The following is a discussion of our financial condition and results of operations as of and for the three months and nine months ended December 31, 2012. The discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the historical consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Overview

NGL Energy Partners LP ("we", "our", "us", or the "Partnership") is a Delaware limited partnership formed in September 2010. NGL Energy Holdings LLC serves as our general partner. We completed an initial public offering in May 2011. At the time of our initial public offering, we owned and operated retail propane and wholesale natural gas liquids businesses. Subsequent to our initial public offering, we significantly expanded our operations through a number of business combinations, including the following:

† On October 3, 2011, we completed a business combination transaction with E. Osterman Propane, Inc., its affiliated companies and members of the Osterman family (collectively, "Osterman"), whereby we acquired retail propane operations in the northeastern United States. We issued 4,000,000 common units and paid $94.9 million of cash, net of cash acquired, in exchange for the assets and operations of Osterman. The agreement also contemplated a post-closing payment of $4.8 million for certain specified working capital items, which was paid in November 2012.

† On November 1, 2011, we completed a business combination transaction with SemStream, L.P. ("SemStream"), whereby we acquired SemStream's wholesale natural gas liquids supply and marketing operations and its 12 natural gas liquids terminals. We issued 8,932,031 common units and paid $91 million in exchange for the assets and operations of SemStream, including working capital.

† On January 3, 2012, we completed a business combination transaction with seven companies associated with Pacer Propane Holding, L.P. (collectively, "Pacer"), whereby we acquired retail propane operations, primarily in the western United States. We issued 1,500,000 common units, valued at $30.4 million, and paid $32.2 million of cash in exchange for the assets and operations of Pacer, including working capital. We also assumed $2.7 million of long-term debt in the form of non-compete agreements.

† On February 3, 2012, we completed a business combination transaction with North American Propane, Inc. ("North American"), whereby we acquired retail propane and distillate operations in the northeastern United States. We paid $69.8 million of cash in exchange for the assets and operations of North American, including working capital.

† On June 19, 2012, we completed a business combination with High Sierra Energy, LP and High Sierra Energy GP, LLC (collectively, "High Sierra"), whereby we acquired all of the ownership interests in High Sierra. High Sierra's businesses include crude oil gathering, transportation and marketing; water treatment, disposal, and transportation; and natural gas liquids transportation and marketing. We paid $91.8 million of cash, net of $5.0 million of cash acquired, and issued 18,018,468 common units to acquire High Sierra Energy, LP. We also paid $97.4 million of High Sierra Energy, LP's long-term debt and other obligations. Our general partner acquired High Sierra Energy GP, LLC by paying $50.0 million of cash and issuing equity. Our general partner then contributed its ownership interests in High Sierra Energy GP, LLC to us, in return for which we paid our general partner $50.0 million of cash and issued 2,685,042 common units to our general partner.

† On November 1, 2012, we completed a business combination whereby we acquired Pecos Gathering & Marketing, L.L.C. and certain of its affiliated companies (collectively, "Pecos"). The business of Pecos consists primarily of crude oil purchasing and logistics operations in Texas and New Mexico. We paid cash of $134.6 million at closing, subject to customary post-closing adjustments, and assumed certain obligations with a value of $10.4 million under certain equipment financing facilities. Also on November 1, 2012, we entered into a call agreement with the former owners of Pecos pursuant to which the former owners of Pecos agreed to purchase a minimum of $45.0 million or a maximum of $60.0 million of common units from us. On November 12, 2012, the former owners of Pecos purchased 1,834,414 common units from us for $45.0 million pursuant to this call agreement.

† On December 31, 2012, we completed a business combination transaction whereby we acquired all of the limited liability company membership interests in Third Coast Towing, LLC ("Third Coast") for $43.0 million in cash. The business of Third Coast consists primarily of transporting crude oil via barge. The agreement contemplates a post-closing adjustment to the purchase price for certain working capital items. Also on December 31, 2012, we entered into an agreement with the former owners of Third Coast pursuant to which the former owners of Third Coast agreed to purchase a minimum of $8.0 million or a maximum of $10.0 million of common units from us. On January 11, 2013, the former owners of Third Coast purchased 344,680 common units from us for $8.0 million pursuant to this agreement.

† During the nine months ended December 31, 2012, we completed six separate business combination transactions to acquire retail propane and distillate operations, primarily in the northeastern and southeastern United States. On a combined basis, we paid $71.1 million of cash and issued 850,676 common units in exchange for these assets and operations, including working capital. In addition, a combined amount of approximately $0.3 million will be payable as deferred payments on the purchase prices. We also assumed $6.6 million of long-term debt in the form of non-compete agreements.

† During the nine months ended December 31, 2012, we completed four separate acquisitions to expand the assets and operations of our crude oil logistics and water services businesses. On a combined basis, we paid $53.3 million of cash and assumed $1.3 million of long-term debt in the form of non-compete agreements. We also issued 516,978 common units, valued at $12.4 million, as partial consideration for one of these acquisitions. Certain of the acquisition agreements contemplate post-closing adjustment to the purchase price for certain specified working capital items.

As of December 31, 2012, our businesses include:

† Our retail propane business, which sells propane and distillates to end users consisting of residential, agricultural, commercial, and industrial customers in more than 20 states and to certain re-sellers;

† Our natural gas liquids logistics business, which supplies propane and other natural gas liquids to retailers, wholesalers, and refiners throughout the United States and in Canada, and which provides natural gas liquids terminalling services through its 17 terminals throughout the United States and rail car transportation services through its fleet of owned and predominantly leased rail cars;

† A crude oil logistics business, the assets of which include crude oil terminals, a fleet of trucks, a fleet of leased rail cars, and several barges; and

† A water services business, the assets of which include water treatment and disposal facilities, a fleet of water trucks, and frac tanks.

Our retail propane segment sells propane, petroleum distillates, and equipment and supplies to residential, agricultural, commercial, and industrial end-users. Our retail propane segment purchases a large portion of its propane from our natural gas liquids logistics segment. Our retail propane segment generates margins based on the difference between the wholesale cost of product and the selling price of the product in the retail markets. These margins fluctuate over time due to supply and demand conditions. Weather conditions have a significant impact on our sales volumes and prices, as a significant portion of our sales are to residential customers who purchase propane and distillates for home heating purposes.

Our natural gas liquids logistics segment purchases propane, butane, and other natural gas liquids from refiners, processing plants, producers, and other parties, and sells the product to retailers, refiners, and other participants in the wholesale markets. Our natural gas liquids logistics segment owns 17 terminals and operates a fleet of leased rail cars and leases storage capacity. The margins we realize in our wholesale business are substantially lower on a per gallon basis than the margins we realize in our retail business. We attempt to reduce our exposure to the impact of price fluctuations by using "back-to-back" contractual agreements and "pre-sale" agreements that essentially allow us to lock in a margin on a percentage of our winter volumes. We also attempt to reduce our exposure to the impact of price fluctuations by entering into swap agreements whereby we agree to pay a floating rate and receive a fixed rate on a specified notional amount of product. We enter into these agreements as economic hedges against the potential decline in the value of a portion of our inventory. Our natural gas liquids logistics segment includes the operations that were previously reported in our wholesale marketing and supply and terminals segments. Our natural gas liquids logistics segment also includes the natural gas liquids operations we acquired in our June 2012 merger with High Sierra.

Our crude oil transportation and marketing business purchases crude oil from producers and transports it for resale at pipeline injection points, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs. We attempt to reduce our exposure to price fluctuations by using "back-to-back" contractual agreements whenever possible. In addition, we enter into forward contracts, financial swaps, and commodity spread trades as economic hedges of our physical forward sales and purchase contracts with our customers and suppliers. The operations of our crude oil logistics segment began with our June 2012 merger with High Sierra.

Our water services business generates revenues from the transportation, treatment, and disposal of wastewater generated from oil and natural gas production operations, and from the re-sale of recycled water and recovered hydrocarbons. The operations of our water services segment began with our June 2012 merger with High Sierra.

Seasonality and Weather

Seasonality and weather have a significant impact on the demand for propane and butane. The most significant impact of seasonality and weather is on our retail segment. A large portion of our retail operation is in the residential market where propane and distillates are used primarily for heating purposes. Approximately 70% of our retail volume is sold during the peak heating season from October through March. Seasonal volume variations also impact our wholesale natural gas liquids operations. Consequently, we expect our sales, operating profits and operating cash flows to be greater in the third and fourth quarters of each fiscal year. We have historically realized operating losses and negative operating cash flows during our first and second fiscal quarters. See "-Liquidity, Sources of Capital and Capital Resource Activities - Cash Flows."

Commodity Price Fluctuations

Fluctuations in the price of commodities can have a direct impact on our reported revenues and sales volumes and may affect our gross margins depending on our success in passing cost increases on to our customers. We believe that volatility in commodity prices will continue, and our ability to adjust to and manage this volatility may impact our financial results.

The range of low and high spot propane prices per gallon at two key pricing hubs for the periods indicated and the prices as of period end were as follows:

                                    Conway, Kansas                          Mt. Belvieu, Texas
                                      Spot Price                                Spot Price
                                      Per Gallon                                Per Gallon
                           Low        High       At Period End       Low        High       At Period End
For the Three Months
Ended December 31:
2012                    $  0.6613   $  0.8769   $        0.8306   $  0.7263   $  1.0050   $        0.8994
2011                       1.1394      1.4187            1.1394      1.3262      1.5412            1.3975
For the Nine Months
Ended December 31,
2012                    $  0.5038   $  0.9625   $        0.8306   $  0.7063   $  1.2175   $        0.8994
2011                       1.1394      1.4900            1.1394      1.3262      1.6275            1.3975

Historically, we have been successful in passing on propane price increases to our customers. We monitor propane prices daily and adjust our retail prices to maintain expected margins by passing on the wholesale costs to our customers.

The range of high and low spot butane prices per gallon at the Mt. Belvieu, Texas pricing hub for the periods indicated and the prices as of period end are as follows:

                                                        Mt. Belvieu, Texas
                                                            Spot Price
                                                            Per Gallon
                                                 Low        High      At Period End

For the Three Months Ended December 31, 2012   $ 1.4388   $ 1.8800   $        1.7763
For the Nine Months Ended December 31, 2012      1.1438     1.9313            1.7763

The range of high and low spot prices per barrel of NYMEX West Texas Intermediate Crude Oil at Cushing, Oklahoma for the periods indicated and the prices as of period end are as follows:

                                                      Spot Price Per Barrel
                                                 Low       High      At Period End

For the Three Months Ended December 31, 2012   $  84.44   $ 92.39   $         91.82
For the Nine Months Ended December 31, 2012       77.69    108.84             91.82

Summary Discussion of Operating Results for the Three Months Ended December 31, 2012

Our retail propane segment generated operating income of $16.4 million during the three months ended December 31, 2012, which was higher than the operating income of $4.9 million during the three months ended December 31, 2011. Our retail propane segment generated $8.4 million of operating income during the three months ended December 31, 2012 from businesses acquired during the last twelve months, including Pacer, North American, and others. The operations that we owned during the corresponding quarter in the prior year experienced more favorable operating results during the three months ended December 31, 2012 than during the three months ended December 31, 2011, which was due primarily to improved margins on propane sales. Although the average selling price per gallon of propane was lower in the current year than in the prior year, the average cost per gallon decreased by a larger amount than the selling price, and volumes were similar over the two periods.

Our natural gas liquids logistics segment generated operating income of $25.1 million during the three months ended December 31, 2012. This was due to $17.5 million of operating income related to the operations acquired in the merger with High Sierra and to $2.9 million of operating income generated by our legacy operations.

Weather conditions were unusually warm during the winter season of late calendar 2011 through early calendar 2012, which significantly reduced the demand for propane. Because of this, and due to continued high levels of production of natural gas and limitations on export infrastructure, the market price for propane and other natural gas liquids was lower during the nine months ended December 31, 2012 than during the corresponding period in the prior year. Weather conditions continued to be warmer than usual during the beginning of the winter season in late calendar 2012.

The operations of our crude oil logistics segment began with our acquisition of High Sierra in June 2012. This segment generated operating income of $11.4 million during the three months ended December 31, 2012, which was reduced by losses of $4.0 million on derivatives.

The operations of our water services segment began with our acquisition of High Sierra in June 2012. This segment generated operating income of $5.5 million during the three months ended December 31, 2012.

Analysis of our operating results by segment for the three and nine months ended December 31, 2012 is provided below.

Consolidated Results of Operations

The following table summarizes our historical consolidated statements of operations for the three and nine months ended December 31, 2012 and 2011.

                                     Three Months Ended            Nine Months Ended
                                        December 31,                  December 31,
                                     2012           2011          2012           2011
                                                      (in thousands)
Revenues                          $ 1,338,208    $  470,649    $ 2,800,154    $   871,544
Cost of sales                       1,204,545       439,790      2,557,220        827,225
Operating and general and
administrative expenses                64,693        16,816        147,865         37,408
Depreciation and amortization          18,747         5,402         41,335          8,480
Operating income (loss)                50,223         8,641         53,734         (1,569 )
Interest expense                       (9,762 )      (2,676 )      (22,254 )       (4,989 )
Loss on early estinguishment
of debt                                     -             -         (5,769 )            -
Interest and other income                 261           283            919            637
Income (loss) before income
taxes                                  40,722         6,248         26,630         (5,921 )
Income tax provision                     (245 )        (158 )         (781 )         (158 )
Net income (loss)                      40,477         6,090         25,849         (6,079 )
Net (income) loss allocated to
general partner                          (942 )          (6 )       (1,731 )            6
Net (income) loss attributable
to noncontrolling interests              (301 )                       (250 )
Net income (loss) attributable
to parent equity allocated to
limited partners                  $    39,234    $    6,084    $    23,868    $    (6,073 )

See the detailed discussion of revenues, cost of sales, gross margin, operating expenses, general and administrative expenses, depreciation and amortization and operating income by segment below.

Set forth below is a discussion of significant changes in the non-segment related corporate other income and expenses during the respective periods.

Interest Expense

Our interest expense consists primarily of interest on borrowings under a revolving credit facility, letter of credit fees, and amortization of debt issuance costs. See Note 7 to our condensed consolidated financial statements included elsewhere in this report for additional information on our long-term debt. The increase in interest expense during the periods presented is due primarily to increases in the average outstanding total debt balance. The average interest rate, amortization of debt issuance costs, and letter of credit fees were as follows (dollars in thousands):

                                                                Average Debt                                  Average Debt
                       Letter of        Amortization              Balance                  Average              Balance
                        Credit        of Debt Issuance         Outstanding -           Interest Rate -       Outstanding -     Interest Rate -
                         Fees              Costs            Revolving Facilities     Revolving Facilities     Senior Notes      Senior Notes
Three Months Ended
December 31,
2012                  $       538    $              925    $              491,847                    3.11 %  $      250,000               6.65 %
2011                           48                   291                   207,346                    4.52 %               -                  -
Nine Months Ended
December 31,
2012                  $       954    $            2,261    $              377,671                    3.39 %  $      178,182               6.65 %
2011                          291                   946                    89,999                    5.12 %               -                  -

On June 19, 2012, we retired our previous revolving credit facility. Upon retirement of this facility, we wrote off the portion of the debt issuance cost asset that had not yet been amortized. This expense is reported as "Loss on early extinguishment of debt" in our consolidated statement of operations for the nine months ended December 31, 2012.

The increased levels of debt outstanding during the nine months ended December 31, 2012 are due primarily to borrowings to finance acquisitions and working capital.

Interest and Other Income



Our non-operating income consists of the following:



                    Three Months Ended       Nine Months Ended
                       December 31,             December 31,
                    2012         2011        2012         2011
                                  (in thousands)
Interest income   $     241    $     197   $     870    $     422
Other                    20           86          49          215
                  $     261    $     283   $     919    $     637

Income Tax Provision

We believe that we qualify as a partnership for income tax purposes. As such, we generally do not pay U.S. Federal income tax. Rather, each owner reports his or her share of our income or loss on his or her individual tax return. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined, as we do not have access to information regarding each partner's basis in the Partnership.

We have two taxable corporate subsidiaries in the United States and two taxable corporate subsidiaries in Canada. The income tax provision reported in our consolidated statements of operations relates primarily to these subsidiaries.

A publicly-traded partnership is required to generate at least 90% of its revenues (net of cost of sales) from certain qualifying sources. Income generated by our taxable corporate subsidiaries is excluded from this qualifying income calculation. Although we routinely generate income outside of our corporate subsidiaries that is non-qualifying, we believe that at least 90% of the income of our non-taxable subsidiaries has been qualifying income for both of the calendar years since our initial public offering.

We evaluate uncertain tax positions for recognition and measurement in the consolidated financial statements. To recognize a tax position, we determine whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the consolidated financial statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. We had no uncertain tax positions that required recognition in the consolidated financial statements at December 31, 2012 or March 31, 2012. Any interest or penalties would be recognized as a component of income tax expense.

Noncontrolling Interests

As of December 31, 2012, we have three consolidated subsidiaries in which outside parties own interests. Our ownership interests in these subsidiaries range from 60% to 80%. One of these subsidiaries was formed in March 2012, and the other two were acquired in June 2012 and October 2012, respectively. The noncontrolling interest shown in our consolidated statements of operations for the three months and nine months ended December 31, 2012 represents the other owners' interests in these entities.

Non-GAAP Financial Measures

The following tables reconcile net income (loss) attributable to parent equity to our EBITDA and Adjusted EBITDA, each of which are non-GAAP financial measures, for the periods indicated:

                                     Three Months Ended            Nine Months Ended
                                        December 31,                 December 31,
                                     2012           2011          2012           2011
                                                      (in thousands)
EBITDA:
Net income (loss) attributable
to parent equity                  $    40,176    $    6,090    $    25,599    $   (6,079 )
Provision for income taxes                245           158            781           158
Interest expense                        9,762         2,676         22,254         4,989
Loss on early extinguishment
of debt                                     -             -          5,769             -
Depreciation and amortization          20,494         5,602         44,607         9,080
EBITDA                            $    70,677    $   14,526    $    99,010    $    8,148
Unrealized (gain) loss on
derivative contracts                      159          (938 )      (11,246 )         (76 )
Loss (gain) on sale of assets             (11 )         (38 )          (34 )         (84 )
Share-based compensation
expense                                 2,365             -          5,322             -
Adjusted EBITDA                   $    73,190    $   13,550    $    93,052    $    7,988

We define EBITDA as net income (loss) attributable to parent equity, plus income taxes, interest expense and depreciation and amortization expense. We define Adjusted EBITDA as EBITDA excluding the unrealized gain or loss on derivative contracts, the gain or loss on the disposal of assets, and share-based compensation expenses. EBITDA and Adjusted EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating . . .