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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 1934For the quarterly period ended September 30, 2010oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number: 001-33631
 Crestwood Midstream Partners LP
  Delaware
    
    56-2639586(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)717 Texas Avenue, Suite 3150, Houston, Texas
    
    77002(Address of principal executive offices)
    
    (Zip Code)
 (832) 519-2200
 f/k/a Quicksilver Gas Services LP
801 Cherry Street
Suite 3400, Unit 20
 Fort Worth, Texas 76102
 þ o
 o o
  Large accelerated filer o   
    Accelerated filer þ
    Non-accelerated filer o
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Title of Class
    
    Outstanding as of October 29, 2010Common Units
    
    19,670,029




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##### Table of Contents



DEFINITIONS
  Bbl Bbls
 Btu
 EBITDA
 LIBOR
 Management
 MMBtu
 MMBtud
 Mcf
 MMcf
 MMcfd
 MMcfe
 MMcfed
 NGL NGLs
 Oil
 COMMONLY USED TERMS
  Alliance Midstream Assets
 Alliance System
 CMLP
 Credit Facility
 Crestwood
 Crestwood Holdings
 Crestwood Transaction
 Exchange Act
 FASB
 FASC Accounting Standards Codification
 GAAP
 General Partner
 HCDS
 IPO
 KGS
 LADS
 Omnibus Agreement
 Partnership Agreement
 Quicksilver
 Quicksilver Counties
 Repurchase Obligation Waiver
 SEC
 SFAS
 2




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##### 



CRESTWOOD MIDSTREAM PARTNERS LP
INDEX TO FORM 10-Q
For the Period Ended September 30, 2010
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    (Removed and Reserved)
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits
    
    
    30Signatures
    
    
    31Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906EX-3.2EX-3.3EX-3.4EX-10.1EX-31.1EX-31.2EX-32.1
  3




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EXPLANATORY NOTE
     FORWARD-LOOKING INFORMATION
  
    
    changes in general economic conditions;
    
    fluctuations in natural gas prices;
    
    failure or delays by our customers in achieving expected production from natural gas
projects;
    
    competitive conditions in our industry;
    
    actions taken or non-performance by third parties, including suppliers, contractors,
operators, processors, transporters and customers;
    
    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 or future litigation; and
    
    certain factors discussed elsewhere in this Quarterly Report.
  4




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5




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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 EndedSeptember 30,

    
    September 30,2010

    
    2009

    
    2010

    
    2009RevenueGathering revenue - Quicksilver
    
    $
    20,670
    
    
    $
    13,759
    
    
    $
    55,464
    
    
    $
    41,018Gathering revenue
    
    
    1,710
    
    
    
    336
    
    
    
    4,165
    
    
    
    1,496Processing revenue - Quicksilver
    
    
    7,372
    
    
    
    8,155
    
    
    
    20,625
    
    
    
    25,541Processing revenue
    
    
    614
    
    
    
    295
    
    
    
    2,045
    
    
    
    1,344Other revenue - Quicksilver
    
    
    -
    
    
    
    691
    
    
    
    -
    
    
    
    1,141Total revenue
    
    
    30,366
    
    
    
    23,236
    
    
    
    82,299
    
    
    
    70,540ExpensesOperations and maintenance
    
    
    7,205
    
    
    
    6,485
    
    
    
    21,806
    
    
    
    17,656General and administrative
    
    
    2,011
    
    
    
    1,727
    
    
    
    6,285
    
    
    
    5,463Depreciation and accretion
    
    
    5,689
    
    
    
    5,565
    
    
    
    16,696
    
    
    
    15,410Total expenses
    
    
    14,905
    
    
    
    13,777
    
    
    
    44,787
    
    
    
    38,529Operating income
    
    
    15,461
    
    
    
    9,459
    
    
    
    37,512
    
    
    
    32,011Other income
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1Interest expense
    
    
    3,185
    
    
    
    1,738
    
    
    
    8,808
    
    
    
    6,216Income from continuing operations before income taxes
    
    
    12,276
    
    
    
    7,721
    
    
    
    28,704
    
    
    
    25,796Income tax provision
    
    
    45
    
    
    
    235
    
    
    
    171
    
    
    
    446Net income from continuing operations
    
    
    12,231
    
    
    
    7,486
    
    
    
    28,533
    
    
    
    25,350Loss from discontinued operations
    
    
    -
    
    
    
    (348
    )
    
    
    -
    
    
    
    (1,802
    )Net income
    
    $
    12,231
    
    
    $
    7,138
    
    
    $
    28,533
    
    
    $
    23,548General partner interest in net income
    
    $
    743
    
    
    $
    353
    
    
    $
    1,777
    
    
    $
    850Common and subordinated unitholders interest
in net income
    
    $
    11,488
    
    
    $
    6,785
    
    
    $
    26,756
    
    
    $
    22,698Basic earnings (loss) per limited partner unit:From continuing operations per common and
subordinated unit
    
    $
    0.40
    
    
    $
    0.29
    
    
    $
    0.94
    
    
    $
    1.02From discontinued operations per common and
subordinated unit
    
    $
    -
    
    
    $
    (0.01
    )
    
    $
    -
    
    
    $
    (0.07
    )Net earnings per common and subordinated unit
    
    $
    0.40
    
    
    $
    0.28
    
    
    $
    0.94
    
    
    $
    0.95Diluted earnings (loss) per limited partner unit:From continuing operations per common and
subordinated unit
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    0.90
    
    
    $
    0.92From discontinued operations per common and
subordinated unit
    
    $
    -
    
    
    $
    (0.01
    )
    
    $
    -
    
    
    $
    (0.06
    )Net earnings per common and subordinated unit
    
    $
    0.38
    
    
    $
    0.26
    
    
    $
    0.90
    
    
    $
    0.86Weighted average number of common and subordinated units outstanding:Basic
    
    
    28,502
    
    
    
    23,827
    
    
    
    28,502
    
    
    
    23,827Diluted
    
    
    31,561
    
    
    
    27,981
    
    
    
    31,783
    
    
    
    28,319Distributions per unit (attributable to the period ended)
    
    $
    0.42
    
    
    $
    0.39
    
    
    $
    1.23
    
    
    $
    1.13
  6




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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data - Unaudited
 September 30,

    
    December 31,2010

    
    2009ASSETSCurrent assetsCash and cash equivalents
    
    $
    57
    
    
    $
    746Accounts receivable
    
    
    1,962
    
    
    
    1,342Prepaid expenses and other
    
    
    1,062
    
    
    
    180Total current assets
    
    
    3,081
    
    
    
    2,268Property, plant and equipment, net
    
    
    524,239
    
    
    
    482,497Other assets
    
    
    2,196
    
    
    
    2,859Total assets
    
    $
    529,516
    
    
    $
    487,624LIABILITIES AND PARTNERS CAPITALCurrent liabilitiesCurrent maturities of debt
    
    $
    3,300
    
    
    $
    2,475Accounts payable to Quicksilver
    
    
    1,033
    
    
    
    1,727Accrued additions to property, plant and equipment
    
    
    5,689
    
    
    
    8,015Accounts payable and other
    
    
    6,844
    
    
    
    2,240Total current liabilities
    
    
    16,866
    
    
    
    14,457Long-term debt
    
    
    238,500
    
    
    
    125,400Note payable to Quicksilver
    
    
    54,309
    
    
    
    53,243Asset retirement obligations
    
    
    9,722
    
    
    
    8,919Deferred income taxes
    
    
    940
    
    
    
    768Commitments
and contingent liabilities (Note 10)Partners capitalCommon unitholders (16,988,429 and 16,313,451 units issued and
outstanding at September 30, 2010 and December 31, 2009, respectively)
    
    
    208,834
    
    
    
    281,239Subordinated unitholders (11,513,625 units issued and outstanding at
September 30, 2010 and December 31, 2009)
    
    
    (366
    )
    
    
    3,040General partner
    
    
    711
    
    
    
    558Total partners capital
    
    
    209,179
    
    
    
    284,837$
    529,516
    
    
    $
    487,624
  7




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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands  Unaudited
 Nine Months Ended September 30,2010

    
    2009Operating activities:Net income
    
    $
    28,533
    
    
    $
    23,548Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    16,321
    
    
    
    17,223Accretion of asset retirement obligations
    
    
    375
    
    
    
    295Deferred income taxes
    
    
    171
    
    
    
    446Equity-based compensation
    
    
    2,001
    
    
    
    1,289Non-cash interest expense
    
    
    3,323
    
    
    
    4,535Changes in assets and liabilities:Accounts receivable
    
    
    (620
    )
    
    
    1,554Prepaid expenses and other
    
    
    (923
    )
    
    
    234Accounts receivable and payable with Quicksilver
    
    
    (8,117
    )
    
    
    (2,248
    )Accounts payable and other
    
    
    3,809
    
    
    
    3,405Net cash provided by operating activities
    
    
    44,873
    
    
    
    50,281Investing activities:Capital expenditures
    
    
    (52,470
    )
    
    
    (50,067
    )Distribution to Quicksilver for Alliance Midstream Assets
    
    
    (80,276
    )
    
    
    (5,645
    )Net cash used in investing activities
    
    
    (132,746
    )
    
    
    (55,712
    )Financing activities:Proceeds from revolving credit facility borrowings
    
    
    143,200
    
    
    
    46,500Repayments of credit facility
    
    
    (30,100
    )
    
    
    (14,500
    )Proceeds from issuance of equity
    
    
    11,088
    
    
    
    -Issuance costs of equity units paid
    
    
    (34
    )
    
    
    -Contributions by Quicksilver
    
    
    -
    
    
    
    987Distributions to unitholders
    
    
    (35,826
    )
    
    
    (27,248
    )Taxes paid for equity-based compensation vesting
    
    
    (1,144
    )
    
    
    (63
    )Net cash provided by financing activities
    
    
    87,184
    
    
    
    5,676Net cash increase (decrease)
    
    
    (689
    )
    
    
    245Cash at beginning of period
    
    
    746
    
    
    
    303Cash at end of period
    
    $
    57
    
    
    $
    548Cash paid for interest
    
    $
    5,485
    
    
    $
    3,700Cash paid for income taxes
    
    
    -
    
    
    
    -Non-cash transactions:Working capital related to capital expenditures
    
    
    15,269
    
    
    
    4,502Contribution of property, plant and equipment from Quicksilver
    
    
    -
    
    
    
    46,970Disposition of property, plant and equipment under
repurchase obligation, net
    
    
    -
    
    
    
    47,577Equity impact of not purchasing assets subject to repurchase
obligations
    
    
    -
    
    
    
    11,809
  8




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CRESTWOOD MIDSTREAM PARTNERS LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
In thousands  Unaudited
 Limited PartnersGeneralCommon

    
    Subordinated

    
    Partner

    
    TotalBalance at December 31, 2009
    
    $
    281,239
    
    
    $
    3,040
    
    
    $
    558
    
    
    $
    284,837Equity-based compensation expense recognized
    
    
    2,001
    
    
    
    -
    
    
    
    -
    
    
    
    2,001Distributions paid to partners
    
    
    (20,387
    )
    
    
    (13,815
    )
    
    
    (1,624
    )
    
    
    (35,826
    )Distribution to Quicksilver for Alliance Midstream Assets
    
    
    (80,276
    )
    
    
    -
    
    
    
    -
    
    
    
    (80,276
    )Net income
    
    
    16,347
    
    
    
    10,409
    
    
    
    1,777
    
    
    
    28,533Public offering of units, net of offering costs
    
    
    11,054
    
    
    
    -
    
    
    
    -
    
    
    
    11,054Taxes paid for stock-based compensation vesting
    
    
    (1,144
    )
    
    
    -
    
    
    
    -
    
    
    
    (1,144
    )Balance at September 30, 2010
    
    $
    208,834
    
    
    $
    (366
    )
    
    $
    711
    
    
    $
    209,179
  9




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CRESTWOOD MIDSTREAM PARTNERS LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
 1.  ORGANIZATION AND DESCRIPTION OF BUSINESS
 Organization
    
    
    recognition of approximately $3.6 million of costs associated with the vesting of
equity-based compensation of our phantom units upon the closing of the Crestwood
Transaction in accordance with the change-in-control provisions of our 2007 Equity Plan;
 
    
    acceleration of amounts due under our old $320 million credit facility, which was
replaced with a new $400 million Credit Facility;
 
    
    termination of our omnibus agreement with Quicksilver, which was replaced with a new
Omnibus Agreement;
 
    
    termination of our Services and Secondment Agreement with Quicksilver which we replaced,
on a temporary basis, with a Transition Services Agreement with Quicksilver;
 
    
    extension of the tenor of all of our gathering and processing agreements with
Quicksilver to 2020; and
 
    
    change to a fixed gathering rate of $0.55 per Mcf for the Alliance System for
Quicksilver to replace the variable rate which had a range of $0.40 to $0.55 per Mcf.
   Ownership PercentageCrestwood
    
    Public
    
    TotalGeneral partner interest
    
    
    1.5
    %
    
    
    -

    
    
    1.5
    %Limited partner interest:Common unitholders
    
    
    25.3
    %
    
    
    36.8
    %
    
    
    62.1
    %Subordinated unitholders
    
    
    36.4
    %
    
    
    -

    
    
    36.4
    %Total interests
    
    
    63.2
    %
    
    
    36.8
    %
    
    
    100.0
    %
   10




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Description of Business
  Cowtown System
 -
    
    the Cowtown Pipeline, consisting of a gathering system and related gas
compression facilities.  This system gathers natural gas produced by our
customers and delivers it to the Cowtown and Corvette Plants for processing;
 -
    
    the Cowtown Plant, consisting of two natural gas processing units with a total
capacity of 200 MMcfd that extract NGLs from the natural gas stream and deliver
customers residue gas and extracted NGLs to unaffiliated pipelines for sale
downstream; and
 -
    
    the Corvette Plant, placed in service during 2009, consisting of a 125 MMcfd
natural gas processing unit that extracts NGLs from the natural gas stream and delivers
customers residue gas and extracted NGLs to unaffiliated pipelines for sale
downstream.
 Lake Arlington Dry System
 Alliance System
 Three Months Ended September 30, 2009As PreviouslyPresented
    
    Alliance System
    
    Combined(In thousands)Revenue
    
    $
    23,216
    
    
    $
    20
    
    
    $
    23,236Operating expenses
    
    
    (12,242
    )
    
    
    (1,535
    )
    
    
    (13,777
    )Operating income (loss)
    
    $
    10,974
    
    
    $
    (1,515
    )
    
    $
    9,459Basic earnings (loss) per limited partner unit:
    
    $
    0.35
    
    
    $
    (0.07
    )
    
    $
    0.28Diluted earnings (loss) per limited partner unit:
    
    $
    0.31
    
    
    $
    (0.05
    )
    
    $
    0.26
 11




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Nine Months Ended September 30, 2009As PreviouslyPresented
    
    Alliance System
    
    Combined(In thousands)Revenue
    
    $
    70,036
    
    
    $
    504
    
    
    $
    70,540Operating expenses
    
    
    (36,074
    )
    
    
    (2,455
    )
    
    
    (38,529
    )Operating income (loss)
    
    $
    33,962
    
    
    $
    (1,951
    )
    
    $
    32,011Basic earnings (loss) per limited partner unit:
    
    $
    1.03
    
    
    $
    (0.08
    )
    
    $
    0.95Diluted earnings (loss) per limited partner unit:
    
    $
    0.92
    
    
    $
    (0.06
    )
    
    $
    0.86As of December 31, 2009As PreviouslyPresented
    
    Alliance System
    
    Combined(In thousands)AssetsProperty, plant and equipment, net
    
    $
    396,952
    
    
    $
    85,545
    
    
    $
    482,497Total assets
    
    $
    396,952
    
    
    $
    85,545
    
    
    $
    482,497LiabilitiesAccrued additions to property, plant and
equipment
    
    $
    4,011
    
    
    $
    4,004
    
    
    $
    8,015Asset retirement obligations
    
    
    7,654
    
    
    
    1,265
    
    
    
    8,919Partners capital
    
    
    204,561
    
    
    
    80,276
    
    
    
    284,837Total liabilities and partners capital
    
    $
    216,226
    
    
    $
    85,545
    
    
    $
    301,771
 Hill County Dry System
  2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Use of Estimates 
  Discontinued Operations 
 12




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Net Income per Limited Partner Unit
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009(In thousands, except per unit data)Common and subordinated unitholders interest in net income from
continuing operations
    
    $
    11,488
    
    
    $
    7,126
    
    
    $
    26,756
    
    
    $
    24,466Common and subordinated unitholders interest in net loss from
discontinued operations
    
    
    -
    
    
    
    (341
    )
    
    
    -
    
    
    
    (1,768
    )Common and subordinated unitholders interest in net income
    
    $
    11,488
    
    
    $
    6,785
    
    
    $
    26,756
    
    
    $
    22,698Impact of interest on subordinated note to Quicksilver
    
    
    647
    
    
    
    416
    
    
    
    1,860
    
    
    
    1,490Income available assuming conversion of convertible debt
    
    $
    12,135
    
    
    $
    7,201
    
    
    $
    28,616
    
    
    $
    24,188Weighted-average common and subordinated units - basic
    
    
    28,502
    
    
    
    23,827
    
    
    
    28,502
    
    
    
    23,827Effect of unvested phantom units
    
    
    516
    
    
    
    486
    
    
    
    516
    
    
    
    486Effect of subordinated note to Quicksilver (1)
    
    
    2,543
    
    
    
    3,668
    
    
    
    2,765
    
    
    
    4,006Weighted-average common and subordinated units - diluted
    
    
    31,561
    
    
    
    27,981
    
    
    
    31,783
    
    
    
    28,319Basic earnings per unit:From continuing operations per common and subordinated unit
    
    $
    0.40
    
    
    $
    0.29
    
    
    $
    0.94
    
    
    $
    1.02From discontinued operations per common and subordinated unit
    
    $
    -
    
    
    $
    (0.01
    )
    
    $
    -
    
    
    $
    (0.07
    )Net earnings per common and subordinated unit
    
    $
    0.40
    
    
    $
    0.28
    
    
    $
    0.94
    
    
    $
    0.95Diluted earnings per unit:From continuing operations per common and subordinated unit
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    0.90
    
    
    $
    0.92From discontinued operations per common and subordinated unit
    
    $
    -
    
    
    $
    (0.01
    )
    
    $
    -
    
    
    $
    (0.06
    )Net earnings per common and subordinated unit
    
    $
    0.38
    
    
    $
    0.26
    
    
    $
    0.90
    
    
    $
    0.86Conversion price of convertible debt (1)
    
    $
    22.65
    
    
    $
    15.04
    
    
    $
    20.84
    
    
    $
    13.77
 (1)
 Comprehensive Income
 Recently Issued Accounting Standards
  3. PARTNERS CAPITAL AND DISTRIBUTIONS
  13




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##### Table of Contents



Attributable to the
    
    Per Unit

    
    Total CashPayment Date
    
    Quarter Ended
    
    Distribution(1)
    

    Distribution(In millions)Pending DistributionNovember 12, 2010 (2)
    
    September 30, 2010
    
    $
    0.420
    
    
    $
    13.9Completed DistributionsAugust 13, 2010 (3)
    
    June 30, 2010
    
    $
    0.420
    
    
    $
    12.7May 14, 2010 (4)
    
    March 31, 2010
    
    $
    0.390
    
    
    $
    11.6February 12, 2010 (4)
    
    December 31, 2009
    
    $
    0.390
    
    
    $
    11.6November 13, 2009 (5)
    
    September 30, 2009
    
    $
    0.390
    
    
    $
    9.7August 14, 2009 (6)
    
    June 30, 2009
    
    $
    0.370
    
    
    $
    9.1May 15, 2009 (6)
    
    March 31, 2009
    
    $
    0.370
    
    
    $
    9.1
 (1)
    
    Represents common and subordinated unitholders(2)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $570,000 to the general partner(3)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $522,000 to the general partner(4)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $261,000 to the general partner(5)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $219,000 to the general partner(6)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $90,000 to the general partner
   4. DISCONTINUED OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    September 30, 2009(In thousands)
    
    
    (In thousands)Revenue
    
    $
    1,082
    
    
    $
    2,957Operating expenses
    
    
    (930
    )
    
    
    (3,051
    )Interest expense
    
    
    (500
    )
    
    
    (1,708
    )Loss from discontinued operations
    
    $
    (348
    )
    
    $
    (1,802
    )
 14




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5. PROPERTY, PLANT AND EQUIPMENT
  September 30,
    
    
    December 31,2010
    
    2009(In thousands)Gathering systems
    
    $
    138,794
    
    
    $
    135,128Processing plants and compression
facilities
    
    
    361,093
    
    
    
    332,053Construction in progress - gathering
    
    
    28,190
    
    
    
    17,693Rights-of-way and easements
    
    
    29,435
    
    
    
    27,788Pipe and pipeline equipment
    
    
    13,023
    
    
    
    -Land
    
    
    4,251
    
    
    
    4,251Buildings and other
    
    
    2,921
    
    
    
    2,732577,707
    
    
    
    519,645Accumulated depreciation
    
    
    (53,468
    )
    
    
    (37,148
    )Net property, plant and equipment
    
    $
    524,239
    
    
    $
    482,497
  6. DEBT
  September 30,
    
    
    December 31,2010
    
    2009(In thousands)Credit Facility
    
    $
    238,500
    
    
    $
    125,400Subordinated Note to Quicksilver
    
    
    57,609
    
    
    
    55,718296,109
    
    
    
    181,118Current maturities of debt
    
    
    (3,300
    )
    
    
    (2,475
    )Debt
    
    $
    292,809
    
    
    $
    178,643
    
    
    a ratio of our consolidated trailing 12-month EBITDA (as defined in the credit
agreement) 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.
   15




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7. ASSET RETIREMENT OBLIGATIONS
  September 30, 2010(In thousands)Beginning asset retirement obligations as reported at
December 31, 2009
    
    $
    7,654Alliance Midstream Asset obligations at December 31, 2009
    
    
    1,265Adjusted asset retirement obligations at December 31, 2009
    
    $
    8,919Incremental liability incurred
    
    
    428Accretion expense
    
    
    375Ending asset retirement obligations at September 30, 2010
    
    $
    9,722
  8. EQUITY-BASED COMPENSATION
  Payable in cash
    
    Payable in unitsWeighted

    
    
    
    
    
    WeightedAverage Grant

    
    
    
    
    
    Average GrantUnits

    
    Date Fair Value

    
    Units

    
    Date Fair ValueUnvested phantom units - January 1, 2010
    
    
    33,240
    
    
    $
    20.90
    
    
    
    485,672
    
    
    $
    12.75Vested
    
    
    (25,925
    )
    
    
    22.37
    
    
    
    (179,886
    )
    
    
    13.74Issued
    
    
    -
    
    
    
    -
    
    
    
    211,600
    
    
    
    21.15Cancelled
    
    
    -
    
    
    
    -
    
    
    
    (1,690
    )
    
    
    16.75Unvested phantom units - September 30,
2010
    
    
    7,315
    
    (1)

    $
    19.04
    
    
    
    515,696
    
    (1)

    $
    15.83
 (1)
    All units vested on October 1, 2010 due to the change in control of our General
Partner
     16




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##### Table of Contents



9. INCOME TAXES
     10. COMMITMENTS AND CONTINGENT LIABILITIES
  11. RELATED-PARTY TRANSACTIONS
      17




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 Overview
  Our Operations
  Operational Measurement
  Volume
 
    
    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.
 Adjusted Gross Margin
 Operating Expenses
 EBITDA
 18




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##### Table of Contents




    
    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.
 2010 Highlights
 Alliance Midstream Assets Acquisition
  Equity Offering
  Crestwood Transaction
    19




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RESULTS OF OPERATIONS
 Three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009
  Three Months Ended September 30,2010
    
    2009(In thousands)Total revenue
    
    $
    30,366
    
    
    $
    23,236Operations and maintenance expense
    
    
    7,205
    
    
    
    6,485General and administrative expense
    
    
    2,011
    
    
    
    1,727Adjusted gross margin
    
    
    21,150
    
    
    
    15,024Other income
    
    
    -
    
    
    
    -EBITDA
    
    
    21,150
    
    
    
    15,024Depreciation and accretion expense
    
    
    5,689
    
    
    
    5,565Interest expense
    
    
    3,185
    
    
    
    1,738Income tax provision
    
    
    45
    
    
    
    235Net income from continuing operations
    
    $
    12,231
    
    
    $
    7,486
  Gathering
    
    Processing2010
    
    2009
    
    2010
    
    2009(MMcf)Cowtown System
    
    
    12,415
    
    
    
    13,238
    
    
    
    12,339
    
    
    
    13,197Lake Arlington Dry System
    
    
    7,887
    
    
    
    6,302
    
    
    
    -
    
    
    
    -Alliance System
    
    
    13,089
    
    
    
    52
    
    
    
    -
    
    
    
    -Total
    
    
    33,391
    
    
    
    19,592
    
    
    
    12,339
    
    
    
    13,197
  Gathering
    
    Processing
    
    Other
    
    Total(In thousands)Revenue for the three
months ended September
30, 2009
    
    $
    14,095
    
    
    $
    8,450
    
    
    $
    691
    
    
    $
    23,236Volume changes
    
    
    9,927
    
    
    
    (550
    )
    
    
    -
    
    
    
    9,377Price changes
    
    
    (1,642
    )
    
    
    86
    
    
    
    (691
    )
    
    
    (2,247
    )Revenue for the three
months ended September
30, 2010
    
    $
    22,380
    
    
    $
    7,986
    
    
    $
    -
    
    
    $
    30,366
 Total Revenue Volumes 
 Operations and Maintenance Expense 
 General and Administrative Expense 
 20




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Adjusted Gross Margin EBITDA 
 Depreciation and Accretion Expense 
 Interest Expense
  Three Months Ended September 30,2010
    
    2009(In thousands)Interest cost:Revolving credit facility
    
    $
    2,527
    
    
    $
    1,001Repurchase obligation
    
    
    -
    
    
    
    314Subordinated note to Quicksilver
    
    
    658
    
    
    
    423Interest expense
    
    $
    3,185
    
    
    $
    1,738
 21




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##### Table of Contents



Nine months Ended September 30, 2010 Compared with Nine months Ended September 30, 2009
  Nine Months Ended September 30,2010
    
    2009(In thousands)Total revenue
    
    $
    82,299
    
    
    $
    70,540Operations and maintenance expense
    
    
    21,806
    
    
    
    17,656General and administrative expense
    
    
    6,285
    
    
    
    5,463Adjusted gross margin
    
    
    54,208
    
    
    
    47,421Other income
    
    
    -
    
    
    
    1EBITDA
    
    
    54,208
    
    
    
    47,422Depreciation and accretion expense
    
    
    16,696
    
    
    
    15,410Interest expense
    
    
    8,808
    
    
    
    6,216Income tax provision
    
    
    171
    
    
    
    446Net income from continuing operations
    
    $
    28,533
    
    
    $
    25,350
  Gathering
    
    Processing2010
    
    2009
    
    2010
    
    2009(MMcf)Cowtown System
    
    
    35,458
    
    
    
    42,771
    
    
    
    35,076
    
    
    
    41,958Lake Arlington Dry System
    
    
    16,920
    
    
    
    17,237
    
    
    
    -
    
    
    
    -Alliance System
    
    
    36,419
    
    
    
    6,786
    
    
    
    -
    
    
    
    -Total
    
    
    88,797
    
    
    
    66,794
    
    
    
    35,076
    
    
    
    41,958
  Gathering
    
    Processing
    
    Other
    
    Total(In thousands)Revenue for the nine
months ended
September 30, 2009
    
    $
    42,514
    
    
    $
    26,885
    
    
    $
    1,141
    
    
    $
    70,540Volume changes
    
    
    14,005
    
    
    
    (4,410
    )
    
    
    -
    
    
    
    9,595Price changes
    
    
    3,110
    
    
    
    195
    
    
    
    (1,141
    )
    
    
    2,164Revenue for the nine
months ended
September 30, 2010
    
    $
    59,629
    
    
    $
    22,670
    
    
    $
    -
    
    
    $
    82,299
 Total Revenue Volumes 
 Operations and Maintenance Expense 
 General and Administrative Expense 
 22




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##### Table of Contents



Adjusted Gross Margin EBITDA 
 Depreciation and Accretion Expense 
 Interest Expense
  Nine Months Ended September 30,2010
    
    2009(In thousands)Interest cost:Revolving credit facility
    
    $
    6,917
    
    
    $
    3,325Repurchase obligation
    
    
    -
    
    
    
    1,681Subordinated note to Quicksilver
    
    
    1,891
    
    
    
    1,520Total cost
    
    
    8,808
    
    
    
    6,526Less interest capitalized
    
    
    -
    
    
    
    (310
    )Interest expense
    
    $
    8,808
    
    
    $
    6,216
 23




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##### Table of Contents



Liquidity and Capital Resources
   
    
    cash generated from operations;
    
    borrowings under our new Credit Facility; and
    
    future capital market transactions.
    Cash Flows
 Nine Months Ended September 30,2010
    
    2009(In thousands)Net cash provided by operating activities
    
    $
    44,873
    
    
    $
    50,281Net cash used in investing activities
    
    
    (132,746
    )
    
    
    (55,712
    )Net cash provided by financing activities
    
    
    87,184
    
    
    
    5,676
 Cash Flows Used in Operating Activities 
 Cash Flows Used in Investing Activities 
 Cash Flows Provided by Financing Activities 
  24




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##### Table of Contents



Capital Expenditures
  
    
    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, or to maintain existing system volumes and related cash flows.
    Other Matters
  Debt
 Credit Facility
   
    
    a ratio of our consolidated trailing 12-month EBITDA (as defined in the credit
agreement) 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.
  Subordinated Note
  25




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##### Table of Contents



Contractual Obligations and Commercial Commitments
    Off-Balance Sheet Arrangements
  Recently Issued Accounting Standards
  Critical Accounting Estimates
  
    
    depreciation expense for property, plant and equipment;
    
    asset retirement obligations; and
    
    equity-based compensation.
  26




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##### Table of Contents



Item 3.   Quantitative and Qualitative Disclosures About Market Risk
  Credit Risk
  Interest Rate Risk
  
 Item 4.   Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
Legal Proceedings
  
 Item 1A. Risk Factors
  Our ability to operate our business effectively may suffer if we do not, quickly and cost
effectively, establish our own operating, maintenance, general and administrative and other
functions to operate as a company not controlled by Quicksilver.
   We may incur additional general and administrative costs as a result of the Crestwood
Transaction.
  As a result of the closing of the Crestwood Transaction and the conversion of the Subordinated
Note, Crestwood owns approximately 62% of our common units outstanding and controls our General
Partner, which has sole responsibility for conducting our business and managing our operations.
  
    
    neither our partnership agreement nor any other agreement requires Crestwood or its
affiliates to pursue a business strategy that favors us;
    
    our General Partner is allowed to take into account the interests of parties other than
us, such as Crestwood, in resolving conflicts of interest;
    
    our General Partner determines the amount and timing of asset purchases and sales,
capital expenditures, borrowings and repayments of debt, issuance of additional partnership
securities, and cash reserves, each of which can affect the amount of cash available for
distribution;
    
    our General Partner determines which costs incurred by it and its affiliates are
reimbursable by us;
 28




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##### Table of Contents




    
    our partnership agreement does not restrict our General Partner from causing us to pay
it or its affiliates for any services rendered to us or entering into additional
contractual arrangements with any of these entities on our behalf;
    
    our General Partner intends to limit its liability regarding our contractual and other
obligations; and
    
    our General Partner controls the enforcement of obligations owed to us by our General
Partner and its affiliates.
 Crestwood and its affiliates may compete directly with us.
  Quicksilver entering into a confidentiality agreement.
  
 Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.   Defaults Upon Senior Securities
  
 Item 4.   (Removed and Reserved)
  
 Item 5.    Other Information
  29




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##### Table of Contents



Item 6.   Exhibits:
 Exhibit No.
    
    Description3.1
    
    Certificate of Amendment to the Certificate of Limited Partnership of Quicksilver Gas Services
LP (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 7, 2010).*3.2
    
    First Amendment to the Second Amended and Restated Agreement of Limited Partnership of
Quicksilver Gas Services LP.*3.3
    
    Certificate of Amendment to the Certificate of Formation of Quicksilver Gas Services GP LLC*3.4
    
    First Amendment to the First Amended and Restated Limited Liability Company Agreement of
Quicksilver Gas Services GP LLC*10.1
    
    Credit Agreement, dated as of October 1, 2010, among Crestwood Midstream Partners LP , BNP
Paribas as administrative agent and collateral agent, Banc of America Securities LLC, BNP
Paribas Securities Corp. and RBC Capital Markets Corporation, as joint lead arrangers and joint
bookrunners, Bank of America, N.A. and Royal Bank of Canada, as syndication agents, and UBS
Securities and The Royal Bank of Scotland PLC as co-documentation agents.10.2
    
    Omnibus Agreement, dated October 8, 2010, by and among Crestwood Midstream Partners LP,
Crestwood Gas Services GP LLC and Crestwood Holdings Partners, LLC (incorporated by reference to
Exhibit 3.1 to Form 8-K filed October 13, 2010).*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.
 
 *
    
    Filed herewith 30




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##### Table of Contents



SIGNATURES
   CRESTWOOD MIDSTREAM PARTNERS LPBy: CRESTWOOD GAS SERVICES GP LLC, its
General PartnerBy:
    /s/ William G. ManiasWilliam G. ManiasSenior Vice President  Chief Financial Officer
 31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description3.1
    
    Certificate of Amendment to the Certificate of Limited Partnership of Quicksilver Gas Services
LP (incorporated by reference to Exhibit 3.1 to Form 8-K filed October 7, 2010).*3.2
    
    First Amendment to the Second Amended and Restated Agreement of Limited Partnership of
Quicksilver Gas Services LP.*3.3
    
    Certificate of Amendment to the Certificate of Formation of Quicksilver Gas Services GP LLC*3.4
    
    First Amendment to the First Amended and Restated Limited Liability Company Agreement of
Quicksilver Gas Services GP LLC*10.1
    
    Credit Agreement, dated as of October 1, 2010, among Crestwood Midstream Partners LP , BNP
Paribas as administrative agent and collateral agent, Banc of America Securities LLC, BNP
Paribas Securities Corp. and RBC Capital Markets Corporation, as joint lead arrangers and joint
bookrunners, Bank of America, N.A. and Royal Bank of Canada, as syndication agents, and UBS
Securities and The Royal Bank of Scotland PLC as co-documentation agents.10.2
    
    Omnibus Agreement, dated October 8, 2010, by and among Crestwood Midstream Partners LP,
Crestwood Gas Services GP LLC and Crestwood Holdings Partners, LLC (incorporated by reference to
Exhibit 3.1 to Form 8-K filed October 13, 2010).*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.
 
 *
    
    Filed herewith