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NGL > SEC Filings for NGL > Form 10-K on 14-Jun-2013All Recent SEC Filings

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Form 10-K for NGL ENERGY PARTNERS LP


14-Jun-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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. As part of our formation, we acquired and combined the assets and operations of NGL Supply, which was primarily a wholesale propane and terminaling business that was founded in 1967, and Hicksgas, which was primarily a retail propane business that was founded in 1940. 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, as described under

Part I, Item I, "Businesses - Acquisitions Subsequent to Initial Public
Offering."


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As of March 31, 2013, our businesses include:

A crude oil logistics business, the assets of which include crude oil terminals, pipeline injection stations, a fleet of trucks, a fleet of leased rail cars, and a fleet of barges and tow boats;

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

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 terminaling services through its 17 terminals throughout the United States and rail car transportation services through its fleet of owned and predominantly leased rail cars; and

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.

Crude Oil Logistics

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.

Most of our contracts to purchase or sell crude oil are at floating prices that are indexed to published rates in active markets, such as Cushing, Oklahoma. We seek to manage price risk by entering into purchase and sale contracts of similar volumes based on similar indexes and by entering into financial derivatives. We utilize our transportation assets to move crude oil from the well head to the highest value market. The spread between crude oil prices in different markets can fluctuate widely, which may expand or limit our opportunity to generate margins by transporting crude to different markets. We also seek to maximize margins by blending crude oil of varying properties.


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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
                                                          At Period
                                      Low       High         End

For the Year Ended March 31, 2013   $ 77.69   $ 106.16   $     97.23

Water Services

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

Our water processing facilities are strategically located near areas of high crude oil and natural gas production. A significant factor affecting the profitability of our water services segment is the extent of exploration and production in the areas near our facilities, which is based upon producers' expectations about the profitability of drilling new wells. The primary customers of our facility in Wyoming have committed to deliver a specified minimum volume of water to our facility under long-term contracts. The primary customers of our facilities in Colorado have committed to deliver to our facilities all wastewater produced at wells in a designated area. The customers of our other facilities are not under volume commitments.

Natural Gas Liquids Logistics

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 owned and leased rail cars and leases underground 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.

Through our natural gas liquids logistics segment, we distribute propane and other natural gas liquids to our retail operation and other propane retailers, refiners, wholesalers and other related businesses. Our wholesale business is a "cost-plus" business that is affected both by price fluctuations and volume variations. We establish our selling price based on a pass through of our product supply, transportation, handling, storage and capital costs plus an acceptable margin. The margins we realize in our wholesale business are substantially less as a percentage of revenues or on a per gallon basis than our retail propane business.


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Propane prices continued to be volatile during our fiscal years 2011 through 2013. At Conway, Kansas and Mt. Belvieu, Texas, two of our main pricing hubs, the range of low and high spot propane prices per gallon for the periods indicated and the prices as of period end were as follows:

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

For the Year Ended
March 31, 2013            $  0.5038   $  0.9625   $        0.9013   $  0.7063   $  1.2175   $        0.9588

For the Year Ended
March 31, 2012               0.9000      1.4900            0.9800      1.1650      1.6275            1.2363

For the Six Months
Ended:
March 31, 2011               1.1175      1.5850            1.2763      1.1694      2.2850            1.3650
September 30, 2010           0.8813      1.1625            1.1625      0.9631      1.2000            1.2000

We purchase butane from refiners during the summer months, when refiners have a greater supply of butane than they need, and sell butane to refiners during the winter blending season, when demand for butane is higher.

The range of high and low spot butane prices per gallon at Mt. Belvieu, Texas for the year ended March 31, 2013 are shown below:

Spot Price Per Gallon Low High At Period End

For the Year Ended March 31, 2013 $ 1.1438 $ 1.9313 $ 1.4450

Retail Propane

Our retail propane segment sells propane, distillates, and equipment and supplies to residential, agricultural, commercial, and industrial end-users. Our retail propane segment purchases the majority 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.

A significant factor affecting the profitability of our retail propane segment is our ability to maintain or increase our realized gross margin on a cents per gallon basis. Gross margin is the differential between our sales prices and our total product costs, including transportation and storage.

Historically, we have been successful in passing on 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. We believe that volatility in commodity prices will continue, and our ability to adjust to and manage this volatility may impact our financial results.

In periods of significant propane price increases we have experienced, and expect to continue to experience, conservation of propane used by our customers that could result in a decline in our sales volumes, revenues and gross margins. In periods of decreasing costs, we have experienced an increase in our gross margin.

The retail propane business is weather-sensitive and subject to seasonal volume variations due to propane's primary use as a heating source in residential and commercial buildings and for agricultural purposes. As a result, operating revenues are generally highest from October through March.


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We believe that the recent economic downturn has caused certain of our retail propane customers to conserve and thereby purchase less propane. Although we believe the economic downturn has not currently had a material impact on our cash collections, it is possible that a prolonged economic downturn could have a negative impact on our future cash collections.

Recent Developments

The formation transactions, our initial public offering, and the acquisitions subsequent to our initial public offering have had a significant impact on the comparability of our results of operations from fiscal 2011 through 2013. These transactions are summarized above under the heading "Overview."

Consolidated Results of Operations

The following table summarizes our historical consolidated statements of operations for the years ended March 31, 2013 and 2012 and the six months ended March 31, 2011 and NGL Supply's consolidated statement of operations for the six months ended September 30, 2010.

                                            NGL Energy Partners LP                  NGL Supply, Inc.
                                Year Ended     Year Ended     Six Months Ended      Six Months Ended
                                 March 31,      March 31,         March 31,          September 30,
                                   2013           2012              2011                  2010
                                                           (in thousands)
Revenues                        $ 4,417,767    $ 1,310,473    $         622,232    $          316,943
Cost of sales                     4,039,110      1,217,023              583,032               310,908
Operating and general and
administrative expenses             222,497         63,309               20,922                 8,441
Depreciation and
amortization                         68,853         15,111                3,441                 1,389
Operating income (loss)              87,307         15,030               14,837                (3,795 )
Interest expense                    (32,994 )       (7,620 )             (2,482 )                (372 )
Loss on early extinguishment
of debt                              (5,769 )            -                    -                     -
Interest and other income             1,521          1,055                  324                   190
Income (loss) before income
taxes                                50,065          8,465               12,679                (3,977 )
(Provision) benefit for
income taxes                         (1,875 )         (601 )                  -                 1,417
Net income (loss)                    48,190          7,864               12,679                (2,560 )
Net (income) loss
attributable to
noncontrolling interests               (250 )           12                    -                    45
Net income (loss)
attributable to parent
equity                          $    47,940    $     7,876    $          12,679    $           (2,515 )

All information herein related to the six months ended September 30, 2010 represents the results of operations of NGL Supply.

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


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Interest Expense

The largest component of interest expense during fiscal 2011 through 2013 has been interest on revolving credit facilities and on senior notes that we issued in June 2012. See Note 8 to our consolidated financial statements as of March 31, 2013 included elsewhere in this Annual Report on Form 10-K for additional information on our long-term debt. The change in interest expense during the periods presented is due primarily to fluctuations in the average outstanding debt balance, and in the applicable interest rates, as summarized below:

                                Revolving Credit Facilities                Senior Notes
                                  Average                             Average
                                  Balance           Average           Balance
                                Outstanding        Interest         Outstanding        Interest
                              (in thousands)         Rate          (in thousands)        Rate
Year Ended March 31, 2013     $       405,114             3.56 %  $        195,890           6.65 %

Year Ended March 31, 2012             125,859             4.48 %                 -              -

Six Months Ended March 31,
2011                                   73,115             5.71 %                 -              -

Six Months Ended
September 30, 2010                     13,767             4.63 %                 -              -

Interest expense also includes amortization of debt issuance costs, which represented $3.4 million of expense during the year ended March 31, 2013, $1.3 million of expense during the year ended March 31, 2012, $0.6 million of expense during the six months ended March 31, 2011, and less than $0.1 million of expense during the six months ended September 30, 2010. Interest expense also includes letter of credit fees, interest on equipment financing notes, and accretion of interest on non-interest bearing debt obligations assumed in business combinations.

On June 19, 2012, we retired our revolving credit facility and replaced it with a new facility. Upon retirement of the old 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 year ended March 31, 2013.

The increased levels of debt outstanding during the periods from fiscal 2011 through fiscal 2013 are due primarily to borrowings to finance the acquisitions of businesses.

Interest and Other Income



Our non-operating other income consists of the following:



                                                NGL Energy Partners LP                   NGL Supply, Inc.
                                   Year Ended       Year Ended      Six Months Ended     Six Months Ended
                                   March 31,         March 31,          March 31,          September 30,
                                      2013             2012               2011                 2010
                                                              (in thousands)
Interest income                  $        1,261    $         765    $             221    $              66
Gain (loss) on sale of assets              (187 )             71                  (16 )                124
Other                                       447              219                  119                    -
                                 $        1,521    $       1,055    $             324    $             190

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.


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

Prior to September 30, 2010, NGL Supply was a taxable entity. NGL Supply's income tax benefit of $1.4 million for the six months ended September 30, 2010 consisted primarily of U.S. federal deferred income taxes. This provision approximated the U.S. federal statutory rate of 35%.

See Note 9 to our consolidated financial statements included elsewhere in this annual report for additional description of income tax provisions.

Noncontrolling Interests

As of March 31, 2013, 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 represents the other owners' interests in these entities.

The noncontrolling interest shown in NGL Supply's consolidated statements of operations represents the 30% interest in Gateway that NGL Supply did not own. We purchased this additional 30% interest in October 2010.

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:



                                               NGL Energy Partners LP                   NGL Supply, Inc.
                                  Year Ended      Year Ended      Six Months Ended      Six Months Ended
                                  March 31,       March 31,          March 31,           September 30,
                                     2013            2012               2011                  2010

EBITDA:
Net income (loss)
attributable to parent equity    $     47,940    $      7,876    $           12,679    $           (2,515 )
Provision (benefit) for
income taxes                            1,875             601                     -                (1,417 )
Interest expense                       32,994           7,620                 2,482                   372
Loss on early extinguishment
of debt                                 5,769               -                     -                     -
Depreciation and amortization          73,739          15,911                 3,841                 1,789
EBITDA                           $    162,317    $     32,008    $           19,002    $           (1,771 )
Unrealized (gain) loss on
derivative contracts                    5,275           4,384                (1,357 )                 200
Loss (gain) on sale of assets             187             (71 )                  16                  (124 )
Share-based compensation
expense                                10,138               -                     -                     -
Adjusted EBITDA                  $    177,917    $     36,321    $           17,661    $           (1,695 )

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 activities, or any other measure of financial performance calculated in accordance with GAAP as those items are used to measure operating performance, liquidity or the ability to service debt obligations. We believe that EBITDA provides additional information for evaluating our ability to make quarterly distributions to our unitholders and is presented solely as a supplemental measure. We believe that Adjusted EBITDA provides additional information for evaluating our financial performance without regard to our financing methods, capital structure and historical cost basis. Further, EBITDA and Adjusted EBITDA, as we define them, may not be comparable to EBITDA and Adjusted EBITDA or similarly titled measures used by other entities.


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Segment Operating Results

Items Impacting the Comparability of Our Financial Results

Our current and future results of operations may not be comparable to our and NGL Supply's historical results of operations for the periods presented due to the following reasons:

In connection with our formation transactions, we also acquired the retail propane operations of Hicksgas. This acquisition was accounted for as a business combination, and the assets acquired and liabilities assumed were recorded in our consolidated financial statements at acquisition date fair value.

During the fiscal years ended March 31, 2012 and 2013, we completed a number of acquisitions, as described under "Overview" above. We have significantly expanded our operations through these acquisitions.

NGL Supply's historical consolidated financial statements include U.S. federal and state income tax expense. Because we have elected to be treated as a partnership for tax purposes, we are generally not subject to U.S. federal income tax and certain state income taxes.

As a result of our initial public offering, we incur incremental general and administrative expenses that are attributable to operating as a publicly traded partnership. These expenses include annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer liability insurance costs; and director compensation. These incremental general and administrative expenses are not reflected in the historical consolidated financial statements of NGL Supply.

After we completed the formation transactions, the financial statements of NGL Supply became our financial statements for all periods prior to October 1, 2010, the net equity (net book value) of NGL Supply became our equity and the net book value of all of the assets and liabilities of NGL Supply became the accounting basis for our assets and liabilities. There were no adjustments to the carryover basis of the assets and liabilities that we acquired from NGL Supply.

Our results of operations are also significantly impacted by seasonality, primarily due to the increase in volumes of propane sold by our retail propane and natural gas liquids logistics segments during the peak heating season of October through March. As a result of our business combination with NGL Supply and Hicksgas in October 2010 and the impact of seasonality, our results of operations for the six months ended March 31, 2011 are not indicative of the results we would anticipate for a full fiscal year, and are not comparable to the results of operations of NGL Supply for the six months ended September 30, 2010.

As described above, the consolidated statement of operations for the year ended March 31, 2011 is divided into two six-month periods. The financial statements for the first six months of that fiscal year were those of NGL Supply, and the financial statements for the last six months of that fiscal year are those of NGL Energy Partners LP. The following analysis compares operating income among the following periods:

          Year Ended March 31, 2013 Compared to Year Ended March 31, 2012;



          Year Ended March 31, 2012 Compared to Six Months Ended March 31,
2011;

Six Months Ended March 31, 2012 Compared to Six Months Ended March 31, 2011;

Six Months Ended September 30, 2011 (NGL Energy Partners LP) Compared to Six Months Ended September 30, 2010 (NGL Supply); and

Six Months Ended March 31, 2011 (NGL Energy Partners LP) Compared to Six Months Ended September 30, 2010 (NGL Supply).


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Year Ended March 31, 2013 of NGL Energy Partners LP

Compared to Year Ended March 31, 2012 of NGL Energy Partners LP

Volumes Sold or Delivered

The following table summarizes the volume of product sold and wastewater . . .

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