deferred financing costs represent financing costs incurred in obtaining financing and are being amortized over the term of the debt. Covenants not to compete, customer accounts and goodwill arose from the various acquisitions by Inergy and are discussed in Note 2. Deferred acquisition costs represent costs incurred to date on acquisitions that Inergy is actively pursuing, most of which relate to the acquisitions completed subsequent to year end, as discussed in Note 11. 
 
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” 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. 
 
In connection with the goodwill impairment evaluation, the reporting units are identified, which for the Company are the same as its operating segments, and carrying value of each reporting unit determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of the evaluation. To the extent a reporting unit’s carrying value exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the second step of the impairment test must be performed. In the second step, the implied fair value of the goodwill is determined by allocating the fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, “Business Combinations” to its carrying amount. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
Under the provisions of Statement No. 142, Inergy completed the valuation of each of Inergy’s reporting units and determined no impairment existed as of September 30, 2004. 
 
Income Taxes 
 
The earnings of the Partnership and Operating Company are included in the Federal and state income tax returns of the individual partners. As a result, no income tax expense has been reflected in Inergy’s consolidated financial statements relating to the earnings of the Partnership and Operating Company. Federal and state income taxes are, however, provided on the earnings of Services. The effect of temporary differences between Services’ basis of assets and liabilities for income tax and financial statement purposes is immaterial. The provision for income tax for the years ended September 30, 2004, 2003 and 2002 was $167,000, $103,000 and $93,000, respectively. Net earnings for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and the financial reporting basis of assets and liabilities and the taxable income allocation requirements under the partnership agreement. 
 
Customer Deposits 
 
Customer deposits primarily represent cash received by Inergy from wholesale and retail customers for propane purchased that will be delivered at a future date. 
 
Fair Value 
 
The carrying amounts of cash, accounts receivable and accounts payable approximate their fair value. Based on the estimated borrowing rates currently available to Inergy for long-term debt with similar terms and maturities, the aggregate fair value of Inergy’s long-term debt was approximately $138 million and $131 million as of September 30, 2004 and 2003, respectively. The fair value of our derivative financial instruments was $(0.1) million and $1.0 million as of September 30, 2004 and 2003, respectively. 
 
Accounting for Unit-Based Compensation 
 
Inergy has a unit-based employee compensation plan, which is accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” for all periods presented and presents the fair value method pro forma disclosures required under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure.” No unit-based employee compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying Common Units on the date of grant. The following table illustrates the effect on net income (loss) and net income (loss) per limited partner unit as if Inergy had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to unit-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of an option is amortized to expense over the 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
option’s vesting period. Inergy’s pro forma information for each of the three years in the period ended September 30, 2004 is as follows (in thousands, except per unit data): 

 	  	2004
	 	 	2003
	 	 	2002
	 	
Net income (loss) as reported	  	$	(4,596	)	 	$	13,512	 	 	$	8,309	 	
Deduct: Total unit-based employee compensation expense determined under fair value method for all awards	  	 	(227	)	 	 	(164	)	 	 	(142	)	
 	  				 				 				
Pro forma net income (loss)	  	$	(4,823	)	 	$	13,348	 	 	$	8,167	 	
 	  				 				 				
Pro forma limited partners’ interest in net income (loss)	  	$	(6,005	)	 	$	12,731	 	 	$	8,004	 	
 	  				 				 				
Net income (loss) per limited partner unit	  	 	 	 	 	 	 	 	 	 	 	 	
Basic – as reported	  	$	(0.26	)	 	$	0.77	 	 	$	0.61	 	
Basic – pro forma	  	$	(0.27	)	 	$	0.76	 	 	$	0.60	 	
Pro forma net income (loss) per limited partner unit:	  	 	 	 	 	 	 	 	 	 	 	 	
Diluted – as reported	  	$	(0.26	)	 	$	0.76	 	 	$	0.60	 	
Diluted – pro forma	  	$	(0.27	)	 	$	0.75	 	 	$	0.59	 	
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
Income (Loss) Per Unit 
 
Basic net income (loss) per limited partner unit is computed by dividing net income (loss), after considering the Non-Managing General Partner’s interest and any incentive distribution allocation to its affiliate, by the weighted average number of Common and Subordinated Units outstanding. Diluted net income (loss) per limited partner unit is computed by dividing net income (loss), after considering the Non-Managing General Partner’s interest, by the weighted average number of Common and Subordinated Units outstanding and the dilutive effect of unit options granted under the long-term incentive plan. The following table presents the calculation of basic and dilutive income (loss) per limited partner unit (in thousands, except per unit data): 

 	  	Year Ended
September 30,
	
 	  	2004
	 	 	2003
	  	2002
	
Numerator:	  	 	 	 	 	 	 	  	 	 	
Net income (loss)	  	$	(4,596	)	 	$	13,512	  	$	8,309	
Less: Non-Managing General Partners’ interest in net income (loss)	  	 	1,182	 	 	 	617	  	 	166	
 	  				 			  			
Limited partners’ interest in net income (loss) – basic and diluted	  	$	(5,778	)	 	$	12,895	  	$	8,143	
 	  				 			  			
Denominator:	  	 	 	 	 	 	 	  	 	 	
Weighted average limited partners’ units outstanding – basic	  	 	22,027	 	 	 	16,676	  	 	13,317	
Effect of dilutive unit options outstanding	  	 	—  	 	 	 	266	  	 	204	
 	  				 			  			
Weighted average limited partners’ units outstanding – dilutive	  	 	22,027	 	 	 	16,942	  	 	13,521	
 	  				 			  			
Net income (loss) per limited partner unit	  	 	 	 	 	 	 	  	 	 	
Basic	  	$	(0.26	)	 	$	0.77	  	$	0.61	
 	  				 			  			
Diluted	  	$	(0.26	)	 	$	0.76	  	$	0.60	

For the year ended September 30, 2004, 468,412 outstanding options were excluded from the determination of diluted net income (loss) per limited partner unit because their inclusion would be anti-dilutive. 
 
Segment Information 
 
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments, as well as related disclosures about products and services, geographic areas, and major customers. Further, SFAS No. 131 defines operating 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 Inergy’s reportable segments under the provisions of SFAS No. 131, Inergy examined the way it organizes its business internally for making operating decisions and assessing business performance. See Note 10 for disclosures related to Inergy’s retail and wholesale segments. 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 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
1. Accounting Policies (continued) 
 
Recently Issued Accounting Pronouncements 
 
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. Interpretation No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interests or significant financial support provided to it. Interpretation No. 46 became effective for Inergy on October 1, 2003 for variable interest entities created prior to February 1, 2003. The adoption of Interpretation No. 46 did not have a material impact on the Company’s consolidated financial statements. 
 
SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for the fiscal year ending September 30, 2004. The adoption of SFAS No. 150 did not have a material effect on the Company’s consolidated financial statements. 
 
Reclassifications 
 
Certain reclassifications have been made to the 2003 and 2002 consolidated financial statements to conform to the 2004 presentation. These reclassifications had no effect on net income. 
 
2. Acquisitions 
 
On July 31, 2003, Inergy purchased substantially all of the retail propane assets and assumed certain liabilities of United Propane, Inc. (“United Propane”), a retail propane distributor located in Maryland, Delaware and West Virginia. The purchase price of $52.7 million consisted of the issuance of 1,779,812 Common Units and 508,518 Senior Subordinated Units with a fair value of approximately $45.0 million, $2.7 million in cash, and the assumption of $5.0 million of liabilities. 
 
During fiscal 2003, Inergy also acquired substantially all of the assets of ten other retail propane companies located in Ohio, Florida, Indiana and North Carolina, and one wholesale company located in Calgary, Canada. The aggregate purchase price for these acquisitions totaled approximately $27.5 million, which included cash of approximately $23.2 million, assumed liabilities of approximately $2.3 million, seller notes payable of $1.9 million and $0.1 million in common and Senior Subordinated Units. The purchase price allocation related to these acquisitions included goodwill of $4.4 million, customer accounts of $1.6 million and other intangible assets acquired of $2.6 million. The operating results of all fiscal 2003 acquisitions are included in Inergy’s consolidated results of operations from the dates of acquisition. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
2. Acquisitions (continued) 
 
During the fiscal year ended September 30, 2004, Inergy acquired substantially all of the assets of sixteen retail propane companies located in South Carolina, Georgia, Florida, Pennsylvania, Virginia, North Carolina, Arkansas, Michigan, New York, and Illinois, and we expanded our wholesale and supply operations by acquiring from Link Energy, LLC (formerly known as EOTT Energy, L.P.) its west coast NGL business, which includes natural gas processing, NGL fractionation, NGL rail and truck terminals, bulk storage, trucking and marketing operations. The aggregate purchase price for these acquisitions totaled approximately $97.4 million, which included cash of approximately $85.2 million, assumed liabilities of approximately $9.7 million, and seller notes payable of approximately $2.5 million. The purchase price allocation related to these assets included goodwill of $13.7 million, customer accounts of $14.2 million and other intangible assets of $2.7 million. In the aggregate, these acquisitions are not material for pro forma disclosure purposes. These acquisitions were financed primarily using the acquisition facility and were accounted for by the purchase method under SFAS No. 141. The operating results for all fiscal 2004 acquisitions are included in Inergy’s consolidated results of operations from the dates of acquisition. 
 
The following reflects the acquisitions in purchase business combinations of the retail assets of United Propane in July 2003, in millions: 

 	  	United
Propane
	
Cash	  	$	2.7	
Assumed liabilities	  	 	5.0	
Common and Senior Subordinated Units	  	 	45.0	
 	  			
 	  	$	52.7	
 	  			
Property, plant and equipment	  	$	19.6	
Goodwill	  	 	13.9	
Customer accounts	  	 	16.9	
Net current assets	  	 	2.3	
 	  			
 	  	$	52.7	

The weighted average amortization period of amortizable intangible assets acquired was approximately 15 years. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
2. Acquisitions (continued) 
 
The following unaudited pro forma data summarizes the results of operations for the period indicated as if the United Propane acquisition had been completed at the beginning of the period presented. The pro forma data gives effect to actual operating results prior to the acquisition and adjustments to interest expense and intangible assets amortization, among other things. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred on October 1, 2002 or that will be obtained in the future. 

 	  	Year Ended
September 30, 2003
	
 	  	(in thousands, except per unit data)	
Revenues	  	$	393,116	
Net income	  	 	15,708	
Net income per limited partner unit - basic	  	$	0.85	
 
3. Price Risk Management and Financial Instruments 
 
Inergy, through its wholesale operations, sells propane and offers price risk management services to energy related businesses through a variety of financial and other instruments including forward contracts involving physical delivery of propane. In addition, Inergy manages its own trading portfolio 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. 
 
The price risk management services offered to propane users, retailers and resellers, and other related businesses utilize a variety of financial and other instruments including forward contracts involving physical delivery of propane, swap agreements, which require payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for propane, options and other contractual arrangements. 
 
As discussed in Note 1, all of these financial instruments are accounted for using the mark-to-market method of accounting. Inergy has entered into these derivative financial instruments to manage its exposure to fluctuation in commodity prices. 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 and timing of performance. 
 
Notional Amounts and Terms 
 
The notional amounts and terms of these financial instruments at September 30, 2004 and 2003 include fixed price payor for 4.9 million and 3.0 million barrels, respectively, and fixed price receiver for 6.5 million and 4.8 million barrels, respectively. 
 
Notional amounts reflect the volume of the transactions, but do not represent the amounts exchanged by the parties to the financial instruments. Accordingly, notional amounts do not accurately measure Inergy’s exposure to market or credit risks. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
3. Price Risk Management and Financial Instruments (continued) 
 
Fair Value 
 
The fair value of all derivative instruments related to price risk management activities as of September 30, 2004 and 2003 was assets of $23.0 million and $8.9 million, respectively, and liabilities of $29.6 million and $5.8 million, respectively. 
 
The net change in unrealized gains and losses related to all price risk management activities and propane based financial instruments for the years ended September 30, 2004, 2003 and 2002 of $(1.2) million, $0.8 million, and $0.1 million, respectively, are included in cost of product sold in the accompanying consolidated statements of operations. 
 
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, 2004 and 2003 where settlement has not yet occurred (in thousands of dollars): 

 	  	Year Ended
September 30, 2004
	 	 	Year Ended
September 30, 2003
	 	
Net unrealized gains and (losses) in fair value of contracts outstanding at beginning of period	  	$	3,104	 	 	$	(4,653	)	
Initial recorded value of new contracts entered into during the period	  	 	2,723	 	 	 	—  	 	
Other unrealized gains and (losses) recognized	  	 	(13,148	)	 	 	4,479	 	
Less: realized gains and (losses) recognized	  	 	695	 	 	 	3,278	 	
 	  				 				
Net unrealized gains and (losses) in fair value of contracts outstanding at end of period	  	$	(6,626	)	 	$	3,104	 	

Of the outstanding unrealized gain (loss) as of September 30, 2004 and 2003, contracts with a maturity of less than one year totaled $(6.6) million and $3.1 million, respectively. There were no contracts maturing in excess of one year in 2004, contracts maturing in excess of one year totaled less than $0.1 million in 2003. 
 
Market and Credit Risk 
 
Inherent in the resulting contractual portfolio are certain business risks, including market risk and credit risk. Market risk is the risk that the value of the portfolio will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract. Inergy does not 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
3. Price Risk Management and Financial Instruments (continued) 
 
require collateral to support financial instruments subject to credit risk but does take 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 value to senior management. Inergy provides for such risks at the time derivative financial instruments are adjusted to fair value and when specific risks become known. Inergy attempts to minimize credit risk exposure through credit policies and periodic monitoring procedures. The counterparties associated with assets from price risk management activities as of September 30, 2004 and 2003 are generally propane users, retailers and resellers, and energy marketers and dealers. 
 
4. Long-Term Debt 
 
Long-term debt consisted of the following (in thousands): 

 	  	September 30,
	
 	  	2004
	  	2003
	
Credit agreement	  	$	132,153	  	$	41,024	
Senior secured notes (including interest rate swap liability)	  	 	—  	  	 	86,265	
Obligations under noncompetition agreements and notes to former owners of businesses acquired	  	 	5,446	  	 	3,833	
Other	  	 	2	  	 	5	
 	  			  			
 	  	 	137,601	  	 	131,127	
Less current portion	  	 	23,615	  	 	12,449	
 	  			  			
 	  	$	113,986	  	$	118,678	

Effective May 27, 2004, Inergy Propane, LLC executed an Amended and Restated Credit Agreement (the “Amended Facility”) with its existing lenders in addition to others. The Amended Facility consists of a $75 million revolving working capital facility and a $225 million revolving acquisition facility. The Amended Facility expires in July 2006 and carries terms, conditions and covenants substantially similar to the previous credit agreement. The obligation under the Amended Facility are secured by a first priority lien on all assets of Inergy Propane and its subsidiaries, the pledge of all of Inergy Propane’s equity interest in its subsidiaries and by a pledge of the Company’s interest in Inergy Propane. The Amended Facility is also guaranteed by Inergy, L.P. and its subsidiary. 
 
Inergy is required to reduce the principal outstanding on the revolving working capital line of credit to $4 million or less for a minimum of 30 consecutive days during the period commencing March 1 and ending September 30. As such, $4 million of the outstanding balance at September 30, 2004 and 2003 has been classified as a long-term liability in the accompanying consolidated balance sheets. At September 30, 2004 and 2003, the balance outstanding under this credit agreement was $132.2 million and $41.0 million, respectively, including $26.4 million and $15.5 million, respectively, 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
4. Long-Term Debt (continued) 
 
under the working capital facility. The prime rate and LIBOR plus the applicable spreads were between 3.77% and 4.75% at September 30, 2004, and between 3.11% and 4.00% at September 30, 2003, for all outstanding debt under the credit agreement. 
 
In June 2002, Inergy Propane, LLC entered into a note purchase agreement with a group of institutional lenders pursuant to which it issued $85.0 million aggregate principal amount of senior secured notes with a weighted average interest rate of 9.07% and a weighted average maturity of 5.9 years. The senior secured notes consisted of the following: $35 million principal amount of 8.85% senior secured notes with a 5-year maturity, $25.0 million principal amount of 9.10% senior secured notes with a 6-year maturity, and $25.0 million principal amount of 9.34% senior secured notes with a 7-year maturity. The net proceeds from these senior secured notes were used to repay a portion of the amount outstanding under the credit facility. 
 
The credit agreement contains several covenants which, among other things, require the maintenance of various financial performance ratios, restrict the payment of distributions to unitholders, and require financial reports to be submitted periodically to the financial institutions. Unused borrowings under the credit agreement amounted to $162.2 million and $154.9 million at September 30, 2004 and 2003, respectively. 
 
The funds from a public unit offering, together with net new borrowings under the revolving credit facility were used to repay in full $85.0 million aggregate principal amount of senior secured notes, plus interest expense related to a make whole premium charge of approximately $17.9 million in January 2004. All interest rate swap agreements were cancelled in conjunction with the repayment of $85 million of senior secured notes. The interest expense related to the make whole premium charge of $17.9 million was recorded as a charge to earnings in the quarter ended March 31, 2004 together with the write-off of the $1.2 million deferred financing costs associated with the senior secured notes, partially offset by a $0.9 million gain from the cancellation of the interest rate swaps. 
 
Noninterest-bearing obligations due under noncompetition agreements and other note payable agreements consist of agreements between Inergy and the sellers of retail propane companies acquired from fiscal years 1999 through 2004 with payments due through 2014 and imputed interest ranging from 5.1% to 10.0%. Noninterest-bearing obligations consist of $6.9 million and $4.6 million in total payments due under agreements, less unamortized discount based on imputed interest of $1.4 million and $0.8 million at September 30, 2004 and 2003, respectively. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
4. Long-Term Debt (continued) 
 
The aggregate amounts of principal to be paid on the outstanding long-term debt during the next five years ending September 30 and thereafter are as follows, in thousands of dollars: 

2005	  	$	23,615	
2006	  	 	110,540	
2007	  	 	797	
2008	  	 	1,216	
2009	  	 	609	
Thereafter	  	 	824	
 	  			
 	  	$	137,601	

In August 2002, the Operating Company entered into two interest rate swap agreements, each designed to hedge $10 million in underlying fixed rate senior secured notes, in order to manage interest rate risk exposure and reduce overall interest expense. In October 2002, the Operating Company entered into three additional interest rate swap agreements each designed to hedge $5 million in underlying fixed rate senior secured notes. These swap agreements, required the counterparty to pay us an amount based on the stated fixed interest rate on the notes due every three months. In exchange, the Operating Company was required to make quarterly floating interest rate payments on the same dates to the counterparty based on an annual interest rate equal to the 3 month LIBOR interest rate plus spreads between 4.83% and 5.02% applied to the same notional amount of $35 million. The swap agreements were recognized as fair value hedges. Amounts received or paid under the agreements were accrued and recognized over the life of the agreements as an adjustment to interest expense. The Partnership recognized approximately $1.3 million increase in the fair market value of the related senior secured notes at September 30, 2003, with a corresponding increase in the fair value of its interest rate swaps, which are recorded in other non-current assets. In January 2004, all interest rate swap agreements were cancelled in conjunction with the repayment of $85 million of senior secured notes. 
 
5. Leases 
 
Inergy has several noncancelable operating leases mainly for office space and vehicles, which expire at various times over the next ten years. 
 
Future minimum lease payments under noncancelable operating leases for the next five years ending September 30 and thereafter consist of the following, in thousands of dollars: 

Year Ending September 30,
	  	 	
2005	  	$	5,072	
2006	  	 	3,827	
2007	  	 	2,888	
2008	  	 	2,177	
2009	  	 	633	
Thereafter	  	 	290	
 	  			
Total minimum lease payments	  	$	14,887	

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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
5. Leases (continued) 
 
Rent expense for all operating leases during 2004, 2003, and 2002 amounted to $4.5 million, $2.8 million, and $1.9 million, respectively. 
 
In connection with our acquisition of assets from United Propane, Inc. on July 31, 2003, we entered into ten leases of real property formerly used by United Propane in its business. We entered into five of these leases with United Propane, three of these leases with Pascal Enterprises, Inc. and two of these leases with Robert A. Pascal. Each of these leases provides for an initial five-year term, and is renewable by us for up to two additional terms of five years each. During the initial term of these leases we are required to make monthly rental payments totaling $59,167, of which $17,167 is payable to United Propane, $16,800 is payable to Pascal Enterprises, and $25,200 is payable to Mr. Pascal. 
 
On May 1, 2004, Inergy Propane, LLC entered into a lease agreement with United Leasing, Inc. to lease a propane rail terminal known as the Curtis Bay Terminal for the base monthly rent of $15,000. 
 
Robert A. Pascal is the sole shareholder of United Propane, Pascal Enterprises and United Leasing and is on our managing general partner’s board of directors. 
 
6. Income Taxes 
 
The provision for income taxes for the years ended September 30, 2004, 2003, and 2002 consists of the following, in thousands of dollars: 

 	  	Year Ended September 30,
	
 	  	2004
	  	2003
	  	2002
	
Current:	  	 	 	  	 	 	  	 	 	
Federal	  	$	 —  	  	$	81	  	$	84	
State	  	 	167	  	 	22	  	 	9	
 	  			  			  			
Total current	  	$	167	  	$	103	  	$	93	

The income tax provision for the years ended September 30, 2004, 2003, and 2002 relates to taxable income of the Services operations as discussed in Note 1. 
 
7. Partners’ Capital 
 
In March 2003, Inergy issued 1,610,000 Common Units in a public offering, resulting in proceeds of $23.3 million, net of underwriter’s discount, commission, and offering expenses. Inergy Partners, LLC contributed $0.5 million in cash to Inergy, L.P. in conjunction with the issuance in order to maintain its 2% non-managing general partner interest. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
7. Partners’ Capital (continued) 
 
In June 2003, Inergy issued 5,302 Common Units in conjunction with the acquisition of Phillips Propane, Inc. Inergy Partners, LLC contributed $2,000 in cash to Inergy, L.P. in conjunction with the issuance in order to maintain its 2% non-managing general partner interest. 
 
In July 2003, Inergy issued 1,779,812 Common Units and 508,518 Senior Subordinated Units to the owner of United Propane, Inc. in conjunction with the acquisition of substantially all the propane assets of United Propane, Inc. Inergy Partners, LLC contributed $0.9 million in cash to Inergy, L.P. in conjunction with the issuance in order to maintain its 2% non-managing general partner interest. 
 
On December 10, 2003, the Board of Directors of the Managing General Partner declared a two-for-one split of the outstanding Limited Partnership units. The split entitled unitholders of record at the close of business on January 2, 2004 to receive one additional unit for each unit held as of such date. The distribution was made on January 12, 2004. The effect of the split was to double the number of all outstanding units and to reduce by half the minimum quarterly per unit distribution and the targeted distribution levels. All common and subordinated unit amounts and per unit amounts have been restated to reflect the two-for-one split. 
 
In January 2004, Inergy, L.P. issued 3,625,000 Common Units in a public offering, resulting in proceeds of $83.3 million, net of underwriter’s discount, commission, and offering expenses. Inergy Partners, LLC contributed $1.8 million in cash to Inergy, L.P. in conjunction with the issuance in order to maintain its 2% non-managing general partner interest. These funds were used to repay borrowings under our credit agreement. 
 
In August 2004, Inergy, L.P. issued 1,300,000 Common Units to Tortoise Energy Infrastructure Corporation resulting in proceeds of $29.9 million, net of underwriter’s discount, commission, and offering expenses. 
 
Also in August 2004, Inergy completed the conversion of 1,656,684 Senior Subordinated Units into common units. 
 
The amended and restated Agreement of Limited Partnership of Inergy, L.P. (Partnership Agreement) contains specific provisions for the allocation of net earnings and losses to each of the partners for purposes of maintaining the partner capital accounts. 
 
The Partnership Agreement provides that during the Subordination Period (as defined below), the Partnership may issue up to 1,600,000 additional Common Units (excluding Common Units issued in connection with conversion of Subordinated Units into Common Units) or an equivalent number of securities ranking on a parity with the Common Units. During 2003, the Partnership issued 246,372 of such Common Units, thus the Partnership currently retains the ability to issue 1,353,628 additional Common Units under this provision. The Partnership Agreement also provides that an unlimited number of partnership interests junior to the Common Units may be issued without a Unitholder vote. The Partnership may also issue additional Common Units during the Subordination Period in connection with certain acquisitions or the repayment of certain indebtedness. After the 
 
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Table of Contents
Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
7. Partners’ Capital (continued) 
 
Subordination Period, the Partnership Agreement authorizes the General Partner to cause the Partnership to issue an unlimited number of limited partner interests of any type without the approval of any Unitholders. 
 
Quarterly Distributions of Available Cash 
 
The Partnership is expected to make quarterly cash distributions of all of its Available Cash, generally defined as income (loss) before income taxes plus depreciation and amortization, less maintenance capital expenditures and net changes in reserves established by the General Partner for future requirements. These reserves are retained to provide for the proper conduct of the Partnership business, or to provide funds for distributions with respect to any one or more of the next four fiscal quarters. 
 
Distributions by the Partnership in an amount equal to 100% of its Available Cash will generally be made 98% to the Common and Subordinated Unitholders and approximately 2% to the General Partner, subject to the payment of incentive distributions to the holders of Incentive Distribution Rights to the extent that certain target levels of cash distributions are achieved. To the extent there is sufficient Available Cash, the holders of Common Units have the right to receive the Minimum Quarterly Distribution ($0.30 per Unit), plus any arrearages, prior to any distribution of Available Cash to the holders of Subordinated Units. Common Units will not accrue arrearages for any quarter after the Subordination Period (as defined below) and Subordinated Units will not accrue any arrearages with respect to distributions for any quarter. 
 
In general, the Subordination Period will continue indefinitely until the first day of any quarter beginning after June 30, 2006 for the Senior Subordinated Units and June 30, 2008 for the Junior Subordinated Units in which distributions of Available Cash equal or exceed the Minimum Quarterly Distribution on the Common Units and the Subordinated Units for each of the three consecutive four-quarter periods immediately preceding such date. On August 13, 2004, 1,656,684 Senior Subordinated Units were converted to Common Units. Prior to the end of the Subordination Period, 286,272 Junior Subordinated Units will convert to Common Units after June 30, 2006 and another 1,656,684 Senior Subordinated Units will convert to Common Units after June 30, 2005 and 286,272 Junior Subordinated Units will convert to Common Units after June 30, 2007, if distributions of Available Cash on the Common Units and Subordinated Units equal or exceed the Minimum Quarterly Distribution for each of the three consecutive four-quarter periods preceding such date. Upon expiration of the Subordination Period, all remaining Subordinated Units will convert to Common Units. 
 
The Partnership is expected to make distributions of its Available Cash within 45 days after the end of each fiscal quarter ending December, March, June, and September to holders of record on the applicable record date. The Partnership made distributions to unitholders, including the non-managing general partner, amounting to $37.4 million, $25.2 million, and $16.2 million during the years ended September 30, 2004, 2003, and 2002, respectively, or $1.60, $1.45, $1.18 per unit, respectively, for the periods to which these distributions relate. 
 
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Table of Contents
Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
7. Partners’ Capital (continued) 
 
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 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, 2004, 2003, and 2002 were 9,518 units, 10,277 units, and 3,280 units, respectively. No units were purchased through the plan prior to fiscal year 2002. 
 
Long-Term Incentive Plan 
 
Inergy’s managing general partner sponsors the Inergy Long-Term Incentive Plan for its employees, consultants, and directors and the employees of its affiliates that perform services for Inergy. The long-term incentive plan currently permits the grant of awards covering an aggregate of 1,735,100 Common Units, which can be granted in the form of unit options and/or restricted units; however, not more than 565,000 restricted units may be granted under the plan. With the exception of 56,000 unit options (exercise prices from $1.92 to $5.34) granted to non-executive employees in exchange for option grants made by the predecessor in fiscal 1999, all of which have been grandfathered into the long-term incentive plan and are presented as grants in the table below, all unit options and restricted units granted under the plan will vest no sooner than, and in the same proportion as, Senior Subordinated Units convert into Common Units as described above. The compensation committee of the managing general partner’s board of directors administers the plan. 
 
Restricted Units 
 
A restricted unit is a “phantom” unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit, or at the discretion of the compensation committee, cash equivalent to the value of a common unit. In general, restricted units granted to employees will vest three years 
 
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Table of Contents
Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
7. Partners’ Capital (continued) 
 
from the date of grant and are subject to the vesting provisions described above in connection with the Subordination Period. In addition, the restricted units will become exercisable upon a change of control of the managing general partner or Inergy. 
 
The restricted units are intended to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of the Common Units. Therefore, plan participants will not pay any consideration for the Common Units they receive, and Inergy will receive no remuneration for the units. 
 
As of September 30, 2004, there were no restricted units issued under the long-term incentive plan. 
 
Unit Options 
 
Unit options issued under the long-term incentive plan will generally have an exercise price equal to the fair market value of the units on the date of grant. In general, unit options will expire after 10 years and are subject to the vesting provisions described above in connection with the Subordination Period. In addition, most unit option grants made under the plan provide that the unit options will become exercisable upon a change of control of the managing general partner or Inergy. None of the outstanding unit options were exercisable at September 30, 2004. 
 
A summary of Inergy’s unit option activity for the years ended September 30, 2004, 2003, and 2002, is provided below: 

 	  	Range of
Exercise Prices
	  	Weighted-
Average
Exercise
Price
	  	Number
of Units
	
Outstanding at September 30, 2001	  	$1.92-$11.00	  	$	10.20	  	663,840	
Granted	  	$11.25-$15.35	  	$	13.56	  	365,000	
Exercised	  	—  	  	 	—  	  	—  	
Canceled	  	$11.00	  	$	11.00	  	32,376	
 	  	 	  	 	 	  		
Outstanding at September 30, 2002	  	$1.92-$15.35	  	$	11.60	  	996,464	
Granted	  	$13.75-$20.13	  	$	16.53	  	308,000	
Exercised	  	—  	  	 	—  	  	—  	
Canceled	  	$10.00-$15.35	  	$	10.54	  	227,400	
 	  	 	  	 	 	  		
Outstanding at September 30, 2003	  	$1.92-$20.13	  	$	13.10	  	1,077,064	
Granted	  	$20.96-$24.71	  	$	23.11	  	84,000	
Exercised	  	—  	  	 	—  	  	—  	
Canceled	  	$13.83-$15.35	  	$	14.51	  	46,000	
 	  	 	  	 	 	  		
Outstanding at September 30, 2004	  	$1.92-$24.71	  	$	13.79	  	1,115,064	

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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
7. Partners’ Capital (continued) 
 
Information regarding options outstanding as of September 30, 2004 is as follows: 

Range of Exercise Prices
	  	Options
Outstanding
	  	Weighted
Average
Remaining
Contracted
Life
(years)
	  	Weighted
Average
Exercise
Price
	
$  1.92 - $8.19	  	25,564	  	6.8	  	$	2.37	
$10.00 - $11.00	  	508,500	  	6.8	  	 	10.82	
$13.75 - $16.90	  	427,000	  	8.1	  	 	15.17	
$19.43 - $24.71	  	154,000	  	9.2	  	 	21.66	
 	  		  	 	  	 	 	
 	  	1,115,064	  	7.6	  	$	13.79	

The weighted-average remaining contract life for options outstanding at September 30, 2004 is approximately eight years. Pro forma information regarding net income and earnings per share, as required by SFAS No. 123, is included in Note 1. SFAS No. 123 requires the pro forma information be determined as if Inergy has accounted for its employee unit options under the fair value method of that statement. As described below, the fair value accounting provided under SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee unit options. The fair value of each option grant was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions: 

 	  	2004
	 	 	2003
	 	 	2002
	 	
Weighted average fair value of options granted	  	$	1.41	 	 	$	1.97	 	 	$	1.83	 	
Expected volatility	  	 	0.159	 	 	 	0.230	 	 	 	0.283	 	
Distribution yield	  	 	6.9	%	 	 	7.5	%	 	 	10.0	%	
Expected life of option in years	  	 	5	 	 	 	5	 	 	 	5	 	
Risk-free interest rate	  	 	3.2	%	 	 	3.0	%	 	 	3.1	%	
 
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected unit price volatility. Because Inergy’s employee unit options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee unit options. 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
8. Employee Benefit Plans 
 
A 401(k) profit-sharing plan is available to all of Inergy’s employees who have completed 30 days of service. The plan permits employees to make contributions up to 75% of their salary, up to statutory limits, currently $13,000 in 2004. The plan provides for matching contributions by Inergy for employees completing one year of service of 1,000 hours. Matching contributions made by Inergy were $0.4 million, $0.3 million, and $0.2 million in 2004, 2003, and 2002, respectively. 
 
9. Commitments and Contingencies 
 
Inergy periodically enters into agreements to purchase fixed quantities of liquid propane at fixed prices with suppliers. At September 30, 2004, the total of these firm purchase commitments was approximately $135 million. The company also enters into agreements to purchase quantities of liquid propane at variable prices with suppliers at future dates at the then prevailing market prices. At September 30, 2004, the quantity of these variable purchase commitments was approximately 50 million gallons. 
 
At September 30, 2004, Inergy was contingently liable for letters of credit outstanding totaling $5.6 million, which guarantees various transactions. 
 
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 and results of operations. 
 
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 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. 
 
Certain employees are entitled to receive up to $1.7 million in aggregate of bonus payments at the end of the subordination periods of the Junior and Senior Subordinated Units. As these amounts will only become due if the employees remain employed by Inergy, no amount has been accrued at September 30, 2004. 
 
10. Segments 
 
Inergy’s financial statements reflect two operating and reportable segments: retail sales operations and wholesale sales operations. Inergy’s retail sales operations include propane sales to end users, the sale of propane-related appliances and service work for propane-related equipment. The wholesale sales operations distribute propane and provide marketing and price risk management services to other users, retailers and resellers of propane, including Inergy’s retail operations. Inergy’s President and Chief Executive Officer has been identified as the Chief Operating Decision 
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
10. Segments (continued) 
 
Maker (CODM). The CODM evaluates performance and allocates resources based on revenues and gross profit of each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment revenues and profits associated with propane sales and other services between the wholesale and retail segments have been eliminated. 
 
The identifiable assets associated with each reportable segment reviewed by the CODM include accounts receivable and inventories. The net asset/liability from price risk management, as reported in the accompanying consolidated balance sheets, is related to the wholesale segment and is specifically reviewed by the CODM. Inergy does not report property, plant and equipment, purchases of property, plant, and equipment, intangible assets, and depreciation and amortization by segment to the CODM. 
 
Revenues, gross profit, and identifiable assets for each of Inergy’s reportable segments are presented below, in thousands of dollars. 

 	  	Year Ended September 30, 2004
	
 	  	Retail
Sales
Operations
	  	Wholesale
Sales
Operations
	  	Intersegment
Eliminations
	 	 	Total
	
Revenues	  	$	225,709	  	$	363,277	  	$	(106,490	)	 	$	482,496	
Gross profit	  	 	105,956	  	 	18,353	  	 	(866	)	 	 	123,443	
Identifiable assets	  	 	23,286	  	 	82,559	  	 	—  	 	 	 	105,845	
		
 	  	Year Ended September 30, 2003
	
 	  	Retail
Sales
Operations
	  	Wholesale
Sales
Operations
	  	Intersegment
Eliminations
	 	 	Total
	
Revenues	  	$	179,936	  	$	259,934	  	$	(76,505	)	 	$	363,365	
Gross profit	  	 	86,088	  	 	11,326	  	 	(1,059	)	 	 	96,355	
Identifiable assets	  	 	16,554	  	 	41,009	  	 	—  	 	 	 	57,563	
		
 	  	Year Ended September 30, 2002
	
 	  	Retail
Sales
Operations
	  	Wholesale
Sales
Operations
	  	Intersegment
Eliminations
	 	 	Total
	
Revenues	  	$	116,811	  	$	120,737	  	$	(28,848	)	 	$	208,700	
Gross profit	  	 	68,605	  	 	5,698	  	 	(602	)	 	 	73,701	
Identifiable assets	  	 	12,132	  	 	42,142	  	 	—  	 	 	 	54,274	
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
11. Subsequent Events 
 
On November 18, 2004, we executed a definitive agreement to purchase 100% partnership interests in Star Gas Propane, L.P., the propane operating partnership of Star Gas Partners, L.P. for approximately $475 million. Star Gas Propane currently serves approximately 345,000 customers from approximately 120 customer service centers in the Midwest, Northeast, Florida, and Georgia. Subject to antitrust clearance and customary closing conditions, the transaction is expected to close in the fourth quarter of calendar 2004. In order to finance the transaction, on November 18, 2004, we entered into a Commitment letter with J.P. Morgan Chase Bank, N.A., J.P. Morgan Securities, Inc., Lehman Commercial Paper Inc. and Lehman Brothers, Inc. for a $400 million 364-day credit facility and a $325 million five year credit facility, both of which would be secured by substantially all of our assets. The Commitment letter for the credit facilities contains a number of closing conditions. 
 
On November 15, 2004, we reached an agreement, in principal, to acquire the propane assets of Moulton Gas Service, Inc. headquartered in Wapakoneta, Ohio, which closed on November 30, 2004. In Moulton Gas’ fiscal year ended June 30, 2004, Moulton Gas delivered approximately 21 million gallons of retail propane to approximately 23,000 customers from 4 retail locations and 11 satellite plants in Ohio and provides further critical mass to Inergy’s strong presence in the Great Lakes region. 
 
12. Quarterly Financial Data (Unaudited) 
 
Summarized unaudited quarterly financial data is presented below. 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. 

 	  	(In Thousands of Dollars, except per unit information)
Quarter Ended
	 	
 	  	December 31
	  	March 31
	  	June 30
	 	 	September 30
	 	
Fiscal 2004	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Revenues	  	$	132,581	  	$	178,068	  	$	69,715	 	 	$	102,132	 	
Gross profit	  	 	37,117	  	 	50,320	  	 	16,987	 	 	 	19,019	 	
Operating income (loss)	  	 	12,101	  	 	25,174	  	 	(8,631	)	 	 	(7,586	)	
Net income (loss)	  	 	9,370	  	 	5,422	  	 	(9,800	)	 	 	(9,588	)	
Net income (loss) per limited partner unit:	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Basic	  	$	0.48	  	$	0.24	  	$	(0.42	)	 	$	(0.42	)	
Diluted	  	$	0.46	  	$	0.23	  	$	(0.42	)	 	$	(0.42	)	
Fiscal 2003	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Revenues	  	$	109,690	  	$	158,650	  	$	39,481	 	 	$	55,544	 	
Gross profit	  	 	28,139	  	 	40,537	  	 	11,067	 	 	 	16,612	 	
Operating income (loss)	  	 	10,467	  	 	20,090	  	 	(4,352	)	 	 	(2,942	)	
Net income (loss)	  	 	7,716	  	 	17,785	  	 	(6,548	)	 	 	(5,441	)	
Net income (loss) per limited partner unit:	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Basic	  	$	0.49	  	$	1.11	  	$	(0.38	)	 	$	(0.29	)	
Diluted	  	$	0.48	  	$	1.10	  	$	(0.38	)	 	$	(0.29	)	
 
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Inergy, L.P. and Subsidiary 
Notes to Consolidated Financial Statements 
 
12. Quarterly Financial Data (Unaudited) (continued) 
 
For the quarter ended March 31, 2004 operating income reflects a make whole premium charge of $17.9 million, the write off of deferred financing cost of $1.2 million, and a credit of $0.9 million relating to swap value received upon the cancellation of outstanding interest rate swap agreements. 
 
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Table of Contents
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, L.P.	
					
 	 	 	 	 	 	By	 	Inergy GP, LLC	
 	 	 	 	 	 	 	 	(its managing general partner)	
				
Dated: December 7, 2004	 	 	 	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 GP, LLC, as managing general partner of Inergy, L.P., the registrant, in the capacities and on the dates indicated. 

Date
	 	 	 	Signature and Title

December 7, 2004	 	 	 	/S/    JOHN J. SHERMAN        	
 	 	 	 	John J. Sherman, President, Chief Executive Officer
and Director (Principal Executive Officer)	
			
December 7, 2004	 	 	 	/S/    R. BROOKS SHERMAN        	
 	 	 	 	R. Brooks Sherman, Jr., Senior Vice President
and Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)	
			
December 7, 2004	 	 	 	/S/    PHILLIP L. ELBERT        	
 	 	 	 	Phillip L. Elbert, Director	
			
December 7, 2004	 	 	 	/S/    WARREN H. GFELLER        	
 	 	 	 	Warren H. Gfeller, Director	
			
December 7, 2004	 	 	 	/S/    ARTHUR B. KRAUSE        	
 	 	 	 	Arthur B. Krause, Director	
			
December 7, 2004	 	 	 	/S/    ROBERT A. PASCAL        	
 	 	 	 	Robert A. Pascal, Director	
 
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Table of Contents
Schedule II 
 
Inergy, L.P. and Subsidiary 
(Successor to Inergy Partners, LLC and Subsidiaries) 
 
Valuation and Qualifying Accounts 
(in thousands) 

Year ended September 30,
	  	Balance at
beginning
of period
	  	Charged
to costs
and
expenses
	  	Other
Additions
(recoveries)
	  	Deductions
(write-offs)
	 	 	Balance
at end
of
period
	
Allowance for doubtful accounts	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	
2004	  	$	997	  	$	214	  	$	1,125	  	$	(1,258	)	 	$	1,078	
2003	  	 	927	  	 	719	  	 	96	  	 	(745	)	 	 	997	
2002	  	 	186	  	 	451	  	 	540	  	 	(250	)	 	 	927	
 
94 
 
Exhibit 10.15 
 
EXECUTION COPY 
 
EMPLOYMENT AGREEMENT 
 
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of the 15th day of September, 2003, by and between Inergy GP, LLC, a Delaware limited liability company (the “Company”), and David G. Dehaemers, Jr., an individual (“Employee”). 
 
The Company and Employee hereby agree as follows: 
 
1. Employment. Employee is being employed by the Company as the Company’s Executive Vice President of Corporate Development upon and subject to the terms and conditions of this Agreement. During the term of his employment under this Agreement, Employee shall report to the Company’s Chief Executive Officer. Employee shall begin his employment with the Company on September 15, 2003. 
 
2. Duties. During the term of his employment under this Agreement, Employee will perform his duties hereunder at such time or times as the Company may reasonably request. Employee’s duties may be varied by the Company from time to time without violating the terms of this Agreement and shall include: (i) devoting his reasonable best efforts and his entire business time to further properly the interests of the Company to the satisfaction of the Company, (ii) being subject to the Company’s direction and control at all times with respect to his activities on behalf of the Company, (iii) complying with all rules, orders, regulations, policies, practices and decisions of the Company, (iv) truthfully and accurately maintaining and preserving all records and making all reports as the Company may require, and (v) fully accounting for all monies and other property of the Company of which he may from time to time have custody and delivering the same to the Company whenever and however directed to do so. 
 
3. Compensation. For all services rendered by Employee to the Company, the Company shall pay Employee a salary (the “Salary”) at the annual rate of Two Hundred Thousand Dollars ($200,000), payable in arrears in accordance with the Company’s general payroll practices. All payments and benefits provided pursuant to this Agreement shall be subject to income tax withholding and other applicable tax and withholding requirements. 
 
4. Expenses. The Company shall reimburse Employee for all ordinary and necessary out-of-pocket expenses incurred and paid by Employee in the course of the performance of Employee’s duties pursuant to this Agreement and consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses, and subject to the Company’s requirements with respect to the manner of approval and reporting of such expenses. 
 
5. Additional Benefits. 
 
(a) Employee shall be eligible for such fringe benefits normally provided to other members of the executive management of the Company generally and such additional benefits as may be from time to time agreed upon in writing between Employee and the Company. 

(b) Employee will receive cash bonuses as determined by the Company in its sole discretion, payable in such amounts and at such times as the Company shall determine. 
 
6. Covenant Not to Disclose Confidential Information. Employee acknowledges that during the course of his employment with the Company Employee has or will have access to and knowledge of certain information and data that the Company or any subsidiary, parent or affiliate of the Company considers confidential and that the release of such information or data to unauthorized persons or entities would be extremely detrimental to the Company. As a consequence, Employee hereby agrees and acknowledges that he owes a duty to the Company not to disclose, and agrees that, during or after the term of his employment, without the prior written consent of the Company, he will not communicate, publish or disclose, to any person or entity anywhere or use (for his own benefit or the benefit of others) any Confidential Information (as hereinafter defined) for any purpose other than carrying out his duties as contemplated by this Agreement. Employee will use his best efforts at all times to hold in confidence and to safeguard any Confidential Information to ensure that any unauthorized persons or entities do not gain possession of any Confidential Information and, in particular, will not permit any Confidential Information to be read, duplicated or copied. Employee will return to the Company all originals and copies of documents and other materials, whether in printed or electronic format or otherwise, containing or derived from Confidential Information in Employee’s possession or under Employee’s control when the duties of Employee no longer require Employee’s possession thereof, or whenever the Company shall so request, and in any event will return all such Confidential Information within ten (10) days if the employment relationship with the Company is terminated for any or no reason and will not retain any copies thereof. Employee acknowledges that Employee is obligated to protect the Confidential Information from disclosure or use even after termination of such employment relationship. For purposes hereof, the term “Confidential Information” shall mean any information or data used by or belonging or relating to the Company or any subsidiary, parent or affiliate of the Company, or any party to whom the Company owes a duty of confidentiality that is not known generally to the industry in which the Company or any subsidiary, parent or affiliate of the Company, or any party to whom the Company owes a duty of confidentiality is or may be engaged, including, but not limited to, any and all trade secrets, proprietary data and information relating to the Company’s or any subsidiary, parent or affiliate of the Company’s, or any party to whom the Company owes a duty of confidentiality past, present or future business and products, price lists, customer lists, acquisition candidates, processes, procedures or standards, know-how, manuals, hardware, software, source code, business strategies, records, marketing plans, drawings, technical information, specifications, designs, patent information, financial information, whether or not reduced to writing, or information or data that the Company or any subsidiary, parent or affiliate of the Company or any party to whom the Company owes a duty of confidentiality advises Employee should be treated as confidential information. Confidential Information does not include any information that: (i) is rightfully known to Employee prior to Employee’s employment, and independent of any disclosure or access to the information via the Company as evidenced by Employee’s written records; or (ii) is or later becomes part of the public domain and known within the relevant industry through no fault of Employee. 
 
2 

7. Disclosure and Assignment of Intellectual Property. 
 
(a) Employee agrees that the Company shall become the owner of all inventions, discoveries, developments, ideas, writings, and expressions, including, but not limited to, any and all concepts, improvements, techniques, know-how, innovations, systems, processes, machines, current or proposed products, works, information, reports, papers, logos, computer programs, designs, marketing materials, and methods of manufacture, distribution, management or other methods (whether or not reduced to writing and whether or not patentable or protectable by copyright), that Employee conceives, develops, creates, makes, perfects or reduces to practice in whole or in part while employed by the Company and that: (i) directly or indirectly relate to or arise out of Employee’s job responsibilities for the Company or the performance of the duties of Employee’s employment by the Company; (ii) result from research, development, or other activities of the Company; or (iii) relate or pertain in any way to the existing or reasonably anticipated scope, business or products of the Company or any subsidiary, parent or affiliate of the Company (hereinafter the “Intellectual Property”). All of the right, title and interest in and to the Intellectual Property shall become exclusively owned by the Company or its nominee regardless of whether or not the conception, development, creation, making, perfection or reduction to practice of such Intellectual Property involved the use of the Company’s time, facilities or materials and regardless of where such Intellectual Property may be conceived, made or perfected. 
 
(b) Employee agrees to promptly and fully disclose in writing to the Company all inventions, discoveries, developments, ideas, writings, and expressions conceived, developed, created, made, perfected or reduced to practice, in whole or in part, while employed by the Company, regardless of whether Employee believes the invention, discovery, development, writing, expression or idea should be considered Intellectual Property of the Company under any provision of this Agreement, in order to enable the Company to make a determination as to its rights with respect to the same. 
 
(c) Any and all information relating to Intellectual Property shall be considered Confidential Information and shall not be disclosed by Employee to any person or entity outside of the Company. 
 
(d) Any Intellectual Property that is the subject of copyright shall be considered a “work made for hire” within the meaning of the Copyright Act of 1976, as amended, and shall be the sole property of the Company or its nominee. To the extent that the Company does not automatically own any such Intellectual Property as a work made for hire, Employee shall assign all right, title and interest in and to such Intellectual Property to the Company. All right, title and interest in and to any other Intellectual Property, including, but not limited to, patent, industrial design, trademark, trade dress and trade secret rights shall be assigned and is hereby assigned exclusively to the Company or its nominee. Employee further agrees to execute and deliver all documents and do all acts that the Company shall deem necessary or desirable to secure to the Company or its nominee the entire right, title and interest in and to the Intellectual Property, including, but not limited to, executing applications for any United States and/or foreign patents or copyright registrations, disclosing relevant prior art, reviewing 
 
3 

office actions and providing technical input to assist the Company in overcoming any rejections. Any document prepared and filed pursuant to this Section 7(d) shall be prepared and filed at the Company’s expense. Employee further agrees to cooperate with the Company as reasonably necessary to maintain or enforce the Company’s rights in the Intellectual Property. Employee hereby irrevocably appoints the President of the Company as Employee’s attorney-in-fact with authority to execute for Employee and on Employee’s behalf any and all assignments, patent or copyright applications, or other instruments and documents required to be executed by Employee pursuant to this Section 7(d), if Employee is unwilling or unable to execute same. 
 
(e) The Company shall have no obligation to use, attempt to protect by patent or copyright, or promote any of the Intellectual Property; provided, however, that the Company, in its sole discretion, may reward Employee for any especially meritorious contributions in any manner it deems appropriate or may provide Employee with full or partial releases as to any subject matter contributed by Employee in which the Company is not interested. 
 
8. Legal Proceedings to Compel Disclosure. In the event that Employee is requested pursuant to, or required by, applicable law, regulation, or legal process, to disclose any Confidential Information or Intellectual Property, Employee shall notify the Company of such request within five (5) days of such request being made and shall enable the Company or any subsidiary, parent or affiliate of the Company to seek an appropriate protective order. In the event that such a protective order or other protective remedy is not obtained, Employee shall furnish only that portion of the Confidential Information or Intellectual Property that, in the opinion of Employee’s counsel, is legally required and will exercise Employee’s best efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information or Intellectual Property. 
 
9. Covenant Not to Compete. Employee acknowledges that during his employment with the Company he, at the expense of the Company, will be specially trained in the business of the Company, will establish favorable relations with the customers, clients and accounts of the Company or any subsidiary, parent or affiliate of the Company and will have access to Intellectual Property, trade secrets and Confidential Information of the Company or any subsidiary, parent or affiliate of the Company. Therefore, in consideration of such training and relations, and in consideration of his employment with the Company, and to further protect the Intellectual Property, trade secrets and Confidential Information of the Company or any subsidiary, parent or affiliate of the Company, Employee agrees that (i) in the case of (a) and (b) below, during the term of his employment by the Company and continuing for a period ending on the later of (x) the date on which Employee no longer owns, directly or indirectly, an interest in Inergy Holdings, LLC, a Delaware limited liability company, or (y) the date on which Employee no longer owns, directly or indirectly, an interest in any general partner of Inergy, L.P., and (ii) in the case of (c) below, during the term of his employment by the Company and for a period of one (1) year from and after the voluntary or involuntary termination of such employment for any or no reason, he will not, directly or indirectly, without the express written consent of the Company, except when and as requested to do in and about the performing of his duties under this Agreement: 
 
(a) own, manage, operate, control or participate in the ownership, management, operation or control of, or have any interest, financial or otherwise, in or act as an officer, director, partner, member, principal, employee, agent, representative, consultant or independent contractor of, or in any way assist, any individual or entity in the conduct of any business that (1) trades, markets, sells or distributes propane gas (at retail, wholesale or otherwise), gathers, processes, stores, transports, trades, markets or distributes natural gas or liquefied by-products of natural gas or petroleum or other natural resources (at retail, wholesale or otherwise) or sells, services and installs parts, appliances or supplies related thereto, and (2) is located in or doing business within the United States or Canada; 
 
4 

(b) divert or attempt to divert clients or customers (whether or not such persons have done business with the Company or any subsidiary, parent or affiliate of the Company once or more than once) or accounts of the Company or any subsidiary, parent or affiliate of the Company; or 
 
(c) entice or induce or in any manner influence any person who is or shall be in the employ or service of the Company or any subsidiary, parent or affiliate of the Company to leave such employ or service for the purpose of engaging in a business that may be in competition with any business now or at any time during the period hereof engaged in by the Company or any subsidiary, parent or affiliate of the Company. 
 
Notwithstanding the foregoing provisions, Employee may (i) take action for, on behalf of, and at the direction of the Company pursuant to a written agreement with the Company or otherwise, and (ii) own up to five percent (5%) of the outstanding equity securities in any corporation or entity (including, but not limited to, units in a master limited partnership) that is listed upon a national stock exchange or actively traded in the over-the-counter market. 
 
10. Specific Performance. Recognizing that irreparable damage will result to the Company in the event of the breach or threatened breach of any of the foregoing covenants and assurances by Employee contained in Sections 6, 7, 8 or 9 hereof, and that the Company’s remedies at law for any such breach or threatened breach will be inadequate, the Company and its successors and assigns, in addition to such other remedies which may be available to them, shall be entitled to an injunction to be issued by any court of competent jurisdiction ordering compliance with this Agreement or enjoining and restraining Employee, and each and every person, firm or company acting in concert or participation with him, from the continuation of such breach and, in addition thereto, he shall pay to the Company all ascertainable damages, including, but not limited to, costs and reasonable attorneys’ fees sustained by the Company by reason of the breach or threatened breach of such covenants and assurances. The covenants and obligations of Employee set forth in Sections 6, 7, 8 and 9 hereof are in addition to and not in lieu of or exclusive of any other obligations and duties of Employee to the Company, whether express or implied in fact or in law. 
 
11. Company Policies. Employee agrees to affirmatively support the Company’s policies and practices as they may from time to time be adopted by the Company, including, but not limited to, policies against discrimination and harassment in the workplace. 
 
5 

12. Term and Termination. 
 
(a) Subject to earlier termination as provided in Sections 12(b) and 12(c) below, the term of Employee’s employment under this Agreement shall be three (3) from the date set forth in Section 1. 
 
(b) Notwithstanding Section 12(a) above, Employee’s employment with the Company shall terminate immediately upon the death, disability or adjudication of legal incompetence of Employee, or upon the Company’s ceasing to carry on its business without assigning this Agreement pursuant to Section 18 or becoming bankrupt. For purposes of this Agreement, Employee shall be deemed to be disabled when Employee has become unable, by reason of physical or mental disability, to satisfactorily perform the essential functions of his job and there is no reasonable accommodation that can be provided to enable him to perform satisfactorily those essential functions. Such matters shall be determined by, or to the reasonable satisfaction of, the Company. 
 
(c) Notwithstanding Section 12(a) above, the Company may terminate Employee’s employment at any time for Cause or without Cause. “Cause” means: (i) Employee has failed to perform his duties as an employee of the Company, to perform any obligation under this Agreement or to reasonably comply with the Company’s policies and decisions, provided that the Company has given Employee at least thirty (30) days notice prior to such termination specifying that failure in reasonable detail and Employee is unsuccessful in correcting that failure or in preventing its reoccurrence; (ii) Employee has willfully engaged in misconduct that is injurious to the Company; (iii) 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; or (iv) Employee has engaged in acts or omissions against the Company constituting dishonesty, breach of fiduciary obligation, or intentional wrongdoing or misfeasance. 
 
(d) In the event Employee’s employment with the Company is terminated (i) as a result of the death, disability, adjudication of legal incompetence of Employee, (ii) as a result of the Company becoming bankrupt, (iii) by the Company for Cause, or (iv) by Employee for any or no reason, the Company shall pay or provide to Employee: 
 
(i) such Salary as Employee shall have earned and not yet received through the date of such employment termination, determined on a pro rata basis based on the number of work days in the month of termination; and 
 
(ii) such other fringe benefits (other than any bonus, severance pay benefit or participation in the Company’s 401(k) employee benefit plan) normally provided to employees of the Company as Employee shall have earned and not yet received through the date of such employment termination, determined on a pro rata basis based on the number of work days in the month of termination. 
 
(e) In the event the Company terminates Employee’s employment with the Company (i) without Cause, or (ii) as a result of the Company ceasing to carry on its 
 
6 

business without assigning this Agreement pursuant to Section 18, the Company shall pay or provide to Employee: 
 
(i) such Salary as Employee shall have earned and not yet received through the date of such employment termination, determined on a pro rata basis based on the number of work days in the month of termination; 
 
(ii) an amount equal to the lesser of (A) One Hundred Thousand Dollars ($100,000) (one half of Employee’s annual Salary), or (B) the unpaid amount of Employee’s Salary for the remainder of the then-current term of this Agreement, in either case, payable in six equal monthly installments on the last payroll date of the month, commencing with the month immediately following the month in which such employment is terminated; and 
 
(iii) such other fringe benefits (other than any bonus, severance pay benefit or participation in the Company’s 401(k) employee benefit plan) normally provided to employees of the Company as Employee shall have earned and not yet received through the date of such employment termination, determined on a pro rata basis based on the number of work days in the month of termination. 
 
13. Survival of Obligations. All obligations of the parties that by their nature involve performance, in any particular, after the expiration or termination of Employee’s employment with the Company, or that cannot be ascertained to have been fully performed until after the expiration or termination of Employee’s employment with the Company, shall survive the expiration or termination of this Agreement. 
 
14. Notice. Any notice, request, consent or communication under this Agreement shall be effective only if it is in writing and personally delivered or sent by certified mail, return receipt requested, postage prepaid, or by a nationally recognized overnight delivery service, with delivery confirmed, addressed as follows: 
 
If to the Company: 

Name:	 	With Copy To:	 	With Copy To:	
Attn: John J. Sherman	 	Attn: Laura Ozenberger	 	Attn: Paul E. McLaughlin	
Inergy GP, LLC	 	Inergy GP, LLC	 	Stinson Morrison Hecker LLP	
2 Brush Creek Blvd., Suite 200	 	2 Brush Creek Blvd., Suite 200	 	1201 Walnut Street	
Kansas City, MO 64112	 	Kansas City, MO 64112	 	Kansas City, MO 64106	
 
If to Employee: 
 
Name: 
David G. Dehaemers, Jr. 
14747 Mission Road 
Leawood, KS 66224 
 
7 

or such other persons and/or addresses as shall be furnished in writing by any party to the other party, and shall be deemed to have been given only upon its delivery in accordance with this Section 14. 
 
15. No Conflicts. Employee represents and warrants to the Company that neither the execution nor delivery of this Agreement, nor the performance of Employee’s obligations hereunder will conflict with, or result in a breach of, any term, condition, or provision of, or constitute a default under, any obligation, contract, agreement, covenant or instrument to which Employee is a party or under which Employee is bound, including, but not limited to, (i) that certain Employment Agreement, dated April 20, 2000, among Employee, Kinder Morgan, Inc., a Kansas corporation, and Kinder Morgan G.P., Inc., a Delaware corporation, as to which the Company and Employee is relying upon a letter dated August 28, 2003 from Kinder Morgan, Inc. and Kinder Morgan G.P., Inc. to the Company, and (ii) the breach by Employee of a fiduciary duty to any former employers (including Kinder Morgan, Inc. and Kinder Morgan G.P., Inc.). 
 
16. Entire Agreement; Amendment; Termination of Previous Agreement. This Agreement cancels and supersedes all previous agreements relating to the subject matter of this Agreement, written or oral, between the parties hereto and contains the entire understanding of the parties hereto with respect to the subject matter hereof and shall not be amended, modified or supplemented in any manner whatsoever except as otherwise provided herein or in writing signed by each of the parties hereto. 
 
17. Potential Unenforceability of Any Provision. If a final judicial determination is made that any provision of this Agreement is an unenforceable restriction against the Company or Employee, the provisions hereof shall be rendered void only to the extent that such judicial determination finds such provisions unenforceable, and such unenforceable provisions shall automatically be reconstituted and become a part of this Agreement, effective as of the date first written above. A judicial determination that any provision of this Agreement is unenforceable shall in no instance render the entire Agreement unenforceable, but rather the Agreement will continue in full force and effect absent any unenforceable provision to the maximum extent permitted by law. 
 
18. Assignment. This Agreement is personal and not assignable by Employee but it may be assigned by the Company without notice to or consent of Employee to, and shall thereafter be binding upon and enforceable by, any affiliate of the Company and any person or entity who shall acquire or succeed to substantially all of the business or assets of the Company or substantially all of the business or assets of the operating unit to which Employee is assigned (and such person shall be deemed included in the definition of the “Company” for all purposes of this Agreement) but is not otherwise assignable by the Company. 
 
19. Waiver of Breach. Failure of the Company to demand strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of the term, covenant or condition, nor shall any waiver or relinquishment by the Company of any right or power hereunder at any one time or more times be deemed a waiver or relinquishment of the right or power at any other time or times. 
 
8 

20. Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 
 
21. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions hereof. 
 
22. Governing Law. This Agreement and all rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of Missouri applicable to agreements made and to be performed entirely within the State, including, but not limited to, all matters of enforcement, validity and performance. 
 
23. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement that is binding upon both of the parties hereto, notwithstanding that both parties are not signatories to the same counterpart. 
 
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed, and Employee has hereunto set his hand, on the day and year first above written. 

INERGY GP, LLC	
		
By:	 	/s/    JOHN J. SHERMAN        	
Name:	 	John J. Sherman	
Title:	 	President and CEO	

	
/s/    DAVID G. DEHAEMERS, JR.        	
David G. Dehaemers, Jr.	
 
9 
 
Exhibit 12.1 
 
Inergy, L.P. and Subsidiary 
Computation of Ratio of Earnings to Fixed Charges 
(In Thousands) 

 	  	Ended September 30,
	 	
 	  	2004
	 	 	2003
	  	2002
	  	2001
	  	2000
	 	
Earnings:	  	 	 	 	 	 	 	  	 	 	  	 	 	  	 	 	 	
Net income (loss)	  	$	(4,596	)	 	$	13,512	  	$	8,309	  	$	4,349	  	$	(1,829	)	
Income taxes	  	 	167	 	 	 	103	  	 	93	  	 	—  	  	 	7	 	
Interest expense	  	 	7,878	 	 	 	9,982	  	 	8,365	  	 	6,670	  	 	2,740	 	
Interest portion of operating leases	  	 	1,519	 	 	 	938	  	 	683	  	 	221	  	 	162	 	
 	  				 			  			  			  				
Earnings for ratio calculation	  	$	4,968	 	 	$	24,535	  	$	17,450	  	$	11,240	  	$	1,080	 	
 	  				 			  			  			  				
Fixed charges:	  	 	 	 	 	 	 	  	 	 	  	 	 	  	 	 	 	
Interest expense	  	$	7,878	 	 	$	9,982	  	$	8,365	  	$	6,670	  	$	2,740	 	
Interest portion of operating leases	  	 	1,519	 	 	 	938	  	 	683	  	 	221	  	 	162	 	
 	  				 			  			  			  				
Total fixed charges	  	$	9,397	 	 	$	10,920	  	$	9,048	  	$	6,891	  	$	2,902	 	
 	  				 			  			  			  				
Ratio of earnings to fixed charges	  	 	n/a	 	 	 	2.25	  	 	1.93	  	 	1.63	  	 	n/a	 	

For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings (loss) from continuing operations before income taxes, plus fixed charges. Fixed charges consist of interest expense on all indebtedness and the amortization of deferred financing costs and interest associated with operating leases. Earnings were inadequate to cover fixed charges by $4.4 million for the year ended September 30, 2004 and $1.8 million for the year ended September 30, 2000. 

EXHIBIT 21.1 
 
Direct of Indirect Subsidiaries of Inergy, L.P. 

Name
	  	Jurisdiction
	
Inergy Propane, LLC	  	Delaware	
L & L Transportation, LLC	  	Delaware	
Inergy Transportation, LLC	  	Delaware	
Inergy Sales & Service, Inc.	  	Delaware	
Inergy Canada Company	  	Canada	
 
Certain subsidiaries of Inergy, L.P. do business under the following names: 
 
 	•	Bastrop Propane 	
 
 	•	Best Butane Co. 	
 
 	•	Bradley Propane 	
 
 	•	Burnet Propane 	
 
 	•	Burnwell Gas 	
 
 	•	Centex Butane Co. 	
 
 	•	Central Carolina Gas 	
 
 	•	Coleman’s Putman Propane 	
 
 	•	Country Gas 	
 
 	•	Deck’s Propane 	
 
 	•	Direct Propane 	
 
 	•	Dobbins Propane 	
 
 	•	Dorsey Propane Gas Company 	
 
 	•	Farmers LP Gas Co. 	
 
 	•	Frankston Reliance Gas Co. 	
 
 	•	Gas Tec 	
 
 	•	Gaylord Gas 	
 
 	•	Gilbert Gas Co. 	
 
 	•	Gilmer Butane Gas & Electric 	
 
 	•	Great Lakes Propane 	
 
 	•	Hall Propane Co. 	
 
 	•	Hancock Gas Company 	
 
 	•	Hancock Gas Service 	
 
 	•	Hancock Propane Company 	
 
 	•	Harper/Shelby LP Gas 	
 
 	•	Highland Propane Company 	
 
 	•	Hoosier Propane 	
 
 	•	Independent Gas Co. 	
 
 	•	Independent Propane 	
 
 	•	Inergy Services 	
 
 	•	Johnson & Johnson 	
 
 	•	Langston Propane Gas Company 	
 
 	•	Live Oak Gas Co. 	
 
 	•	Marshall Propane 	
 
 	•	McCracken Propane 	
 
 	•	Midtex LP Gas 	
 
 	•	Mount Vernon Bottled Gas 	
 
 	•	Nelson Propane 	
 
 	•	Ottawa Gas 	
 
 	•	Penny’s Propane Co. 	
 
 	•	Peoples Gas and Appliance 	
 
 	•	Petersen Propane Company 	
 
 	•	Phillips Oil & Propane 	
 
 	•	Plum Creek Propane 	
 
 	•	Premier Propane 	
 
 	•	Pro Gas Sales & Service 	
 
 	•	Propane Gas Service Co. 	
 
 	•	Reliance Gas Co. 	
 
 	•	Sarpol Gas 	
 
 	•	Shelby LP Gas 	
 
 	•	Southeast Propane 	
 
 	•	Spe-D-Gas Company 	
 
 	•	Sullivan County Gas Service 	
 
 	•	Tarkington Propane 	
 
 	•	Taylor Propane Gas Co. 	
 
 	•	United Propane 	
 
 	•	Willis Propane 	

Exhibit 23.1 
 
Consent of Independent Registered Public Accounting Firm 
 
We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-118941, No. 333-108359, No. 333-101165 and No. 333-100023 and Form S-8 No. 333-83872) of Inergy L.P. and in the related Prospectuses and the Registration Statement (Form S-3 No. 333-118941-02) of Inergy Finance Corp. and the related Prospectus of our report dated November 18, 2004, with respect to the consolidated financial statements and schedule of Inergy L.P. included in this Annual Report (Form 10-K) for the year ended September 30, 2004. 
 
/s/ Ernst & Young LLP 
 
Kansas City, Missouri 
December 3, 2004 

Exhibit 31.1 
 
CERTIFICATIONS 
 
I, John J. Sherman, certify that: 
 
1. I have reviewed this annual report on Form 10-K of Inergy, L.P.; 
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: 
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
 
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
 
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): 
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. 
 
Date: December 7, 2004 

	
/s/    JOHN J. SHERMAN        	
John J. Sherman	
President and Chief Executive Officer	

Exhibit 31.2 
 
CERTIFICATIONS 
 
I, R. Brooks Sherman, Jr., certify that: 
 
1. I have reviewed this annual report on Form 10-K of Inergy, L.P.; 
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: 
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
 
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
 
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): 
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and 
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. 
 
Date: December 7, 2004 

	
/s/    R. BROOKS SHERMAN, JR.        	
R. Brooks Sherman, Jr.	
Senior Vice President and Chief Financial Officer	

Exhibit 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 
 
In connection with the Annual Report of Inergy, L.P. (the “Company”) on Form 10-K for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J. Sherman, Chief Executive Officer of Inergy, L.P., certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 
 
 	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 	
 
 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 	

	
/S/    JOHN J. SHERMAN.        	
John J. Sherman
Chief Executive Officer
December 7, 2004	
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 

Exhibit 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 
 
In connection with the Annual Report of Inergy, L.P. (the “Company”) on Form 10-K for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Brooks Sherman, Jr., Chief Financial Officer of Inergy, L.P., certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 
 
 	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 	
 
 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. 	

	
/S/    R. BROOKS SHERMAN, JR.        	
R. Brooks Sherman, Jr.
Chief Financial Officer
December 7, 2004	
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.