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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number: 001-33631
Crestwood Midstream Partners LP
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  56-2639586
(I.R.S. Employer Identification No.)
     
717 Texas Avenue, Suite 3150, Houston, Texas
(Address of principal executive offices)
  77002
(Zip Code)
(832) 519-2200
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
     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.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Indicate the number of shares outstanding of the issuer’s common units and Class C units, as of the latest practicable date:
     
Title of Class   Outstanding as of October 28, 2011
     
Common Units   32,992,696
Class C Units   6,452,233
 
 

 


Table of Contents

DEFINITIONS
As used in this report, unless the context otherwise requires:
“Bbl(s)” means barrel or barrels
“EBITDA” means earnings before interest, taxes, depreciation, amortization and accretion
“hp” means horsepower
“LIBOR” means London Interbank Offered Rate
“Management” means management of Crestwood Midstream Partners LP’s General Partner
“Mcf” means thousand cubic feet
“MMcf” means million cubic feet
“MMcfd” means million cubic feet per day
“MMcfe” means MMcf of natural gas equivalents, calculated as one Bbl of oil or NGLs equaling six Mcf of gas
“MMcfed” means MMcfe per day
“NGL(s)” means natural gas liquids
“Oil” includes crude oil and condensate
COMMONLY USED TERMS
Other commonly used terms and their definitions follow:
“Alliance Midstream Assets” means gathering and treating assets purchased from Quicksilver in January 2010 in the Alliance Airport area of Tarrant and Denton Counties, Texas
“Alliance System” means the Alliance Midstream Assets and subsequent additions
“Barnett Shale” means our Cowtown System, Lake Arlington System and Alliance System
“CMLP” means Crestwood Midstream Partners LP and our wholly owned subsidiaries, which trades under the ticker symbol “CMLP”
“Credit Facility” means our senior secured credit facility, as amended, dated effective October 1, 2010
“Crestwood” means Crestwood Holdings Partners, LLC and its affiliates
“Crestwood Holdings” means Crestwood Holdings LLC and its affiliates
“Crestwood Transaction” means the sale to Crestwood by Quicksilver of all its interests in CMLP that was completed on October 1, 2010
“Exchange Act” means the Securities Exchange Act of 1934, as amended
“Fayetteville Shale Systemmeans the pipeline, compression and treating assets located in Arkansas that were acquired in the Frontier Gas Acquisition and subsequent additions
“Frontier” means Frontier Gas Services, LLC, a Delaware limited liability company
“Frontier Gas Acquisition” means the purchase of midstream assets in the Fayetteville Shale and Granite Wash from Frontier that was completed on April 1, 2011
“GAAP” means generally accepted accounting principles in the United States
“General Partner” means Crestwood Gas Services GP LLC
“Granite Wash System” means the pipeline, compression and processing assets and subsequent additions located in Roberts County, Texas, that were acquired in the Frontier Gas Acquisition
“Joinder Agreement” means the additional commitments received from certain lenders under our Credit Facility, dated April 1, 2011, which expanded the total borrowing capacity under our Credit Facility to $500 million
“Lake Arlington System” means gathering and compression assets purchased from Quicksilver in 2008 located in eastern Tarrant County, Texas
“Las Animas System” means the gathering assets acquired in February 2011, located in Eddy County, New Mexico and subsequent additions
“Omnibus Agreement” means the Omnibus Agreement, dated October 8, 2010, among our General Partner and Crestwood
“Partnership Agreement” means the Second Amended and Restated Agreement of Limited Partnership of Crestwood Midstream Partners LP, dated February 19, 2008, as amended
“Tristate” means Tristate Sabine, LLC
“Sabine System” means the gathering and treating assets located in Sabine Parish, Louisiana, acquired on November 1, 2011
“Senior Notes” means the $200 million aggregate principal amount of 7.75% Senior Notes due 2019 issued by CMLP on April 1, 2011
“Quicksilver” means Quicksilver Resources Inc. and its affiliates
“SEC” means the U.S. Securities and Exchange Commission

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CRESTWOOD MIDSTREAM PARTNERS LP
INDEX TO FORM 10-Q
For the Period Ended September 30, 2011
         
       
 
       
    5  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    24  
 
       
    35  
 
       
    35  
 
       
       
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    37  
 
       
    38  
Certification(s) Pursuant to Section 302
       
Certification Pursuant to Section 906
       
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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FORWARD-LOOKING INFORMATION
     Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our current expectations or forecasts of future events. Words such as “may,” “assume,” “forecast,” “predict,” “strategy,” “expect,” “intend,” “plan,” “aim,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements and should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
    changes in general economic conditions;
 
    fluctuations in natural gas prices;
 
    failure or delays by our customers in achieving expected production in their natural gas projects;
 
    competitive conditions in our industry;
 
    actions or inactions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters and customers;
 
    our ability to consummate acquisitions, successfully integrate acquired business and realize any cost savings and other synergies from any acquisition;
 
    fluctuations in the value of certain of our assets and liabilities;
 
    changes in the availability and cost of capital;
 
    operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
 
    construction costs or capital expenditures exceeding estimated or budgeted amounts;
 
    the effects of existing and future laws and governmental regulations, including environmental and climate change requirements;
 
    the effects of existing and future litigation;
 
    risks related to our substantial indebtedness; and
 
    certain factors discussed elsewhere in this Quarterly Report.
     The list of factors is not exhaustive, and new factors may emerge or changes to these factors may occur that would impact our business. Additional information regarding these and other factors may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. All such risk factors are difficult to predict and are subject to material uncertainties that may affect actual results and may be beyond our control. The forward-looking statements included in this report are made only as of the date of this report, and we undertake no obligation to update any of these forward-looking statements to reflect subsequent events or circumstances except to the extent required by applicable law.
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In thousands, except for per unit data — Unaudited
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Revenue
                               
Gathering revenue — related party
  $ 27,840     $ 20,670     $ 75,706     $ 55,464  
Gathering revenue
    8,007       1,710       17,908       4,165  
Processing revenue — related party
    7,183       7,372       21,723       20,625  
Processing revenue
    692       614       1,867       2,045  
Product sales
    14,893             29,326        
 
                       
Total revenue
    58,615       30,366       146,530       82,299  
 
                       
 
                               
Expenses
                               
Operations and maintenance
    10,573       6,564       26,165       19,979  
Product purchases
    13,482             26,010        
General and administrative
    5,566       2,652       17,996       8,112  
Depreciation, amortization and accretion
    9,595       5,689       23,981       16,696  
 
                       
Total expenses
    39,216       14,905       94,152       44,787  
 
                       
 
                               
Gain from exchange of property, plant and equipment
    1,106             1,106        
 
                       
Operating income
    20,505       15,461       53,484       37,512  
 
                               
Interest expense
    7,100       3,185       19,925       8,808  
 
                       
 
                               
Income from continuing operations before income taxes
    13,405       12,276       33,559       28,704  
 
                               
Income tax provision
    347       45       898       171  
 
                       
 
                               
Net income
  $ 13,058     $ 12,231     $ 32,661     $ 28,533  
 
                       
 
                               
General partner interest in net income
  $ 2,426     $ 743     $ 4,942     $ 1,777  
Limited partners’ interest in net income
  $ 10,632     $ 11,488     $ 27,719     $ 26,756  
 
                               
Basic income per unit:
                               
Net income per limited partner unit — basic
  $ 0.27     $ 0.40     $ 0.76     $ 0.94  
 
                               
Diluted income per unit:
                               
Net income per limited partner unit — diluted
  $ 0.27     $ 0.38     $ 0.76     $ 0.90  
 
                               
Weighted average number of common units outstanding:
                               
Basic
    39,388       28,502       36,424       28,502  
Diluted
    39,504       31,561       36,540       31,783  
Distributions declared per unit (attributable to the period ended)
  $ 0.48     $ 0.42     $ 1.38     $ 1.23  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data — Unaudited
                 
    September 30,     December 31,  
    2011     2010  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 58     $ 2  
Accounts receivable
    7,373       1,679  
Accounts receivable — related party
    28,678       23,003  
Prepaid expenses and other
    2,254       1,052  
 
           
Total current assets
    38,363       25,736  
 
               
Property, plant and equipment, net
    682,000       531,371  
Intangible assets, net
    112,739        
Goodwill
    93,628        
Other assets
    18,132       13,520  
 
           
Total assets
  $ 944,862     $ 570,627  
 
           
 
               
LIABILITIES AND PARTNERS’ CAPITAL
               
Current liabilities
               
Accounts payable and other
  $ 27,650     $ 2,917  
Accrued additions to property, plant and equipment
    7,873       11,309  
Accounts payable — related party
    1,918       4,267  
Capital leases
    2,672        
 
           
Total current liabilities
    40,113       18,493  
 
               
Long-term debt
    428,000       283,504  
Long-term capital leases
    4,610        
Asset retirement obligations
    10,822       9,877  
Commitments and contingent liabilities (Note 13)
               
 
               
Partners’ capital
               
Common unitholders (32,992,696 and 31,187,696,units issued and outstanding at September 30, 2011 and December 31, 2010)
    294,756       258,069  
Class C unit holders (6,452,233 and 0 units issued and outstanding at September 30, 2011 and December 31, 2010, respectively)
    155,795        
General partner
    10,766       684  
 
           
Total partners’ capital
    461,317       258,753  
 
           
 
  $ 944,862     $ 570,627  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands — Unaudited
                 
    Nine Months Ended September 30,  
    2011     2010  
Operating activities:
               
Net income
  $ 32,661     $ 28,533  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    23,554       16,321  
Accretion of asset retirement obligations
    427       375  
Deferred income taxes
          171  
Equity-based compensation
    851       2,001  
Non-cash interest expense
    2,542       3,323  
Gain from exchange of plant, property and equipment
    (1,106 )      
Changes in assets and liabilities:
               
Accounts receivable
    (5,359 )     (620 )
Prepaid expenses and other
    (447 )     (923 )
Accounts receivable — related party
    (5,675 )     (8,117 )
Accounts payable — related party
    (2,349 )      
Accounts payable and other
    23,366       3,809  
 
           
Net cash provided by operating activities
    68,465       44,873  
 
           
 
               
Investing activities:
               
Capital expenditures
    (31,256 )     (52,470 )
Proceeds from exchange of plant, property and equipment
    5,943        
Acquisitions, net of cash acquired
    (349,662 )      
Distribution to Quicksilver for Alliance Midstream Assets
          (80,276 )
 
           
Net cash used in investing activities
    (374,975 )     (132,746 )
 
           
 
               
Financing activities:
               
Proceeds from senior notes
    200,000        
Proceeds from credit facility
    100,200       143,200  
Repayments of credit facility
    (155,704 )     (30,100 )
Debt issuance costs paid
    (6,982 )      
Proceeds from issuance of Class C units, net
    152,671        
Proceeds from issuance of Common units, net
    53,550       11,054  
Contributions by partners
    8,741        
Distributions paid
    (45,910 )     (35,826 )
Taxes paid for equity-based compensation vesting
          (1,144 )
 
           
Net cash provided by financing activities
    306,566       87,184  
 
           
 
               
Net cash increase (decrease)
    56       (689 )
 
               
Cash and cash equivalents at beginning of period
    2       746  
 
           
 
               
Cash and cash equivalents at end of period
  $ 58     $ 57  
 
           
 
               
Cash paid for interest
  $ 9,380     $ 5,485  
Non-cash transactions:
               
Working capital related to capital expenditures
    7,873       15,269  
PIK value to Class C unitholders
    6,050        
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
In thousands – Unaudited
                                 
    Limited Partners’              
    Common     Subordinated     General Partner     Total  
Balance at December 31, 2009
  $ 281,239     $ 3,040     $ 558     $ 284,837  
Equity-based compensation
    2,001                   2,001  
Distributions paid
    (20,387 )     (13,815 )     (1,624 )     (35,826 )
Distributions to Quicksilver
    (80,276 )                 (80,276 )
Net income
    16,347       10,409       1,777       28,533  
Issuance of units, net of offering costs
    11,054                   11,054  
Taxes paid for equity-based compensation vesting
    (1,144 )                 (1,144 )
 
                       
Balance at September 30, 2010
  $ 208,834     $ (366 )   $ 711     $ 209,179  
 
                       
                                 
    Limited Partners’              
    Common     Class C     General Partner     Total  
Balance at December 31, 2010
  $ 258,069     $     $ 684     $ 258,753  
Equity-based compensation
    851                   851  
Distributions paid
    (42,309 )           (3,601 )     (45,910 )
Net income
    24,595       3,124       4,942       32,661  
Issuance of units, net of offering costs
    53,550       152,671             206,221  
Contributions by partners
                8,741       8,741  
 
                       
Balance at September 30, 2011
  $ 294,756     $ 155,795     $ 10,766     $ 461,317  
 
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CRESTWOOD MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
     Organization — Crestwood Midstream Partners LP is a publicly traded Delaware limited partnership formed for the purpose of acquiring and operating midstream assets. Our common units are listed on the New York Stock Exchange under the symbol “CMLP.” In this report, unless the context requires otherwise, references to “we,” “us,” “our” or the “Partnership” are intended to mean the business and operations of Crestwood Midstream Partners LP and its subsidiaries.
     As of September 30, 2011 our ownership is as follows:
                         
    Ownership Percentage  
    Crestwood     Public     Total  
General partner interest
    1.9 %           1.9 %
Limited partner interest:
                       
Common unitholders
    48.6 %     33.5 %     82.1 %
Class C unitholders
    0.5 %     15.5 %     16.0 %
 
                 
Total
    51.0 %     49.0 %     100.0 %
 
                 
     Description of Business — We are primarily engaged in the gathering, compression, processing and treating of natural gas and the delivery of NGLs produced in the Barnett Shale, Fayetteville Shale, Avalon Shale and Granite Wash areas. We provide these midstream services under long-term contracts, whereby we receive fees for performing gathering, compression, processing and treating services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of Presentation — The accompanying financial statements and related notes present the unaudited condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010. They also include the unaudited condensed consolidated statements of income for the three and nine month periods ended September 30, 2011 and 2010, the unaudited condensed consolidated statements of cash flows and unaudited changes in partners’ capital for the nine month periods ended September 30, 2011 and 2010.
     The accompanying condensed consolidated financial statements were prepared in accordance with GAAP for the interim financial information and in accordance with the rules and regulations of the SEC. In management’s opinion, all necessary adjustments to fairly present our results of operations, financial position and cash flows for the periods presented have been made and all such adjustments are of a normal and recurring nature. Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2010 Annual Report on Form 10-K.
     Changes in Presentation — Certain changes have been made to the 2010 financial statements for presentations adopted in 2011. The amount of the change is approximately $0.6 million and $1.8 million for the three and nine months ended September 30, 2010, respectively, from operations and maintenance expense to general and administrative expense.
     Use of Estimates — The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities that exist at the date of the financial statements. Estimates and judgments are based on information available at the time such estimates and judgments are made. Although management believes the estimates are appropriate, actual results can differ from those estimates.
     Fair Value of Financial Instruments — The fair value of cash and cash equivalents, accounts receivable, accounts payable and Credit Facility debt approximate their carrying amounts as of September 30, 2011. The fair value of our Senior Notes was $192 million as of September 30, 2011.
     Revenue Recognition — Our primary service offerings are the gathering, compression, processing and treating of natural gas. We have fixed-fee contracts under which we receive revenue based on the volume of natural gas gathered and processed. We also have percent-of-proceeds contracts where we receive revenue based on the value of products sold to third parties which we present as Product Sales. We recognize revenue when all of the following criteria are met:
    persuasive evidence of an exchange arrangement exists;
 
    services have been rendered;
 
    the price for its services is fixed or determinable; and
 
    collectability is reasonably assured.

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     Segment Information — Our operations include three reportable operating segments. These operating segments reflect how we manage our operations. Our business segments reflect the primary geographic areas in which we operate and consist of the Barnett Shale, the Fayetteville Shale and the Granite Wash. Our business segments are engaged in the gathering, compression, processing and treating of natural gas and delivery of NGLs.
     Net Income per Limited Partner Unit — The following is a reconciliation of the components of the basic and diluted net income per limited partner unit calculations for the three and nine months ended September 30, 2011 and 2010. There have not been any units excluded due to being anti-dilutive.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands, except per unit data)  
Limited partners’ interest in net income
  $ 10,632     $ 11,488     $ 27,719     $ 26,756  
Impact of interest on subordinated note (1)
          647             1,860  
 
                       
Income available assuming conversion of convertible debt
  $ 10,632     $ 12,135     $ 27,719     $ 28,616  
 
                       
 
                               
Weighted-average common units — basic (2)
    39,388       28,502       36,424       28,502  
Effect of unvested phantom units and Class C units
    116       516       116       516  
Effect of subordinated note (1)
          2,543             2,765  
 
                       
Weighted-average common units — diluted
    39,504       31,561       36,540       31,783  
 
                       
 
                               
Basic earnings per unit:
                               
Net income per limited partner unit — basic
  $ 0.27     $ 0.40     $ 0.76     $ 0.94  
 
                               
Diluted earnings per unit:
                               
Net income per limited partner unit — diluted
  $ 0.27     $ 0.38     $ 0.76     $ 0.90  
Conversion price (1)
    N/A     $ 22.65       N/A     $ 20.84  
 
    (1) Assumes that convertible debt is converted using the lesser of average closing price per unit or final closing price on September 30, 2010. See Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for a more complete description of our subordinated note that terminated during the fourth quarter of 2010.
 
    (2) Includes 6,398,418 and 4,253,787 shares of Class C units for the three and nine months ended September 30, 2011, respectively.
     Comprehensive Income — Comprehensive income is equal to net income for the periods presented due to the absence of any other comprehensive income.
Recently Issued Accounting Standards
     Accounting standard-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements. No pronouncements materially affecting our financial statements have been issued since the filing of our 2010 Annual Report on Form 10-K.
3. ACQUISITIONS
     Las Animas Acquisition
     Effective February 1, 2011, we acquired natural gas gathering pipelines near the emerging Avalon Shale and Bone Spring trends in Southeastern New Mexico for $5.1 million. The pipelines, which we refer to as the Las Animas System, are supported by long-term, primarily fixed-fee contracts which include existing Morrow/Atoka production. The Avalon Shale is a liquids-rich oil and gas producing formation that is part of the Permian basin located in West Texas.
    Las Animas System
    The Las Animas System, located in Eddy County, New Mexico, near the emerging Avalon Shale and Bone Spring trends in Southeastern New Mexico, consists of natural gas gathering pipelines that deliver gas to El Paso Natural Gas and Southern Union Gas Services. The Las Animas System is reflected in the Barnett Shale for segment reporting.

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     Frontier Gas Acquisition
     On April 1, 2011, we completed the Frontier Gas Acquisition including assets in the Fayetteville Shale and the Granite Wash. The Fayetteville Shale is a dry gas formation in the Arkoma basin located in Arkansas. The Granite Wash is a liquids-rich oil and gas producing formation in the Anadarko basin located in the Texas Panhandle.
    Fayetteville Shale System
 
    The Fayetteville Shale System, located in Arkansas, consists of high pressure and low pressure gathering pipelines with a capacity of approximately 510 MMcfd, treating capacity of approximately 165 MMcfd and approximately 35,000 hp of compression. This system interconnects with multiple interstate pipelines and is supported by long-term, primarily fixed-fee contracts with producers in the core of the Fayetteville Shale, with initial terms through 2020 with five year extensions.
  -   Twin Groves / Prairie Creek / Woolly Hollow System. Located in Conway and Faulkner Counties, Arkansas and consists of a gathering system and a related gas compression facility with a capacity of 350 MMcfd and a dehydration and treating facility with capacity of 165 MMcfd. This system gathers natural gas produced by BHP Billiton Petroleum, a wholly owned subsidiary of BHP Billiton Limited (“BHP”), BP p.l.c. (“BP”) and XTO Energy, Inc., a subsidiary of Exxon Mobil Corporation (“ExxonMobil”) and interconnects with interstate pipelines including Boardwalk Gas Transmission, Ozark Gas Transmission and Fayetteville Express Pipeline.
 
  -   Rose Bud System. Located in White County, Arkansas and consists of a gathering system and a related gas compression facility with a capacity of 60 MMcfd. This system gathers natural gas produced by BHP / BP and ExxonMobil, and interconnects with Ozark Gas Transmission.
 
  -   Wilson Creek System. Located in Van Buren County, Arkansas and consists of a gathering system and a related compression facility with a capacity of 100 MMcfd. This system gathers natural gas produced by BHP and SH Exploration and interconnects with Ozark Gas Transmission.
    Granite Wash System
    The Granite Wash System, located in Roberts County, Texas, consists of a gathering system and NGL pipeline system, approximately 9,000 hp of compression, and the Indian Creek Plant consisting of a 36 MMcfd natural gas processing unit that extracts NGLs from the natural gas stream. This system gathers natural gas produced by Chesapeake Energy Corporation and others and delivers NGLs to the Mid-America Pipeline for ultimate delivery to the Mt. Belvieu or Conway NGL market centers. Residue gas is delivered into ANR Pipeline Company and Northern Natural Gas Company.
    The final purchase price allocation is as follows ($ in thousands):
         
Purchase Price:
       
Total purchase price
  $ 344,562  
 
     
 
       
Preliminary Purchase Price Allocation:
       
Accounts receivable
    335  
Prepaid expenses and other
    750  
Capital lease asset
    8,587  
Property, plant and equipment
    135,918  
Intangible assets
    114,200  
Other assets
    178  
 
     
Total assets
  $ 259,968  
 
     
 
       
Current portion of capital leases
    2,576  
Other payables
    64  
Capital leases
    6,011  
Asset Retirement Obligations
    383  
 
     
Total liabilities
  $ 9,034  
 
     
 
       
 
     
Goodwill
  $ 93,628  
 
     
 
       
     The $338 million purchase price paid at closing was financed through a combination of equity and debt as described in Notes 4 and 7 to our condensed consolidated interim financial statements in this Quarterly Report. The total purchase price paid of $345

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million also includes $4 million in capital expenditures and $3 million of inventory purchased. Transaction costs for the nine months ended September 30, 2011 were $5.7 million of which $3.2 million was recorded in general and administrative expense and $2.5 million was recorded in interest expense.
     The following is the presentation of income as if we had owned the Fayetteville and Granite Wash Systems for the three and nine months ended September 30, 2010 and for nine months ended September 30, 2011:
                         
    Three Months Ended September 30, 2010  
    Crestwood     Fayetteville        
    Midstream     and Granite        
    Partners LP     Wash     Combined  
            (In thousands)          
Revenue
  $ 30,366     $ 16,702     $ 47,068  
Operating expenses
    (14,905 )     (11,246 )     (26,151 )
 
                 
Operating income
  $ 15,461     $ 5,456     $ 20,917  
 
                 
 
                       
Basic earnings per limited partner unit:
  $ 0.40     $ 0.19     $ 0.59  
Diluted earnings per limited partner unit:
  $ 0.38     $ 0.17     $ 0.55  
 
    Nine Months Ended September 30, 2010  
    Crestwood     Fayetteville        
    Midstream     and Granite        
    Partners LP     Wash     Combined  
            (In thousands)          
Revenue
  $ 82,299     $ 48,432     $ 130,731  
Operating expenses
    (44,787 )     (32,416 )     (77,203 )
 
                 
Operating income
  $ 37,512     $ 16,016     $ 53,528  
 
                 
 
                       
Basic earnings per limited partner unit:
  $ 0.94     $ 0.55     $ 1.49  
Diluted earnings per limited partner unit:
  $ 0.90     $ 0.50     $ 1.40  
 
    Nine Months Ended September 30, 2011  
    Crestwood Midstream     Fayetteville and        
    Partners LP(1)     Granite Wash(2)     Combined  
            (In thousands)          
Revenue
  $ 146,530     $ 17,002     $ 163,532  
Operating expenses
    (94,152 )     (12,420 )     (106,572 )
Gain from exchange of property, plant and equipment
    1,106             1,106  
 
                 
Operating income
  $ 53,484     $ 4,582     $ 58,066  
 
                 
 
                       
Basic earnings per limited partner unit:
  $ 0.76     $ 0.14     $ 0.90  
Diluted earnings per limited partner unit:
  $ 0.76     $ 0.13     $ 0.89  
 
(1)   Includes six months of operating income for Fayetteville and Granite Wash, from April 1, 2011 to September 30, 2011, subsequent to acquisition.
 
(2)   Represents the first quarter of 2011, prior to the acquisition of Fayetteville and Granite Wash.
4. PARTNERS’ CAPITAL AND DISTRIBUTIONS
     On April 1, 2011, we issued 6,243,000 Class C units, representing limited partner interests, in a private placement. The negotiated purchase price for the Class C units was $24.50 per unit, resulting in net proceeds to us of approximately $153 million which was used to finance a portion of our Frontier Gas Acquisition. The Class C units are substantially similar in all respects to our existing common units, representing limited partner interests, except that we can elect to pay distributions for our Class C units through the issuance of additional Class C units or cash. The Class C units will convert into common units on a one-for-one basis on the second anniversary of the date of issuance.
     In connection with the issuance of the Class C units, our General Partner made an additional capital contribution of $8.7 million to us in exchange for the issuance of an additional 293,948 general partner units, increasing the General Partner interest to 2%.

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     On May 4, 2011, we completed a public offering of 1,800,000 common units, representing limited partner interests, under an existing shelf registration statement at a price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net proceeds of approximately $53 million. The net proceeds from the offering were used to reduce indebtedness under our Credit Facility and for general partnership purposes. In connection with the issuance of the common units, our General Partner did not make an additional capital contribution resulting in a reduction of the General Partner’s interest to approximately 1.9%.
     Our Partnership Agreement requires that we make distributions within 45 days after the end of each quarter to unitholders of record on the applicable record date selected by the General Partner.
     The following table presents distributions attributable to quarters ended in 2011 and 2010:
                                                 
                            PIK Value                
    Attributable to the     Per Unit     Total Cash     to Class C             Total IDR  
Payment Date   Quarter Ended     Distribution     Distribution     unitholders     Total     Distribution  
    (In millions, except per unit information)
Pending Distributions
                                               
November 10, 2011
  September 30, 2011   $ 0.48     $ 18.1     $ 3.5     $ 21.6     $ 2.2  
 
                                               
Completed Distributions
                                               
2011
                                               
August 12, 2011
  June 30, 2011   $ 0.46     $ 16.8     $ 3.1     $ 19.9     $ 1.5  
May 13, 2011
  March 31, 2011   $ 0.44     $ 14.8     $ 2.9     $ 17.7     $ 0.8  
February 11, 2011
  December 31, 2010   $ 0.43     $ 14.3     $     $ 14.3     $ 0.7  
2010
                                               
November 12, 2010
  September 30, 2010   $ 0.42     $ 13.9     $     $ 13.9     $ 0.6  
August 13, 2010
  June 30, 2010   $ 0.42     $ 12.7     $     $ 12.7     $ 0.5  
May 14, 2010
  March 31, 2010   $ 0.39     $ 11.6     $     $ 11.6     $ 0.3  
     Cash distributions included amounts paid to common and subordinated unitholders. Beginning with the distributions for the quarter ended December 31, 2010, we no longer have any subordinated units due to the conversion of all subordinated units into common units. See Note 13 to the consolidated financial statements in our 2010 Annual Report on Form 10-K for a more complete description of our conversion of the subordinated units. We have the option to pay distributions to our Class C unitholders with cash or by issuing additional Class C units based upon the volume weighted average price of our common units for the 10 trading days immediately preceding the date the distribution is declared. For the distribution that was paid August 12, 2011, attributable to the quarter ended June 30, 2011, we issued 115,140 additional Class C units. For the distribution that will be paid November 10, 2011, attributable to the quarter ended September 30, 2011, we will issue 144,402 additional Class C units.
5. PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment consisted of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Gathering systems
  $ 265,722     $ 158,975  
Processing plants and compression facilities
    403,390       365,208  
Construction in progress — gathering
    37,120       26,385  
Rights-of-way and easements
    46,966       32,054  
Land
    4,511       4,251  
Buildings and other
    5,380       3,494  
 
           
 
    763,089       590,367  
Accumulated depreciation
    (81,089 )     (58,996 )
 
           
Net property, plant and equipment
  $ 682,000     $ 531,371  
 
           
     With the Frontier Gas Acquisition we have leased compressors which are accounted for as capital leases for a total of $8.6 million less accumulated amortization of $1.3 million as of September 30, 2011.

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     During the quarter we had a gain from exchange of property, plant and equipment due to an agreement with PVR Midstream, LLC, on August 18, 2011, to exchange the delivery of certain processing plants that were under contract with Exterran Energy Solutions, L.P. resulting in proceeds of $5.9 million and a gain of $1.1 million.
6. INTANGIBLE ASSETS AND GOODWILL
     Intangible assets consist of gas contracts. The following table summarizes the intangibles and goodwill associated with the purchase of the Frontier Gas Acquisition.
                         
            Accumulated     Net Book  
    Cost     Amortization     Value  
            (In thousands)          
Intangibles — subject to amortization:
                       
Gas contracts
  $ 114,200     $ 1,461     $ 112,739  
 
                       
Intangibles — not subject to amortization:
                       
Goodwill
    93,628             93,628  
 
                 
 
                       
 
  $ 207,828     $ 1,461     $ 206,367  
 
                 
     The intangible assets have useful lives of 6 to 17 years. Amortization expense recorded for the three and nine months ended September 30, 2011 was approximately $0.7 million and $1.5 million, respectively. The expected amortization of the intangible assets is as follows:
         
Years Ending (in thousands)        
2011 (remaining)
  $ 718  
2012
    4,295  
2013
    5,772  
2014
    7,039  
2015
    7,896  
Thereafter
    87,019  
 
     
 
       
Total
  $ 112,739  
 
     
7. DEBT
     Debt consisted of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Credit Facility
  $ 228,000     $ 283,504  
Senior Notes
    200,000        
 
           
 
    428,000       283,504  
Current maturities of debt
           
 
           
Total
  $ 428,000     $ 283,504  
 
           
     Credit Facility — At September 30, 2011, we had $228 million outstanding under our $500 million Credit Facility at the weighted-average interest rate of 3.6%. Borrowings under the Credit Facility bear interest at LIBOR plus an applicable margin or a base rate as defined in the Credit Facility. Under the terms of the Credit Facility, the applicable margin under LIBOR borrowings is 3.25%. On April 1, 2011, we entered into a Joinder Agreement with certain lenders of our Credit Facility, which expanded our borrowing capacity from $400 million to $500 million. See Note 7 to the consolidated financial statements in our 2010 Annual Report on Form 10-K for a more complete description of our indebtedness.
     The Credit Facility contains provisions that trigger an acceleration of indebtedness based solely on the occurrence of a material adverse change in our financial condition or results of operations.
     Bridge Loans — In February 2011, in connection with the Frontier Gas Acquisition, we obtained commitments from multiple lenders for senior unsecured bridge loans in an aggregate amount up to $200 million. The commitment was not drawn and was terminated on April 1, 2011 in connection with the issuance of the Senior Notes described below. We recognized $2.5 million of commitment fees in the second quarter of 2011, which is included in interest expense, related to the bridge loans.

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     Senior Notes — On April 1, 2011, we issued the Senior Notes. Our obligations under the Senior Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries. The proceeds were used to partially finance the Frontier Gas Acquisition. The Senior Notes accrue interest at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011, and mature April 2019. Our Senior Notes require us to maintain a ratio of our consolidated trailing 12-month EBITDA (as defined in the senior notes indenture) to fixed charges of at least 1.75 to 1.0.
8. ACCOUNTS PAYABLE AND OTHER
    Accounts payable and other consist of the following:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Accrued operating expenses
  $ 2,206     $ 1,736  
Accrued property taxes
    4,134        
Product purchases payable
    3,869        
Compensation and benefits payable
    2,106        
Tax payable
    1,042       280  
Interest payable
    8,852       726  
Accounts payable
    5,179        
Other
    262       175  
 
           
 
  $ 27,650     $ 2,917  
 
           
9. CAPITAL LEASES
     With the Frontier Gas Acquisition we acquired compressor leases which are accounted for as capital leases. The total liability outstanding at September 30, 2011 related to these leases is $7.3 million. Future minimum lease payments related to capital leases are as follows (in thousands):
         
Years Ending        
2011 (remaining)
  $ 716  
2012
    2,860  
2013
    2,860  
2014
    1,161  
 
     
Total payments
    7,597  
Imputed interest
    (315 )
 
     
Present value of future payments
  $ 7,282  
 
     
10. ASSET RETIREMENT OBLIGATIONS
     Activity for asset retirement obligations is as follows (in thousands):
         
Asset retirement obligations as of December 31, 2010
  $ 9,877  
Incremental liability
    518  
Accretion expense
    427  
 
     
Asset retirement obligations as of September 30, 2011
  $ 10,822  
 
     
     Accretion expense for the three months ended was approximately $0.2 million. As of September 30, 2011, no assets are legally restricted for use in settling asset retirement obligations.
11. EQUITY-BASED COMPENSATION
     Awards of phantom units have been granted under our Third Amended and Restated 2007 Equity Plan (the “2007 Equity Plan”). The following table summarizes information regarding 2011 phantom unit activity:

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    Payable in cash     Payable in units  
            Weighted Average             Weighted  
            Grant Date Fair             Average Grant  
    Units     Value     Units     Date Fair Value  
Unvested phantom units — January 1, 2011
        $       121,526     $ 27.11  
Vested
                       
Issued
    11,777       27.56       24,411       27.10  
Cancelled
                (20,287 )     27.17  
 
                       
Unvested phantom units — September 30, 2011
    11,777     $ 27.56       125,650     $ 27.10  
 
                           
     At January 1, 2011, we had total unvested compensation cost of $2.6 million related to phantom units. We recognized compensation expense of approximately $0.3 million and $0.9 million during the three and nine months ended September 30, 2011. Grants of phantom units during the nine months ended September 30, 2011 had an estimated grant date fair value of $1.0 million. We had unearned compensation expense of $2.6 million at September 30, 2011, which is generally expected to be recognized over the vesting period of three years except for grants to non-employee directors of our General Partner in lieu of cash compensation, which vest after one year. No phantom units vested during the nine months ended September 30, 2011. At September 30, 2011, 636,356 units were available for issuance under the 2007 Equity Plan.
     See Note 11 to the consolidated financial statements in our 2010 Annual Report on Form 10-K, for a more complete description of our 2007 Equity Plan.
12. INCOME TAXES
     No provision for federal or state income taxes is included in our results of operations as such income is taxable directly to the partners.
     However, we are subject to Texas Margin tax and our current tax liability will be assessed based on 0.7% of the gross revenue apportioned to Texas.
     See Note 10 to the consolidated financial statements in our 2010 Annual Report on Form 10-K for more information about our income taxes.
13. COMMITMENTS AND CONTINGENT LIABILITIES
     Litigation — In May 2011, a class action lawsuit, Ginardi v. Frontier Gas Services, LLC, et al, was filed in the United States District Court of the Eastern District of Arkansas against Frontier Gas Services, LLC; Chesapeake Energy Corporation, BHP Billiton Petroleum, No 4:11-cv-0420 BRW alleging that defendants’, including Crestwood Arkansas Pipeline LLC (“Crestwood Arkansas”) which was served in August 2011, operations pollute the atmosphere, groundwater, and soil with allegedly harmful gases, chemicals, and compounds and the facilities create excessive noise levels constituting trespass, nuisance and annoyance. The plaintiffs seek compensatory and punitive damages of loss of use and enjoyment of property, contamination of soil and ground water, air and atmosphere and seek future monitoring. Crestwood Arkansas has filed an answer in the matter denying liability. This case has not had, and is not expected to have, a material impact on our results of the operation or financial condition. We intend to vigorously defend against the claims.
     At September 30, 2011, we are not currently subject to any material lawsuits or other legal proceedings that could have a material effect on our results of operations, cash flows or financial condition or for which disclosure is required by Item 103 of Regulation S-K.
     Casualties or Other Risks — We maintain coverage in various insurance programs, which provide us with property damage and other coverages which are customary for the nature and scope of our operations.
     Management of our General Partner believes that we have adequate insurance coverage, although insurance will not cover every type of loss that might occur. As a result of insurance market conditions, premiums and deductibles for certain insurance policies have increased substantially and, in some instances, certain insurance may become unavailable, or available for only reduced amounts of coverage. As a result, we may not be able to renew existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all.
     If we were to incur a significant loss for which we were not adequately insured, the loss could have a material impact on our consolidated financial condition and results of operations and cash flows. In addition, the proceeds of any available insurance may not be paid in a timely manner and may be insufficient if such an event were to occur. Any event that interrupts our revenues, or which causes us to make significant expenditures not covered by insurance, could reduce our ability to meet our financial obligations.

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     Regulatory Compliance — In the ordinary course of our business, we are subject to various laws and regulations. In the opinion of management of our General Partner, compliance with current laws and regulations will not have a material adverse effect on our financial condition or results of operations and cash flows.
     Environmental Compliance — Our operations are subject to stringent and complex laws and regulations pertaining to health, safety, and the environment. As an owner or operator of these facilities, we are subject to laws and regulations at the federal, state and local levels that relate to air and water quality, hazardous and solid waste management and disposal and other environmental matters. The cost of planning, designing, constructing and operating our facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures. At September 30, 2011, we had recorded no liabilities for environmental matters.
14. RELATED-PARTY TRANSACTIONS
     We routinely conduct business with Quicksilver and its affiliates. Quicksilver remains a related party as Thomas F. Darden, a member of our General Partner’s board of directors until September 6, 2011, is Chairman of the Board of Quicksilver and beneficially holds a greater than 10% interest in Quicksilver. However, Quicksilver does not own any interest in us. For a more complete description of our agreements with Quicksilver, see Note 12 to the consolidated financial statements in our 2010 Annual Report on Form 10-K.
     During the quarter and nine months ended September 30, 2011, Quicksilver accounted for 60% and 66%, respectively of our total revenue. Approximately 6% of our revenue for the nine months ended September 30, 2011 are comprised of natural gas purchased by Quicksilver from Eni SpA and gathered under Quicksilver’s Alliance System gathering agreement.
     With the purchase of the Alliance Midstream Assets, we also entered into an agreement with Quicksilver to lease pipeline assets attached to the Alliance System that we did not purchase. We have recognized $0.4 million of expense related to this agreement during the nine months ended September 30, 2011.
15. SUBSEQUENT EVENTS
     On November 1, 2011, we acquired Tristate from affiliates of Energy Spectrum Capital, Zwolle Pipeline, LLC and the Tristate management for $65 million of cash paid at closing and a deferred payment of approximately $8 million one year following the closing date, subject to customary post-closing adjustments. The final purchase price allocation is pending the finalization of the appraisal valuations.
     Tristate owns the Sabine System which consists of approximately 61 miles of high-pressure natural gas gathering pipelines located in Sabine Parish, Louisiana. The Sabine System provides gathering and treating services for Haynesville and Bossier Shale production from the Toledo Bend South field area for redelivery to Gulf South Pipeline and Tennessee Gas Pipeline. We have contracts on the Sabine System with multiple producers with dedications of approximately 20,000 acres under long term, fixed-fee arrangements. The acquisition was financed with borrowings under our Credit Facility.
16. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
     On April 1, 2011, we issued the Senior Notes. Our obligations under the Senior Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries. Condensed consolidated financial information for CMLP is presented below:

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Condensed Consolidated Statements of Income
                                 
    For the Three Months Ended September 30, 2011  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
    (in thousands)
Revenue
  $     $ 58,615     $     $ 58,615  
Operating expenses
    5,573       33,643             39,216  
Gain from exchange of plant, property and equipment
    1,106                   1,106  
     
Operating income
    (4,467 )     24,972             20,505  
 
                               
Interest expense
    7,040       60             7,100  
     
Income before income tax
    (11,507 )     24,912             13,405  
Income tax provision
          347             347  
     
Net income before equity in net earnings of subsidiaries
    (11,507 )     24,565             13,058  
Equity in net earnings of subsidiaries
    24,565             (24,565 )      
     
Net Income
  $ 13,058     $ 24,565     $ (24,565 )   $ 13,058  
     
                                 
    For the Three Months Ended September 30, 2010  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
     
            (in thousands)          
Revenue
  $     $ 30,366     $     $ 30,366  
Operating expenses
    2,652       12,253             14,905  
     
Operating income
    (2,652 )     18,113             15,461  
 
                               
Interest expense
    3,185                   3,185  
     
Income before income tax
    (5,837 )     18,113             12,276  
Income tax provision
          45             45  
     
Net income before equity in net earnings of subsidiaries
    (5,837 )     18,068             12,231  
Equity in net earnings of subsidiaries
    18,068             (18,068 )      
     
Net Income
  $ 12,231     $ 18,068     $ (18,068 )   $ 12,231  
     

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    For the Nine Months Ended September 30, 2011  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
     
            (in thousands)          
Revenue
  $     $ 146,530     $     $ 146,530  
Operating expenses
    18,014       76,138             94,152  
Gain from exchange of plant, property and equipment
    1,106                   1,106  
     
Operating income
    (16,908 )     70,392             53,484  
 
                               
Interest expense
    19,800       125             19,925  
     
Income before income tax
    (36,708 )     70,267             33,559  
Income tax provision
          898             898  
     
Net income before equity in net earnings of subsidiaries
    (36,708 )     69,369             32,661  
Equity in net earnings of subsidiaries
    69,369             (69,369 )      
     
Net Income
  $ 32,661     $ 69,369     $ (69,369 )   $ 32,661  
     
                                 
    For the Nine Months Ended September 30, 2010  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
     
            (in thousands)          
Revenue
  $     $ 82,299     $     $ 82,299  
Operating expenses
    8,112       36,675             44,787  
     
Operating income
    (8,112 )     45,624             37,512  
 
                               
Interest expense
    8,808                   8,808  
     
Income before income tax
    (16,920 )     45,624             28,704  
Income tax provision
          171             171  
     
Net income before equity in net earnings of subsidiaries
    (16,920 )     45,453             28,533  
Equity in net earnings of subsidiaries
    45,453             (45,453 )      
     
Net Income
  $ 28,533     $ 45,453     $ (45,453 )   $ 28,533  
     

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Condensed Consolidated Balance Sheet
                                 
    September 30, 2011  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
     
            (in thousands)          
ASSETS
                               
Current assets
  $ 344,132     $ 66,620     $ (372,389 )   $ 38,363  
Properties, plant and equipment, net
    7,910       674,090             682,000  
Intangible assets, net
          112,739             112,739  
Goodwill
          93,628             93,628  
Investment in subsidiaries
    582,763             (582,763 )      
Other assets
    17,333       799             18,132  
 
                       
Total assets
  $ 952,138     $ 947,876     $ (955,152 )   $ 944,862  
 
                       
 
                               
LIABILITIES AND PARTNERS’ CAPITAL
                               
Current liabilities
  $ 62,821     $ 349,681     $ (372,389 )   $ 40,113  
Long-term liabilities
    428,000       15,432             443,432  
Partners’ capital
    461,317       582,763       (582,763 )     461,317  
 
                       
Total liabilities and partners’ capital
  $ 952,138     $ 947,876     $ (955,152 )   $ 944,862  
 
                       
                                 
    December 31, 2010  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
     
            (in thousands)          
ASSETS
                               
Current assets
  $ 291,637     $ 23,843     $ (289,744 )   $ 25,736  
Properties, plant and equipment, net
    11,142       520,229             531,371  
Investment in subsidiaries
    228,587             (228,587 )      
Other assets
    12,890       630             13,520  
 
                       
Total assets
  $ 544,256     $ 544,702     $ (518,331 )   $ 570,627  
 
                       
 
                               
LIABILITIES AND PARTNERS’ CAPITAL
                               
Current liabilities
  $ 1,999     $ 306,238     $ (289,744 )   $ 18,493  
Long-term liabilities
    283,504       9,877             293,381  
Partners’ capital
    258,753       228,587       (228,587 )     258,753  
 
                       
Total liabilities and partners’ capital
  $ 544,256     $ 544,702     $ (518,331 )   $ 570,627  
 
                       

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Condensed Consolidated Statement of Cash Flows
                                 
    For the Nine Months Ended September 30, 2011  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
            (in thousands)          
Net cash (used in) provided by operating activities
  $ (9,886 )   $ 78,351     $     $ 68,465  
 
                       
Capital expenditures
    (265 )     (30,991 )           (31,256 )
Proceeds from exchange of plant, property and equipment
    5,943                   5,943  
Acquisitions, net of cash acquired
          (349,662 )           (349,662 )
 
                       
Net cash (used in) provided by investing activities
    5,678       (380,653 )           (374,975 )
 
                       
Proceeds from Senior Notes
    200,000                   200,000  
Proceeds from Credit Facility
    100,200                   100,200  
Repayments of Credit Facility
    (155,704 )                 (155,704 )
Debt issuance costs paid
    (6,982 )                 (6,982 )
Proceeds from issuance of equity
    206,221                   206,221  
Contributions by other partners
    8,741                   8,741  
Distributions to unitholders
    (45,910 )                 (45,910 )
Advances to Affiliates
    38,290       (38,290 )            
 
                       
Net cash (used in) provided by financing activities
    344,856       (38,290 )           306,566  
 
                       
Net cash increase (decrease)
    340,648       (340,592 )           56  
Cash and cash equivalents at beginning of period
    2                   2  
 
                       
Cash and cash equivalents at end of period
  $ 340,650     $ (340,592 )   $     $ 58  
 
                       
                                 
    For the Nine Months Ended September 30, 2010  
                            Crestwood  
    Crestwood     Restricted             Midstream  
    Midstream     Guarantor             Partners LP  
    Partners LP     Subsidiaries     Eliminations     Consolidated  
            (in thousands)          
Net cash (used in) provided by operating activities
  $ (4,989 )   $ 49,862     $     $ 44,873  
 
                       
Capital expenditures
          (52,470 )           (52,470 )
Distributions to Quicksilver for Alliance Midstream Assets
          (80,276 )           (80,276 )
 
                       
Net cash used in investing activities
          (132,746 )           (132,746 )
 
                       
Proceeds from Credit Facility
    143,200                   143,200  
Repayments of Credit Facility
    (30,100 )                 (30,100 )
Proceeds from issuance of equity
    11,088                   11,088  
Equity issuance cost paid
    (34 )                 (34 )
Distributions to unitholders
    (35,826 )                 (35,826 )
Taxes paid for equity-based compensation vesting
    (1,144 )                 (1,144 )
Advances to Affiliates
    123,741       (123,741 )              
 
                       
Net cash (used in) provided by financing activities
    210,925       (123,741 )           87,184  
 
                       
Net cash increase (decrease)
    205,936       (206,625 )           (689 )
Cash and cash equivalents at beginning of period
    746                     746  
 
                       
Cash and cash equivalents at end of period
  $ 206,682     $ (206,625 )   $     $ 57  
 
                       
17. SEGMENT INFORMATION
     Our operations include three reportable operating segments. These operating segments reflect the way we manage our operations. We evaluate the performance of our operating segments based on EBITDA. Our business segments reflect the primary geographic areas in which we operate and consist of the Barnett Shale, the Fayetteville Shale and the Granite Wash. Each of our business segments are engaged in the gathering, compression, processing and treating of natural gas and delivery of NGLs.

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     The following tables summarize the reportable segment data for the three and nine months ended September 30, 2011 and September 30, 2010:
                                         
    Three Months Ended September 30, 2011  
    Barnett     Fayetteville     Granite        
    Shale     Shale     Wash     Corporate     Total  
    (In thousands)  
Revenue
  $ 3,836     $ 7,081     $ 12,675     $     $ 23,592  
Revenue — related party
    35,023                         35,023  
 
                             
Total revenues
  $ 38,859     $ 7,081     $ 12,675     $     $ 58,615  
 
Operations and maintenance expense
    6,109       3,965       499             10,573  
Product purchases
    1,764       454       11,264             13,482  
General and administrative expense
                      5,566       5,566  
Gain from exchange of property, plant and equipment
                      1,106       1,106  
 
                             
EBITDA
    30,986       2,662       912       (4,460 )     30,100  
Depreciation, amortization and accretion expense
    6,185       2,895       508       7       9,595  
 
                             
Operating income (loss)
  $ 24,801     $ (233 )   $ 404     $ (4,467 )   $ 20,505  
 
                             
Goodwill
  $     $ 76,767     $ 16,861     $     $ 93,628  
Total assets
  $ 556,399     $ 296,771     $ 73,156     $ 18,536     $ 944,862  
Capital Expenditures
  $ 3,876     $ 9,806     $ 421     $ 265     $ 14,368  
                                         
    Three Months Ended September 30, 2010  
    Barnett     Fayetteville     Granite              
    Shale     Shale     Wash     Corporate     Total  
    (In thousands)  
Revenue
  $ 2,324     $     $     $     $ 2,324  
Revenue — related party
    28,042                         28,042  
 
                             
Total revenues
  $ 30,366     $     $     $     $ 30,366  
Operations and maintenance expense
    6,564                         6,564  
General and administrative expense
                      2,652       2,652  
 
                             
EBITDA
    23,802                   (2,652 )     21,150  
Depreciation, amortization and accretion expense
    5,689                         5,689  
 
                             
Operating income (loss)
  $ 18,113     $     $     $ (2,652 )   $ 15,461  
 
                             
Total assets
  $ 528,845     $     $     $ 670     $ 529,515  
Capital Expenditures
  $ 17,625     $     $     $     $ 17,625  

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    Nine Months Ended September 30, 2011  
    Barnett     Fayetteville     Granite              
    Shale     Shale(1)     Wash(1)     Corporate     Total  
    (In thousands)  
Revenue
  $ 9,727     $ 14,164     $ 25,210     $     $ 49,101  
Revenue — related party
    97,429                         97,429  
 
                             
Total revenues
  $ 107,156     $ 14,164     $ 25,210     $     $ 146,530  
 
Operations and maintenance expense
    18,811       6,356       998             26,165  
Product purchases
    3,259       1,012       21,739             26,010  
General and administrative expense
                      17,996       17,996  
Gain from exchange of property, plant and equipment
                      1,106       1,106  
 
                             
EBITDA
    85,086       6,796       2,473       (16,890 )     77,465  
Depreciation, amortization and accretion expense
    18,459       4,604       900       18       23,981  
 
                             
Operating income (loss)
  $ 66,627     $ 2,192     $ 1,573     $ (16,908 )   $ 53,484  
 
                             
Goodwill
  $     $ 76,767     $ 16,861     $     $ 93,628  
Total assets
  $ 556,399     $ 296,771     $ 73,156     $ 18,536     $ 944,862  
Capital Expenditures
  $ 15,696     $ 12,134     $ 3,161     $ 265     $ 31,256  
 
(1)   Includes six months of operating income for Fayetteville and Granite Wash, from April 1, 2011 to September 30, 2011, subsequent to acquisition.
                                         
    Nine Months Ended September 30, 2010  
    Barnett     Fayetteville     Granite              
    Shale     Shale     Wash     Corporate     Total  
    (In thousands)  
Revenue
  $ 6,210     $     $     $     $ 6,210  
Revenue — related party
    76,089                         76,089  
 
                             
Total revenues
  $ 82,299     $     $     $     $ 82,299  
Operations and maintenance expense
    19,979                         19,979  
General and administrative expense
                      8,112       8,112  
 
                             
EBITDA
    62,320                   (8,112 )     54,208  
Depreciation, amortization and accretion expense
    16,696                         16,696  
 
                             
Operating income (loss)
  $ 45,624     $     $     $ (8,112 )   $ 37,512  
 
                             
 
                                       
Total assets
  $ 528,845     $     $     $ 670     $ 529,515  
Capital Expenditures
  $ 52,470     $     $     $     $ 52,470  

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated interim financial statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2010 Annual Report on Form 10-K.
Overview
     We are a growth-oriented publicly traded Delaware master limited partnership engaged in gathering, compression, processing and treating of natural gas and delivery of NGLs produced in the Barnett Shale, Fayetteville Shale, Avalon Shale and in Granite Wash. We began operations in 2004 to provide midstream services primarily to Quicksilver as well as to other natural gas producers in the Barnett Shale. During the quarter and nine months ended September 30, 2011, Quicksilver accounted for 60% and 66%, respectively of our total revenue. Approximately 6% of our revenue for the nine months ended September 30, 2011 are comprised of natural gas purchased by Quicksilver from Eni SpA and gathered under Quicksilver’s Alliance System gathering agreement.
Our Operations
     Our results of operations are significantly influenced by the volumes of natural gas gathered and processed through our systems. We gather, process, compress and treat natural gas pursuant primarily to long term, fixed fee-based contracts. However, a prolonged low commodity price environment could result in our customers reducing their production volumes which would cause a decrease in our revenue. All of our natural gas volumes gathered and processed in the Barnett Shale, Fayetteville Shale, Avalon Shale and Granite Wash during the three and nine months ended September 30, 2011 were subject to a mixture of percent-of-proceeds and fee-based contracts.
Operational Measurement
     Our Management uses a variety of financial and operational measures to analyze our performance. We view these measures as important factors affecting our profitability and unitholder value and therefore we review them monthly for consistency and to identify trends in our operations. These performance measures are outlined below:
     Volume — We must continually obtain new supplies of natural gas to maintain or increase throughput volumes on our gathering and processing systems. We routinely monitor producer activity in the areas we serve to identify new supply opportunities. Our ability to achieve these objectives is impacted by:
    the level of successful drilling and production activity in areas where our systems are located;
 
    our ability to compete with other midstream companies for production volumes; and
 
    our pursuit of new opportunities.
     Operating Expenses — We consider operating expenses in evaluating the performance of our operations. These expenses are comprised primarily of direct labor, insurance, property taxes, repair and maintenance expense, utilities and contract services, and are largely independent of the volumes through our systems, but may fluctuate depending on the scale of our operations during a specific period. Our ability to manage operating expenses has a significant impact on our profitability and ability to pay distributions.
     EBITDA — We believe that EBITDA is a widely accepted financial indicator of a company’s operational performance and its ability to incur and service debt, fund capital expenditures and make distributions. EBITDA is not a measure calculated in accordance with GAAP, as it does not include deductions for items such as depreciation, amortization and accretion, interest and income taxes, which are necessary to maintain our business. EBITDA should not be considered an alternative to net income, operating cash flow or any other measure of financial performance presented in accordance with GAAP. EBITDA calculations may vary among entities, so our computation may not be comparable to EBITDA measures of other entities. In evaluating EBITDA, we believe that investors should also consider, among other things, the amount by which EBITDA exceeds interest costs, how EBITDA compares to principal payments on debt and how EBITDA compares to capital expenditures for each period. A reconciliation of EBITDA to amounts reported under GAAP is presented in “Results of Operations.”
     EBITDA is also used as a supplemental performance measure by our Management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:
    financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
    our operating performance as compared to those of other companies in the midstream industry without regard to financing methods, capital structure or historical cost basis; and
    the viability of acquisitions and capital expenditure projects and the rates of return on investment opportunities.

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     ADJUSTED EBITDA — We define adjusted EBITDA as net income from continuing operations plus, interest expense, provision for income taxes, depreciation, amortization and accretion expense and non-recurring expenses. Adjusted EBITDA is commonly used as a supplemental financial measure by senior management and by external users of our financial statements, such as investors, research analysts and rating agencies, to assess the financial performance of our assets without regard to financing methods, capital structures or historical cost basis. A reconciliation of adjusted EBITDA to amounts reported under GAAP is presented in “Results of Operations.”
2011 Developments
Las Animas Acquisition - Effective February 1, 2011, we acquired approximately 46 miles of natural gas gathering pipelines near the emerging Avalon Shale and Bone Spring trends in Southeastern New Mexico for $5.1 million. The pipelines are supported by long-term, fixed-fee contracts which include existing Morrow/Atoka production and dedications of approximately 55,000 acres.
Bridge Loans - In February 2011, in connection with the Frontier Gas Acquisition, we obtained commitments from multiple lenders for senior unsecured bridge loans in an aggregate amount up to $200 million. On April 1, 2011, the commitment was not drawn and was terminated in connection with the closing of the Senior Notes described below. We recognized $2.5 million of commitment fees in the second quarter of 2011, which is included in interest expense, related to the bridge loans.
Frontier Gas Acquisition — On April 1, 2011, we completed the Frontier Gas Acquisition for a purchase price of approximately $338 million. The $338 million purchase price paid at closing was financed through a combination of equity and debt as described in Notes 4 and 7 to our condensed consolidated interim financial statements in this Quarterly Report.
The Fayetteville Shale System, located in Arkansas, consists of approximately 127 miles of high pressure and low pressure gathering pipelines with capacity of approximately 510 MMcfd, treating capacity of approximately 165 MMcfd and approximately 35,000 hp of compression. The Fayetteville Shale System which interconnects with multiple interstate pipelines are supported by long-term, fixed-fee contracts with producers who have dedicated approximately 100,000 acres in the core of the Fayetteville Shale System to Frontier. These contracts have initial terms that extend through 2020 with a five year extension.
The Granite Wash System, located in the Texas Panhandle, consist of a 28 mile pipeline system and a 36 MMcfd natural gas processing unit. This area has emerged as a highly economic liquids-rich natural gas play with active drilling programs and the Granite Wash System is supported by long-term contracts. We have made progress payments for a delivery of a second processing plant with 60 MMcfd of capacity to support growth in volumes from this region.
With the completion of the Frontier Gas Acquisition, we own and/or operate over 700 miles of natural gas gathering pipelines, and NGL, gas lift, residue and production lines.
Class C Units — On April 1, 2011, we issued 6,243,000 Class C units, representing limited partner interests, in a private placement. The negotiated purchase price for the Class C units was $24.50 per unit, resulting in net proceeds to us of approximately $153 million which was used to finance a portion of our Frontier Gas Acquisition. The Class C units are substantially similar in all respects to our existing common units, representing limited partner interests, except that we can elect to pay distributions for our Class C units through the issuance of additional Class C units or cash. The Class C units will convert into common units on a one-for-one basis on April 1, 2013.
In connection with the issuance of the Class C units, our General Partner made an additional capital contribution of $8.7 million to us in exchange for an additional 293,948 general partner units, increasing the General Partner interest to 2%.
Senior Notes — On April 1, 2011, we issued the Senior Notes. Our obligations under the Senior Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries. The proceeds were used to partially finance the Frontier Gas Acquisition. The Senior Notes accrue interest at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011, and mature April 2019.
Joinder Agreement to Credit Facility — On April 1, 2011, we entered into a Joinder Agreement with certain lenders under our Credit Facility, which expanded our borrowing capacity from $400 million to $500 million.
Offering of Common Units — On May 4, 2011, we completed a public offering of 1,800,000 common units, representing limited partner interests, under an existing shelf registration statement at a price of $30.65 per common unit ($29.75 per common unit, net of underwriting discounts and commissions), providing net proceeds of approximately $53 million. The net proceeds from the offering were used to reduce indebtedness under our Credit Facility and for general partnership purposes. In connection with the issuance of the common units, our General Partner did not make an additional capital contribution resulting in a reduction of our General Partner’s interest to approximately 1.9%.

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Tristate Acquisition - On November 1, 2011, we acquired Tristate from affiliates of Energy Spectrum Capital, Zwolle Pipeline, LLC and the Tristate management for $65 million of cash paid at closing and a deferred payment of approximately $8 million one year following the closing date, subject to customary post-closing adjustments. Tristate owns the Sabine System which consists of approximately 61 miles of high-pressure natural gas gathering pipelines located in Sabine Parish, Louisiana. The Sabine System provides gathering and treating services for Haynesville and Bossier Shale production from the Toledo Bend South field area for redelivery to Gulf South Pipeline and Tennessee Gas Pipeline. We have contracts on the Sabine System with multiple producers with dedications of approximately 20,000 acres under long term, fixed-fee arrangements. The acquisition was financed with borrowings under our Credit Facility.
     RESULTS OF OPERATIONS
Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010
     The following discussion compares the results of operations for the three months ended September 30, 2011 to the three months ended September 30, 2010, which we refer to as the 2011 quarter and the 2010 quarter, respectively.
                 
    Three Months Ended September 30,  
    2011     2010  
    (In thousands)  
Total revenues
  $ 58,615     $ 30,366  
Operations and maintenance expense
    10,573       6,564  
Product purchases
    13,482        
General and administrative expense
    5,566       2,652  
Gain from exchange of property, plant and equipment
    1,106        
 
           
EBITDA
    30,100       21,150  
Non-recurring expenses
    129        
Gain from exchange of property, plant and equipment
    (1,106 )      
 
           
Adjusted EBITDA
    29,123       21,150  
Depreciation, amortization and accretion expense
    9,595       5,689  
Interest expense
    7,100       3,185  
Income tax provision
    347       45  
 
           
Net income
  $ 13,058     $ 12,231  
 
           
The following table summarizes our volumes:
                                 
    Gathering     Processing  
    2011     2010     2011     2010  
            (MMcf)          
Barnett Shale
    47,678       33,391       11,975       12,339  
Fayetteville Shale
    7,813                    
Granite Wash
    1,473             1,475        
 
                       
 
                               
Total
    56,964       33,391       13,450       12,339  
 
                       
The following table summarizes our revenue:
                                                                 
    Gathering     Processing     Product Sales     Total  
    2011     2010     2011     2010     2011     2010     2011     2010  
                            (In thousands)                          
Barnett Shale
  $ 29,200     $ 22,380     $ 7,842     $ 7,986     $ 1,817     $     $ 38,859     $ 30,366  
Fayetteville Shale
    6,534                         547             7,081        
Granite Wash
    113             33             12,529             12,675        
 
                                               
 
                                                               
Total
  $ 35,847     $ 22,380     $ 7,875     $ 7,986     $ 14,893     $     $ 58,615     $ 30,366  
 
                                               

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The following table summarizes our operations and maintenance expense:
                 
    Three Months Ended September 30,  
    2011     2010  
    (In thousands)  
Barnett Shale
  $ 6,109     $ 6,564  
Fayetteville Shale
    3,965        
Granite Wash
    499        
 
           
 
  $ 10,573     $ 6,564  
 
           
     Total Revenue and Volumes — Revenues related to the Fayetteville Shale totaled $7.1 million. Revenues related to the Granite Wash totaled $12.6 million primarily related to product sales to third parties. The increase in revenue related to the Barnett Shale was $8.5 million due to increased volumes primarily in the Alliance System of the Fort Worth Basin.
     Operations and Maintenance Expense — The increase in operations and maintenance expense of $4.0 million was primarily attributable to the Frontier Gas Acquisition, partially offset by lower costs in the Barnett Shale due to lower head count and lower operation costs at the facilities.
     Product purchases — The increase in product purchases of $13.5 million was due primarily to the cost of gas purchased from local producers under percent-of-proceeds contracts, primarily related to Granite Wash.
     General and Administrative Expense — The increase in general and administrative expense of $2.9 million was primarily due to an increase in compensation and benefits costs, costs of a new corporate location and costs related to professional services. General and administrative expense included $0.2 million and $0.7 million of equity-based compensation expense for the quarters ended September 30, 2011 and 2010, respectively.
     Gain from exchange of property, plant and equipment — The gain from exchange of property, plant and equipment was due to an agreement with PVR Midstream, LLC, (“PVR”) on August 18, 2011, to exchange the delivery of certain processing plants that were under contract with Exterran Energy Solutions, L.P. resulting in proceeds of $5.9 million and a gain of $1.1 million. Our original plant was delivered to PVR during the third quarter 2011, and our new plant is scheduled to be received by the second quarter of 2012. We continue to make progress payments on our new plant.
     EBITDA — EBITDA increased primarily as a result of the increase in revenues described above. As a percentage of revenue, EBITDA decreased from 70% of revenues in the 2010 quarter to 51% in the 2011 quarter. Increased revenues and expenses include product sales and product purchases primarily related to Granite Wash, which decreased EBITDA as a percent of revenue. Barnett Shale’s EBITDA increased from 78% to 80% of revenues was primarily due to higher revenues offset by product purchases. Fayetteville Shale’s EBITDA was 38% and Granite Wash’s EBITDA was 7% of revenue for the 2011 quarter.
     Depreciation, Amortization and Accretion Expense — Depreciation, amortization and accretion expense increased primarily as a result of the Frontier Gas Acquisition and the continuing expansion of our Barnett Shale asset base. Fayetteville Shale and Granite Wash contributed $2.9 million and $0.5 million, respectively, to depreciation, amortization and accretion expense.
     Interest Expense — Interest expense increased primarily due to the increases in the borrowings under our Credit Facility, which were principally used to fund capital projects and the addition of the Senior Notes. These increases were partially offset by the termination of the subordinated note in October 2010.
The following table summarizes the details of interest expense for the three months ended September 30, 2011 and 2010.

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    Three Months Ended September 30,  
    2011     2010  
    (In thousands)  
Interest:
               
Revolving Credit Facility
  $ 3,089     $ 2,527  
Senior Notes
    4,005        
Capital lease interest
    60        
Subordinated note
          658  
 
           
Total
    7,154       3,185  
Less interest capitalized
    (54 )      
 
           
Interest expense
  $ 7,100     $ 3,185  
 
           
Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010
     The following discussion compares the results of operations for the nine months ended September 30, 2011 to the nine months ended September 30, 2010, which we refer to as the 2011 period and the 2010 period, respectively.
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In thousands)  
Total revenues
  $ 146,530     $ 82,299  
Operations and maintenance expense
    26,165       19,979  
Product purchases
    26,010        
General and administrative expense
    17,996       8,112  
Gain from exchange of property, plant and equipment
    1,106        
 
           
EBITDA
    77,465       54,208  
Non-recurring expenses
    3,166        
Gain from exchange of property, plant and equipment
    (1,106 )      
 
           
Adjusted EBITDA
    79,525       54,208  
 
Depreciation, amortization and accretion expense
    23,981       16,696  
Interest expense
    19,925       8,808  
Income tax provision
    898       171  
 
           
Net income
  $ 32,661     $ 28,533  
 
           
The following table summarizes our volumes:
                                 
    Gathering     Processing  
    2011     2010     2011     2010  
            (MMcf)          
Barnett Shale
    129,126       88,797       36,028       35,076  
Fayetteville Shale
    15,146                    
Granite Wash
    3,011             2,941        
 
                       
 
                               
Total
    147,283       88,797       38,969       35,076  
 
                       

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The following table summarizes our revenue:
                                                                 
    Gathering     Processing     Product Sales     Total  
    2011     2010     2011     2010     2011     2010     2011     2010  
                            (In thousands)                          
Barnett Shale
  $ 80,311     $ 59,629     $ 23,552     $ 22,670     $ 3,293     $     $ 107,156     $ 82,299  
Fayetteville Shale
    13,095                         1,069             14,164        
Granite Wash
    208             38             24,964             25,210        
 
                                               
 
                                                               
Total
  $ 93,614     $ 59,629     $ 23,590     $ 22,670     $ 29,326     $     $ 146,530     $ 82,299  
 
                                               
The following table summarizes our operations and maintenance expense:
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In thousands)  
Barnett Shale
  $ 18,811     $ 19,979  
Fayetteville Shale
    6,356        
Granite Wash
    998        
 
           
 
  $ 26,165     $ 19,979  
 
           
     Total Revenue and Volumes — Operations related to the Fayetteville Shale contributed $14.2 million to gathering revenue. Operations related to Granite Wash contributed $25.2 million to revenue primarily related to product sales to third parties. The increase in revenue related to the Barnett Shale was $24.8 million due to increased volumes on all the systems.
     Operations and Maintenance Expense — The increase in operations and maintenance expense of $6.2 million was primarily attributable to the Frontier Gas Acquisition, partially offset by lower costs in the Barnett Shale due to lower head count and lower operation costs at the facilities.
     Product purchases — The increase in product purchases of $26.0 million was due primarily to the cost of gas purchased from local producers under percent-of-proceeds contracts, primarily related to Granite Wash.
     General and Administrative Expense — The increase in general and administrative expense of $9.9 million was primarily due to transaction costs associated with the Frontier Gas Acquisition, an increase in compensation and benefits costs, costs of a new corporate location, costs related to professional services and transition costs related to the transition services agreement with Quicksilver, which expired March 31, 2011. Transaction costs related to the Crestwood Transaction and Frontier Gas Acquisition amounted to approximately $3.2 million for the 2011 period. General and administrative expense included $0.6 million and $2.0 million of equity-based compensation expense for the periods ended September 30, 2011 and 2010, respectively.
     Gain from exchange of property, plant and equipment — The gain from exchange of property, plant and equipment was due to an agreement with PVR on August 18, 2011, to exchange the delivery of certain processing plants that were under contract with Exterran Energy Solutions, L.P. resulting in proceeds of $5.9 million and a gain of $1.1 million. Our original plant was delivered to PVR during the third quarter 2011, and our new plant is scheduled to be received by the second quarter of 2012. We continue to make progress payments on our new plant.
     EBITDA — EBITDA increased primarily as a result of the increase in revenues described above. As a percentage of revenue, EBITDA decreased from 66% of revenues in the 2010 period to 53% in the 2011 period. Increased revenues and expenses include product sales and product purchases primarily related to Granite Wash, which decreases EBITDA as a percent of revenue. Barnett Shale’s EBITDA increased from 76% to 79% of revenues was primarily due to higher revenues offset by product purchases. Fayetteville Shale’s EBITDA was 48% and Granite Wash’s EBITDA 10% of revenue for the 2011 period.
     Depreciation, Amortization and Accretion Expense — Depreciation, amortization and accretion expense increased primarily as a result of the Frontier Gas Acquisition and the continuing expansion of our Barnett Shale asset base. Fayetteville Shale and Granite Wash contributed $4.6 million and $0.9 million, respectively, to depreciation, amortization and accretion expense.
     Interest Expense — Interest expense increased primarily due to the increases in the borrowings under our Credit Facility, which were principally used to fund capital projects, the addition of the Senior Notes and expenses related to the bridge loans commitments. These increases were partially offset by the termination of the subordinated note in October 2010.

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The following table summarizes the details of interest expense for the nine months ended September 30, 2011 and 2010.
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In thousands)  
Interest cost:
               
Revolving Credit Facility
  $ 9,325     $ 6,917  
Senior Notes
    8,097        
Bridge Loan
    2,500        
Capital lease interest
    125        
Subordinated note
          1,891  
 
           
Total cost
    20,047       8,808  
Less interest capitalized
    (122 )      
 
           
Interest expense
  $ 19,925     $ 8,808  
 
           

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Liquidity and Capital Resources
     Our sources of liquidity include:
    cash generated from operations;
    borrowings under our Credit Facility; and
    future capital market transactions.
     We believe that the cash generated from these sources will be sufficient to meet our expected $0.48 per unit quarterly cash distributions during 2011 and satisfy our short-term working capital and maintenance capital expenditure requirements.
     Since the inception of operations in 2004, our cash flows have been significantly influenced by Quicksilver’s production in the Barnett Shale. As Quicksilver and others have developed the Barnett Shale, we have expanded our gathering and processing facilities to serve the additional volumes produced by such development. We expect to benefit from the Frontier Gas Acquisition and the acquisition of Tristate which will result in lower dependency on Quicksilver and our Barnett Shale operations. During the quarter ended September 30, 2011, Quicksilver accounted for 60% of our total revenue, which has decreased approximately 32% from 92% in the third quarter of 2010.
Known Trends and Uncertainties
     Our financial condition and results of operations, including our liquidity and profitability, can be significantly affected by the following:
    natural gas prices;
 
    dependency on Quicksilver and the Barnett Shale; and
 
    regulatory requirements.
     The volumes of natural gas that we gather and process are dependent upon the natural gas volumes produced by our customers, which may be affected by prevailing natural gas prices, their derivative programs, and the availability and cost of their capital. We cannot predict future changes to natural gas prices or how any such pricing changes will influence producers’ behaviors. If reduced drilling and development programs were to be sustained over a prolonged period of time, we could experience a reduction in volumes through our systems and therefore reductions of revenue and cash flows.
     For the nine months ended September 30, 2011, approximately 73% of our revenue was derived from our operations in the Barnett Shale, including approximately 66% associated with Quicksilver. The risk of revenue fluctuations in the near-term is somewhat mitigated by the use of predominantly fixed-fee contracts for providing gathering and processing and treating services to our customers, but we are still susceptible to volume fluctuations. While the Frontier Gas Acquisition and the acquisition of Tristate reduce the concentration risk associated with our dependency on one producer and one geographic area, we continue to regularly review opportunities for both organic growth projects and acquisitions in other producing basins and with other producers.
     We are subject to environmental laws, regulations and permits, including greenhouse gas requirements that may expose us to significant costs or obligations. In general, these laws, regulations, and permits have become more stringent over time and are subject to further changes and could materially affect our financial condition and results of operations in the future.
Significant Economic Factors That Impact our Business
     Changes in natural gas supply such as new discoveries of natural gas reserves, declining production in older fields and the introduction of new sources of natural gas supply, such as non-conventional and emerging natural gas shale plays, affect the demand from producers for our services. As these supply dynamics change, we anticipate that we will actively pursue projects that will allow us to provide midstream services to producers associated with the growth of new sources of supply. Changes in demographics, the amount of natural gas fired power generation, liquefied natural gas imports and exports and shifts in industrial and residential usage affect the overall demand for natural gas.
     We believe that the key factors that impact our business are natural gas prices, our customers’ drilling and completion activities, and government regulation on natural gas pipelines. These key factors play an important role in how we evaluate our operations and implement our long-term strategies.

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Cash Flows
                 
    Nine Months Ended June 30,  
    2011     2010  
    (In thousands)  
Net cash provided by operating activities
  $ 68,465     $ 44,873  
Net cash used in investing activities
    (374,975 )     (132,746 )
Net cash provided by financing activities
    306,566       87,184  
     Cash Flows Provided by Operating Activities — The increase in cash flows provided by operating activities is the result of an increase in operating income as a result of the Frontier Gas Acquisition and improved performance by our Barnett Shale operations. The income also reflects an increase in accrued expenses related to operations, ad valorem tax, interest expense and incentive compensation, partially offset by higher receivables from the Fayetteville Shale and Granite Wash operations and the gain on exchange of property, plant and equipment.
     Cash Flows Used in Investing Activities — The increase in cash flows used in investing activities resulting from the Frontier and Las Animas System acquisitions were approximately $349.7 million, offset by the proceeds received with the exchange of property, plant and equipment of $5.9 million and the distribution to Quicksilver of $80.3 million related to the purchase of the Alliance Midstream Assets in the prior year. For the 2011 period, we spent $31.3 million for gathering assets and processing facilities.
     Cash Flows Provided by Financing Activities — Changes in cash flows provided by financing activities during the 2011 period resulted primarily from the net borrowings under our Senior Notes and Credit Facility of $144.5 million compared with the 2010 period net borrowings of $113.1 million. This change is largely reflective of our Frontier Gas Acquisition in the 2011 period compared to the purchase of the Alliance Midstream Assets for $84.4 million in the 2010 period. We also had $206.2 million in proceeds from issuance of common and Class C units. In addition, we distributed $10.1 million more to our unitholders during the 2011 period. We have increased our distributions by 14.3% from the 2010 quarter to the 2011 quarter. In January 2010, the underwriters of our equity offering exercised their option to purchase an additional 549,200 common units, which generated proceeds of $11.1 million for which there was no comparable 2011 event.
     Information regarding historical and pending cash distributions is included in Note 4 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report.
Capital Expenditures
     The midstream energy business is capital intensive, requiring significant investment for the acquisition or development of new facilities. We categorize our capital expenditures as either:
    expansion capital expenditures, which are made to construct additional assets, expand and upgrade existing systems, or acquire additional assets; or
    maintenance capital expenditures, which are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and extend their useful lives.
     We anticipate that we will continue to make capital expenditures to develop our gathering and processing network as Quicksilver and other producers continue to expand their development efforts in the Barnett Shale, Fayetteville Shale, Avalon Shale and the Granite Wash areas. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives and to maintain our distribution levels.
     For the full year of 2011, we plan capital spending to total approximately $40 to $50 million, including approximately $2 to $3 million for maintenance capital projects. The approximate $15 million reduction from previous estimates is primarily attributable to delayed timing of expenditures related to expansion projects on the Alliance System. These expenditures are currently expected to be incurred in the first half of 2012.
     During the nine months ended September 30, 2011, we increased gross property, plant and equipment by $172.7 million, including $144.5 million for the Frontier Gas Acquisition, $5.1 million for the Las Animas Acquisition, expansion capital expenditures of approximately $22.0 million, $1.0 million in maintenance capital expenditures and $0.1 million in asset retirement cost.
Other Matters
     We regularly review opportunities for both organic growth projects and acquisitions that will enhance our financial performance. Since we distribute all of our available cash to our unitholders, we will depend on a combination of borrowings under our Credit Facility, operating cash flows and debt or equity offerings to finance any future growth capital expenditures or acquisitions.

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Debt
     Credit Facility — At September 30, 2011, we had $228 million outstanding under our $500 million Credit Facility at a weighted-average interest rate of 3.6%. Our average outstanding debt was $238 million for the three months ended September 30, 2011. Note 7 to the consolidated financial statements in our 2010 Annual Report on Form 10-K contains a more complete description of our indebtedness. On April 1, 2011, we entered into a Joinder Agreement with certain lenders under our Credit Facility, which expanded our borrowing capacity from $400 million to $500 million.
     Our Credit Facility requires us to maintain:
    a ratio of our consolidated trailing 12-month EBITDA (as defined in the Credit Facility) to our net interest expense of not less than 2.5 to 1.0; and
    a ratio of total indebtedness to consolidated trailing 12-month EBITDA of not more than 5.0 to 1.0 or not more than 5.5 to 1.0 for up to nine months following certain acquisitions.
     As of September 30, 2011, we were in compliance with these financial covenants. The Credit Facility contains provisions that trigger an acceleration of indebtedness based solely on the occurrence of a material adverse change in our financial condition or results of operations.
     Bridge Loans — In February 2011, in connection with the Frontier Gas Acquisition, we obtained commitments from multiple lenders for senior unsecured bridge loans in an aggregate amount up to $200 million. On April 1, 2011, the commitment was not drawn and was terminated in connection with the closing of the Senior Notes described below. We recognized $2.5 million of commitment fees in the second quarter of 2011, which is included in interest expense, related to the bridge loans.
     Senior Notes — On April 1, 2011, we issued the Senior Notes. Our obligations under the Senior Notes are guaranteed on an unsecured basis by our current and future domestic subsidiaries. The proceeds were used to partially finance the Frontier Gas Acquisition. The Senior Notes accrue at a rate of 7.75% per annum, and are payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011, and mature April 2019.
     Our Senior Notes require us to maintain a ratio of our consolidated trailing 12-month EBITDA (as defined in the senior notes indenture) to fixed charges of at least 1.75 to 1.0. As of September 30, 2011, we were in compliance with this covenant.
Contractual Obligations and Commercial Commitments
     The following table summarizes our total contractual cash obligations as of September 30, 2011.
                                                         
    Payments Due by Period  
Contractual Obligations   Total     2011 (remaining)     2012     2013     2014     2015     Thereafter  
                    (In millions)                          
Long-term debt (1)
  $ 428.0     $     $     $     $     $ 228.0     $ 200.0  
Scheduled interest obligations (2)
    148.7       5.9       23.6       23.6       23.6       21.6       50.4  
Contractual obligations (3)
    12.6       3.5       5.9       2.0       0.8       0.4        
Capital lease obligations (4)
    7.3       0.7       2.7       2.7       1.2              
Asset retirement obligations (5)
    10.8                                     10.8  
 
                                         
Total contractual obligations
  $ 607.4     $ 10.1     $ 32.2     $ 28.3     $ 25.6     $ 250.0     $ 261.2  
 
                                         
 
(1)   As of September 30, 2011, we had $228.0 million outstanding under our Credit Facility and $200 million outstanding on our Senior Notes.
 
(2)   Based on our debt outstanding and interest rates in effect at September 30, 2011, we would anticipate interest payments to be approximately $8.1 million annually on our Credit Facility and $15.5 million annually on our Senior Notes. For each additional $10.0 million in borrowings on our Credit Facility, annual interest payments will increase by approximately $0.4 million. If the committed amount under our Credit Facility were to be fully utilized by year-end 2011 at interest rates in effect at September 30, 2011, we estimate that annual interest expenses would increase by approximately $9.7 million. If interest rates on our September 30, 2011 variable debt balance of $228.0 million increase or decrease by one percentage point, our annual income will decrease or increase by $2.3 million.
 
(3)   We lease office buildings and other property under operating leases, including a contract to purchase a second processing plant at Granite Wash.

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(4)   We lease compressors which are accounted for as capital leases, see Note 9 to our condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report.
 
(5)   For more information regarding our asset retirement obligations, see Note 10 to our condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report.
Off-Balance Sheet Arrangements
     We have no off-balance sheet arrangements within the definition of Item 303(a)(4) of SEC Regulation S-K.
Recently Issued Accounting Standards
     The information regarding recent accounting pronouncements is included in Note 2 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report.
Critical Accounting Estimates
     Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated interim financial statements and related footnotes contained within Item 1 of Part I of this Quarterly Report. The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Our critical accounting estimates used in the preparation of the consolidated financial statements were discussed in Item 7 in our 2010 Annual Report on Form 10-K. These critical estimates, for which no significant changes have occurred in the nine months ended September 30, 2011, include estimates and assumptions pertaining to:
    depreciation expense for property, plant and equipment;
    asset retirement obligations; and
    equity-based compensation.
     These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     We have established policies and procedures for managing risk within our organization, including internal controls. The level of risk assumed by us is based on our objectives and capacity to manage risk.
    Credit Risk
     Our primary credit risk relates to our dependency on Quicksilver for the majority of our natural gas volumes, which causes us to be subject to the risk of nonpayment or late payment by Quicksilver for gathering and processing fees. Quicksilver’s credit ratings are below investment grade, where they may remain for the foreseeable future. Accordingly, this risk could be higher than it might be with a more creditworthy customer or with a more diversified group of customers. Unless and until we significantly diversify our customer base, we expect to continue to be subject to non-diversified risk of nonpayment or late payment of our fees. Additionally, we perform credit analysis of our customers on a regular basis pursuant to our corporate credit policy. We have not had any significant losses due to counter-party failures to perform.
    Interest Rate Risk
     Although our base interest rates remain low, our leverage ratios directly influence the spreads charged by lenders. The credit markets could also drive the spreads charged by lenders upward. As base rates or spreads increase, our financing costs will increase accordingly. Although this could limit our ability to raise funds in the capital markets, we expect that our competitors would face similar challenges with respect to funding acquisitions and capital projects. We are exposed to variable interest rate risk as a result of borrowings under our Credit Facility.
Item 4. Controls and Procedures
    Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
     We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
    Changes in Internal Control Over Financial Reporting
     During the quarter ended September 30, 2011, we have continued to migrate our financial systems to a hosted environment. In connection with this implementation and resulting business process changes, we continue to enhance the design and documentation of our internal control processes to ensure suitable controls over our financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. We are not currently subject to any material lawsuits or other legal proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition or for which disclosure is required by Item 103 of Regulation S-K.
Ginardi v. Frontier Gas Services, LLC, et al. In May 2011, a class action lawsuit was filed in the United States District Court of the Eastern District of Arkansas against Frontier Gas Services, LLC; Chesapeake Energy Corporation, BHP Billiton Petroleum, No 4:11-cv-0420 BRW alleging that defendant’s, including Crestwood Arkansas which was served in August 2011, operations pollute the atmosphere, groundwater, and soil with allegedly harmful gases, chemicals, and compounds and the facilities creates excessive noise levels constituting trespass, nuisance and annoyance. The plaintiffs seek compensatory and punitive damages of loss of use and enjoyment of property, contamination of soil and ground water, air and atmosphere and seek future monitoring. Crestwood Arkansas has filed an answer in the matter denying liability. This case has not had, and is not expected to have, a material impact on our results of the operation or financial condition. We intend to vigorously defend against the claims.
Item 1A. Risk Factors
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, results of operations and cash flows, except that the following risk factors are no longer applicable:
    “Our pending acquisition of Frontier may not be consummated”;
 
    “The closing of the Frontier Acquisition is not subject to a financing condition and the Bridge Loans do not backstop the equity portion of the purchase price or our equity commitments”; and
 
    “Financing the Frontier Acquisition will substantially increase our leverage. We may not be able to obtain debt financing for the acquisition on expected or acceptable terms.”
     Except as set forth above and as disclosed in Part II, “Item 1A. Risk Factors” included in our Quarterly Report for the quarter ended September 30, 2011, there have been no material changes to the risks factors previously described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     None.
Item 3. Defaults Upon Senior Securities
     None.
Item 4. (Removed and Reserved)
     Not Applicable.
Item 5. Other Information
     None.

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Item 6. Exhibits:
The exhibit index is incorporated herein by reference into this quarterly report on Form 10-Q.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 8, 2011
         
  CRESTWOOD MIDSTREAM PARTNERS LP
 
 
  By:   CRESTWOOD GAS SERVICES GP LLC, its
General Partner  
 
       
       
 
     
  By:   /s/ William G. Manias    
    William G. Manias   
    Senior Vice President — Chief Financial Officer   
 

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EXHIBIT INDEX
Exhibits designated by an asterisk (*) are filed herewith and those with (**) are furnished and not filed herewith, all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
     
Exhibit No.   Description
**10.1  
Separation Agreement and Release, dated October 29, 2011, by and among Crestwood Midstream Partners, LP, Crestwood Gas Services GP. LLC, Crestwood Holdings Partners, LLC, Crestwood Midstream Partners II, LLC and Terry L. Morrison (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2011).
   
 
*31.1  
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
 
*31.2  
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
 
*32.1  
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 
**101.INS  
XBRL Instance Document
   
 
**101.SCH  
XBRL Taxonomy Extension Schema Linkbase Document
   
 
**101.CAL  
XBRL Taxonomy Extension Calculation Linkbase Document
   
 
**101.DEF  
XBRL Taxonomy Extension Definition Linkbase Document
   
 
**101.LAB  
XBRL Taxonomy Extension Labels Linkbase Document
   
 
**101.PRE  
XBRL Taxonomy Extension Presentation Linkbase Document