As filed with the Securities and Exchange Commission on December 3, 2009
Registration Statement
No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INERGY HOLDINGS,
L.P.
(Exact name of registrant as specified in its charter)
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Delaware
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43-1792470
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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Two Brush Creek Boulevard, Suite 200
Kansas City, Missouri 64112
(816) 842-8181
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
Laura L. Ozenberger
Two Brush Creek Boulevard, Suite 200
Kansas City, Missouri 64112
(816) 842-8181
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
David P. Oelman
Gillian A. Hobson
Vinson & Elkins L.L.P.
First City Tower
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the
following box:
¨
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box:
x
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become
effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.
¨
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register
additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.
¨
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
x
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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CALCULATION OF REGISTRATION FEE
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Title of each class of
securities to be registered
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Proposed maximum
aggregate offering price
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Amount of
registration fee(3)
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Common Units
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$300,000,000
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Total
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$300,000,000(1)(2)
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$16,740
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(1)
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Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). In no event will the aggregate initial offering price of all securities
offered from time to time pursuant to the prospectus included as a part of this registration statement exceed $300,000,000. To the extent applicable, the aggregate amount of common units registered is further limited to that which is permissible
under Rule 415(a)(4) under the Securities Act.
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(2)
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There are being registered hereunder a presently indeterminate number of common units, which shall have an aggregate offering price not to exceed $300,000,000. The
common units consist of units representing limited partner interests in Inergy Holdings, L.P.
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(3)
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Calculated in accordance with Rule 457(o) under the Securities Act. The currently due filing fee of $16,740 is being offset by $13,134, which is the aggregate total
dollar amount of the filing fee associated with the unsold securities registered on Form S-3 (Registration No. 333-136200) that was filed by Inergy Holdings, L.P. on August 1, 2006. Accordingly, a filing fee of $3,606 is being paid
herewith pursuant to Rule 457(p).
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The registrant
hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
Subject to completion, dated December 3, 2009
PROSPECTUS
Inergy Holdings, L.P.
Common Units
We may offer, from time to time, common units representing limited partner interests in Inergy Holdings, L.P. under this prospectus.
We may offer and sell these securities to or through one or more underwriters, dealers and agents, or directly to purchasers,
on a continuous or delayed basis. This prospectus describes the general terms of these securities and the general manner in which we will offer the securities. The specific terms of any securities we offer will be included in a supplement to this
prospectus. The prospectus supplement will also describe the specific manner in which we will offer the securities.
You
should carefully read this prospectus and any prospectus supplement before you invest. You should also read the documents we refer to in the Where You Can Find More Information section of this prospectus for information on us and our
financial statements.
Investing in our securities involves risks. Limited partnerships are inherently different from
corporations. You should carefully consider each of the risk factors described under
Risk Factors
beginning on page 5 of this prospectus and in the applicable prospectus supplement before you make an
investment in our securities.
Our common units trade on the Nasdaq Global Select Market under the symbol
NRGP.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 20
.
TABLE OF CONTENTS
This prospectus is
part of a registration statement we filed with the Securities and Exchange Commission, or the SEC or Commission. In making your investment decision, you should rely only on the information contained in or incorporated by
reference into this prospectus. We have not authorized anyone to provide you with any other information. If you receive any unauthorized information, you must not rely on it. Our business, financial condition, results of operations and prospects may
have changed since those dates.
You should not assume that the information contained in this prospectus or in the documents incorporated by reference into this prospectus
are accurate as of any date other than the date on the front cover of this prospectus or the date of such incorporated documents, as the case may be.
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GUIDE TO READING THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-3 that we have filed with the SEC utilizing a shelf registration
process or continuous offering process. Under this shelf registration process, we may, from time to time, sell up to $300,000,000 of common units described in this prospectus in one or more offerings. Each time we offer common units, we will provide
you with this prospectus and a prospectus supplement that will describe, among other things, the specific amounts and prices of the common units being offered and the terms of the offering.
The prospectus supplement may include additional risk factors or other special considerations applicable to those securities and may also
add, update or change information in this prospectus. If there is any inconsistency between the information in this prospectus and any prospectus supplement, you should rely on the information in that prospectus supplement.
Additional information, including our financial statements and the notes thereto, is incorporated in this prospectus by reference to our
reports filed with the SEC. Please read Where You Can Find More Information. You are urged to read this prospectus and any attached prospectus supplements relating to the securities offered to you, together with the additional
information described under the heading Where You Can Find More Information, carefully before investing in our common units. To the extent information in this prospectus is inconsistent with information contained in a prospectus
supplement, you should rely on the information in the prospectus supplement.
The following information should help you
understand some of the conventions used in this prospectus.
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Throughout this prospectus, when we use the terms we, us, our, our partnership or Inergy
Holdings, L.P., we are referring either to Inergy Holdings, L.P., the registrant itself, or to Inergy Holdings, L.P. and its subsidiaries collectively, as the context requires.
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All references in this prospectus to Inergy refer to Inergy, L.P.
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Inergy Holdings GP, LLC, our general partner, is responsible for the management of our partnership and its operations. Throughout this prospectus we
refer to Inergy Holdings GP, LLC as our general partner.
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WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports and other information with the SEC. You may read and copy any documents filed
by us at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our filings with the SEC are also available to
the public from commercial document retrieval services and at the SECs web site at
http://www.sec.gov
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We also
make available free of charge on our Internet website at
http://www.inergypropane.com
all of the documents that we file with the SEC as soon as reasonably practicable after we electronically file such material with the SEC
.
Information
contained on our website is not incorporated by reference into this prospectus.
We incorporate by reference
information into this prospectus, which means that we disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except
for any information superseded by information contained expressly in this prospectus, and the information we file later with the SEC will automatically supersede this information. You should not assume that the information in this prospectus is
current as of any date other than the date on the front page of this prospectus.
DOCUMENTS
INCORPORATED BY REFERENCE
We incorporate by reference the documents listed below and any future filings made by Inergy
Holdings, L.P. with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) (excluding any information furnished and not filed with the SEC) until all offerings under this shelf
registration statement are completed or after the date on which the registration statement that includes this prospectus was initially filed with the SEC and before the effectiveness of such registration statement:
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Our Annual Report on Form 10-K for the year ended September 30, 2009; and
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The description of our common units contained in our Registration Statement on Form 8-A (File No. 000-51304) filed with the SEC on
May 6, 2005 and any subsequent amendments or reports filed for the purpose of updating such description.
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You may request a copy of any document incorporated by reference in this prospectus and any exhibit specifically incorporated by reference in those documents, at no cost, by writing or telephoning us at the following address or phone
number:
Inergy Holdings, L.P.
Investor Relations
Two Brush Creek Boulevard, Suite 200
Kansas City, Missouri 64112
(816) 842-8181
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including information included or incorporated by reference in this prospectus, contains forward-looking statements
concerning our financial condition, results of operations, plans, objectives, future performance and business. These forward-looking statements include:
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statements that are not historical in nature, including but not limited to, our belief that Inergys acquisition expertise should allow it to
continue to grow through acquisitions; our belief that Inergy will have adequate propane supply to support its retail operations; and our belief that Inergys diversification of its suppliers will enable it to meet supply needs; and
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statements preceded by, followed by or that contain forward-looking terminology, including the words believe, expect,
may, will, should, could, anticipate, estimate, intend or similar expressions.
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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:
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price and availability of propane, and the capacity of Inergy to transport to market areas;
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the ability of Inergy to pass the wholesale cost of propane through to its customers;
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costs or difficulties related to the integration of the business of Inergy and its acquisition targets may be greater than expected;
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governmental legislation and regulations;
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local economic conditions;
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the demand for high deliverability natural gas storage capacity in the Northeast;
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the availability of natural gas and the price of natural gas to the consumer compared to the price of alternative and competing fuels;
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Inergys ability to successfully implement its business plan for its natural gas storage facilities;
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competition from the same and alternative energy sources;
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operating hazards and other risks incidental to transporting, storing and distributing propane;
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energy efficiency and technology trends;
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the price and availability of debt and equity financing; and
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large customer defaults.
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A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that
they are reasonable when made. However, we caution you that assumed facts or bases sometimes vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When
considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus and the documents that we have incorporated by reference, including those described in the Risk Factors
section of this prospectus. We will not update these statements unless the securities laws require us to do so.
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INERGY HOLDINGS, L.P.
We were formed in November 1996 as a Delaware limited liability company. On April 28, 2005, Inergy Holdings, LLC converted from a
Delaware limited liability company into a Delaware limited partnership and changed its name to Inergy Holdings, L.P. On June 24, 2005, we completed our initial public offering of common units. Our common units trade on the Nasdaq Global Select
Market under the symbol NRGP.
Inergy Holdings GP, LLC, our general partner, manages our operations and
activities, including, among other things, establishing the quarterly cash distribution levels for our common units and reserves that it believes are prudent for maintaining the proper conduct of our business. Our general partner is entitled to
reimbursement for out-of-pocket expenses it incurs on our behalf, but is not entitled to any other compensation, fees, profits or other benefits for acting in its capacity as our general partner.
Our cash-generating assets consist of our partnership interests, including incentive distribution rights, in Inergy, L.P. (NASDAQ: NRGY), a
publicly traded Delaware limited partnership, which owns and operates a geographically diverse retail and wholesale propane supply, marketing and distribution business. In addition to its propane operations, Inergy also operates a growing midstream
business that includes interests in two natural gas storage facilities (Stagecoach and Steuben), a liquefied petroleum gas (LPG) storage facility located near Bath, New York, a natural gas liquids business located
near Bakersfield, California and a solution-mining and salt production company (US Salt). We are the sole member of Inergys managing general partner and directly and indirectly own all of the member interests in Inergys
non-managing general partner.
Our primary objective is to increase distributable cash flow to our unitholders through our
ownership of partnership interests in Inergy. Our incentive distribution rights in Inergy entitle us to receive an increasing percentage of total cash distributions made by Inergy as it reaches certain target distribution levels and have resulted in
increasing cash distributions to us.
Our principal executive office is located at Two Brush Creek Boulevard, Suite 200,
Kansas City, Missouri 64112. Our telephone number is (816) 842-8181.
For additional information as to our business,
assets and financial condition, please refer to the documents cited in Where You Can Find More Information.
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RISK FACTORS
The nature of our business activities subjects us to certain hazards and risks. Additionally, limited partner interests are inherently
different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. You should carefully consider the following risk
factors together with all of the other information included in this prospectus, any prospectus supplement and the information that we have incorporated herein by reference in evaluating an investment in our common units.
The risk factors set forth below are not the only risks that may affect our business. Our business could also be affected by additional
risks not currently known to us or that we currently deem to be immaterial. If any of the following risks were actually to occur, our business, financial condition or results of operations could be materially adversely affected. When we offer and
sell any common units pursuant to a prospectus supplement, we may include additional risk factors relevant to such securities in the prospectus supplement
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Risks Inherent in Our Dependence on Distributions from Inergy, L.P.
Our only cash-generating assets are our partnership interests in Inergy, L.P., and our cash flow is therefore completely dependent upon the ability of Inergy to make distributions to its partners.
The amount of cash that Inergy can distribute to its partners each quarter, including us, principally depends upon the amount of cash Inergy
generates from its operations, which amounts of cash will fluctuate from quarter to quarter based on, among other things:
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the weather in Inergys operating areas;
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the cost to Inergy of the propane it buys for resale;
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the level of competition from other propane companies, natural gas storage providers and natural gas processors;
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other energy providers; and
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the prevailing economic conditions.
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In addition, the actual amount of cash Inergy will have available for distribution will depend on other factors, some of which are beyond its control, including:
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the level of capital expenditures Inergy makes;
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the cost of acquisitions or expansions, if any;
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debt service requirements;
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the price and availability of debt and equity financing;
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fluctuations in working capital needs;
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restrictions on distributions contained in Inergys credit facility and senior notes;
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Inergys ability to borrow under its working capital facility to make distributions;
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prevailing economic conditions; and
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the amount, if any, of cash reserves established by Inergys managing general partner, in its sole discretion, for the conduct of Inergys
business.
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If Inergy reduced its per unit distribution to its partners, we would have less cash available
for distribution to our unitholders and would probably be required to reduce our per unit distribution. Furthermore, the amount of cash that Inergy has available for distribution depends primarily upon its cash flow, including cash flow from
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financial reserves and working capital borrowings, and is not solely a function of profitability. As a result, Inergy may be able to make cash distributions during periods when Inergy records
losses and may not be able to make cash distributions during periods when Inergy records net income. Please read Risks Inherent in Inergy, L.P.s Business for a discussion of risks affecting Inergys ability to generate
distributable cash flow.
To the extent we purchase additional units from Inergy, our rate of growth may be reduced.
Our business strategy includes supporting the growth of Inergy by purchasing Inergy securities or lending funds to
Inergy to provide funding for the acquisition of a business or asset or for an internal growth project. To the extent we purchase common units from Inergy, the rate of our distribution growth may be reduced, at least in the short term, as less of
our cash distributions will come from our ownership of Inergy incentive distribution rights, which distributions increase at a faster rate than those of our other Inergy securities.
The managing general partner of Inergy has the ability to limit or modify the incentive distributions we are entitled to receive in
order to facilitate the growth strategy of Inergy.
We hold incentive distribution rights in Inergy that entitle us to
receive increasing percentages, up to a maximum of 48%, of any cash distributed by Inergy as certain target distribution levels are reached in excess of $0.33 per Inergy common unit in any quarter. A substantial portion of the cash flows we receive
from Inergy is provided by these incentive distributions. There may be instances in which the amount of cash we receive from the incentive distributions could limit Inergys growth through acquisitions or expansions. This is because a potential
acquisition or expansion might not be accretive to Inergys unitholders as a result of the significant portion of the cash flows attributable to such acquisition or expansion which otherwise would be paid as incentive distributions to us. By
limiting the level of incentive distributions in connection with a particular acquisition, expansion or issuance of units of Inergy, the cash flows associated with that acquisition or expansion could be accretive to Inergys unitholders as well
as substantially beneficial to us. Accordingly, in order to facilitate acquisitions and expansions by Inergy, the managing general partner of Inergy may elect to limit the incentive distributions we are entitled to receive in all instances or with
respect to a particular acquisition, expansion or unit issuance contemplated by Inergy. In doing so, the board of directors of the managing general partner of Inergy would be required to consider both its fiduciary obligations to investors in Inergy
as well as to us as its sole member. Our partnership agreement specifically permits our general partner to authorize the managing general partner of Inergy to limit or modify the incentive distribution rights held by us without approval by our
unitholders, if our general partner determines that such limitation or modification does not adversely affect our limited partners in any material respect. If distributions on the incentive distribution rights were reduced for the benefit of the
Inergy common units, the total amount of cash distributions we would receive from Inergy, and therefore the amount of cash distributions we could pay to our unitholders, would be reduced.
A reduction in Inergys distributions will disproportionately affect the amount of cash distributions to which we are currently
entitled.
Our ownership of the incentive distribution rights in Inergy entitles us to receive our pro rata share of
specified percentages of total cash distributions made by Inergy with respect to any particular quarter only in the event that Inergy distributes more than $0.33 per unit for such quarter. As a result, the holders of Inergys common units have
a priority over the holders of Inergys incentive distribution rights to the extent of cash distributions by Inergy up to and including $0.33 per unit for any quarter.
Our incentive distribution rights entitle us to receive increasing percentages, up to 48%, of all cash distributed by Inergy. Because the
incentive distribution rights currently participate at the maximum 48% target cash distribution level in all distributions made by Inergy above the current distribution level, future growth in distributions we receive from Inergy will not result
from an increase in the target cash distribution level associated with the incentive distribution rights. Furthermore, a decrease in the amount of distributions by Inergy to less than $0.45 per common unit per quarter would reduce our percentage of
the incremental cash distributions
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above $0.375 per common unit per quarter from 48% to 23%. As a result, any such reduction in quarterly cash distributions from Inergy would have the effect of disproportionately reducing the
amount of all distributions that we receive from Inergy based on our ownership interest in the incentive distribution rights in Inergy as compared to cash distributions we receive from Inergy on our approximate 0.8% general partner interest in
Inergy and our Inergy common units.
The amount of cash distributions from Inergy that we will be able to distribute to
our unitholders will be reduced by general and administrative expenses and debt service, and reserves that our general partner believes prudent to maintain for the proper conduct of our business and for future distributions.
Before we can pay distributions to our unitholders, we must first pay or reserve funds for our expenses, including debt service. We may also
establish reserves for future distributions during periods of limited cash flows. In addition, we may reserve funds to meet the right of our wholly owned subsidiary, Inergy Partners, LLC, to maintain its approximate 0.8% general partner interest in
Inergy by making a capital contribution to Inergy when Inergy issues additional Inergy common units.
Risks Inherent in Inergy, L.P.s
Business
Because we are substantially dependent on the distributions we receive from Inergy, risks to Inergys
operations are also risks to us. We have set forth below risks to Inergys business and operations, the occurrence of which could negatively impact Inergys financial performance and decrease the amount of cash it is able to distribute to
us.
Inergys future acquisitions and completion of its expansion projects will require significant amounts of debt
and equity financing, which may not be available to Inergy on acceptable terms, or at all.
Inergy plans to fund its
acquisitions and expansion capital expenditures, including any future expansions it may undertake, with proceeds from sales of its debt and equity securities and borrowings under its revolving credit facility; however, Inergy cannot be certain that
it will be able to issue its debt and equity securities on terms or in the proportions that it expects, or at all, and Inergy may be unable to refinance its revolving credit facility when it expires. In addition, Inergy may be unable to obtain
adequate funding under its current revolving credit facility because its lending counterparties may be unable to meet their funding obligations.
Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been distressed. These issues, along with significant
write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions may make it difficult to obtain funding.
The cost of raising money in the debt and equity capital markets has increased while the availability of funds from those markets generally has diminished. Also, as a result of concerns about the
stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at maturity or on terms similar to Inergys current debt and reduced and, in some cases, ceased to provide funding to borrowers.
A significant increase in Inergys indebtedness, or an increase in Inergys indebtedness that is proportionately greater than its
issuances of equity, as well as the credit market and debt and equity capital market conditions discussed above could negatively impact Inergys credit ratings or its ability to remain in compliance with the financial covenants under its
revolving credit agreement which could have a material adverse effect on Inergys financial condition, results of operations and cash flows. If Inergy is unable to finance acquisitions or our expansion projects as expected, Inergy could be
required to seek alternative financing, the terms of which may not be attractive, or to revise or cancel its expansion plans.
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If Inergy does not continue to make acquisitions on economically acceptable terms, its
future financial performance may be limited.
Due to increased competition from alternative energy sources, the propane
industry is not a growth industry. In addition, as a result of long-standing customer relationships that are typical in the retail home propane industry, the inconvenience of switching tanks and suppliers and propanes higher cost as compared
to other energy sources, Inergy may have difficulty in increasing its retail customer base other than through acquisitions. Therefore, while Inergys operating objectives include promoting internal growth, its ability to grow will depend
principally on acquisitions. Inergys future financial performance depends on its ability to continue to make acquisitions at attractive prices. We cannot assure our unitholders that Inergy will be able to continue to identify attractive
acquisition candidates in the future or that it will be able to acquire businesses on economically acceptable terms. In particular, competition for acquisitions in the propane business has intensified and become more costly. Inergy may not be able
to grow as rapidly as it expects through its acquisition of additional businesses for various reasons, including the following:
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Inergy will use its cash from operations primarily to service its debt and for distributions to unitholders and reinvestment in its business.
Consequently, the extent to which Inergy is unable to use cash or access capital to pay for additional acquisitions may limit its growth and impair its operating results. Further, Inergy is subject to certain debt incurrence covenants under its bank
credit agreement and the indentures that govern its senior notes that may restrict its ability to incur additional debt to finance acquisitions.
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Although Inergy intends to use its own securities as acquisition currency, some prospective sellers may not be willing to accept Inergy securities as
consideration.
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Inergy will use cash for capital expenditures related to expansion projects, which will reduce its cash available to pay for additional acquisitions.
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Moreover, acquisitions involve potential risks, including:
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Inergys ability to integrate the operations of recently acquired businesses;
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the diversion of managements attention from other business concerns;
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customer or key employee loss from the acquired businesses; and
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a significant increase in Inergys indebtedness.
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Inergys growth strategy includes acquiring entities with lines of business that are distinct and separate from its existing operations that could subject Inergy to additional business and
operating risks.
Consistent with Inergys announced growth strategy and its acquisition of the US Salt facility
and related assets, Inergy 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 has limited operating experience. Failure to timely and successfully integrate acquired entities new lines of business with Inergys existing operations may have a material adverse effect on its business, financial condition
or results of operations. The difficulties of integrating new business segments with existing operations include, among other things:
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operating distinct business segments that require different operating strategies and different managerial expertise;
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the necessity of coordinating organizations, systems and facilities in different locations;
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integrating personnel with diverse business backgrounds and organizational cultures; and
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consolidating corporate and administrative functions.
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In addition, the diversion of Inergys attention and any delays or difficulties
encountered in connection with the integration of the new business segments, such as unanticipated liabilities or costs, could harm its existing business, results of operations, financial condition or prospects. Furthermore, new lines of business
will subject Inergy to additional business and operating risks which could have a material adverse effect on its financial condition or results of operations.
Inergy may be unable to successfully integrate its recent acquisitions.
One of Inergys primary business strategies is to grow through acquisitions. We cannot assure our unitholders that Inergy will successfully integrate acquisitions into its operations or that it will achieve the desired profitability
from its acquisitions. Failure to successfully integrate these substantial acquisitions could adversely affect Inergys operations. The difficulties of combining the acquired operations include, among other things:
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operating a significantly larger combined organization and integrating additional retail and wholesale distribution operations to Inergys
existing supply, marketing and distribution operations;
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coordinating geographically disparate organizations, systems and facilities;
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integrating personnel from diverse business backgrounds and organizational cultures;
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consolidating corporate, technological and administrative functions;
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integrating internal controls, compliance under the Sarbanes-Oxley Act of 2002 and other corporate governance matters;
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the diversion of managements attention from other business concerns;
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customer or key employee loss from the acquired businesses;
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a significant increase in Inergys indebtedness; and
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potential environmental or regulatory liabilities and title problems.
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In addition, Inergy may not realize all of the anticipated benefits from its acquisitions, such as cost savings and revenue enhancements,
for various reasons, including difficulties integrating operations and personnel, higher costs, unknown liabilities and fluctuations in markets.
Inergys indebtedness may limit its ability to borrow additional funds, make distributions to its unitholders, or capitalize on acquisition or other business opportunities, in addition to
impairing its ability to fulfill its debt obligation under its senior notes.
As of September 30, 2009, Inergy had
$1.1 billion of total outstanding indebtedness. Inergys leverage, various limitations in its credit facility, other restrictions governing its indebtedness and the indentures governing Inergys senior notes may reduce its ability to incur
additional indebtedness, to engage in some transactions and to capitalize on acquisition or other business opportunities.
Inergys indebtedness and other financial obligations could have important consequences to unitholders. For example, they could:
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make it more difficult for Inergy to make distributions to its unitholders;
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impair Inergys ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general partnership
purposes or other purposes;
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result in higher interest expense in the event of increases in interest rates since some of Inergys debt is, and will continue to be, at variable
rates of interest;
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have a material adverse effect on Inergy if it fails to comply with financial and restrictive covenants in its debt agreements and an event of default
occurs as a result of that failure that is not cured or waived;
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require Inergy to dedicate a substantial portion of its cash flow to payments of Inergys indebtedness and other financial obligations, thereby
reducing the availability of Inergys cash flow to fund working capital, capital expenditures and other general partnership requirements;
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limit Inergys flexibility in planning for, or reacting to, changes in its business and the propane industry; and
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place Inergy at a competitive disadvantage compared to its competitors that have proportionately less debt.
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If Inergy is unable to meet its debt service obligations and other financial obligations, it could be forced to restructure or refinance its
indebtedness and other financial transactions, seek additional equity capital or sell its assets. Inergy may then be unable to obtain such financing or capital or sell its assets on satisfactory terms, if at all.
A change of control could result in Inergy facing substantial repayment obligations under its credit facility and its senior notes.
Inergys bank credit agreement and the indentures governing its senior notes contain provisions relating to
change of control of Inergys managing general partner, the partnership, and Inergys operating company. If these provisions are triggered, Inergys outstanding bank indebtedness may become due. In such an event, there is no assurance
that Inergy would be able to pay the indebtedness, in which case the lenders under Inergys credit facility would have the right to foreclose on Inergys assets, which would have a material adverse effect on Inergy. There is no restriction
on the ability of Inergys general partners to enter into a transaction which would trigger the change of control provisions.
Restrictive covenants in the agreements governing Inergys indebtedness may reduce its operating flexibility.
The indentures governing Inergys outstanding senior notes and agreements governing Inergys revolving credit facilities and other future indebtedness contain or may contain various covenants
limiting Inergys ability and the ability of specified subsidiaries of Inergy to, among other things:
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pay distributions on, redeem or repurchase Inergys equity interests or redeem or repurchase Inergys subordinated debt;
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incur or guarantee additional indebtedness or issue preferred securities;
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create or incur certain liens;
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enter into agreements that restrict distributions or other payments from Inergys restricted subsidiaries to Inergy;
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consolidate, merge or transfer all or substantially all of Inergys assets;
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engage in transactions with affiliates;
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create unrestricted subsidiaries; and
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create non-guarantor subsidiaries.
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These restrictions could limit Inergys ability and the ability of its subsidiaries to obtain future financings, make needed capital expenditures, withstand a future downturn in Inergys
business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. Inergys bank credit agreement contains covenants requiring it to maintain specified financial ratios and satisfy other
financial conditions. Inergy may be unable to meet those ratios and conditions. Any future breach of these covenants and
10
Inergys failure to meet any of those ratios and conditions could result in a default under the terms of Inergys bank credit agreement, which could result in the acceleration of
Inergys debt and other financial obligations. If Inergy were unable to repay these amounts, the lenders could initiate a bankruptcy proceeding or liquidation proceeding or proceed against the collateral.
Inergy is subject to operating and litigation risks that could adversely affect its operating results to the extent not covered by
insurance.
Inergys operations are subject to all operating hazards and risks incident to handling, storing,
transporting and providing customers with combustible products such as propane and natural gas. As a result, Inergy has been, and likely will be, a defendant in legal proceedings and litigation arising in the ordinary course of business. Inergy
maintains insurance policies with insurers in such amounts and with such coverages and deductibles as it believes are reasonable and prudent. However, Inergys insurance may not be adequate to protect it from all material expenses related to
potential future claims for personal injury and property damage. In addition, the occurrence of a serious accident, whether or not Inergy is involved, may have an adverse effect on the publics desire to use its products.
Inergys operations are subject to compliance with environmental laws and regulations that can adversely affect Inergys
results of operations and financial condition.
Inergys operations are subject to stringent environmental laws
and regulations of federal, state and local authorities. Such environmental laws and regulations impose numerous obligations, including the acquisition of permits to conduct regulated activities, the incurrence of capital expenditures to comply with
applicable laws, and restrictions on the generation, handling, treatment, storage, disposal, and transportation of certain materials and wastes. Failure to comply with such environmental laws and regulations can result in the assessment of
substantial administrative, civil, and criminal penalties, the imposition of remedial liabilities and even the issuance of injunctions restricting or prohibiting Inergys activities. Certain environmental laws impose strict, joint and several
liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. In the course of Inergys operations, materials or wastes may have been spilled or released from properties owned or
leased by Inergy or on or under other locations where these materials or wastes have been taken for disposal. In addition, many of the properties owned or leased by Inergy were previously operated by third parties whose management, disposal, or
release of materials and wastes was not under Inergys control. Accordingly, Inergy may be liable for the costs of cleaning up or remediating contamination arising out of its operations or as a result of activities by others who previously
occupied or operated on properties now owned or leased by Inergy. It is also possible that adoption of stricter environmental laws and regulations or more stringent interpretation of existing environmental laws and regulations in the future could
result in additional costs or liabilities to Inergy as well as the industry in general.
Cost reimbursements due
Inergys managing general partner may be substantial and will reduce the cash available for principal and interest on Inergys outstanding indebtedness.
Inergy reimburses its managing general partner and its affiliates, including officers and directors of its managing general partner, for all expenses they incur on Inergys behalf. The reimbursement
of expenses could adversely affect Inergys ability to make payments of principal and interest on our outstanding indebtedness. Inergys managing general partner has sole discretion to determine the amount of these expenses. In addition,
Inergys managing general partner and its affiliates provide Inergy with services for which Inergy is charged reasonable fees as determined by Inergys managing general partner in its sole discretion.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could cause Inergy to
incur additional expenditures of time and financial resources.
Inergy has completed the process of documenting and
testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management
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assessments of the effectiveness of its internal controls over financial reporting and a report by its independent registered public accounting firm on its controls over financial reporting. If,
in the future, Inergy fails to maintain the adequacy of its internal controls, as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that it has effective
internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could cause Inergy to incur substantial expenditures of management
time and financial resources to identify and correct any such failure.
Climate change legislation, regulatory
initiatives and litigation may adversely affect Inergys operations.
On April 17, 2009, the EPA issued a
notice of its proposed finding and determination that emissions of carbon dioxide, methane and other greenhouse gases presented an endangerment to human health and the environment because emissions of such gases are, according to EPA,
contributing to warming of the earths atmosphere and other climatic changes. Once finalized, EPAs finding and determination would allow the agency to begin regulating emissions of greenhouse gases under existing provisions of the federal
Clean Air Act. In late September 2009, EPA proposed two sets of regulations in anticipation of finalizing its findings and determination, one rule to reduce emissions of greenhouse gases from motor vehicles and the other to control emissions of
greenhouse gases from stationary sources. Although the motor vehicle rules are expected to be adopted in March 2010, it may take EPA several years to adopt and impose regulations limiting emissions of greenhouse gases from stationary sources. Any
limitation on emissions of greenhouse gases from Inergys equipment and operations could require it to incur costs to reduce emissions of greenhouse gases associated with its operations.
Also, on June 26, 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, or
ACESA, which would establish an economy-wide cap-and-trade program to reduce U.S. emissions of greenhouse gases including carbon dioxide and methane that may contribute to warming of the Earths atmosphere and other
climatic changes. ACESA would require a 17% reduction in greenhouse gas emissions from 2005 levels by 2020 and just over an 80% reduction of such emissions by 2050. Under this legislation, the EPA would issue a capped and steadily declining number
of tradable emissions allowances to major sources of greenhouse gas emissions, including producers of NGLs (i.e., natural gas fractionators), local distribution companies and certain industrial facilities, so that such sources could continue to emit
greenhouse gases into the atmosphere. These allowances would be expected to escalate significantly in cost over time. The U.S. Senate has begun work on its own legislation for restricting domestic greenhouse gas emissions and President Obama has
indicated his support of legislation to reduce greenhouse gas emissions through an emission allowance system. Although it is not possible at this time to predict when the Senate may act on climate change legislation or how any bill passed by the
Senate would be reconciled with ACESA, any future federal laws or implementing regulations that may be adopted to address greenhouse gas emissions could require Inergy to incur increased operating costs and could adversely affect demand for the
natural gas and NGL products and services Inergy provides.
Risks Related to Inergys Propane Operations
Since weather conditions may adversely affect the demand for propane, Inergys financial condition and results of operations are
vulnerable to, and will be adversely affected by, warm winters.
Weather conditions have a significant impact on the
demand for propane because Inergys customers depend on propane principally for heating purposes. As a result, warm weather conditions will adversely impact Inergys operating results and financial condition. Actual weather conditions can
substantially change from one year to the next. Furthermore, warmer than normal temperatures in one or more regions in which Inergy operates can significantly decrease the total volume of propane it sells. Consequently, Inergys operating
results may vary significantly due to actual changes in temperature. During seven of the last ten fiscal years temperatures were significantly warmer than normal in Inergys areas of operation (based on the 30-year average consisting of years
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1976 through 2005 published by the National Oceanic and Atmospheric Administration). We believe that Inergys results of operations during these periods were adversely affected as a result
of this warm weather.
Sudden and sharp propane price increases that cannot be passed on to customers may adversely
affect Inergys profit margins.
The propane industry is a margin-based business in which gross
profits depend on the excess of sales prices over supply costs. As a result, Inergys profitability is sensitive to changes in wholesale prices of propane caused by changes in supply or other market conditions. When there are sudden and sharp
increases in the wholesale cost of propane, Inergy may not be able to pass on these increases to its customers through retail or wholesale prices. Propane is a commodity and the price Inergy pays for it can fluctuate significantly in response to
changes in supply or other market conditions. Inergy has no control over supply or market conditions. In addition, the timing of cost pass-throughs can significantly affect margins. Sudden and extended wholesale price increases could reduce
Inergys gross profits and could, if continued over an extended period of time, reduce demand by encouraging its retail customers to conserve or convert to alternative energy sources.
The highly competitive nature of the retail propane business could cause Inergy to lose customers or affect its ability to acquire new
customers, thereby reducing its revenues.
Inergy has competitors and potential competitors who are larger and have
substantially greater financial resources than it does. Also, because of relatively low barriers to entry into the retail propane business, numerous small retail propane distributors, as well as companies not engaged in retail propane distribution,
may enter Inergys markets and compete with it. Most of Inergys propane retail branch locations compete with several marketers or distributors. The principal factors influencing competition with other retail marketers are:
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reliability and quality of service;
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responsiveness to customer needs;
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long-standing customer relationships;
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the inconvenience of switching tanks and suppliers; and
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the lack of growth in the industry.
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We can make no assurances that Inergy will be able to compete successfully on the basis of these factors. If a competitor attempts to increase market share by reducing prices, Inergy may lose customers,
which would reduce its revenues.
If Inergy is not able to purchase propane from its principal suppliers, Inergys
results of operations would be adversely affected.
Most of Inergys total volume purchases are made under supply
contracts that have a term of one year, are subject to annual renewal, and provide various pricing formulas. Two of Inergys suppliers, BP Amoco Corp. (12%) and Sunoco, Inc. (11%), accounted for 23% of propane purchases during the fiscal
year ended September 30, 2009. In the event that Inergy is unable to purchase propane from its significant suppliers, Inergys failure to obtain alternate sources of supply at competitive prices and on a timely basis may hurt its ability
to satisfy customer demand, reduce its revenues and adversely affect its results of operations.
Competition from other
energy sources may cause Inergy to lose customers, thereby reducing its revenues.
Competition from other energy
sources, including natural gas and electricity, has been increasing as a result of reduced regulation of many utilities, including natural gas and electricity. Propane is generally not competitive
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with natural gas in areas where natural gas pipelines already exist because natural gas is a less expensive source of energy than propane. The gradual expansion of natural gas distribution
systems and availability of natural gas in many areas that previously depended upon propane could cause Inergy to lose customers, thereby reducing its revenues.
Inergys business would be adversely affected if service at its principal storage facilities or on the common carrier pipelines it uses is interrupted.
Historically, a substantial portion of the propane purchased to support Inergys operations has originated at Conway, Kansas,
Hattiesburg, Mississippi and Mont Belvieu, Texas and has been shipped to it through major common carrier pipelines. Any significant interruption in the service at these storage facilities or on the common carrier pipelines Inergy uses would
adversely affect its ability to obtain propane.
If Inergy is not able to sell propane that it has purchased through
wholesale supply agreements to either its own retail propane customers or to other retailers and wholesalers, the results of its operations would be adversely affected.
Inergy currently is party to propane supply contracts and expects to enter into additional propane supply contracts which require it to
purchase substantially all the propane production from certain refineries. Inergys inability to sell the propane supply in its own propane distribution business, to other retail propane distributors or to other propane wholesalers would have a
substantial adverse impact on its operating results and could adversely impact its capital liquidity. Inergy is also a party to fixed price sale contracts with certain customers that are backed-up by propane supply contracts. If a significant number
of Inergys customers default under these fixed price contracts, the results of Inergys operations would be adversely affected.
Energy efficiency and new technology may reduce the demand for propane and adversely affect Inergys operating results.
Increased conservation and technological advances, including installation of improved insulation and the development of more efficient
furnaces and other heating devices, have adversely affected the demand for propane by retail customers. Future conservation measures or technological advances in heating, conservation, energy generation or other devices might reduce demand for
propane and adversely affect Inergys operating results.
Due to Inergys limited asset diversification,
adverse developments in its propane business could adversely affect Inergys operating results and reduce its ability to make distributions to its unitholders.
Inergy relies substantially on the revenues generated from its propane business. Due to Inergys limited asset diversification, an
adverse development in this business would have a significantly greater impact on Inergys financial condition and results of operations than if it maintained more diverse assets.
Risks Related to Inergys Midstream Operations
Federal, state
or local regulatory measures could adversely affect Inergys business.
Inergys operations are subject to
federal, state and local regulatory authorities. Specifically, Inergys natural gas storage facilities are subject to the regulation of the Federal Energy Regulatory Commission (FERC).
Under the Natural Gas Act of 1938 (NGA), FERC has authority to regulate Inergys natural gas facilities that provide
natural gas transportation services in interstate commerce, including storage services. FERCs authority to regulate those services includes the rates charged for the services, terms and conditions of service, certification and construction of
new facilities, the extension or abandonment of services and facilities, the
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maintenance of accounts and records, the acquisition and disposition of facilities, the initiation and discontinuation of services, relationships with affiliated entities, and various other
matters. Natural gas companies may not charge rates that, upon review by FERC, are found to be unjust and unreasonable or unduly discriminatory. In addition, FERC prohibits natural gas companies from unduly preferring or unreasonably discriminating
against any person with respect to pipeline transportation rates or terms and conditions of service. The rates and terms and conditions for interstate services provided by the Steuben facility are found in the FERC-approved tariff of Steuben Gas
Storage Company. The rates and terms and conditions for interstate services provided by Stagecoach are found in the FERC-approved tariff of Central New York Oil and Gas Company, LLC (CNYOG), Inergys subsidiary and owner of the
Stagecoach facility. The rates and terms and conditions for interstate services provided by the Thomas Corners facility are found in the FERC-approved tariff of Arlington Storage Company, LLC (ASC), Inergys subsidiary and owner of
the Thomas Corners facility.
Pursuant to the NGA, existing interstate transportation and storage rates may be challenged by
complaint and are subject to prospective change by FERC. Additionally, rate increases proposed by the regulated pipeline or storage provider may be challenged by protest and such increases may ultimately be rejected by FERC. CNYOG and ASC currently
hold authority from FERC to charge and collect market-based rates for services provided at the Stagecoach facility and the Thomas Corners facility, respectively. There can be no guarantee that CNYOG and ASC will be allowed to continue to operate
under such a rate structure for the remainder of the Stagecoach and Thomas Corners facilities operating lives. Any successful complaint or protest against rates charged for CNYOGs and ASCs storage and related services, or
CNYOGs or ASCs loss of market-based rate authority, could have an adverse impact on Inergys revenues.
In
addition, CNYOG or ASCs market-based rate authority would be subject to further review if it acquires transportation facilities or additional storage capacity, if Inergy or one of its affiliates provides storage or transportation services in
the same market area or acquires an interest in another storage field that can link Inergys facilities to the market area or if Inergy or one of its affiliates acquire an interest in or is acquired by an interstate pipeline.
There can be no assurance that FERC will continue to pursue its approach of pro-competitive policies as it considers matters such as
pipeline rates and rules and policies that may affect rights of access to natural gas transportation capacity, transportation and storage facilities. Any successful complaint or protest against Inergys rates or loss of our market-based rate
authority could have an adverse impact on Inergys revenues associated with providing storage services. Failure to comply with applicable regulations under the NGA, Natural Gas Policy Act of 1978, Pipeline Safety Act of 1968 and certain other
laws, and with implementing regulations associated with these laws could result in the imposition of administrative and criminal remedies and civil penalties of up to $1,000,000 per day, per violation.
Inergys storage business depends on neighboring pipelines to transport natural gas.
Inergys Stagecoach natural gas storage business depends on Tennessee Gas Pipeline Companys 300-Line and the Millennium Pipeline,
currently the only pipelines to which it is interconnected, the Steuben natural gas storage facility depends on the Dominion Transmission System and the Thomas Corners natural gas storage facility depends on Tennessee Gas Pipeline Companys
400-Line and the Millennium Pipeline. These pipelines are owned by parties not affiliated with Inergy. Any interruption of service on the pipeline or lateral connections or adverse change in the terms and conditions of service could have a material
adverse effect on Inergys ability, and the ability of Inergys customers, to transport natural gas to and from Inergys facilities and have a corresponding material adverse effect on Inergys storage revenues. In addition, the
rates charged by the interconnected pipelines for transportation to and from Inergys facilities affect the utilization and value of our storage services. Significant changes in the rates charged by these pipelines or the rates charged by other
pipelines with which the interconnected pipelines compete could also have a material adverse effect on Inergys storage revenues.
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Inergy expects to derive a significant portion of its revenues from its natural gas
and LPG storage operations 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 expects to derive a significant portion of its revenues and cash flow in connection with its natural gas and LPG storage operations
from a limited number of customers. The loss, nonpayment, nonperformance, or impaired creditworthiness of one of these customers could have a material adverse effect on Inergys business, results of operations and financial condition.
Inergy competes with other natural gas storage companies and services that can substitute for storage services.
Inergys principal competitors in its natural gas storage market include other storage providers including among
others Dominion Resources, Inc., NiSource Inc. and El Paso Corporation. These major natural gas transmission companies have existing storage facilities connected to their systems that compete with certain of Inergys facilities. FERC has
adopted a policy that favors authorization of new storage projects, and there are numerous natural gas storage options in the New York/Pennsylvania geographic market. Pending and future construction projects, if and when brought on line, may also
compete with Inergys natural gas storage operations. Such projects may include FERC-certificated storage expansions and greenfield construction projects. Inergy also competes with the numerous alternatives to storage available to customers,
including pipeline balancing/no-notice services, seasonal/swing services provided by pipelines and marketers, and on-system LNG facilities.
Expanding Inergys business by constructing new midstream assets subjects Inergy to risks.
One of the ways Inergy may grow its business is through the expansion of its existing assets, such as the Thomas Corners development, the West Coast expansion project and the Watkins Glenn LPG storage
facility. The construction of additional storage facilities or new pipeline interconnects involves numerous regulatory, environmental, political and legal uncertainties beyond Inergys control and may require the expenditure of significant
amounts of capital. If Inergy undertakes these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, Inergys revenues may not increase immediately upon the expenditure of funds on a particular project.
For instance, if Inergy builds a new midstream asset, the construction will occur over an extended period of time, and Inergy will not receive material increases in revenues until after the project is placed in service. Moreover, Inergy may
construct facilities to capture anticipated future growth in production and/or demand in a region in which such growth does not materialize. As a result, new facilities may not be able to attract enough throughput to achieve Inergys expected
investment return, which could adversely affect Inergys results of operations and financial condition.
Inergy may
not be able to retain existing customers or acquire new customers, which would reduce Inergys revenues and limit our future profitability.
The renewal or replacement of existing contracts with Inergys customers at rates sufficient to maintain current revenues and cash flows depends on a number of factors beyond Inergys control,
including competition from other pipelines and storage providers, and the price of, and demand for, natural gas in the markets Inergy serves. The inability to renew or replace its current contracts as they expire and to respond appropriately to
changing market conditions could have a negative effect on Inergys profitability.
The fees charged by Inergy to
third parties under transmission, transportation and storage agreements may not escalate sufficiently to cover increases in costs and the agreements may not be renewed or may be suspended in some circumstances.
Inergys costs may increase at a rate greater than the rate that the fees Inergy charges to third parties increase pursuant to our
contracts with them. Furthermore, third parties may not renew their contracts with Inergy. Additionally, some third parties obligations under their agreements with Inergy may be permanently or
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temporarily reduced upon the occurrence of certain events, some of which are beyond Inergys 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
Inergys equipment or facilities or those of third parties. If the escalation of fees is insufficient to cover increased costs, if third parties do not renew or extend their contracts with Inergy or if any third party suspends or terminates its
contracts with Inergy, Inergys financial results would be negatively impacted.
Inergys business would be
adversely affected if operations at any of its facilities were interrupted.
Inergys operations are dependent
upon the infrastructure that it has developed, including, storage facilities and various means of transportation. Any significant interruption at these facilities or pipelines or Inergys or its customers inability to transmit natural gas
to or from these facilities or pipelines for any reason would adversely affect Inergys results of operations.
Risks Inherent in an
Investment in Us
We are largely dependent on Inergy, L.P. for our growth. As a result of the fiduciary obligations
of Inergys managing general partner, which is our wholly owned subsidiary, to the unitholders of Inergy, our ability to pursue business opportunities independently will be limited.
We currently intend to grow primarily through the growth of Inergy. While we are not precluded from pursuing business opportunities
independent of Inergy, Inergys managing general partner, which is our wholly owned subsidiary, has fiduciary duties to Inergy unitholders which would make it difficult for us to engage in any business activity that is competitive with Inergy.
Those fiduciary duties are applicable to us because we control the managing general partner through our ability to elect all of its directors. While there may be circumstances in which these fiduciary duties may be satisfied while allowing us to
pursue business opportunities independent of Inergy, we expect such opportunities to be limited. Accordingly, we may be unable to diversify our sources of revenue in order to increase cash distributions to our unitholders. Please read
Risks Related to Conflicts of Interest.
A substantial portion of our partnership interests in Inergy
are restricted and some are not publicly traded, which may limit our ability to sell these interests as well as interests in other subsidiaries that we own.
We own 4,706,689 Inergy common units, the majority of which are unregistered and restricted securities, within the meaning of Rule 144 under the Securities Act of 1933. We therefore face restrictions on
the volume of Inergy common units we can sell in any three-month period. In addition, our investment in Inergys general partners and our ability to sell such interests is limited because there is no market for them.
Cost reimbursements due our general partner may be substantial and will reduce our cash available for distribution to holders of our
common units.
Prior to making any distribution on our common units, we reimburse our general partner for expenses it
incurs on our behalf. The reimbursement of expenses could adversely affect our ability to pay cash distributions to holders of our common units. Our general partner has sole discretion to determine the amount of these expenses. In addition, our
general partner and its affiliates may perform other services for us for which we will be charged fees as determined by our general partner.
The President and Chief Executive Officer of our general partner effectively controls us and Inergy through his control of our general partner and Inergys managing general partner.
The president and chief executive officer of both our general partner and Inergys managing general partner owns an
economic interest of 57.03% in our general partner and has voting control of our general partner. He
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therefore controls our general partner and through it, the managing general partner of Inergy and may be able to influence unitholder votes. Control over these entities gives our president and
chief executive officer substantial control over our and Inergys business and operations.
The control of our
general partner may be transferred to a third party, and that party could replace our current management team, in each case without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, there
is no restriction in our partnership agreement on the ability of the owners of our general partner to transfer their ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to
replace the board of directors and officers of our general partner with its own choices and to control the decisions taken by the board of directors and officers.
Our unitholders cannot easily remove our general partner.
Unlike
the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence managements decisions regarding our business. Our unitholders did not
elect our general partner or the directors of our general partner and will have no right to elect our general partner or the directors of our general partner on an annual or other continuing basis in the future.
Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little
ability to remove our general partner. Our general partner may not be removed except upon the vote of the holders of at least 66
2
/
3
% of the outstanding units voting together as a single class. Because affiliates of our general partner own more than one-third of our outstanding units, our general
partner currently cannot be removed without the consent of our general partner and its affiliates.
Our
unitholders voting rights are further restricted by the provision in our partnership agreement stating that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner and its
affiliates, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our
unitholders ability to influence the manner or direction of our management.
As a result of these provisions, the price
at which our common units trade may be lower because of the absence or reduction of a takeover premium in the trading price.
Inergys unitholders have the right to remove Inergys general partner with the approval of the holders of 66
2
/
3
% of all units, which would cause us to lose our general partner
interest in Inergy and the ability to manage Inergy.
We currently manage Inergy through
Inergy GP, LLC, Inergys managing general partner and our wholly owned subsidiary. Inergys partnership agreement, however, gives unitholders of Inergy the right to remove the managing general partner of Inergy upon the affirmative vote of
holders of 66
2
/
3
% of Inergys outstanding
units. If Inergy GP, LLC were removed as managing general partner of Inergy, Inergy Partners, LLC, Inergys non-managing general partner and our wholly owned subsidiary, would receive cash or common units in exchange for its approximate 0.8%
general partner interest and Inergy GP, LLC would lose its ability to manage Inergy. While the common units or cash we would receive are intended under the terms of Inergys partnership agreement to fully compensate us in the event such an
exchange is required, the value of these common units or investments we make with the cash over time may not be equivalent to the value of the general partner interest had we retained it.
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Inergy may issue additional Inergy common units, which may increase the risk that
Inergy will not have sufficient available cash to maintain or increase the per Inergy unit distribution level.
Inergy
has wide latitude to issue additional Inergy common units, including Inergy common units that rank senior to the incentive distributions rights as to quarterly cash distributions, on the terms and conditions established by Inergys managing
general partner. The payment of distributions on these additional Inergy common units may increase the risk that Inergy will be unable to maintain or increase the per Inergy unit distribution level.
If in the future we cease to manage and control Inergy through our direct and indirect ownership of the general partner interests in
Inergy, we may be deemed to be an investment company under the Investment Company Act of 1940.
If we cease to manage
and control Inergy and are deemed to be an investment company under the Investment Company Act of 1940, we would either have to register as an investment company under the Investment Company Act of 1940, obtain exemptive relief from the SEC or
modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with
affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are
independent of us or our affiliates.
You may not have limited liability if a court finds that unitholder action
constitutes control of our business.
Under Delaware law, you could be held liable for our obligations to the same
extent as a general partner if a court determined that the right or the exercise of the right by our unitholders as a group to remove or replace our general partner, to approve some amendments to the partnership agreement or to take other action
under our partnership agreement constituted participation in the control of our business.
Our general partner
generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner.
In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some
circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution. Please read Material Provisions of Our Partnership AgreementLimited Liability for a
discussion of the implications of the limitations on liability to a unitholder.
Restrictions in our credit facility
could limit our ability to make distributions to our unitholders.
Our credit facility contains covenants limiting our
ability to incur indebtedness, grant liens, engage in transactions with affiliates and make distributions to our unitholders. This facility also contains covenants requiring us to maintain certain financial ratios. We are prohibited from making any
distribution to unitholders if such distribution would cause an event of default or otherwise violate a covenant under this facility.
We may issue an unlimited number of limited partner interests without the consent of our unitholders, which will dilute a unitholders ownership interest in us and may increase the risk that we will not have sufficient available
cash to maintain or increase our per unit distribution level .
Our general partner may cause us to issue an unlimited
number of limited partner interests of any type, on terms and conditions established by our general partner, without unitholder approval. Such issuances may occur in connection with acquisitions or capital improvements by us or by Inergy or as a
result of grants made under our long-term incentive plan.
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The issuance of additional common units or other equity securities of equal rank will have
the following effects:
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our unitholders proportionate ownership interest in us will decrease;
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the amount of cash available for distribution on each common unit may decrease;
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the relative voting strength of each previously outstanding common unit may be diminished;
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the ratio of taxable income to distributions may increase; and
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the market price of the common units may decline.
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Furthermore, our partnership agreement does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time.
Our cash distribution policy limits our ability to grow.
Because we distribute all of our available cash, our growth may not be as rapid as businesses that reinvest their available cash to expand
ongoing operations. In fact, our growth initially will be completely dependent upon Inergys ability to increase its quarterly distribution per unit because currently our only cash-generating assets are partnership interests in Inergy. If we
issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per
unit distribution level.
We are required to evaluate our internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse affect on our financial results and the market price of our
common units.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual
review and evaluation of our internal control systems, and attestation of these systems by our independent auditors. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, investors could
lose confidence in the reliability of our financial statements, which could result in a decrease in the market price of our common units. In addition, to the extent we or our independent registered public accounting firm identify a significant
deficiency in our internal control over financial reporting, the resources and costs required to remediate such deficiency could have an adverse impact on our future results of operations.
Risks Related to Conflicts of Interest
Although we control Inergy through our ownership of its managing general partner, Inergys managing general partner owes fiduciary duties to Inergy and Inergys unitholders, which may
conflict with our interests.
Conflicts of interest exist and may arise in the future as a result of the relationships
between us and our affiliates, including Inergys managing general partner, on the one hand, and Inergy and its limited partners, on the other hand. The directors and officers of Inergy GP, LLC have fiduciary duties to manage Inergy in a manner
beneficial to us, its owner. At the same time, the managing general partner has a fiduciary duty to manage Inergy in a manner beneficial to Inergy and its limited partners. The board of directors of Inergy GP, LLC will resolve any such conflict and
has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.
For example, conflicts of interest may arise in the following situations:
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the allocation of shared overhead expenses to Inergy and us;
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the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and Inergy, on the other hand;
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the determination of the amount of cash to be distributed to Inergys partners and the amount of cash to be reserved for the future conduct of
Inergys business;
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the determination of whether Inergy should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital
projects, repay indebtedness, meet working capital needs, pay distributions to Inergys partners or otherwise;
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the determination of the terms and purchase price applicable to any class of units sold in a private placement between us and Inergy; and
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any decision we make in the future to engage in business activities independent of Inergy.
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The fiduciary duties of our general partners officers and directors may conflict with those of Inergy GP, LLC, Inergys
managing general partner.
Conflicts of interest may arise because of the relationships between Inergy GP, LLC, Inergy
and us. Our general partners directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. Simultaneously, a majority of our general partners directors and all of its officers are
also directors and officers of Inergy GP, LLC, Inergys managing general partner, and have fiduciary duties to manage the business of Inergy in a manner beneficial to Inergy and Inergys unitholders. The resolution of these conflicts may
not always be in our best interest or that of our unitholders.
Our general partner has conflicts of interest and
limited fiduciary responsibilities to us, which may allow it to favor its own interests to the detriment of our unitholders.
Our general partner owns a non-economic general partner interest in us, and certain named executive officers and directors of our general partner and certain named executive officers and directors of the managing general partner of Inergy
own an approximate 46.0% limited partner interest in us. In addition, certain officers of our general partner and certain officers and directors of the managing general partner of Inergy own approximately 65.8% of our general partner.
Conflicts of interest may arise between our general partner and us. As a result of these conflicts, our general partner may favor its own
interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:
Conflicts Relating to Control:
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our general partner is allowed to take into account the interests of parties other than us, including Inergy and its affiliates and any other
businesses acquired in the future, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
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our general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to our unitholders for
actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other
duties under applicable state law;
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our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates;
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our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and
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our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business. These
reserves also affect the amount of cash available for distribution.
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Conflicts Relating to Costs:
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our general partner determines the amount and timing of investment transactions, asset purchases and sales, capital expenditures, borrowings, issuance
of additional partnership securities and reserves, each of which can affect the amount of cash that is distributed to our unitholders;
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our general partner determines which of the costs incurred by our general partner and its affiliates are reimbursable by us; and
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our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are
fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf.
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Our general partner may not be fully reimbursed for the use of its officers and employees by Inergys managing general partner.
Our general partner shares officers and administrative personnel with Inergys managing general partner to operate both our business and
Inergys business. In that case, our general partners officers, who are also the officers of Inergys managing general partner, allocate, in their reasonable and sole discretion, the time its employees spend on our behalf and on
behalf of Inergy. These allocations may not necessarily be the result of arms-length negotiations between Inergys managing general partner and our general partner. Although our general partner intends to be reimbursed for its employees
activities, due to the nature of the allocations, this reimbursement may not exactly match the actual time and overhead spent.
Our partnership agreement contains provisions that reduce the remedies available to unitholders for actions that might otherwise constitute a breach of fiduciary duty by our general partner. It will be difficult for a unitholder to
challenge a resolution of a conflict of interest by our general partner or by its conflicts committee.
Whenever our
general partner makes a determination or takes or declines to take any other action in its capacity as our general partner, it will be obligated to act in good faith, which means it must reasonably believe that the determination or other action is
in our best interests. Whenever a potential conflict of interest exists between us and our general partner, our general partner may resolve such conflict of interest. If our general partner determines that its resolution of the conflict of interest
is on terms no less favorable to us than those generally being provided to or available from unrelated third parties or is fair and reasonable to us, taking into account the totality of the relationships between us and our general partner, then it
shall be presumed that in making this determination, our general partner acted in good faith. A unitholder seeking to challenge this resolution of the conflict of interest would bear the burden of overcoming such presumption. This is different from
the situation with Delaware corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair.
Furthermore, if our general partner obtains the approval of our conflicts committee, the resolution will be conclusively deemed to be fair
and reasonable to us and not a breach by our general partner of any duties it may owe to us or our unitholders. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of
independent directors would merely shift the burden of demonstrating unfairness to the plaintiff. If you chose to purchase a common unit, you will be treated as having consented to the various actions contemplated in our partnership agreement and
conflicts of interest that might otherwise be considered a breach of fiduciary duties under applicable state law. As a result, unitholders will effectively not be able to challenge a decision by the conflicts committee.
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Unlike Inergy and most other master limited partnerships, which require at least two
independent members of the conflicts committee, our partnership agreement provides that a conflicts committee may be comprised of one or more directors. If we establish a conflicts committee with only one director, your interests may not be as well
served as if we had a conflicts committee with at least two independent directors. A single member committee would not have the benefit of discussion with and input from other independent directors.
Our general partner has a limited call right that may require unitholders to sell common units at an undesirable time or price.
If at any time less than 85% of the total limited partner interests of any class then outstanding is held by persons
other than our general partner and its affiliates, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining common units held by
unaffiliated persons at a price not less than their then-current market price. As a result, our unitholders may be required to sell common units at an undesirable time or price and may not receive any return on their investment. A unitholder may
also incur a tax liability upon a sale of common units.
Tax Risks to Our Common Unitholders
You should read Material Tax Consequences for a more complete discussion of the expected material federal income tax consequences
of owning and disposing of common units.
The tax treatment of publicly traded partnerships is subject to potential
legislative, judicial or administrative changes. If we or Inergy were treated as a corporation for federal income tax purposes, or if legislation is passed that may preclude us from qualifying for treatment as a partnership, or if we or Inergy were
to become subject to a material amount of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.
The value of our investment in Inergy depends largely on Inergy being treated as a partnership for federal income tax purposes, which
requires that 90% or more of Inergys gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Internal Revenue Code. Inergy may not meet this requirement or current law may change so as to cause,
in either event, Inergy to be treated as a corporation for federal income tax purposes or otherwise subject to federal income tax. Moreover, the anticipated after-tax benefit of an investment in our common units depends largely on our being treated
as a partnership for federal income tax purposes.
If we or Inergy were treated as a corporation for federal income tax
purposes, we or Inergy would pay federal income tax on our taxable income at the corporate tax rate. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow
through to us. As a result, there would be a material reduction in our anticipated cash flow and distributions to our unitholders, likely causing a substantial reduction in the value of our units.
Current law may change, causing us or Inergy to be treated as a corporation for federal income tax purposes or otherwise subjecting us or
Inergy to entity level taxation. In response to recent public offerings of interests of private equity funds and hedge funds, Congress is considering changes to Internal Revenue Code section 7704(d) (definition of qualifying income). We are unable
to predict whether legislation will be enacted or have any impact on us.
Because of widespread state budget deficits and
other reasons, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. For instance, Inergy will be subject to a new entity-level tax on the
portion of its income that is generated in Texas beginning in 2007. Imposition of such a tax upon us or Inergy as an entity will reduce, our cash available for distribution to our unitholders.
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Inergys partnership agreement provides that if a law is enacted or existing law is
modified or interpreted in a manner that subjects Inergy to taxation as a corporation or otherwise subjects Inergy to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target
distribution amounts will be adjusted to reflect the impact of that law on Inergy. Likewise, if we or Inergy is subjected to any such form of an entity-level taxation the cash available for distribution to our unitholders will be reduced.
If the IRS contests the federal income tax positions we or Inergy take, the market for our common units or Inergy units
may be adversely impacted, and the costs of any contest will reduce cash available for distribution to our unitholders.
The IRS may adopt positions that differ from the positions we or Inergy take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or Inergy take. A court may disagree with some or
all of the positions we or Inergy take. Any contest with the IRS may materially and adversely impact the market for our common units or Inergy units and the price at which they trade. In addition, the cost of any contest between Inergy and the IRS
will result in a reduction in cash available for distribution to Inergy unitholders and thus indirectly by us, as a unitholder and as the owner of the general partners of Inergy. Moreover, the costs of any contest between us and the IRS will result
in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.
Our unitholders may be required to pay taxes on income from us even if they do not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we will allocate taxable income, which could be different in amount than the cash we distribute, our unitholders are required to pay any federal
income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our
taxable income or even equal to the tax liability that results from the taxation of their share of our taxable income.
Tax gain or loss on disposition of our common units could be more or less than expected.
A unitholder
who sells common units will recognize a gain or loss equal to the difference between the amount realized and his adjusted tax basis in those common units. Prior distributions to a unitholder in excess of the total net taxable income allocated to
that unitholder, which decreased the tax basis in that unitholders common unit, will, in effect, become taxable income to that unitholder if the common unit is sold at a price greater than that unitholders tax basis in that common unit,
even if the price is less than the original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to that unitholder. In addition, if a unitholder sells units, the unitholder may incur a tax
liability in excess of the amount of cash received from the sale.
Tax-exempt entities, regulated investment companies
and foreign persons face unique tax issues from owning common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, including employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to
organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to such a unitholder. Distributions to non-U.S. persons will be reduced
by withholding taxes imposed at the highest effective applicable tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.
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The sale or exchange of 50% or more of our capital and profits interests within a
twelve-month period will result in the termination of our partnership for federal income tax purposes.
We will be
considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Likewise, Inergy will be considered to have
terminated its partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in Inergys capital and profits within a twelve-month period. A termination would, among other things, result in the
closing of our or Inergys taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income for the year in which the termination occurs. Thus, if this occurs our unitholders
will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated as a percentage of the cash distributed to unitholders with respect to that period. Although the amount of increase cannot be
estimated because it depends upon numerous factors including the timing of the termination, the amount could be material. Our termination, or the termination of Inergy, currently would not affect our classification, or the classification of Inergy,
as a partnership for federal income tax purposes, but instead, we or Inergy would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to
determine that a termination occurred. Please read Material Tax ConsequencesDisposition of Common UnitsConstructive Termination for a discussion of the consequences of our termination for federal income taxes purposes.
Our unitholders will likely be subject to state and local taxes and return filing requirements in states where they do
not live as a result of investing in our common units.
In addition to federal income taxes, our unitholders will
likely be subject to other taxes, including foreign taxes, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we or Inergy do business or own
property and in which they do not reside. We and Inergy own property and conduct business in numerous states in the United States. Unitholders may be required to file state and local income tax returns and pay state and local income taxes in many or
all of the jurisdictions in which we or Inergy do business or own property. Further, unitholders may be subject to penalties for failure to comply with those requirements. It is our unitholders responsibility to file all United States federal,
state, local and foreign tax returns.
Inergy has adopted certain valuation methodologies and monthly conventions that
may result in a shift of income, gain, loss and deduction between us and the public unitholders of Inergy. The IRS may challenge this treatment, which could adversely affect the value of Inergys common units and our common units.
When we or Inergy issue additional units or engage in certain other transactions, Inergy determines the fair market
value of its assets and allocates any unrealized gain or loss attributable to such assets to the capital accounts of Inergys public unitholders and us. The adopted methodology may be viewed as understating the value of Inergys assets. In
that case, there may be a shift of income, gain, loss and deduction between certain Inergy public unitholders and us, which may be unfavorable to such Inergy unitholders. Moreover, subsequent purchasers of our common units may have a greater portion
of their Internal Revenue Code Section 743(b) adjustment allocated to Inergys intangible assets and a lesser portion allocated to Inergys tangible assets. The IRS may challenge the adopted valuation methods, or our or Inergys
allocation of the Section 743(b) adjustment attributable to Inergys tangible and intangible assets, and allocations of income, gain, loss and deduction between us and certain of Inergys public unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to
our unitholders or Inergy unitholders. It also could affect the amount of gain on the sale of common units by our unitholders or Inergys unitholders and could have a negative impact on the value of our common units or those of Inergy or result
in audit adjustments to the tax returns of our or Inergys unitholders without the benefit of additional deductions.
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We treat each purchaser of common units as having the same tax benefits without regard
to the actual common units purchased. The IRS may challenge this treatment, which could result in a unitholder owing more tax and may adversely affect the value of the common units.
To maintain the uniformity of the economic and tax characteristics of our common units, we have adopted certain depreciation and amortization
positions that may not conform to all aspects of existing Treasury Regulations. These positions may result in an understatement of deductions and an overstatement of income to our unitholders. For example, we do not amortize certain goodwill assets,
the value of which has been attributed to certain of our outstanding units. A subsequent holder of those units may be entitled to an amortization deduction attributable to that goodwill under Internal Revenue Code Section 743(b). But, because
we cannot identify these units once they are traded by the initial holder, we do not allocate any subsequent holder of a unit any such amortization deduction. This approach may understate deductions available to those unitholders who own those units
and may result in those unitholders believing that they have a higher tax basis in their units than would be the case if the IRS strictly applied certain Treasury Regulations. This, in turn, may result in those unitholders reporting less gain or
more loss on a sale of their units than would be the case if the IRS strictly applied certain Treasury Regulations.
The IRS
may challenge the manner in which we calculate our unitholders basis adjustment under Section 743(b). If so, because neither we nor a unitholder can identify the units to which this issue relates once the initial holder has traded them,
the IRS may assert adjustments to all unitholders selling units within the period under audit as if all unitholders owned such units.
A successful IRS challenge to this position or other positions Inergy may take could adversely affect the amount of taxable income or loss allocated to Inergys unitholders. It also could affect the gain from a unitholders sale
of common units and could have a negative impact on the value of the common units or result in audit adjustments to Inergys unitholders tax returns without the benefit of additional deductions.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the
ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among
our unitholders.
Under the terms of our partnership agreement, we prorate our items of income, gain, loss and
deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may
not be permitted under Treasury Regulations. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
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USE OF PROCEEDS
Unless otherwise indicated to the contrary in an accompanying prospectus supplement relating to an offering, we intend to use the net
proceeds from the sale of the securities covered by this prospectus for general partnership purposes, which may include debt repayment, future acquisitions, capital expenditures, purchases of limited partnership interests of Inergy, L.P. and
additions to working capital.
Any specific allocation of the net proceeds of an offering of securities to a specific purpose
will be determined at the time of the offering and will be described in an accompanying prospectus supplement.
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DESCRIPTION OF THE COMMON UNITS
Our common units represent limited partner interests in Inergy Holdings, L.P. The holders of our common units are entitled to participate in
our distributions and exercise the rights or privileges available to limited partners under our partnership agreement. As of November 30, 2009, we had 20,277,361 common units issued and outstanding.
Timing of Distributions
We
pay distributions approximately 45 days after March 31, June 30, September 30 and December 31 to unitholders of record on the applicable record date.
Issuance of Additional Units
In general, we may issue additional common
units for any partnership purpose at any time and from time to time to such persons for such consideration and on such terms and conditions as our general partner shall determine, all without the approval of any limited partners.
Voting Rights
Unlike the holders of common stock in a corporation, our common unitholders have only limited voting rights on matters affecting our business. Our common unitholders have no right to elect our general partner or its directors on an annual
or other continuing basis. Our general partner may not be removed except by the vote of the holders of at least 66
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% of our outstanding common units, including common units owned by our general partner and its affiliates. Each holder of common units is entitled to one vote for each common unit
on all matters submitted to a vote of the unitholders.
Limited Call Right
If at any time less than 85% of the total limited partner interests of any class then outstanding is held by persons other than our general
partner and its affiliates, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price not less than the then current market price of the common units.
Exchange Listing
Our
common units trade on the Nasdaq Global Select Market under the symbol NRGP.
Transfer Agent and Registrar
Duties
. American Stock Transfer & Trust Company serves as registrar and transfer agent for our common units. We will pay all
fees charged by the transfer agent for transfers of our common units, except the following fees that will be paid by unitholders:
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surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges;
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special charges for services requested by a holder of a common unit; and
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other similar fees or charges.
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There will be no charge to unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, its agents and each of their stockholders, directors, officers and employees
against all claims and losses that may arise out of acts performed or omitted for its activities as transfer agent, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.
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Resignation or Removal
. The transfer agent may at any time resign, by notice to us,
or be removed by us. The resignation or removal of the transfer agent will become effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed and accepted the
appointment within 30 days after notice of the resignation or removal, we are authorized to act as the transfer agent and registrar until a successor is appointed.
Transfer of Common Units
By transfer of our common units in accordance
with our partnership agreement, each transferee of our common units will be admitted as a unitholder with respect to the common units transferred when such transfer and admission is reflected in our books and records. Additionally, each transferee
of our common units:
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becomes bound by the terms of, and is deemed to have executed, our partnership agreement;
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represents that the transferee has the capacity, power and authority to enter into our partnership agreement;
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grants the powers of attorney set forth in our partnership agreement; and
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makes the consents and waivers contained in our partnership agreement.
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An assignee will become a substituted limited partner of our partnership for the transferred common units automatically upon the recording
of the transfer on our books and records. Our general partner will cause any transfers to be recorded on our books and records no less frequently than quarterly.
We may, at our discretion, treat the nominee holder of a common unit as the absolute owner. In that case, the beneficial holders rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee holder.
Common units are securities and are
transferable according to the laws governing transfers of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred
common units.
Until a common unit has been transferred on our books, we and the transfer agent, notwithstanding any notice to
the contrary, may treat the record holder of the unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.
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MATERIAL PROVISIONS OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of the Amended and Restated Agreement of Limited Partnership of Inergy Holdings,
L.P., which could impact our results of operations. The Amended and Restated Agreement of Limited Partnership of Inergy Holdings, L.P., which is referred to in this prospectus as our partnership agreement, is incorporated by reference in
the registration statement of which this prospectus constitutes a part.
We summarize the following provisions of our
partnership agreement elsewhere in this prospectus:
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With regard to the transfer of common units, please read Description of the Common UnitsTransfer of Common Units.
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With regard to distributions of available cash, please read Cash Distribution Policy.
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With regard to allocations of taxable income and taxable loss, please read Material Tax Consequences.
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Purpose
Under our
partnership agreement we are permitted to engage, directly or indirectly, in any business activity that is approved by our general partner and that lawfully may be conducted by a limited partnership organized under Delaware law; provided, that our
general partner may not cause us to engage, directly or indirectly, in any business activity that our general partner determines would cause us to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal
income tax purposes.
Although our general partner has the ability to cause us, our affiliates or our subsidiaries to engage
in activities other than the ownership of partnership interests in Inergy, L.P., our general partner has no current plans to do so and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interest of us or our limited partners. Our general partner is authorized in general to perform all acts it determines to be necessary or appropriate to carry out our purposes and to conduct our business.
Power of Attorney
Each limited partner, and each person who acquires a unit from a unitholder, grants to our general partner and, if appointed, a liquidator, a power of attorney to, among other things, execute and file documents required for our
qualification, continuance or dissolution. The power of attorney also grants our general partner the authority to amend, and to make consents and waivers under, our partnership agreement.
Capital Contributions
Our
unitholders are not obligated to make additional capital contributions, except as described below under Limited Liability.
Limited Liability
Assuming that a limited partner does not participate in the control of our business within
the meaning of the Delaware Revised Uniform Limited Partnership Act (the Delaware Act) and that it otherwise acts in conformity with the provisions of our partnership agreement, such limited partners liability under the Delaware
Act will be limited, subject to possible exceptions, to the amount of capital it is obligated to contribute to us for its common units plus its share of any undistributed profits and assets. If it were determined, however, that the right, or
exercise of the right, by the limited partners as a group:
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to remove or replace our general partner,
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to approve some amendments to our partnership agreement, or
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to take other action under our partnership agreement,
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constituted participation in the control of our business for the purposes of the Delaware Act, then our limited partners could be held personally liable for our obligations under the laws of
Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us who reasonably believe that the limited partner is a general partner. Neither our partnership agreement nor the Delaware Act
specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner. While this does not mean that a limited partner could not seek legal recourse, we know
of no precedent for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to
specified property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is limited will be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware Act provides
that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act will be liable to the limited partnership for the amount of the distribution for three years.
Under the Delaware Act, an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations of its assignor to make contributions to the partnership, except the assignee is not obligated for liabilities
unknown to it at the time the assignee became a limited partner and that could not be ascertained from the partnership agreement.
Our subsidiaries conduct business in multiple states. If it were determined that we or our subsidiaries were conducting business in any state without compliance with the applicable limited partnership or limited liability company statute,
or that the right or exercise of the right by the limited partners as a group to remove or replace our general partner, to approve some amendments to our partnership agreement, or to take other action under our partnership agreement constituted
participation in the control of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent
as our general partner under the circumstances. We operate in a manner that our general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.
Vote Required
The
following is a summary of the unitholder vote required for the matters specified below. The holders of a majority of the outstanding units, represented in person or by proxy, will constitute a quorum unless any action by the unitholders requires
approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage. In voting their units, affiliates of our general partner will have no fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best interests of us or the limited partners.
Issuance of additional securities
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No approval right.
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Amendment of our partnership agreement
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Certain amendments may be made by our general partner without the approval of our unitholders. Other amendments generally require the approval of a majority of our outstanding units. Please read
Amendment of the Partnership Agreement.
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Merger of our partnership or the sale of all or substantially all of our assets
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A majority of our outstanding units in certain circumstances. Please read Merger, Sale or Other Disposition of Assets.
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Dissolution of our partnership
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A majority of our outstanding units. Please read Termination and Dissolution.
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Continuation of our business upon dissolution
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A majority of our outstanding units. Please read Termination and Dissolution.
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Withdrawal of our general partner
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Under most circumstances, the approval of a majority of the units, excluding units held by our general partner and its affiliates, is required for the withdrawal of our general partner prior to
June 30, 2015 in a manner that would cause a dissolution of our partnership. Please read Withdrawal or Removal of the General Partner.
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Removal of our general partner
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Not less than 66
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% of the outstanding units, including units held by our general partner and its affiliates. Please read Withdrawal or Removal of the General Partner.
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Transfer of the general partner interest
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Our general partner may transfer all, but not less than all, of its general partner interest in us without a vote of our unitholders to another entity in connection with its merger or
consolidation with or into, or sale of all or substantially all of its assets to, such person. The approval of a majority of the units, excluding units held by our general partner and its affiliates, is required in other circumstances for a transfer
of the general partner interest to a third party prior to June 30, 2015. Please read Transfer of General Partner Interests.
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Issuance of Additional Securities
Our partnership agreement authorizes us
to issue an unlimited number of additional limited partner interests and other equity securities for the consideration and on the terms and conditions established by our general partner in its sole discretion without the approval of any limited
partners.
In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional
partnership interests that have special voting rights to which the common units are not entitled.
Amendment of the Partnership Agreement
General
Amendment to our partnership agreement may be proposed only by or with the consent of our general partner. However, our general partner will have no duty or obligation to propose any amendment and may
decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interest of us or the limited partners. To adopt a proposed amendment, other than the
amendments discussed below, our general partner is required to seek written approval of the holders of the number of units required to approve the amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment.
Except as described below, an amendment must be approved by a majority of our outstanding units.
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Prohibited Amendments
No amendment may be made that would:
(1) enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner interests so affected, or
(2) enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by us to our general partner or any of its affiliates without the consent of our general partner, which may be given or withheld in its sole discretion.
The provision of our partnership agreement preventing the amendments having the effects described in clauses (1) or (2) above can
be amended upon the approval of the holders of at least 90% of the outstanding units.
No Unitholder Approval
Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner or
assignee to reflect:
(1) a change in the name of the partnership, the location of our principal place of
business, our registered agent or our registered office,
(2) the admission, substitution, withdrawal or
removal of partners in accordance with our partnership agreement,
(3) a change that our general partner
determines is necessary or appropriate for us to qualify or to continue our qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or to ensure that we will not be
treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes,
(4) a change that our general partner determines (i) does not adversely affect the limited partners (including any particular class of partnership interests as compared to other classes of partnership interests) in any material
respect, (ii) to be necessary or appropriate to (A) satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in
any federal or state statute (including the Delaware Act) or (B) facilitate the trading of our limited partner interests (including the division of any class or classes of outstanding limited partner interests into different classes to
facilitate uniformity of tax consequences within such classes of limited partner interests) or comply with any rule, regulation, guideline or requirement of any national securities exchange on which our limited partner interests are or will be
listed, (iii) to be necessary or appropriate in connection with action taken by our general partner in connection with subdivisions or combinations of our partnership securities under the provisions of our partnership agreement or (iv) is
required to effect the intent of the provisions of our partnership agreement or is otherwise contemplated by our partnership agreement,
(5) a change in our fiscal year or taxable year and related changes,
(6) an amendment that is necessary, in the opinion of our counsel, to prevent us or our general partner or its directors, officers, trustees or agents from in any manner being subjected to the provisions of the Investment Company Act of
1940, the Investment Advisors Act of 1940, or plan asset regulations adopted under the Employee Retirement Income Security Act of 1974, whether or not substantially similar to plan asset regulations currently applied or proposed,
(7) an amendment that our general partner determines to be necessary or appropriate in connection with the
authorization of issuance of additional partnership securities or rights to acquire partnership securities,
(8) any amendment expressly permitted in our partnership agreement to be made by our general partner acting alone,
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(9) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our partnership agreement,
(10) an amendment that our
general partner determines to be necessary or appropriate to reflect and account for our formation of, or our investment in, any corporation, partnership, joint venture, limited liability company or other entity, in connection with our conduct of
activities otherwise permitted by our partnership agreement,
(11) a merger with or conveyance to another
limited liability entity that is newly formed and has no assets, liabilities or operations at the time of the merger or conveyance other than those it receives by way of the merger or conveyance, or
(12) any other amendments substantially similar to any of the matters described in (1) through (11) above.
Finally, our partnership agreement specifically permits our general partner to approve and authorize any action taken by the
managing general partner of Inergy to limit or modify the incentive distribution rights of Inergy held by us if our general partner determines that such limitation or modification does not adversely affect our limited partners in any material
respect.
Opinion of Counsel and Unitholder Approval
Our general partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to
the limited partners or result in our being treated as an entity for federal income tax purposes if one of the amendments described above under No Unitholder Approval should occur. No other amendments to our partnership agreement
will become effective without the approval of holders of at least 90% of the outstanding units, unless we obtain an opinion of counsel to the effect that such amendment will not affect the limited liability under applicable law of any of our limited
partners. Any amendment that reduces the voting percentage required to take any action must be approved by the written consent or affirmative vote of limited partners whose aggregate outstanding units constitute not less than the voting requirement
sought to be reduced.
In addition to the above restrictions, any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected.
Merger, Sale or Other Disposition of Assets
Our partnership agreement generally prohibits our general partner, without the prior approval of a majority of our outstanding units, from causing us to, among other things, sell, exchange or otherwise
dispose of all or substantially all of our assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination, or approving on our behalf the sale, exchange or other disposition of all
or substantially all of the assets of our subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without that approval. Our general partner may also sell
all or substantially all of our assets under a foreclosure or other realization upon those encumbrances without that approval.
If conditions specified in our partnership agreement are satisfied, our general partner may merge us or any of our subsidiaries into, or convey some or all of our assets to, a newly formed entity if the sole purpose of that merger or
conveyance is to effect a mere change in our legal form into another limited liability entity. The unitholders are not entitled to dissenters rights of appraisal under our partnership agreement or applicable Delaware law in the event of a
merger or consolidation, a sale of substantially all of our assets or any other transaction or event.
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Termination and Dissolution
We will continue as a limited partnership until terminated under the partnership agreement. We will dissolve upon:
(1) the withdrawal or removal of our general partner or any other event that results in its ceasing to be our general partner
other than by reason of a transfer of general partner interests in accordance with our partnership agreement or withdrawal or removal of our general partner following approval and admission of a successor,
(2) the election of our general partner to dissolve us, if approved by a majority of our outstanding units,
(3) the entry of a decree of judicial dissolution of us pursuant to the provisions of the Delaware Act, or
(4) there being no limited partners, unless we are continued without dissolution in accordance with applicable Delaware law.
Upon a dissolution under clause (1), the holders of a majority of our outstanding units may also elect, within specific time
limitations, to continue our business on the same terms and conditions described in our partnership agreement by appointing as a successor general partner an entity approved by the holders of a majority of the outstanding common units, subject to
our receipt of an opinion of counsel to the effect that:
(1) the action would not result in the loss of
limited liability of any limited partner, and
(2) neither we nor the reconstituted limited partnership would
be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.
Liquidation and Distribution of Proceeds
Upon our dissolution, unless we
are continued as a new limited partnership, the liquidator authorized to wind up our affairs will, acting with all of the powers of our general partner that the liquidator deems necessary or desirable in its judgment, liquidate our assets and apply
the proceeds of the liquidation as provided in our partnership agreement. The liquidator may defer liquidation of our assets for a reasonable period of time or distribute assets to partners in kind if it determines that a sale would be impractical
or would cause undue loss to the partners.
Withdrawal or Removal of the General Partner
Except as described below, our general partner has agreed not to withdraw voluntarily as the general partner prior to June 30, 2015
without obtaining the approval of the holders of at least a majority of the outstanding common units, excluding common units held by our general partner and its affiliates (including us), and furnishing an opinion of counsel regarding limited
liability and tax matters. On or after June 30, 2015, our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days written notice, and that withdrawal will not constitute a
violation of the partnership agreement. Notwithstanding the information above, our general partner may withdraw without unitholder approval upon 90 days notice to the limited partners if at least 50% of the outstanding common units are held or
controlled by one person and its affiliates other than our general partner and its affiliates. If our general partner is removed or withdraws and no successor is appointed, our general partner will continue the business of Inergy.
Upon the withdrawal of our general partner under any circumstances, the holders of a majority of the outstanding units may select a
successor to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, we will be dissolved, wound up and liquidated, unless within 180
days after that withdrawal, the holders of a majority of the outstanding units agree in writing to continue our business and to appoint a successor general partner. Please read Termination and Dissolution above.
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Our general partner may not be removed unless that removal is approved
by the vote of the holders of not less than 66
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%
of the outstanding units and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of our general partner is also subject to the approval of a successor general partner by the vote of the holders of a majority of
the outstanding common units. The ownership of more than 33
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% of the outstanding units by our general partner and its affiliates would give it the practical ability to prevent its removal.
In addition, we are required to reimburse the departing general partner for all amounts due the departing general partner, including,
without limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed by the departing general partner or its affiliates for our benefit.
Transfer of General Partner Interests
Except for transfer by our general partner of all, but not less than all, of its general partner interests in us to another entity as part of the merger or consolidation of our general partner with or
into another entity or the transfer by our general partner of all or substantially all of its assets to another entity, our general partner may not transfer all or any part of its general partner interest in us to another person prior to
June 30, 2015 without the approval of the holders of at least a majority of the outstanding common units, excluding common units held by our general partner and its affiliates. As a condition of this transfer, the transferee must assume the
rights and duties of the general partner to whose interest that transferee has succeeded, agree to be bound by the provisions of our partnership agreement and furnish an opinion of counsel regarding limited liability and tax matters. At any time,
the members of our general partner may sell or transfer all or part of their membership interests in our general partner without the approval of the unitholders, subject to certain restrictions as described elsewhere in this prospectus.
Change of Management Provisions
Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove our general partner as general partner or otherwise change management. If any person or group other than our
general partner and its affiliates acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires the
units from our general partner or its affiliates and any transferees of that person or group approved by our general partner.
Limited Call
Right
If at any time less than 85% of the total limited partner interests of any class then outstanding is held by persons
other than our general partner and its affiliates, our general partner will have the right, which it may assign and transfer in whole or in part to any of its affiliates or to us, to purchase all, but not less than all, of the remaining limited
partner interests of the class held by unaffiliated persons as of a record date to be selected by our general partner, on at least ten but not more than 60 days notice. The purchase price in the event of this purchase is the greater of:
(1) the current market price as of the date three days prior to the date that the notice described above is mailed, and
(2) the highest price paid by our general partner or any of its affiliates for any such limited partner
interest of such class purchased during the 90-day period preceding the date that the notice described above is mailed.
As a
result of our general partners right to purchase outstanding limited partner interests, a holder of limited partner interests may have its limited partner interests purchased at an undesirable time or price. The tax consequences to a
unitholder of the exercise of this call right are the same as a sale by that unitholder of its common units in the market. Please read Material Tax ConsequencesDisposition of Common Units.
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Meetings; Voting
Except as described below regarding a person or group owning 20% or more of units then outstanding, unitholders or assignees who are record holders of units on the record date will be entitled to notice
of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited. Common units that are owned by an assignee who is a record holder, will be voted by our general partner at the written direction of
the record holder. Absent direction of this kind, the common units will not be voted, except that, in the case of common units held by our general partner on behalf of non-citizen assignees, our general partner will distribute the votes on those
common units in the same ratios as the votes of limited partners on other units are cast.
Our general partner does not
anticipate that any meeting of unitholders will be called in the foreseeable future. Any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if consents in
writing describing the action so taken are signed by holders of the number of units as would be necessary to authorize or take that action at a meeting. Meetings of the unitholders may be called by our general partner or by unitholders owning at
least 20% of the outstanding units. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units, represented in person or by proxy, will constitute a quorum unless any action by the unitholders
requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.
Each record holder of a unit has a vote according to its percentage interest in us, although additional limited partner interests having special voting rights could be issued. Please read Issuance of Additional Securities
above. However, if at any time any person or group, other than our general partner and its affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates, acquires, in the aggregate, beneficial ownership of 20%
or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of
unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the
beneficial owner unless the arrangement between the beneficial owner and its nominee provides otherwise.
Any notice, demand,
request, report or proxy material required or permitted to be given or made to record holders of common units under our partnership agreement will be delivered to the record holder by us or by the transfer agent.
Status as Limited Partner
By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission is reflected in
our books and records. Except as described under Limited Liability above, the common units will be fully paid, and unitholders will not be required to make additional contributions.
Non-Citizen Assignees; Redemption
If the partnership is or becomes subject to federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that the
partnership has an interest in because of the nationality, citizenship or other related status of any limited partner or assignee, the partnership may redeem the units held by the limited partner or assignee at their current market price. To avoid
any cancellation or forfeiture, our general partner may require each limited partner or assignee to furnish information about its nationality, citizenship or related status. If a limited partner or assignee fails to furnish information about this
nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the information that the limited partner or assignee
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is not an eligible citizen, the limited partner or assignee may be treated as a non-citizen assignee. In addition to other limitations on the rights of an assignee that is not a substituted
limited partner, a non-citizen assignee does not have the right to direct the voting of its units and may not receive distributions in kind upon our liquidation.
Indemnification
Under our partnership agreement, in most circumstances, we
will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:
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any departing general partner,
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any person who is or was an affiliate of a general partner or any departing general partner,
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any person who is or was a member, partner, officer, director or trustee of a general partner or any departing general partner or any affiliate of a
general partner or any departing general partner,
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any person who is or was serving at the request of a general partner or any departing general partner or any affiliate of a general partner or any
departing general partner as an officer, director, employee, member, partner, agent, fiduciary or trustee of another person, or
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any person designated by our general partner.
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Any indemnification under these provisions will only be out of our assets. Unless it otherwise agrees, the general partner will not be personally liable for, or have any obligation to contribute or loan
funds or assets to us to enable it to effectuate, indemnification. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether it would have the power to indemnify the
person against liabilities under our partnership agreement.
Books and Reports
Our general partner is required to keep appropriate books of the partnerships business at our principal offices. The books will be
maintained for both tax and financial reporting purposes on an accrual basis. For fiscal reporting purposes, our fiscal year ends September 30 of each calendar year. For tax reporting purposes, our tax year ends December 31 each year.
We will furnish or make available to record holders of common units, within 120 days after the close of each fiscal year, an
annual report containing audited financial statements and a report on those financial statements by our independent registered public accounting firm. Except for our fourth quarter, we will also furnish or make available summary financial
information within 90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying us with specific information. Every unitholder will receive information to assist it in determining its federal and state tax
liability and filing its federal and state income tax returns, regardless of whether such unitholder supplies us with information.
Right
to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can, for a purpose reasonably
related to its interest as a limited partner, upon reasonable demand and at its own expense, have furnished:
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a current list of the name and last known address of each partner,
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a copy of our tax returns,
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information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner,
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copies of our partnership agreement, our certificate of limited partnership, related amendments and powers of attorney under which they have been
executed,
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information regarding the status of our business and financial condition, and
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any other information regarding our affairs as is just and reasonable.
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Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of
which our general partner believes in good faith is not in our best interests or which we are required by law or by agreements with third parties to keep confidential.
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CASH DISTRIBUTION POLICY
Rationale for Our Cash Distribution Policy
. Our cash distribution policy reflects a basic judgment that our unitholders will be
better served by our distributing our available cash rather than retaining it. It is important that you understand that our sole cash generating assets consist of our partnership interests and incentive distribution rights in Inergy from which we
receive quarterly distributions. We currently have no independent operations and do not currently intend to conduct operations separate from those of Inergy. Because it is unlikely that we will acquire assets other than partnership interests in
Inergy and, accordingly, believe we will have relatively low cash requirements for operating expenses and capital investments, we believe that our investors are best served by distributing all of our available cash. Because we are not subject to an
entity-level federal income tax, we have more cash to distribute to you than would be the case were we subject to federal income tax.
Restrictions on and Our Ability to Change Our Cash Distribution Policy
. There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be
changed at any time, including:
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Our distribution policy is subject to certain restrictions on distributions under our credit facility. Our credit facility contains covenants limiting
our ability to incur indebtedness, grant liens, engage in transactions with affiliates and make distributions to our unitholders. This facility also contains covenants requiring us to maintain certain financial ratios. We are prohibited from making
any distribution to unitholders if such distribution would cause an event of default or otherwise violate a covenant under this facility.
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Inergys cash distribution policy is subject to restrictions on distributions under the agreements governing its indebtedness. The indentures
governing Inergys outstanding senior notes and agreements governing Inergys revolving credit facilities and other future indebtedness contain or may contain various covenants limiting Inergys ability to, among other things, pay
distributions on its equity interests. Should Inergy be unable to satisfy these restrictions under the agreements governing its indebtedness, Inergy would be prohibited from making cash distributions to us, which in turn would prevent us from making
cash distributions to you notwithstanding our stated cash distribution policy.
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Our board of directors has broad discretion to establish reserves for the prudent conduct of our business and the establishment of those reserves could
result in a reduction of our stated distribution policy.
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The board of directors of Inergys managing general partner has the authority under Inergys partnership agreement to establish reserves for
the prudent conduct of Inergys business and for future cash distributions to Inergys unitholders, and the establishment of those reserves could result in a reduction in cash distributions we would otherwise anticipate receiving from
Inergy, which in turn could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.
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While our partnership agreement requires us to distribute our available cash, our partnership agreement, including our cash distribution policy
contained therein, may be amended by a vote of the holders of a majority of our common units. As of November 30, 2009, certain of the officers and directors of our general partner and certain of the officers and directors of Inergys managing
general partner own approximately 46.0% of our outstanding common units. Some of these owners are our officers as well as officers of Inergy.
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Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any
distribution is at the discretion of our general partner, taking into consideration the terms of our partnership agreement.
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The amount of distributions paid under Inergys cash distribution policy and the decision to make any distribution to its unitholders is at the
discretion of Inergys managing general partner, taking into consideration the terms of its partnership agreement.
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Under Section 17-607 of the Delaware Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair
value of our assets.
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We may lack sufficient cash to pay distributions to our unitholders due to increases in general and administrative expenses, principal and interest
payments on our outstanding debt, tax expenses of our subsidiaries, working capital requirements and anticipated cash needs.
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Our Cash Distribution Policy Limits Our Ability to Grow
. Because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand
ongoing operations. In fact, since our sole cash generating assets consist of our partnership interests in Inergy, our growth will be dependent upon Inergys ability to increase its quarterly distribution per unit or our purchase of additional
interests in Inergy. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to
maintain or increase our per unit distribution level.
Inergys Ability to Grow Is Primarily Dependent on Its Ability
to Access External Growth Capital
. Inergy distributes most of the cash generated by its operations to its unitholders and relies upon external financing sources, including commercial borrowings and other debt and common unit issuances, to fund
its acquisition and growth capital expenditures. However, to the extent Inergy is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow.
Our Cash Distribution Policy
. Our distribution policy is consistent with the terms of our partnership agreement, which requires that
we distribute all of our available cash quarterly. Under our partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from our business in excess of the amount our general partner determine is
necessary or appropriate to provide for the conduct of our business, comply with applicable law, any of our debt instruments or other agreements or provide for future distributions to our unitholders for any one or more of the upcoming four
quarters.
Inergys Cash Distribution Policy
. Like us, Inergy has adopted a cash distribution policy that requires
it to distribute its available cash to unitholders on a quarterly basis. Inergys determination of available cash takes into account the need to maintain certain cash reserves to preserve its distribution levels across seasonal and cyclical
fluctuations in its business and to provide for certain growth opportunities. Inergy makes its quarterly distributions from cash generated from its operations, and those distributions have grown over time as Inergys business has grown,
primarily as a result of a substantial acquisition program that is funded through external financing sources.
Sources of Distributable
Cash
Our only cash generating assets are our partnership interests in Inergy. Therefore, as Inergy makes quarterly
distributions to its partners, we receive our share of such distributions in proportion to our ownership interests in Inergy. We own, directly or indirectly:
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a 100% non-economic membership interest in Inergy GP, LLC, the managing general partner of Inergy;
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a 100% membership interest in Inergy Partners, LLC, the non-managing general partner of Inergy, which currently owns an approximate 0.8% general
partner interest in Inergy;
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4,706,689 common units of Inergy, representing an aggregate limited partner interest in Inergy of approximately 7.8%; and
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all of Inergys incentive distribution rights, which entitles us to receive increasing percentages, up to a maximum of 48%, of any cash
distributed by Inergy as certain target distribution levels are reached in excess of $0.33 per Inergy unit in any quarter.
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Incentive Distribution Rights
For any quarter that Inergy distributes available cash from operating surplus to its common unitholders in an amount equal to the minimum
quarterly distribution on all Inergy units, then Inergy will distribute any additional available cash from operating surplus in that quarter among its unitholders and its non-managing general partner in the following manner:
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First, 100% to Inergys non-managing general partner and all Inergy unitholders in accordance with their respective percentage interests until
each unitholder receives a total of $0.33 for that quarter for each outstanding unit;
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Second, to Inergys non-managing general partner in a percentage equal to its percentage interest, 13% to us as the holder of the incentive
distribution rights, and the remainder to all unitholders, pro rata, until each unitholder receives a total of $0.375 for that quarter for each outstanding unit;
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Third, to Inergys non-managing general partner in a percentage equal to its percentage interest, 23% to us as the holder of the incentive
distribution rights, and the remainder to all unitholders, pro rata, until each unitholder receives a total of $0.45 for that quarter for each outstanding unit; and
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Thereafter, to Inergys non-managing general partner in a percentage equal to its percentage interest, 48% to us as the holder of the incentive
distribution rights, and the remainder to all unitholders, pro rata.
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Inergys distributions to us
above represent the incentive distribution rights in Inergy that we own. Incentive distribution rights represent non-voting limited partner interests in Inergy.
The impact to us of changes in Inergys distribution levels will vary depending on several factors, including the number of Inergys outstanding partnership interests at the time of the
distributions, our ownership percentage of such partnership interests, our relative holdings of Inergy common units and incentive distribution rights and the then current target distribution level. In addition, the level of distributions we receive
may be affected by the various risks associated with an investment in us and the underlying business of Inergy. Please read Risk Factors.
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MATERIAL TAX CONSEQUENCES
This section is a summary of the material tax consequences that may be relevant to prospective unitholders who are individual citizens or
residents of the United States and, unless otherwise noted in the following discussion, is the opinion of Vinson & Elkins L.L.P., counsel to our general partner and us, insofar as it relates to legal conclusions with respect to matters of
U.S. federal income tax law. This section is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), existing and proposed Treasury regulations promulgated under the Internal Revenue
Code (the Treasury Regulations) and current administrative rulings and court decisions, all of which are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences
described below. Unless the context otherwise requires, references in this section to us or we are references to the Partnership.
The following discussion does not comment on all federal income tax matters affecting us or our unitholders. Moreover, the discussion focuses on unitholders who are individual citizens or residents of the
United States and has only limited application to corporations, estates, trusts, nonresident aliens or other unitholders subject to specialized tax treatment, such as tax-exempt institutions, foreign persons, individual retirement accounts (IRAs),
employee benefit plans, real estate investment trusts (REITs) or mutual funds. Accordingly, we encourage each prospective unitholder to consult, and depend on, his own tax advisor in analyzing the federal, state, local and foreign tax consequences
particular to him of the ownership or disposition of common units.
No ruling has been or will be requested from the Internal
Revenue Service (the IRS) regarding any matter affecting us or prospective unitholders. Instead, we will rely on opinions of Vinson & Elkins L.L.P. Unlike a ruling, an opinion of counsel represents only that counsels best
legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made herein may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the
market for the common units and the prices at which the common units trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne indirectly by our unitholders and our general partner. Furthermore, the tax treatment of us, or of an investment in us, may be significantly modified by future legislative or administrative
changes or court decisions. Any modifications may or may not be retroactively applied.
All statements as to matters of law
and legal conclusions, but not as to factual matters, contained in this section, unless otherwise noted, are the opinion of Vinson & Elkins L.L.P. and are based on the accuracy of the representations made by us.
For the reasons described below, Vinson & Elkins L.L.P. has not rendered an opinion with respect to the following specific federal
income tax issues: (1) the treatment of a unitholder whose common units are loaned to a short seller to cover a short sale of common units (please read Tax Consequences of Unit OwnershipTreatment of Short Sales);
(2) whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read Disposition of Common UnitsAllocations Between Transferors and Transferees); and
(3) whether our method for depreciating Section 743 adjustments is sustainable in certain cases (please read Tax Consequences of Unit OwnershipSection 754 Election and Uniformity of Units).
Partnership Status
A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take into account his share of items of income, gain, loss and deduction of the partnership in computing
his federal income tax liability, regardless of whether cash distributions are made to him by the partnership. Distributions by a partnership to a partner are generally not taxable to the partnership or the partner unless the amount of cash
distributed to him is in excess of the partners adjusted basis in his partnership interest.
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Section 7704 of the Internal Revenue Code provides that publicly traded partnerships
will, as a general rule, be taxed as corporations. However, an exception, referred to in this discussion as the Qualifying Income Exception, exists with respect to publicly traded partnerships of which 90% or more of the gross income for
every taxable year consists of qualifying income. Qualifying income includes income and gains derived from the wholesale and retail marketing and transportation of propane, including our allocable share of such income from Inergy. Other
types of qualifying income include interest (other than from a financial business), dividends, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise
constitutes qualifying income. We estimate that less than 6% of our current gross income is not qualifying income; however, this estimate could change from time to time. Based upon and subject to this estimate, the factual representations made by us
and our general partner and a review of the applicable legal authorities, Vinson & Elkins L.L.P. is of the opinion that at least 90% of our current gross income constitutes qualifying income. The portion of our income that is qualifying
income may change from time to time.
No ruling has been or will be sought from the IRS and the IRS has made no determination
as to our status for federal income tax purposes or whether our operations generate qualifying income under Section 7704 of the Internal Revenue Code. Moreover, no ruling has been or will be sought from the IRS, and the IRS has made
no determination as to Inergys status for federal income tax purposes or whether its operations generate qualifying income under Section 7704 of the Internal Revenue Code. Instead, we will rely on the opinion of
Vinson & Elkins L.L.P. on such matters. It is the opinion of Vinson & Elkins L.L.P. that, based upon the Internal Revenue Code, Treasury Regulations, published revenue rulings and court decisions and the representations described
below, we and Inergy will be classified as partnerships for federal income tax purposes.
In rendering its opinion,
Vinson & Elkins L.L.P. has relied on factual representations made by us and our general partner. Among the representations made by us and our general partner upon which Vinson & Elkins L.L.P. has relied are the following:
(a) Neither we nor Inergy has elected or will elect to be treated as a corporation;
(b) For each taxable year of the Partnership, more than 90% of our gross income has been and will be income from sources that
Vinson & Elkins L.L.P. has opined, or will opine, as generating qualifying income within the meaning of Section 7704(d) of the Internal Revenue Code; and
(c) Each hedging transaction that we treat as resulting in qualifying income has been and will be appropriately identified as
a hedging transaction pursuant to applicable Treasury Regulations, and has been and will be associated with oil, gas, or products thereof that are held or to be held by us or Inergy in activities that Vinson & Elkins L.L.P. has opined or
will opine result in qualifying income.
We believe that these representations have been true in the past and expect that
these representations will be true in the future.
If we or Inergy fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery (in which case the IRS may also require us or Inergy to make adjustments with respect to our respective unitholders or pay other
amounts), we or Inergy will be treated as if we had transferred all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we or Inergy fail to meet the Qualifying Income Exception, in return for
stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in us or Inergy. This deemed contribution and liquidation should be tax-free to unitholders and us or Inergy so long as we or Inergy, at
that time, do not have liabilities in excess of the tax basis of our or Inergys assets. Thereafter, we or Inergy would be treated as a corporation for federal income tax purposes.
If we were treated as an association taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying
Income Exception or otherwise, our items of income, gain, loss and deduction would be
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reflected only on our tax return rather than being passed through to our unitholders, and our net income would be taxed to us at corporate rates. Moreover, if Inergy were taxable as a corporation
in any taxable year, our share of Inergys items of income, gain, loss and deduction would not be passed through to us and Inergy would pay tax on its income at corporate rates. If we or Inergy were taxable as corporations, losses recognized by
Inergy would not flow through to us or our losses would not flow through to our unitholders, as the case may be. In addition, any distribution made by us to a unitholder (or by Inergy to us) would be treated as either taxable dividend income, to the
extent of our current or accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholders tax basis in his common units (or our tax basis in our interest in Inergy),
or taxable capital gain, after the unitholders tax basis in his common units (or our tax basis in our interest in Inergy) is reduced to zero. Accordingly, taxation of either us or Inergy as a corporation would result in a material reduction in
a unitholders cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.
The discussion below is based on Vinson & Elkins L.L.P.s opinion that we and Inergy will be classified as partnerships for federal income tax purposes.
Limited Partner Status
Unitholders who have become limited partners of us
will be treated as partners in us for federal income tax purposes. Also, unitholders whose common units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the
ownership of their common units will be treated as partners in us for federal income tax purposes.
A beneficial owner of
common units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read Tax Consequences of Unit
OwnershipTreatment of Short Sales.
Income, gains, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore appear to be fully taxable as ordinary income. These holders
are urged to consult their own tax advisors with respect to their tax consequences of holding our common units.
The
references to unitholders in the discussion that follows are to persons who are treated as partners in us for federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-Through of Taxable Income
. We do not pay any federal
income tax. Instead, each unitholder will be required to report on his income tax return his share of our income, gains, losses and deductions without regard to whether we make cash distributions to him. Consequently, we may allocate income to a
unitholder even if he has not received a cash distribution. Each unitholder will be required to include in income his allocable share of our income, gains, losses and deductions for our taxable year ending with or within his taxable year. Our
taxable year ends on December 31.
Treatment of Distributions
. Distributions by us to a unitholder
generally will not be taxable to the unitholder for federal income tax purposes, except to the extent the amount of any such cash distribution exceeds his tax basis in his common units immediately before the distribution. Our cash distributions in
excess of a unitholders tax basis generally will be considered to be gain from the sale or exchange of the common units, taxable in accordance with the rules described under Disposition of Common Units below. Any reduction in
a unitholders share of our liabilities for which no partner, including the general partner, bears the economic risk of loss, known as nonrecourse liabilities, will be treated as a distribution by us of cash to that unitholder. To
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the extent our distributions cause a unitholders at-risk amount to be less than zero at the end of any taxable year, he must recapture any losses deducted in previous years.
Please read Limitations on Deductibility of Losses.
A decrease in a unitholders percentage interest
in us because of our issuance of additional common units will decrease his share of our nonrecourse liabilities, and thus will result in a corresponding deemed distribution of cash. This deemed distribution may constitute a non-pro rata
distribution. A non-pro rata distribution of money or property may result in ordinary income to a unitholder, regardless of his tax basis in his common units, if the distribution reduces the unitholders share of our unrealized
receivables, including depreciation recapture, and substantially appreciated inventory items, both as defined in Section 751 of the Internal Revenue Code, and collectively, Section 751 Assets. To that extent, he
will be treated as having been distributed his proportionate share of the Section 751 Assets and then having exchanged those assets with us in return for the non-pro rata portion of the actual distribution made to him. This latter deemed
exchange will generally result in the unitholders realization of ordinary income, which will equal the excess of (1) the non-pro rata portion of that distribution over (2) the unitholders tax basis (generally zero) for the
share of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units
. A
unitholders initial tax basis for his common units will be the amount he paid for the common units plus his share of our nonrecourse liabilities. That basis will be increased by his share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased, but not below zero, by distributions from us, by the unitholders share of our losses, by any decreases in his share of our nonrecourse liabilities and by his share of our expenditures that
are not deductible in computing taxable income and are not required to be capitalized. A unitholder will have no share of our debt that is recourse to our general partner, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities. Please read Disposition of Common UnitsRecognition of Gain or Loss.
Limitations on Deductibility of Losses
. The deduction by a unitholder of his share of our losses will be limited to the tax basis in his units and, in the case of an individual unitholder, estate, trust, or a corporate
unitholder (if more than 50% of the value of the corporate unitholders stock is owned directly or indirectly by or for five or fewer individuals or some tax-exempt organizations) to the amount for which the unitholder is considered to be
at risk with respect to our activities, if that is less than his tax basis. A common unitholder subject to these limitations must recapture losses deducted in previous years to the extent that distributions cause his at-risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a unitholder or recaptured as a result of these limitations will carry forward and will be allowable as a deduction to the extent that his at-risk amount is subsequently increased,
provided such losses do not exceed such common unitholders tax basis in his common units. Upon the taxable disposition of a unit, any gain recognized by a unitholder can be offset by losses that were previously suspended by the at-risk
limitation but may not be offset by losses suspended by the basis limitation. Any loss previously suspended by the at-risk limitation in excess of that gain would no longer be utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of his units, excluding any portion of that basis attributable to
his share of our nonrecourse liabilities, reduced by (i) any portion of that basis representing amounts otherwise protected against loss because of a guarantee, stop loss agreement or other similar arrangement and (ii) any amount of money
he borrows to acquire or hold his units, if the lender of those borrowed funds owns an interest in us, is related to the unitholder or can look only to the units for repayment. A unitholders at-risk amount will increase or decrease as the tax
basis of the unitholders units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in his share of our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the deductibility of losses, the passive loss limitations generally provide that
individuals, estates, trusts and some closely-held corporations and personal service corporations can deduct losses from passive activities, which are generally trade or business activities in which
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the taxpayer does not materially participate, only to the extent of the taxpayers income from those passive activities. The passive loss limitations are applied separately with respect to
each publicly traded partnership. However, the application of the passive loss limitations to tiered publicly traded partnerships is uncertain. We will take the position that any passive losses we generate that are reasonably allocable to our
investment in Inergy will be available to offset only our passive income generated in the future that is reasonably allocable to our investment in Inergy and will not be available to offset income from other passive activities or investments,
including other investments in private businesses or investments we may make in other publicly traded partnerships. Moreover, because the passive loss limitations are applied separately with respect to each publicly traded partnership, any passive
losses we generate will not be available to offset your income from other passive activities or investments, including your investments in other publicly traded partnerships, such as Inergy, or salary or active business income. Further, your share
of our net income may be offset by any suspended passive losses from your investment in us, but may not be offset by your current or carryover losses from other passive activities, including those attributable to other publicly traded partnerships.
Passive losses that are not deductible because they exceed a unitholders share of income we generate may be deducted by the unitholder in full when he disposes of his entire investment in us in a fully taxable transaction with an unrelated
party. The passive loss limitations are applied after other applicable limitations on deductions, including the at-risk rules and the basis limitation.
The IRS could take the position that for purposes of applying the passive loss limitation rules to tiered publicly traded partnerships, such as Inergy and us, the related entities are treated as one
publicly traded partnership. In that case, any passive losses we generate would be available to offset income from your investments in Inergy. However, passive losses that are not deductible because they exceed a unitholders share of income we
generate would not be deductible in full until a unitholder disposes of his entire investment in both us and Inergy in a fully taxable transaction with an unrelated party.
Limitations on Interest Deductions
. The deductibility of a non-corporate taxpayers investment interest
expense is generally limited to the amount of that taxpayers net investment income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.
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The computation of a unitholders investment interest expense will take into account interest on any
margin account borrowing or other loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible
expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment or qualified dividend income. The IRS has indicated that
the net passive income earned by a publicly traded partnership will be treated as investment income to its unitholders for purposes of the investment interest deduction limitation. In addition, the unitholders share of our portfolio income
will be treated as investment income.
Entity-Level Collections
. If we are required or elect under applicable
law to pay any federal, state, local or foreign income tax on behalf of any unitholder or our general partner or any former unitholder, we are authorized to pay those taxes from our funds. That payment, if made, will be treated as a distribution of
cash to the unitholder on whose behalf the payment was made. If the payment is made on behalf of a person whose identity cannot be determined, we are authorized to treat the payment as a distribution to all current unitholders. Pursuant to the terms
of our partnership agreement, we are authorized to amend our partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these
distributions, the priority and characterization of distributions otherwise applicable
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under our partnership agreement is maintained as nearly as is practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of an individual unitholder in
which event the unitholder would be required to file a claim in order to obtain a credit or refund.
Allocation of
Income, Gain, Loss and Deduction
. In general, if we have a net profit or net loss, our items of income, gain, loss and deduction will be allocated among our unitholders in accordance with their percentage interests in us.
Specified items of our income, gain, loss and deduction will be allocated under Section 704(c) of the Internal Revenue Code to account
for any difference between the tax basis and fair market value of our assets at the time of an offering and certain other transactions, referred to in this discussion as the Contributed Property. These Section 704(c)
Allocations are required to eliminate the difference between a partners book capital account, credited with the fair market value of Contributed Property, and the tax capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the Book-Tax Disparity. The effect of these Section 704(c) Allocations to a unitholder purchasing common units from us in an offering will be essentially the same as if the
tax bases of our assets were equal to their fair market value at the time of such offering. In the event we issue additional common units or engage in certain other transactions in the future reverse Section 704(c) Allocations,
similar to the Section 704(c) Allocations described above, will be made to the general partner and our other unitholders immediately prior to such issuance or other transactions to account for the Book-Tax Disparity of all property held by us,
directly or indirectly through Inergy, at the time of such issuance or future transaction. In addition, items of recapture income will be allocated to the extent possible to the unitholder who was allocated the deduction giving rise to the treatment
of that gain as recapture income in order to minimize the recognition of ordinary income by some unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital
accounts nevertheless result, items of our income and gain will be allocated in an amount and manner sufficient to eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than an allocation required by Section 704(c) of the Internal Revenue Code to eliminate the Book-Tax Disparity, will generally be
given effect for federal income tax purposes in determining a partners share of an item of income, gain, loss or deduction only if the allocation has substantial economic effect. In any other case, a partners share of an item will be
determined on the basis of his interest in us, which will be determined by taking into account all the facts and circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon liquidation.
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Vinson & Elkins L.L.P. is of the opinion that, with the exception of the issues described in Section 754
Election and Disposition of Common UnitsAllocations Between Transferors and Transferees, allocations under our partnership agreement will be given effect for federal income tax purposes in determining a partners
share of an item of income, gain, loss or deduction.
Treatment of Short Sales
. A unitholder whose units are
loaned 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. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Vinson & Elkins L.L.P. has not rendered an opinion regarding the tax treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account
agreements to prohibit their brokers from borrowing and loaning their units. The IRS has previously announced that it is studying issues relating to the tax treatment of short sales of partnership interests. Please also read Disposition
of Common UnitsRecognition of Gain or Loss.
Alternative Minimum Tax
. Each unitholder will be
required to take into account his distributive share of any items of our income, gain, loss or deduction for purposes of the alternative minimum tax. The current minimum tax rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum taxable income. Prospective unitholders are urged to consult with their tax advisors as to the impact of an investment in units on their liability
for the alternative minimum tax.
Tax Rates
. Under current law, the highest marginal U.S. federal income tax
rate applicable to ordinary income of individuals is 35% and the highest marginal U.S. federal income tax rate applicable to long-term capital gains (generally, capital gains on certain assets held for more than 12 months) of individuals is 15%.
However, absent new legislation extending the current rates, beginning January 1, 2011, the highest marginal U.S. federal income tax rate applicable to ordinary income and long-term capital gains of individuals will increase to 39.6% and 20%,
respectively. Moreover, these rates are subject to change by new legislation at any time.
Section 754
Election
. We have made the election permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS. The election will generally permit us to adjust a common unit purchasers tax
basis in our assets (inside basis) under Section 743(b) of the Internal Revenue Code to reflect his purchase price of units acquired from another unitholder. This election does not apply to a person who purchases common units
directly from us. The Section 743(b) adjustment belongs to the purchaser and not to other unitholders. For purposes of this discussion, a unitholders inside basis in our assets will be considered to have two components: (1) his share
of our tax basis in our assets (common basis) and (2) his Section 743(b) adjustment to that basis.
Where the remedial allocation method is adopted (which we have historically adopted as to all property other than certain goodwill properties and which we will generally adopt as to all properties going forward), the Treasury Regulations
under Section 743 of the Internal Revenue Code require a portion of the Section 743(b) adjustment that is attributable to recovery property subject to depreciation under Section 168 of the Internal Revenue Code whose book basis is in
excess of its tax basis to be depreciated over the remaining cost recovery period for the propertys unamortized Book-Tax Disparity. If we elect a method other than the remedial method with respect to a goodwill property, Treasury Regulation
Section 1.197-2(g)(3) generally requires that the Section 743(b) adjustment attributable to an amortizable Section 197 intangible, which includes goodwill properties, should be treated as a newly-acquired asset placed in service in
the month when the purchaser acquires the common unit. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Internal Revenue Code,
rather than cost recovery deductions under Section 168, is generally required to be depreciated using either the straight-line method or the 150% declining balance method. If we elect a method other than the remedial method, the depreciation
and amortization methods and useful lives associated with the Section 743(b) adjustment, therefore, may differ from the methods and useful lives generally used to depreciate the inside basis in such properties. Under our partnership agreement,
our general partner is authorized to take a position to preserve the uniformity of units even if that position is not consistent with these and any other Treasury Regulations. If we elect a method other than the remedial method with respect to a
goodwill property, the common basis of such property is not amortizable. Please read Uniformity of Units.
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Although Vinson & Elkins L.L.P. is unable to opine as to the validity of this
approach because there is no direct or indirect controlling authority on this issue, we intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent
of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the propertys unamortized Book-Tax Disparity, or treat that portion as
non-amortizable to the extent attributable to property which is not amortizable. This method is consistent with the methods employed by other publicly traded partnerships but is arguably inconsistent with Treasury Regulation
Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets, and Treasury Regulation Section 1.197-2(g)(3). To the extent this Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization
position under which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased
a direct interest in our assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to some unitholders. Please read Uniformity of Units. A
unitholders tax basis for his common units is reduced by his share of our deductions (whether or not such deductions were claimed on an individuals income tax return) so that any position we take that understates deductions will
overstate the common unitholders basis in his common units, which may cause the unitholder to understate gain or overstate loss on any sale of such units. Please read Disposition of Common UnitsRecognition of Gain or
Loss. The IRS may challenge our position with respect to depreciating or amortizing the Section 743(b) adjustment we take to preserve the uniformity of the units. If such a challenge were sustained, the gain from the sale of units might
be increased without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the units share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a
greater amount of depreciation deductions and his share of any gain or loss on a sale of our assets would be less. Conversely, a Section 754 election is disadvantageous if the transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets immediately prior to the transfer. Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a transfer of an interest in us if we have a substantial builtin loss immediately after the transfer, or if we distribute property and have a substantial basis reduction. Generally a
builtin loss or a basis reduction is substantial if it exceeds $250,000.
The calculations involved in the
Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets and other matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance with
the Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by us to our tangible assets or the tangible assets owned by Inergy to goodwill instead. Goodwill, as an intangible asset, is
generally nonamortizable or amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure you that the determinations we make will not be successfully challenged by the IRS and that the
deductions resulting from them will not be reduced or disallowed altogether. Should the IRS require a different basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election, we may seek
permission from the IRS to revoke our Section 754 election. If permission is granted, a subsequent purchaser of units may be allocated more income than he would have been allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year
. We use the year ending December 31 as our taxable year and the accrual method of accounting for federal income tax purposes. Each unitholder will be required to include in income his
share of our income, gain, loss and deduction for our taxable year ending within or with his taxable
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year. In addition, a unitholder who has a taxable year ending on a date other than December 31 and who disposes of all of his units following the close of our taxable year but before the
close of his taxable year must include his share of our income, gain, loss and deduction in income for his taxable year, with the result that he will be required to include in his taxable income for his taxable year his share of more than twelve
months of our income, gain, loss and deduction. Please read Disposition of Common UnitsAllocations Between Transferors and Transferees.
Tax Basis, Depreciation and Amortization
. The tax basis of our assets and Inergys assets will be used for purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their tax basis immediately prior to an offering will be borne by unitholders
as of that time. Please read Tax Consequences of Unit OwnershipAllocation of Income, Gain, Loss and Deduction.
To the extent allowable, we may elect to use the depreciation and cost recovery methods that will result in the largest deductions being taken in the early years after assets subject to these allowances are placed in service. Because our
general partner may determine not to adopt the remedial method of allocation with respect to any difference between the tax basis and the fair market value of goodwill immediately prior to this or any future offering, we may not be entitled to any
amortization deductions with respect to any goodwill properties conveyed to us on formation or held by us at the time of any future offering. Please read Uniformity of Units. Property we subsequently acquire or construct may be
depreciated using accelerated methods permitted by the Internal Revenue Code.
If we or Inergy dispose of depreciable property
by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property we own or Inergy owns will likely be required to recapture some or all of those deductions as ordinary income upon a sale of his
interest in us. Please read Tax Consequences of Unit OwnershipAllocation of Income, Gain, Loss and Deduction and Disposition of Common UnitsRecognition of Gain or Loss.
The costs incurred in selling our units (called syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon our termination. There are uncertainties regarding the classification of costs as organization expenses, which may be amortized by us, and as syndication expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as syndication expenses.
Valuation and Tax Basis of Our Properties
. The
federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values, and the tax bases, of our assets and Inergys assets. Although we may from time to time consult
with professional appraisers regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of basis are subject to challenge and will not be binding on the IRS or the courts.
If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported by unitholders might change, and unitholders might be required to adjust their
tax liability for prior years and incur interest and penalties with respect to those adjustments.
Disposition of Common Units
Recognition of Gain or Loss
. Gain or loss will be recognized on a sale of units equal to the difference
between the amount realized and the unitholders tax basis for the units sold. A unitholders amount realized will be measured by the sum of the cash or the fair market value of other property received by him plus his share of our
nonrecourse liabilities. Because the amount realized includes a unitholders share of our nonrecourse liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.
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Prior distributions from us in excess of cumulative net taxable income for a common unit
that decreased a unitholders tax basis in that common unit will, in effect, become taxable income if the common unit is sold at a price greater than the unitholders tax basis in that common unit, even if the price received is less than
his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than a dealer in units,
on the sale or exchange of a unit will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held for more than twelve months will generally be taxed at a maximum U.S. federal income tax rate of
15% through December 31, 2010 and 20% thereafter (absent new legislation extending or adjusting the current rate). However, a portion, which will likely be substantial, of this gain or loss will be separately computed and taxed as ordinary
income or loss under Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise to depreciation recapture or other unrealized receivables or to inventory items we own or Inergy owns. The
term unrealized receivables includes potential recapture items, including depreciation recapture. Ordinary income attributable to unrealized receivables, inventory items and depreciation recapture may exceed net taxable gain realized
upon the sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a unitholder may recognize both ordinary income and a capital loss upon a sale of units. Net capital losses may offset capital
gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests. Upon a sale
or other disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold using an equitable apportionment method, which generally means that the tax basis allocated to the interest
sold equals an amount that bears the same relation to the partners tax basis in his entire interest in the partnership as the value of the interest sold bears to the value of the partners entire interest in the partnership. Treasury
Regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify common units transferred with an ascertainable holding period to elect to use the actual holding period of the common units transferred.
Thus, according to the ruling discussed above, a common unitholder will be unable to select high or low basis common units to sell as would be the case with corporate stock, but, according to the Treasury Regulations, he may designate specific
common units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of common units transferred must consistently use that identification method for all subsequent sales or
exchanges of common units. A unitholder considering the purchase of additional units or a sale of common units purchased in separate transactions is urged to consult his tax advisor as to the possible consequences of this ruling and application of
the Treasury Regulations.
Specific provisions of the Internal Revenue Code affect the taxation of some financial products and
securities, including partnership interests, by treating a taxpayer as having sold an appreciated partnership interest, one in which gain would be recognized if it were sold, assigned or terminated at its fair market value, if the
taxpayer or related persons enter(s) into:
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract
with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also
authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial position.
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Allocations Between Transferors and Transferees
. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on
the first business day of the month, which we refer to in this prospectus as the Allocation Date. However, gain or loss realized on a sale or other disposition of our assets other than in the ordinary course of business will be allocated
among the unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.
Although simplifying conventions are contemplated by the Internal Revenue Code and most publicly traded partnerships use similar simplifying
conventions, the use of this method may not be permitted under existing Treasury Regulations. Recently, however, the Department of the Treasury and the IRS issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly
traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders, although such tax items must be prorated on a daily basis. Existing publicly traded partnerships are entitled to
rely on these proposed Treasury Regulations; however, they are not binding on the IRS and are subject to change until final Treasury Regulations are issued. Accordingly, Vinson & Elkins L.L.P. is unable to opine on the validity of this
method of allocating income and deductions between transferor and transferee unitholders. If this method is not allowed under the Treasury Regulations, or only applies to transfers of less than all of the unitholders interest, our taxable
income or losses might be reallocated among the unitholders. We are authorized to revise our method of allocation between transferor and transferee unitholders, as well as unitholders whose interests vary during a taxable year, to conform to a
method permitted under future Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes
of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deductions attributable to that quarter but will not be entitled to receive that cash distribution.
Notification Requirements
. A unitholder who sells any of his units is generally required to notify us in writing of that sale
within 30 days after the sale (or, if earlier, January 15 of the year following the sale). A purchaser of units who purchases units from another unitholder is also generally required to notify us in writing of that purchase within 30 days
after the purchase. Upon receiving such notifications, we are required to notify the IRS of that transaction and to furnish specified information to the transferor and transferee. Failure to notify us of a purchase may, in some cases, lead to the
imposition of penalties. However, these reporting requirements do not apply to a sale by an individual who is a citizen of the United States and who effects the sale or exchange through a broker who will satisfy such requirements.
Constructive Termination
. We will be considered to have been terminated for tax purposes if there are sales or exchanges
which, in the aggregate, constitute 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of measuring whether the 50% threshold is reached, multiple sales of the same interest are counted only
once. A constructive termination results in the closing of our taxable year for all unitholders. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may result in
more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. A constructive termination occurring on a date other than December 31 will result in us filing two tax returns (and could
result in unitholders receiving two Schedules K-1) for one fiscal year and the cost of the preparation of these returns will be borne by all common unitholders. Our constructive termination could result in an increase in the amount of taxable income
to be allocated to our unitholders if our termination results in a termination of Inergy. Although the amount of increase cannot be estimated because it depends upon numerous factors, including the time of the termination, the amount could be
material. We would be required to make new tax elections after a termination, including a new election under Section 754 of the Internal Revenue Code, and a termination would result in a deferral of our deductions for depreciation. A
termination could also result in penalties if we were unable to determine that the termination had occurred. Moreover, a termination might either accelerate the application of, or subject us to, any tax
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legislation enacted before the termination. The IRS has announced recently that it plans to issue guidance regarding the treatment of constructive terminations of publicly traded partnerships
such as us. Any such guidance may change the application of the rules discussed above and may affect the tax treatment of a unitholder.
Uniformity of Units
Because we cannot match transferors and transferees of units, we must maintain uniformity
of the economic and tax characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of
uniformity can result from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6) and Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could have a negative impact on the value of the units. Please read
Tax Consequences of Unit OwnershipSection 754 Election.
We intend to depreciate the portion of a
Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the propertys unamortized Book-Tax Disparity, or treat that portion as nonamortizable, to the extent attributable to property the common basis of which is not amortizable, consistent with the
Treasury Regulations under Section 743 of the Internal Revenue Code, even though that position may be inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our
assets, and Treasury Regulation Section 1.197-2(g)(3). Please read Tax Consequences of Unit OwnershipSection 754 Election. To the extent that the Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may adopt a depreciation and amortization
position under which all purchasers acquiring units in the same month would receive depreciation and amortization deductions, whether attributable to a common basis or Section 743(b) adjustment, based upon the same applicable methods and lives
as if they had purchased a direct interest in our property. If this position is adopted, it may result in lower annual depreciation and amortization deductions than would otherwise be allowable to some unitholders and risk the loss of depreciation
and amortization deductions not taken in the year that these deductions are otherwise allowable. This position will not be adopted if we determine that the loss of depreciation and amortization deductions will have a material adverse effect on the
unitholders. If we choose not to utilize this aggregate method, we may use any other reasonable depreciation and amortization method to preserve the uniformity of the intrinsic tax characteristics of any units that would not have a material adverse
effect on the unitholders. The IRS may challenge any method of depreciating the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of units might be affected, and the gain from the sale of
units might be increased without the benefit of additional deductions. Please read Disposition of Common UnitsRecognition of Gain or Loss.
Tax-Exempt Organizations and Other Investors
Ownership of units by
employee benefit plans, other tax-exempt organizations, non-resident aliens, non-U.S. corporations and other non-U.S. persons raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them.
If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units. Moreover, under our partnership agreement, in certain circumstances, non-U.S. persons may be subject to redemption. Please
read Material Provisions of Our Partnership AgreementNon-Citizen Assignees; Redemption.
Employee benefit
plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income. Virtually all of our income less certain
allowable deductions allocated to a unitholder that is a tax-exempt organization will be unrelated business taxable income and will be taxable to them.
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Non-resident aliens and non-U.S. corporations, trusts or estates that own units will be
considered to be engaged in business in the United States because of the ownership of units. As a consequence, they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax
at regular rates on their share of our net income or gain. Moreover, under rules applicable to publicly traded partnerships, cash distributions to non-U.S. unitholders will be subject to withholding at the highest applicable effective tax rates.
Each non-U.S. unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form W-8BEN or applicable substitute form in order to obtain credit for these withholding taxes. A change in
applicable law may require us to change these procedures.
In addition, because a non-U.S. corporation that owns units will be
treated as engaged in a United States trade or business, that corporation may be subject to the United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of our income and gain, as adjusted for
changes in the non-U.S. corporations U.S. net equity, which is effectively connected with the conduct of a United States trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States and
the country in which the non-U.S. corporate unitholder is a qualified resident. In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.
A non-U.S. unitholder who sells or otherwise disposes of a common unit will be subject to U.S. federal income tax on gain
realized from the sale or disposition of that unit to the extent the gain is effectively connected with a U.S. trade or business of the non-U.S. unitholder. Under a ruling published by the IRS, interpreting the scope of effectively connected
income, a non-U.S. unitholder would be considered to be engaged in a trade or business in the U.S. by virtue of the U.S. activities of the Partnership, and part or all of that unitholders gain would be effectively connected with that
unitholders indirect U.S. trade or business. Moreover, under the Foreign Investment in Real Property Tax Act, a non-U.S. common unitholder generally will be subject to U.S. federal income tax upon the sale or disposition of a common unit if
(i) he owned (directly or constructively applying certain attribution rules) more than 5% of our common units at any time during the five-year period ending on the date of such disposition and (ii) 50% or more of the fair market value of
all of our assets consisted of U.S. real property interests at any time during the shorter of the period during which such unitholder held the common units or the 5-year period ending on the date of disposition. Currently, more than 50% of our
assets consist of U.S. real property interests and we do not expect that to change in the foreseeable future. Therefore, non-U.S. unitholders may be subject to federal income tax on gain from the sale or disposition of their units.
Administrative Matters
Information Returns and Audit Procedures
. We intend to furnish to each unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes his share of our
income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have been mentioned earlier, to determine
each unitholders share of income, gain, loss and deduction. We cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code, Treasury Regulations or administrative interpretations of
the IRS. Neither we nor Vinson & Elkins L.L.P. can assure prospective unitholders that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the IRS could negatively affect the value of the
units.
The IRS may audit our federal income tax information returns. Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and possibly may result in an audit of his return. Any audit of a unitholders return could result in adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of federal tax audits, judicial review of administrative
adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of
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income, gain, loss and deduction are determined in a partnership proceeding rather than in separate proceedings with the partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these purposes. Our partnership agreement names our general partner as our Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on our behalf and on behalf of unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax
deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in us to a settlement with the IRS unless that unitholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward,
and each unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS
identifying the treatment of any item on his federal income tax return that is not consistent with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial
penalties.
Nominee Reporting
. Persons who hold an interest in us as a nominee for another person are required
to furnish to us:
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(a)
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the name, address and taxpayer identification number of the beneficial owner and the nominee;
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(b)
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whether the beneficial owner is:
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a person that is not a United States person;
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2.
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a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing; or
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(c)
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the amount and description of units held, acquired or transferred for the beneficial owner; and
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(d)
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specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount
of net proceeds from sales.
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Brokers and financial institutions are required to furnish additional information,
including whether they are United States persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is imposed by the Internal Revenue
Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.
Accuracy-Related Penalties
. An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence
or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown
that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion.
For
individuals, a substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. The amount of any
understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return:
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(1)
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for which there is, or was, substantial authority; or
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(2)
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as to which there is a reasonable basis and the pertinent facts of that position are disclosed on the return.
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If any item of income, gain, loss or deduction included in the distributive shares of unitholders might result in that kind of an
understatement of income for which no substantial authority exists, we must disclose the pertinent facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns and to take other actions as may be appropriate to permit unitholders to avoid liability for this penalty. More stringent rules apply to tax shelters, which we do not believe includes us, or any of
our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the value of any property, or
the tax basis of any property, claimed on a tax return is 150% or more of the amount determined to be the correct amount of the valuation or tax basis, (b) the price for any property or services (or for the use of property) claimed on any such
return with respect to any transaction between persons described in Internal Revenue Code Section 482 is 200% or more (or 50% or less) of the amount determined under Section 482 to be the correct amount of such price, or (c) the net
Internal Revenue Code Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5 million or 10% of the taxpayers gross receipts. No penalty is imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for most corporations). The penalty is increased to 40% in the event of a gross valuation misstatement. We do not anticipate making any valuation misstatements.
Reportable Transactions
. If we were to engage in a reportable transaction, we (and possibly you and others) would
be required to make a detailed disclosure of the transaction to the IRS. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the
IRS as a listed transaction or that it produces certain kinds of losses for partnerships, individuals, S corporations, and trusts in excess of $2 million in any single year, or $4 million in any combination of 6 successive tax years. Our
participation in a reportable transaction could increase the likelihood that our federal income tax information return (and possibly your tax return) would be audited by the IRS. Please read Information Returns and Audit
Procedures.
Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or
evade tax, or in any listed transaction, you may be subject to the following provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at
Accuracy-Related Penalties;
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for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability; and
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in the case of a listed transaction, an extended statute of limitations.
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We do not expect to engage in any reportable transactions.
State, Local, Foreign and Other Tax Considerations
In addition to federal
income taxes, you likely will be subject to other taxes, such as state, local and foreign income taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which we or Inergy
do business or own property or in which you are a resident. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on his investment in us. We or Inergy presently own
property or do business in numerous states, almost all of which currently impose a personal income tax. We or Inergy may also own property or do business in other jurisdictions in the future. Although you may not be required to file a return and pay
taxes in
57
some jurisdictions because your income from that jurisdiction falls below the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many other
jurisdictions in which we may do business or own property and may be subject to penalties for failure to comply with those requirements. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and may not be available to
offset income in subsequent taxable years. Some jurisdictions may require us, or we may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the jurisdiction. Withholding, the amount of
which may be greater or less than a particular unitholders income tax liability to the jurisdiction, generally does not relieve a nonresident unitholder from the obligation to file an income tax return. Amounts withheld will be treated as if
distributed to unitholders for purposes of determining the amounts distributed by us. Please read Tax Consequences of Unit OwnershipEntity Level Collections. Based on current law and our estimate of our future operations, the
general partner anticipates that any amounts required to be withheld will not be material.
It is the responsibility of
each unitholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions, of his investment in us. Accordingly, each prospective unitholder is urged to consult, and depend upon, his tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each unitholder to file all state, local and foreign, as well as United States federal tax returns, that may be required of him. Vinson & Elkins L.L.P. has not rendered an
opinion on the state, local or foreign tax consequences of an investment in us.
58
PLAN OF DISTRIBUTION
We may sell common units described in this prospectus and any accompanying prospectus supplement through underwriters, through brokers or
dealers, through agents or directly to one or more investors.
We will prepare a prospectus supplement for each offering that
will disclose the terms of the offering, including the name or names of any underwriters, brokers, dealers or agents, the purchase price of the common units and the proceeds to us from the sale, any underwriting discounts and other items
constituting compensation to underwriters, dealers or agents.
We will fix a price or prices of our common units to be sold
under this prospectus from time to time at:
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market prices prevailing at the time of any sale under this registration statement;
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prices related to such prevailing market prices; or
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We may change the price of the common units offered from time to time.
If we use underwriters or dealers in the
sale, they will acquire the common units for their own account, and they may resell these common units from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The common units may be offered to the public either through underwriting syndicates represented by one or more managing underwriters or directly by one or more of such firms. Unless otherwise disclosed in the prospectus
supplement, the obligations of the underwriters to purchase common units will be subject to certain conditions precedent, and the underwriters will be obligated to purchase all of the common units offered by the prospectus supplement if any of the
common units are purchased. Any initial public offering price and any discounts or concessions allowed or re-allowed or paid to dealers may be changed from time to time.
We may sell the common units through agents designated by us from time to time. We will name any agent involved in the offering and sale of the common units for which this prospectus is delivered, and
disclose any commissions payable by us to the agent or the method by which the commissions can be determined, in the prospectus supplement. Unless otherwise indicated in the prospectus supplement, any agent will be acting on a best efforts basis for
the period of its appointment.
Offers to purchase common units may be solicited directly by us and the sale thereof may be
made by us directly to institutional investors or others, who may be deemed to be underwriters within the meaning of the Securities Act of 1933 with respect to any resale thereof. The terms of any such sales will be described in the prospectus
supplement relating thereto. We may use electronic media, including the Internet, to sell offered common units directly.
We
may offer our common units into an existing trading market on the terms described in the prospectus supplement relating thereto. Underwriters, dealers and agents who participate in any at-the-market offerings will be described in the prospectus
supplement relating thereto.
We may agree to indemnify underwriters, dealers and agents who participate in the distribution
of common units against certain liabilities to which they may become subject in connection with the sale of the common units, including liabilities arising under the Securities Act of 1933.
Certain of the underwriters and their affiliates may be customers of, may engage in transactions with and may perform services for us or our
affiliates in the ordinary course of business.
59
A prospectus and accompanying prospectus supplement in electronic form may be made available
on the web sites maintained by the underwriters. The underwriters may agree to allocate a number of common units for sale to their online brokerage account holders. Such allocations of common units for Internet distributions will be made on the same
basis as other allocations. In addition, common units may be sold by the underwriters to securities dealers who resell common units to online brokerage account holders.
The aggregate maximum compensation the underwriters will receive in connection with the sale of any common units under this prospectus and the registration statement of which it forms a part will not
exceed 10% of the gross proceeds from the sale.
Because the Financial Industry Regulatory Authority, Inc., or
FINRA, views our common units as interests in a direct participation program, any offering of common units under the registration statement of which this prospectus forms a part will be made in compliance with FINRA Rule 2310.
To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of
distribution. The place and time of delivery for the common units in respect of which this prospectus is delivered will be set forth in the accompanying prospectus supplement.
In connection with offerings of common units under the registration statement of which this prospectus forms a part and in compliance with
applicable law, underwriters, brokers or dealers may engage in transactions that stabilize or maintain the market price of the common units at levels above those that might otherwise prevail in the open market. Specifically, underwriters, brokers or
dealers may over-allot in connection with offerings, creating a short position in the common units for their own accounts. For the purpose of covering a syndicate short position or stabilizing the price of the common units, the underwriters, brokers
or dealers may place bids for the common units or effect purchases of the common units in the open market. Finally, the underwriters may impose a penalty whereby selling concessions allowed to syndicate members or other brokers or dealers for
distribution of the common units in offerings may be reclaimed by the syndicate if the syndicate repurchases previously distributed common units in transactions to cover short positions, in stabilization transactions or otherwise. These activities
may stabilize, maintain or otherwise affect the market price of the common units, which may be higher than the price that might otherwise prevail in the open market, and, if commenced, may be discontinued at any time.
60
LEGAL MATTERS
Vinson & Elkins L.L.P. will pass upon the validity of the common units offered in this registration statement. If certain legal
matters in connection with an offering of the common units made by this prospectus and a related prospectus supplement are passed upon by counsel for the underwriters of such offering, that counsel will be named in the applicable prospectus
supplement related to that offering.
EXPERTS
The consolidated financial statements of Inergy Holdings, L.P. and Subsidiaries and the balance sheet of Inergy Holdings GP, LLC appearing
in Inergy Holdings, L.P.s Annual Report (Form 10-K) for the year ended September 30, 2009 (including schedules appearing therein), and the effectiveness of Inergy Holdings, L.P.s internal control over financial reporting as of September
30, 2009, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein, and incorporated herein by reference. Such consolidated financial statements and audited
consolidated financial statements to be included in subsequently filed documents will be, incorporated herein in reliance upon the reports of Ernst & Young LLP pertaining to such consolidated financial statements and the effectiveness of our
internal control over financial reporting as of the respective dates (to the extent covered by consents filed with the Securities and Exchange Commission) given on the authority of such firm as experts in accounting and auditing.
61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14.
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Other Expenses of Issuance and Distribution.
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Set forth below are the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the
exception of the SEC registration fee, the amounts set forth below are estimates.
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SEC registration fee
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$
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16,740
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Legal fees and expenses
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60,000
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Accounting fees and expenses
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15,000
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Printing expenses
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30,000
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Transfer Agent and Registrar Fees
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10,000
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Miscellaneous
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5,000
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TOTAL
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$
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136,740
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Item 15.
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Indemnification of Directors and Officers.
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Inergy Holdings GP, LLC
Section 18-108 of the Delaware Limited Liability Company Act provides that,
subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and
against any and all claims and demands whatsoever. The Limited Liability Company Agreement of Inergy Holdings GP, LLC provides that Inergy Holdings GP will indemnify each person who has been or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or appellate (regardless of whether such action, suit or proceeding is by or in the right of Inergy Holdings GP or by third parties)
by reason of the fact that such person is or was a member, director or officer of Inergy Holdings GP, or is or was serving at the request of Inergy Holdings GP as a director, officer or in any other comparable position of any other enterprise,
against all liabilities and expenses, including judgments, amounts paid in settlement, attorneys fees, ERISA excise taxes or penalties, fines and other expenses, actually and reasonably incurred by such person in connection with such action,
suit or proceeding (including the investigation, defense, settlement or appeal of such action, suit or proceeding);
provided, however
, that Inergy Holdings GP will not be required to indemnify or advance expenses to any person on account of
such persons conduct that was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct;
provided, further
, that Inergy Holdings GP will not be required to indemnify or advance expenses to any
person in connection with an action, suit or proceeding initiated by such person unless the initiation of such action, suit or proceeding was authorized in advance by the board of directors or the voting members;
provided, further
, that a
director or officer will be indemnified only for those actions taken or omitted to be taken by such director or officer in the discharge of such directors or officers obligations in connection with the management of the business and
affairs of Inergy Holdings GP, Inergy Holdings, L.P. or any other enterprise. The foregoing right to indemnification will apply to all persons serving as directors or officers and to all persons who serve as a representative of Inergy Holdings GP at
any time or who serve at any time at the request of Inergy Holdings GP as a director, officer or in any other comparable position of any other enterprise. Nothing prevents one or more of the members or Inergy Holdings, L.P. from indemnifying their
respective representatives or directors or officers under such members or Inergy Holdings, L.P.s organizational documents or other agreements. If any person is entitled to indemnification both from Inergy Holdings GP, from a member or
from Inergy Holdings, L.P., then indemnification will come first from Inergy Holdings, L.P., then Inergy Holdings GP and thereafter from the member.
II-1
Inergy Holdings, L.P.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act provides that, subject to such standards and restrictions, if any, as are set forth in its partnership agreement, a limited
partnership may, and shall have the power to, indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever. The Amended and Restated Agreement of Limited Partnership of Inergy Holdings, L.P.
provides that, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses),
judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as an indemnitee;
provided
, that the indemnitee shall not be indemnified and held harmless if there has been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that, in respect of the matter for which the indemnitee is seeking indemnification, the indemnitee acted in bad faith or engaged in fraud, willful misconduct, or in the case of a criminal matter, acted with
knowledge that the indemnitees conduct was unlawful:
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any departing general partner;
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any person who is or was an affiliate of our general partner or any departing general partner;
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any person who is or was a member, partner, officer, director, fiduciary or trustee of our general partner or any departing general partner or any
affiliate of our general partner or any departing general partner;
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any person who is or was serving at the request of our general partner or any departing general partner or any affiliate of a general partner or any
departing general partner as an officer, director, employee, member, partner, agent, fiduciary or trustee of another person; and
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any person our general partner designates as an indemnitee.
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Any indemnification under these provisions will be made only out of our assets. Our general partner will not be personally liable for, or
have any obligation to contribute or loan funds or assets to us to enable us to effectuate, such indemnification. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of
whether we would have the power to indemnify the person against liabilities under our partnership agreement.
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Exhibit
Number
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Description
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**1.1
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Form of Underwriting Agreement
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3.1
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Form of Amended and Restated Agreement of Limited Partnership of Inergy Holdings, L.P. (incorporated herein by reference to Appendix A to Inergy Holdings, L.P.s Prospectus
(Registration No. 333-122466) filed on June 21, 2005)
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3.2A
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Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.s Quarterly Report on Form 10-Q
(Registration No. 000-32453) filed on February 13, 2004)
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3.2B
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Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.s Quarterly
Report on Form 10-Q (Registration No. 000-32453) filed on May 14, 2004)
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II-2
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Exhibit
Number
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Description
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3.2C
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Amendment No. 2 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.s Current
Report on Form 8-K (Registration No. 000-32453) filed on January 24, 2005)
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3.2D
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Amendment No. 3 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 4.2 to Inergy, L.P.s Current
Report on Form 8-K (Registration No. 000-32453) filed on August 12, 2005)
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4.1
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Specimen Certificate Evidencing Common Units Representing Limited Partner Interests in Inergy Holdings, L.P. (incorporated herein by reference to Exhibit 4.1 to Inergy Holdings,
L.P.s Amendment No. 2 to Registration Statement on Form S-1 (Reg. No. 333-122466) filed on April 11, 2005)
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*5.1
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Opinion of Vinson & Elkins L.L.P. as to the legality of the securities being registered
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*8.1
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Opinion of Vinson & Elkins L.L.P. as to tax matters
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*23.1
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Consent of Ernst & Young LLP
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*23.2
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Consent of Vinson & Elkins L.L.P. (contained in Exhibits 5.1 and 8.1)
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*24.1
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Power of Attorney (included on signature page of this registration statement)
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**
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To be filed as an Exhibit to a Current Report on Form 8-K or in a post-effective amendment to this registration statement.
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The
undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration
statement;
provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) above do not apply if the registration statement is on
Form S-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of this registration statement;
II-3
(2) That, for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of
1933 to any purchaser:
(a) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed
to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(b) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an
underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes
that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(a) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed
pursuant to Rule 424;
(b) Any free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned registrant;
(c) The portion of any other free
writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(d) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each
filing of the registrants annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plans annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof.
II-4
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kansas City, State of Missouri, on December 3, 2009.
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INERGY HOLDINGS, L.P.
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By:
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Inergy Holdings GP, LLC,
its General Partner
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By:
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/
S
/ R. B
ROOKS
S
HERMAN
, J
R
.
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Name:
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R. Brooks Sherman, Jr.
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Title:
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Executive Vice President and Chief Financial Officer
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POWER OF ATTORNEY
Each person whose signature appears below appoints John J. Sherman, R. Brooks Sherman, Jr., and Laura L. Ozenberger, and each of them, any
of whom may act without the joinder of the other, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement and any Registration Statement (including any amendment thereto) for this offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or would do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them of their or
his substitute and substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed by the following officers and directors of Inergy Holdings GP, LLC, as general partner of Inergy Holdings, L.P., the registrant, in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/
S
/ J
OHN
J.
S
HERMAN
John J. Sherman
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President, Chief Executive Officer and Director (Principal Executive Officer)
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December 3, 2009
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/
S
/ R. B
ROOKS
S
HERMAN
, J
R
.
R. Brooks Sherman,
Jr.
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Executive Vice President and Chief Financial Officer (Principal Accounting Officer and Principal
Financial Officer)
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December 3, 2009
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/
S
/ W
ARREN
H.
G
FELLER
Warren H. Gfeller
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Director
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December 3, 2009
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/
S
/ A
RTHUR
B.
K
RAUSE
Arthur B. Krause
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Director
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December 3, 2009
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/
S
/ R
ICHARD
T.
OB
RIEN
Richard T. OBrien
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Director
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December 3, 2009
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II-6
INDEX TO EXHIBITS
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Exhibit
Number
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Description
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**1.1
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Form of Underwriting Agreement
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3.1
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Form of Amended and Restated Agreement of Limited Partnership of Inergy Holdings, L.P. (incorporated herein by reference to Appendix A to Inergy Holdings, L.P.s
Prospectus (Registration No. 333-122466) filed on June 21, 2005)
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3.2A
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Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.s Quarterly Report on Form 10-Q
(Registration No. 000-32453) filed on February 13, 2004)
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3.2B
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Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.s Quarterly
Report on Form 10-Q (Registration No. 000-32453) filed on May 14, 2004)
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3.2C
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Amendment No. 2 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.s Current
Report on Form 8-K (Registration No. 000-32453) filed on January 24, 2005)
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3.2D
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Amendment No. 3 to Second Amended and Restated Agreement of Limited Partnership of Inergy, L.P. (incorporated herein by reference to Exhibit 4.2 to Inergy, L.P.s Current
Report on Form 8-K (Registration No. 000-32453) filed on August 12, 2005)
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4.1
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Specimen Certificate Evidencing Common Units Representing Limited Partner Interests in Inergy Holdings, L.P. (incorporated herein by reference to Exhibit 4.1 to Inergy Holdings,
L.P.s Amendment No. 2 to Registration Statement on Form S-1 (Reg. No. 333-122466) filed on April 11, 2005)
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*5.1
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Opinion of Vinson & Elkins L.L.P. as to the legality of the securities being registered
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*8.1
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Opinion of Vinson & Elkins L.L.P. as to tax matters
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*23.1
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Consent of Ernst & Young LLP
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*23.2
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Consent of Vinson & Elkins L.L.P. (contained in Exhibits 5.1 and 8.1)
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*24.1
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Power of Attorney (included on signature page of this registration statement)
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**
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To be filed as an Exhibit to a Current Report on Form 8-K or in a post-effective amendment to this registration statement.
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II-7
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