Growth Portfolio holding Inergy LP (NYSE: NRGY), which owns a propane distribution business and midstream infrastructure for natural gas and natural gas liquids (NGL), announced its regular cash distribution for the three months ended Dec. 31, 2011.

Although Inergy didn’t cut its distribution, the firm’s press release also included the discouraging news that the master limited partnership (MLP) generated only 68 percent of the cash flow needed to cover its full-year payout of $2.82 per unit. This shortfall stems from the difficult operating environment we discussed at length in Paying Their Way.

The MLP’s propane distribution business has suffered a double whammy: Not only have wholesale propane prices weighed on sales volumes and pinched profit margins, but an unseasonably warm winter has also made it easier for customers to reduce consumption.

The company’s plight is hardly a new development. Inergy LP’s cash flow had fallen short of its distribution in previous quarters. To address this shortfall, the company spun off its valuable midstream business as Inergy Midstream LP (NYSE: NRGM), a move that should highlight the segment’s growth prospects and generate shareholder value.

With management acknowledging that the Inergy will need to evaluate “a reset of its distribution to a level that’s supportable by the cash flow expected to be generated by [the MLP’s] business in the near term,” Inergy LP now rates a sell.

However, we are adding Inergy Midstream LP to the Growth Portfolio to maintain our exposure to the Inergy’s well-positioned midstream assets–what attracted us to Inergy LP in the first place. The Jan. 30 issue of MLP Profits will feature an in-depth analysis of the newly listed Inergy Midstream LP.