"Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the accompanying consolidated financial statements and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K of Inergy, L.P. for the fiscal year ended September 30, 2008.

The statements in this Quarterly Report on Form 10-Q that are not historical facts, including most importantly, those statements preceded by, or that include the words "may", "believes", "expects", "anticipates" or the negation thereof, or similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such forward-looking statements include, but are not limited to, statements that: (i) we believe our wholesale supply, marketing and distribution business complements our retail distribution business, (ii) we expect recovery of goodwill through future cash flows associated with acquisitions, and (iii) we believe that anticipated cash from operations and borrowings under our credit facility will be sufficient to meet our liquidity needs for the foreseeable future. Such forward-looking statements involve risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: weather in our area of operations; market price of propane; availability of financing; changes in, or failure to comply with, government regulations; the costs, uncertainties and other effects of legal and administrative proceedings and other risks and uncertainties detailed in our Securities and Exchange Commission filings. For those statements, we claim the protections of the safe harbor for forward-looking statements contained in the Reform Act. We will not undertake and specifically decline any obligation to publicly release the result of any revisions to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect events or circumstances after anticipated or unanticipated events.

Overview

We are a growing retail and wholesale propane supply, marketing and distribution business. We also own and operate a growing midstream business that includes two natural gas storage facilities ("Stagecoach" and "Steuben"), a liquefied petroleum gas ("LPG") storage facility, a natural gas liquids ("NGL") business and a solution-mining and salt production company ("US Salt"). We further intend to pursue our growth objectives in the propane business through, among other things, future acquisitions. Our acquisition strategy focuses on propane companies that meet our acquisition criteria, including targeting acquisition prospects that maintain a high percentage of retail sales to residential customers, operating in attractive markets and focusing our operations under established and locally recognized trade names. Our midstream growth objectives focus both on organically expanding our existing assets and acquiring future operations that leverage our existing operating platform, produce predominantly fee-based cash flow characteristics and have future organic or commercial expansion characteristics.

Both of our operating segments, propane and midstream, are supported by business development personnel groups employed by the Partnership. These groups' daily responsibilities include research, sourcing, financial analysis and due diligence of potential acquisition targets and organic growth opportunities. These employees work closely with the operators of both of our segments in the course of their work to ensure the appropriate growth opportunities are pursued.

We have grown primarily through acquisitions and to a lesser extent through organic expansion projects. Since the inception of our predecessor in November 1996 through June 30, 2009, we have acquired 84 companies, including 78 retail propane companies and 6 midstream businesses, for an aggregate purchase price of approximately $1.8 billion, including working capital, assumed liabilities and acquisition costs.

In October 2008, we acquired the assets of the Blu-Gas group of companies ("Blu-Gas") headquartered in Denver, North Carolina, in April 2009, we acquired the assets of Newton's Gas Service, Inc. ("Newton's Gas") and on June 30, 2009, we acquired the assets of F.G.White Company, Inc. ("F.G. White"). The purchase price allocation for these acquisitions has been prepared on a preliminary basis pending final asset valuation and asset rationalization, and changes are expected when additional information becomes available. Changes to final asset valuation of prior fiscal year acquisitions have been included in our consolidated financial statements but are not material.

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

Because a substantial portion of our propane is used in the weather-sensitive residential markets, the temperatures realized in our areas of operations, particularly during the six-month peak heating season of October through March, have a significant effect on our financial performance. In any given area, warmer-than-normal temperatures will tend to result in reduced propane use, while sustained colder-than-normal temperatures will tend to result in greater propane use. Therefore, we use information on normal temperatures in understanding how historical results of operations are affected by temperatures that are colder or warmer than normal and in preparing forecasts of future operations, which are based on the assumption that normal weather will prevail in each of our operating regions. "Heating degree days" are a general indicator of how weather impacts propane usage and are calculated for any given period by adding the difference between 65 degrees and the average temperature of each day in the period (if less than 65 degrees). While a substantial portion of our propane is used by our customers for heating needs, our propane operations are geographically diversified and not all of our propane sales are weather sensitive. Together, these factors may make it difficult to draw definitive conclusions as to the correlation of our gallon sales to weather calculations comparing weather in a year to normal or to the prior year.

The retail propane business is a "margin-based" business where the level of profitability is largely dependent on the difference between sales prices and product costs. Propane prices have continued to be volatile during 2009. At the main pricing hub of Mount Belvieu Texas during the nine-month period ended June 30, 2009, propane prices ranged from a low of $0.53 per gallon to a high of $1.41 per gallon and a price of $0.82 per gallon at June 30, 2009. Our hedging program and ability to pass on price increases to our customers limits the impact that volatility has had on our operations. In the future, we will continue to hedge virtually 100% of our exposure from fixed price sales. While we have historically been successful in passing on any price increases to our customers, there can be no guarantees that this trend will continue in the future. In periods of increasing costs, we have experienced a decline in our gross profit as a percentage of revenues. In addition, during those periods we have historically experienced conservation of propane gallons used by our customers which has resulted in a decline in gross profit. In periods of decreasing costs, we have experienced an increase in our gross profit as a percentage of revenues. There is no assurance that because propane prices decline customers will use more propane and thus historical gallon sales declines we've attributed to customer conservation will reverse. The prices of crude oil and natural gas have maintained historically high costs in 2007, 2008 and in the first half of 2009 and, since propane is a by-product of these commodities, it too has been at historically high levels over this same time frame. As such, our selling prices of propane have been at higher levels in order to attempt to maintain our historical gross margin per gallon. We do not attempt to predict or control the underlying commodity prices; however, we monitor these prices daily and adjust our operations and retail prices to maintain expected margins by passing on the wholesale costs to end users of our product. We believe that volatility in commodity prices will continue, and our ability to adjust to and manage our operations in response to this volatility may impact our operations and financial results.

We believe that the economic downturn that began in the second half of 2008 has caused certain of our retail propane customers to conserve and thereby purchase less propane. This trend is expected to continue throughout the life of the recession. In addition, although we believe the recession has not currently had a material impact on our cash collections, it is possible that a prolonged recession could have a negative impact on our future cash collections.

We believe our wholesale supply, marketing and distribution business complements our retail distribution business. Through our wholesale operations, we distribute propane and also offer price risk management services to propane retailers, resellers and other related businesses as well as energy marketers and dealers, through a variety of financial and other instruments, including:

• forward contracts involving the physical delivery of propane;

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

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

We engage in derivative transactions to reduce the effect of price volatility on our product costs and to help ensure the availability of propane during periods of short supply. We attempt to balance our contractual portfolio by purchasing volumes only when we have a matching purchase commitment from our wholesale customers. However, we may experience net unbalanced positions from time to time.

Our midstream operations primarily include the storage, processing, fractionation, and sale of natural gas and NGLs and, to a lesser extent, the wholesale distribution of salt from solution mining operations of US Salt, which was acquired in August 2008. The cash flows from these operations are predominantly fee-based under one to ten year contracts with substantial, creditworthy counterparties and, therefore, are generally economically stable and not significantly affected in the short term by changing commodity prices, seasonality or weather fluctuations.

We believe our midstream operations 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. However, we also believe that the contractual fee-based nature of our midstream operations may serve to mitigate this potential risk.

The majority of our operating cash flows in our midstream operations are generated by our natural gas storage operations. Most of our natural gas storage revenues are based on regulated market-based tariff rates, which are driven in large part by competition and demand for our storage capacity and deliverability. Demand for storage in our key midstream market in the northeastern United States 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. The natural gas industry is currently experiencing a significant shift in the sources of supply, and this dramatic change could affect our operations. Traditionally, supply to our markets has come from the Gulf Coast region, onshore and offshore, as well as from Canada. The national supply profile is shifting to new sources of natural gas from basins in the Rockies, Mid-Continent, Appalachia and East Texas. In addition, the natural gas supply outlook includes new LNG regasification facilities under various stages of development in multiple locations. LNG can be a new source of potential supply, but the timing and extent of incremental supply ultimately realized from LNG is yet to be determined and, at present, LNG remains a small percentage of the overall supply to the markets we serve. These supply shifts and other changes to the natural gas market may have an impact on our storage operations and our development plans in the northeastern United States and may ultimately drive the need for more domestic capacity for natural gas storage. Currently, we have committed to capital expansion projects at our Thomas Corners natural gas storage development and our Finger Lakes LPG storage expansion. The rights to the Thomas Corners development were obtained when we acquired ASC in October 2007. Thomas Corners is located in Steuben County, NY and is expected to have working gas capacity of approximately 7 bcf when complete. This project is expected to be completed in 2010. The Finger Lakes LPG storage expansion project relates to the development of certain caverns acquired in the acquisition of US Salt in August 2008. The solution mining process creates caverns that can be developed into LPG or Natural Gas storage after the salt has been extracted. The Finger Lakes LPG expansion project is expected to convert certain of the caverns at US Salt into LPG storage with a capacity of up to 5 million barrels. This project is expected to be completed in 2010.

As we execute on our strategic objectives, capital expansion projects will continue to be an important part of our growth plan. We have committed capital and investment expenditures at June 30, 2009 of approximately $30.6 million in our midstream operations. These capital requirements, along with the refinancings of normal maturities of existing debt, will require us to continue long-term borrowings. An inability to access capital at competitive rates could adversely affect our ability to implement our strategy. Market disruptions or a downgrade in our credit ratings may increase the cost of borrowing or adversely affect our ability to access one or more sources of liquidity. During the past several years, capital expansion projects have been exposed to cost pressures associated with the availability of skilled labor and the pricing of materials. Although certain costs have begun to decrease, there will be continual focus on project management activities to address these pressures as we move forward with planned expansion opportunities. Significant cost increases could negatively affect the returns ultimately earned on current and future expansions.

Our midstream operations in the United States are subject to regulations at the federal and state level. Regulations applicable to the gas storage industry have a significant effect on the nature of our midstream operations and the manner in which they operate. Changes to regulations are ongoing and we cannot predict the future course of changes in the regulatory environment or the ultimate effect that any future changes will have on our midstream operations.

Results of Operations

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The following table summarizes the consolidated income statement components for
the three months ended June 30, 2009 and 2008, respectively (in millions):



                                               Three Months Ended
                                                    June 30,                         Change
                                               2009           2008         In Dollars       Percentage
Revenue                                      $   235.0       $ 375.2      $     (140.2 )         (37.4 )%
Cost of product sold                             137.7         286.5            (148.8 )         (51.9 )

Gross profit                                      97.3          88.7               8.6             9.7
Operating and administrative expenses             66.4          67.1              (0.7 )          (1.0 )
Depreciation and amortization                     26.4          26.1               0.3             1.1
Loss on disposal of assets                        (1.1 )        (0.4 )            (0.7 )        (175.0 )

Operating income (loss)                            3.4          (4.9 )             8.3           169.4
Interest expense, net                            (17.2 )       (15.2 )            (2.0 )         (13.2 )

Loss before income taxes and interest of
non-controlling partners in ASC                  (13.8 )       (20.1 )             6.3            31.3
Provision for income taxes                        (0.2 )        (0.2 )              -               -
Interest of non-controlling partners in
ASC's consolidated net income                     (0.3 )        (0.4 )             0.1            25.0

Net loss                                     $   (14.3 )     $ (20.7 )    $        6.4            30.9 %

The following table summarizes revenues, including associated volume of gallons sold, for the three months ended June 30, 2009 and 2008, respectively (in millions):

                                                              Revenues                                               Gallons
                                           Three Months Ended                                       Three Months Ended
                                                June 30,                   Change                        June 30,                 Change
                                            2009         2008      In Dollars       Percent         2009         2008      In Units      Percent
Retail propane                           $     87.5    $  121.7   $      (34.2 )      (28.1 )%         41.9         46.7       (4.8 )      (10.3 )%
Wholesale propane                              48.0        99.2          (51.2 )      (51.6 )          60.7         59.8        0.9          1.5
Other retail                                   36.9        56.3          (19.4 )      (34.5 )            -            -          -            -
Storage, fractionation and midstream           62.6        98.0          (35.4 )      (36.1 )            -            -          -            -

Total                                    $    235.0    $  375.2   $     (140.2 )      (37.4 )%        102.6        106.5       (3.9 )       (3.7 )%

Volume. During the three months ended June 30, 2009, we sold approximately 41.9 million retail gallons of propane, a decrease of 4.8 million gallons or 10.3% from the 46.7 million retail gallons sold during the same three-month period in 2008. Gallons sold during the three months ended June 30, 2009 declined as compared to the same prior year period as a result of lower volumes sold at our existing locations of 5.8 million gallons partially offset by a 1.0 million gallon increase from acquisition-related volume. We believe the decline in volumes at existing locations resulted from (1) continued customer conservation due to the current overall weak United States economic environment and to a lesser extent the lingering effects of propane cost, which had been at record high prices the past several years, and (2) volume declines from net customer losses during earlier periods of relatively high propane costs, including low margin and less profitable customers.

Wholesale gallons delivered increased 0.9 million gallons, or 1.5%, to 60.7 million gallons in the three months ended June 30, 2009 from 59.8 million gallons in the three months ended June 30, 2008. The increase was due primarily to greater volumes sold to existing customers and addition of new customers.

The total natural gas liquid gallons sold or processed by our West Coast NGL operations decreased 16.3 million gallons, or 17.9%, to 74.8 million gallons during the three months ended June 30, 2009 from 91.1 million gallons during the same three-month period in 2008. This decrease was partially attributed to the non-renewal of certain customer contracts.

During the three months ended June 30, 2009 and 2008, our Northeast natural gas and LPG storage facilities were 100% contracted. The total volume available for storage was the same during each of these periods.

Revenues. Revenues for the three months ended June 30, 2009 were $235.0 million, a decrease of $140.2 million, or 37.4%, from $375.2 million during the same three-month period in 2008.

Revenues from retail propane sales were $87.5 million for the three months ended June 30, 2009 compared to $121.7 million during the same three-month period in 2008. This $34.2 million, or 28.1%, decrease resulted primarily from a combination of a lower overall average selling price of propane due to a reduction in the wholesale cost of propane and a decline in gallons sold to existing customers as described above, which together contributed to a $36.6 million revenue decline, partially offset by acquisition-related sales, which resulted in higher revenues of $2.4 million.

Revenues from wholesale propane sales were $48.0 million in the three months ended June 30, 2009, a decrease of $51.2 million or 51.6%, from $99.2 million in the three months ended June 30, 2008. This decrease resulted primarily from the lower average selling price of propane, which contributed $52.7 million to the decrease in revenues. The lower selling price for our wholesale propane sales in 2009 compared to 2008 was the result of the lower cost of propane. This decrease was partially offset by increases in volume sold to existing and new customers.

Revenues from other retail sales, which primarily includes distillates, service, rental, appliance sales and transportation services, were $36.9 million for the three months ended June 30, 2009, a decrease of $19.4 million, or 34.5%, from $56.3 million during the same three-month period in 2008. Revenue from other retail sales declined $17.0 million as a result of lower average selling prices of distillates at existing locations and $2.8 million due to a decline in revenues from other products and services, partially offset by a $0.4 million increase from acquisition-related sales. Distillate revenues from existing locations decreased as a result of lower volume sold coupled with a decline in the comparable average selling price of the distillates resulting from a lower wholesale cost.

Revenues from storage, fractionation and other midstream activities were $62.6 million for the three months ended June 30, 2009, a decrease of $35.4 million or 36.1% from $98.0 million during the same three-month period in 2008. Revenues from our West Coast NGL operations decreased $48.8 million primarily as a result of decreases in commodity cost and expected changes in the variety of natural gas liquid products sold. Partially offsetting this decrease was a $12.8 million increase due to the acquisition of US Salt. In addition, revenues at our Stagecoach Storage Facility increased due to the commencement of operations on the North Lateral connecting to Millennium Pipeline in December 2008.

Cost of Product Sold. Cost of product sold for the three months ended June 30, 2009 was $137.7 million, a decrease of $148.8 million, or 51.9%, from $286.5 million during the same three-month period in 2008.

Retail propane cost of product sold was $37.9 million for the three months ended June 30, 2009 compared to $78.2 million for the same three-month period in 2008. This $40.3 million, or 51.5%, decrease in retail cost of product sold was driven by an approximate 46.0% decline in the average per gallon cost of propane along with lower volume sales at our existing locations as discussed above, which together reduced costs by approximately $40.6 million. Also contributing to the decline in retail propane cost of product sold was a $0.6 million decrease due to changes in non-cash charges on derivative contracts associated with retail propane fixed price sales contracts. These factors were partially offset by a $0.9 million increase in retail propane cost of product sold associated with acquisition-related volume.

Wholesale propane cost of product sold in the three months ended June 30, 2009 was $43.4 million, a decrease of $51.5 million or 54.3%, from wholesale cost of product sold of $94.9 million in 2008. These lower costs were primarily a result of an approximate $52.9 million decrease due to the lower average cost of propane, partially offset by a $1.4 million increase in volume sold to existing and new customers.

Other retail cost of product sold was $19.6 million for the three months ended June 30, 2009 compared to $38.8 million during the same three-month period in 2008. This $19.2 million, or 49.5%, decrease was primarily due to lower costs from distillate sales at existing locations of $18.3 million and a decline in costs for other products and services of $1.0 million, partially offset by a $0.1

million increase in the cost of product sold associated with acquisition-related volume. The cost of product sold for distillates declined as a result of lower volume sales at existing locations coupled with an approximate 47.3% decline in the average cost per gallon of distillates.

Storage, fractionation and other midstream cost of product sold was $36.8 million for the three months ended June 30, 2009, a decrease of $37.8 million, or 50.7%, from $74.6 million during the same three-month period in 2008. Costs from our West Coast NGL operations were $45.7 million lower primarily as a result of decreases in commodity cost and expected changes in the variety of natural gas liquid products sold due to additional contracts. Partially offsetting this decrease was a $7.7 million increase in cost due to the acquisition of US Salt.

Our retail and wholesale cost of product sold consists primarily of tangible products sold including all propane, distillates and other natural gas liquids sold and all propane-related appliances sold. Other costs incurred in conjunction with the distribution of these products are included in operating and administrative expenses and consist primarily of wages to delivery personnel, delivery vehicle costs consisting of fuel costs, repair and maintenance and lease expense, and depreciation on tanks being rented to customers. Costs associated with delivery vehicles approximated $14.4 million and $16.2 million for the three months ended June 30, 2009 and 2008, respectively. In addition, the depreciation expense associated with the delivery vehicles and customer tanks is reported within depreciation and amortization expense and amounted to $8.5 million and $8.4 million for the three months ended June 30, 2009 and 2008, 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.

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