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NGL > SEC Filings for NGL > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for NGL ENERGY PARTNERS LP

Form 10-Q for NGL ENERGY PARTNERS LP


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations

The following is a discussion of our financial condition and results of operations as of and for the three months and six months ended September 30, 2013. 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, 2013.

Overview

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

During October 2011, we completed a business combination with E. Osterman Propane, Inc., its affiliated companies and members of the Osterman family, whereby we acquired retail propane operations in the northeastern United States.

During November 2011, we completed a business combination 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.

During January 2012, we completed a business combination with seven companies associated with Pacer Propane Holding, L.P., whereby we acquired retail propane operations, primarily in the western United States.

During February 2012, we completed a business combination with North American Propane, Inc., whereby we acquired retail propane and distillate operations in the northeastern United States.

During the year ended March 31, 2012, we completed three additional separate business combination transactions to acquire retail propane operations.

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.

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.

On December 31, 2012, we completed a business combination whereby we acquired all of the membership interests in Third Coast Towing, LLC ("Third Coast"). The business of Third Coast consists primarily of transporting crude oil via barge.

During the year ended March 31, 2013, we completed six additional separate business combination transactions to acquire retail propane and distillate operations, primarily in the northeastern and southeastern United States.

During the year ended March 31, 2013, we completed four additional separate acquisitions to expand the assets and operations of our crude oil logistics and water services businesses.

During the six months ended September 30, 2013, we completed three acquisitions of retail propane and distillate businesses.

On July 1, 2013, we completed a business combination whereby we acquired the assets of Crescent Terminals, LLC and the ownership interests in Cierra Marine, LP and its affiliated companies (collectively, "Crescent"), whereby we acquired four tow boats, seven crude oil barges, and one crude oil terminal in South Texas.


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On July 2, 2013, we completed a business combination with High Roller Wells Big Lake SWD No. 1, Ltd. ("Big Lake"), whereby we acquired a water disposal facility in West Texas. We also entered into a development agreement that provides us the option to purchase water disposal facilities that may be developed in the future.

On August 2, 2013, we completed a business combination whereby we acquired seven entities affiliated with Oilfield Water Lines LP (collectively, "OWL"). The businesses of OWL include water disposal operations and a water transportation business in Texas.

On September 1, 2013, we completed a business combination whereby we acquired a crude oil marketing business in Oklahoma and Texas.

On September 3, 2013, we completed a business combination with Coastal Plains Disposal #1, LLC ("Coastal"), in which we acquired the ownership interests in a water disposal facility in Texas.

As of September 30, 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. Our crude oil logistics 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. The operations of our crude oil logistics segment began with our June 2012 merger with High Sierra.

A water services business, the assets of which include water treatment and disposal facilities, a fleet of water trucks, and frac tanks. 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 natural gas liquids logistics business, which supplies 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. 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 retail propane business, which sells propane, distillates, and equipment and supplies to end users consisting of residential, agricultural, commercial, and industrial customers and to certain re-sellers in more than 20 states.

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.

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 oil 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 period 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:
September 30, 2013            $ 97.99   $ 110.53   $        102.33
September 30, 2012              83.75      99.00             92.19

For the Six Months Ended:
September 30, 2013            $ 86.68   $ 110.53   $        102.33
September 30, 2012              77.69     106.16             92.19

We believe volatility in commodity prices will continue, and our ability to adjust to and manage this volatility may impact our financial results.

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. 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. Most of the customers of our facilities in Texas are not under volume commitments, other than one customer that has committed to deliver 50,000 barrels per day to one of our facilities.

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. 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 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.

Weather conditions have a significant impact on the demand for propane and butane, and sales volumes and prices are typically higher during the colder months of the year. Consequently, our revenues, operating profits, and operating cash flows are typically lower in the first and second quarters of each fiscal year.


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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 Three Months
Ended:
September 30, 2013      $    0.81   $    1.16   $          1.01   $    0.86   $    1.19   $          1.05
September 30, 2012           0.51        0.88              0.79        0.79        0.99              0.92

For the Six Months
Ended:
September 30, 2013      $    0.77   $    1.16   $          1.01   $    0.81   $    1.19   $          1.05
September 30, 2012           0.50        0.96              0.79        0.71        1.22              0.92

The range of high and low spot butane prices per gallon at Mt. Belvieu, Texas are shown below for the periods indicated:

                                      Spot Price Per Gallon
                                Low        High      At Period End
For the Three Months Ended:
September 30, 2013            $   1.19    $  1.44   $          1.38
September 30, 2012                1.23       1.59              1.44

For the Six Months Ended:
September 30, 2013            $   1.08    $  1.44   $          1.38
September 30, 2012                1.14       1.93              1.44

We believe volatility in commodity prices will continue, and our ability to adjust to and manage this volatility may impact our financial results.

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 our realized product margin on a cents per gallon basis. Product 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 and distillate 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 typically experienced an increase in our product 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. Approximately 70% of our retail volume is sold during the peak heating season from October through March. Consequently, our revenues, operating profits, and operating cash flows are typically lower in the first and second quarters of each fiscal year.


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Recent Developments

Senior Unsecured Notes

On October 16, 2013, we issued $450.0 million of senior unsecured notes (the "Unsecured Notes") in a private placement exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") pursuant to Rule 144A and Regulation S under the Securities Act. We received net proceeds of approximately $438.4 million, after the initial purchasers' discount of $10.1 million and estimated offering costs of $1.5 million. We used the net proceeds to reduce the outstanding balance on our Revolving Credit Facility.

The Unsecured Notes mature on October 15, 2021. We have the right to redeem the Unsecured Notes prior to the maturity date, although we would be required to pay a premium for early redemption. The notes bear interest at a fixed rate of 6.875%. Interest is payable on April 15 and October 15 of each year.

The purchase agreement and the indenture governing the Unsecured Notes contain various customary representations, warranties, and additional covenants, including, without limitation, limitations on fundamental changes and limitations on indebtedness and liens. Our obligations under the purchase agreement and the indenture may be accelerated following certain events of default (subject to applicable cure periods), including, without limitation,
(i) the failure to pay principal or interest when due, (ii) experiencing an event of default on certain other debt agreements, or (iii) certain events of bankruptcy or insolvency.

We also entered into a registration rights agreement whereby we have committed to exchange the Unsecured Notes for a new issue of notes registered under the Securities Act that has substantially identical terms to the Unsecured Notes on or before October 16, 2014. If we are unable to fulfill this obligation, we would be required to pay liquidated damages to the holders of the Unsecured Notes.

Gavilon Acquisition Agreement

On November 5, 2013, we entered into an agreement with Gavilon Energy Intermediate, LLC to acquire 100% of its equity interests in Gavilon, LLC ("Gavilon"), which is a midstream energy business with pipeline terminal and storage assets located in Oklahoma, Texas, and Louisiana. The purchase price is $890 million in cash, subject to adjustment based on a target level of working capital to be delivered by Gavilon at the closing of the transaction. The acquisition agreement contains customary representations, warranties, indemnification obligations and covenants by the parties. The acquisition is expected to close in December 2013, subject to customary closing conditions including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act.

Sale of Common Units

On November 5, 2013, we entered into an agreement to issue and sell 8,110,848 of our common units in a private placement at a price of $29.59 per common unit for approximately $240.0 million. The agreement for the sale of the common units includes customary representations and warranties, conditions, indemnification obligations and covenants by the parties. This sale of common units is subject to customary conditions to closing, and is expected to close in December 2013, concurrent with and contingent upon the closing of the Gavilon acquisition. The agreement will require us to register these units for resale under the Securities Act of 1933 within 90 days of the closing of the sale of the units.

Amendment to Credit Agreement

On November 5, 2013, we entered into an amendment to our Credit Agreement. This amendment increased the capacity on the Expansion Capital Facility from $725.0 million to $785.5 million and increased the capacity on the Working Capital Facility from $325.0 million to $885.5 million. This amendment also extended the maturity date of the agreement from June 19, 2017 to November 5, 2018.

Borrowings under the Credit Agreement bear interest, at our option, at (i) an alternate base rate plus a margin or (ii) an adjusted LIBOR rate plus a margin. The applicable margin is determined based on our consolidated leverage ratio, as defined in the Credit Agreement. The amendment in November 2013 changed the margin on LIBOR rate borrowings from a range of 2.75% to 3.75% to a range of 1.50% to 2.50%. We paid fees of approximately $8.8 million to the lenders related to this amendment.

Summary Discussion of Operating Results for the Three Months Ended September 30, 2013

During the three months ended September 30, 2013, we generated operating income of $9.9 million, compared to operating income of $18.6 million during the three months ended September 30, 2012.

Our crude oil logistics segment generated operating income of $5.9 million during the three months ended September 30, 2013, compared to operating income of $10.1 million during the three months ended September 30, 2012. Cost of sales was increased by $3.1 million during the three months ended September 30, 2013 due to unrealized losses on derivatives. Cost of sales was reduced by $6.7 million during the three months ended September 30, 2012 due to unrealized gains on derivatives. The impact of these unrealized gains and losses on derivatives impacted the comparability of operating income between the three months ended September 30, 2013 and the three months ended September 30, 2012 by $9.8 million. Acquisitions of business contributed to operating income during the three months ended September 30, 2013, although this benefit was partially offset by a narrowing of price differences between markets, which reduced our opportunities to generate increased margins by transporting product from lower-price to higher-price markets.

Our water services segment generated operating income of $2.9 million during the three months ended September 30, 2013, compared to operating income of $4.4 million during the three months ended September 30, 2012. The decrease in operating income was due primarily to an increase in depreciation and amortization expense, partially offset by operating income generated by water services businesses we acquired subsequent to our merger with High Sierra.

Our natural gas liquids logistics segment generated operating income of $14.6 million during the three months ended September 30, 2013, compared to operating income of $10.2 million during the three months ended September 30, 2012. Market demand was greater during the three months ended September 30, 2013 than during the three months ended September 30, 2012, which resulted in higher sales volumes. Volumes also improved due to the expansion of our sales staff. In addition, during the year ended March 31, 2013, we refurbished two terminals that we acquired in February 2012, which enabled us to expand our wholesale operations from these terminals. Operating income during the three months ended September 30, 2013 also benefitted from $3.3 million of unrealized gains on derivatives, compared to $1.7 million of unrealized gains on derivatives during the three months ended September 30, 2012.

Our retail propane segment generated an operating loss of $4.5 million during the three months ended September 30, 2013, compared to an operating loss of $0.5 million during the three months ended September 30, 2012. Due to the seasonal nature of demand for propane and distillates, sales volumes of our retail propane business are lower during the first and second quarters of the fiscal year than during the third and fourth quarters of the fiscal year. Sales volumes and product margins during the three months ended September 30, 2013 were similar to volumes and product margins during the three months ended September 30, 2012, except that cost of sales during the three months ended September 30, 2012 were reduced by $1.8 million of unrealized gains on derivatives. These derivatives were entered into as hedges against potential increases in the cost of distillates. During the three months ended September 30, 2013, we have primarily used physical contracts accounted for as normal purchases, rather than financial derivatives, to hedge against potential increases in the cost of distillates. Depreciation and amortization expense was higher during the three months ended September 30, 2013 than during the three months ended September 30, 2012.

We incurred interest expense of $11.1 million during the three months ended September 30, 2013. This was higher than the interest expense of $8.7 million during the three months ended September 30, 2012, due primarily to borrowings to finance acquisitions.


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