false0001504461 0001504461 2019-12-26 2019-12-26 0001504461 exch:XNYS us-gaap:PreferredClassBMember 2019-12-26 2019-12-26 0001504461 exch:XNYS ngl:LimitedPartnersCapitalAccountCommonUnitsMember 2019-12-26 2019-12-26 0001504461 exch:XNYS ngl:PreferredClassCMember 2019-12-26 2019-12-26




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

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

Date of Report (Date of earliest event reported): December 26, 2019

NGL ENERGY PARTNERS LP
(Exact name of registrant as specified in its charter)

Delaware
 
001-35172
 
27-3427920
(State or other jurisdiction of
incorporation or organization)
 
(Commission File Number)
 
(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)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240-14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240-14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240-13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbols
 
Name of Each Exchange on Which Registered
Common units representing Limited Partner Interests
 
NGL
 
New York Stock Exchange
Fixed-to-floating rate cumulative redeemable perpetual preferred units
 
NGL-PB
 
New York Stock Exchange
Fixed-to-floating rate cumulative redeemable perpetual preferred units
 
NGL-PC
 
New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o






Item 8.01. 
  Other Events.

On October 31, 2019, NGL Energy Partners LP (the “Partnership”) completed its acquisition of Hillstone Environmental Partners, LLC (“Hillstone”. The Partnership previously filed the historical and pro forma financial information required under Regulation S-X with respect to the Hillstone acquisition in a Form 8-K/A on November 18, 2019.  The Partnership is filing this Current Report on Form 8-K to provide additional updated historical and pro forma financial information as set forth under Item 9.01 below.

Item 9.01.  
  Financial Statements and Exhibits.

(b) Pro Forma Financial Statements

The unaudited consolidated balance sheet as of September 30, 2019 and the unaudited consolidated statement of operations for the three months ended September 30, 2019, of Hillstone Environmental Partners, LLC and the related notes are filed as Exhibit 99.1 to this Current Report on Form 8-K and incorporated herein by reference.

The unaudited pro forma condensed consolidated balance sheet as of September 30, 2019, the unaudited pro forma condensed consolidated statements of operations for the six months ended September 30, 2019 and the year ended March 31, 2019, of NGL Energy Partners LP and the related notes are filed as Exhibit 99.2 to this Current Report on Form 8-K and incorporated herein by reference.

(d) Exhibits.
Exhibit No.
 
Description
 
 
 
99.1
 
99.2
 
101
 
Cover Page formatted as Inline XBRL.
104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
NGL ENERGY PARTNERS LP
 
By:
NGL Energy Holdings LLC,
 
 
its general partner
Date: December 26, 2019
 
By:
/s/ Robert W. Karlovich III
 
 
 
Robert W. Karlovich III
 
 
 
Chief Financial Officer





Exhibit 99.1



















Hillstone Environmental Partners, LLC
Condensed Consolidated Financial Statements
September 30, 2019 and 2018 (unaudited)





Hillstone Environmental Partners, LLC
Index
September 30, 2019 and 2018


 
Page (s)

Unaudited Condensed Consolidated Financial Statements
 
 
 
Balance Sheets as of September 30, 2019 and June 30, 2019 (unaudited)
2

 
 
Statements of Operations for the three months ended September 30, 2019 and 2018 (unaudited)
3

 
 
Statements of Members’ Equity for the three months ended September 30, 2019 and 2018 (unaudited)
4-5

 
 
Statements of Cash Flows for the three months ended September 30, 2019 and 2018 (unaudited)
6

 
 
Notes to Unaudited Condensed Consolidated Financial Statements
7-19



1

Hillstone Environmental Partners, LLC
Condensed Consolidated Balance Sheets (unaudited)
September 30, 2019 and June 30, 2019


(in thousands)
 
 
 
 
September 30, 2019
 
June 30, 2019
 
 
 
 
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
34,757

 
$
21,535

Accounts receivable, net
9,950

 
14,697

Inventory
330

 
349

Prepayments and other current assets
630

 
1,243

Due from affiliate - current
188

 
205

Total current assets
45,855

 
38,029

Property and equipment, net
155,128

 
151,460

Intangible assets
930

 
946

Other noncurrent assets
811

 
795

Investments in unconsolidated affiliates
786

 
808

Total assets
$
203,510

 
$
192,038

 
 
 
 
Liabilities and Members’ Equity
 
 
 
 
 
 
 
Current liabilities
 
 
 
Accounts payable
$
8,542

 
$
14,066

Accrued payroll expenses
1,233

 
1,585

Accrued expenses and other current liabilities
12,029

 
9,772

Accrued interest
2,309

 
2,164

Due to affiliate - current
115

 
113

Total current liabilities
24,228

 
27,700

Noncurrent liabilities
 
 
 
Long-term debt, net
133,643

 
118,470

Other long-term liability
867

 
739

Total liabilities
158,738

 
146,909

Commitments and contingencies (note 10)
 
 
 
 
 
 
 
Equity
 
 
 
Common stock: Class A 147,200,010 units; Class B 9,257,243 units; Class C 3,085,747 units as of September 30, 2019; Class A 146,982,150 units; Class B 9,257,243 units; Class C 3,085,747 units as of June 30, 2019
81,746

 
81,722

Members’ deficit
(38,960
)
 
(38,586
)
Total Hillstone Environmental members’ equity
42,786

 
43,136

Noncontrolling interest in consolidated subsidiary
1,986

 
1,993

Total members’ equity
44,772

 
45,129

Total liabilities and members’ equity
$
203,510

 
$
192,038


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


2

Hillstone Environmental Partners, LLC
Condensed Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 2019 and 2018


(in thousands)
Three Months Ended September 30
 
2019
 
2018
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
Service
$
22,910

 
$
14,994

Product
(9
)
 
1,032

Management fees
175

 
213

Total operating revenues, net
23,076

 
16,239

 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Operating
 
 
 
Service
10,044

 
9,952

Product
70

 
283

General and administrative
6,973

 
3,421

Depreciation and amortization
2,787

 
1,503

Loss on fire

 
12,105

Total operating expenses
19,874

 
27,264

Income (loss) from operations
3,202

 
(11,025
)
Interest expense
(3,583
)
 
(1,519
)
Loss before equity in net earnings of unconsolidated affiliates
(381
)
 
(12,544
)
Equity in net earnings of unconsolidated affiliates
(22
)
 
53

Net loss
(403
)
 
(12,491
)
Net income attributable to noncontrolling interests
7

 
4

Net loss attributable to members
$
(396
)
 
$
(12,487
)

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


3

Hillstone Environmental Partners, LLC
Condensed Consolidated Statement of Members' Equity (unaudited)
Three Months Ended September 30, 2019


(in thousands)
 
 
 
 
 
 
 
 
Class A, B and C Units
 
Members’
 
Noncontrolling
 
 
 
 
Equity (Deficit)
 
Interest
 
Total
 
 
 
 
 
 
 
 
Balances at June 30, 2019
$
81,722

 
$
(38,586
)
 
$
1,993

 
$
45,129

Contributions
24

 

 

 
24

Equity-based compensation

 
22

 

 
22

Net loss

 
(396
)
 
(7
)
 
(403
)
Balances at September 30, 2019
$
81,746

 
$
(38,960
)
 
$
1,986

 
$
44,772


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

4

Hillstone Environmental Partners, LLC
Condensed Consolidated Statement of Members' Equity (unaudited)
Three Months Ended September 30, 2018


(in thousands)
 
 
 
 
 
 
 
 
Class A, B and C Units
 
Members’
 
Noncontrolling
 
 
 
 
Equity (Deficit)
 
Interest
 
Total
 
 
 
 
 
 
 
 
Balances at June 30, 2018
$
67,755

 
$
(23,847
)
 
$
2,025

 
$
45,933

Net loss

 
(12,487
)
 
(4
)
 
(12,491
)
Balances at September 30, 2018
$
67,755

 
$
(36,334
)
 
$
2,021

 
$
33,442


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


5

Hillstone Environmental Partners, LLC
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended September 30, 2019 and 2018


(in thousands)
Three Months Ended September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(403
)
 
$
(12,491
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
Depreciation and amortization expense
2,787

 
1,503

Amortization of debt issuance costs
211

 
119

Equity-based compensation
22

 

Gain on disposal of property and equipment
129

 

Equity in net (income) loss of other unconsolidated affiliates
22

 
(53
)
Loss on fire

 
11,987

Other long-term liability
128

 

Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
4,746

 
(2,120
)
Inventory
18

 
(32
)
Prepayments and other current assets
613

 
(56
)
Due from affiliate
17

 
(110
)
Other noncurrent assets
(15
)
 
(11
)
Accounts payable
(504
)
 
(136
)
Accrued payroll
(352
)
 
493

Due to affiliate
1

 
49

Accrued interest
145

 
(11
)
Accrued expenses and other current liabilities
2,258

 
1,947

Net cash provided by operating activities
9,823

 
1,078

 
 
 
 
Investing activities
 
 
 
Purchase of property and equipment
(11,588
)
 
(15,476
)
Net cash used in investing activities
(11,588
)
 
(15,476
)
 
 
 
 
Financing activities
 
 
 
Proceeds from debt
15,000

 

Payment of debt issuance costs
(37
)
 

Contributions from members
24

 

Net cash provided by financing activities
14,987

 

 
 
 
 
Cash and cash equivalents
 
 
 
Beginning
21,535

 
18,339

Net increase (decrease) in cash and cash equivalents
13,222

 
(14,398
)
Ending
$
34,757

 
$
3,941

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
(3,649
)
 
$
(1,411
)
Non cash purchase of property and equipment
(5,020
)
 
(2,280
)
Non cash proceeds from the sale of property and equipment
231

 


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



6

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


1.
Nature of Business Operations

Hillstone Environmental Partners, LLC (the “Company”) is a Delaware Limited Liability Company formed in 2015.  “We,” “us,” “our” and similar terms refer to the Company together with its consolidated subsidiaries. On June 30, 2015, the Company raised equity capital from Golden Gate Capital (“GGC”) for the purpose of building a water logistics platform servicing the oil and gas industry within the continental United States and simultaneously closed its first acquisition.  Subsequent to the initial acquisition and augmented by the acquisitions discussed in Note 3, the Company expanded its operations through signing new customer contracts and building the associated infrastructure.  At September 30, 2019, the Company’s primary activities include:

Water pipeline and wastewater disposal facilities. This includes services for the transportation and disposal of wastewater generated from development and production of crude oil and natural gas.

Water treatment and waste services.  The Company currently operates near-field and on-pad treatment facilities which manage, recycle, treat and dispose of wastewater and solid waste generated by oil and gas producers. In addition, the near-field facilities are used to manufacture heavy brine water for product sales.

2.
Summary of Significant Accounting Policies

Basis of Financial Reporting
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles accepted in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiaries after elimination of all intercompany accounts and transactions. As of September 30, 2019 and June 30, 2019, there were 147,200,010 Class A units, 9,257,243 Class B units, and 3,085,747 Class C units authorized and outstanding and 146,982,150 Class A units, 9,257,243 Class B units, and 3,085,747 Class C units authorized and outstanding, respectively.

Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, including its wholly owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The condensed consolidated balance sheet at June 30, 2019 was derived from audited financial statements but does not contain all of the footnote disclosures from the annual financial statements. Following the formation of the Company, SBG Energy Services, LLC and BVI Infrastructure, LLC both owned 5% each as a noncontrolling interest in HEP Hidden Bench Holdco, LLC (“Hidden Bench”), which is 90% owned by a wholly owned subsidiary of the Company. In addition, DACO Permian 76, LLC owned a 20% non-controlling interest in Hillstone DACO Permian, LLC (“Hillstone DACO Permian”) which was 80% owned by the Company.

Investment in Unconsolidated Affiliates
The Company accounts for investments in which the Company exercises significant influence but does not control and is not the primary beneficiary, using the equity method and reports them in “Investments in unconsolidated affiliates” within the Unaudited Condensed Consolidated Balance Sheets.

Investments in unconsolidated affiliates are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of such investments may have experienced a decline in value that is considered other than temporary. When there is evidence that an other than temporary loss in value exists, we compare the estimated fair value of the investment to the carrying value of the investment to determine whether impairment has occurred. We assess the fair value of our investments in unconsolidated affiliates using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable transactions and discounted cash flow models. The difference between the carrying amount of the unconsolidated affiliates and their estimated fair value is recognized as an impairment loss when the loss in value is deemed to be other than temporary. See Note 8 - Investments in Unconsolidated Affiliates for additional information regarding our investment in unconsolidated affiliates.

Use of Estimates
The preparation of these unaudited financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the following: (i) fair values of equity-based compensation; (ii) estimates and

7

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


assumptions used in connection with business combinations; (iii) estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill, long-lived assets and investments), and (iv) certain contingent liabilities. Management regularly evaluates these estimates utilizing historical experience, consultation with experts and other methods considered reasonable under the circumstances. Nevertheless, actual results may differ significantly from these estimates. Any effect on the financial statements resulting from revisions to these estimates is recorded prospectively in the period in which the facts that give rise to the revision become known.

Cash and Cash Equivalents
Cash and cash equivalents are defined as all highly marketable securities with maturities of three months or less when purchased. The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these investments.

The Company maintains cash in bank deposit accounts. As of September 30, 2019 and June 30, 2019, cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250 thousand per financial institution. At times, cash balances may be in excess of the FDIC limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

Accounts Receivable
Trade accounts receivable represent valid claims for services provided and goods sold on or before the balance sheet date. The Company grants unsecured credit to customers under normal industry standards and terms. Delinquent receivables are written off based on individual credit evaluation and when specific circumstances of the customer indicate the account will not be collected. The Company’s bad debt expense is de minimis for the three months ended September 30, 2019 and September 30, 2018. No allowance for bad debts was maintained at September 30, 2019 and June 30, 2019. The Company evaluates the collectability of its accounts receivable based on a combination of factors, including length of time the receivables are outstanding and historical performance.

Inventory
Materials and Supplies
Materials and supplies inventory, which consists of chemicals, salt, diesel fuel and other miscellaneous materials and supplies, are valued at the lower of cost or market, cost being determined by the first-in, first-out (“FIFO”) method.

Brine Inventory
We state our brine inventory, which consists of product available for sale, at the lower of cost or net realizable value. Net realizable value represents the estimated future sales price based on spot prices and prices under contracts, less the estimated costs to complete production and bring the product to sale.

Property and Equipment
Property and equipment consist of rights of ways (“ROWs”), buildings, pipelines, wells, tanks, field equipment, vehicles, computer and office equipment, leasehold improvements, and construction in progress.  The Company records property and equipment at historical cost, which includes indirect costs such as payroll taxes, other employee benefits, and other costs directly related to the projects.  Costs of improvements that substantially extend the useful lives of the assets are capitalized.  Maintenance and repairs are expensed as incurred.  Depreciation for these assets is computed using the straight-line method over estimated useful lives.  The company has acquired ROWs for water pipeline activities. The ROWs are amortized over the life of the agreements, and in some cases said agreements do not expire. Those ROWs without expiration are not amortized. Upon retirement, impairment or disposition of assets, the costs and related accumulated depreciation are removed from the accounts with the resulting gain or losses, if any, reflected in the Unaudited Condensed Consolidated Statements of Operations.

Goodwill and Intangible Assets
The Company records goodwill when the consideration paid in a business acquisition exceeds the fair value of the net tangible assets acquired, identifiable intangible assets acquired, and liabilities assumed. Goodwill is not amortized.

Definite-lived intangible assets subject to amortization include customer contracts. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition and are amortized over their estimated useful lives, which range from two to twenty-one years, based on a straight-line method or based on the pattern over which the Company expects to consume the economic benefit of each asset, which, in general, reflects the expected cash flows from each asset.

8

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019



Impairment of Long-Lived Assets
Long-lived assets include property and equipment and definite-lived intangible assets are subject to amortization. The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured and recorded based on the estimated fair value of the long-lived assets being tested for impairment, and their carrying amounts. Fair value is typically determined through the use of an income approach utilizing estimates of discounted pre-tax future cash flows or a market approach utilizing recent transaction activity for comparable assets. Occasionally, such as when an asset is held for sale, market prices are used. The Company believes its estimates and models used to determine fair value are similar to what a market participant would use.

In estimating cash flows used to assess recoverability of long-lived assets and to measure the fair value of the Company’s operations, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other asset groups. The Company’s estimates of cash flows are based on numerous assumptions including the current business plan, oil and gas price environment and management’s long-term projections. It is possible that actual cash flows will be significantly different than the estimates, as actual results are each subject to significant risks and uncertainties.

Impairment of Goodwill
Goodwill is tested for impairment on each reporting unit’s carrying value annually or more frequently if events or circumstances occur that indicate an impairment may exist. The Company’s policy is to perform the annual goodwill impairment test as of the first day of April of each fiscal year.

Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected operating results, significant changes in the Company’s use of the acquired assets in a business combination or the strategy for its overall business, and significant negative industry or economic trends.

Revenue and Cost Recognition
The Company recognizes revenue when all revenue recognition criteria are met. Costs include all direct material and labor costs and those indirect costs related to the service performance, such as indirect labor, supplies, tools, and repairs. These costs, as well as general and administrative costs, are expensed as incurred.

The Company offers cash discounts to certain customers for payments received within an agreed upon time, generally 10-20 days after services are performed. The Company also offers service discounts upon negotiations with customers based on certain circumstances. The Company records a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenues, based on experience with each customer.

Debt Issuance Costs
Debt issuance costs represent fees and expenses associated with securing the Company’s Credit Agreement. Amortization of the capitalized debt issuance costs is recorded on a straight-line basis, which approximates the effective interest rate method, over the term of the Credit Agreement. See Note 8 - Credit Agreement for definition and additional discussion.

Equity-Based Compensation
We measure share-based compensation cost at fair value using the Black Scholes option pricing model with compensation cost amortized on a straight-line basis over each award’s full vesting period, except for awards with performance conditions, which we recognize using the accelerated method. In regard to inputs into the Black Scholes model, the expected term is based on management’s estimated time to liquidation, while the volatility is based on historical data for a group of peer companies for the expected term of the award. With the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting in fiscal 2017, share-based compensation expense is recorded with no estimated forfeitures. The effects of forfeitures are now recognized when they occur. We include share-based compensation expense in “General and administrative” expenses in the Unaudited Condensed Consolidated Statements of Operations.





9

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


Income Taxes
The Company files their income tax returns on the accrual basis as a partnership under subchapter K for federal and related state income tax purposes, which provide that, in lieu of entity level income taxes, the members separately account for the Company’s items of income, deductions, losses and credits.

The Company is subject to the Texas franchise tax, which is considered an entity level state income tax. For Texas franchise tax purposes, income or loss generated by the Company does not pass through to the members and is subject to tax at the Company level. The tax on the Company’s net income is borne by the individual partners through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income of members as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the Hillstone Environmental Partners Second Amended and Restated LLC agreement.

Accounting for Acquisitions
The purchase accounting of business combinations and acquisition purchase price allocations are based on management estimates and assumptions, which utilize established valuation techniques appropriate for the industry. These techniques include the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace or reproduce the asset and the effects on the asset’s value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. See Note 3 - Business Combinations and Acquisitions for additional information.

Contingencies
The Company is involved in a variety of legal matters that arise in the normal course of business. Based on the available information, the Company evaluates the relevant range and likelihood of potential outcomes and records the appropriate liability when the amount is deemed probable and reasonably estimable.

Fair Value
The Company utilizes fair value measurements to measure or assess (i) equity-based compensation; (ii) assets and liabilities in a business combination or asset acquisition; and (iii) impairment of property and equipment, intangible assets, and goodwill. Fair value is the amount received from the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement considered from the perspective of a market participant. The Company uses market data or assumptions that it believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation.  These inputs can be readily observable, market corroborated, or unobservable.  The Company applies both market and income approaches for fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy prioritizes the inputs used to measure fair value, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  The Company classifies fair value balances based on the observability of those inputs.  The three levels of the fair value hierarchy are as follows:

Level 1
Quoted prices for identical assets or liabilities in active markets that management has the ability to access.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable.  These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.

10

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


Level 3
Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured.  These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.
New Accounting Pronouncements Issued and Adopted
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment, which amends FASB Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other. The objective of this amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This pronouncement is effective for the Company on July 1, 2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has elected to early adopt these amendments effective April 1, 2017.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This pronouncement is effective for the Company on July 1, 2018, and allows for prospective, retrospective or modified retrospective adoption, depending on the area covered in the update, with early adoption permitted. The Company has elected to early adopt these amendments effective July 1, 2016. As the Company is a pass-through entity for tax purposes, there is no impact for the three months ended September 30, 2019, other than the application of the new forfeiture accounting policy as discussed in our summary of significant accounting policies.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company has elected to early adopt this amendment and has applied this guidance to the Chivo acquisition in May 2019.
New Accounting Pronouncements Issued and Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue. The guidance is effective for annual periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. The Company is currently evaluating the impact on the financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application is permitted for all entities. The Company is currently evaluating the impact on the Company’s financial statements and related disclosures.

3.
Business Combinations and Acquisitions

The Company pursues strategic acquisitions from time to time to leverage its existing capabilities and further build its business. Such acquisitions are accounted for as business combinations or acquisition of assets rather than a business pursuant to ASC 805, Business Combinations.

4.
Contingent Consideration

Shalewater Solutions & ShaleApps
On January 15, 2016 the Company acquired substantially all of the assets and liabilities of Shalewater Solutions, LLC (“SWS”) and ShaleApps, LLC (“SA”). As part of this acquisition, the Company is obligated to pay an earn-out to the

11

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


seller based upon certain Adjusted EBITDA in excess of designated thresholds for the calendar years ended December 31, 2016, December 31, 2017 and December 31, 2018. The combined maximum payout amount for SWS and SA is $12,250 thousand. Per the Asset Purchase Agreement (“APA”), SWS and SA contingent consideration is determined on a combined basis based on Adjusted EBITDA defined in the APA.
At January 15, 2016, the fair value of the combined SWS and SA contingent consideration, using a geometric Brownian Motion Monte Carlo Simulation, was $1,400 thousand. SA is no longer part of the Company following a fiscal year 2017 spin-off transaction. Accordingly, $1,276 thousand was allocated to SWS at the acquisition date. The contingent consideration is remeasured on a fair value basis each fiscal year until the performance bonus is paid or expires.
On December 31, 2018, when the agreement expired, the Company calculated a total amount to be paid out of $65 thousand, all attributable to SWS. As of June 30, 2019, no payment has been made and the final calculation was being disputed by the seller. In accordance with the APA, we engaged in a dispute resolution process. On September 13, 2019, the Company and SWS resolved the earn-out dispute. The agreement included payment of $65 thousand for the 2018 earn-out liability and an additional $163 thousand in settlement fees.
5.
Inventory

Inventory consisted of the following as of period end (in thousands):
 
 
September 30,
2019
 
June 30,
2019
Materials and supplies
 
$
330

 
$
349


6.
Property and Equipment

The Company’s policy is to review the carrying value of all property and equipment as well as leasehold improvements and purchased intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. Impairment results when the carrying value of the asset group exceeds fair value. The fair value is based on estimated market values for similar assets or other reasonable estimates of fair market value based upon a discounted cash flow model. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset group’s fair value.

The following is a summary of property and equipment (in thousands):
Asset Category
Useful Lives
 
September 30,
2019
 
June 30,
2019
 
(years)
 
 
 
 
Right of ways - unamortizable
 
 
$
1,671

 
$
1,671

Right of ways - amortizable
10
 
390

 
390

Pipelines, wells, and facilities
15-30
 
142,574

 
137,003

Field equipment
5-9
 
3,040

 
3,167

Vehicles
4
 
559

 
505

Computer and office equipment
5
 
235

 
229

Leasehold improvements
5
 
3,738

 
3,738

Construction in progress
 
 
17,692

 
16,780

Property and equipment, gross
 
 
169,899

 
163,483

Less: Accumulated depreciation & amortization
 
 
(14,771
)
 
(12,023
)
Property and equipment, net
 
 
$
155,128

 
$
151,460


Depreciation and amortization expense for the quarter ended September 30, 2019 was approximately $2,787 thousand, of which $2,672 thousand was depreciation expense. Depreciation and amortization expense for the quarter ended September 30, 2018 was approximately $1,503 thousand, of which $1,389 thousand was depreciation expense.


12

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


7.
Goodwill and Intangible Assets

Goodwill
As of September 30, 2019 and June 30, 2019, the carrying amount of goodwill was $0, respectively.

Intangible Assets
The Company’s policy is to review the carrying value of all property and equipment as well as purchased intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. Impairment results when the carrying value of the asset group exceeds the undiscounted future cash flows over the life of the asset group. Our estimate of undiscounted future cash flows over the asset life is based on the Company’s projections of revenues, operating costs and cash flows of each reporting unit, considering historical and anticipated future results and general economic and market conditions as well as the impact of planned business and operational strategies. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset group’s fair value.

Intangible assets consisted of the following (in thousands):
 
September 30, 2019
 
Gross Amount
 
Accumulated Amortization
 
Carrying Value
 
 
 
 
 
 
Customer contracts, net
$
1,195

 
$
(265
)
 
$
930

 
$
1,195

 
$
(265
)
 
$
930

 
June 30, 2019
 
Gross Amount
 
Accumulated Amortization
 
Carrying Value
 
 
 
 
 
 
Customer contracts, net
$
1,195

 
$
(249
)
 
$
946

 
$
1,195

 
$
(249
)
 
$
946


Amortization expense related to intangible assets was $16 thousand for each respective quarters ended September 30, 2019 and 2018.

The estimated future amortization expense of intangible assets as of September 30, 2019 is as follows (in thousands):
Year Ending June 30,
 
 
2020
 
$
46

2021
 
62

2022
 
62

2023
 
62

2024
 
62

Thereafter
 
636

Total
 
$
930


8.
Credit Agreement

The Company is party to a credit agreement (“Credit Agreement”) that provides up to $165,000 thousand in borrowing capacity. The senior secured term loans had a total outstanding balance of $120,000 thousand and the revolving line of credit had a total outstanding balance of $10,000 thousand as of September 30, 2019. Additionally, the Company had a note outstanding with Golden Gate Capital for $7,500 thousand as of September 30, 2019 in subordinated debt. The Company is also a party to a letter of credit of $100,000 thousand, of which, $0 is outstanding at September 30, 2019.


13

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


Borrowing activity for the three months ended September 30, 2019 under the Credit Agreement was as follows (in thousands):
 
June 30, 2019 Balance
 
Activity
 
September 30, 2019 Balance
 
 
 
 
 
 
Term loan
$
75,000

 
$

 
$
75,000

Delayed draw term loan
37,500

 
7,500

 
45,000

Subordinated debt

 
7,500

 
7,500

Revolver
10,000

 

 
10,000

Total borrowings
122,500

 
15,000

 
137,500

Less: Short-term portion of long-term debt

 

 

 
122,500

 
15,000

 
137,500

Less: Debt issuance costs
(4,030
)
 
173

 
(3,857
)
Long-term debt
$
118,470

 
$
15,173

 
$
133,643


The carrying value of the Company’s long-term debt approximates fair value, as the borrowings under the Credit Agreement are considered to be priced at market for debt instruments having similar terms and conditions (Level 2 of the fair value hierarchy).

All borrowings under the Credit Agreement bear interest, at our option, on the outstanding principal at (i) a base rate plus a margin of 6.75% per annum (“Base Rate Borrowings”) or (ii) equal to the LIBOR rate plus a margin of 7.75% per annum (“LIBOR Borrowings”). Generally, the interest rate on our Credit Agreement borrowings ranged between 10.11% and 10.12%.

The Company’s obligations under the amended credit agreement are collateralized by a first priority interest in substantially all of the Company’s assets.

Maturities on long-term debt are as follows (in thousands):
Year Ending June 30,
 
 
2020
 
$

2021
 
1,500

2022
 
4,500

2023
 
6,000

2024
 
125,500

 
 
$
137,500

On October 31, 2019, as part of the acquisition of the Company by NGL Water Solutions Permian, LLC (as discussed in Note 13), a portion of the purchase price was used to repay all of the outstanding debt of the Company.


14

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


9.
Investments in Unconsolidated Affiliates

The Company has a 50% ownership interest in Hillstone-Silcor Treatment, LLC (“HST JV”), which is recorded under the equity method of accounting and reported as “Investments in unconsolidated affiliates” within our Unaudited Condensed Consolidated Balance Sheets. The difference between the fair value of our investment in HST JV and the book value of the underlying net assets resulted in a positive basis difference. The basis difference at September 30, 2019 was allocated as follows (in thousands):
 
Amortization Period
 
September 30,
2019
 
June 30,
2019
 
 
 
 
 
 
Basis difference in equipment
5-7 years
 
$
188

 
$
245

Less: amortization
 
 
(14
)
 
(57
)
Total basis difference
 
 
$
174

 
$
188

During the quarters ended September 30, 2019 and 2018, we recognized a loss (gain) from equity in earnings from HST JV of $36 thousand and ($38) thousand, respectively.

10.
Related-Party Transactions

During the quarter ended September 30, 2019, we provided management services and incurred costs that were charged to ShaleApps, an affiliate of the Company, and HST JV. These balances were reported as “Due from affiliate - current” in the Unaudited Condensed Consolidated Balance Sheets.

During the quarters ended September 30, 2019 and 2018, we incurred costs associated with the Stateline Facility subsidy letter agreement, discussed further in Note 11 - Commitments and Contingencies. During the quarters ended September 30, 2019 and 2018 the Company incurred costs for management fees, legal fees, acquisition fees, consulting fees, and other business-related expenses from multiple related parties including GGC, David Cowan, DACO Operating, LLC, Diversified Field Services ("DFS"), and Challenger Partners Stateline SWD, LLC (“Challenger Partners”). David Cowan is a consultant and member of the Board of Managers. DFS and Challenger Partners are oilfield services firms controlled by an affiliate of a minority member of the Company.


15

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


Totals of transactions with related parties included in the Unaudited Condensed Consolidated Statements of Operations are as follows (in thousands):
 
Three Months Ended
 
Three Months Ended
 
September 30, 2019
 
September 30, 2018
Revenue Category
HEP ShaleApps, LLC
 
Hillstone - Silcor Treatment, LLC
 
HEP ShaleApps, LLC
 
Hillstone - Silcor Treatment, LLC
 
 
 
 
 
 
 
 
Management fees
$
22

 
$
153

 
$
34

 
$
179

 
$
22

 
$
153

 
$
34

 
$
179

 
Three Months Ended
 
September 30, 2019
Expenditure Category
Challenger Partners
 
David
Cowan
 
Diversified Field Services, Inc.
 
DACO Operating
 
Golden Gate Capital
 
 
 
 
 
 
 
 
 
 
Management fees
$

 
$

 
$

 
$

 
$
214

Consulting fees

 
60

 

 

 

Legal fees

 

 

 

 
3

Subsidy fee
265

 

 

 

 

 
$
265

 
$
60

 
$

 
$

 
$
217

 
Three Months Ended
 
September 30, 2018
Expenditure Category
Challenger Partners
 
David
Cowan
 
Diversified Field Services, Inc.
 
DACO Operating
 
Golden Gate Capital
 
 
 
 
 
 
 
 
 
 
Management fees
$

 
$

 
$

 
$

 
$
70

Consulting fees

 
45

 

 

 

Plant electricity



 

 
110

 

Contracted oilfield services

 

 
377

 

 

 
$

 
$
45

 
$
377

 
$
110

 
$
70


Details of balances with related parties included in the Unaudited Condensed Consolidated Balance Sheets are as follows (in thousands):
Due From Affiliate - Current
September 30, 2019
 
June 30, 2019
 
 
 
 
HEP ShaleApps, LLC
$
53

 
$
28

Hillstone - Silcor Treatment, LLC
135

 
177

 
$
188

 
$
205


16

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


Accrued Expenses and Other Current Liabilities
September 30, 2019
 
June 30, 2019
 
 
 
 
HEP ShaleApps, LLC
$
90

 
$
85

Hillstone - Silcor Treatment, LLC
23

 
27

Golden Gate Capital
595

 
381

David Cowan

 
15

Diversified Field Services, Inc.

 
(3
)
Challenger Partners
265

 
448

 
$
973

 
$
953

Subordinated Debt (Long Term Liabilities)
September 30, 2019
 
June 30, 2019
 
 
 
 
Golden Gate Capital
$
7,500

 
$

11.
Commitments and Contingencies

Subsidy Letter Contingency
The Company has agreed to pay Challenger Partners a quarterly subsidy payment in the event that specified volumetric thresholds are not exceeded at the Stateline Facility. The term of the agreement is five years from commencement date of January 1, 2018. For the quarters ended September 30, 2019 and 2018, we recorded $265 thousand and $0 thousand, respectively, in Operating expenses within the Unaudited Condensed Consolidated Statements of Operations, respectively. At September 30, 2019 and June 30, 2019, the range of potential payments we could be obligated to make pursuant to the subsidy agreement could be from $0 to $10,530 thousand and from $0 to $11,340 thousand, respectively.

Environmental Laws and Regulations
The Company is subjected to extensive federal, state, and local environmental laws and regulations, which are constantly changing. Governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment, remediation requirements, and injunctions as to future activities. The Company has established procedures for ongoing evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policies and procedures. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly waste handling, disposal, or other environmental requirements could adversely affect the Company’s financial position and operations, as well as the industry in general. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations, and the Company has not experienced any material adverse effect from compliance with these environmental requirements. However, there is no assurance that this will continue in the future.

Operating Leases
The Company leases office facilities, yards, apartments, and land under operating lease agreements. These leases expire at various dates and provide for renewal options at the Company’s discretion. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. Equipment is leased as needed. No leases extend past the June 30, 2024 year end. The expense associated with the Company’s operating leases was $107 thousand and $138 thousand for the quarters ended September 30, 2019 and 2018, respectively. The lease expense associated with the Company’s royalty payments was $2,471 thousand and $1,134 thousand for the quarters ended September 30, 2019 and 2018, respectively.


17

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


At September 30, 2019, minimum annual commitments under operating leases for real property are as follows (in thousands):
Year Ending June 30,
 
 
2020
 
$
591

2021
 
694

2022
 
519

2023
 
218

2024
 
19

 
 
$
2,041


Poker Lake Contract
On March 15, 2019, the Company entered into a Produced Water Disposal Services Agreement (“Poker Lake Contract”) with XTO Delaware Basin, LLC (“XTO”). The Company is to provide services for the transportation and disposal of wastewater generated by XTO’s oil and natural gas production on certain specified acreage in the Permian-Delaware Basin. XTO will be obligated to deliver certain thresholds of wastewater to the Company, while the Company will supply XTO with minimum thresholds of transportation and disposal capacity (“Firm Capacity”).

In accordance with the Poker Lake Contract, the Company is obligated to construct and maintain pipelines and SWD facilities (“Disposal Facilities”) in order to supply the Firm Capacity. In order to provide XTO assurance that the Disposal Facilities construction is adequately funded, the Company has agreed to meet scheduled project financing hurdles, measured as cumulative capital expenditures plus working capital for a reporting period (“HPPL Project Financing”). Each Reporting Period has a Target Project Financing, as follows (in thousands):
Reporting Period
 
Target Project Financing
September 30, 2020
 
$100,000
September 30, 2021
 
145,000
September 30, 2022
 
$250,000 (or system completion)

Upon execution of the Poker Lake Contract, the Company was issued an Irrevocable Standby Letter of Credit (“LC”) which guarantees the performance of all obligations of the Company under the Poker Lake Contract to perform work, provide services or pay money. The Poker Lake Contract requires either a replacement Letter of Credit of substantially the same terms, or a renewal of the Letter of Credit be in place to fulfill the financing requirements. The Letter of Credit in place at the balance sheet date terminates on December 31, 2019. As of September 30, 2019, the LC has $0 outstanding. Further, the Company does not anticipate drawing on the LC. If the Company does not comply with the contractual commitment, XTO would not be obligated to deliver the volumes guaranteed under the Poker Lake Contract. However, there is no financial penalty required if the Company were to not comply with their commitment under the contract.    

12.
Equity-Based Compensation

The Company’s Board of Managers adopted a Profit Interest Unit plan (“Plan”) for certain employees within the Company and members of the Board of Managers. The Company has three classes of equity units; Class B, Class C Tranche 2 and Class C Tranche 3 units. The three classes of units have different participation thresholds and are all non-voting. The Company recognized $22 thousand and $0 of equity-based compensation expense, respectively, included in “General and administrative” expenses, during the quarters ended September 30, 2019 and 2018, respectively, specific to these units. Unrecognized compensation expense related to the Plan as of September 30, 2019, was $430 thousand.

13.
Roosevelt Fire

On August 2, 2018 there was a fire at our Roosevelt SWD facility, which we believe was caused by a vendor doing a chemical treatment. The fire resulted in the destruction of surface assets, although the subsequent setup of temporary operations allowed for minimal service disruption. As a result of the fire, it was necessary to dispose of certain surface

18

Hillstone Environmental Partners, LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2019


assets and reclaim the site. All appropriate governmental agencies were contacted and informed of our cleanup procedures.
The Company is currently reconstructing the permanent facility, while operating the SWD with temporary equipment.
Fire-related losses for the quarter ended September 30, 2018 were $12,105 thousand, which consisted of $11,987 thousand of property loss and $118 thousand of reclamation and associated clean-up costs. Costs incurred associated with the fire-related temporary operations were $1,057 thousand recognized in "Operating Expenses" within the Unaudited Condensed Consolidated Statement of Operations. To-date, we have received $2,448 thousand in insurance recoveries. We are seeking additional recoveries through our property insurance company we had at the time and/or through third party indemnification. We are currently unable to predict what any additional losses or recoveries will be, if any.
14.
Subsequent Events

On October 31, 2019, the Company’s Parent Company executed an equity purchase agreement with NGL Water Solutions Permian, LLC (the “Buyer”), a wholly owned subsidiary of NGL Energy Partners LP. The Buyer purchased 100% of the outstanding equity interest in the Company. As part of the acquisition, NGL settled the outstanding debt arrangements the Company had in place as of the balance sheet date aside from the $100,000 thousand letter of credit. The letter of credit is set to expire in December 2019 with no requirement to renew.

On December 13, 2019, the Buyer also reached an agreement with XTO to waive the required letter of credit discussed in Note 11 in exchange for a letter guarantee from the Buyer stating that the Buyer will comply with the Company's obligations under the Poker Lake Contract.

On December 19, 2019, the Company agreed to settle the claims that had been ongoing since 2017 agreeing to pay the counterparty $100 thousand. As a result, the Company has recognized $100 thousand accrued liability and operating - service expense in the current quarter.

No other events have occurred through December 26, 2019, the date the financial statements were available to be issued.


19


Exhibit 99.2

NGL ENERGY PARTNERS LP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Introduction

On October 31, 2019, NGL Energy Partners LP (“we,” “us,” “our” or “the Partnership”) closed its transaction to acquire all of the equity interests of Hillstone Environmental Partners, LLC (“Hillstone”) for approximately $642.5 million, subject to certain adjustments. To fund a portion of this acquisition, the Partnership issued 200,000 Class D Preferred Units and 8.5 million warrants to purchase common units for estimated net proceeds of $194.8 million. The remaining amount of the purchase price was paid using funds available under our revolving credit facility.

The unaudited pro forma condensed combined financial statements are presented for the Partnership and give effect to the acquisition of Hillstone (as described above) and are based on the audited and unaudited financial statements of the Partnership and the audited and unaudited financial statements of Hillstone. These unaudited pro forma financial statements include all adjustments necessary to fairly present results for the periods and as of the dates presented. The following unaudited pro forma condensed consolidated balance sheet as of September 30, 2019 and the unaudited pro forma condensed consolidated statements of operations for the six months ended September 30, 2019 and the year ended March 31, 2019, should be read in conjunction with the Partnership’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on November 1, 2019, the Partnership’s Current Report on Form 8-K/A filed with the SEC on November 18, 2019, the Partnership’s quarterly report on Form 10-Q for the three months ended September 30, 2019, filed with the SEC on November 8, 2019, the Partnership’s Annual Report on Form 10-K for the year ended March 31, 2019, filed with the SEC on May 30, 2019, the Partnership’s Current Report on Form 8-K filed with the SEC on November 22, 2019 and with Hillstone’s audited consolidated financial statements for the year ended June 30, 2019, including the related notes, included within Exhibit 99.1 of Current Report on Form 8-K/A filed with the SEC on November 18, 2019 .

The following unaudited pro forma condensed combined balance sheet as of September 30, 2019 is presented to illustrate the estimated effects of the acquisition of Hillstone, as if this transaction had occurred on September 30, 2019. The unaudited pro forma condensed combined balance sheet combines the Partnership’s unaudited consolidated balance sheet as of September 30, 2019 and Hillstone’s unaudited consolidated balance sheet as of September 30, 2019.

The following unaudited pro forma condensed combined statements of operations for the six months ended September 30, 2019 and for the year ended March 31, 2019, are presented to illustrate the estimated effects of the acquisition of Hillstone as if this transaction had occurred on April 1, 2018. The unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2019 combined the Partnership’s unaudited consolidated statement of operations for the six months ended September 30, 2019 and Hillstone’s unaudited consolidated statement of operations for the six months ended September 30, 2019. The unaudited pro forma condensed combined statement of operations for the year ended March 31, 2019 combined the Partnership’s audited consolidated statement of operations for the year ended March 31, 2019 and Hillstone’s audited consolidated statement of operations for the year ended June 30, 2019. The unaudited pro forma condensed combined statements of operations for the six months ended September 30, 2019 and for the year ended March 31, 2019 both contain the results recorded within Hillstone’s unaudited statement of operations for the three months ended June 30, 2019.

The following unaudited pro forma condensed consolidated financial statements are based on certain assumptions and do not purport to be indicative of the results that actually would have been achieved if the transaction described above had occurred on the dates indicated. Moreover, the accompanying unaudited pro forma condensed consolidated financial statements do not project the Partnership’s results of operations for any future date or period.






NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2019
(U.S. Dollars in Thousands)
 
 
Historical NGL Energy Partners LP (As Reported)
 
Hillstone Environmental Partners, LLC
 
Pro Forma Adjustments
 
Pro Forma As Further Adjusted
ASSETS
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
21,154

 
$
34,757

 
$
447,900

(A)
$
105,996

 
 
 
 
 
 
194,810

(B)
 
 
 
 
 
 
 
(592,625
)
(C)
 
Accounts receivable-trade, net
 
987,875

 
9,950

 

 
997,825

Accounts receivable-affiliates
 
14,374

 
188

 
(188
)
(D)
14,374

Inventories
 
308,793

 
330

 
(330
)
(D)
308,793

Prepaid expenses and other current assets
 
199,002

 
630

 
(630
)
(D)
149,127

 
 
 
 
 
 
(49,875
)
(E)
 
Total current assets
 
1,531,198

 
45,855

 
(938
)
 
1,576,115

PROPERTY, PLANT AND EQUIPMENT, net
 
2,485,880

 
155,128

 
(2,054
)
(F)
2,638,954

GOODWILL
 
1,176,042

 

 
107,066

(D)
1,283,108

INTANGIBLE ASSETS, net
 
1,194,581

 
930

 
401,240

(D)
1,596,751

INVESTMENTS IN UNCONSOLIDATED ENTITIES
 
1,445

 
786

 

 
2,231

OPERATING LEASE RIGHT-OF-USE ASSETS
 
203,122

 

 
3,340

(D)
206,462

OTHER NONCURRENT ASSETS
 
71,755

 
811

 

 
72,566

Total assets
 
$
6,664,023

 
$
203,510

 
$
508,654

 
$
7,376,187

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
Accounts payable-trade
 
$
842,064

 
$
8,542

 
$

 
$
850,606

Accounts payable-affiliates
 
24,542

 
115

 
(115
)
(D)
24,542

Accrued expenses and other payables
 
336,126

 
15,571

 
(2,060
)
(D)
349,637

Advance payments received from customers
 
27,045

 

 

 
27,045

Current maturities of long-term debt
 
649

 

 

 
649

Operating lease obligations
 
68,084

 

 
454

(D)
68,538

Total current liabilities
 
1,298,510

 
24,228

 
(1,721
)
 
1,321,017

LONG-TERM DEBT, net of debt issuance costs and current maturities
 
2,773,235

 
133,643

 
(133,643
)
(G)
3,221,135

 
 
 
 
 
 
447,900

(A)
 
OPERATING LEASE OBLIGATIONS
 
132,132

 

 
2,886

(D)
135,018

OTHER NONCURRENT LIABILITIES
 
64,487

 
867

 
41,208

(D)
106,562

COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
.

 
 
 
 
 
 
 
 
 
CLASS D PREFERRED UNITS
 
343,748

 
 
 
176,071

(B)
519,819

 
 
 
 
 
 
 
 
 
EQUITY:
 
 
 
 
 
 
 
 
General partner, representing a 0.1% interest
 
(51,014
)
 
 
 

 
(51,014
)
Limited partners, representing a 99.9% interest
 
1,697,015

 

 
18,739

(B)
1,715,754

Members’ Equity - Hillstone Environmental Partners, LLC
 
 
 
42,786

 
(42,786
)
(H)

Class B preferred limited partners
 
305,488

 
 
 

 
305,488

Class C preferred limited partners
 
42,905

 
 
 
 
 
42,905

Accumulated other comprehensive loss
 
(264
)
 
 
 

 
(264
)
Noncontrolling interests
 
57,781

 
1,986

 

 
59,767

Total equity
 
2,051,911

 
44,772

 
(24,047
)
 
2,072,636

Total liabilities and equity
 
$
6,664,023

 
$
203,510

 
$
508,654

 
$
7,376,187


See accompanying notes to the unaudited pro forma condensed consolidated financial statements.





NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the six months ended September 30, 2019
(U.S. dollars in thousands, except unit and per unit amounts)
 
 
Historical NGL Energy Partners LP (As Reported)
 
Hillstone Environmental Partners, LLC (I)
 
Pro Forma Adjustments
 
Pro Forma As Adjusted
 
 
 
 
 
 
 
 
 
REVENUES
 
$
9,455,761

 
$
42,421

 
$

 
$
9,498,182

 
 
 
 
 
 
 
 
 
COST OF SALES
 
9,052,342

 

 

 
9,052,342

 
 
 
 
 
 
 
 
 
OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
Operating
 
137,529

 
18,921

 

 
156,450

General and administrative
 
64,250

 
13,394

 
(5,844
)
(K)
71,800

Depreciation and amortization
 
116,867

 
5,511

 
10,571

(L)
132,949

Loss (gain) on disposal or impairment of assets, net
 
2,144

 
(85
)
 

 
2,059

Revaluation of liabilities
 

 
65

 

 
65

Operating Income
 
82,629

 
4,615

 
(4,727
)
 
82,517

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
 
(257
)
 
(87
)
 

 
(344
)
Interest expense
 
(84,910
)
 
(6,339
)
 
6,339

(M)
(89,647
)
 
 
 
 
 
 
(4,737
)
(M)
 
Other income, net
 
1,193

 

 

 
1,193

Loss From Continuing Operations Before Income Taxes
 
(1,345
)
 
(1,811
)
 
(3,125
)
 
(6,281
)
 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
 
(319
)
 

 

 
(319
)
Loss From Continuing Operations
 
(1,664
)
 
(1,811
)
 
(3,125
)
 
(6,600
)
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
397

 
18

 

 
415

NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NGL ENERGY PARTNERS LP
 
(1,267
)
 
(1,793
)
 
(3,125
)
 
(6,185
)
LESS: DISTRIBUTIONS TO PREFERRED UNITHOLDERS
 
(146,523
)
 

 
(9,000
)
(N)
(155,523
)
LESS: CONTINUING OPERATIONS NET LOSS ALLOCATED TO GENERAL PARTNER
 
76

 

 
14

(O)
90

NET LOSS FROM CONTINUING OPERATIONS ALLOCATED TO COMMON UNITHOLDERS
 
$
(147,714
)
 
$
(1,793
)
 
$
(12,111
)
 
$
(161,618
)
BASIC AND DILUTED LOSS PER COMMON UNIT
 
$
(1.17
)
 
 
 
 
 
$
(1.28
)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON UNITS OUTSTANDING
 
126,435,870

 
 
 
 
 
126,435,870


See accompanying notes to the unaudited pro forma condensed consolidated financial statements.







NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended March 31, 2019
(U.S. dollars in thousands, except unit and per unit amounts)
 
 
Historical NGL Energy Partners LP (As Reported)
 
Hillstone Environmental Partners, LLC (J)
 
Pro Forma Adjustments
 
Pro Forma As Adjusted
 
 
 
 
 
 
 
 
 
REVENUES
 
$
17,820,620

 
$
74,437

 
$

 
$
17,895,057

 
 
 
 
 
 
 
 
 
COST OF SALES
 
17,162,275

 

 

 
17,162,275

 
 
 
 
 
 
 
 
 
OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
Operating
 
233,313

 
42,357

 

 
275,670

General and administrative
 
107,407

 
18,537

 
(2,912
)
(K)
123,032

Depreciation and amortization
 
211,973

 
7,590

 
24,574

(L)
244,137

Loss on disposal or impairment of assets, net
 
34,296

 
11,137

 

 
45,433

Revaluation of liabilities
 
(5,373
)
 

 

 
(5,373
)
Operating Income (Loss)
 
76,729

 
(5,184
)
 
(21,662
)
 
49,883

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated entities
 
2,533

 
37

 

 
2,570

Interest expense
 
(164,725
)
 
(9,741
)
 
9,741

(M)
(183,671
)
 
 
 
 
 
 
(18,946
)
(M)
 
Loss on early extinguishment of liabilities, net
 
(12,340
)
 

 

 
(12,340
)
Other expense, net
 
(30,414
)
 

 

 
(30,414
)
Loss From Continuing Operations Before Income Taxes
 
(128,217
)
 
(14,888
)
 
(30,867
)
 
(173,972
)
 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
 
(1,233
)
 

 

 
(1,233
)
Net Loss From Continuing Operations
 
(129,450
)
 
(14,888
)
 
(30,867
)
 
(175,205
)
LESS: CONTINUING OPERATIONS NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
20,206

 
32

 

 
20,238

NET LOSS FROM CONTINUING OPERATIONS ATTRIBUTABLE TO NGL ENERGY PARTNERS LP
 
(109,244
)
 
(14,856
)
 
(30,867
)
 
(154,967
)
LESS: DISTRIBUTIONS TO PREFERRED UNITHOLDERS
 
(111,936
)
 

 
(18,000
)
(N)
(129,936
)
LESS: CONTINUING OPERATIONS NET LOSS ALLOCATED TO GENERAL PARTNER
 
82

 

 
64

(O)
146

NET LOSS FROM CONTINUING OPERATIONS ALLOCATED TO COMMON UNITHOLDERS
 
$
(221,098
)
 
$
(14,856
)
 
$
(48,803
)
 
$
(284,757
)
BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER COMMON UNIT
 
$
(1.80
)
 
 
 
 
 
$
(2.31
)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON UNITS OUTSTANDING
 
123,017,064

 
 
 
 
 
123,017,064


See accompanying notes to the unaudited pro forma condensed consolidated financial statements.












NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

See “Introduction” for more information regarding the basis of presentation for these unaudited pro forma condensed consolidated financial statements.

Note 2 - Preliminary Purchase Price Allocation

The following presents the preliminary purchase price allocation for Hillstone based on a preliminary purchase price of $642.5 million in cash and preliminary estimates of fair value (in thousands):
Current assets
 
$
44,707

Property, plant and equipment
 
153,074

Intangible assets
 
402,170

Investments in unconsolidated entities
 
786

Operating lease right-of-use assets
 
3,340

Other noncurrent assets
 
811

Goodwill
 
107,066

Current liabilities
 
(22,053
)
Operating lease obligations
 
(3,340
)
Asset retirement obligations
 
(446
)
Other long-term liabilities
 
(867
)
Deferred tax liability
 
(40,762
)
Noncontrolling interests
 
(1,986
)
 
 
$
642,500


The purchase price and the allocation of the purchase price are preliminary. Items pending completion include the determination of the final purchase price, including any final closing adjustments and completion of independent appraisals of property, plant and equipment, intangible assets, investments in unconsolidated entities and noncontrolling interests and the valuations of the operating lease liabilities and right-of-use assets, the asset retirement obligations and the deferred tax liability.

Note 3 - Pro Forma Adjustments

The unaudited pro forma condensed consolidated financial statements reflect the impact of the following pro forma adjustments:

A.
Represents the amount borrowed under our revolving credit facility and used to pay a portion of the consideration for the acquisition of Hillstone.
B.
Represents the net cash proceeds from the issuance of $194.8 million Class D Preferred Units and warrants to purchase common units. The net proceeds were allocated between Class D Preferred Units and the warrants based on the preliminary fair value of the instruments.
C.
Represents the payment of the preliminary purchase price for the purchase of Hillstone.
D.
Represents the step up in basis for the assets acquired and liabilities assumed as a result of the difference in valuation between the purchase price allocated to the assets and liabilities and their book value on September 30, 2019 in accordance with the acquisition method of accounting.
E.
Amount reflects the reversal of the deposit paid to Hillstone.
F.
Reflects the reclassification from property, plant and equipment to intangible assets the rights-of-way to conform to the Partnership’s presentation of these amounts.
G.
Represents the repayment of Hillstone’s outstanding debt as of September 30, 2019.
H.
Represents the reversal of Hillstone’s equity book value.





I.
Amounts in this column represent Hillstone’s unaudited consolidated statement of operations for the six months ended September 30, 2019.
J.
Amounts in this column represent Hillstone’s audited consolidated statement of operations for the year ended June 30, 2019.
K.
Represents the reversal of transaction expenses incurred by Hillstone related to this transaction for the respective periods.
L.
Represents the incremental increase in depreciation and amortization expense for the respective periods.
M.
Represents the incremental increase in interest expense due to the repayment of Hillstone’s outstanding debt and the elimination of the amortization of the related debt issuance costs and the interest expense incurred related to the borrowings under the Partnership’s revolving credit facility. The additional interest expense was calculated by using $447.9 million and an assumed rate of 4.23%, the interest rate on the Partnership's revolving credit facility as of September 30, 2019. A change of 0.125% in the assumed interest rate would result in an adjustment of interest expense, on an annual basis, of approximately $0.6 million.
N.
Represents the distributions paid on the Class D preferred units for the respective periods.
O.
Represents our general partner’s interest in Hillstone’s operations and the pro forma adjustments for the respective periods.
Note 4 - Earnings per Unit

Basic earnings per unit is computed by dividing the net income (loss) by the weighted average number of units outstanding during a period. To determine net income (loss) allocated to each class of ownership, the Partnership first allocates net income (loss) in accordance with the amount of distributions made for the quarter by each class of units, if any. The remaining net income is allocated to each class of units in proportion to the weighted average number of units of such class outstanding for a period, as compared to the weighted average number of units outstanding for all classes for the period, with the exception of net losses. Net losses are allocated only to the common units.