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Executives

Brooks Sherman – EVP and CFO

John Sherman – President and CEO

Bill Moler – President and COO, Inergy Midstream

Analysts

Gabe Moreen – Bank of America Merrill Lynch

Brian Zarahn – Barclays Capital

Darren Horowitz – Raymond James

Ron Londe – Wells Fargo

Elvira Scotto – RBC Capital Markets

Ethan Bellamy – Baird

Inergy LP (NRGY) F3Q12 Earnings Call August 2, 2012 11:00 AM ET

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Inergy and Inergy Midstream Third Quarter Conference Call. (Operator Instructions) After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I will now turn the call over to Mr. Brooks Sherman, Chief Financial Officer. You may begin your conference.

Brooks Sherman

Thank you, Melissa, and welcome, everyone. Welcome to the fiscal 2012 third quarter joint earnings call of Inergy LP and Inergy Midstream LP. With me on the call today are John Sherman, our President and CEO, and Bill Moler, our President of Inergy Midstream.

The format of our call today will be such that after I read the forward-looking statement, I’ll turn it over to John for an overview. Bill will follow John with an operations overview as well as an update on our projects. I’ll then go over highlights of the quarter and the year-to-date numbers for both of our MLPs before we open it up for questions.

I would say just one item of significant note is that as you saw in a separate press release this morning, we closed on the sale of our retail propane operations to Suburban Propane. While John will speak in a moment on the strategic benefits of this transaction and how it repositions NRGY, I’ll give you a brief overview of the economics of the deal. The press release had these in it but just to give you a breakdown.

The breakdown consideration for the sale was that we received 14.2 million registered Suburban common units and 1.187 billion of our high yield bonds were exchanged for Suburban high yield bonds and cash that was paid to the note holders by Suburban. Those bonds are now off of our books, leaving only 13 million of these high yield bonds at NRGY.

As for the Suburban units, approximately 14.1 million of those Suburban common units will be distributed to NRGY limited partner unit holders and we expect that to occur over the next 30 to 45 days. And as you saw in the press release, that equates to a ratio of distribution of about 0.1067 Suburban unit per NRGY unit. The completion of this transaction leaves NRGY with a strong balance sheet at less than two times debt to EBITDA leverage, ample liquidity within our revolving bank facility then as we pursue accretive opportunities at both NRGY and NRGM.

To move to our forward-looking statement. In our discussion today, we may communicate certain forward-looking information. Various risk factors, including regulatory proceedings, commodity prices and weather conditions, among others, may cause actual results to differ materially from any projections or estimates in these forward-looking statements. We provide a detailed discussion of these risk factors and others in our SEC filings and we encourage you to review these filings.

With that, John, I’ll turn it to you.

John Sherman

Thank you, Brooks. Good morning and thank you for your attendance on the call today. I want to talk to this morning, as Brooks mentioned, about the final structure for our retail propane divestiture, including the pending distribution of the Suburban common units received in that transaction, our financial and operating performance for the quarter and first nine months for NRGM and NRGY, update you on current and future growth plans and discuss our future as a pure-play midstream MLP.

First, today’s announcement of the closing of the divestiture of our retail propane operations to Suburban is a major event for the partnership. It’s another step in the transformation of Inergy that began with the separation of our major business units last year. The IPO of NRGM gave us a competitive cost of capital to finance the growth of our Midstream business and delevered the NRGY balance sheet. The recent dropdown of U.S. Salt continued that and today’s transactions accelerates our conversion into a pure-play midstream business. In the process, we put our propane investment in a good place and cost effectively shed $1.2 billion of debt.

Now for the quarter. At NRGM, $33.4 million of adjusted EBITDA is a solid result and ahead of plan. About $3 million of that number was due to a nonrecurring insurance recovery from a prior period, but net of that, we were right on track as expected. That’s not surprising given the highly fee-based nature of the NRGM cash flows.

We are just beginning to reap the benefits of building out this storage and transportation hub over the last six years. Our storage capacity is fully contracted. Recent recontracting has been consummated at or near historic rates and we have extended our weighted average maturity this year.

Transportation is becoming a bigger part of our business mix, currently about 25% of revenues, and it will be more than a third of revenues when Marc I is up and running. Speaking of Marc I, Bill Moler will provide more color on that in a minute, but the project is progressing well and is expected to be up and running shortly.

At NRGY we produced 54.4 million of consolidated adjusted EBITDA. These numbers include the operating results of our propane business, our Texas natural gas business and Inergy Services, which is our NGL Midstream business. At Tres Palacios while we continue to deal with the current pricing environment, we feel very good about that asset long term. It has unmatched operating capability and connectivity. The potential for liquids development, and a strategic location adjacent to the Eagle Ford.

Inergy Services is currently experiencing rapid growth in partnership with our producer customers, particularly in the rich shale plays, and demand for NGL storage is at an all-time high.

Bottom line before I turn this over to Bill, it’s been a challenging year for us and some of the wounds were self-inflicted. But we have deftly repositioned the partnership for growth and value creation on behalf of our unit holders. We still have a lot of work to do, but we stand today in a strong position with two strong balance sheets and two valuable currencies. We have great assets and an industry environment providing the opportunity to invest capital accretively in bolt-on projects and a robust M&A market. We will be disciplined, pick our spots, and we look forward to returning to growth on behalf of our investors.

With that, I’ll turn it over to Bill, and I look forward to the Q&A.

Bill Moler

Thank you, John. Good morning. Today I’m going to give some brief thoughts on the overall market dynamics that we’re witnessing, discuss our current operations at both NRGY and NRGM, and then discuss our portfolio of growth-related opportunities and our projects that are currently under construction.

First of note, this is a very exciting time in the gas industry. The continued growth in supply is awakening new markets in all regions of the country. We’ve seen demand for coal to gas conversion and new generation being sited and planned throughout the Northeast. We’ve seen new petrochemical infrastructure sited in the Northeast to help build demand for supplies of both natural gas and natural gas liquids. We’ve seen numerous pipeline expansions planned and announced and under construction, including our Marc I project and our joint efforts with UGI and Washington Gas Light on the Commonwealth Pipeline.

In the South we have seen announcements of gas processing plant expansions, including those that will be direct connected to our Tres header system. We’ve seen transportation volumes on all of our systems increase quarter-over-quarter and have successfully launched a program emphasizing our ability to wheel volumes between our connected markets on all of our assets. Although commodity prices are depressed due to the oversupply situation in the market, we’ve seen utilization of our asset base increase due to our connectivity and our ability to move produced volumes through storage to other more liquid points of sale.

For the quarter, we have wheeled approximately 50 Bcf of gas between our interconnected pipes in the Northeast. Most of this is tied to the movement of Pennsylvania produced volume from directly interconnected gathering systems or from the constrained Tennessee Gas Pipeline in Zone 4 to available capacity on Millennium Pipeline at the northern end of our system.

Our Firm Wheeling Service associated with the North/South project placed in service last November floated virtually 100% utilization for the quarter, while the remaining transportation volumes is comprised of interruptible wheeled volume. Due to the bidirectional nature of our compression facilities, we are able to move almost twice the firm volume on our North/South system by utilizing a combination of horsepower on the northern and southern ends of the pipeline. We continue to analyze expansion of firm capability on our North/South project and expect to fund an expansion to firm up under term contracts some of the interruptible volume we are flowing today.

Commensurately, Millennium Pipeline has received authority a couple weeks ago to build its Minisink Compressor facility on the east end of its system, which should increase their ability to take volume from us at the northern end of our system. This past quarter we interconnected our Seneca Lake storage facility to Millennium Pipeline and our customers are utilizing that interconnect in support of their storage capacity at Seneca.

We have grown wheeling services at Arlington storage from Millennium Pipeline to Dominion Transmission through our bidirectional interconnects at Thomas Corners and Seneca Lake. At Steuben we have filed an application at the FERC for market-based rates with the support of the majority of our customer base. The majority of storage capacity there is under binding precedent agreements, extending the existing contracts for terms up to five years at historical rates, all in association with the application for market-based rates.

Steuben today has no authority to wheel volume through its infrastructure, but post authorization from FERC Steuben, like Thomas Corners, Seneca Lake and Stagecoach, will be able to wheel volumes between the three interconnected pipelines of Tennessee, Dominion and Millennium.

Down south at Tres we continue to execute on a robust book of hub services including parts, loans and interruptible wheeling, including the enhanced wheeling service that is optimizing the facility and its ability to generate revenues in the current environment. As we have stated in the past, unlike the northeast, Tres is more tied to movements in the forward curve and developed or undeveloped spreads that surface in the front month market.

However, with the press spreads we are capturing all opportunities to park and loan gas at better than intrinsic values. Currently we have over 13.8 billion cubic feet of volume parked in the field along with our 20.5 billion cubic feet of firm contracted volumes. We are set to maximize additional hub revenues as they materialize and expect to see more opportunity as we head into the shoulder months this fall.

We expect soon to get our environmental assessment from the FERC for the connection of our header system to Copano’s Houston Central Plant in Colorado County, Texas, and expect to complete that project later this year. With this direct connection to supply, we expect to further develop our wheeling book of business. For the last two quarters at Tres we have wheeled approximately 2.5 Bcf to 3.5 Bcf of volume per quarter from points on our header system to other points of delivery on the header. It’s expected that this wheeling volume could double once the connector project is placed in service.

As you know, NRGM acquired U.S. Salt from NRGY on May 14th for $192.5 million. The Salt business is a stable performer that continues to provide a stream of cash flows while its solution mines additional cavern space that can be utilized in the future for additional energy storage opportunities. In the quarter this segment met expectations and continued to find ways to improve the process through packaging upgrades, new customer accounts and continued focus on customer satisfaction. We are considering additional upgrades in the future that will maintain the stability of this business while offering potential new revenue opportunities. This transaction was a real win-win for both NRGM and NRGY.

At our LPG storage facility in Bath, we continued to see significant throughput and capacity utilization for our Storage and Logistics business. Processed liquids from the many gas plants operating or being developed in the area have driven significant demand for our capabilities. In the quarter we approved a capital expansion project increasing our ability to handle truck traffic into and out of the facility, and while providing drying and odorization of propane for delivery to end markets. The relationship with Energy Services and their relationships with both suppliers and end use markets has made this facility a critical tool in handling the increased production of NGLs from the Marcellus Shale.

Now for a brief project update. Marc I project continues to progress forward. It has seen some challenging topography and has slowed pace a little, but we expect to place the northern half in service in advance of the full project coming on line in October. We have completed the drill of the Susquehanna River and have over half the project welded up. The associated northern compressor station is complete, and the southern compressor facilities are progressing nicely.

At our Finger Lakes NGL storage facility the permitting process is coming to a close. We have been working hard over the last several weeks to resolve all outstanding concerns to the point that we are now planning construction efforts around our anticipated receipt of the underground storage permit later this year. It’s been a long process, but in the delay we have seen the demand for storage build even stronger than we anticipated, and therefore the project is more valuable than our original estimates.

As announced, we have concluded the nonbinding open season for our Commonwealth Pipeline project, and interest has been robust. We’ve seen the market show some concern about additional constraints on west-to-east pipeline systems in Central Pennsylvania, and this is increasing interest in the Commonwealth project. We continue to work with both producers and markets in Southern Pennsylvania and Northern Maryland and have commenced negotiating precedent agreements that define the services, timing, route and rate. As this process continues, we’ll keep you apprised of the project’s success.

We continue to explore opportunities that would further integrate our Inergy Pipeline East with our other storage and transportation assets in New York in a way that adds value to our customers and to our unit holders. As New York makes its decision on allowing shale development, Inergy Pipeline East and our northern Stagecoach assets are positioned to be benefactors of produced volume from the southern tier of New York.

We remain focused on building out our integrated northeast storage and transportation hub in order to provide our customers the shale to market services they desire while delivering the value to our unit holders.

At this time I’ll turn it over to Brooks to review the numbers.

Brooks Sherman

Thanks, Bill. With this a joint NRGM, NRGY call, I’m going to start with the three-month period for NRGM and follow that with NRGY’s quarter, then do the same for the nine-month period.

At NRGM our total revenues for this year’s quarter were $48.6 million, 16% increase over approximately $42 million earned in last year’s quarter and in line with our expectations. Let me point out there since it’s embedded in all of these numbers, this includes a full three months of activity for the Salt business, which was dropped down to NRGM from NRGY on May 14.

Although only legally present for about half the quarter at NRGM, the accounting rules require that we treat the dropdown similar to a pooling of interest given the related party nature of the deal. As such, the reporting and presentation is that NRGM is shown as having owned the Salt business historically so Salt’s results are in the full period for each period presented.

Our Firm Storage revenues amount to $24.1 million for the quarter ended June 30, 2012, an increase of $1.6 million over the $22.5 million achieved in the same period last year. The Seneca Lake acquisition accounted for about $1 million of that increase with the balance coming from NGL storage increases. Transportation revenues were $7.1 million in this year’s quarter versus $3.9 million last year reflecting the North/South project placed in service in November and the Seneca Lake acquisition.

Hub Services revenues were $4.4 million in this year’s quarter, a $1.9 million increase over the $2.5 million earned in last year’s period. Similar to last quarter, this increase primarily attributable to the high demand from customers to move gas through our pipelines and interconnects in light of the high rate of Marcellus production of natural gas in Pennsylvania.

Salt revenues in the June quarter were $13 million, that’s essentially the same as the full quarter June 2011 results from last year.

Total NRGM service-related costs that you saw in the press release were actually down quarter-over-quarter about $9 million this year, so down about $3.1 million from the $12.1 million in the same period last year. Storage and transportation costs made up $1.4 million of these costs in this year’s quarter versus $4.3 million last year. This decrease was primarily driven by our receipt of business interruption insurance proceeds in this year’s quarter due to a compressor issue that we had back in December of 2010. You saw that highlighted in our earnings release this morning also.

Salt related costs were $7.6 million in this year’s three-month period versus $7.8 million last year. At NRGM our cash operating and administrative expenses amounted to $6.2 million in this year’s quarter versus $3.5 million last year. The increase in these expenses are the result of the Seneca Lake acquisition in addition to higher property taxes and slightly higher personnel costs.

Adjusted EBITDA then came in at $33.4 million in this year’s quarter, up from $26.4 million in last year’s period. So a solid quarter, and where we expected to come out. To arrive at net income for this year’s quarter, we had depreciation and amortization of about $12.8 million, about $1.3 million of noncash, long-term incentive and equity comp, and 600,000 of acquisition costs to arrive at net income of 18 million, an increase of $2.5 million over the $15.5 million in last year’s period. For DCF, that amounted to $29.8 million this year up from $21.1 million last year.

One adjustment that you see in arriving at DCF at NRGM is that we do show a deduction where the DCF generated by Salt for the period of time that Salt was not legally owned by NRGM during the reporting periods that we present here. We think this presentation is the most appropriate since the DCF was not physically generated within NRGM and thus not truly available for distribution.

To move to NRGY for its quarter results, I’m going to stick to adjusted EBITDA in DCF results only, just for ease of discussion. As I just went through, NRGM produced $33.4 million of adjusted EBITDA in this year’s quarter, and so on a consolidated basis, NRGY producing $54.4 million of adjusted EBITDA. So the NRGY direct-owned businesses produced about $21 million of adjusted EBITDA. This $21 million compares to about $16 million last year when NRGM’s adjusted EBTIDA was $26.4 million and NRGY on a consolidated bases totaled $42.4 million. So an improved quarter this year for our NRGY businesses, the increase coming both from the retail propane operations that were in there and our Energy Services or our Liquids group.

NRGY’s distributable cash flow was $23.8 million in this year’s quarter, up from last year. And as you can see in the press release how we calculate that is that we pull out the share of NRGM’s distribution paid to the NRGM public unit holders to arrive at the NRGY DCF. So a good increase this year for us.

The nine months, NRGM’s nine-month results reflect similar trend characteristics, as I just went through for the three months results, in that our fee-based natural gas transportation is becoming a bigger component of our revenues and earnings when you consider the North/South being operational and the transportation revenues acquired with the Seneca Lake acquisition.

Hub services also increased as we used these transportation assets to assist more customers to move gas in the Northeast with the capacity that we’ve added. Our storage endcount has remained pretty stable year-over-year for NRGM, and adjusted EBITDA for the nine-month period totaled $93.9 million, pretty much where we expected to be, an increase of nearly 30% over the $72.8 million you see in the earnings release from last year.

NRGM’s Bcf increased to $80.6 million year-to-date from $56.7 million in last year’s comparable period. We were pleased to increase NRGM’s distribution to $1.52 as you saw on an annualized basis from the original amount of $1.48 annualized. And as we look ahead four quarters, we’re forecasting that we covered that distribution of $1.52 about 1.1 times, and as we get out into that June 2013 quarter and you run rate those cash flows when you have Marc I up and running, you have Watkins Glen up and running, we’re covering the distribution on a run rate basis nearly 1.2 times.

Our balance sheet at NRGM continues to be strong with our debt-to-EBITDA leverage at June 30 in our bank facility about 2.3 times. Liquidity today is over $250 million. That liquidity is sufficient to cover our CapEx through the final expenditures for Marc I and Watkins Glen and beyond out into 2013.

At NRGY for the nine months we generated adjusted EBITDA of $279.1 million on a consolidated basis in 2012, with $93.9 million of that coming from NRGM, so about $185 million generated otherwise from the NRGY owned assets. These amounts compare to $335.5 million total adjusted EBITDA in 2011 with $72.8 million of that last year coming from NRGM and the balance of $263 million coming from retail and the other businesses at NRGY. As that shows you, retail propane had a challenging year with the warm weather this year. Our NRGM midstream businesses have grown and are continuing to grow. We also expect improving results in the balance of our NRGY businesses as the natural gas markets firm up as well as creating our own opportunities in the Liquids businesses in which we deal.

Further, I would point out with our retail propane sale now complete, our focus is on creating opportunities at both partnerships. We’re working to ensure that we’re taking full advantage of the complement of assets that we own, expansion opportunities, third party acquisition opportunities, in addition to a clear focus on having efficient overhead in place to run the business.

It’s our intention as well to schedule an Analyst Day, an Investor Day, later this fall and at that time provide a fiscal 2013 forecast in addition to presenting a more detailed presentation of our businesses and the opportunities that we see to grow these businesses.

NRGY is now repositioned and we believe in a very strong way. We have low leverage. We have adequate liquidity with over $250 million available on our revolver at NRGY. We’re the GP that owns the IDRs as well as a 75% limited partnership ownership interest in a growing midstream business that is NRGM that’s well positioned for growth. I think as an example of how NRGY participates there, the $0.04 annualized distribution increase at NRGM increased the distributable cash flow up to NRGY unit holders by $5.25 million or about $0.04 a unit. So we see the future as very bright for us and we look forward to it.

Melissa, you can now open the lines up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gabe Moreen with Bank of America Merrill Lynch.

Gabe Moreen – Bank of America Merrill Lynch

Hi. Good morning, everyone. Quick question and I don’t know whether this was gone over. In the operating and administrative expense, were there any expenses from the SPH transaction, sort of one-timers embedded in there?

Brooks Sherman

You know, Gabe, this is Brooks. In the press release you see that we add back what we termed transaction costs and that was about $3.2 million and that essentially all related to the Suburban deal. So that’s what’s been spent thus far.

Gabe Moreen – Bank of America Merrill Lynch

Got it. Sorry, didn’t notice that. And then if I could just ask on a couple of the projects. In terms of Bill’s comments around Marc I, you still feel good about your CapEx estimates there? You have enough contingencies baked in given some of the topography? Or do you think there may be a risk to your CapEx number there?

Bill Moler

Gabe, it’s a great question. What we see right now is that we’re on budget but it has been challenging, challenging environment and regulatory process as you’ve seen in the press with our fight with Earthjustice but we think we’re on track.

Gabe Moreen – Bank of America Merrill Lynch

Okay. And then if I could follow-up on another project on Watkins Glen. I just wasn’t quite clear in terms of – it sounds like obviously the timing’s been delayed there. That’s expected but something about the returns getting a little bit better despite the delays. My understanding was that, that facility is mostly contracted for, so if you could just give some more color on that comment?

Bill Moler

That color comes from what we’re seeing happen at Bath. Our Inergy Services group has contracted for all the space at Bath, and they have sublet the capacity to their customers as well as taken advantage of optimal opportunities in the market to place our own product in the field and hedge it forward. That value that we’re seeing at Bath should be a directly applicable and comparable to what the value of Watkins Glen is moving forward. There is just no place for the NGLs to go, Gabe. We’re the only game in town.

Gabe Moreen – Bank of America Merrill Lynch

Got it. Not a bad place to be.

Bill Moler

It is not.

Gabe Moreen – Bank of America Merrill Lynch

Just on Commonwealth, Bill, just to follow up with one last question on my end, just kind of next steps there? And are you looking for a certain threshold on this open season before you can kind of green light it? Do you think you’re there yet? Just some of the last steps you need to kind of get across the finish line?

Bill Moler

Our partners are signing up for somewhere around 50% of the capacity of that project, and we’re out negotiating for precedent agreements with others who have reflected interest currently. It’s too early to say. We have the announcement that we made generated some competition in the marketplace, so there are several projects out there, none of which are under contract yet. But we’re progressing nicely and have teams out in the market knocking on doors and trying to get people to sign up.

Gabe Moreen – Bank of America Merrill Lynch

Got it. Okay. Good luck. That’s all from me. Congrats on the SPH deal, and I look forward to hearing the 2013 outlook.

Brooks Sherman

Thanks, Gabe.

John Sherman

Thanks, Gabe.

Operator

Your next question comes from Brian Zarahn with Barclays Capital.

Brian Zarahn – Barclays Capital

Good morning.

John Sherman

Good morning.

Brian Zarahn – Barclays Capital

On following up on Watkins Glen, can you give what your current expected timeframe is for that project to come on line?

Bill Moler

I think it was 2008. You know it’s hard to tell. We see the light at the end of the tunnel. We’ve had face-to-face meetings with the DEC and have a schedule in front of us. We expect to get the permits by the end of the year, and then construct the facilities, unfortunately in the winter, and hope to be up in time for injection season of 2013.

Brian Zarahn – Barclays Capital

Okay. And then in terms of turning the dropdowns, I know you’ve been busy obviously with the SPH sale, and you dropped down U.S. Salt, but any color on your timeframe for your next drop-down to NRGM?

Brooks Sherman

Brian, this is Brooks. I wouldn’t tell that we had a set timeframe. I think as we’ve said all along we’ve had the intent that those assets that we own today up in NRGY ultimately be owned down at NRGM. We think that’s the right place for it. But we just completed U.S. Salt a couple of months ago and we have no set timeframe but ultimately that’s what happens but wouldn’t try to put a date on it right now.

Brian Zarahn – Barclays Capital

Okay. Thanks, Brooks.

Operator

Your next question comes from Darren Horowitz with Raymond James.

Darren Horowitz – Raymond James

Morning, guys.

John Sherman

Morning.

Darren Horowitz – Raymond James

A couple quick questions. The first, Bill, as it relates to you guys leveraging that bidirectional ability of the North/South system, can you just give a little bit more color on what kind of scale and scope that you’re thinking about in terms of an expansion? And how much from capacity you might need to move forward? I mean is it a situation where you’d want to have an incremental 100 decatherms or 200 decatherms a day firm or maybe even less than that?

Bill Moler

It’s a great question. We are trying to balance right now the interruptible wheeling service versus our Firm Wheeling service just to give you an idea. We contracted for 325,000 decatherms a day. We placed the facility in service in November. The very first day that we placed it in service, we flowed 325,000 decatherms on that day and we’ve been flowing 325,000 decatherms on a firm basis every day since then. So I think I mentioned nearly 100% utilization at that project.

In addition to that, we’re moving an incremental 325,000 a day on interruptible wheeling service. And those services have been consistent. We’ve moved 650,000 a day consistently to Millennium. What we’re waiting on right now quite honestly is when Marc I goes in, how much of that interruptible continues to flow. We think a lot of it will because the Leidy line is constrained down south of Marc I. It’s starting to get constrained. So just trying to balance that. And it’s really a matter of firming up for term contracted volumes that we’re getting today anyway on an interruptible basis.

Darren Horowitz – Raymond James

Yeah, that makes sense. Shifting over real quick to Tres. Is the weighted average maturity of that 20.5 Bcf of firm contracted capacity that you referenced still about one-and-a-half years?

Bill Moler

I think that’s about right.

Darren Horowitz – Raymond James

Okay. And how much capacity do you have at that facility coming up for renewal over the next 12 months?

Bill Moler

I want to say about 12 Bcf.

Darren Horowitz – Raymond James

Okay. And then last question on Tres. Cavern 4, that capacity, when is it coming into service? And based on your comments regarding the P&L and wheeling opportunities, how do you think about balancing that 9.5 Bcf in terms of keeping it open relative to firming it up?

Bill Moler

Right now the market as we’ve talked is still experiencing depressed spreads. That facility, although is getting more physical in nature, which has been our goal all along, still has some response to spreads and forward curve. That cavern, we would probably at this point if it was in service we would be using it for our park-and-loan book in order to maximize our opportunity of earnings revenues.

Darren Horowitz – Raymond James

Thanks, Bill.

Bill Moler

Thanks.

Operator

Your next question comes from Ron Londe with Wells Fargo.

Ron Londe – Wells Fargo

Yes. Thanks. Given the price of propane nowadays, can you give us a feel for where you think the margins might be going for your Wholesale business? And when that might be dropped into NRGM?

Brooks Sherman

Ron, this is Brooks. The Wholesale business, we’re pretty adept there at being able to garner new customers and maintain margins at pretty good levels. That business is now blended well with our total Liquids business when you think of the West Coast and you think of the Energy Services work that’s done around that. So we’re able to earn the kind of margin we expect. The lower cost of the product there, we’re doing some fixed price. So we generally lock those margins in. So the lower price is really beneficial to retail, probably mildly beneficial to wholesale, but that group is doing a lot more. I don’t know if John...

John Sherman

Yeah. I think, Ron, the earnings opportunities for that group really is coming from providing liquids take-away services in these shale plays, and also the dislocation. We’re very well positioned in the market as there are supply and demand dislocations. So I see that as having a positive impact on the margins of that business. On when we might drop it down to NRGM, I think as Brooks said, when I think about Tres, we’d like to further better develop that business, get it more contracted and more developed. I think the Inergy Services business, that’s got a stable base to it. I hadn’t really thought about too much when we drop down. One thing that may – there could be a catalyst, as an example, if we did an M&A transaction where it made sense to move that business to NRGM because it’s complementary to more of the things that we’re doing down there. So that’s kind of how we’re thinking about it.

Ron Londe – Wells Fargo

From the standpoint of the movement of the Propane business over to Suburban, what kind of deal have you worked out with Suburban to supply the NRGY locations that they just acquired?

Brooks Sherman

We do a supply agreement with them, Ron. I forget the exact numbers, but I think we’re probably looking at supplying 70% of the retail business that we have done. That will continue to be supplied by us. We’ve got a contract there. We’ve got our L&L Transportation fleet assisting there, and our supply contracts to help. So we’ve got a strong relationship there with them, and look forward to hammering that through the winter and then hopefully be done.

Ron Londe – Wells Fargo

When you look at your checkbook today, how much debt do you have on the balance sheet dollar-wise?

Brooks Sherman

At NRGY?

Ron Londe – Wells Fargo

At NRGY.

Brooks Sherman

At NRGY, standalone $260 million of debt outstanding, and then at NRGM standalone about $335 million.

Ron Londe – Wells Fargo

All right. Also in the units of Suburban that you’re going to distribute to holders, are fractional shares going to be paid in cash?

Brooks Sherman

Yes.

Ron Londe – Wells Fargo

Okay. That’s all I have. Thanks.

Brooks Sherman

All right.

John Sherman

Thanks, Ron.

Operator

Your next question comes from Elvira Scotto with RBC Capital Markets.

Elvira Scotto – RBC Capital Markets

Hi. Good morning.

John Sherman

Morning.

Elvira Scotto – RBC Capital Markets

You talked about the potential for liquids development at Tres. Could you maybe provide a little more color there may be around what would be involved in terms of permitting? Engineering? What types of costs you would see? And what you need to actually move forward?

Bill Moler

Elvira, this is Bill. We have the right to store liquids in cavern space on the Marcum dome. We have probably four caverns that we’ve identified that could be used for NGL, either y-mix or purity products on the dome that we could utilize. Permitting goes to the Texas Railroad Commission. It is not a permit situation like we’re experiencing in New York. It’s relatively quick, comparatively quick. And then we’re in discussions with the market today about utilizing that cavern capacity.

The Marcum dome is right in the center of all the NGL type activity. There are several pipelines planned and discussed that are going right through the area where we operate. So we’re in discussions with all of those other infrastructure folks to offer storage services for them.

Elvira Scotto – RBC Capital Markets

And so if you did contract with someone or move forward, how long of a process, how long would the process take to actually convert or create the storage?

Bill Moler

I would think it would be within a year to 18 months, once we became economically viable.

Elvira Scotto – RBC Capital Markets

Okay. Great. Would that be a relatively large capital outlay? Or have you looked at what kind of CapEx would be involved?

Bill Moler

We have, and it simply depends on what we end up firming up, whether it’s purity products or wide grade and how many caverns we place in service, but relatively small amounts of capital deployment associated with that.

Elvira Scotto – RBC Capital Markets

That’s helpful. Thank you very much.

John Sherman

Thanks, Elvira.

Operator

Your next question comes from Ethan Bellamy with Baird.

Ethan Bellamy – Baird

Hey, guys. Just a follow-up on Gabe’s question, any further one-time items we should be modeling in the current quarter?

Brooks Sherman

In the September quarter, Ethan?

Ethan Bellamy – Baird

Yeah.

Brooks Sherman

I think we’ll account for the entire transaction within the September quarter. So there will be some costs that will either one, be applied against the GAAP gain. Or will be one-time that will just run separately through the P&L. And whichever way they go, we will highlight them for you as they come through. The bulk of those have been paid already, so are reflected in our debt balances.

Ethan Bellamy – Baird

Okay. In terms of long-term strategic direction, should we – is it still copasetic for us to think about NRGY morphing into a pure GP holding entity over time?

Brooks Sherman

I think ultimately that’s what we would see here. As to when that exact timing would be that we would end up like that? I don’t think we’d give you a date for that, just because of the drop-down schedule isn’t firm. But ultimately, yeah. We think that our assets that we own up at NRGY today will ultimately be dropped down and the IDRs and LP interests of NRGM ownership would remain.

Ethan Bellamy – Baird

Okay. Lastly, just sort of conceptually, depending on how things go this fall, it looks like we might actually get some drilling in New York State. Is there any low-hanging fruit that would arise if you saw Marcellus volumes come out in New York? What opportunities would that present for you? And then sort of a related question, do you still have that small Marcellus acreage position?

Bill Moler

Yes, and yes. We see some opportunity. Our assets are primarily in those southern tier counties that the Governor is considering releasing, in Tioga, in Broome County, Shamong, Steuben. We have the infrastructure that is present. We are already out talking to acreage and mineral lease holders should that be released, I think there’s some nice gathering opportunities for us to move that produced volume into Inergy Pipeline East, which goes from Tompkins County down into Broome County, obviously our Tioga County assets with the north lateral and the Stagecoach system connecting those and integrating those with Inergy Pipeline East. We want to be the shale-to-market service provider in those counties, and I think we have the infrastructure to get a large chunk of that business.

Ethan Bellamy – Baird

So just to be clear, you’d consider getting into the gathering business there?

Bill Moler

Absolutely. To some extent we’re in that business today. We have gathering systems that are direct connected into the north lateral and direct connected into the south lateral. We didn’t go out and lay those gathering systems, but we certainly want to be the benefactor of volume transport to market. And if that means going out and building gathering infrastructure, that’s what we’ll do.

Ethan Bellamy – Baird

Thank you.

John Sherman

Thanks, Ethan.

Operator

Your final question comes from Ron Londe with Wells Fargo.

Ron Londe – Wells Fargo

Yes. Just a technical question, are there any tax issues for NRGY holders, given the transfer of assets to Suburban? And also are the, or will the Suburban units that they receive be a tax-free distribution?

Brooks Sherman

Ron, yeah. The Suburban unit distribution itself is a tax-free distribution and a part of an NRGY unit holders’ basis then moves over to those SPH units once they own them individually. As far as taxes go, as a result of the sale, as we have said before, yes. There will be taxable income that is generated that will be allocated on K-1 to NRGY unit holders.

We continue to be in the process of determining what that taxable amount would be, the characteristics of that gain, capital gain versus ordinary. It’s a complex process, as I think you well know with an MLP so we continue to work on that and as we have those numbers at some point here down the road, we would share them publicly. What I would say is what I said last time in that we see the value and it’s certainly true, the value of this transaction for NRGY far outweighs any tax impact that we’re going to have as unit holders.

Ron Londe – Wells Fargo

Okay.

John Sherman

Thanks, Ron.

Ron Londe – Wells Fargo

Okay.

Brooks Sherman

Thank you.

Operator

I will now turn the call back to Mr. Sherman for closing remarks.

Brooks Sherman

Thank you, everyone, for joining us today. We very appreciate the attention and support. Thank you.

John Sherman

Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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