10-K 1 nrgy-10kx9302012.htm FORM 10-K NRGY - 10K - 9.30.2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2012
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: 001-34664
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
Common Units representing limited partnership interests
 
The New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
 
 
Accelerated filer ¨
Non-accelerated filer ¨
 
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
As of March 30, 2012, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common units held by non-affiliates of the registrant was $1.7 billion based on a closing price of $16.37 per common unit as reported on the New York Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the indicated parts of this report: None.



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,” “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 wholly-owned operating subsidiaries collectively, as the context requires.

(2)
When we use the term “Inergy Propane,” we are referring to Inergy Propane, LLC itself, or to Inergy Propane, LLC and its operating subsidiaries collectively, as the context requires. We contributed Inergy Propane to Suburban Propane Partners, L.P. in August 2012.

(3)
When we use the term “Inergy Midstream,” we are referring to Inergy Midstream, L.P. itself, or to Inergy Midstream, L.P. and its operating subsidiaries collectively, as the context requires. As of September 30, 2012, we own an approximate 75% ownership interest in, and 100% of the incentive distribution rights of, Inergy Midstream.

(4)
When we use the term “general partner,” we are referring to Inergy GP, LLC.





INERGY, L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




GLOSSARY

The terms below are common to our industry and used throughout this report.
/d
per day
Balancing services
Services pursuant to which natural gas storage customers pay fees to help balance and true up their deliveries to, or takeaways of natural gas from, storage facilities.
Barrel (bbl)
One barrel of petroleum products equal to 42 U.S. gallons.
Base gas
A quantity of natural gas held within the confines of the natural gas storage facility and used for pressure support and to maintain a minimum facility pressure. May consist of injected base gas or native base gas. Also known as cushion gas.
Bcf
One billion cubic feet of natural gas. A standard volume measure of natural gas products.
Cycle
A complete withdrawal and injection of working gas.
Dth
One dekatherm of natural gas.
FERC
Federal Energy Regulatory Commission.
Firm service
Services pursuant to which customers receive an assured, or “firm”, right to (i) in the context of storage service, store product in the storage facility or (ii) in the context of transportation service, transport product through a pipeline, over a defined period of time.
GAAP
Generally Accepted Accounting Principles.
Gas storage capacity
The maximum volume of natural gas that can be cost-effectively injected into a storage facility and extracted during the normal operation of the storage facility. Gas storage capacity excludes base gas.
Hub
Geographic location of a natural gas storage facility and multiple pipeline interconnections.
Hub services
With respect to our natural gas operations, the following services: (i) interruptible storage services, (ii) firm and interruptible park and loan services, (iii) interruptible wheeling services, and (iv) balancing services.
Injection rate
The rate at which a customer is permitted to inject natural gas into a natural gas storage facility.
Interruptible service
Services pursuant to which customers receive only limited assurances regarding the availability of (i) with respect to natural gas storage services, capacity and deliverability in storage facilities or (ii) with respect to natural gas transportation services, capacity and deliverability from receipt points to delivery points. Customers pay fees for interruptible services based on their actual utilization of the storage or transportation assets.
Local distribution companies (LDCs)
The local gas utility companies that transport natural gas from interstate and intrastate pipelines to retail and industrial customers through small-diameter distribution pipelines.
Liquefied natural gas (LNG)
Natural gas that has been cooled to minus 161 degrees Celsius for transportation, typically by ship. The cooling process reduces the volume of natural gas by 600 times.
Mcf
One thousand cubic feet of natural gas. We have converted throughput numbers from a heating value number to a volumetric number based upon a conversion factor of 1 MMbtu equals 1 Mcf.
MMbtu
One million British thermal units, which is approximately equal to one Mcf. One British thermal unit is equivalent to an amount of heat required to raise the temperature of one pound of water by one degree.
MMcf
One million cubic feet of natural gas.
Natural gas
A gaseous mixture of hydrocarbon compounds, the primary one being methane, but other components include ethane, propane and butane.
Natural Gas Act
Federal law enacted in 1938 that established the FERC's authority to regulate interstate pipelines.
Natural gas liquids (NGLs)
Those hydrocarbons in natural gas that are separated from the natural gas as liquids through the process of absorption, condensation, adsorption or other methods in natural gas processing or cycling plants. Natural gas liquids include natural gas plant liquids (primarily ethane, propane, butane and isobutane) and lease condensate (primarily pentanes produced from natural gas at lease separators and field facilities).
Park and loan services
Services pursuant to which natural gas storage customers receive the right to store natural gas in (park), or borrow natural gas from (loan), storage facilities on a seasonal basis.
Reservoir
An underground formation that originally contained crude oil or natural gas, or both.



Salt cavern
A man-made cavern developed in a salt dome or salt beds by leaching or mining of the salt.
Wheeling
The transportation of natural gas from one pipeline to another pipeline through the pipeline facilities of a natural gas storage facility. The gas does not flow into or out of actual storage, but merely uses the surface facilities of the storage operation.
Wheeling services
Services pursuant to which natural gas customers pay fees for the limited right to move a volume of natural gas from one interconnection point through storage and redelivering the natural gas to another interconnection point.
Withdrawal rate
The rate at which a customer is permitted to withdraw gas from a natural gas storage facility.
Working gas
Natural gas in a storage facility in excess of base gas. Working gas may or may not be completely withdrawn during any particular withdrawal season.
Working gas storage capacity
See gas storage capacity (above).





PART I

Item 1. Business.

Introduction

Inergy, L.P. is a publicly-traded Delaware limited partnership formed in March 2001. We own and operate energy midstream infrastructure and an NGL marketing, supply and logistics business. We are headquartered in Kansas City, Missouri, and our common units representing limited partner interests are listed on the New York Stock Exchange under the symbol “NRGY”.

Our midstream infrastructure business consists of storage and transportation operations, which are conducted primarily through Inergy Midstream, L.P. ("Inergy Midstream"), a predominantly fee-based, growth-oriented master limited partnership that develops, acquires, owns and operates natural gas and NGL storage and transportation infrastructure. Our NGL marketing, supply and logistics business utilizes our West Coast processing, fractionation and storage operations and other NGL facilities that we own or control. We have two reporting segments: (i) storage and transportation, which includes our natural gas storage assets in Texas and our approximately 75% ownership interest and incentive distribution rights ("IDRs") in Inergy Midstream (NYSE: NRGM); and (ii) NGL marketing, supply and logistics operations.

On August 1, 2012, we completed the contribution of our retail propane operations to Suburban Propane Partners, L.P. ("SPH"). We received approximately 14.2 million SPH common units with a market and book value of approximately $590 million, substantially all of which we distributed to our unitholders in September 2012. SPH also exchanged approximately $1.19 billion of our outstanding senior notes for $1.0 billion of new SPH senior notes and paid cash directly to tendering note holders. As a result of this transaction, we have repositioned our company to create a pure-play midstream company and deleveraged our balance sheet.

Our primary business objective is to increase the cash distributions that we pay to our unitholders. We expect to increase our cash flow that may be distributed to unitholders predominantly through our investment in Inergy Midstream (including our ownership of Inergy Midstream's IDRs) and, to a lesser extent, by growing our existing natural gas and NGL businesses.

On November 3, 2012, Inergy Midstream entered into an agreement to acquire Rangeland Energy, LLC (“Rangeland Energy”) for $425 million, subject to certain performance goals and working capital adjustments.  Rangeland Energy owns and operates an integrated crude oil rail and truck terminal, storage and pipeline facilities (the “COLT Hub”) located in Williams County, North Dakota in the heart of the Bakken and Three Forks shale oil-producing region.  The Colt Hub primarily consists of 720,000 barrels of crude oil storage, two 8,700-foot unit train rail loading loops, an eight-bay truck unloading rack, and 21-mile bi-directional crude oil pipeline that connects the terminal to crude oil gathering systems and crude oil interstate pipelines.  We expect Inergy Midstream to complete the Rangeland Energy acquisition in calendar 2012. 


1


Ownership Structure

The diagram below reflects a simplified version of our ownership structure:



We formed Inergy Midstream, LLC in 2004 to develop, acquire, own and operate natural gas and other midstream assets. In November 2011, we converted Inergy Midstream, LLC into a Delaware limited partnership named Inergy Midstream, L.P. On December 21, 2011, Inergy Midstream completed its initial public offering.

Our Assets

Storage and Transportation

Our storage and transportation segment includes our Tres Palacios natural gas storage facility and our investment in Inergy Midstream.

We own and operate the Tres Palacios natural gas storage facility, a high performance, multi-cycle salt dome storage facility located approximately 100 miles outside of Houston in Matagorda and Wharton Counties, Texas. Tres Palacios, which is owned and operated by our subsidiary, Tres Palacios Gas Storage LLC ("TPGS"), has approximately 38.4 Bcf of certificated working gas capacity and is expandable by up to an additional 9.5 Bcf of working gas capacity. Tres Palacios is connected to 10 intrastate and interstate pipelines offering connectivity to multiple demand markets in Texas as well as the Northeast, Midwest, Southeast and Florida. Tres Palacios has placed three storage caverns into service, and we expect to place a fourth cavern into service in 2015. As of September 30, 2012, 83% of Tres Palacios's available storage capacity is contracted on a firm or interruptible basis. We acquired this storage facility on October 14, 2010.

We own an approximate 75% limited partnership interest and all the IDRs in Inergy Midstream. Inergy Midstream owns and operates four high-performance natural gas storage facilities located in New York and Pennsylvania that have an aggregate working gas storage capacity of approximately 41.0 Bcf, which we believe makes Inergy Midstream the largest independent natural gas storage provider in the Northeast. Its storage facilities have low maintenance costs, long useful lives and comparatively high cycling capabilities. The interconnectivity of its storage facilities with interstate pipelines offers flexibility to shippers in the Northeast, and the facilities are located in close proximity to the Northeast demand market and a prolific

2


supply source, the Marcellus shale. Inergy Midstream's natural gas storage facilities, all of which generate fee-based revenues, include:

Stagecoach, a multi-cycle, depleted reservoir storage facility located approximately 150 miles northwest of New York City in Tioga County, New York and Bradford County, Pennsylvania. Stagecoach, which is owned and operated by Central New York Oil And Gas Company, L.L.C. ("CNYOG"), has 26.25 Bcf of certificated working gas capacity. Its 24-mile, 30-inch diameter south pipeline lateral connects the storage facility to Tennessee Gas Pipeline's ("TGP") 300 Line, and its 10-mile, 20-inch diameter north pipeline lateral connects to the Millennium Pipeline ("Millennium"). As of September 30, 2012, 100% of Stagecoach's available storage capacity is contracted;

Thomas Corners, a multi-cycle, depleted reservoir storage facility in Steuben County, New York. Thomas Corners, which is owned and operated by Arlington Storage Company, LLC ("ASC"), has 7.0 Bcf of certificated working gas capacity. Its 8-mile, 12-inch diameter pipeline lateral connects the storage facility to TGP's 400 Line, and its 7.5-mile, 8-inch diameter pipeline lateral connects to Millennium. As of September 30, 2012, 100% of Thomas Corners' available storage capacity is contracted;

Steuben, a single-turn, depleted reservoir storage facility in Schuyler County, New York. Steuben, which is owned and operated by Steuben Gas Storage Company ("Steuben Gas Storage"), has 6.2 Bcf of certificated working gas capacity. Its 12.5-mile, 12-inch diameter pipeline lateral connects the storage facility to the Dominion Transmission Inc. ("Dominion") system, and a 6-inch diameter pipeline measuring less than one mile connects Inergy Midstream's Steuben and Thomas Corners storage facilities. As of September 30, 2012, 100% of Steuben's available storage capacity is contracted; and

Seneca Lake, a multi-cycle, bedded salt storage facility in Schuyler County, New York. Seneca Lake, which is owned and operated by ASC, has 1.45 Bcf of certificated working gas capacity. Its 19-mile, 16-inch diameter pipeline lateral connects the storage facility to Millennium and Dominion's system. Inergy Midstream acquired the Seneca Lake facility from New York State Electric & Gas Corporation ("NYSEG") on July 13, 2011. As of September 30, 2012, 100% of Seneca Lake's available storage capacity is contracted.

The following provides additional information about these natural gas storage facilities:
Facility Name/ Location
 
Cycling Capability (Number of Cycles
per Year)
 
Certificated
Working Gas
Storage
Capacity
(Bcf)
 
Maximum
Injection
Rate
(MMcf/d)
 
Maximum
Withdrawal
Rate
(MMcf/d)
 
Pipeline
Connections
Tres Palacios
Matagorda and Wharton Counties, TX
 
7x
 
38.4

 
 
1,000

 
 
2,500

 
 
Multiple(1)
Stagecoach
Tioga County, NY;
Bradford County, PA
 
2x
 
26.25

 
 
250

 
 
500

 
 
TGP's 300 Line;
Millennium;
Transco's Leidy Line(2)
Thomas Corners
Steuben County, NY
 
2x
 
7.0

 
 
70

 
 
140

 
 
TGP's 400 Line;
Millennium;
Dominion(3) 
Seneca Lake
Schuyler County, NY
 
12x(4)
 
1.45

 
 
72.5

 
 
145

 
 
Dominion;
Millennium
Steuben
Steuben County, NY
 
1x
 
6.3

 
 
30

 
 
60

 
 
TGP's 400 Line;
Millennium;
Dominion(5) 
Total
 
 
 
79.4

 
 
1,422.5

 
 
3,345

 
 
 

(1)
Tres Palacios is interconnected to Florida Gas Transmission Company, LLC, Kinder Morgan Tejas Pipeline, L.P., Houston Pipe Line Company, Central Texas Gathering System, Natural Gas Pipeline Company of America, Transcontinental Gas Pipe Line Corporation ("Transco"), TGP, Valero Natural Gas Pipe Line Company, Channel Pipeline Company, and Texas Eastern Transmission, L.P.
(2)
Stagecoach's south lateral will be connected to Transco's Leidy Line as a result of the MARC I Pipeline.
(3)
Thomas Corners is connected to Dominion indirectly through the Steuben facility.
(4)
Seneca Lake was designed for 12-turn service, but we operate it as a nine-turn high-deliverability storage facility.
(5)
Steuben is connected to TGP and Millennium indirectly through the Thomas Corners facility.


3


Inergy Midstream also owns and operates the Bath storage facility, a 1.5 million barrel NGL storage facility located near Bath, New York. The facility is located approximately 210 miles northwest of New York City. It is supported by both rail and truck terminal facilities capable of loading and unloading 23 railcars per day and approximately 70 truck transports per day. The Bath storage facility generates fee-based revenues, and as of September 30, 2012, we control 100% of its available storage under a five-year contract expiring in 2016.

Inergy Midstream also owns and operates gas transportation facilities located in New York and Pennsylvania. These facilities have low maintenance costs and long useful lives, and they are located in or near the Marcellus shale. Throughput on Inergy Midstream's transportation assets can also be expanded at relatively low capital costs. Inergy Midstream's natural gas transportation facilities include:

North-South Facilities, which include compression and appurtenant facilities installed to expand transportation capacity on the Stagecoach north and south pipeline laterals. The bi-directional facilities, which are owned and operated by CNYOG, provide 325 MMcf/d of firm interstate transportation service to shippers. The North-South Facilities, which were placed into service on December 1, 2011, generate fee-based revenues under a negotiated rate structure authorized by the FERC;

MARC I Pipeline, a 39-mile, 30-inch diameter interstate natural gas pipeline that connects the Stagecoach south lateral and TGP's 300 Line in Bradford County, Pennsylvania, with Transcontinental Gas Pipe Line Company, LLC's ("Transco") Leidy Line in Lycoming County, Pennsylvania. The bi-directional pipeline, which is owned and operated by CNYOG, will provide 550 MMcf/d of interstate transportation capacity. It includes a 16,360 horsepower gas-fired compressor station in the vicinity of the Transco interconnection, and a 15,000 horsepower electric-powered compressor station at the proposed interconnection between the Stagecoach south lateral and TGP's 300 Line. Inergy Midstream expects to place the MARC I Pipeline into service on December 1, 2012, and it will generate fee-based revenues under a negotiated rate structure authorized by the FERC; and

East Pipeline, a 37.5 mile, 12-inch diameter natural gas intrastate pipeline located in New York which transports 30 MMcf/d of natural gas from Dominion to the Binghamton, New York city gate. The pipeline, which is owned and operated by Inergy Pipeline East, LLC ("IPE"), runs within three miles of the Stagecoach north lateral's point of interconnection with Millennium. The East Pipeline generates fee-based revenues under a negotiated rate structure authorized by the New York State Public Service Commission ("NYPSC"). Inergy Midstream acquired the East Pipeline (formerly known as the Seneca Lake east pipeline) from NYSEG on July 13, 2011 as part of its acquisition of the Seneca Lake natural gas storage facility.

The following provides additional information about Inergy Midstream's transportation facilities:
Facility Name
 
Pipeline
Diameter
(Inches)
 
Design
Capacity
(MMcf/d)
 
Pipeline Connections
North-South Facilities
 
20 (North lateral);
30 (South lateral)
 
560 (North lateral);
728 (South lateral)
 
Millennium (North lateral);
 TGP's 300 Line (South lateral)
MARC I Pipeline (1)
 
30
 
550
 
Stagecoach South Lateral; TGP's 300 Line;
Transco's Leidy Line
East Pipeline
 
12
 
30
 
Dominion

(1)
The MARC I Pipeline has not been placed into full commercial service.

In addition, Inergy Midstream owns US Salt, an industry-leading solution mining and salt production company located on the shores of Seneca Lake near Watkins Glen in Schuyler County, New York. US Salt is strategically located in close proximity to Inergy Midstream's Seneca Lake natural gas storage facility and Watkins Glen NGL storage development project. It is one of five major solution mined salt manufacturers in the United States, producing evaporated salt products for food, industrial, pharmaceutical and water conditioning uses. US Salt produces and sells more than 300,000 tons of evaporated salt each year, and the solution mining process used by US Salt creates salt caverns that can be converted into natural gas and NGL storage capacity.


4


NGL Marketing, Supply and Logistics

We own and operate an NGL business located near Bakersfield, California, which includes a 24.0 million gallon NGL storage facility, a 25.0 MMcf/day natural gas processing plant, a 12,000 barrels per day NGL fractionation plant, an 8,000 barrels per day butane isomerization plant, and NGL rail and truck terminals. Our West Coast operations provide NGL processing, storage, transportation and marketing services to producers, refiners and other customers.

We own and operate the Seymour storage facility, which has 21 million gallons of underground NGL storage capacity and 1.2 million gallons of aboveground “bullet” storage capacity. Located in Seymour, Indiana, the facility's receipts and deliveries are supported by TE Products Pipeline ("TEPPCO") pipeline and truck access.

We also own and operate a wholesale supply, marketing and logistics business providing NGL procurement, transportation and supply and price risk management services to independent dealers, multistate marketers, petrochemical companies, refinery and gas processors and a number of other NGL marketing and distribution companies.

Our NGL marketing, supply and logistics operations include a truck fleet, truck terminals and truck maintenance facilities. The transportation of NGLs requires specialized equipment, and our trucks carry specialized steel tanks that maintain NGLs in a liquefied state. As of September 30, 2012, we own (i) a fleet of 275 tractors and 452 transports; (ii) terminal facilities including the South Jersey Terminal in Bridgeton, New Jersey, and (iii) truck maintenance facilities in Indiana, Ohio and Mississippi.

Growth Projects

We are pursuing multiple growth projects related to our Tres Palacios storage facility, including:

NGL storage - effective January 1, 2012, we acquired a “call” right that enables us to store NGLs in certain storage caverns in service today near our Tres Palacios facility, as well as rights of first use for new NGL storage caverns developed on certain properties on the Markham salt dome. We expect to utilize these rights as greater volumes of NGLs are produced from the Eagle Ford shale and other plays in and around Texas, and we are pursuing commercial opportunities using caverns subject to our NGL storage rights.

System enhancements - we are working to extend the Tres Palacios header system by approximately 20 miles to interconnect with Copano's Houston Central gas processing plant in Colorado County, Texas. This extension is expected to allow shippers to move gas along 60 miles of large-diameter header pipe with access to a combination of 10 interstate and intrastate pipelines and the Tres Palacios facility. We expect to receive this year the FERC authorization necessary to commence construction, and we plan to complete the expansion project in calendar 2013. We believe our customers will continue to support projects that enhance connectivity and offer greater storage and transportation services.

Natural gas expansions - Texas Brine, which leases to us the mineral and surface rights we rely upon to operate the Tres Palacios storage facility, is debrining a fourth cavern located in close proximity to Tres Palacios' existing three natural gas storage caverns. We expect to place this fourth cavern into natural gas storage service after the cavern is converted from brine production into storage service. However, because this fourth cavern may be converted into NGL storage capacity, we have the flexibility to pursue the type of storage capacity that the market demands the most.

Inergy Midstream is pursuing numerous projects, including both expansions and greenfield development projects, designed to further build out and interconnect its platform of Northeast natural gas and NGL assets, which we expect to increase its operating scale and enhance our profitability.

MARC I Pipeline

In August 2010, Inergy Midstream requested FERC authorization to construct, own and operate the MARC I Pipeline, a 39-mile bi-directional interstate natural gas pipeline that runs through Bradford, Sullivan and Lycoming Counties, Pennsylvania. Before doing so, Inergy Midstream entered into binding precedent agreements with four shippers under which they agreed to subscribe for 550 MMcf/d of firm transportation service on the MARC I Pipeline for a period of 10 years. At that time, Inergy Midstream expected to receive a FERC certificate order authorizing its pipeline by mid-summer 2011 and to place the pipeline into service by July 2012. Inergy Midstream's development plans have taken longer than anticipated due to regulatory delays and legal challenges, however, and the MARC I Pipeline is scheduled to be placed into service on December 1, 2012. As of September 30, 2012, Inergy Midstream has incurred aggregate capital costs of approximately $213.5 million for development and construction of the MARC I Pipeline.

5



In October 2012, the MARC I shippers requested that their volumetric commitments be reduced from 550 MMcf/d to 450 MMcf/d. Under Inergy Midstream's precedent agreements, the shippers could terminate their contractual obligations if the pipeline was not placed into service on or before October 1, 2012. In October 2012, Inergy Midstream executed agreements with the MARC I shippers under which, among other things, (i) the shippers' volumetric requirements were permanently reduced from 550 MMcf/d to 450 MMcf/d and (ii) the shippers agreed not to terminate their contracts if the MARC I Pipeline is placed into service on or before January 1, 2013. Inergy Midstream has received FERC authorization to place the pipeline into interim service and is working to complete the final commissioning activity before requesting FERC authorization to place the pipeline into full commercial service on December 1, 2012. Inergy Midstream expects to sell all or substantially all of the 100 MMcf/d of turned-back capacity at or near rates payable by the releasing MARC I shippers. If Inergy Midstream is unable to sell any such capacity on a firm basis under long-term contracts, then it expects to sell the capacity on an interruptible basis until market conditions support the execution of long-term contracts at acceptable rates.

Watkins Glen NGL Storage Development Project

Inergy Midstream is developing a 2.1 million barrel NGL storage facility near Watkins Glen, New York, using existing cavern capacity created by US Salt's solution-mining process. Propane and butane are expected to be stored in these caverns seasonally. The facility will be supported by rail and truck terminal facilities capable of loading and unloading 32 railcars per day and 45 truck transports per day, and will connect with TEPPCO's NGL interstate pipeline. Inergy Midstream has entered into a five-year contract with us under which we will effectively market the facility's storage capacity for Inergy Midstream's economic benefit under a pass-through revenue arrangement.

Inergy Midstream filed an application with the New York State Department of Environmental Conservation ("NYSDEC") for an underground storage permit in October 2009, and it has encountered delays in the permitting process. Inergy Midstream believes it has provided all of the information the NYSDEC requires to issue the requested permit, and it expects to receive the requested permit early next year. Subject to receiving the requested permit and barring any other unexpected delays, it expects to construct and place into service the NGL storage facility within 120 days after receiving its underground storage permit. As of September 30, 2012, Inergy Midstream has incurred approximately $44.9 million of aggregate capital costs for the Watkins Glen NGL storage development project.

Truck Rack Expansion and Upgrade

In November 2012, Inergy Midstream completed construction of a new truck loading and unloading facilities at its Bath NGL storage facility. The new truck rack has two bays and arms capable of loading and unloading 70 trucks per day. Inergy Midstream is also upgrading the existing truck rack to increase the rack's loading and unloading capabilities from 17 trucks to 30 trucks per day, which it expects to complete in December 2012. Upon completion of the upgrade, Inergy Midstream's truck racks at the Bath facility are expected to be able to load and unload up to 100 trucks per day. As of September 30, 2012, Inergy Midstream has incurred approximately $0.9 million of total capital costs for this project. The affiliate that utilizes and markets all of the Bath storage capacity, Inergy Services, will pay higher annual reservation fees as a result of the new truck rack.

Commonwealth Pipeline Project

In February 2012, Inergy Midstream announced plans to jointly market and develop a new interstate natural gas pipeline project with affiliates of UGI Corporation and WGL Holdings, Inc. The Commonwealth Pipeline project is designed to provide a direct, cost-effective basis for moving Marcellus shale gas to growing natural gas demand markets in southeastern Pennsylvania and the Mid-Atlantic markets. The project sponsors held a non-binding open season for capacity on the Commonwealth Pipeline late in the second quarter of calendar 2012. Based on the results of the open season and subsequent discussions with potential shippers, the project sponsors on September 20, 2012 announced that, among other things, (i) the pipeline is expected to run approximately 120 miles to the southern terminus of Inergy Midstream's MARC I Pipeline to a point of interconnection with several interstate pipelines in Chester County, Pennsylvania; (ii) the 30-inch diameter pipeline will have an initial capacity of 800 MMcf/d of natural gas; (iii) affiliates of UGI Corporation and WGL Holdings have entered into binding precedent agreements to subscribe for firm transportation service on the Commonwealth Pipeline at negotiated rates under 10-year contracts; and (iv) the sponsors expect to place the pipeline into service in 2015.

The project sponsors are continuing to refine costs, route options and other information required to complete a feasibility study, and assess market demand for the proposed transportation capacity. Inergy Midstream remains optimistic that the market will support this low-cost transportation option for providing a direct path for moving local Marcellus shale gas to local demand centers, although we can provide no assurances that this project will be placed into service.


6


Seneca Lake Expansion (Gallery 2)

Throughout fiscal 2012, Inergy Midstream continued to perform pre-construction activity and pursue the regulatory approvals required to expand the working gas capacity of its Seneca Lake natural gas storage facility by approximately 0.5 Bcf. Inergy Midstream estimates the total capital cost of this expansion to be approximately $3.0 million. Inergy Midstream has filed an application with the NYSDEC for the underground storage permit required to debrine and inject natural gas into the cavern. Upon receipt of the underground storage permit, Inergy Midstream will request FERC authorization to place the expansion capacity into natural gas storage service. Inergy Midstream expects to place this expansion capacity into service in the second half of calendar 2013.

North-South II Expansion and Extension

In September 2011, Inergy Midstream held a non-binding open season to gauge shipper interest in its North-South II expansion project, which involved the installation of pipeline, compression and other facilities to enable shippers to move higher volumes of natural gas on a firm basis through the Stagecoach laterals from TGP's 300 Line to Millennium, and all points in between. As part of this project, Inergy Midstream would (i) extend its Stagecoach north lateral approximately three miles to interconnect with the East Pipeline, which would enable shippers to transport volumes from TGP's 300 Line (as well as intermediate points, including Millennium) to the point of interconnection between the East Pipeline and Dominion's system in Tompkins County, New York, and (ii) expand the capacity of the Stagecoach laterals, by installing additional compression or looping, to enable shippers to move higher volumes over the existing pipeline route of the North-South Facilities. Inergy Midstream believes the market will desire additional transportation flexibility provided by this project and is continuing both its commercial discussions with potential shippers and its efforts to acquire the land rights necessary to complete the three-mile extension of the Stagecoach north lateral, although we can provide no assurances that this project will be placed into service.

Other Growth Projects

In May 2012, Inergy Midstream connected its Seneca Lake natural gas storage facility to Millennium. Inergy Midstream installed this interconnection at a total capital cost of approximately $7.4 million. This interconnection provides Inergy Midstream's storage customers with greater takeaway and delivery options, which it believes will translate into greater revenues from higher storage rates and increased wheeling services.

Inergy Midstream has identified existing salt caverns on US Salt's property that it believes can be converted into natural gas and NGL storage capacity. This storage capacity is in addition to the caverns designated for NGL storage by the Watkins Glen NGL storage development project and the expansion of the Seneca Lake natural gas storage facility by approximately 0.5 Bcf. In the normal course of Inergy Midstream's business, it periodically reviews cavern information to assess whether caverns are potential candidates for natural gas or NGL storage conversion, evaluates whether market demand would support developing incremental storage services, and discusses storage opportunities with potential customers. Inergy Midstream continues to believe the market will require additional natural gas and NGL storage capacity in the Northeast to help satisfy growing demand, and it believes its solution-mined caverns will be able to provide cost-effective solutions.

Our Services

Storage and Transportation

Our Tres Palacios facility provides natural gas storage services on a firm and interruptible basis, and Inergy Midstream's facilities provide storage and transportation services on a firm (natural gas and NGL) and interruptible (natural gas only) basis. We and Inergy Midstream seek to maximize the portion of physical capacity sold in our respective storage facilities under firm contracts. To the extent the physical capacity that is contracted for firm storage service is not being fully utilized, we attempt to sell the available capacity on an interruptible basis. The terms and conditions of the agreements under which our Tres Palacios storage facility provides interstate storage services, as well as the agreements under which Inergy Midstream provides interstate storage and transportation service, to customers are governed by FERC tariffs. The general terms and conditions of the tariffs address customary matters such as creditworthiness, extension and termination rights, force majeure, fuel reimbursement and capacity releases. Non-conforming service agreements must be submitted to the FERC for approval.

Firm Storage Services. Firm storage services include storage services pursuant to which customers receive an assured, or “firm,” right to store the commodity in facilities over a defined period, typically one to three years for the Tres Palacios firm storage contracts and three to five years for Inergy Midstream's natural gas firm storage contracts. Under firm storage contracts, the storage owner receives fixed monthly capacity reservation fees regardless of whether or not the storage capacity is used. The amount of the monthly reservation fees is typically determined by the number of cycles a customer can fill and

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empty its contracted storage capacity. The storage owner also typically collects a cycling fee based on the volume of natural gas nominated for injection and/or withdrawal, and retains a small portion of the gas nominated for injection as compensation for the owner's fuel use. No-notice service, which is commonly referred to as load-following service, is a premium type of firm storage service that entitles natural gas shippers to priority service and provides additional nominating and balancing flexibility.

Transportation Services. Our Tres Palacios facility does not offer transportation services, whereas Inergy Midstream provides both interstate and intrastate transportation services. Inergy Midstream's customers choose, based upon their particular needs, the applicable mix of services depending upon availability of pipeline capacity, the price of services and the volume and timing of the customer's requirements. Firm transportation customers reserve a specific amount of pipeline capacity at specified receipt and delivery points on Inergy Midstream's system. Firm customers generally pay fees based on the quantity of capacity reserved regardless of use, plus a commodity and a fuel charge paid on the volume of gas actually transported. Capacity reservation revenues derived from a firm service contract are generally consistent during the contract term. Inergy Midstream's firm transportation contracts generally range in term from five to ten years, although it may enter into shorter or longer term contracts. In providing interruptible transportation service, it agrees to transport gas for a customer when capacity is available. Interruptible transportation service customers pay a commodity charge only for the volume of gas actually transported, plus a fuel charge. Interruptible transportation agreements have terms ranging from day-to-day to multiple years, with rates that change on a daily, monthly or seasonal basis.

Inergy Midstream's interstate transportation services include firm wheeling services and firm and interruptible transportation services provided under its FERC tariffs. CNYOG has entered into firm wheeling agreements with five shippers under which it is providing 325 MMcf/d of firm wheeling service to the North-South Facilities shippers at negotiated rates for an initial five-year period. CNYOG has entered into firm transportation agreements with four shippers under which it will, upon placement of the MARC I Pipeline into service, provide 450 MMcf/d of firm transportation service to the MARC I shippers at negotiated rates for an initial 10-year period. The East Pipeline provides intrastate transportation services to NYSEG under a firm transportation service agreement approved by the NYPSC. Under this 10-year contract agreement, Inergy Midstream makes 30 MMcf/d of transportation capacity available to NYSEG on the East Pipeline for transporting natural gas from Dominion's system to NYSEG's city gates.

Hub Services. With respect to our Tres Palacios storage operations and Inergy Midstream's natural gas storage and transportation operations, hub services include: (i) interruptible storage services, under which customers receive only limited assurances regarding the availability of capacity and deliverability in storage facilities and pay fees based on their actual utilization of the storage assets; (ii) firm and interruptible park and loan services, under which customers receive the right to store gas in (park), or borrow gas from (loan), storage facilities on a short-term or seasonal basis; (iii) interruptible wheeling services, under which customers pay fees for the limited right to move a volume of natural gas from one interconnection point through storage and redelivering the natural gas to another interconnection point; and (iv) balancing services, under which customers pay the storage owner fees to help balance and true up their deliveries of natural gas to, or takeaways of natural gas from, storage facilities.


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The table below summarizes the storage and transportation services that our Tres Palacios facility and Inergy Midstream offer to natural gas customers under their FERC tariffs, as of September 30, 2012:
  
  
 
  
Facility
 (FERC-Certificated Operator)
Type of Service
  
Category  of
 Service(1)
  
Stagecoach
 (CNYOG)
 
Thomas Corners
 (ASC)
 
Seneca Lake
 (ASC)
  
Steuben (Steuben Gas)(2)
 
Tres Palacios (TPGS)
Firm Storage Service
  
Firm S/S
  
Ÿ
  
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
Interruptible Storage Service
  
Hub
  
Ÿ
  
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
No-Notice Storage Service
  
Firm S/S
  
 
 
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
Firm Parking Service
  
Hub
  
 
 
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
Interruptible Parking Service
  
Hub
  
 
 
Ÿ
  
Ÿ
  
Ÿ
 
 
Firm Loan Service
  
Hub
  
 
 
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
Interruptible Loan Service
  
Hub
  
 
 
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
Firm Wheeling Service
  
Transport
  
Ÿ
  
 
 
 
  
 
 
 
Interruptible Wheeling Service
  
Hub
  
Ÿ
  
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ
Enhanced Interruptible Wheeling Service
  
Hub
 
 
 
Ÿ
  
Ÿ
 
Ÿ
 
Ÿ
Firm Transportation Service(3)
  
Transport
  
Ÿ

 
 
 
  
 
 
 
Interruptible Transportation Service
  
Transport
  
Ÿ
 
 
 
 
  
 
 
 
Interruptible Hourly Balancing Service
  
Hub
  
 
 
Ÿ
  
Ÿ
  
Ÿ
 
Ÿ

(1) "Firm S/S" refers to firm storage services, "Hub" refers to hub services and "Transport" refers to transportation services
(2) Pro forma for pending merger of Steuben Gas Storage with and into ASC.
(3) Assumes the MARC I Pipeline is placed into service.

US Salt's products are manufactured for food, industrial, pharmaceutical and water conditioning applications. US Salt produces evaporated salt products for customers according to customized specifications, and its product line includes food-grade salt, pharmaceutical-grade salt, bulk salt for chemical feedstock, water softening pellets, pool salt and salt blocks. US Salt does not market and distribute products under its own brand. When US Salt enters into long-term contracts, it attempts to secure minimum volumetric purchase requirements and other appropriate contractual protections. US Salt has entered into a limited number of long-term contracts under which it has agreed to provide a fixed volume of product to the customer at certain times over the life of the contract, subject to standard contractual protections like force majeure rights.

For the year ended September 30, 2012, approximately 30% of our gross profit was derived from our storage and transportation operations. Excluding the retail propane operations that we disposed of on August 1, 2012, approximately 68% of our gross profit would have been derived from our storage and transportation operations for the year ended September 30, 2012.
 
NGL Marketing, Supply and Logistics

Our West Coast NGL operations separate NGLs from methane, deliver methane to the local natural gas pipelines, and retain NGLs for further processing at our fractionation facility. The mixed NGLs delivered to our fractionation facility from domestic natural gas processing plants and crude oil refineries are normally transported by pipelines, railcars and transport trucks. Our West Coast business also provides butane isomerization and refrigerated storage services. Our isomerization facility chemically changes normal butane to isobutane, which we provide to area refineries for motor fuel blending.

We provide a menu of marketing, supply and logistics services to producers, refiners, petrochemical companies, gas processors, and other NGL marketers, which effectively provide "flow assurance" to our customers. These flow assurance services offer customers certainty that production and supply NGL volumes effectively flow without interruption and at attractive economic values.

For the year ended September 30, 2012, approximately 70% of our gross profit was derived from our NGL marketing, supply and logistics operations including the results of our retail propane operations that we disposed of on August 1, 2012. Excluding the retail propane operations, approximately 32% of our gross profit would have been derived from our NGL marketing, supply and logistics operations for the year ended September 30, 2012.




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Our Customers

Storage and Transportation

Our Tres Palacios natural gas storage customers and Inergy Midstream's natural gas storage and transportation customers primarily include natural gas LDCs, electric generation companies, natural gas producers, other natural gas pipelines, and natural gas marketing companies. Our Tres Palacios facility provides storage services, and Inergy Midstream provides storage and transportation services, in both natural gas supply and demand markets. The customers of our Tres Palacios facility and Inergy Midstream's natural gas storage and transportation facilities are largely investment-grade customers. Natural gas storage and transportation customers that are unrated or non-investment grade may be required to post credit support as authorized under the operating entity's FERC tariffs and policies to secure a portion of the customers' obligations.

US Salt customers are largely creditworthy industrial companies, pharmaceutical companies, food manufacturing companies, and distribution companies, including retail companies such as national grocer chains.

NGL Marketing, Supply and Logistics

The majority of our NGL processing and fractionation activities entail processing mixed NGL streams for third-party customers and supporting our NGL marketing activities under contractual and fee-based arrangements. These fees (typically calculated in cents per gallon) are subject to adjustment for changes in certain fractionation expenses, including natural gas fuel costs. Our integrated midstream energy asset system affords us flexibility in meeting our customers' needs. While many companies participate in the natural gas processing business, few have a presence in significant downstream activities, such as NGL fractionation, transportation and marketing, as we do. Our competitive position and presence in these downstream businesses allow us to extract incremental value while offering our customers enhanced services, including comprehensive service packages.

Industry Background

The midstream sector of the natural gas industry provides the link between exploration and production and the delivery of natural gas and its components to end-use markets. The midstream sector consists generally of gathering and processing, transportation and storage activities.

Natural Gas Midstream Activities

The fundamentals of the natural gas market create a basic demand for storage. Natural gas is produced at a relatively steady rate throughout the year so natural gas supply is relatively constant. However, natural gas consumption is highly seasonal because the market consumes more natural gas in the winter than can be produced. In contrast, more natural gas is produced in the summer than is consumed, which creates this fundamental need for storage. Natural gas storage acts as the balancing mechanism between supply and demand.

Natural gas storage plays a vital role in maintaining the reliability of natural gas supplies needed to meet consumer demands. Storage facilities are used by pipelines to balance operations, by end users (such as power generation companies and local gas distribution companies) to manage volatility and secure natural gas supplies, and by independent natural gas marketing and trading companies in connection with the execution of their trading strategies. Storage allows for the warehousing of natural gas and is used to inject excess production during periods of low demand (typically, warmer summer months) and to withdraw natural gas during periods of high demand (typically, colder winter months).

As is the case with natural gas storage, natural gas transportation pipelines play a vital role in ensuring gas supplies find a market (i.e., moving supply to demand). Transportation pipelines receive natural gas from other mainline transportation pipelines and gathering systems and deliver the natural gas to industrial end-users, utilities and other pipelines.

A recent shift in supply sources, from conventional to unconventional, has affected the supply patterns, the flows and the rates that can be charged on pipeline systems. The impacts will vary among pipelines according to the location and the number of competitors attached to these new supply sources. These changing market dynamics are prompting midstream companies to evaluate the construction of short-haul pipelines as a means of providing demand markets with cost-effective access to newly-developed production regions, as compared to relying on higher-cost, long-haul pipelines that were originally designed to transport natural gas greater distances across the country.


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Demand for natural gas storage can be negatively impacted during periods in which there is a narrow seasonal spread between current and future natural gas prices. The natural gas industry is currently experiencing a significant shift in the sources of supply with prolific new shale plays primarily, and this dramatic change could affect our operations.

NGL Midstream Activities

Natural gas produced at the wellhead typically contains methane and various NGLs. Raw natural gas containing NGLs is generally not acceptable for transportation in the interstate pipeline system or for commercial use. Processing plants extract the NGLs, leaving residual dry gas that meets interstate pipeline and commercial quality specifications. NGL fractionation facilities separate mixed NGL streams into discrete products: propane, normal butane, isobutane and pentanes (sometimes referred to as natural gasoline). NGL storage facilities store mixed NGLs and discrete NGL products parties in aboveground storage tanks or underground wells, which allow for the injection and withdrawal of such products at various times of the year to meet demand cycles.

Purity products (propane, normal butane, isobutane and natural gasoline) are normally used as raw materials by the petrochemical industry, feedstocks by refiners in the production of motor gasoline, and by industrial and residential users as fuel. Propane is used both as a petrochemical feedstock in the production of propylene and as a heating, engine and industrial fuel. Normal butane is used as a petrochemical feedstock in the production of butadiene (a key ingredient of synthetic rubber), as a blendstock for motor gasoline and to derive isobutane through isomerization. Common uses of isobutane include blendstock in motor gasoline to enhance the octane content and in the production of propylene oxide. Natural gasoline, a mixture of pentanes and heavier hydrocarbons, is primarily used as a blendstock for motor gasoline, denaturant for ethanol and dilute for heavy crude oil.

Current industry dynamics are resulting in increased domestic drilling targeting NGLs, particularly in areas with unconventional reserves, creating the need for additional NGL infrastructure and services. Factors contributing to this include (i) a strong crude oil and NGL price environment relative to current natural gas prices, with the price of West Texas Intermediate crude oil at $92.19/bbl, Henry Hub spot prices for natural gas at $3.06/MMBTU and composite NGL prices at $0.93/gallon each as of September 30, 2012; (ii) the continuation of oil and natural gas exploration and production innovation including geophysical interpretation, horizontal drilling and well completion techniques; (iii) a trend toward increased drilling in oil, condensate and NGL rich, or “liquids rich” reservoirs, especially resource plays; and (iv) increasing supply levels of mixed NGLs coupled with strong demand from petrochemical complexes and exports, which are leading to higher capacity utilization of NGL storage facilities. We believe these trends will continue to result in strong demand for the services provided by our NGL businesses.
 
Salt Activities

According to the Salt Institute, a North American based non-profit salt industry trade association, more than 290 million metric tons of salt were produced in the world in calendar 2011. Salt is generally categorized into four types based upon the method of production: evaporated salt, solar salt, rock salt and salt in brine. Dry salt is produced through the following methods: solution mining and mechanical evaporation, solar evaporation or deep-shaft mining. US Salt produces salt using solution mining and mechanical evaporation. In solution mining, wells are drilled into salt beds or domes and then water is injected into the formation and circulated to dissolve the salt. After salt is removed from a solution-mined salt deposit, the empty cavern can be used to store other substances, such as natural gas, NGLs or compressed air.

The salt solution, or brine, is next pumped out of the cavern and taken to a processing plant for evaporation. The brine may be treated to remove minerals and then pumped into vacuum pans in which the brine is boiled, and evaporated until a salt slurry is created. The slurry is then dried and separated. Depending on the type of salt product to be produced, iodine and an anti-caking agent may be added to the salt. Most food grade table salt is produced in this manner.

Regulation

The midstream operations of our company and Inergy Midstream are subject to extensive regulation by federal, state and local authorities. The regulatory burden on these operations increases the cost of doing business and, in turn, affects profitability. We have experienced increased and more burdensome regulatory oversight over the past few years and, based on our expectation that this trend will continue for the foreseeable future, we anticipate that greater time and resources will be required to obtain the approvals necessary to acquire, develop, and construct midstream infrastructure. We believe the regulatory environment for Inergy Midstream's projects located in the Northeast is particularly challenging, as public opposition to upstream oil and gas activities has increasingly influenced regulatory processes.


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We believe our operations are in substantial compliance with existing federal, state, and local laws and regulations (including the laws and regulations described below), and that our on-going compliance with applicable law will not have a material adverse effect on our business or results of operations. However, we can provide no assurance that the adoption of new laws and regulations will not add significant costs that could have a material adverse effect on our or Inergy Midstream's operations and financial results, or that our results from operations will not be materially and adversely impacted if regulations become more stringent in general. Our inability to obtain or maintain any material permit required to operate or expand our projects, or the inability of Inergy Midstream to obtain or maintain any material permits required to operate or expand its projects, could have an adverse impact on our revenues.

Natural Gas Storage and Transportation

Our natural gas storage operations, as well as the natural gas storage and transportation operations of Inergy Midstream, are subject to extensive federal and state regulation. In particular, our Tres Palacios facility and Inergy Midstream's natural gas storage and transportation facilities are subject to regulation by the FERC, and natural gas pipelines (including storage lateral pipelines) are subject to regulation by the Department of Transportation's ("DOT") Pipeline and Hazardous Materials Safety Administration ("PHMSA").

Under the Natural Gas Act, the FERC has authority to regulate gas transportation services in interstate commerce, which includes natural gas storage services. The FERC exercises jurisdiction over rates charged for services and the terms and conditions of service; the certification and construction of new facilities; the extension or abandonment of services and facilities; the maintenance of accounts and records; the acquisition and disposition of facilities; standards of conduct between affiliated entities; and various other matters. Regulated natural gas companies are prohibited from charging rates determined by the FERC to be unjust, unreasonable, or unduly discriminatory, and both the existing tariff rates and the proposed rates of regulated natural gas companies are subject to challenge.

The rates and terms and conditions of our natural gas storage services and Inergy Midstream's natural gas storage and transportation services are found in the FERC-approved tariffs of TPGS, the owner of the Tres Palacios facility; CNYOG, the owner of the Stagecoach facility, the North-South Facilities and the MARC I Pipeline; Steuben Gas Storage, the owner of the Steuben facility; and ASC, the owner of the Thomas Corners and Seneca Lake facilities. TPGS, CNYOG and ASC are authorized to charge and collect market-based rates for storage services provided at the Tres Palacios, Stagecoach, Thomas Corners and Seneca Lake natural gas storage facilities, and CNYOG is authorized to charge and collect negotiated rates for transportation services provided by the North-South Facilities and MARC I Pipeline. Steuben Gas Storage is authorized to charge and collect cost-of-service rates at the Steuben facility. Market-based and negotiated rate authority allows storage and transport owners to negotiate rates with individual customers based on market demand, which storage and transport owners then make public. A loss of market-based or negotiated rate authority or any successful complaint or protest against the rates charged or provided by TPGS, CNYOG or ASC could have an adverse impact on our revenues.

On December 20, 2011, we filed an application with the FERC (Docket No. CP12-36) requesting authority for the Copano header extension project. On October 9, 2012, the FERC issued an Environmental Assessment for the project in which the FERC Staff has proposed a “finding of no significant impact”. We expect to receive the requested authorization this year, and to complete the header extension project in calendar 2013.

On August 6, 2010, CNYOG filed an application with the FERC (Docket No. CP10-480) requesting authority to construct, operate and own the MARC I Pipeline. On November 14, 2011, the FERC issued a certificate order granting the requested authorization. On February 13, 2012, the FERC issued an order denying or dismissing all requests for rehearing of the certificate order and a request for stay of that order.

On February 14, 2012, certain of the parties seeking rehearing of the MARC I certificate order filed with the Second Circuit Court of Appeals an appeal and emergency motion for stay of the MARC I certificate. A temporary stay was granted on February 17, 2012, which halted all construction-related activity on the Pipeline until a three-judge panel vacated the temporary stay on February 28, 2012. In March, the Second Circuit granted the request for an expedited hearing briefing schedule for the MARC I certificate appeal. On June 12, 2012, the appellate court held that the FERC properly discharged its responsibilities and summarily dismissed with prejudice petition challenging the MARC I certificate and rehearing orders.

On May 21, 2012, Inergy Midstream filed applications with the FERC (Docket Nos. CP12-465 and CP12-466) requesting authority (i) to abandon the FERC tariff held by Steuben Gas Storage and (ii) for ASC to acquire the Steuben facility, via the merger of Steuben Gas Storage into ASC, and to charge marketed-based rates under ASC's tariff for services at the Steuben facility. On October 11, 2012, the FERC issued an order granting the requested authorizations. Effective April 1, 2013, ASC will have the ability to charge market-based rates for storage service provided by its Thomas Corners, Seneca Lake and Steuben

12


facilities and to provide wheeling services under one tariff (ASC's tariff). Thomas Corners will also effectively be connected to Dominion, and Steuben will effectively be connected to TGP and Millennium, with respect to services offered under ASC's tariff. These actions move Inergy Midstream closer toward its goal of developing and operating a fully-integrated natural gas storage and transportation hub in the Northeast.

Pipelines used to store and transport natural gas are subject to regulation by PHMSA under the Natural Gas Pipeline Safety Act of 1968 ("NGPSA"). The NGPSA regulates safety requirements in the design, installation, testing, construction, operation and maintenance of natural gas pipeline facilities. The NGPSA has since been amended by the Pipeline Safety Act of 1992, the Pipeline Safety Improvement Act of 2002, and the Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006. These amendments, along with implementing regulations more recently adopted by PHMSA, have imposed additional safety requirements on pipeline operators such as the development of a written qualification program for individuals performing covered tasks on pipeline facilities and the implementation of pipeline integrity management programs. These integrity management plans require more frequent inspections and other preventative measures to ensure pipeline safety in “high consequence areas,” such as high population areas, areas unusually sensitive to environmental damage, and commercially navigable waterways.

Notwithstanding the investigatory and preventative maintenance costs incurred performing routine pipeline management activities, we may incur significant expenses if anomalous pipeline conditions are discovered or due to the implementation of more stringent pipeline safety standards as a result of new or amended legislation. For example, in January 2012, President Obama signed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (“Pipeline Safety Act”), which requires increased safety measures for gas and hazardous liquids transportation pipelines. Among other things, the Pipeline Safety Act directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, and leak detection system installation. The Pipeline Safety Act also directs owners and operators of interstate and intrastate gas transmission pipelines to verify their records confirming the maximum allowable pressure of pipelines in certain class locations and high consequence areas, requires promulgation of regulations for conducting tests to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas, and increases the maximum penalty for violation of pipeline safety regulations from $1 million to $2 million. PHMSA is also considering changes to its natural gas transmission pipeline regulations to, among other things, expand the scope of "high consequence areas", strengthen integrity management requirements applicable to existing operators; strengthen or expand non-integrity pipeline management standards relating to such matters as valve spacing, automatic or remotely-controlled valves, corrosion protection, and gathering lines; and add new regulations to govern the safety of underground natural gas storage facilities including underground storage caverns and injection or withdrawal well piping that are not regulated today. Inergy Midstream cannot predict the final outcome of these legislative or regulatory efforts or the precise impact that compliance with any resulting new requirements may have on its business.

The natural gas operations of Tres Palacios and Inergy Midstream are also subject to non-rate regulation by various state agencies. For example, the Railroad Commission of Texas ("RRC") has jurisdiction over oil and gas wells drilled and produced, underground natural gas storage caverns and related facilities and pipelines used to transport oil and gas resources in Texas, and the NYSDEC has jurisdiction over the underground storage of natural gas and well drilling, conversion and plugging in New York.  Accordingly, the RRC regulates aspects of our Tres Palacios storage operations and the NYSDEC regulates aspects of the Stagecoach, Thomas Corners, Seneca Lake and Steuben storage facilities. 

IPE, as the owner and operator of Inergy Midstream's East Pipeline, is subject to lightened regulation under NYPSC regulations and policies. Lightened regulation generally exempts IPE from NYPSC regulation applicable to the provision of retail service. IPE remains subject to limited corporate (e.g., obtaining approval prior to any transfer of its ownership interests or the issuance of debt securities) and operational and safety (e.g., filing of vegetation management plan and annual reports detailing the gas volumes transported over the pipeline) regulation established and maintained by the NYPSC.

On September 15, 2011, IPE filed an application with the NYPSC (Docket No. 11-G-0510) requesting authority to pledge its equity interests in collateral support of, and to guarantee, up to $3 billion of our long-term indebtedness. The application described that, upon completion of Inergy Midstream's initial public offering, the scope of the requested authorization would be limited to pledges and guarantees supporting up to $1.5 billion of long-term indebtedness of Inergy Midstream and its wholly-owned subsidiaries. On December 15, 2011, the NYPSC issued an order granting the requested authorization.


13


NGL Storage and Transportation

NGL storage operations are subject to federal, state and local regulatory oversight. For example, the Indiana Department of Natural Resources ("INDNR") and the NYSDEC have jurisdiction over the underground storage of NGLs and well drilling, conversion and plugging in Indiana and New York, respectively. Thus, the INDNR regulates aspects of our Seymour facility, and the NYSDEC regulates aspects of Inergy Midstream's Bath facility and its proposed Watkins Glen facility.
In October 2009, Inergy Midstream filed an application with the NYSDEC for an underground storage permit for its Watkins Glen NGL storage facility. In November 2010, the NYSDEC issued a Positive Declaration for the project. In August 2011, the NYSDEC determined that the Draft Supplemental Environmental Impact Statement submitted for the project was complete. A public hearing on the project was held in September 2011, and a second public hearing was held in November 2011. In early 2012, based on concerns expressed by interested stakeholders and conversations with NYSDEC Staff, Inergy Midstream informed the NYSDEC that it would reduce the environmental footprint and modified our brine pond design. In September 2012, Inergy Midstream submitted to the NYSDEC all final drawings and plans for the revised project design. Inergy Midstream expects the NYSDEC to issue an underground storage permit early next year.
Our transportation of NGLs and ammonia by truck is subject to regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover the transportation of hazardous materials and are administered by the DOT. We conduct ongoing training programs to help ensure that our operations are in compliance with application regulations, and we believe that our procedures for transporting NGLs and ammonia are consistent with industry standards and in compliance in all material respects with applicable law.

Salt Production

US Salt's salt production and manufacturing business is highly regulated. Under the Food, Drug and Cosmetic Act, the United States Food and Drug Administration regulates food and pharmaceutical standards applicable to salt products for human consumption and drug products. The United States Environmental Protection Agency ("EPA") administers regulations for emissions control under a Title V air permit, operation and control of solution mining operations, and stormwater pollution prevention for petroleum products. The NYSDEC regulates the drilling and plugging of brine production wells, cooling/process water intake, and wastewater and stormwater discharges. The NYSDEC also administers regulations for bulk petroleum and chemical storage.

Environmental, Health and Safety

In addition, our operations and those of Inergy Midstream are subject to stringent federal, regional, state and local laws and regulations governing the discharge and emission of pollutants into the environment, environmental protection, or occupational health and safety. These laws and regulations may impose significant obligations on our operations, including the need to obtain permits to conduct regulated activities; restrict the types, quantities and concentration of materials that can be released into the environment; apply workplace health and safety standards for the benefit of employees; require remedial activities or corrective actions to mitigate pollution from former or current operations; and impose substantial liabilities on us for pollution resulting from our operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties; the imposition of investigatory, remedial and corrective action obligations or the incurrence of capital expenditures; the occurrence of delays in the development of projects; and the issuance of injunctions restricting or prohibiting some or all of the activities in a particular area.
The following is a summary of the more significant existing environmental laws and regulations, each as amended from time to time, to which our business operations are subject:
The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, a remedial statute that imposes strict liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur;
The federal Resource Conservation and Recovery Act, which governs the treatment, storage and disposal of solid wastes, including hazardous wastes;
The federal Clean Air Act, which restricts the emission of air pollutants from many sources and imposes various pre-construction, monitoring and reporting requirements;

14


The federal Water Pollution Control Act, also known as the federal Clean Water Act, which regulates discharges of pollutants from facilities to state and federal waters;
The federal Safe Drinking Water Act, which ensures the quality of the nation's public drinking water through adoption of drinking water standards and controlling the injection of substances into below-ground formations that may adversely affect drinking water sources;
The National Environmental Policy Act, which requires federal agencies to evaluate major agency actions having the potential to significantly impact the environment and which may require the preparation of Environmental Assessments and more detailed Environmental Impact Statements that may be made available for public review and comment;
The federal Endangered Species Act, which restricts activities that may affect federally identified endangered and threatened species or their habitats through the implementation of operating restrictions or a temporary, seasonal, or permanent ban in affected areas; and
The federal Occupational Safety and Health Act, which establishes workplace standards for the protection of the health and safety of employees, including the implementation of hazard communications programs designed to inform employees about hazardous substances in the workplace, potential harmful effects of these substances, and appropriate control measures.
Certain of these environmental laws impose strict, joint and several liability for costs required to clean up and restore properties where pollutants have been released regardless of whom may have caused the harm or whether the activity was performed in compliance with all applicable laws. In the course of our operations, generated materials or wastes may have been spilled or released from properties owned or leased by us or on or under other locations where these materials or wastes have been taken for recycling or disposal. In addition, many of the properties owned or leased by us were previously operated by third parties whose management, disposal or release of materials and wastes was not under our control. Accordingly, we may be liable for the costs of cleaning up or remediating contamination arising out of our operations or as a result of activities by others who previously occupied or operated on properties now owned or leased by us. Private parties, including the owners of properties that we lease and facilities where our materials or wastes are taken for recycling or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property or natural resource damages. We may not be able to recover some or any of these additional costs from insurance.
We have not received any notices that we have violated these environmental laws and regulations in any material respect and we have not otherwise incurred any material liability or capital expenditures thereunder. Future developments, such as stricter environmental laws or regulations, or more stringent enforcement of existing requirements could affect our operations. For instance, the EPA and other federal and state agencies are considering or have already commenced the study of potential adverse impacts that certain drilling methods (including hydraulic fracturing) may have on water quality and public health, with the U.S. Department of Energy having released a report recommending the implementation of a variety of measures to reduce the environmental impacts from shale-gas production. Similarly, Congress and several states, including New York and Pennsylvania, have proposed or enacted legislation or regulations that are expected to make it more difficult or costly for exploration and production companies to produce natural gas and NGLs. These initiatives, enactments and regulations could have an indirect adverse impact on us by decreasing demand for the storage and transportation services that we offer.
In addition, federal and state occupational safety and health laws require us to organize information about materials, some of which may be hazardous or toxic, that are used, released, or produced in the course of our operations. Certain portions of this information must be provided to employees, state and local governmental authorities and responders, and local citizens in accordance with applicable federal and state Emergency Planning and Community Right-to-Know Act requirements. Our operations are also subject to the safety hazard communication requirements and reporting obligations set forth in federal workplace standards.

Competition

The principal elements of competition among our Tres Palacios facility and Inergy Midstream's storage and transportation assets are rates, terms of service, types of service, supply and market access, and flexibility and reliability of service. An increase in competition in our markets or Inergy Midstream's markets could arise from new ventures or expanded operations from existing competitors.

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Principal competitors in the natural gas storage market include other independent storage providers and major natural gas pipelines. These major pipeline natural gas transmission companies have existing storage facilities connected to their systems that compete with our Tres Palacios facility and Inergy Midstream's facilities. The FERC has adopted a policy that favors authorization of new storage projects, and there are numerous natural gas storage options in Tres Palacios' geographic market and Inergy Midstream's geographic market. Pending and future construction projects, if and when brought on line, may also compete with our natural gas storage operations and Inergy Midstream's natural gas storage operations. These projects may include FERC-certificated storage expansions and greenfield construction projects.
Inergy Midstream's primary competitors in the NGL storage business include integrated major oil companies, refiners and processors, and other pipeline and storage companies.
Our NGL marketing, supply and logistics business encounters competition from fully integrated oil companies and independent NGL marketing companies. Our competitors have varying levels of financial and personnel resources, and competition generally revolves around price, service and location.
Our salt operations compete for customers primarily based on price and service. Because transportation costs are a material component of the costs our customers pay, most of our customers are geographically located east of the Mississippi River.

Employees

As of October 31, 2012, we had 653 full time employees. Of the 653 employees, 117 were general and administrative and 536 were operational.   As of October 31, 2012, US Salt had 140 employees, 105 of which are members of a labor union. We believe that our relationship with our employees (including union labor) is satisfactory.

Available Information

Our website is located at www.inergylp.com. We make available, free of charge, on or through our website our annual reports on Form 10-K, which include our audited financial statements, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as we electronically file such material with the Securities and Exchange Commission ("SEC"). These documents are also available, free of charge, at the SEC's website at www.sec.gov. In addition, copies of these documents, excluding exhibits, may be requested at no cost by contacting Investor Relations, Inergy, L.P., Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri, 64112, and our corporate telephone number is (816) 842-8181.

We also make available within the “Corporate Governance” section of our website our corporate governance guidelines, the charter of our Audit Committee and our Code of Business Conduct and Ethics. Requests for copies may be directed in writing to: Inergy, L.P., Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri, 64112, Attention: General Counsel. Interested parties may contact the chairperson of any of our Board committees, our Board's independent directors as a group or our full Board in writing by mail to Inergy, L.P., Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri, 64112, Attention: General Counsel. All such communications will be delivered to the director or directors to whom they are addressed.


Item 1A. Risk Factors

Risks Inherent in Our Structure and Relationship with Inergy Midstream

Our primary cash-generating assets are our partnership interests, including incentive distribution rights, in Inergy Midstream, and our cash flow is therefore materially dependent upon the ability of Inergy Midstream to make distributions in respect to those partnership interests to its partners.

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

the rates Inergy Midstream charges for storage and transportation services and the amount of services their customers purchase from Inergy Midstream, which will be affected by, among other things, the overall balance between the supply of and demand for natural gas, governmental regulation of Inergy Midstream's rates and services, and Inergy Midstream's ability to obtain permits for growth projects;

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force majeure events that damage Inergy Midstream or third-party pipelines, facilities, related equipment and surrounding properties;
prevailing economic and market conditions;
governmental regulation, including changes in governmental regulation in our industry;
leaks or accidental releases of products or other materials into the environment, whether as a result of human error or otherwise;
difficulties in collecting receivables because of customers' credit or financial problems; and
changes in tax laws.

In addition, the actual amount of cash Inergy Midstream will have available for distribution will depend on other factors, some of which are beyond its control, including: the level and timing of capital expenditures it makes; the cost of acquisitions; its debt service requirements and other liabilities; fluctuations in its working capital needs; its ability to borrow funds and access capital markets; restrictions contained in its debt agreements; and the amount of cash reserves established by its general partner.

We do not have control over many of these factors, including the level of cash reserves established by the board of directors and Inergy Midstream's general partner. Accordingly, we cannot guarantee that Inergy Midstream will have sufficient available cash to pay a specific level of cash distributions to its partners.

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

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

Our business strategy may include supporting the growth of Inergy Midstream by purchasing its securities or lending funds to Inergy Midstream to provide funding for acquisitions or internal growth projects. To the extent we purchase common units, the rate of our distribution growth may be reduced, at least in the short term, as less of our cash distributions will come from our ownership of Inergy Midstream's IDRs, which distributions increase at a faster rate than those of our other securities.

We could have an indemnification obligation to Inergy Midstream, which could materially adversely affect our financial condition.

We have entered into an omnibus agreement with Inergy Midstream and its general partner that governs certain aspects of our relationship with them. Pursuant to the omnibus agreement, we are generally obligated to indemnify Inergy Midstream and its affiliates against certain environmental liabilities and liabilities of the assets of the operations of Inergy Midstream prior to December 21, 2011. See “Certain Relationships and Related Party Transactions-Omnibus Agreement.” Our indemnification obligations under the omnibus agreement could result in substantial expenses and liabilities to Inergy Midstream, which could materially adversely affect our financial condition. For example, we may be required to indemnify Inergy Midstream in connection with the Anadarko litigation. See “Item 3 - Legal Proceedings.”

Unitholders have less ability to elect or remove management than holders of common stock in a corporation.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business, and therefore limited ability to influence management's decisions regarding our business. Unitholders did not elect, and do not have the right to elect, our general partner or its board of directors on an annual or other continuing basis. The board of directors of our general partner is chosen by the sole member of our general partner, Inergy Holdings, L.P. John J. Sherman, who currently is the only voting member of the general partner of Inergy Holdings, effectively has the authority to appoint all of our directors. Although our general partner has a fiduciary duty to manage our partnership in a manner beneficial to Inergy, L.P. and our unitholders, the directors of our general partner also have a fiduciary duty to manage our general partner in a manner beneficial to its member, Inergy Holdings, L.P.

If unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner generally may not be removed except upon the vote of the holders of 66 2/3% of the outstanding units voting together as a single class.


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Our unitholders' voting rights are further restricted by a provision in our partnership agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partners and their affiliates, cannot be voted on any matter.

The control of our general partner may be transferred to a third party without unitholder consent.

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

Cost reimbursements due our general partner may be substantial and reduce our ability to pay the quarterly distribution.

Before making any distributions on our units, we will reimburse our general partner for all expenses it has incurred on our behalf. In addition, our general partner and its affiliates may provide us with services for which we will be charged reasonable fees as determined by our general partner. The reimbursement of these expenses and the payment of these fees could adversely affect our ability to make distributions to you. Our general partner has sole discretion to determine the amount of these expenses and fees.

We may issue additional common units without unitholder approval, which would dilute our unitholders' existing ownership interests.

We may issue an unlimited number of limited partner interests of any type without the approval of unitholders. The issuance of additional common units or other equity securities of equal rank will have the following effects:

the proportionate ownership interest of our existing unitholders in us will decrease;
the amount of cash available for distribution on each common unit or partnership security may decrease;
the relative voting strength of each previously outstanding common unit will be diminished; and
the market price of the common units or partnership securities may decline.

Future sales of the Inergy Midstream common units we own or other limited partner interests in the public market could reduce the market price of our unitholders' limited partner interests.

As of September 30, 2012, we owned approximately 56.4 million common units of Inergy Midstream. If we were to sell and/or distribute our Inergy Midstream common units to the holders of our equity interests in the future, those holders may dispose of some or all of these units. The sale or disposition of a substantial portion of these units in the public markets could reduce the market price of Inergy Midstream's outstanding common units and our receipt of cash distributions.

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

The Inergy Midstream partnership agreement allows it to issue an unlimited number of additional limited partner interests. The issuance of additional common units or other equity securities by Inergy Midstream will have the following effects:
  
Our unitholders' current proportionate ownership interest in Inergy Midstream will decrease;
the amount of cash available for distribution on each common unit or partnership security may decrease;
the ratio of taxable income to distributions may increase;
the relative voting strength of each previously outstanding common unit may be diminished; and
the market price of Inergy Midstream's common units may decline.

The payment of distributions on any additional units issued by Inergy Midstream may increase the risk that Inergy Midstream may not have sufficient cash available to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to meet our obligations.


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If we cease to manage and control Inergy Midstream in the future, we may be deemed to be an investment company under the Investment Company Act of 1940.

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

Moreover, treatment of us as an investment company would prevent our qualification as a partnership for federal income tax purposes, in which case we would be treated as a corporation for federal income tax purposes. For further discussion of the importance of our treatment as a partnership for federal income tax purposes and the implications that would result from our treatment as a corporation in any taxable year, please read the risk factor below entitled “The tax treatment of publicly traded partnerships is subject to potential legislative, judicial or administrative changes. If we or Inergy Midstream were treated as a corporation for federal income tax purposes, or if we or Inergy Midstream were to become subject to a material amount of state or local taxation, then our cash available for distribution to our unitholders would be substantially reduced.

In the event of a change of control, we may be obligated to transfer control of our general partner interest in Inergy Midstream to an affiliate.
 
We and the general partner of Inergy Holdings (“Holdings GP”) have entered into an agreement under which Holdings GP will be required to purchase the entity that controls the general partner of Inergy Midstream in the event that (i) a change of control of our partnership occurs at a time when we are entitled to receive less than 50% of all cash distributed with respect to our limited partner interests and incentive distribution rights or (ii) through dilution or a distribution to our common unitholders of our interests in Inergy Midstream, we are entitled to receive less than 25% of all cash distributed with respect to our limited partner interests and incentive distribution rights. Please read “Certain Relationships and Related Party Transactions-NRGM GP, LLC Change of Control Event.”

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

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

For example, conflicts of interest with Inergy Midstream may arise in the following situations:
    
the allocation of shared overhead expenses to Inergy Midstream and us;
the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and Inergy Midstream, on the other hand;
the determination of the amount of cash to be distributed to Inergy Midstream's partners and the amount of cash to be reserved for the future conduct of Inergy Midstream's business;
the determination whether to make borrowings under Inergy Midstream's revolving credit facility to pay distributions to Inergy Midstream's partners; and
any decision we make in the future to engage in business activities independent of Inergy Midstream.

The fiduciary duties of our general partner's officers and directors may conflict with those of Inergy Midstream's general partners.

Conflicts of interest may arise because of the relationships among Inergy Midstream, its general partner and us. Our general partner's directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. Some of our general partner's directors and officers are also directors and officers of Inergy Midstream's general partner, and have fiduciary duties to manage the business of Inergy Midstream in a manner beneficial to Inergy Midstream and its unitholders. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

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Affiliates of our general partner are not prohibited from competing with us.

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. Except as provided in our partnership agreement, affiliates of our general partner are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us.

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner and its affiliates have limited fiduciary duties to us, which may permit them to favor their own interests to the detriment of us.

Conflicts of interest may arise among our general partner and its affiliates, on the one hand, and us, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over our interests. These conflicts include, among others, the following:
    
Our general partner is allowed to take into account the interests of parties other than us, including Inergy Midstream and its affiliates and any general partner and limited partnerships acquired in the future, in resolving conflicts of interest, which has the effect of limiting its fiduciary duties to us.
    
Our general partner has limited its liability and reduced its fiduciary duties under the terms of our partnership agreement, while also restricting the remedies available for actions that, without these limitations, might constitute breaches of fiduciary duty. As a result of purchasing our units, unitholders consent to various actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law.

Our general partner determines the amount and timing of our investment transactions, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution.

Our general partner determines which costs it and its affiliates have incurred are reimbursable by us.

Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such payments or additional contractual arrangements are fair and reasonable to us.

Our general partner controls the enforcement of obligations owed to us by it and its affiliates.

Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

Our partnership agreement limits our general partner's fiduciary duties to us and restricts the remedies available for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

provides that our general partner is entitled to make other decisions in “good faith” if it reasonably believes that the decisions are in our best interests;

generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the Conflicts Committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships among the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and
    
provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud, willful misconduct or gross negligence.


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

If at any time our general partner and its affiliates own more than 85% of our outstanding units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the units held by unaffiliated persons at a price not less than their then-current market price. As a result, unitholders may be required to sell their units at an undesirable time or price and may not receive any return on their investment. Unitholders may also incur a tax liability upon a sale of their units. As of September 30, 2012, the directors and executive officers of our general partner owned less than 1% of our common units.

Our cash distribution policy limits our ability to grow.

Because we distribute all of our available cash, our growth may not be as rapid as businesses that reinvest their available cash to expand ongoing operations. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

Risks Inherent in Our Business and Inergy Midstream's Business

Unless otherwise indicated, the risk factors in this section apply to our operations and Inergy Midstream's operations.

The supply and demand for natural gas could be adversely affected by many factors outside of our control which could negatively affect us.

Our success depends on the supply and demand for natural gas. The degree to which our business is impacted by changes in supply or demand varies. Our business can be negatively impacted by sustained downturns in supply and demand for natural gas, including reductions in our ability to renew contracts on favorable terms and to construct new infrastructure. One of the major factors that will impact natural gas demand will be the potential growth of the demand for natural gas in the power generation market, particularly driven by the speed and level of existing coal-fired power generation that is replaced with natural gas-fired power generation. One of the major factors impacting natural gas supplies has been the significant growth in unconventional sources such as shale plays. In addition, the supply and demand for natural gas for our business will depend on many other factors outside of our control, which include, among others:

adverse changes in general global economic conditions. The level and speed of the recovery from the recent recession remains uncertain and could impact the supply and demand for natural gas and our future rate of growth in our business;
adverse changes in domestic regulations that could impact the supply or demand for natural gas;
technological advancements that may drive further increases in production and reduction in costs of developing natural gas shales;
competition from imported LNG and Canadian supplies and alternate fuels;
increased prices of natural gas or NGLs that could negatively impact demand for these products;
increased costs to explore for, develop, produce, gather, process and transport natural gas or NGLs;
adoption of various energy efficiency and conservation measures; and
perceptions of customers on the availability and price volatility of our services, particularly customers' perceptions on the volatility of natural gas prices over the longer-term.

If volatility and seasonality in the natural gas industry decrease, because of increased production capacity or otherwise, the demand for our services and the prices that we will be able to charge for those services may decline. In addition to volatility and seasonality, an extended period of high natural gas prices would increase the cost of acquiring base gas and likely place upward pressure on the costs of associated expansion activities. An extended period of low natural gas prices could adversely impact storage values for some period of time until market conditions adjust. These commodity price impacts could have a negative impact on our business, financial condition, and results of operations.
 
If we do not complete growth projects or make acquisitions, our future growth may be limited.
 
Our business strategy depends on Inergy Midstream's ability to grow cash available for distribution and our ability to grow our existing businesses. Inergy Midstream's business strategy depends on its ability to complete growth projects and make acquisitions that result in an increase in cash generated from operations on a per unit basis (i.e., complete accretive

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transactions). We or Inergy Midstream may be unable to complete successful, accretive growth projects or acquisitions for any of the following reasons:
 
a failure to identify attractive expansion or development projects or acquisition candidates that satisfy acceptable economic and other criteria, or an inability to realize such opportunities as a result of being outbid by competitors;
a failure to raise financing for such projects or acquisitions on economically acceptable terms;
a failure to secure adequate customer commitments to use the facilities to be developed, expanded or acquired; or
a failure to obtain governmental approvals or other rights, licenses or consents needed to complete such projects or acquisitions. 

Our and Inergy Midstream's operations are subject to extensive regulation, and regulatory measures adopted by regulatory authorities could have a material adverse effect on our business, financial condition and results of operations.
 
Our and Inergy Midstream's operations are subject to extensive regulation by federal, state and local regulatory authorities. For example, because we transport natural gas in interstate commerce and we store natural gas that is transported in interstate commerce, our natural gas storage and transportation facilities are subject to comprehensive regulation by the FERC under the Natural Gas Act. Federal regulation under the Natural Gas Act extends to such matters as:
 
rates, operating terms and conditions of service;
the form of tariffs governing service;
the types of services we may offer to our customers; 
the certification and construction of new, or the expansion of existing, facilities;
the acquisition, extension, disposition or abandonment of facilities; 
contracts for service between storage and transportation providers and their customers; 
creditworthiness and credit support requirements; 
the maintenance of accounts and records;
relationships among affiliated companies involved in certain aspects of the natural gas business;
the initiation and discontinuation of services; and 
various other matters.
 
Natural gas companies may not charge rates that, upon review by FERC, are found to be unjust and unreasonable or unduly discriminatory. Existing interstate transportation and storage rates may be challenged by complaint and are subject to prospective change by FERC. Additionally, rate increases proposed by a regulated pipeline or storage provider may be challenged and such increases may ultimately be rejected by FERC. We currently hold authority from FERC to charge and collect market-based rates for interstate storage services provided at our Tres Palacios facility. Inergy Midstream currently holds authority from FERC to charge and collect (i) market-based rates for interstate storage services provided at the Stagecoach, Thomas Corners and Seneca Lake facilities and (ii) negotiated rates for interstate transportation services provided over the North-South Facilities and the MARC I Pipeline. FERC's “market-based rate” policy allows regulated entities to charge rates different from, and in some cases, less than, those which would be permitted under traditional cost-of-service regulation. Among the sorts of changes in circumstances that could raise market power concerns would be an expansion of capacity, acquisitions or other changes in market dynamics. There can be no guarantee that we will be allowed to continue to operate under such rate structures for the remainder of those assets' operating lives. Any successful challenge against rates charged for our storage and transportation services, or our loss of market-based rate authority or negotiated rate authority, could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions. Our market-based rate authority for our natural gas storage facilities may be subject to review and possible revocation if FERC determines that we have the ability to exercise market power in our market area. If we were to lose our ability to charge market-based rates, we would be required to file rates based on our cost of providing service, including a reasonable rate of return. Cost-of-service rates may be lower than our current market-based rates.
 
There can be no assurance that FERC will continue to pursue its approach of pro-competitive policies as it considers matters such as pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity and transportation and storage facilities. Failure to comply with applicable regulations under the Natural Gas Act, the Natural Gas Policy Act of 1978, the Pipeline Safety Act of 1968 and certain other laws, and with implementing regulations associated with these laws, could result in the imposition of administrative and criminal remedies and civil penalties of up to $1,000,000 per day, per violation.
 

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We may not be able to renew or replace expiring contracts.
 
Our primary exposure to market risk occurs at the time our existing contracts expire and are subject to renegotiation and renewal. As of September 30, 2012, the weighted average remaining tenor of our and Inergy Midstream's existing portfolio of firm storage contracts are approximately 1.2 and 3.4 years, respectively. Customer contracts for 11 Bcf of natural gas firm storage service will expire at our Tres Palacios facility in fiscal 2013, and customer contracts for 5.2 Bcf of natural gas firm storage service will expire at Inergy Midstream's facilities in fiscal 2013. The extension or replacement of existing contracts depends on a number of factors beyond our control, including:
 
the macroeconomic factors affecting natural gas and NGL storage economics for our current and potential customers;
the level of existing and new competition to provide services to our markets;
the balance of supply and demand, on a short-term, seasonal and long-term basis, in our markets;
the extent to which the customers in our markets are willing to contract on a long-term basis; and
the effects of federal, state or local regulations on the contracting practices of our customers.

Any failure to extend or replace a significant portion of our existing contracts, or extending or replacing them at unfavorable or lower rates, could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.

We depend on third-party pipelines connected to our storage facilities and pipelines, and we could be negatively impacted by circumstances beyond our control that temporarily or permanently interrupt the operation of such third-party pipelines.
 
We depend on the continued operation of third-party pipelines that provide delivery options to and from our storage facilities, and to which our transportation pipelines are connected. For example, Inergy Midstream's Stagecoach facility depends on TGP's 300 Line and Millennium, currently the only interstate pipelines to which it is directly interconnected. These pipelines are owned by parties not affiliated with us. Any temporary or permanent interruption at any key pipeline or other interconnect point with our storage facilities that causes a material reduction in the volume of storage or transportation services provided by us could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.
 
In addition, the rates charged by the interconnected pipelines for transportation to and from our facilities and pipelines affect the utilization and value of our services. Significant changes in the rates charged by these pipelines or the rates charged by other pipelines with which the interconnected pipelines compete could also have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.
 
Expanding our business by developing new midstream assets subjects us to risks.
 
Our growth projects are an integral part of our business strategy. The development and construction of storage facilities, pipelines, and truck/rail terminals involves numerous regulatory, environmental, political and legal uncertainties beyond our control and may require the expenditure of significant amounts of capital. When we undertake these projects, they may not be completed on schedule, at the budgeted cost or at all. Moreover, our revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if we build a new midstream asset, the construction will occur over an extended period of time, and we will not receive material increases in revenues until the project is placed in service. Moreover, we may construct facilities to capture anticipated future growth in production and/or demand in a region in which such growth does not materialize. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our business, financial condition, results of operations and ability to make distributions.
 
Certain of our growth projects must receive regulatory approval from federal and state authorities prior to construction, such as Inergy Midstream's Watkins Glen NGL storage development project. The approval process for storage and transportation projects has become increasingly challenging. We cannot guarantee such authorization will be granted or, if granted, that such authorization will be free of burdensome or expensive conditions.
 

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Acquisitions or growth projects that we complete may not perform as anticipated and could result in a reduction of our cash available for distribution.
 
Even if we complete projects or acquisitions that we believe will be accretive, such projects or acquisitions may nevertheless reduce our cash available for distribution due to the following factors:
 
mistaken assumptions about storage capacity, deliverability, base gas needs, geological integrity, revenues, synergies, costs (including operating and administrative, capital, debt and equity costs), customer demand, growth potential, assumed liabilities and other factors;
the failure to receive cash flows from an growth project or newly acquired asset due to delays in the commencement of operations for any reason;
unforeseen operational issues or the realization of liabilities that were not known to us at the time the acquisition or growth project was completed; 
the inability to attract new customers or retain acquired customers to the extent assumed in connection with the acquisition or growth project; 
the failure to successfully integrate growth projects or acquired assets or businesses into our operations and/or the loss of key employees; or 
the impact of regulatory, environmental, political and legal uncertainties that are beyond our control.
 
If we complete future growth projects or acquisitions, our capitalization and results of operations may change significantly, and you will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources. If any growth projects or acquisitions we ultimately complete are not accretive to our cash available for distribution, our ability to make distributions may be reduced.
 
If we are unable to obtain needed capital or financing on satisfactory terms to fund expansions of our asset base, our ability to pay cash distributions may be diminished or our financial leverage could increase.
 
In order to expand our asset base, we will need to make expansion capital expenditures. If we do not make sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and may be unable to raise the level of our cash distributions. To fund our expansion capital expenditures, we will be required to use cash from our operations or incur borrowings or sell additional common units or other limited partner interests. Such uses of cash from operations will reduce cash available for distribution to our common unitholders. Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our debt agreements, as well as by general economic conditions and contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining the necessary funds, the terms of such financings could limit our ability to pay distributions to our common unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant common unitholder dilution and increase the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the then-current distribution rate.

Increased competition could have a negative impact on the demand for our services, which could adversely affect our financial results.
 
We compete primarily with other providers of storage and transportation services that own or operate natural gas and NGL storage facilities and natural gas pipelines. Such competitors include independent storage developers and operators, LDCs, interstate and intrastate natural gas transmission companies with storage facilities connected to their pipelines, and other midstream companies. Some of our competitors have greater financial, managerial and other resources than we do and control substantially more storage and transportation capacity than we do. In addition, our customers may develop their own storage and transportation assets in lieu of using ours. FERC has adopted a policy that favors authorization of new storage projects, and there are numerous natural gas storage options in the geographic markets we serve. Pending and future construction projects, if and when brought on-line, may also compete with our natural gas storage operations. Such projects may include FERC-certificated storage expansions and greenfield construction projects.
 
We also compete with the numerous alternatives to storage available to customers, including pipeline balancing/no-notice services, seasonal/swing services provided by pipelines and marketers and on-system LNG facilities. Natural gas as a fuel also competes with other forms of energy available to end-users, including electricity, coal and liquid fuels. Increased demand for such forms of energy at the expense of natural gas could lead to a reduction in demand for natural gas storage and transportation services.
 

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If our competitors substantially increase the resources they devote to the development and marketing of competitive services or substantially decrease the prices at which they offer their services, we may be unable to compete effectively. Some of these competitors may expand or construct new storage or transportation assets that would create additional competition for us. The expansion of storage or transportation assets and construction activities of our competitors could result in storage or transportation capacity in excess of actual demand, which could reduce the demand for our services, and potentially reduce the rates that we receive for our services.
 
All of these competitive pressures could make it more difficult for us to retain our existing customers and/or attract new customers as we seek to expand our business, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions. In addition, competition could intensify the negative impact of factors that decrease demand for natural gas and NGL storage and transportation in our markets, such as adverse economic conditions, weather, higher fuel costs and taxes or other governmental or regulatory actions that directly or indirectly increase the cost or limit the use of natural gas.
 
Inergy Midstream expects to derive a significant portion of its revenues from a limited number of customers, and the loss of one or more of these customers could result in a significant loss of revenues and cash flow.
 
Inergy Midstream expects to derive a significant portion of its revenues and cash flow from a limited number of customers. For the fiscal year ended September 30, 2012, ConEd accounted for approximately 14% of Inergy Midstream's total revenue. The loss, nonpayment, nonperformance or impaired creditworthiness of one of Inergy Midstream's large customers could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.
 
We are exposed to the credit risk of our customers in the ordinary course of our business.
 
We extend credit to our customers as a normal part of our business. As a result, we are exposed to the risk of loss resulting from the nonpayment and/or nonperformance of our customers. While we have established credit policies that include assessing the creditworthiness of our customers as permitted by our FERC-approved gas tariffs and requiring appropriate terms or credit support from them based on the results of such assessments, there can be no assurance that we have adequately assessed the creditworthiness of our existing or future customers or that there will not be unanticipated deterioration in their creditworthiness. Resulting nonpayment and/or nonperformance by our customers could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.
 
Additionally, in instances where we loan natural gas to third parties, the magnitude of our credit risk is significantly increased, as the failure of the third party to return the loaned volumes would result in losses equal to the full value of the loaned natural gas rather than, in the case of firm storage or hub services contracts, losses equal to fees on volumes nominated for injection or withdrawal.
 
The fees charged by us to third parties under storage and transportation agreements may not escalate sufficiently to cover increases in costs, and those agreements may be suspended in some circumstances.
 
Our costs may increase at a rate greater than the rate that the fees we charge to third parties increase pursuant to our contracts with them. In addition, some third parties' obligations under their agreements with us may be permanently or temporarily reduced upon the occurrence of certain events, some of which are beyond our control, including force majeure events wherein the supply of natural gas is curtailed or cut off. Force majeure events include (but are not limited to) revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities or those of third parties. If the escalation of fees is insufficient to cover increased costs or if any third party suspends or terminates its contracts with us, our business, financial condition, results of operations and ability to make distributions could be materially adversely affected.
 
Our business involves many hazards and risks, some of which may not be fully covered by insurance.
 
Our operations are subject to all of the risks and hazards inherent in the natural gas and NGL storage and transportation businesses, including:

subsidence of the geological structures where we store natural gas and NGLs; 
risks and hazards inherent in drilling operations associated with the development of new caverns; 
problems maintaining the wellbores and related equipment and facilities that form a part of the infrastructure that is critical to the operation of our storage facilities; 

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damage to our facilities and properties caused by hurricanes, tornadoes, floods, fires and other natural disasters, acts of terrorism, third parties, equipment or material failures, pipeline or vessel ruptures or corrosion, explosions and other incidents;
leaks, migrations or losses of natural gas and NGLs; 
collapse of storage caverns;
operator error;
environmental hazards, such as NGL or condensate spills, pipeline and tank ruptures, drinking water contamination associated with our raw water or water disposal wells, and discharges of toxic gases, fluids or other pollutants into the surface and subsurface environment;
failure to comply with environmental or pipeline safety regulatory requirements; and
other industry hazards that could result in the suspension of operations.
 
These risks could result in substantial losses due to breaches of contractual commitments, personal injury and/or loss of life, damage to and destruction of property and equipment and pollution or other environmental damage. These risks may also result in curtailment or suspension of our operations. A natural disaster or other hazard affecting the areas in which we operate could have a material adverse effect on our operations. We are not fully insured against all risks inherent in our business. In addition, we are not insured against all environmental accidents that might occur, some of which may result in toxic tort claims. If a significant accident or event occurs for which we are not fully insured, it could result in a material adverse effect on our business, financial condition, results of operations and ability to make distributions. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. Additionally, we may be unable to recover from prior owners of our assets, pursuant to our indemnification rights, for potential environmental liabilities.

As a result of these risks and hazards, we have been, and will likely be, a defendant in legal proceedings and litigation arising in the ordinary course of business. We maintain insurance policies with insurers in such amounts and with such coverages and deductibles as we believe are reasonable and prudent. However, our insurance may not be adequate to protect us from all material expenses related to potential future claims for personal injury and property damage.
 
In addition, we share insurance coverage with Inergy, for which we reimburse Inergy pursuant to the terms of the omnibus agreement. To the extent Inergy experiences covered losses under the insurance policies, the limit of our coverage for potential losses may be decreased.
 
Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make distributions.
 
We have a $550 million credit facility with a maturity date in July 2016 and Inergy Midstream has a $600 million credit facility (expandable up to $750 million) with a maturity date in December 2016. Both credit facilities are available to fund working capital and growth projects, make acquisitions and for general partnership purposes.
 
Our and Inergy Midstream's credit facilities contain various covenants and restrictive provisions that will limit our and Inergy Midstream's ability to, among other things:
 
incur additional debt;
make distributions on or redeem or repurchase units;
make certain investments and acquisitions; 
incur or permit certain liens to exist; 
enter into certain types of transactions with affiliates;
merge, consolidate or amalgamate with another company; and 
transfer or otherwise dispose of assets.
 
Furthermore, our credit facility contains covenants requiring us to maintain certain financial ratios. For example, our credit facility requires maintenance of a consolidated leverage ratio (as defined in our credit agreement) of not more than 4.75 to 1.00 and an interest coverage ratio (as defined in our credit agreement) of not less than 2.5 to 1.00. Inergy Midstream's revolving credit facility contains covenants requiring it to maintain certain financial ratios. For example, Inergy Midstream's revolving credit facility requires maintenance of a consolidated leverage ratio (as defined in its credit agreement) of not more than 5.00 to 1.00 and an interest coverage ratio (as defined in its credit agreement) of not less than 2.50 to 1.00.


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Borrowings under our credit facility are secured by (i) pledges of the equity interests of, and guarantees by, substantially all of our existing and future domestic wholly-owned subsidiaries, and (ii) liens on substantially all of our real and personal property. Borrowings under Inergy Midstream's revolving credit facility are secured by (i) pledges of the equity interests of, and guarantees by, substantially all of its existing and future subsidiaries, and (ii) liens on substantially all of its real and personal property.
 
The provisions of each company's credit facility may affect its ability to obtain future financing and pursue attractive business opportunities and each company's flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of a credit facility could result in an event of default, which could enable the lenders, subject to applicable notice and cure provisions, to declare any outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of any such debt of our's is accelerated, our assets may be insufficient to repay such debt in full, and the holders of our common units could experience a partial or total loss of their investment. If the payment of any such debt of Inergy Midstream is accelerated, its assets may be insufficient to repay such debt in full, and the holders of Inergy Midstream's common units could experience a partial or total loss of their investment.
 
Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.
 
Our future level of debt could have important consequences to us, including the following:

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms; 
our funds available for operations, future business opportunities and distributions to common unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt; 
we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and
our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to effect any of these actions on satisfactory terms or at all.
  
An unfavorable resolution of the Anadarko litigation could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.
 
In June 2010, Inergy Midstream's predecessor, Inergy Midstream, LLC (“NRGM Predecessor”), and CNYOG entered into a letter of intent with Anadarko Petroleum Corporation ("Anadarko") which contemplated that, subject to certain conditions, Anadarko may exercise an option to acquire up to a 25% ownership interest in the MARC I Pipeline. On September 23, 2011, Anadarko filed a complaint against NRGM Predecessor and CNYOG in the Court of Common Pleas in Lycoming County, Pennsylvania (Cause No. 11-01697) alleging that (i) Anadarko had an option to acquire, and timely exercised its option to acquire, a 25% ownership interest in the MARC I Pipeline, (ii) NRGM Predecessor refused to enter into definitive agreements under which Anadarko would acquire a 25% interest in the pipeline and, by doing so, NRGM Predecessor breached the letter of intent, and (iii) by refusing to enter into definitive agreements, NRGM Predecessor breached a duty of good faith and fair dealing in connection with the letter of intent.  Based on these allegations, Anadarko seeks various remedies, including specific performance of the letter of intent and monetary damages.  Inergy Midstream filed its answer to Anadarko's complaint in January 2012, and discovery is continuing. An unfavorable resolution of such litigation could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions. In addition, such litigation could divert the attention of management and resources in general from day-to-day operations. For further information regarding this lawsuit, please see “Item 3 -Legal Proceedings” of this Part I.

Our operations are subject to compliance with environmental and occupational health and safety laws and regulations that may expose us to significant costs and liabilities.
 
Our operations are subject to stringent federal, regional, state and local laws and regulations governing occupational health and safety aspects of our operations, the discharge of materials into the environment or otherwise relating to environmental protection. Such laws and regulations impose numerous obligations that are applicable to our operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital expenditures to comply with applicable legal requirements, the application of specific health and safety criteria addressing worker protections and the imposition of

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restrictions on the generation, handling, treatment, storage, disposal and transportation of materials and wastes. Failure to comply with such laws and regulations can result in the assessment of substantial administrative, civil and criminal penalties, the imposition of remedial liabilities and the issuance of injunctions restricting or prohibiting some or all of our activities. Certain environmental laws impose strict, joint and several liability for costs required to clean up and restore sites where materials or wastes have been disposed or otherwise released. In the course of our operations, generated materials or wastes may have been spilled or released from properties owned or leased by us or on or under other locations where these materials or wastes have been taken for recycling or disposal.
 
It is also possible that adoption of stricter environmental laws and regulations or more stringent interpretation of existing environmental laws and regulations in the future could result in additional costs or liabilities to us as well as the industry in general or otherwise adversely affect demand for our services and salt products. It is also possible that adoption of stricter environmental laws and regulations or more stringent interpretation of existing environmental laws and regulations in the future could result in additional costs or liabilities to us or our customers and also adversely affect demand for the natural gas, NGLs or salt products.

Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating and capital costs and reduced demand for our services.
 
In December 2009, the EPA determined that emissions of carbon dioxide, methane and other greenhouse gases (GHGs) present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth's atmosphere and other climatic changes. Based on these findings, has already adopted rules regulating GHG emissions under the Clean Air Act, including one that requires a reduction in emissions of GHGs from motor vehicles and another that regulates emissions of GHGs from certain large stationary sources, which could require greenhouse emission controls for those sources. The EPA has also adopted rules requiring the reporting of GHG emissions from specified onshore oil and natural gas production, processing, transmission, storage and distribution facilities on an annual basis. In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs, and almost one-half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall GHG emission reduction goal.
 
The adoption of legislation or regulatory programs to reduce emissions of GHGs could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas that is produced, which may decrease demand for our storage services. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse effect on our business, financial condition and results of operations.
 
Increases in interest rates could adversely impact demand for our storage capacity, our ability to issue equity or incur debt for acquisitions or other purposes, and our ability to make cash distributions at our intended levels.
 
There is a financing cost for our customers to store natural gas or NGLs in our storage facilities. That financing cost is impacted by the cost of capital or interest rate incurred by the customer in addition to the commodity cost of the natural gas or NGLs in inventory. Absent other factors, a higher financing cost adversely impacts the economics of storing natural gas or NGLs for future sale. As a result, a significant increase in interest rates could adversely affect the demand for our storage capacity independent of other market factors.
 
In addition, interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our common unit price is impacted by the level of our cash distributions and our implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have an adverse impact on our common unit price, our ability to issue equity or incur debt for acquisitions or other purposes, and our ability to make cash distributions at our intended levels.


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If Inergy Midstream is unable to diversify its assets and geographic locations, its ability to make distributions to Inergy Midstream's common unitholders could be adversely affected.
 
Inergy Midstream relies on revenues generated from storage and transportation assets that it owns, which are located exclusively in the Northeast region of the United States.  Due to its lack of diversification in asset location and the storage-heavy nature of its existing asset base, an adverse development in these businesses or areas, including adverse developments due to catastrophic events, weather and decreases in demand for natural gas, could have a significantly greater impact on Inergy Midstream's results of operations and cash available for distribution to its common unitholders than if Inergy Midstream maintained more diverse assets and locations.
 
Inergy Midstream's growth strategy includes acquiring entities with lines of business that are distinct and separate from its existing operations, which could subject Inergy Midstream to additional business and operating risks.

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

operating distinct business segments that require different operating strategies and different managerial expertise;
the necessity of coordinating organizations, systems and facilities in different locations;
integrating personnel with diverse business backgrounds and organizational cultures; and
consolidating corporate and administrative functions.

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

Inergy Midstream may be unable to successfully integrate its acquisitions.

One of Inergy Midstream's primary business strategies is to grow through acquisitions. There is no assurance that Inergy Midstream will successfully integrate acquisitions into our operations, or that Inergy Midstream will achieve the desired profitability from its acquisitions. Failure to successfully integrate these substantial acquisitions could adversely affect Inergy Midstream's operations. The difficulties of combining the acquired operations include, among other things: (i) operating a significantly larger organization; (ii) coordinating geographically disparate organizations, systems and facilities; (iii) integrating personnel from diverse business backgrounds and organizational cultures; (iv) consolidating corporate, technological and administrative functions; (v) integrating internal controls, compliance under the Sarbanes-Oxley Act of 2002 and other corporate governance matters; (vi) the diversion of management's attention from other business concerns; (vii) customer or key employee loss from the acquired businesses; and (viii) potential environmental or regulatory liabilities and title problems. In addition, Inergy Midstream may not realize all of the anticipated benefits from our acquisitions, such as cost-savings and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher costs, unknown liabilities and fluctuations in markets.

If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.
 
We are subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act). Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 requires us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm's, conclusions about the effectiveness of

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our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

A change of control could result in us facing substantial repayment obligations under our credit facility.

Our credit agreement contains provisions relating to change of control of our general partner and our partnership. If these provisions are triggered, our outstanding bank indebtedness may become due. In such an event, there is no assurance that we would be able to pay the indebtedness, in which case the lenders under our credit facility would have the right to foreclose on our assets, which would have a material adverse effect on us. There is no restriction on the ability of our general partners to enter into a transaction which would trigger the change of control provisions.

If we are not able to sell propane that we have purchased through wholesale supply agreements to retailers and other wholesalers, the results of our operations would be adversely affected.

We currently are party to propane supply contracts and may enter into additional propane supply contracts which require us to purchase substantially all the propane production from certain refineries. Our inability to sell the propane supply to retail propane distributors or to other propane wholesalers would have a substantial adverse impact on our operating results and could adversely impact our capital liquidity.

Our agreement with SPH exposes us to potentially significant indemnification obligations.

We have certain indemnification obligations to SPH pursuant to the agreement entered into in connection with our contribution to SPH of Inergy Propane (the “Contribution Agreement”). Under the Contribution Agreement, we have agreed to indemnify SPH for any damages arising out of any breach of our representations and warranties, our failure to perform any of our covenants or agreements, certain tax matters and certain retained liabilities. In general, our indemnification obligations are limited by an indemnification deductible of $15 million and indemnification ceiling of $150 million; provided, however, that our indemnification obligations for breach of certain fundamental representations and warranties, certain tax matters and certain retained liabilities are not subject to such limitations. In the event that SPH brings a claim for indemnification, we may be obligated to make significant payments, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions.

Tax Risks to Common Unitholders

The tax treatment of publicly traded partnerships is subject to potential legislative, judicial or administrative changes. If we were treated as a corporation for federal income tax purposes, or if we or Inergy Midstream were to become subject to a material amount of state or local taxation, then our cash available for distribution to our unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes. The value of our investments in Inergy Midstream depends largely on Inergy Midstream being treated as a partnership for federal income tax purposes. A publicly traded partnership such as us or Inergy Midstream may be treated as a corporation for federal income tax purposes unless it satisfies requirements regarding the sources of its income. Based on our current operations we believe that we and Inergy Midstream are each treated as a partnership rather than a corporation; however, a change in either of our businesses could cause either of us to be treated as a corporation for federal income tax purposes.

If we or Inergy Midstream were treated as a corporation for federal income tax purposes, we each would be obligated to pay federal income tax on our respective taxable income at the corporate tax rate, currently a maximum rate of 35%, as well as any applicable state income tax. Distributions to our and Inergy Midstream's unitholders generally would be taxedin the same manner as distributions from a corporation, and none of our or Inergy Midstream's income, gain, loss, deduction or credit from us or Inergy Midstream would flow through to our respective unitholders. Because a tax would be imposed upon us or Inergy Midstream as a corporation, our respective cash available for distribution would be substantially reduced. Therefore, treatment as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our respective unitholders, likely causing a substantial reduction in the value of our common units.


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The tax treatment of publicly traded partnerships or an investment in Inergy Midstream's or our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including Inergy Midstream and us, or an investment in Inergy Midstream's or our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Currently, one such legislative proposal would eliminate the qualifying income exception upon which we and Inergy Midstream rely on for our treatment as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in Inergy Midstream's or our common units. Any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible to meet the expectation for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes.
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to you.

Neither we nor Inergy Midstream has requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, the costs of any contest with the IRS will be borne indirectly by you and our general partner because the costs will reduce our cash available for distribution.

You will be required to pay taxes on your share of our income even if you do not receive cash distributions from us.

Because you will be treated as a partner in us for federal income tax purposes, we will allocate a share of our taxable income to you which could be different in amount than the cash we distribute to you, and you may be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income even if you do not receive any cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

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

If you sell your common units, you will recognize a gain or loss equal to the difference between your amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our total net taxable income result in a reduction in your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those common units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture of depreciation deductions. In addition, because the amount realized includes a unitholder's share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.

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

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


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We and Inergy Midstream will treat each purchaser of our respective units as having the same tax benefits without regard to the actual units purchased. The IRS may challenge this treatment, which could adversely affect the value of Inergy Midstream's and our common units.
Because we cannot match transferors and transferees of units, we and Inergy Midstream will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of Inergy Midstream's common units and our common units and could have a negative impact on the value of our respective common units or result in audit adjustments to your tax returns.

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

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. However, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.
Because there is no tax concept of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.
The sale or exchange of 50% or more of our capital and profits interests within a twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated as a partnership for federal income tax purposes if there is a sale or exchange within a twelve-month period of 50% or more of the total interests in our capital and profits. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our termination would, among other things, result in the closing of our taxable year for all unitholders which could result in us filing two tax returns (and unitholders receiving two Schedule K-1s) for one calendar year. Our termination could also result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in its taxable income for the year of termination. Our termination would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Pursuant to an IRS relief procedure a publicly traded partnership that has technically terminated may request special relief which, if granted by the IRS, among other things, would permit the partnership to provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs.


32


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

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes, estate, inheritance or intangible taxes and foreign taxes that are imposed by the various jurisdictions in which we do business or own property and in which they do not reside. We own property and conduct business in various parts of the United States. Unitholders may be required to file state and local income tax returns in many or all of the jurisdictions in which we do business or own property. Further, unitholders may be subject to penalties for failure to comply with those requirements. It is our unitholders' responsibility to file all required U. S. federal, state, local and foreign tax returns.


Item 1B. Unresolved Staff Comments.

None.


Item 2. Properties.

We lease our Kansas City, Missouri headquarters.  We lease the subsurface and surface rights necessary to own and operate our Tres Palacios gas storage facility under a 25-year storage sublease agreement.  We also lease underground storage facilities for our NGL marketing, supply and logistics business with an aggregate capacity of 38.2 million gallons of propane and butane storage at six locations under annual lease agreements, and we lease capacity on multiple pipelines pursuant to annual agreements.

We own the following assets as discussed in Item 1:

facilities comprising our Tres Palacios natural gas storage facility;
facilities comprising our West Coast NGL business; and
our Seymour NGL storage facility.

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 credit facility are secured by liens and mortgages on our fee-owned 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. 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 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 June 2010, Inergy Midstream's predecessor ("NRGM Predecessor") and CNYOG entered into a letter of intent with Anadarko which contemplated that, subject to certain conditions, Anadarko may exercise an option to acquire up to a 25% ownership interest in the MARC I Pipeline. On September 23, 2011, Anadarko filed a complaint against NRGM Predecessor and CNYOG in the Court of Common Pleas in Lycoming County, Pennsylvania (Cause No. 11-01697) alleging that (i) Anadarko had an option to acquire, and timely exercised its option to acquire, a 25% ownership interest in the MARC I Pipeline, (ii) NRGM Predecessor refused to enter into definitive agreements under which Anadarko would acquire a 25% interest in the pipeline and, by doing so, Inergy Midstream breached the letter of intent, and (iii) by refusing to enter into

33


definitive agreements, NRGM Predecessor breached a duty of good faith and fair dealing in connection with the letter of intent.  Based on these allegations, Anadarko seeks various remedies, including specific performance of the letter of intent and monetary damages. 

Inergy Midstream filed preliminary objections to the complaint and sought a judgment in its favor and an order dismissing Anadarko's complaint. Following a hearing on the motion to dismiss the Anadarko complaint on December 2, 2011, the motion was denied. Inergy Midstream filed its answer to Anadarko's complaint in January 2012 and discovery continues. Inergy Midstream believes that Anadarko's claims are without merit and intend to vigorously defend itself in the lawsuit.

Following the announcement of the Merger Agreement, two unitholder class action lawsuits were filed in the Court of Chancery of the State of Delaware challenging the proposed merger (Joel A. Gerber v. Inergy GP, LLC et al., No. 5864 and G-2 Trading LLC v. Inergy GP, LLC et al., No. 5816) (collectively, the “Inergy Unitholder Lawsuits”). The parties to the Inergy Unitholder Lawsuits have entered into a Memorandum of Understanding whereby in consideration for the settlement and dismissal of the claims, the individual Class B unitholders will forego and relinquish a total of 135,539 Class B units to be received as distributions following the date on which the settlement and dismissal becomes final and no longer appealable. On March 29, 2012, the court approved the terms of the settlement, which included the certification of a settlement class and the dismissal with prejudice of all claims. Also as part of the settlement, the defendants in the Inergy Unitholder Lawsuits other than Inergy must pay fees and expenses to counsel for the plaintiffs in the amount of $1.8 million, which amount is covered by insurance.


Item 4. Mine Safety Disclosures

Not applicable.




34



PART II

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

Our common units representing limited partner interests are traded on The New York Stock Exchange ("NYSE") under the symbol “NRGY.” The following table sets forth the range of high and low bid prices of the common units, as reported by the NYSE, as well as the amount of cash distributions declared per common unit for the periods indicated.
Quarters Ended:
Low
 
High
 
Cash
Distribution
Per Unit
Fiscal 2012:
 
 
 
 
 
September 30, 2012
$
17.25

 
$
21.99

 
$
0.290

June 30, 2012
15.22

 
20.24

 
0.375

March 31, 2012
15.06

 
24.99

 
0.375

December 31, 2011
22.54

 
28.88

 
0.705

Fiscal 2011:
 
 
 
 
 
September 30, 2011
$
24.91

 
$
35.90

 
$
0.705

June 30, 2011
33.52

 
41.22

 
0.705

March 31, 2011
38.49

 
42.75

 
0.705

December 31, 2010
37.25

 
41.92

 
0.705


As of November 7, 2012, we had issued and outstanding 125,645,598 common units, 4,867,252 Class A units and 5,882,105 Class B units, which were held by 188, 2 and 20 unitholders of record, respectively.

Cash Distribution Policy

Our company makes quarterly distributions to the partners within approximately 45 days after the end of each fiscal quarter in an aggregate amount equal to our available cash for such quarter. Available cash generally means, with respect to each fiscal quarter, all cash on hand at the end of the quarter less the amount of cash that the general partner determines in its reasonable discretion is necessary or appropriate to:

provide for the proper conduct of our business;

comply with applicable law, any of our debt instruments, or other agreements; or

provide funds for distributions to unitholders for any one or more of the next four quarters;

plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Working capital borrowings are generally borrowings that are made under our working capital facility and in all cases are used solely for working capital purposes or to pay distributions to partners.

On November 14, 2012, we paid a distribution of $0.290 per limited partner unit ($1.16 per limited partner unit on an annualized basis) to all unitholders of record on November 7, 2012.

Distribution of SPH Units

We distributed 14.1 million SPH common units on September 14, 2012.

Issuance of Class A Units and Class B Units

On November 5, 2010, in connection with the merger between us and Inergy Holdings, L.P., we issued 4,867,252 Class A units and 11,568,560 Class B units. Following the November 2011 distribution, 6,586,968 Class B units converted to Inergy common units. Following the November 2012 distribution, the remaining Class B units were converted to Inergy common units. Inergy, L.P. indirectly owns 100% of the Class A units.


35


Issuer Purchases of Equity Securities

For the fiscal year ended September 30, 2012, 103,236 common units were relinquished to us to cover payroll taxes upon the vesting of restricted units. 

Equity Compensation Plan Information

The following table sets forth in tabular format, a summary of equity compensation plan information as of September 30, 2012: 
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

 

 

Equity compensation plans not approved by security holders
181,541

 
$
13.11

 
8,350,709

Total
181,541

 
13.11

 
8,350,709



Item 6. Selected Financial Data.

The following tables set forth selected consolidated financial data and other operating data of Inergy, L.P. The selected historical consolidated financial data of Inergy, L.P. as of and for the years ended September 30, 2012, 2011, 2010, 2009, and 2008, are derived from the audited consolidated financial statements of Inergy, L.P. The historical consolidated financial data of Inergy, L.P. include the results of operations of its acquisitions from the effective date of the respective acquisitions.

“EBITDA” shown in the table below is defined as income before income taxes, plus net interest expense and depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding the gain or loss on derivative contracts associated with retail propane fixed price sales contracts, the gain or loss on the disposal of assets, long-term incentive and equity compensation expenses, the gain on the disposal of retail propane operations, the loss on SPH units and transaction costs. Transaction costs are third party professional fees and other costs that are incurred in conjunction with closing a transaction. EBITDA and Adjusted 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 quarterly distribution and is presented solely as a supplemental measure. We believe that Adjusted EBITDA provides additional information for evaluating our financial performance without regard to our financing methods, capital structure and historical cost basis. EBITDA and Adjusted EBITDA, as we define them, may not be comparable to EBITDA and Adjusted EBITDA or similarly titled measures used by other corporations or partnerships.

The data in the following tables 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.
 

36



 
Inergy L.P.
Years Ended September 30,
(in millions, except unit and per unit data)
 
2012
 
2011
 
2010
 
2009
 
2008
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues
$
2,006.8

 
$
2,153.8

 
$
1,786.0

 
$
1,570.6

 
$
1,878.9

Cost of product sold (excluding depreciation and amortization as shown below):
1,396.2

 
1,476.0

 
1,165.9

 
996.9

 
1,376.7

Expenses:
 
 
 
 
 
 
 
 
 
Operating and administrative
300.8

 
323.3

 
310.7

 
280.5

 
266.6

Depreciation and amortization
169.6

 
191.8

 
161.8

 
115.8

 
98.0

Loss on disposal of assets
5.7

 
8.2

 
11.5

 
5.2

 
11.5

Operating income
134.5

 
154.5

 
136.1

 
172.2

 
126.1

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense, net
(83.6
)
 
(113.5
)
 
(91.5
)
 
(70.5
)
 
(62.6
)
Gain on disposal of retail propane operations
589.5

 

 

 

 

Loss on Suburban Propane Partners, L.P. units
(47.6
)
 

 

 

 

Early extinguishment of debt
(26.6
)
 
(52.1
)
 

 

 

Other income
1.5

 
1.2

 
2.0

 
0.1

 
1.0

Income (loss) before gain on issuance of units in subsidiary and income taxes
567.7

 
(9.9
)
 
46.6

 
101.8

 
64.5

Gain on issuance of units in subsidiary

 

 

 
8.0

 

Provision for income taxes
1.8

 
0.7

 
0.2

 
1.7

 
1.4

Net income (loss)
565.9

 
(10.6
)
 
46.4

 
108.1

 
63.1

Net (income) loss attributable to non-controlling partners
(11.0
)
 
28.2

 
15.4

 
(51.0
)
 
(27.6
)
Net income attributable to partners
$
554.9

 
$
17.6

 
$
61.8

 
$
57.1

 
$
35.5

 
 
 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 
 
Basic
$
4.39

 
$
0.17

 
$
1.73

 
$
1.62

 
$
1.01

Diluted
$
4.22

 
$
0.15

 
$
1.29

 
$
1.21

 
$
0.75

Weighted-average limited partners’ units outstanding
   (in thousands):
 
 
 
 
 
 
 
 
 
Basic
124,976

 
105,732

 
35,726

 
35,197

 
35,049

Diluted
131,589

 
117,684

 
48,002

 
47,036

 
47,106

 
 
 
 
 
 
 
 
 
 
Cash distributions paid per unit(a)
$
2.16

 
$
2.82

 
$
2.76

 
$
2.60

 
$
2.44

Balance Sheet Data (end of period):
 
 
 
 
 
 
 
 
 
Total assets
$
2,207.6

 
$
3,340.9

 
$
3,117.8

 
$
2,154.1

 
$
2,098.5

Total debt, including current portion
743.2

 
1,853.0

 
1,690.7

 
1,124.8

 
1,139.2

Total partners’ capital
1,184.8

 
1,146.0

 
1,160.1

 
772.0

 
609.1

 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 
 
 
 
 
 
 
 
 
EBITDA (unaudited)
$
847.5

 
$
347.5

 
$
299.9

 
$
296.1

 
$
225.1

Adjusted EBITDA (unaudited)
321.5

 
372.2

 
$
323.9

 
$
295.9

 
$
238.0

Net cash provided by operating activities
239.0

 
114.4

 
173.6

 
237.9

 
180.2

Net cash used in investing activities
(350.6
)
 
(390.6
)
 
(926.4
)
 
(230.6
)
 
(386.7
)
Net cash provided by (used in) financing activities
100.1

 
143.3

 
885.5

 
(13.0
)
 
216.0

Maintenance capital expenditures(b) (unaudited)
12.4

 
14.0

 
9.9

 
8.0

 
5.4

 
 
 
 
 
 
 
 
 
 
Other Operating Data (unaudited):
 
 
 
 
 
 
 
 
 
Retail propane gallons sold
233.5

 
325.6

 
340.2

 
310.0

 
331.9

NGL Marketing gallons delivered(c)
504.3

 
395.5

 
393.7

 
357.7

 
335.0


37


 
2012
 
2011
 
2010
 
2009
 
2008
Reconciliation of Net Income to EBITDA and Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
565.9

 
$
(10.6
)
 
$
46.4

 
$
108.1

 
$
63.1

Interest expense, net
83.6

 
113.5

 
91.5

 
70.5

 
62.6

Early extinguishment of debt
26.6

 
52.1

 

 

 

Provision for income taxes
1.8

 
0.7

 
0.2

 
1.7

 
1.4

Depreciation and amortization
169.6

 
191.8

 
161.8

 
115.8

 
98.0

EBITDA
$
847.5

 
$
347.5

 
$
299.9

 
$
296.1

 
$
225.1

Non-cash (gain) loss on derivative contracts
(8.6
)
 
1.2

 
(1.0
)
 
1.4

 
0.1

Long-term incentive and equity compensation expense
17.9

 
5.8

 
10.9

 
3.1

 
3.5

Loss on disposal of assets
5.7

 
8.2

 
11.5

 
5.2

 
11.5

Gain on disposal of retail propane operations
(589.5
)
 

 

 

 

Loss on Suburban Propane Partners, L.P. units
47.6

 

 

 

 

Gain on issuance of units in subsidiary

 

 

 
(8.0
)
 

Transaction costs
0.9

 
9.5

 
3.5

 

 

Adjusted EBITDA
$
321.5

 
$
372.2

 
$
324.8

 
$
297.8

 
$
240.2

 
 
 
 
 
 
 
 
 
 
Reconciliation of Net Cash Provided by Operating Activities to EBITDA and Adjusted EBITDA:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
239.0

 
$
114.4

 
$
173.6

 
$
237.9

 
$
180.2

Net changes in working capital balances
(9.4
)
 
104.1

 
60.7

 
(4.4
)
 
3.8

Non-cash early extinguishment of debt
(10.0
)
 
(12.7
)
 

 

 

Provision for doubtful accounts
(2.1
)
 
(3.7
)
 
(2.8
)
 
(3.7
)
 
(5.7
)
Amortization of deferred financing costs, swap premium and net bond discount
(4.9
)
 
(7.4
)
 
(7.3
)
 
(5.2
)
 
(2.3
)
Unit-based compensation charges
(12.9
)
 
(5.8
)
 
(4.8
)
 
(3.1
)
 
(3.5
)
Loss on disposal of assets
(5.7
)
 
(8.2
)
 
(11.5
)
 
(5.2
)
 
(11.5
)
Gain on disposal of retail propane operations
589.5

 

 

 

 

Loss on Suburban Propane Partners, L.P. units
(47.6
)
 

 

 

 

Deferred income tax
(0.4
)
 
0.5

 
0.3

 
(0.4
)
 
0.1

Interest expense, net
83.6

 
113.5

 
91.5

 
70.5

 
62.6

Early extinguishment of debt
26.6

 
52.1

 

 

 

Gain on issuance of units in subsidiary

 

 

 
8.0

 

Provision for income taxes
1.8

 
0.7

 
0.2

 
1.7

 
1.4

EBITDA
$
847.5

 
$
347.5

 
$
299.9

 
$
296.1

 
$
225.1

Non-cash (gain) loss on derivative contracts
(8.6
)
 
1.2

 
(1.0
)
 
1.4

 
0.1

Long-term incentive and equity compensation expense
17.9

 
5.8

 
10.9

 
3.1

 
3.5

Loss on disposal of assets
5.7

 
8.2

 
11.5

 
5.2

 
11.5

Gain on disposal of retail propane operations
(589.5
)
 

 

 

 

Loss on Suburban Propane Partners, L.P. units
47.6

 

 

 

 

Gain on issuance of units in subsidiary
 
 
 
 
 
 
(8.0
)
 

Transaction costs
0.9

 
9.5

 
3.5

 

 

Adjusted EBITDA
$
321.5

 
$
372.2

 
$
324.8

 
$
297.8

 
$
240.2


(a)
These amounts reflect the historical cash distributions paid per unit on the common units.
(b)
Maintenance capital expenditures are defined as those capital expenditures that do not increase operating capacity or revenues from existing levels.
(c)
Subsequent to the sale of Inergy's retail propane operations, the Company reorganized its operating and reporting segments. Prior year amounts have been adjusted to reflect the current year presentation.



38


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, (i) our belief that our investments and growth strategies to allow us to increase the distributions that we pay to our unitholders; (ii) our expectation that Inergy Midstream will complete its acquisition of Rangeland Energy in calendar 2012; (iii) our expectation that Inergy Midstream will place the MARC I Pipeline into service on December 1, 2012; (iv) our expectations concerning Tres Palacios' growth projects; (v) our belief that Inergy Midstream's growth projects will enhance our profitability; (v) our expectation that Inergy Midstream will obtain the permits required construct its Watkins Glen NGL storage development project and place it into service in calendar 2013; 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 the negation thereof, 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:

our ability to successfully implement our business plan for our assets and operation;
governmental legislation and regulations;
industry factors that influence the supply of, and demand for, natural gas and NGLs;
weather conditions;
industry factors that influence the demand for natural gas and NGL storage and transportation capacity, particularly in the Northeast and Texas markets;
economic conditions;
the availability of natural gas and NGLs, and the price of natural gas and NGLs, to consumers compared to the price of alternative and competing fuels;
costs or difficulties related to the integration of our existing businesses and acquisitions;
environmental claims;
operating hazards and other risks incidental to transporting and storing natural gas and NGLs;
interest rates; and
the price and availability of debt and equity financing.

We have described under “Risk Factors” 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.

Overview

We are a publicly-traded master limited partnership that owns and operates energy midstream infrastructure and an NGL marketing, supply and logistics business. We own and operate the Tres Palacios natural gas storage facility in Texas; a proprietary NGL business that specializes in providing logistics and marketing services predominantly to producers and refiners; and approximately 75% ownership interest in Inergy Midstream, a publicly-traded, growth-oriented master limited partnership with midstream facilities located in the Northeast region of the United States.

Our Company

With the disposition of our retail propane business in August 2012, we have transformed our company into a “pure play” midstream energy company with significant investments in the natural gas and NGL sectors of the energy value chain. Our Tres Palacios facility is located near the liquids-rich Eagle Ford shale play and Texas demand markets, and through Inergy Midstream, we have significant investments in natural gas storage and transportation facilities located near the Marcellus shale play and the Northeast demand market. We believe our NGL business complements our infrastructure investments, and the

39


combination of the expertise and proprietary knowledge developed by our NGL marketing, supply, transportation and risk management professionals and our fleet of NGL transportation assets provides a competitive advantage over our competitors.
Our primary business objective is to increase the cash distributions that we pay to our unitholders by growing our investment in Inergy Midstream and, to a lesser extent, growing our Texas storage operations and NGL business. We intend to position Inergy Midstream to be able to increase its cash distributions by providing strong general partner support (including, if applicable, selling assets to Inergy Midstream) and using it as the primary vehicle through which we grow our midstream business. We expect to grow our Tres Palacios operations through development projects, such as the Copano header extension project, and we believe the facility's strategic location to the Eagle Ford shale play and interconnections with 10 interstate and intrastate pipelines will allow us to capture greater revenue opportunities as natural gas prices and volatility increase. We anticipate growing our NGL marketing, supply, and logistics business by continuing to leverage our industry knowledge, expertise and relationships to develop and harvest business opportunities and to expand our service offerings. We will continuously evaluate the best way to grow our company and unlock value for our unitholders.

Our business segments include (i) storage and transportation, which includes our Tres Palacios natural gas storage facility and our investment in Inergy Midstream, and (ii) NGL supply, marketing and logistics reporting segment, which includes our NGL business. The cash flows from our Tres Palacios facility are predominantly fee-based under one to three year contracts with creditworthy counterparties. The cash flows from our NGL supply, marketing and logistics operations represent sales to creditworthy customers typically under contracts that are less than one year in duration, and these cash flows tend to be seasonal in nature due to our customer profiles and their tendencies to purchase NGLs during peak winter periods.

As a result of our disposition of our retail propane operations, a majority of our distributable cash flows are expected to be generated by distributions received from Inergy Midstream and cash from operations generated by our Tres Palacios facility and NGL business. Our natural gas storage revenues are driven in large part by competition and demand for our storage capacity and deliverability, although demand for firm storage service in Texas remains depressed due to low natural gas prices and low seasonal spreads. Our NGL segment revenues are driven in large part by our ability to optimize NGL assets that we own or control, and provide services to producers, refiners and other customers which effectively provide flow assurance to our customers. These services offer customers certainty of NGL production and supply volumes flowing without interruption and at attractive economic value.

Our long-term profitability will be influenced primarily by (i) Inergy Midstream's ability to execute on its growth strategy, including both development projects and strategic acquisitions, and to increase cash available for distribution; (ii) our ability to execute growth strategies for our Tres Palacios facility and NGL business; (iii) our ability to contract and re-contract with customers; and (iv) our ability to manage increasingly difficult regulatory processes, particularly in permitting and approval proceedings at the federal and state levels.

With respect to market trends, the assets comprising our storage and transportation segment (including the infrastructure assets of Inergy Midstream) could be negatively affected in the long term by sustained downturns or sluggishness in the economy, which could affect long-term demand and market prices for natural gas and NGLs, all of which are beyond our control and could impair our ability to meet our long-term goals. At the same time, we believe that the contractual fee-based nature of these assets should help to reduce this risk. Development projects over the past few years have also been exposed to increased cost pressures associated with a shortage availability of skilled labor and the pricing of materials, even though we have seen some of these pressures begin to decrease in certain geographic areas. Moreover, although it has become more difficult to obtain the authorizations required to develop or expand natural gas and NGL infrastructure, we remain confident that the incremental time and money required to pursue and complete market-driven facilities will deliver meaningful value to our unitholders. The regulatory environment, combined with the location of our assets relative to both high-demand markets and prolific shale basins, effectively provides a significant barrier to entry that other market participants may find difficult to overcome.
 
Inergy Midstream

Inergy Midstream is a predominantly fee-based, growth-oriented limited partnership that develops, acquires, owns and operates midstream energy assets. It owns and operates natural gas and NGL storage and transportation facilities and a salt production business located in the Northeast region of the United States. Inergy Midstream owns and operates four natural gas storage facilities that have an aggregate working gas storage capacity of 41.0 Bcf; natural gas pipeline facilities with 905 MMcf/d of transportation capacity; a 1.5 million barrel NGL storage facility; and US Salt, a leading solution mining and salt production company.


40


Inergy Midstream's primary business objective is to increase the cash distributions that it pays to unitholders by growing its business through the development, acquisition and operation of additional midstream assets near production and demand centers. An integral part of its growth strategy is the continued development of Inergy Midstream's platform of interconnected natural gas assets in the Northeast that can be operated as an integrated storage and transportation hub. For example, because Inergy Midstream believes that storage and transportation customers value operating flexibility, it expects to increase the interconnectivity between its natural gas assets and third-party pipelines, thereby resulting in increased demand for its services. Its growth strategy is expected to reflect Inergy Midstream's desire to diversify its operations, in terms of both its geographic footprint and the type of midstream services it provides to customers.

Organic growth projects, including both expansions and greenfield development projects, have recently provided cost-effective options for Inergy Midstream to grow its infrastructure base. In general, purchasers of midstream infrastructure have paid relatively high prices (measured in terms of a multiple of EBITDA or another financial metric) to acquire midstream assets and operations in recent arms-length transactions. Although the prices paid for certain types of midstream assets are likely to remain robust for the foreseeable future, acquisitions will continue to permit Inergy Midstream to gain access to new markets (with respect to geographic footprint and product offerings) and develop the scale required to grow its business quickly and successfully. We therefore expect Inergy Midstream to grow its business in the near term through both organic growth projects and acquisitions.

Inergy Midstream's operations include (i) the storage and transportation of natural gas and NGLs, which are reported in its storage and transportation reporting segment, and (ii) US Salt's production and wholesale distribution of evaporated salt products, which are reported in its salt reporting segment. The cash flows from its storage and transportation operations are predominantly fee-based under one to ten year contracts with creditworthy counterparties and, therefore, are generally economically stable and not significantly affected in the short term by changing commodity prices, seasonality or weather fluctuations. The cash flows from its salt operations represent sales to creditworthy customers typically under contracts that are less than one year in duration, and these cash flows tend to be relatively stable and not subject to seasonal or cyclical variation due to the use of, and demand for salt products in everyday life.

The majority of Inergy Midstream's operating cash flows are generated by its natural gas storage operations. Its natural gas storage revenues are driven in large part by competition and demand for storage capacity and deliverability. Demand for storage in the Northeast is projected to continue to be strong, driven by a shortage in storage capacity and a higher than average annual growth in natural gas demand. This demand growth is primarily driven by the natural gas-fired electric generation sector and conversion from petroleum-based fuels. Due to the high percentage of its cash flows generated by its natural gas storage operations, Inergy Midstream has attempted to diversify its asset base recently by developing natural gas transportation assets and NGL storage assets. Its pending acquisition of Rangeland Energy also illustrates how Inergy Midstream expects to diversify its asset base through acquisitions.

Inergy Midstream's ability to market available transportation capacity is impacted by supply and demand for natural gas, competition from other pipelines, natural gas price volatility, the price differential between physical locations on its pipeline systems (basis spreads), economic conditions, and other factors. Its transportation facilities have benefited from, and Inergy Midstream expects its pipelines to continue to benefit from, the development of the Marcellus shale as a significant supply basin. As LDCs and other customers increasingly utilize short-haul transportation options to satisfy their transportation needs, the location of its transportation assets relative to the Marcellus shale will enable Inergy Midstream to realize additional benefits.

Inergy Midstream's long-term profitability will be influenced primarily by (i) successfully executing its existing development projects and continuing to develop new organic growth projects in its markets; (ii) pursuing strategic acquisitions from third parties, including us, to grow its business; (iii) contracting and re-contracting storage and transportation capacity with its customers; and (iv) managing increasingly difficult regulatory processes, particularly in permitting and approval proceedings at the federal and state levels.

We remain encouraged by Inergy Midstream's inventory of growth projects, such as the Watkins Glen NGL storage development project and the Commonwealth Pipeline project. These projects illustrate its diversification objectives, its desire to deploy capital prudently, its strong belief in the markets in which it operates, and its goal of integrating its assets when possible. Importantly, we also believe these projects demonstrate Inergy Midstream's commitment to its customers and their existing and forecast needs. In addition, many of its growth projects provide a basis for incremental growth, such as Inergy Midstream's ability to potentially expand the MARC I Pipeline through the installation of additional compression.




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How We Evaluate Our Operations
 
We evaluate our business performance on the basis of the following key measures:
 
cash available for distribution to our unitholders;
distributions received from Inergy Midstream;
revenues derived from our Tres Palacios natural gas storage facility; 
gross profit (excluding depreciation and amortization) derived from our NGL marketing, supply and logistics business; 
EBITDA and Adjusted EBITDA.
 
We do not utilize depreciation, depletion and amortization expense in our key measures because we focus our performance management on cash flow generation and our assets have long useful lives.

Fiscal 2012 Acquisitions and Dispositions

In November 2011, we completed the acquisition of substantially all of the assets of Papco, LLC/South Jersey Terminal, LLC (“Papco”), located in Bridgeton, New Jersey. Papco provides transportation services to the NGL marketplace, mostly serving the East Coast, Midwest and Southeastern portions of the United States. South Jersey Terminal is a rail terminal facility with onsite product storage and truck loading operations. This acquisition provides our NGL business with a significant fleet of specialized transport vehicles and a strong presence in the Marcellus shale region, and allows us to increase our service offerings in the Eastern region of the United States.
In August 2012, we completed the acquisition of substantially all of the operating assets of Werner Transportation Services, Inc. (“Werner”), located in Gainesville, Georgia. Werner provides transportation services to the NGL marketplace primarily for customers east of the Mississippi River. This acquisition provides our NGL business with a strategic fleet of transport vehicles to help meet the increasing customer demand for hauling NGLs, notably in the Eastern region of the United States.
We acquired two retail propane businesses, one in January 2012 and one in February 2012, that were sold as part of our disposition of Inergy Propane to SPH in August 2012, as described below.

On August 1, 2012, we completed the disposition of our retail propane operations to SPH. We received approximately 14.2 million SPH common units with a market and book value of approximately $590 million, almost all of which we distributed to our unitholders in September 2012. SPH also exchanged approximately $1.19 billion of our outstanding senior notes for $1.0 billion of new SPH senior notes and paid cash directly to tendering note holders. In connection with the closing of this transaction, we entered into a support agreement with SPH pursuant to which we are obligated to provide contingent, residual support of approximately $497 million of aggregate principal amount of the 7½% senior unsecured notes due 2018 of SPH and Suburban Energy Finance Corp. (collectively, the “SPH Issuers”) or any permitted refinancing thereof. Under the support agreement, in the event the SPH Issuers fail to pay any principal amount of the supported debt when due, we will pay directly to, or to the SPH Issuers for the benefit of, the holders of the Supported Debt (“Holders”) an amount up to the principal amount of the supported debt that the SPH Issuers have failed to pay. We have no obligation to make a payment under the support agreement with respect to any accrued and unpaid interest or any redemption premium or other costs, fees, expenses, penalties, charges or other amounts of any kind whatsoever that shall be due to noteholders by the SPH Issuers, whether on or related to the supported debt or otherwise. The support agreement terminates on the earlier of the date the supported debt is extinguished or on the maturity date of supported debt or any permitted refinancing thereof.


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Recent Developments

On November 3, 2012, Inergy Midstream entered into an agreement to acquire Rangeland Energy for $425 million, subject to certain performance goals and working capital adjustments.  Rangeland Energy owns and operates the COLT Hub, which is an integrated crude oil rail and storage terminal located in the heart of the Bakken and Three Forks shale oil-producing region.  The Colt Hub primarily consists of 720,000 barrels of crude oil storage, two 8,700-foot unit train rail loading loops, an eight-bay truck unloading rack, and 21-mile bi-directional crude oil pipeline that connects the terminal to crude oil gathering systems and crude oil interstate pipelines.  The COLT Hub is capable of moving more than 120,000 barrels of crude oil per day by rail. We expect Inergy Midstream to complete the Rangeland Energy acquisition in calendar 2012. 

Inergy Midstream anticipates financing approximately $453 million of Rangeland Energy transaction costs and post-closing capital expenditures through a combination of debt and equity offerings.  In particular, Inergy Midstream (i) entered into an agreement to sell $225 million through a private placement of common units to qualified institutional investors conditioned upon and closing contemporaneously with the closing of the Rangeland acquisition and (ii) Inergy Midstream expects to fund its remaining financing requirements through the sale of long-term senior notes or, if applicable, borrowings on an unsecured $225 million credit facility that Inergy Midstream has arranged to backstop its financing requirements.   Inergy Midstream expects to complete these financing transactions prior to or contemporaneously with the closing of the Rangeland Energy acquisition.




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Results of Operations

Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011

The following table summarizes the consolidated income statement components for the fiscal years ended September 30, 2012 and 2011, respectively (in millions):
 
Year Ended
September 30,
 
Change
 
2012
 
2011
 
In Dollars
 
Percentage
Revenue
$
2,006.8

 
$
2,153.8

 
$
(147.0
)
 
(6.8
)%
Cost of product sold
1,396.2

 
1,476.0

 
(79.8
)
 
(5.4
)
Gross profit (excluding depreciation and amortization)
610.6

 
677.8

 
(67.2
)
 
(9.9
)
Operating and administrative expenses
300.8

 
323.3

 
(22.5
)
 
(7.0
)
Depreciation and amortization
169.6

 
191.8

 
(22.2
)
 
(11.6
)
Loss on disposal of assets
5.7

 
8.2

 
(2.5
)
 
(30.5
)
Operating income
134.5

 
154.5

 
(20.0
)
 
(12.9
)
Interest expense, net
(83.6
)
 
(113.5
)
 
29.9

 
26.3

Gain on disposal of retail propane operations
589.5

 

 
589.5

 
*

Loss on Suburban Propane Partners, L.P. units
(47.6
)
 

 
(47.6
)
 
*

Early extinguishment of debt
(26.6
)
 
(52.1
)
 
25.5

 
48.9

Other income
1.5

 
1.2

 
0.3

 
25.0

Income (loss) before income taxes
567.7

 
(9.9
)
 
577.6

 
*

Provision for income taxes
1.8

 
0.7

 
1.1

 
157.1

Net income (loss)
565.9

 
(10.6
)
 
576.5

 
*

Net (income) loss attributable to non-controlling partners
(11.0
)
 
28.2

 
(39.2
)
 
(139.0
)
Net income attributable to partners
$
554.9

 
$
17.6

 
$
537.3

 
*

*
Not meaningful

The following table summarizes revenues, including associated volume of gallons sold, for the years ended September 30, 2012 and 2011, respectively (in millions):
 
Revenues
 
Gallons
 
Year Ended
September 30,
 
Change
 
Year Ended
September 30,
 
Change
 
2012
 
2011
 
In Dollars
 
Percent
 
2012
 
2011
 
In Units
 
Percent
NGL Marketing, Supply and Logistics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
$
777.3

 
$
1,050.9

 
$
(273.6
)
 
(26.0
)%
 
233.5

 
325.6

 
(92.1
)
 
(28.3
)%
NGL Marketing
618.9

 
562.9

 
56.0

 
9.9

 
504.3

 
395.5

 
108.8

 
27.5

L&L Transportation
58.5

 
19.9

 
38.6

 
194.0

 

 

 

 

West Coast NGL
313.7

 
309.7

 
4.0

 
1.3

 

 

 

 

Storage and Transportation
238.4

 
210.4

 
28.0

 
13.3

 

 

 

 

Total
$
2,006.8

 
$
2,153.8

 
$
(147.0
)
 
(6.8
)%
 
737.8

 
721.1

 
16.7

 
2.3
 %

Volume. During the year ended September 30, 2012, we sold 233.5 million retail gallons of propane, a decrease of 92.1 million gallons or 28.3% from the 325.6 million retail gallons sold during fiscal 2011. Gallons sold during the year ended September 30, 2012, decreased compared to the same prior year period primarily due to lower volumes sold at our existing locations of 93.0 million, partially offset by acquisition-related volume of 0.9 million. As indicated above, we sold our retail propane business to SPH effective August 1, 2012. As a result of this sale, gallons sold at existing locations reflected only ten months of operating activity during the year ended September 30, 2012 compared to twelve months for the prior year, which contributed an approximate 31.5 million gallon decline. For the remainder of the decline experienced during the year ended September 30, 2012, we believe that retail propane gallon sales were impacted by several ongoing factors, including lower

44


demand arising from above average temperatures, customer conservation, high commodity prices and customers switching to other suppliers or energy sources. The weather during the year ended September 30, 2012 was approximately 21% warmer than the prior year period and approximately 20% warmer than normal in our areas of operations. These warmer temperatures had a significant negative impact on retail propane gallons sold during the year ended September 30, 2012. Additionally, although the average cost of propane has declined approximately 20% during the year ended September 30, 2012 compared to the prior year, the average wholesale cost of propane during our primary heating season from October to March 2012 increased approximately 2% compared to the same prior year period. We believe these higher costs during our primary heating season impacted customers' buying decisions and conservation trends, including customers seeking alternative sources of energy, such as electricity, wood burning and pellet burning stoves, since those sources can be more economical for the customer considering the higher cost of propane.

NGL marketing gallons delivered increased 108.8 million gallons, or 27.5%, to 504.3 million gallons in the year ended September 30, 2012, from 395.5 million gallons in the year ended September 30, 2011.  This increase was driven primarily by (i) a 59.9 million gallon increase in Y-grade sales in the year ended September 30, 2012 as a result of increased production by the Caiman/Williams facility at Fort Beeler, West Virginia, noting that we marketed 100% of the production at this facility during the years ended September 30, 2012 and 2011; (ii) additional third party sales volumes to SPH after the close of the sale of the retail propane business to SPH, which accounted for an additional 21.7 million gallons in the year ended September 30, 2012 compared to the prior year period; and (iii) an increase in sales of 49.0 million gallons in the year ended September 30, 2012 specific to the Delaware City location, which was only operational for a portion of the prior year period. These increases were partially offset by lower volumes sold to existing customers primarily due to the warmer weather conditions in the year ended September 30, 2012 compared to the year ended September 30, 2011 as discussed above.

The total NGL gallons sold or processed by our West Coast NGL operations increased 93.3 million gallons, or 25.8%, to 455.6 million gallons during the year ended September 30, 2012, from 362.3 million gallons during the prior year period. The increase was primarily attributable to higher throughput volumes processed as a result of operational expansion of the facility in fiscal 2012, which accounted for 64.1 million gallons of the increase. An additional 29.8 million gallons of isomerization gallons were processed in the year ended September 30, 2012 due to favorable market conditions and changes in contractual obligations from the prior year.

Our Tres Palacios storage facility was approximately 53% and 69% contracted on a firm basis (83% and 80% contracted on a firm and interruptible basis) during the years ended September 30, 2012 and 2011, respectively. Additionally 100% of available capacity was sold at Inergy Midstream's Northeast natural gas facilities (Stagecoach, Steuben and Thomas Corners) on a firm basis, and the Bath NGL storage facility was approximately 100% contracted (for storage or forward sales). The Seneca Lake storage facility, which was acquired in July 2011, was approximately 72% and 59% contracted on a firm basis during the years ended September 30, 2012 and 2011, respectively.

Revenues. Revenues for the year ended September 30, 2012, were $2,006.8 million, a decrease of $147.0 million, or 6.8%, from $2,153.8 million during the same prior year period.

Revenues from retail sales were $777.3 million for the year ended September 30, 2012, compared to $1,050.9 million during the year ended September 30, 2011, a decrease of $273.6 million, or 26.0%. Retail propane revenues were $626.6 million in fiscal 2012, a decrease of $232.0 million compared to $858.6 million in fiscal 2011. This decrease was primarily due to a $245.2 million decline arising from lower retail propane volumes sold to existing customers as described above, partially offset by a $10.7 million increase due to a higher overall average selling price of propane and a $2.5 million increase resulting from acquisition-related retail propane sales. Approximately $81.2 million of the decrease attributable to lower volumes sold to existing customers resulted from the sale of our retail propane operations to SPH effective August 1, 2012. The overall average selling price of propane was higher than the same prior year period due to our ability to pass on to the customer at least a portion of the higher average wholesale cost of propane experienced during the primary heating season. Other retail sales, which primarily includes distillates, service, rental, and appliance sales, decreased $41.6 million to $150.7 million for the year ended September 30, 2012 from $192.3 million during the year ended September 30, 2011. Revenue from other retail sales declined $43.6 million, mostly as a result of lower distillate volumes sold at existing locations, of which approximately $21.3 million resulted from the sale of our retail propane operations to SPH. This decline was partially offset by a $2.0 million increase in other retail revenues as a result of acquisitions.
 
Revenues from NGL marketing sales were $618.9 million for the year ended September 30, 2012, an increase of $56.0 million, or 9.9%, from $562.9 million in the year ended September 30, 2011. The increase can be attributed to greater volumes sold to existing and new customers, which contributed $154.8 million to the increase, partially offset by a $98.8 million decline due to a lower average sales price for commodities sold.


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Revenues from L&L transportation sales were $58.5 million for the year ended September 30, 2012, an increase of $38.6 million or 194.0% from $19.9 million during the year ended September 30, 2011. This increase was primarily attributable to our acquisitions of the assets of Papco and Werner.

Revenues from our West Coast NGL operations were $313.7 million for the year ended September 30, 2012, an increase of $4.0 million or 1.3% from $309.7 million during the year ended September 30, 2011. West Coast facility revenues were $270.2 million for the year ended September 30, 2012 compared to $269.3 million in the prior year period, an increase of $0.9 million. This increase was primarily a result of increased throughput revenues as noted above, partially offset by lower commodity revenues resulting from lower commodity sales prices in fiscal 2012. West Coast propane revenues were $43.5 million for the year ended September 30, 2012 compared to $40.4 million for the prior year period, an increase of $3.1 million. These higher propane revenues were attributable to an increase of 8.3 million propane gallons sold at the West Coast facility for the year ended September 30, 2012, partially offset by lower sales price per gallon as a result of lower commodity costs.

Revenues from storage and pipeline transportation were $238.4 million for the year ended September 30, 2012, an increase of $28.0 million or 13.3% from $210.4 million during the year ended September 30, 2011. Revenues at our Tres Palacios facility increased $2.0 million primarily due to higher facility usage as a result of additional parking revenues. Inergy Midstream revenues increased $15.2 million primarily due to the placement into service of the North-South Facilities. Inergy Midstream's revenues also increased $8.4 million primarily due to additional demand for interruptible wheeling service as a result of customer demand to move gas to and from Inergy Midstream's interconnecting pipes primarily due to increasing natural gas development in Pennsylvania, and Inergy Midstream's acquisition of the Seneca Lake storage facility in July 2011 also increased revenue $6.5 million.

Cost of Product Sold. Cost of product sold for the year ended September 30, 2012, was $1,396.2 million, a decrease of $79.8 million, or 5.4%, from $1,476.0 million during the year ended September 30, 2011.

Retail cost of product sold was $438.8 million for the year ended September 30, 2012, a decrease of $156.1 million, or 26.2%, when compared to $594.9 million for the year ended September 30, 2011. Retail propane cost was $341.9 million in fiscal 2012, a decrease of $129.9 million compared to $471.8 million in fiscal 2011. This decline in retail propane cost of product sold was driven by a $134.4 million decrease resulting from lower volumes sold at existing locations, coupled with a $4.2 million decline due to a lower average per gallon cost of propane. These factors were partially offset by a $1.3 million increase due to acquisition-related sales, and a $7.4 million increase due to changes in non-cash charges on derivative contracts associated with retail propane fixed price sales contracts. The increase in non-cash charges on derivative contracts primarily relates to a $9.2 million non-cash gain recognized in the fourth quarter of 2012 related to certain derivative contracts entered into with SPH on the date of the close of the sale of our retail propane operations to SPH.  These derivative contracts related to the procurement of propane at fixed prices to supply the propane necessary to satisfy fixed price sales contracts with retail customers that SPH acquired as part of their acquisition of our retail propane operations.  We also have a related amount recorded as of September 30, 2012 as a loss in accumulated other comprehensive income related to derivative contracts that, prior to the sale of retail to SPH, were associated with our cash flow hedging activities related to fixed price sales to retail customers.   The amount recorded in accumulated other comprehensive income as of September 30, 2012 is expected to be realized in earnings during the year ended September 30, 2013. Approximately $52.1 million of the decrease attributable to volumes sold at existing locations resulted from the sale of our retail propane operations to SPH effective August 1, 2012. Other retail cost of product sold was $96.9 million for the year ended September 30, 2012, compared to $123.1 million during the year ended September 30, 2011. This $26.2 million decrease was primarily due to a $27.8 million decline in the cost for distillates and other retail sales, partially offset by a $1.6 million increase from acquisitions. The decrease in the cost of product sold for distillates and other retail sales was driven by a $12.3 million decline due to the sale of our retail propane operations with the remainder of the decline due mostly to lower volumes of distillates sold at existing locations.

NGL marketing cost of product sold for the year ended September 30, 2012, was $590.2 million, an increase of $58.3 million, or 11.0%, from NGL marketing cost of product sold of $531.9 million for the year ended September 30, 2011. This increase was attributable to greater volumes sold to existing and new customers as noted above, which contributed $146.3 million to the increase, partially offset by an $88.0 million decrease due to a lower average purchase price as a result of lower commodity costs during the year ended September 30, 2012 compared to the prior year period.

L&L transportation cost of product sold was $34.1 million for the year ended September 30, 2012, an increase of $20.9 million or 158.3% from $13.2 million for the year ended September 30, 2011. This increase was primarily attributable to our acquisitions of the assets of Papco and Werner.


46


Cost of product sold at our West Coast NGL operations was $281.1 million for the year ended September 30, 2012, a decrease of $1.1 million or 0.4% from $282.2 million for the year ended September 30, 2011. Cost of product sold for West Coast facility operations was $238.7 million for the year ended September 30, 2012 compared to $241.9 million for the prior year period, a decrease of $3.2 million. This decrease was primarily a result of lower average commodity prices and expected changes in types of NGLs sold, partially offset by higher throughput volumes processed. West Coast propane cost of product sold was $42.4 million for the year ended September 30, 2012 compared to $40.3 million for the prior year period, an increase of $2.1 million. This increase was attributable to increased volume sold as noted above, partially offset by lower commodity costs.

Storage and pipeline transportation cost of product sold was $52.0 million for the year ended September 30, 2012, a decrease of $1.8 million, or 3.3%, from $53.8 million for the year ended September 30, 2011. Storage and pipeline transportation cost of product sold at our Tres Palacios facility increased $2.5 million primarily due to an increase in cavern lease payments year over year. Inergy Midstream's storage and pipeline transportation cost of product sold decreased $3.4 million as a result of insurance reimbursements related to the Stagecoach central compressor loss, and also decreased $3.7 million related to the costs incurred in the prior period associated with the Stagecoach central compressor loss. Additionally, Inergy Midstream's storage and pipeline transportation costs decreased by $1.6 million due to a decrease in leased transportation capacity held on a non-affiliated interconnecting pipeline. The above decreases in Inergy Midstream's storage and pipeline transportation costs were partially offset by a $3.9 million increase in storage related costs incurred as a result of placing the North/South Facilities into service in December 2011.

Our retail and NGL marketing cost of product sold consists primarily of tangible products sold including all propane, distillates and other NGLs sold and all propane-related appliances sold. Other costs incurred in conjunction with the distribution of these products are included in operating and administrative expenses and consist primarily of wages to delivery personnel, delivery vehicle costs consisting of fuel costs, repair and maintenance and lease expense. Costs associated with delivery vehicles approximated $63.9 million and $75.3 million for the years ended September 30, 2012 and 2011, respectively. In addition, the depreciation expense associated with the delivery vehicles and customer tanks is reported within depreciation and amortization expense and amounted to $57.7 million and $69.9 million for the years ended September 30, 2012 and 2011, respectively. Since we include these costs in our operating and administrative expense and depreciation and amortization expense rather than in cost of product sold, our results may not be comparable to other entities in our lines of business if they include these costs in cost of product sold.

Our storage and pipeline transportation cost of product sold consists primarily of commodity and transportation costs. Other costs incurred in conjunction with these services are included in operating and administrative expense and depreciation and amortization expense and consist primarily of depreciation, vehicle costs consisting of fuel costs and repair and maintenance and wages. Depreciation expense for storage and pipeline transportation services amounted to $70.5 million and $60.8 million for the year ended September 30, 2012 and 2011, respectively. Vehicle costs and wages for personnel directly involved in providing storage and pipeline transportation services amounted to $4.6 million and $3.5 million for the year ended September 30, 2012 and 2011, respectively. Since we include these costs in our operating and administrative expense and depreciation and amortization expense rather than in cost of product sold, our results may not be comparable to other entities in our lines of business if they include these costs in cost of product sold.

Gross Profit (Excluding Depreciation and Amortization). Gross profit for the year ended September 30, 2012, was $610.6 million, a decrease of $67.2 million, or 9.9%, from $677.8 million during the year ended September 30, 2011.

Retail gross profit was $338.5 million for the year ended September 30, 2012, compared to $456.0 million for the year ended September 30, 2011, a decrease of $117.5 million, or 25.8%. Retail propane gross profit was $284.7 million in fiscal 2012, a decrease of $102.1 million compared to $386.8 million in fiscal 2011. This decrease was mostly due to a $110.8 million decline attributable to lower volumes sold at existing locations, coupled with a $7.4 million decline due to changes in non-cash charges on derivative contracts associated with retail propane fixed price sales contracts. Approximately $29.1 million of the decline from lower volumes sold at existing locations resulted from the sale of our retail propane operations to SPH effective August, 1, 2012. These factors were partially offset by an increase in retail gross profit of $14.9 million resulting from a higher cash margin per gallon and a $1.2 million increase associated with acquisitions. Other retail gross profit was $53.8 million for the year ended September 30, 2012, compared to $69.2 million for the year ended September 30, 2011. This $15.4 million decrease was due primarily to a decline in gross profit from distillate and other retail sales of $15.8 million, partially offset by an increase of $0.4 million arising from acquisition-related gross profit. Gross profit from distillate and other retail sales declined mostly due to lower volumes sold at our existing locations, approximately $9.0 million of which resulted from the sale of our retail propane operations.


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NGL marketing gross profit was $28.7 million for the year ended September 30, 2012, compared to $31.0 million for the year ended September 30, 2011, a decrease of $2.3 million, or 7.4%. This decrease resulted from lower margins on volumes sold to new and existing customers.

L&L transportation gross profit was $24.4 million for the year ended September 30, 2012, an increase of $17.7 million or 264.2% from $6.7 million during the year ended September 30, 2011. This increase was primarily attributable to our acquisitions of the assets of Papco and Werner.

Gross profit at our West Coast NGL operations was $32.6 million for the year ended September 30, 2012, an increase of $5.1 million or 18.5% from $27.5 million during the year ended September 30, 2011. This increase was primarily attributable to increased margins attained through increased throughput volumes and isomerization volumes during the period.

Storage and pipeline transportation gross profit was $186.4 million in the year ended September 30, 2012, compared to $156.6 million during the year ended September 30, 2011, an increase of $29.8 million, or 19.0%. This change is primarily related to the placement into service of the North/South Facilities and CNYOG's business interruption insurance reimbursement, which in total contributed $18.5 million to the increase. Inergy Midstream's acquisition of Seneca Lake in July 2011 resulted in an increase in gross profit of $6.3 million.

Operating and Administrative Expenses.  Operating and administrati