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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number: 001-35172

 

NGL Energy Partners LP

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		27-3427920
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
6120 South Yale Avenue Suite 805 Tulsa, Oklahoma		74136
(Address of Principal Executive Offices)		(Zip code)

 

(918) 481-1119

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

At November 3, 2014, there were 89,404,315 common units issued and outstanding.

 

 

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TABLE OF CONTENTS

 

PART I
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at September 30, 2014 and March 31, 2014	3
	Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Loss for the three months and six months ended September 30, 2014 and 2013	5
	Condensed Consolidated Statement of Changes in Equity for the six months ended September 30, 2014	6
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2014 and 2013	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	90
Item 4.	Controls and Procedures	92
PART II
Item 1.	Legal Proceedings	93
Item 1A.	Risk Factors	93
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 3.	Defaults Upon Senior Securities	93
Item 4.	Mine Safety Disclosures	93
Item 5.	Other Information	93
Item 6.	Exhibits	94
Signatures		95
Exhibit Index		96

 

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Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains various forward-looking statements and information that are based on our beliefs and those of our general partner, as well as assumptions made by and information currently available to us. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. When used in this Quarterly Report, words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “project,” “will,” and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we and our general partner believe that the expectations on which such forward-looking statements are based are reasonable, neither we nor our general partner can give assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that impact our consolidated financial position and results of operations are:

 

·                   the prices for crude oil, natural gas, natural gas liquids, refined products, ethanol, and biodiesel;

 

·                   energy prices generally;

 

·                   the price of propane relative to the price of alternative and competing fuels;

 

·                   the price of gasoline relative to the price of corn, which impacts the price of ethanol;

 

·                   the general level of crude oil, natural gas, and natural gas liquids production;

 

·                   the general level of demand for crude oil, natural gas liquids, refined products, ethanol, and biodiesel;

 

·                   the availability of supply of crude oil, natural gas liquids, refined products, ethanol, and biodiesel;

 

·                   the level of crude oil and natural gas drilling and production in producing basins in which we have water treatment facilities;

 

·                   the ability to obtain adequate supplies of propane and distillates for retail sale in the event of an interruption in supply or transportation and the availability of capacity to transport propane and distillates to market areas;

 

·                   actions taken by foreign oil and gas producing nations;

 

·                   the political and economic stability of petroleum producing nations;

 

·                   the effect of weather conditions on supply and demand for crude oil, natural gas liquids, refined products, ethanol, and biodiesel;

 

·                   the effect of natural disasters, lightning strikes, or other significant weather events;

 

·                   availability of local, intrastate and interstate transportation infrastructure, including with respect to our truck, railcar, and barge transportation services;

 

·                   availability, price, and marketing of competitive fuels;

 

·                   the impact of energy conservation efforts on product demand;

 

·                   energy efficiencies and technological trends;

 

·                   governmental regulation and taxation;

 

·                   the impact of legislative and regulatory actions on hydraulic fracturing and on the treatment of flowback and produced water;

 

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·                   hazards or operating risks incidental to the transporting and distributing of petroleum products that may not be fully covered by insurance;

 

·                   the maturity of the crude oil and natural gas liquids industries and competition from other marketers;

 

·                   the loss of key personnel;

 

·                   the ability to hire drivers;

 

·                   the ability to renew contracts with key customers;

 

·                   the ability to maintain or increase the margins we realize for our terminal, barging, trucking and water disposal, and recycling and discharge services;

 

·                   the ability to renew leases for general purpose and high pressure railcars;

 

·                   the ability to renew leases for underground natural gas liquids storage;

 

·                   the nonpayment or nonperformance by our customers;

 

·                   the availability and cost of capital and our ability to access certain capital sources;

 

·                   a deterioration of the credit and capital markets;

 

·                   the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to our financial results;

 

·                   the ability to successfully integrate acquired assets and businesses;

 

·                   changes in the volume of crude oil recovered during the wastewater treatment process;

 

·                   changes in the financial condition and results of operations of entities in which we own noncontrolling equity interests;

 

·                   changes in laws and regulations to which we are subject, including tax, environmental, transportation, and employment regulations, or new interpretations by regulatory agencies concerning such laws and regulations and the impact of such laws and regulations (now existing or in the future) on our business operations, including our sales of crude oil, condensate, natural gas liquids, refined products, ethanol, and biodiesel; our processing of wastewater; and transportation and risk management activities;

 

·                   the costs and effects of legal and administrative proceedings;

 

·                   any reduction or the elimination of the Renewable Fuels Standard;

 

·                   the operational and financial success of our joint ventures; and

 

·                   changes in the jurisdictional characteristics of, or the applicable regulatory policies with respect to, our joint venture’s pipeline assets.

 

You should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report. Except as required by state and federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise. When considering forward-looking statements, please review the risks described under “Item 1A — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 and under Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

 

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PART I

 

Item 1.                    Financial Statements (Unaudited)

 

NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(U.S. Dollars in Thousands, except unit amounts)

 

		September 30,			March 31,
		2014			2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	11,823		$	10,440
Accounts receivable - trade, net of allowance for doubtful accounts of $2,816 and $2,822, respectively		1,433,117			900,904
Accounts receivable - affiliates		41,706			7,445
Inventories		941,589			310,160
Prepaid expenses and other current assets		156,818			80,350
Total current assets		2,585,053			1,309,299
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $153,057 and $109,564, respectively		1,433,313			829,346
GOODWILL		1,170,490			1,107,006
INTANGIBLE ASSETS, net of accumulated amortization of $166,484 and $116,728, respectively		838,088			714,956
INVESTMENTS IN UNCONSOLIDATED ENTITIES		482,644			189,821
OTHER NONCURRENT ASSETS		42,091			16,795
Total assets		$	6,551,679		$	4,167,223
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable - trade		$	1,345,024		$	740,211
Accounts payable - affiliates		85,307			76,846
Accrued expenses and other payables		218,482			141,690
Advance payments received from customers		106,105			29,965
Current maturities of long-term debt		5,062			7,080
Total current liabilities		1,759,980			995,792
LONG-TERM DEBT, net of current maturities		2,437,351			1,629,834
OTHER NONCURRENT LIABILITIES		39,518			9,744
COMMITMENTS AND CONTINGENCIES
EQUITY, per accompanying statement:
General partner, representing a 0.1% interest, 88,634 and 79,420 notional units at September 30, 2014 and March 31, 2014, respectively		(39,690		)	(45,287		)
Limited partners, representing a 99.9% interest -
Common units, 88,545,764 and 73,421,309 units issued and outstanding at September 30, 2014 and March 31, 2014, respectively		1,785,823			1,570,074
Subordinated units, 5,919,346 units issued and outstanding at March 31, 2014		—			2,028
Accumulated other comprehensive loss		(73		)	(236		)
Noncontrolling interests		568,770			5,274
Total equity		2,314,830			1,531,853
Total liabilities and equity		$	6,551,679		$	4,167,223

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

Three Months and Six Months Ended September 30, 2014 and 2013

(U.S. Dollars in Thousands, except unit and per unit amounts)

 

		Three Months Ended						Six Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
REVENUES:
Crude oil logistics		$	2,111,143		$	1,014,008		$	4,040,426		$	1,944,802
Water solutions		52,719			34,190			100,033			54,703
Liquids		539,753			484,874			1,014,910			845,833
Retail propane		68,358			59,380			146,260			131,597
Refined products and renewables		2,607,220			—			3,724,717			—
Other		1,333			1,485			2,794			2,959
Total Revenues		5,380,526			1,593,937			9,029,140			2,979,894
COST OF SALES:
Crude oil logistics		2,083,712			992,135			3,981,351			1,901,354
Water solutions		(9,439		)	3,782			1,134			4,365
Liquids		514,064			459,394			976,080			809,645
Retail propane		39,894			33,539			87,418			76,562
Refined products and renewables		2,550,851			—			3,665,164			—
Other		383			—			2,371			—
Total Cost of Sales		5,179,465			1,488,850			8,713,518			2,791,926
OPERATING COSTS AND EXPENSES:
Operating		101,553			55,769			169,421			104,814
General and administrative		41,639			14,312			69,512			32,766
Depreciation and amortization		50,099			25,061			89,474			47,785
Operating Income (Loss)		7,770			9,945			(12,785		)	2,603
OTHER INCOME (EXPENSE):
Earnings of unconsolidated entities		3,697			—			6,262			—
Interest expense		(28,651		)	(11,060		)	(49,145		)	(21,682		)
Other, net		(617		)	419			(1,008		)	469
Loss Before Income Taxes		(17,801		)	(696		)	(56,676		)	(18,610		)
INCOME TAX (PROVISION) BENEFIT		1,922			(236		)	887			170
Net Loss		(15,879		)	(932		)	(55,789		)	(18,440		)
LESS: NET INCOME ALLOCATED TO GENERAL PARTNER		(11,056		)	(2,451		)	(20,437		)	(4,139		)
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		(3,345		)	(9		)	(3,410		)	(134		)
NET LOSS ALLOCATED TO LIMITED PARTNERS		$	(30,280	)	$	(3,392	)	$	(79,636	)	$	(22,713	)
BASIC AND DILUTED LOSS PER COMMON UNIT		$	(0.34	)	$	(0.05	)	$	(0.93	)	$	(0.37	)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON UNITS OUTSTANDING		88,331,653			58,909,389			81,267,742			53,336,969

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

Three Months and Six Months Ended September 30, 2014 and 2013

(U.S. Dollars in Thousands)

 

		Three Months Ended						Six Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
Net loss		$	(15,879	)	$	(932	)	$	(55,789	)	$	(18,440	)
Other comprehensive income (loss)		(22		)	(5		)	163			(30		)
Comprehensive loss		$	(15,901	)	$	(937	)	$	(55,626	)	$	(18,470	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Equity

(U.S. Dollars in Thousands, except unit amounts)

 

															Accumulated
					Limited Partners										Other
		General			Common					Subordinated					Comprehensive			Noncontrolling			Total
		Partner			Units		Amount			Units		Amount			Loss			Interests			Equity
BALANCES AT MARCH 31, 2014		$	(45,287	)	73,421,309		$	1,570,074		5,919,346		$	2,028		$	(236	)	$	5,274		$	1,531,853
Distributions		(15,235		)	—		(89,025		)	—		(6,748		)	—			(8,654		)	(119,662		)
Contributions		395			—		—			—		—			—			—			395
Sales of units, net of issuance costs		—			8,767,100		370,446			—		—			—			—			370,446
Conversion of subordinated units to common units		—			5,919,346		(8,733		)	(5,919,346	)	8,733			—			—			—
Equity issued pursuant to incentive compensation plan		—			438,009		18,684			—		—			—			—			18,684
Business combinations		—			—		—			—		—			—			568,740			568,740
Net income (loss)		20,437			—		(75,623		)	—		(4,013		)	—			3,410			(55,789		)
Other comprehensive income		—			—		—			—		—			163			—			163
BALANCES AT SEPTEMBER 30, 2014		$	(39,690	)	88,545,764		$	1,785,823		—		$	—		$	(73	)	$	568,770		$	2,314,830

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

 

		Six Months Ended
		September 30,
		2014			2013
OPERATING ACTIVITIES:
Net loss		$	(55,789	)	$	(18,440	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization, including debt issuance cost amortization		97,624			51,821
Non-cash equity-based compensation expense		11,758			6,762
Loss on disposal or impairment of assets		4,566			2,163
Provision for doubtful accounts		1,347			781
Commodity derivative (gain) loss		(38,496		)	17,881
Earnings of unconsolidated entities		(6,262		)	—
Distributions from unconsolidated entities		5,180			—
Other		(837		)	8
Changes in operating assets and liabilities, exclusive of acquisitions:
Accounts receivable - trade		(358,497		)	(28,013		)
Accounts receivable - affiliates		(33,733		)	19,812
Inventories		(203,965		)	(226,727		)
Prepaid expenses and other assets		(56,109		)	(10,830		)
Accounts payable - trade		463,767			60,725
Accounts payable - affiliates		8,392			11,529
Accrued expenses and other liabilities		25,719			18,162
Advance payments received from customers		73,700			45,622
Net cash used in operating activities		(61,635		)	(48,744		)
INVESTING ACTIVITIES:
Purchases of long-lived assets		(82,851		)	(67,399		)
Acquisitions of businesses, including acquired working capital, net of cash acquired		(658,764		)	(392,605		)
Cash flows from commodity derivatives		4,327			(19,074		)
Proceeds from sales of assets		8,741			2,224
Investments in unconsolidated entities		(26,390		)	—
Distributions of capital from unconsolidated entities		4,649			—
Net cash used in investing activities		(750,288		)	(476,854		)
FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facilities		1,979,500			1,061,500
Payments on revolving credit facilities		(1,804,000		)	(893,000		)
Issuance of notes		400,000			—
Proceeds from borrowings on other long-term debt		—			880
Payments on other long-term debt		(4,175		)	(4,507		)
Debt issuance costs		(9,198		)	(2,218		)
Contributions		395			2,444
Distributions to owners		(111,008		)	(60,623		)
Distributions to noncontrolling interest partners		(8,654		)	—
Proceeds from sale of common units, net of offering costs		370,446			415,089
Net cash provided by financing activities		813,306			519,565
Net increase (decrease) in cash and cash equivalents		1,383			(6,033		)
Cash and cash equivalents, beginning of period		10,440			11,561
Cash and cash equivalents, end of period		$	11,823		$	5,528

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

Note 1 — Organization and Operations

 

NGL Energy Partners LP (“we,” “us,” “our,” or the “Partnership”) is a Delaware limited partnership. NGL Energy Holdings LLC serves as our general partner. At September 30, 2014, our operations include:

 

·                   Our crude oil logistics segment, the assets of which include owned and leased crude oil storage terminals, pipeline injection stations, a fleet of trucks, a fleet of leased and owned railcars, and a fleet of barges and towboats, and a 50% interest in a crude oil pipeline. Our crude oil logistics segment purchases crude oil from producers and transports it for resale at owned and leased pipeline injection points, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs.

 

·                   Our water solutions segment, the assets of which include water treatment and disposal facilities. Our water solutions segment generates revenues from the treatment and disposal of wastewater generated from crude oil and natural gas production, and from the sale of recycled water and recovered hydrocarbons.

 

·                   Our liquids segment, which supplies natural gas liquids to retailers, wholesalers, refiners, and petrochemical plants throughout the United States and in Canada, and which provides natural gas liquids terminaling services through its 22 terminals throughout the United States and railcar transportation services through its fleet of leased and owned railcars. Our liquids segment purchases propane, butane, and other products from refiners, processing plants, producers, and other parties, and sells the product to retailers, refiners, petrochemical plants, and other participants in the wholesale markets.

 

·                   Our retail propane segment, 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.

 

·       Our refined products and renewables segment , which conducts gasoline, diesel, ethanol, and biodiesel marketing operations. We also own the 2.0% general partner interest and a 19.7% limited partner interest in TransMontaigne Partners L.P. (“TLP”), which conducts refined products terminaling operations. TLP also owns a 42.5% interest in Battleground Oil Specialty Terminal Company LLC (“BOSTCO”) and a 50% interest in Frontera Brownsville LLC (“Frontera”), which are entities that own refined products storage facilities.

 

Note 2 — Significant Accounting Policies

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements as of and for the three months and six months ended September 30, 2014 and 2013 include our accounts and those of our controlled subsidiaries. Investments where we do not have the ability to exercise control, but do have the ability to exercise significant influence, are accounted for using the equity method of accounting. All significant intercompany transactions and account balances have been eliminated in consolidation. The unaudited condensed consolidated balance sheet at March 31, 2014 is derived from audited financial statements. We have made certain reclassifications to prior period financial statements to conform to classification methods used in fiscal year 2015. These reclassifications had no impact on previously reported amounts of equity or net income.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim consolidated financial information in accordance with the rules and regulations of the Securities and Exchange Commission. The unaudited condensed consolidated financial statements include all adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for the interim periods presented. Such adjustments consist of only normal recurring items, unless otherwise disclosed herein. Accordingly, the unaudited condensed consolidated financial statements do not include all the information and notes required by GAAP for complete annual consolidated financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended March 31, 2014 included in our Annual Report on Form 10-K (the “Annual Report”). Due to the seasonal nature of our natural gas liquids operations and other factors, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results could differ from those estimates.

 

Significant Accounting Policies

 

Our significant accounting policies are consistent with those disclosed in Note 2 of our audited consolidated financial statements included in our Annual Report.

 

Revenue Recognition

 

We record revenues from product sales at the time title to the product transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser. We record terminaling, transportation, storage, and service revenues at the time the service is performed, and we record tank and other rentals over the term of the lease. Pursuant to terminaling services agreements with certain of our throughput customers, we are entitled to the volume of product gained resulting from differences in the measurement of product volumes received and distributed at our terminaling facilities. Such measurement differentials occur as the result of the inherent variances in measurement devices and methodology. We recognize as revenue the net proceeds from the sale of the product gained. Revenues for our water solutions business are recognized upon receipt of the wastewater at our disposal facilities.

 

We report taxes collected from customers and remitted to taxing authorities, such as sales and use taxes, on a net basis. Amounts billed to customers for shipping and handling costs are included in revenues in our condensed consolidated statements of operations.

 

We enter into certain contracts whereby we agree to purchase product from a counterparty and sell the same volume of product to the same counterparty at a different location or time. When such agreements are entered into concurrently and are entered into in contemplation of each other, we record the revenues for these transactions net of cost of sales.

 

Fair Value Measurements

 

We apply fair value measurements to certain assets and liabilities, principally our commodity derivative instruments and assets and liabilities acquired in business combinations. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and risks inherent in valuation techniques and inputs to valuations. This includes not only the credit standing of counterparties and credit enhancements but also the impact of our own nonperformance risk on our liabilities. Fair value measurements assume that the transaction occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability (the market for which the reporting entity would be able to maximize the amount received or minimize the amount paid). We evaluate the need for credit adjustments to our derivative instrument fair values in accordance with the requirements noted above. Such adjustments were not material to the fair values of our derivative instruments.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

We use the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

 

·                   Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date.

 

·                   Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 include non-exchange traded derivatives such as over-the-counter commodity price swap and option contracts and interest rate protection agreements. The majority of our fair value measurements related to our derivative financial instruments were categorized as Level 2 at September 30, 2014 and March 31, 2014 (see Note 11). We determine the fair value of all our derivative financial instruments utilizing pricing models for significantly similar instruments. Inputs to the pricing model include publicly available prices and forward curves generated from a compilation of data gathered from third parties.

 

·                   Level 3 — Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. We did not have any fair value measurements categorized as Level 3 at September 30, 2014 or March 31, 2014.

 

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement requires judgment, considering factors specific to the asset or liability.

 

Supplemental Cash Flow Information

 

Supplemental cash flow information is as follows:

 

		Three Months Ended						Six Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
		(in thousands)
Interest paid, exclusive of debt issuance costs and letter of credit fees		$	10,445		$	8,423		$	36,429		$	16,908
Income taxes paid		$	1,241		$	369		$	2,246		$	650
Value of common units issued in business combinations		$	—		$	80,619		$	—		$	80,619

 

Cash flows from settlements of commodity derivative instruments are classified as cash flows from investing activities in the condensed consolidated statements of cash flows, and adjustments to the fair value of commodity derivative instruments are included in the reconciliation of net loss to net cash used in operating activities.

 

Inventories

 

We value our inventories at the lower of cost or market, with cost determined using either the weighted-average cost or the first in, first out (FIFO) methods, including the cost of transportation and storage. In performing this analysis, we take into consideration fixed-price forward sale commitments and the opportunity to transfer propane inventory from our wholesale business to our retail business for sale in the retail markets.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

Inventories consist of the following:

 

		September 30,			March 31,
		2014			2014
		(in thousands)
Crude oil		$	136,722		$	156,473
Natural gas liquids —
Propane		207,694			85,159
Butane		84,822			15,106
Other		27,091			3,945
Refined products —
Gasoline		219,111			15,597
Diesel		214,567			7,298
Other		3,675			314
Renewables		36,517			11,778
Other		11,390			14,490
Total		$	941,589		$	310,160

 

Investments in Unconsolidated Entities

 

In December 2013, as part of our acquisition of Gavilon, LLC (“Gavilon Energy”), we acquired a 50% interest in Glass Mountain Pipeline, LLC (“Glass Mountain”) and an 11% interest in a limited liability company that owns an ethanol production facility. In June 2014, we acquired an interest in a limited liability company that o perates a water supply business . On July 1, 2014, as part of our acquisition of TransMontaigne Inc. (“TransMontaigne”), we acquired TLP, which owns a 42.5% interest in BOSTCO and a 50% interest in Frontera. We account for these investments using the equity method of accounting. Under the equity method, we do not report the individual assets and liabilities of these entities on our condensed consolidated balance sheets; instead, our ownership interests are reported within investments in unconsolidated entities on our condensed consolidated balance sheets. Under the equity method, the investment is recorded at acquisition cost, increased by our proportionate share of any earnings and additional capital contributions and decreased by our proportionate share of any losses, distributions paid and amortization of any excess investment. Excess investment is the amount by which our total investment exceeds our proportionate share of the book value of the net assets of the investment entity.

 

Our investments in unconsolidated entities consist of the following:

 

		September 30,			March 31,
		2014			2014
		(in thousands)
Glass Mountain (1)		$	189,847		$	181,488
Ethanol production facility		9,361			8,333
Water supply company		15,026			—
BOSTCO (2)		244,092			—
Frontera		24,318			—
Total		$	482,644		$	189,821

 

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(1)          When we acquired Gavilon we recorded the investment in Glass Mountain at fair value. The fair value of our investment in Glass Mountain exceeds our share of the historical net book value of Glass Mountain’s net assets by approximately $70 million. This difference relates primarily to goodwill and customer relationships.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

(2)          When we acquired TransMontaigne, we recorded the investment in BOSTCO at fair value. The fair value of our investment in BOSTCO exceeds our share of the historical net book value of BOSTCO’s net assets by approximately $24 million.

 

Accrued Expenses and Other Payables

 

Accrued expenses and other payables consist of the following:

 

		September 30,			March 31,
		2014			2014
		(in thousands)
Accrued compensation and benefits		$	49,146		$	45,006
Derivative liabilities		39,023			42,214
Product exchange liabilities		43,185			3,719
Accrued interest		23,945			18,668
Income and other tax liabilities		38,255			13,421
Other		24,928			18,662
Total		$	218,482		$	141,690

 

Business Combination Measurement Period

 

We record the assets acquired and liabilities assumed in a business combination at their acquisition-date fair values. Pursuant to GAAP, an entity is allowed a reasonable period of time (not to exceed one year) to obtain the information necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination. As described in Note 4, certain of our acquisitions are still within this measurement period, and as a result, the acquisition-date fair values we have recorded for the assets acquired and liabilities assumed are subject to change. Also as described in Note 4, we made certain adjustments during the six months ended September 30, 2014 to our estimates of the acquisition-date fair values of assets acquired and liabilities assumed in business combinations that occurred during the year ended March 31, 2014.

 

Noncontrolling Interests

 

We have certain consolidated subsidiaries in which outside parties own interests. The noncontrolling interest shown in our condensed consolidated financial statements represents the other owners’ share of these entities.

 

On July 1, 2014, as part of our acquisition of TransMontaigne, we acquired a 19.7% limited partner interest in TLP. We have attributed net earnings allocable to TLP’s limited partners to the controlling and noncontrolling interests based on the relative ownership interests in TLP as well as including certain adjustments related to our acquisition accounting. Net earnings allocable to TLP’s limited partners are net of the earnings allocable to TLP’s general partner interest. The earnings allocable to TLP’s general partner interest include the distributions of available cash (as defined by TLP’s partnership agreement) attributable to the period to TLP’s general partner interest and incentive distribution rights, net of adjustments for TLP’s general partner’s share of undistributed earnings. Undistributed earnings are allocated to TLP’s limited partners and TLP’s general partner interest based on their respective sharing of earnings or losses specified in TLP’s partnership agreement, which is based on their ownership percentages of 98% and 2%, respectively.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

Note 3 — Earnings Per Unit

 

Our earnings per common unit were computed as follows:

 

		Three Months Ended						Six Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
		(in thousands, except unit and per unit amounts)
Net loss attributable to parent equity		$	(19,224	)	$	(941	)	$	(59,199	)	$	(18,574	)
Less: net income allocated to general partner (1)		(11,056		)	(2,451		)	(20,437		)	(4,139		)
Net loss allocated to subordinated unitholders (2)		—			562			4,013			3,076
Net loss allocated to common unitholders		$	(30,280	)	$	(2,830	)	$	(75,623	)	$	(19,637	)
Weighted average common units outstanding		88,331,653			58,909,389			81,267,742			53,336,969
Loss per common unit - basic and diluted		$	(0.34	)	$	(0.05	)	$	(0.93	)	$	(0.37	)

 

---

(1)          The net income allocated to the general partner includes distributions to which it is entitled as the holder of incentive distribution rights, which are described in Note 10.

(2)          All outstanding subordinated units converted to common units in August 2014. Since the subordinated units did not share in the distribution of cash generated during the three months ended September 30, 2014, we did not allocate any earnings or loss during this period to the subordinated unitholders. During the three months ended June 30, 2014 and the six months ended September 30, 2013, 5,919,346 subordinated units were outstanding. The loss per subordinated unit was $(0.68) for the three months ended June 30, 2014, $(0.09) for the three months ended September 30, 2013, and $(0.52) for the six months ended September 30, 2013.

 

The restricted units described in Note 10 were antidilutive during the three months and six months ended September 30, 2014 and 2013, but could impact earnings per unit in future periods.

 

Note 4 — Acquisitions

 

Year Ending March 31, 2015

 

TransMontaigne Inc.

 

On July 1, 2014, we acquired TransMontaigne for $174.2 million of cash, net of cash acquired. As part of this transaction, we also purchased $380.4 million of inventory from the previous owner of TransMontaigne (including $346.9 million paid at closing and $33.5 million subsequently paid as the working capital settlement process progressed). The operations of TransMontaigne include the marketing of refined products and crude oil. As part of this transaction, we acquired the 2.0% general partner interest, the incentive distribution rights, and a 19.7% limited partner interest in TLP, and assumed certain terminaling service agreements with TLP from an affiliate of the previous owner of TransMontaigne. The acquisition agreement contemplates a post-closing adjustment to the purchase price for certain working capital items. We estimate that we will pay an additional $27.5 million once the working capital settlement process has been completed.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

We are in the process of identifying and determining the fair value of the assets acquired and liabilities assumed in this business combination. The estimates of fair value reflected at September 30, 2014 are subject to change, and such changes could be material. We expect to complete this process prior to finalizing our financial statements for the quarter ending June 30, 2015. We have preliminarily estimated the fair values of the assets acquired (and useful lives) and liabilities assumed as follows (in thousands):

 

Cash and cash equivalents		$	1,469
Accounts receivable - trade		197,349
Accounts receivable - affiliates		528
Inventories		426,913
Prepaid expenses and other current assets		15,373
Property, plant and equipment:
Refined products terminal assets (20 years)		418,405
Buildings and leasehold improvements (20 years)		10,339
Crude oil tanks and related equipment (20 years)		28,666
Vehicles		1,565
Land		56,095
Information technology equipment		7,851
Other		12,592
Construction in progress		4,487
Goodwill (1)		29,118
Intangible assets:
Customer relationships (7 years)		50,000
Pipeline capacity rights (30 years)		87,000
Trade names (indefinite life)		5,000
Equity method investments		250,000
Other noncurrent assets		3,911
Accounts payable - trade		(140,597		)
Accounts payable - affiliates		(69		)
Accrued expenses and other payables		(73,565		)
Advance payments received from customers		(1,919		)
Long-term debt		(234,000		)
Other noncurrent liabilities		(34,856		)
Noncontrolling interests		(567,120		)
Fair value of net assets acquired		$	554,535

 

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(1)          Included in the refined products and renewables segment.

 

Goodwill represents the excess of the consideration paid for the acquired business over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill primarily represents the value of synergies between the acquired entity and the Partnership, the opportunity to use the acquired business as a platform for growth, and the acquired assembled workforce. We estimate that all of the goodwill will be deductible for federal income tax purposes.

 

The intangible asset for pipeline capacity rights relates to capacity allocations on a third-party refined products pipeline. Demand for use of this pipeline exceeds the pipeline’s capacity, and the limited capacity is allocated based on a shipper’s historical shipment volumes.

 

The fair value of the noncontrolling interests was calculated by multiplying the closing price of TLP’s common units on the acquisition date by the number of TLP common units held by parties other than us.

 

We recorded in the acquisition accounting a liability of $2.5 million related to certain crude oil contracts with terms that were unfavorable at current market conditions. We amortized this balance to cost of sales during the three months ended September 30, 2014.

 

Employees of TransMontaigne participate in a plan whereby they are entitled to certain termination benefits in the event of a change in control of TransMontaigne and a subsequent change in job status. We recorded expense of $2.7 million during the three months ended September 30, 2014 related to these termination benefits, and we may record additional expense in future quarters as we continue our integration efforts.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

The operations of TransMontaigne have been included in our condensed consolidated statements of operations since TransMontaigne was acquired on July 1, 2014. Our condensed consolidated statements of operations for the three months and six months ended September 30, 2014 include revenues of $1.1 billion and an operating loss of $0.3 million that were generated by the operations of TransMontaigne. We have not provided supplemental pro forma financial information as though the business combination had occurred on April 1, 2013. The previous owner of TransMontaigne conducted trading operations, whereas we strive to generate reliable and predictable cash flows. Because of the difference in strategies between the pre-acquisition and post-acquisition periods, the pre-acquisition operations of TransMontaigne have limited importance as an indicator of post-acquisition results.

 

On July 10, 2014, we submitted a nonbinding proposal to the conflicts committee of the board of directors of TLP’s general partner. Under this proposal, each outstanding unit of TLP would be exchanged for one of our common units. On August 15, 2014, we and TLP’s general partner terminated discussions regarding our previously submitted nonbinding proposal to acquire the outstanding common units of TLP.

 

Water Solutions Facilities

 

As described below, we are party to a development agreement that provides us a right to purchase water disposal facilities developed by the other party to the agreement. During the six months ended September 30, 2014, we purchased four water disposal facilities under this development agreement. We also purchased a 75% interest in one additional water disposal facility in July 2014 from a different seller. On a combined basis, we paid $82.9 million of cash for these five water disposal facilities.

 

We are in the process of identifying and determining the fair value of the assets acquired and liabilities assumed in these business combinations. The estimates of fair value reflected at September 30, 2014 are subject to change, and such changes could be material. We expect to complete this process prior to finalizing our financial statements for the quarter ending June 30, 2015. We have preliminarily estimated the fair values of the assets acquired (and useful lives) and liabilities assumed as follows (in thousands):

 

Accounts receivable - trade		$	939
Inventories		253
Prepaid expenses and other current assets		62
Property, plant and equipment:
Water treatment facilities and equipment (5–40 years)		23,066
Buildings and leasehold improvements (3–7 years)		2,599
Land		1,010
Other (7 years)		33
Goodwill		57,777
Other noncurrent assets		50
Accounts payable - trade		(58		)
Accrued expenses and other payables		(1,092		)
Other noncurrent liabilities		(149		)
Noncontrolling interest		(1,620		)
Fair value of net assets acquired		$	82,870

 

Goodwill represents the excess of the consideration paid for the acquired business over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill primarily represents the value of synergies between the acquired entity and the Partnership and the opportunity to use the acquired business as a platform for growth. We estimate that all of the goodwill will be deductible for federal income tax purposes.

 

The operations of these water disposal facilities have been included in our condensed consolidated statement of operations since their acquisition date. Our condensed consolidated statement of operations for the quarter ended September 30, 2014 includes revenues of $7.1 million and operating income of $1.5 million that were generated by the operations of these water disposal facilities.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

Retail Propane Acquisitions

 

During the six months ended September 30, 2014, we completed three acquisitions of retail propane businesses. On a combined basis, we paid $6.4 million of cash to acquire these assets and operations. The agreements for these acquisitions contemplate post-closing payments for certain working capital items. We are in the process of identifying and determining the fair value of the assets acquired and liabilities assumed in certain of these business combinations, and as a result, the estimates of fair value reflected at September 30, 2014 are subject to change.

 

Water Supply Company

 

On June 9, 2014, we paid cash of $15.0 million in exchange for an interest in a water supply company operating in the DJ Basin. We account for this investment using the equity method of accounting.

 

Year Ended March 31, 2014

 

As described in Note 2, pursuant to GAAP, an entity is allowed a reasonable period of time to obtain the information necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination. The business combinations for which this measurement period was still open as of March 31, 2014 are summarized below.

 

Gavilon Energy

 

On December 2, 2013, we completed a business combination in which we acquired Gavilon Energy. We paid $832.4 million of cash, net of cash acquired, in exchange for these assets and operations. The acquisition agreement also contemplates a post-closing adjustment to the purchase price for certain working capital items.

 

The assets of Gavilon Energy include crude oil terminals in Oklahoma, Texas, and Louisiana, a 50% interest in Glass Mountain, which owns a crude oil pipeline that originates in western Oklahoma and terminates in Cushing, Oklahoma, and an 11% interest in an ethanol production facility in the Midwest. The operations of Gavilon Energy include the marketing of crude oil, refined products, ethanol, biodiesel, and natural gas liquids and owned and leased crude oil storage in Cushing, Oklahoma.

 

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

At September 30, 2014 and March 31, 2014, and for the

Three Months and Six Months Ended September 30, 2014 and 2013

 

During the three months ended September 30, 2014, we completed the acquisition accounting for this business combination. The following table presents the final calculation of the fair values of the assets acquired (and useful lives) and liabilities assumed for this acquisition:

 

					Estimated at
					at
					March 31,
		Final			2014			Change
		(in thousands)
Accounts receivable - trade		$	326,484		$	349,529		$	(23,045	)
Accounts receivable - affiliates		2,564			2,564			—
Inventories		107,430			107,430			—
Prepaid expenses and other current assets		68,322			68,322			—
Property, plant and equipment:
Vehicles (3 years)		327			791			(464		)
Crude oil tanks and related equipment (3–40 years)		83,797			77,429			6,368
Information technology equipment (3–7 years)		4,049			4,046			3
Buildings and leasehold improvements (3–40 years)		7,817			7,716			101
Land		6,427			6,427			—
Tank bottoms		16,930			15,230			1,700
Other (7 years)		162			170			(8		)
Construction in progress		7,180			7,190			(10		)
Goodwill (1)		342,769			359,169			(16,400		)
Intangible assets:
Customer relationships (10–20 years)		107,950			101,600			6,350
Lease agreements (1–5 years)		8,700			8,700			—
Pipeline capacity rights (30 years)		7,800			—			7,800
Investments in unconsolidated entities		183,000			178,000			5,000
Other noncurrent assets		2,287			9,918			(7,631		)
Accounts payable - trade		(342,792		)	(342,792		)	—
Accounts payable - affiliates		(2,585		)	(2,585		)	—
Accrued expenses and other payables		(49,447		)	(70,999		)	21,552
Advance payments received from customers		(10,667		)	(10,667		)	—
Other noncurrent liabilities		(46,056		)	(44,740		)	(1,316		)
Fair value of net assets acquired		$	832,448		$	832,448		$	—

 

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(1)          Primarily included in the crude oil logistics segment.

 

We estimated the value of the customer relationship intangible asset using the income approach, which uses valuation techniques to convert future amounts (for example , cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts.

 

17