"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, 2011. Unless the context indicates otherwise, the terms "Inergy," "we," "us," "our," "ours" and similar terms refer to Inergy, L.P. and its subsidiaries.

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". Such forward-looking statements include, but are not limited to, statements that:
(i) 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, (ii) we believe that the economic downturn that began in the second half of 2008 has caused certain of our retail propane customers to conserve or seek cheaper suppliers or energy sources and thereby purchase less propane, (iii) we believe our midstream operations could be negatively affected in the long term by sustained downturns or sluggishness in the economy and narrow seasonal spreads in the cost of natural gas along with new natural gas supply from prolific shale plays, which could affect long-term demand and market prices for natural gas and NGLs,
(iv) we anticipate completion of our announced midstream capital expansion projects at various times, and (v) 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; failure to achieve growth plans; 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 (including permit and other regulatory proceedings associated with our development projects) and other risks and uncertainties detailed in our Securities and Exchange Commission filings. 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.

Recent Developments

Propane Operations

On August 1, 2012, Inergy closed on its definitive agreement and contributed its retail propane operations to Suburban Propane Partners, L.P. ("SPH") in exchange for consideration of approximately $1.8 billion. Under the terms of the agreement, Inergy received approximately 14.2 million SPH common units; and SPH exchanged $1,187.0 million of Inergy's outstanding senior notes for approximately $1,000.0 million of new SPH senior notes and cash paid to noteholders tendering the exchange. Inergy has agreed to distribute approximately 14.1 million of the SPH common units it received to NRGY unitholders of record on a pro rata basis at a future record date to be determined by the board of directors of NRGY's managing general partner, which management expects to occur within the next 30-45 days.

Credit Facility

On July 26, 2012, we further amended our amended and restated Credit Agreement in order to: (i) permit us to enter into a series of transactions as described in the Contribution Agreement dated as of April 25, 2012 among us and SPH,
(ii) permit us to repurchase, repay or redeem all or any portion of the senior notes that remain outstanding after the closing of the Contribution Agreement, (iii) modify certain negative and financial covenants under the Credit Agreement, and (iv) allow us to redeem, buy back or otherwise acquire up to $100,000,000 of our common units on or prior to March 31, 2013.

Overview

We are a Delaware limited partnership formed to own and operate a growing retail and wholesale propane supply, marketing and distribution business. We also own a 75.0% limited partner interest and all the IDRs in Inergy Midstream, L.P. ("Inergy Midstream"). Inergy Midstream owns a growing midstream business that includes four natural gas storage facilities (Stagecoach, Thomas Corners, Steuben and Seneca Lake), interstate and intrastate natural gas transportation facilities in New York, a natural gas liquids ("NGL") storage facility (the Bath storage facility) and a solution-mining and salt production company (US Salt). In addition to our interest in Inergy Midstream, we own midstream businesses including a natural gas storage facility (Tres Palacios) and an NGL business on the West Coast. We further intend to pursue our growth objectives in the midstream business through, among other things, future acquisitions. 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. Although the discussion below includes our retail propane business, effective August 1, 2012, we contributed this business to SPH.

Over the past several years, we have transformed our company from a propane distribution company into a diversified master limited partnership with significant investment in both the propane and midstream sectors. We continuously evaluate the best way to grow our company and unlock value for our unit holders. For example, we completed an initial public offering of approximately 25% of Inergy Midstream in December 2011. We expect to continue to evaluate transactions that both create investor value and grow our business, as it relates to both our propane and our midstream businesses.

Both of our operating segments, propane and midstream, are supported by business development personnel groups. 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. Since the inception of our predecessor in November 1996 through June 30, 2012, we have acquired 93 companies, including 85 retail propane companies and 8 midstream businesses, for an aggregate purchase price of approximately $2.9 billion, including working capital, assumed liabilities and acquisition costs.

On November 11, 2011, we completed the acquisition of Papco, LLC / South Jersey Terminal, LLC ("Papco"), located in Bridgeton, New Jersey.

On January 13, 2012, we completed the acquisition of substantially all the assets of Baker-Doucette, Inc. (d/b/a Woodstock Oil Company) and Rising Moon, LLC (d/b/a Woodstock Propane Company) ("Woodstock"), located in Bryant Pond, Maine.

On February 13, 2012, we completed the acquisition of all operating assets at the Aztec, New Mexico location ("Aztec") of Alliance Propane, LLC (d/b/a Mesa Propane).

The purchase price allocation for these acquisitions has been prepared on a preliminary basis pending final asset valuation and asset rationalization.Changes to reflect 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 nine-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 nine-month peak heating season of October through March, have a significant effect on our financial performance. In any given area, warmer-than-normal temperatures, such as those we experienced in the nine months ended June 30, 2012, 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 continued to be volatile during 2010, 2011 and 2012. At the main pricing hub of Mont Belvieu, Texas ("Mt. Belvieu Price") during the three-month period ended June 30, 2012, the average Mt. Belvieu Price was $0.97 with prices ranging from a low of $0.71 per gallon to a high of $1.22 per gallon and a price of $0.82 per gallon at June 30, 2012. During the nine-month period ended June 30, 2012, the average propane price was $1.22 with propane prices ranging from a low of $0.71 per gallon to a high of $1.54 per gallon. Further, the average Mt. Belvieu Price in our fiscal years of 2009, 2010 and 2011 was $0.77, $1.12 and $1.42 per gallon, respectively. Our ability to pass on price increases to our customers and our hedging program has historically limited the impact that such volatility has had on our results from operations and we will continue to hedge virtually 100% of our exposure from fixed prices; however, those higher propane costs have led to higher selling prices by us and have negatively impacted our volume sales and may continue to do so in the future for reasons discussed below. While we had historically been successful in passing on price increases to our customers, we were unable to fully do so in the three and nine months ended June 30, 2012, and we may not be able to fully do so in the future. In periods of increasing propane 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 in addition to lesser gallon sales as a result of customers switching to lower price propane providers as well as alternative energy sources such as electricity and wood-burning and pellet-burning stoves which have become more economical than propane due to the high cost of propane, all of which has resulted in a decline in gross profit. These trends generally increase in periods of sustained cost increases such as we experienced as described above including thus far in fiscal 2012. Further, improved technology in new appliances, including those using propane, has resulted in fewer gallons of propane used by our customers for their needs thus resulting in lesser gallon sales for us. In periods of decreasing costs, we have experienced an increase in our gross profit as a percentage of revenues. There is no assurance that if propane prices decline customers will use more propane and thus historical gallon sales declines we've attributed to customer conservation and losses will reverse. Propane is a by-product of both crude oil refining and natural gas processing and thus typically follows the same pricing pattern as these two commodities with crude oil pricing having a much closer correlation of the two historically. The prices of crude oil and natural gas had maintained historically high costs in calendar years 2007 and 2008 before both began to fall rather dramatically in late 2008 and throughout the 2008-2009 winter season. While natural gas pricing has further declined and remained at historically low levels since 2008, crude oil costs leveled off in the spring of 2009 before beginning another increase that persisted through the winter seasons of 2009-2010, 2010-2011 and 2011-2012 with propane prices following a similar pattern for the majority of this time. Further, propane was exported from the United States in greater quantities in 2011, and continues as such into 2012, than in the past due to higher propane costs overseas, leading to sustained higher propane costs in the United States. As such, our selling prices of propane have been at higher levels in order to attempt to maintain our historical gross margin per gallon with these higher prices negatively impacting our volume sales for the reasons discussed above. We do not attempt to predict 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 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, shop for lower prices that may be available from other suppliers or begin using alternative energy sources, such as electricity or wood burning and pellet burning stoves to replace some or all of their propane usage.

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 requires 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, transportation, 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. 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.

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 and conversion from petroleum based fuels. Demand for storage in Texas is expected to strengthen driven primarily by growth in natural gas fired generation and increasing gas supplies from growing shale developments such as the Eagle Ford shale. Demand for 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. Our Texas storage asset is currently being negatively impacted by both of these occurrences with both low natural gas prices and a narrow seasonal spread.

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.

Traditionally, supply to our markets is satisfied primarily by production from conventional onshore and offshore production in the lower 48 states, as supplemented by production from historically declining pipeline imports from Canada, imports of LNG from foreign sources, and some Alaska production. In order to maintain current levels of U.S. natural gas supply and to meet the projected increase in demand, new sources of domestic natural gas must continue to be developed to offset an established trend of depletion associated with mature, conventional production as well as the uncertainty of future LNG imports and infrastructure challenges associated with sourcing additional production from Alaska. Over the past several years, a fundamental shift in production has emerged with the contribution of natural gas from unconventional resources
(defined by the EIA as natural gas produced from shale formations and coal beds)
increasing from 6% of total U.S. natural gas supply in 2000 to 16% in 2008. In fact, according to EIA data, during the three-year period from January 15, 2007 through December 15, 2010 domestic production of natural gas increased by an average of approximately 4% per annum, largely due to continued development of shale resources. The emergence of shale plays has resulted primarily from advances in horizontal drilling and hydraulic fracturing technologies, which have allowed producers to extract significant volumes of natural gas from these plays at cost-advantaged per unit economics versus most conventional plays.

Inergy Midstream has several significant capital projects under development related to its midstream operations, including:

• MARC I Pipeline

Inergy Midstream is constructing the MARC I pipeline, a fully contracted natural gas transmission pipeline with 550 MMcf/d of interstate transportation service, which it expects to complete and place into service in 2012 with contracts extending to 2022. Inergy Midstream obtained its FERC certificate order authorizing the MARC I project in November 2011, and commenced full-scale construction in February 2012.

On February 13, 2012, the FERC denied an intervener's request to stay and rehear the MARC I certificate order. On February 14, 2012, the intervener filed an appeal and emergency motion for stay of the MARC I certificate order with the Second Circuit Court of Appeals, and a temporary stay was granted on February 17, 2012. The temporary stay remained in place until it was vacated by a three-judge panel following oral arguments on February 28, 2012. On March 6, 2012, the Second Circuit granted the intervener's request for an expedited briefing schedule. Briefs were filed by all parties in March and April, and oral arguments were held on May 31, 2012. On June 12, 2012, the appellate court held that FERC had properly discharged its responsibilities and denied with prejudice the intervener's petition challenging FERC's MARC I certificate order.

Inergy Midstream continues to construct the pipeline and expects to place into service the north 20-mile segment by September 1, 2012, and to complete and place into service the rest of the pipeline by October 1, 2012.

• Watkins Glen NGL Storage Project

Inergy Midstream is developing a 2.1 million barrel NGL storage facility located near Watkins Glen, New York, which is approximately 95% contracted under a contract extending to 2016. Inergy Midstream continues to face delays in the permitting process due to other regulatory priorities (e.g., implementation of "fracking" regulations) and other reasons. Inergy Midstream expects to receive the underground storage permit required for the project this calendar year, and to complete and place into service the storage facility within 120 days of the final permit being granted.

• North/South II Expansion Project

Inergy Midstream is developing the North/South II expansion project, which is expected to enable shippers to move higher volumes of natural gas bi-directionally through the Stagecoach facility from Millennium to TGP's 300 Line, and all points in between. As part of this project, Inergy Midstream plans to (i) extend the Stagecoach north lateral approximately three miles to interconnect with the East Pipeline, which will allow 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 the Dominion transmission system in Tompkins County, New York, and (ii) expand, through the installation of additional compression or looping, the capacity of the Stagecoach laterals, which will enable shippers to move higher volumes of natural gas over the existing North/South pipeline route. Inergy Midstream is working to acquire the land required to complete the 3-mile lateral extension under CNYOG's blanket authority, evaluating uprating options for the East Pipeline, and discussing commercial commitments with potential shippers.

• Commonwealth Pipeline

On February 29, 2012, Inergy Midstream announced plans to explore the marketing and development of a new interstate natural gas pipeline ("Commonwealth Pipeline") with affiliates of UGI Corporation and WGL Holdings, Inc. As proposed, Commonwealth Pipeline would run approximately 200 miles from the southern terminus of Inergy Midstream's MARC I pipeline to a point of interconnection with Washington Gas Light's distribution system in Maryland. Inergy Midstream is exploring costs, route options and other information required to complete a feasibility study, and assessing market demand for the proposed transportation capacity. To the extent the partners determine that the project is economically feasible, affiliates of UGI Corporation and WGL Holdings, Inc. are expected to become anchor shippers on the new pipeline. The project sponsors held a non-binding open season for capacity on the Commonwealth Pipeline in the second calendar quarter, and on June 18, 2012, announced that the initial results from the open season were positive. The project sponsors are working to finalize route information and have commenced negotiating precedent agreements with potential shippers.

In addition to Inergy Midstream's significant growth projects, Inergy Midstream is working on a number of initiatives that it expects to enhance customer flexibility, deliver operational synergies and augment its platform of future growth opportunities. For example, in the second calendar quarter Inergy Midstream (i) filed applications requesting FERC authorization to effectively convert its Steuben gas tariff from cost-based rates to market-based rates, by merging the entity that owns its Steuben gas storage facility into the entity that owns its Thomas Corner and Seneca Lake gas storage facilities, and
(ii) interconnected its Seneca Lake west lateral pipeline and the Millennium Pipeline, thus enhancing deliverability and receipt flexibility for its Seneca Lake natural gas storage customers.

In addition, we also have the following capital project under development related to our midstream operations:

• the Tres Palacios header extension project, which involves laying approximately 20 miles of pipeline to connect the Tres Palacios north header system to the tailgate of Copano's Houston Central gas processing plant in Colorado County, Texas. On December 20, 2011, we filed an application with the FERC requesting the authorization required to complete this project. We expect to receive FERC authorization and place the extension project into service in the second half of calendar 2012.

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, 2012, of approximately $50.8 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 and NGL storage industries 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, 2012 Compared to Three Months Ended June 30, 2011

The following table summarizes the consolidated statement of operations
components for the three months ended June 30, 2012 and 2011, respectively (in
millions):



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