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

FORM 10-Q

(Mark One)

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨    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 ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes x   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
Non-accelerated filer o
 
Smaller reporting company ¨
Emerging growth company o
 
 

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

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

At November 2, 2018, there were 123,741,462 common units issued and outstanding.


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TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 


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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. Certain words in this Quarterly Report 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, identify forward-looking statements. Although we and our general partner believe such forward-looking statements are reasonable, neither we nor our general partner can assure they 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 expected. Among the key risk factors that may affect our consolidated financial position and results of operations are:

•
the prices of crude oil, natural gas liquids, gasoline, diesel, ethanol, and biodiesel;
•
energy prices generally;
•
the general level of crude oil, natural gas, and natural gas liquids production;
•
the general level of demand, and the availability of supply, for crude oil, natural gas liquids, gasoline, diesel, ethanol, and biodiesel;
•
the level of crude oil and natural gas drilling and production in areas where we have water treatment and disposal facilities;
•
the price of gasoline relative to the price of corn, which affects the price of ethanol;
•
the ability to obtain adequate supplies of products if an interruption in supply or transportation occurs and the availability of capacity to transport products to market areas;
•
actions taken by foreign oil and gas producing nations;
•
the political and economic stability of foreign oil and gas producing nations;
•
the effect of weather conditions on supply and demand for crude oil, natural gas liquids, gasoline, diesel, ethanol, and biodiesel;
•
the effect of natural disasters, lightning strikes, or other significant weather events;
•
the availability of local, intrastate, and interstate transportation infrastructure with respect to our truck, railcar, and barge transportation services;
•
the availability, price, and marketing of competing fuels;
•
the effect of energy conservation efforts on product demand;
•
energy efficiencies and technological trends;
•
governmental regulation and taxation;
•
the effect of legislative and regulatory actions on hydraulic fracturing, wastewater disposal, and the treatment of flowback and produced water;
•
hazards or operating risks related to transporting and distributing petroleum products that may not be fully covered by insurance;
•
the maturity of the crude oil, natural gas liquids, and refined products industries and competition from other marketers;
•
loss of key personnel;
•
the ability to renew contracts with key customers;
•
the ability to maintain or increase the margins we realize for our terminal, barging, trucking, wastewater disposal, recycling, and discharge services;
•
the ability to renew leases for our leased equipment and storage facilities;
•
the nonpayment or nonperformance by our counterparties;
•
the availability and cost of capital and our ability to access certain capital sources;

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•
a deterioration of the credit and capital markets;
•
the ability to successfully identify and complete accretive acquisitions, and integrate acquired assets and businesses;
•
changes in the volume of hydrocarbons 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 applicable laws and regulations, including tax, environmental, transportation, and employment regulations, or new interpretations by regulatory agencies concerning such laws and regulations and the effect of such laws and regulations (now existing or in the future) on our business operations;
•
the costs and effects of legal and administrative proceedings;
•
any reduction or the elimination of the federal Renewable Fuel Standard; and
•
changes in the jurisdictional characteristics of, or the applicable regulatory policies with respect to, our 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 may be 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 discussed under Part I, Item 1A–“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

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PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements

NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in Thousands, except unit amounts)
 
September 30, 2018
 
March 31, 2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
36,374

 
$
22,094

Accounts receivable-trade, net of allowance for doubtful accounts of $4,225 and $4,201, respectively
1,366,597

 
1,026,764

Accounts receivable-affiliates
17,888

 
4,772

Inventories
679,125

 
551,303

Prepaid expenses and other current assets
159,617

 
128,742

Assets held for sale
—

 
517,604

Total current assets
2,259,601

 
2,251,279

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $388,557 and $343,345, respectively
1,706,612

 
1,518,607

GOODWILL
1,271,648

 
1,204,607

INTANGIBLE ASSETS, net of accumulated amortization of $481,691 and $433,565, respectively
966,929

 
913,154

INVESTMENTS IN UNCONSOLIDATED ENTITIES
4,520

 
17,236

LOAN RECEIVABLE-AFFILIATE
—

 
1,200

OTHER NONCURRENT ASSETS
176,129

 
245,039

Total assets
$
6,385,439

 
$
6,151,122

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES AND REDEEMABLE NONCONTROLLING INTEREST:
 
 
 
Accounts payable-trade
$
1,045,415

 
$
852,839

Accounts payable-affiliates
42,798

 
1,254

Accrued expenses and other payables
267,296

 
223,504

Advance payments received from customers
29,658

 
8,374

Current maturities of long-term debt, net of debt issuance costs of $4,874 and $0, respectively
716,245

 
646

Liabilities and redeemable noncontrolling interest held for sale
—

 
42,580

Total current liabilities and redeemable noncontrolling interest
2,101,412

 
1,129,197

LONG-TERM DEBT, net of debt issuance costs of $13,234 and $20,645, respectively, and current maturities
1,815,855

 
2,679,740

OTHER NONCURRENT LIABILITIES
86,396

 
173,514

COMMITMENTS AND CONTINGENCIES (NOTE 9)


 


 
 
 
 
CLASS A 10.75% CONVERTIBLE PREFERRED UNITS, 19,942,169 and 19,942,169 preferred units issued and outstanding, respectively
104,362

 
82,576

 
 
 
 
EQUITY:
 
 
 
General partner, representing a 0.1% interest, 123,865 and 121,594 notional units, respectively
(50,613
)
 
(50,819
)
Limited partners, representing a 99.9% interest, 123,741,462 and 121,472,725 common units issued and outstanding, respectively
2,046,621

 
1,852,495

Class B preferred limited partners, 8,400,000 and 8,400,000 preferred units issued and outstanding, respectively
202,731

 
202,731

Accumulated other comprehensive loss
(270
)
 
(1,815
)
Noncontrolling interests
78,945

 
83,503

Total equity
2,277,414

 
2,086,095

Total liabilities and equity
$
6,385,439

 
$
6,151,122


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

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(in Thousands, except unit and per unit amounts)
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
REVENUES:
 
 
 
 
 
 
 
 
Crude Oil Logistics
 
$
860,054

 
$
437,022

 
$
1,643,884

 
$
941,937

Water Solutions
 
79,764

 
51,032

 
155,909

 
97,999

Liquids
 
550,442

 
411,170

 
1,010,339

 
705,195

Refined Products and Renewables
 
5,163,782

 
2,977,206

 
9,688,189

 
5,861,843

Other
 
592

 
246

 
747

 
407

Total Revenues
 
6,654,634

 
3,876,676

 
12,499,068

 
7,607,381

COST OF SALES:
 
 
 
 
 
 
 
 
Crude Oil Logistics
 
792,735

 
401,170

 
1,540,980

 
870,640

Water Solutions
 
7,892

 
2,674

 
22,161

 
2,827

Liquids
 
520,944

 
395,616

 
961,459

 
682,901

Refined Products and Renewables
 
5,187,238

 
2,957,867

 
9,680,096

 
5,829,569

Other
 
718

 
121

 
987

 
194

Total Cost of Sales
 
6,509,527

 
3,757,448

 
12,205,683

 
7,386,131

OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
Operating
 
60,309

 
47,792

 
116,571

 
95,628

General and administrative
 
39,369

 
21,158

 
61,759

 
43,543

Depreciation and amortization
 
52,750

 
53,595

 
104,795

 
106,012

Loss on disposal or impairment of assets, net
 
5,988

 
110,959

 
107,323

 
99,142

Revaluation of liabilities
 
—

 
5,600

 
800

 
5,600

Operating Loss
 
(13,309
)
 
(119,876
)
 
(97,863
)
 
(128,675
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 

 
 

Equity in earnings of unconsolidated entities
 
379

 
2,170

 
598

 
4,089

Interest expense
 
(41,358
)
 
(50,118
)
 
(87,626
)
 
(99,222
)
Gain (loss) on early extinguishment of liabilities, net
 
—

 
1,943

 
(137
)
 
(1,338
)
Other income (expense), net
 
1,471

 
1,637

 
(32,298
)
 
3,370

Loss From Continuing Operations Before Income Taxes
 
(52,817
)
 
(164,244
)
 
(217,326
)
 
(221,776
)
INCOME TAX EXPENSE
 
(691
)
 
(49
)
 
(1,342
)
 
(505
)
Loss From Continuing Operations
 
(53,508
)
 
(164,293
)
 
(218,668
)
 
(222,281
)
Income (Loss) From Discontinued Operations, net of Tax
 
408,447

 
(9,286
)
 
404,318

 
(15,005
)
Net Income (Loss)
 
354,939

 
(173,579
)
 
185,650

 
(237,286
)
LESS: NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
518

 
(80
)
 
863

 
(132
)
LESS: NET LOSS ATTRIBUTABLE TO REDEEMABLE NONCONTROLLING INTERESTS
 
48

 
288

 
446

 
685

NET INCOME (LOSS) ATTRIBUTABLE TO NGL ENERGY PARTNERS LP
 
$
355,505

 
$
(173,371
)
 
$
186,959

 
$
(236,733
)
NET LOSS FROM CONTINUING OPERATIONS ALLOCATED TO COMMON UNITHOLDERS (NOTE 3)
 
$
(76,925
)
 
$
(180,325
)
 
$
(261,746
)
 
$
(248,363
)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS ALLOCATED TO COMMON UNITHOLDERS (NOTE 3)
 
$
408,086

 
$
(8,990
)
 
$
404,359

 
$
(14,307
)
NET INCOME (LOSS) ALLOCATED TO COMMON UNITHOLDERS
 
$
331,161

 
$
(189,315
)
 
$
142,613

 
$
(262,670
)
BASIC INCOME (LOSS) PER COMMON UNIT
 
 
 
 
 
 
 
 
Loss From Continuing Operations
 
$
(0.63
)
 
$
(1.49
)
 
$
(2.15
)
 
$
(2.05
)
Income (Loss) From Discontinued Operations, net of Tax
 
3.33

 
(0.07
)
 
3.32

 
(0.12
)
Net Income (Loss)
 
$
2.70

 
$
(1.56
)
 
$
1.17

 
$
(2.17
)
DILUTED INCOME (LOSS) PER COMMON UNIT
 
 
 
 
 
 
 
 
Loss From Continuing Operations
 
$
(0.63
)
 
$
(1.49
)
 
$
(2.15
)
 
$
(2.05
)
Income (Loss) From Discontinued Operations, net of Tax
 
3.33

 
(0.07
)
 
3.32

 
(0.12
)
Net Income (Loss)
 
$
2.70

 
$
(1.56
)
 
$
1.17

 
$
(2.17
)
BASIC WEIGHTED AVERAGE COMMON UNITS OUTSTANDING
 
122,380,197

 
121,314,636

 
121,964,593

 
120,927,400

DILUTED WEIGHTED AVERAGE COMMON UNITS OUTSTANDING
 
122,380,197

 
121,314,636

 
121,964,593

 
120,927,400


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

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in Thousands)
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
354,939

 
$
(173,579
)
 
$
185,650

 
$
(237,286
)
Other comprehensive loss
 
(13
)
 
(59
)
 
(24
)
 
(434
)
Comprehensive income (loss)
 
$
354,926

 
$
(173,638
)
 
$
185,626

 
$
(237,720
)

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

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NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Changes in Equity
Six Months Ended September 30, 2018
(in Thousands, except unit amounts)
 
 
 
 
Limited Partners
 
 
 
 
 
 
 
 
 
 
Class B Preferred
 
Common
 
Accumulated
Other
 
 
 
 
 
 
General
Partner
 
Units
 
Amount
 

Units
 
Amount
 
Comprehensive
(Income) Loss
 
Noncontrolling
Interests
 
Total
Equity
BALANCES AT MARCH 31, 2018
 
$
(50,819
)
 
8,400,000

 
$
202,731

 
121,472,725

 
$
1,852,495

 
$
(1,815
)
 
$
83,503

 
$
2,086,095

Distributions to general and common unit partners and preferred unitholders (Note 10)
 
(164
)
 
—

 
—

 
—

 
(117,322
)
 
—

 
—

 
(117,486
)
Contributions
 
—

 
—

 
—

 
—

 
—

 
—

 
169

 
169

Sawtooth joint venture
 
—

 
—

 
—

 
—

 
(63
)
 
—

 
63

 
—

Purchase of noncontrolling interest (Note 4)
 
—

 
—

 
—

 
—

 
(33
)
 
—

 
(3,927
)
 
(3,960
)
Redeemable noncontrolling interest valuation adjustment (Note 2)
 
—

 
—

 
—

 
—

 
(3,349
)
 
—

 
—

 
(3,349
)
Repurchase of warrants (Note 10)
 
—

 
—

 
—

 
—

 
(14,988
)
 
—

 
—

 
(14,988
)
Common unit repurchases and cancellations (Note 10)
 
—

 
—

 
—

 
(4,661
)
 
(54
)
 
—

 
—

 
(54
)
Equity issued pursuant to incentive compensation plan (Note 10)
 
21

 
—

 
—

 
2,044,601

 
27,372

 
—

 
—

 
27,393

Warrants exercised (Note 10)
 
—

 
—

 
—

 
228,797

 
2

 
—

 
—

 
2

Accretion of beneficial conversion feature of Class A convertible preferred units (Note 10)
 
—

 
—

 
—

 
—

 
(21,786
)
 
—

 
—

 
(21,786
)
Net income (loss)
 
212

 
—

 
—

 
—

 
186,747

 
—

 
(863
)
 
186,096

Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(24
)
 
—

 
(24
)
Cumulative effect adjustment for adoption of ASC 606 (Note 15)
 
139

 
—

 
—

 
—

 
139,167

 
—

 
—

 
139,306

Cumulative effect adjustment for adoption of ASU 2016-01 (Note 2)
 
(2
)
 
—

 
—

 
—

 
(1,567
)
 
1,569

 
—

 
—

BALANCES AT SEPTEMBER 30, 2018
 
$
(50,613
)
 
8,400,000

 
$
202,731

 
123,741,462

 
$
2,046,621

 
$
(270
)
 
$
78,945

 
$
2,277,414


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


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NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in Thousands)
 
 
Six Months Ended September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
185,650

 
$
(237,286
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
 
(Gain) loss from discontinued operations, net of tax
 
(404,318
)
 
15,005

Depreciation and amortization, including amortization of debt issuance costs
 
112,532

 
114,612

Loss on early extinguishment or revaluation of liabilities, net
 
937

 
6,938

Non-cash equity-based compensation expense
 
24,730

 
14,886

Loss on disposal or impairment of assets, net
 
107,323

 
99,142

Provision for doubtful accounts
 
163

 
705

Net adjustments to fair value of commodity derivatives
 
88,996

 
34,629

Equity in earnings of unconsolidated entities
 
(598
)
 
(4,089
)
Distributions of earnings from unconsolidated entities
 
—

 
2,777

Other
 
211

 
9,182

Changes in operating assets and liabilities, exclusive of acquisitions:
 
 
 
 
Accounts receivable-trade and affiliates
 
(353,647
)
 
(59,741
)
Inventories
 
(127,409
)
 
(13,289
)
Other current and noncurrent assets
 
(3,888
)
 
(14,985
)
Accounts payable-trade and affiliates
 
196,777

 
(25,971
)
Other current and noncurrent liabilities
 
53,745

 
29,830

Net cash used in operating activities-continuing operations
 
(118,796
)
 
(27,655
)
Net cash provided by operating activities-discontinued operations
 
30,915

 
39,364

Net cash (used in) provided by operating activities
 
(87,881
)
 
11,709

INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(193,519
)
 
(46,639
)
Acquisitions, net of cash acquired
 
(197,971
)
 
(19,897
)
Settlements of commodity derivatives
 
(94,879
)
 
(21,789
)
Proceeds from sales of assets
 
8,204

 
22,575

Proceeds from divestitures of businesses and investments
 
18,594

 
—

Investments in unconsolidated entities
 
(92
)
 
(14,150
)
Distributions of capital from unconsolidated entities
 
—

 
4,378

Repayments on loan for natural gas liquids facility
 
4,558

 
4,875

Loan to affiliate
 
(1,515
)
 
(960
)
Net cash used in investing activities-continuing operations
 
(456,620
)
 
(71,607
)
Net cash provided by (used in) investing activities-discontinued operations
 
845,779

 
(36,605
)
Net cash provided by (used in) investing activities
 
389,159

 
(108,212
)
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from borrowings under Revolving Credit Facility
 
2,008,000

 
814,500

Payments on Revolving Credit Facility
 
(2,153,500
)
 
(657,500
)
Repurchase of senior secured and senior unsecured notes
 
(5,069
)
 
(115,407
)
Payments on other long-term debt
 
(326
)
 
(552
)
Debt issuance costs
 
(780
)
 
(2,474
)
Contributions from noncontrolling interest owners, net
 
169

 
23

Distributions to general and common unit partners and preferred unitholders
 
(117,486
)
 
(107,389
)
Distributions to noncontrolling interest owners
 
—

 
(3,082
)
Proceeds from sale of preferred units, net of offering costs
 
—

 
202,755

Repurchase of warrants
 
(14,988
)
 
(10,549
)
Common unit repurchases and cancellations
 
(54
)
 
(11,663
)
Payments for settlement and early extinguishment of liabilities
 
(2,639
)
 
(1,650
)
Net cash (used in) provided by financing activities-continuing operations
 
(286,673
)
 
107,012

Net cash used in financing activities-discontinued operations
 
(325
)
 
(2,611
)
Net cash (used in) provided by financing activities
 
(286,998
)
 
104,401

Net increase in cash and cash equivalents
 
14,280

 
7,898

Cash and cash equivalents, beginning of period
 
22,094

 
7,826

Cash and cash equivalents, end of period
 
$
36,374

 
$
15,724

Supplemental cash flow information:
 
 
 
 
Cash interest paid
 
$
82,690

 
$
96,217

Income taxes paid (net of income tax refunds)
 
$
1,368

 
$
1,473

Supplemental non-cash investing and financing activities:
 
 
 
 
Distributions declared but not paid to Class B preferred unitholders
 
$
4,725

 
$
5,670

Accrued capital expenditures
 
$
21,508

 
$
2,907


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

7
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements


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, 2018, our operations included:

•
Our Crude Oil Logistics segment purchases crude oil from producers and transports it to refineries or for resale at pipeline injection stations, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs, and provides storage, terminaling, trucking, marine and pipeline transportation services through its owned assets.
•
Our Water Solutions segment provides services for the treatment and disposal of wastewater generated from crude oil and natural gas production and for the disposal of solids such as tank bottoms, drilling fluids and drilling muds and performs truck and frac tank washouts. In addition, our Water Solutions segment sells the recovered hydrocarbons that result from performing these services and it also sells freshwater to producers for exploration and production activities.
•
Our Liquids segment supplies natural gas liquids to retailers, wholesalers, refiners, and petrochemical plants throughout the United States and in Canada using its leased underground storage and fleet of leased railcars, markets regionally through its 19 owned terminals throughout the United States, and provides terminaling and storage services at its salt dome storage facility joint venture in Utah.
•
Our Refined Products and Renewables segment conducts gasoline, diesel, ethanol, and biodiesel marketing operations, purchases refined petroleum and renewable products primarily in the Gulf Coast, Southeast and Midwest regions of the United States and schedules them for delivery at various locations throughout the country. In addition, in certain storage locations, our Refined Products and Renewables segment may also purchase unfinished gasoline blending components for subsequent blending into finished gasoline to supply our marketing business as well as third parties.

Recent Developments

On July 10, 2018, we completed the sale of virtually all of our Retail Propane segment to Superior Plus Corp. (“Superior”) for total consideration of $896.5 million in cash after adjusting for estimated working capital. Accordingly, upon satisfaction of the significant closing conditions for this transaction during the month of June 2018, the assets, liabilities and redeemable noncontrolling interest of the Retail Propane segment were classified as held for sale in our unaudited condensed consolidated balance sheets. This sale included all three of the retail propane businesses we acquired during the three months ended June 30, 2018 (see Note 4). We retained our 50% ownership interest in Victory Propane, LLC (“Victory Propane”), which we subsequently sold on August 14, 2018 (see Note 2). This transaction, combined with the sale of a portion of our Retail Propane segment to DCC LPG (“DCC”) on March 30, 2018, represents a strategic shift in our operations and will have a significant effect on our operations and financial results going forward. Accordingly, the results of operations and cash flows related to the entire Retail Propane segment (including equity in earnings of Victory Propane) have been classified as discontinued operations for all periods presented and prior periods have been retrospectively adjusted in the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows.

Note 2—Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include our accounts and those of our controlled subsidiaries. Intercompany transactions and account balances have been eliminated in consolidation. Investments we do not control, but can exercise significant influence over, are accounted for using the equity method of accounting. We also own an undivided interest in a crude oil pipeline, and include our proportionate share of assets, liabilities, and expenses related to this pipeline in our unaudited condensed consolidated financial statements.

Our unaudited condensed consolidated financial statements are 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 (“SEC”). Accordingly, the unaudited condensed consolidated financial statements exclude certain information and notes required by GAAP for complete annual consolidated financial

8
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


statements. However, we believe that the disclosures made are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements include all adjustments that we consider necessary for a fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed in this Quarterly Report. The unaudited condensed consolidated balance sheet at March 31, 2018 was derived from our audited consolidated financial statements for the fiscal year ended March 31, 2018 included in our Annual Report on Form 10-K (“Annual Report”) filed with the SEC on May 30, 2018 and adjusted retrospectively for the Retail Propane segment disposition as previously described.

These interim unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report. Due to the seasonal nature of certain of our operations and other factors, the results of operations for interim periods are not necessarily indicative of the results of operations to be expected for future periods or for the full fiscal year ending March 31, 2019.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amount of assets and liabilities reported at the date of the consolidated financial statements and the amount of revenues and expenses reported during the periods presented.

Critical estimates we make in the preparation of our unaudited condensed consolidated financial statements include, among others, determining the fair value of assets and liabilities acquired in business combinations, the fair value of derivative instruments, the collectibility of accounts receivable, the recoverability of inventories, useful lives and recoverability of property, plant and equipment and amortizable intangible assets, the impairment of long-lived assets and goodwill, the fair value of asset retirement obligations, the value of equity-based compensation, accruals for environmental matters and estimating certain revenues. Although we believe these estimates are reasonable, 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.

Fair Value Measurements

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

•
Level 1: Quoted prices 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 (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) 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 forward commodity contracts. We determine the fair value of all of our derivative financial instruments utilizing pricing models for similar instruments. Inputs to the pricing models 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.

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair

9
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


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 a fair value measurement requires judgment, considering factors specific to the asset or liability.

Derivative Financial Instruments

We record all derivative financial instrument contracts at fair value in our unaudited condensed consolidated balance sheets except for certain contracts that qualify for the normal purchase and normal sale election. Under this accounting policy election, we do not record the contracts at fair value at each balance sheet date; instead, we record the purchase or sale at the contracted value once the delivery occurs.

We have not designated any financial instruments as hedges for accounting purposes. All changes in the fair value of our commodity derivative instruments that do not qualify as normal purchases and normal sales (whether cash transactions or non-cash mark-to-market adjustments) are reported within cost of sales in our unaudited condensed consolidated statements of operations, regardless of whether the contract is physically or financially settled.

We utilize various commodity derivative financial instrument contracts to attempt to reduce our exposure to price fluctuations. We do not enter into such contracts for trading purposes. Changes in assets and liabilities from commodity derivative financial instruments result primarily from changes in market prices, newly originated transactions, and the timing of settlements. We attempt to balance our contractual portfolio in terms of notional amounts and timing of performance and delivery obligations. However, net unbalanced positions can exist or are established based on our assessment of anticipated market movements. Inherent in the resulting contractual portfolio are certain business risks, including commodity price risk and credit risk. Commodity price risk is the risk that the market value of crude oil, natural gas liquids, or refined and renewables products will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by suppliers, customers or financial counterparties to a contract. Procedures and limits for managing commodity price risks and credit risks are specified in our market risk policy and credit policy, respectively. Open commodity positions and market price changes are monitored daily and are reported to senior management and to marketing operations personnel. Credit risk is monitored daily and exposure is minimized through customer deposits, restrictions on product liftings, letters of credit, and entering into master netting agreements that allow for offsetting counterparty receivable and payable balances for certain transactions.

Income Taxes

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

We have certain taxable corporate subsidiaries in Canada, and our operations in Texas are subject to a state franchise tax that is calculated based on revenues net of cost of sales.

During the six months ended September 30, 2018, we recognized a deferred tax liability of $22.4 million as a result of acquiring a corporation in connection with one of our acquisitions (see Note 4). The deferred tax liability is the tax effected cumulative temporary difference between the GAAP basis and tax basis of the acquired assets within the corporation. For GAAP purposes, certain of the acquired assets will be depreciated and amortized over time which will lower the GAAP basis. The deferred tax liability is included within other noncurrent liabilities in our unaudited condensed consolidated balance sheet at September 30, 2018.

We evaluate uncertain tax positions for recognition and measurement in the unaudited condensed consolidated financial statements. To recognize a tax position, we determine whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the unaudited condensed consolidated financial statements. We had no material uncertain tax positions that required recognition in our unaudited condensed consolidated financial statements at September 30, 2018 or March 31, 2018.


10
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Inventories

Our inventories are valued at the lower of cost or net realizable value, with cost determined using either the weighted-average cost or the first in, first out (FIFO) methods, including the cost of transportation and storage, and with net realizable value defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. In performing this analysis, we consider fixed-price forward commitments.

Inventories consist of the following at the dates indicated:
 
 
September 30, 2018
 
March 31, 2018
 
 
(in thousands)
Crude oil
 
$
46,366

 
$
77,351

Natural gas liquids:
 
 
 
 
Propane
 
97,720

 
38,910

Butane
 
63,182

 
12,613

Other
 
11,016

 
6,515

Refined products:
 
 
 
 
Gasoline
 
270,060

 
253,286

Diesel
 
131,614

 
113,939

Renewables:
 
 
 
 
Ethanol
 
41,773

 
38,093

Biodiesel
 
17,394

 
10,596

Total
 
$
679,125

 
$
551,303


Amounts in the table above do not include inventory related to the Retail Propane segment, as these amounts have been classified as assets held for sale within our unaudited condensed consolidated balance sheets (see Note 14).

Investments in Unconsolidated Entities

Investments we do not control, but can exercise significant influence over, are accounted for using the equity method of accounting. Investments in partnerships and limited liability companies, unless our investment is considered to be minor, and investments in unincorporated joint ventures are also accounted for using the equity method of accounting. Under the equity method, we do not report the individual assets and liabilities of these entities on our unaudited condensed consolidated balance sheets; instead, our ownership interests are reported within investments in unconsolidated entities on our unaudited 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 net assets of the investee.


11
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Our investments in unconsolidated entities consist of the following at the dates indicated:
Entity
 
Segment
 
Ownership
Interest (1)
 
Date Acquired
or Formed
 
September 30, 2018
 
March 31, 2018
 
 
 
 
 
 
 
 
(in thousands)
Water treatment and disposal facility (2)
 
Water Solutions
 
50%
 
August 2015
 
$
2,124

 
$
2,094

Water services company (3)
 
Water Solutions
 
50%
 
August 2018
 
2,396

 
—

E Energy Adams, LLC (4)
 
Refined Products and Renewables
 
—%
 
December 2013
 
—

 
15,142

Victory Propane, LLC (5)
 
Corporate and Other
 
—%
 
April 2015
 
—

 
—

Total
 
 
 
 
 
 
 
$
4,520

 
$
17,236

 
(1)
Ownership interest percentages are at September 30, 2018.
(2)
This is an investment in an unincorporated joint venture.
(3)
This is an investment in an unincorporated joint venture that we acquired as part of an acquisition in August 2018. See Note 4 for a further discussion.
(4)
On May 3, 2018, we sold our previously held 20% interest in E Energy Adams, LLC for net proceeds of $18.6 million and recorded a gain on disposal of $3.0 million during the six months ended September 30, 2018 within loss on disposal or impairment of assets, net in our unaudited condensed consolidated statement of operations.
(5)
On August 14, 2018, we sold our previously held 50% interest in Victory Propane. See Note 13 for a further discussion.

Variable Interest Entity

Victory Propane was formed as a joint venture in April 2015 by us and an unrelated third party. The business purpose of Victory Propane is to acquire and/or develop retail propane operations in a defined geographic area. In conjunction with the formation of Victory Propane, we agreed to provide Victory Propane a revolving line of credit of $5.0 million and have concluded that Victory Propane is a variable interest entity because the equity of Victory Propane is not sufficient to fund its activities without additional subordinated financial support. As discussed above and in Note 13, during the three months ended September 30, 2018, we sold our interest in Victory Propane.

Other Noncurrent Assets

Other noncurrent assets consist of the following at the dates indicated:
 
 
September 30, 2018
 
March 31, 2018
 
 
(in thousands)
Loan receivable (1)
 
$
23,327

 
$
29,463

Line fill (2)
 
33,437

 
34,897

Tank bottoms (3)
 
44,148

 
42,044

Minimum shipping fees - pipeline commitments (4)
 
23,494

 
88,757

Other
 
51,723

 
49,878

Total
 
$
176,129

 
$
245,039

 
(1)
Represents the noncurrent portion of a loan receivable associated with our financing of the construction of a natural gas liquids facility to be utilized by a third party.
(2)
Represents minimum volumes of product we are required to leave on certain third-party owned pipelines under long-term shipment commitments. At September 30, 2018, line fill consisted of 335,069 barrels of crude oil and 262,000 barrels of propane. At March 31, 2018, line fill consisted of 360,425 barrels of crude oil and 262,000 barrels of propane. Line fill held in pipelines we own is included within property, plant and equipment (see Note 5).
(3)
Tank bottoms, which are product volumes required for the operation of storage tanks, are recorded at historical cost. We recover tank bottoms when the storage tanks are removed from service. At September 30, 2018 and March 31, 2018, tank bottoms held in third party

12
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


terminals consisted of 389,737 barrels and 366,212 barrels of refined products, respectively. Tank bottoms held in terminals we own are included within property, plant and equipment (see Note 5).
(4)
Represents the minimum shipping fees paid in excess of volumes shipped, or deficiency credits, for two contracts with crude oil pipeline operators. This amount can be recovered when volumes shipped exceed the minimum monthly volume commitment (see Note 9). During the three months ended June 30, 2018, we entered into a definitive agreement, as described further in Note 13, in which we agreed to provide the benefit of our deficiency credit under one of these contracts. As a result of providing this benefit to the third party, we wrote off $67.7 million of these deficiency credits to loss on disposal or impairment of assets, net in our unaudited condensed consolidated statements of operation during the three months ended June 30, 2018. Under the remaining other contract for which we have the future benefit, we currently have 19 months in which to ship the excess volumes.

Amounts in the table above do not include other noncurrent assets related to the Retail Propane segment, as these amounts have been classified as assets held for sale within our unaudited condensed consolidated balance sheets (see Note 14).

Accrued Expenses and Other Payables

Accrued expenses and other payables consist of the following at the dates indicated:
 
 
September 30, 2018
 
March 31, 2018
 
 
(in thousands)
Accrued compensation and benefits
 
$
15,148

 
$
18,033

Excise and other tax liabilities
 
33,521

 
40,829

Derivative liabilities
 
75,575

 
51,039

Accrued interest
 
40,066

 
39,947

Product exchange liabilities
 
30,394

 
11,842

Gavilon legal matter settlement (Note 9)
 
34,167

 
—

Deferred gain on sale of general partner interest in TLP (1)
 
—

 
30,113

Other
 
38,425

 
31,701

Total
 
$
267,296

 
$
223,504

 
(1)
See Note 15 for a discussion of the accounting for the deferred gain upon adoption of ASU No. 2014-09 and ASU No. 2017-05.

Amounts in the table above do not include accrued expenses and other payables related to the Retail Propane segment, as these amounts have been classified as liabilities held for sale within our unaudited condensed consolidated balance sheets (see Note 14).

Noncontrolling Interests

Noncontrolling interests represent the portion of certain consolidated subsidiaries that are owned by third parties. Amounts are adjusted by the noncontrolling interest holder’s proportionate share of the subsidiaries’ earnings or losses each period and any distributions that are paid. Noncontrolling interests are reported as a component of equity, unless the noncontrolling interest is considered redeemable, in which case the noncontrolling interest is recorded between liabilities and equity (mezzanine or temporary equity) in our unaudited condensed consolidated balance sheet. The redeemable noncontrolling interest is adjusted at each balance sheet date to its maximum redemption value if the amount is greater than the carrying value. The redeemable noncontrolling interest is included in liabilities and redeemable noncontrolling interest held for sale in our unaudited condensed consolidated balance sheets (see Note 14). The following table summarizes changes in our redeemable noncontrolling interest (in thousands):
Balance at March 31, 2018
 
$
9,927

Net loss attributable to redeemable noncontrolling interest
 
(446
)
Redeemable noncontrolling interest valuation adjustment
 
3,349

Disposal of redeemable noncontrolling interest
 
(12,830
)
Balance at September 30, 2018
 
$
—



13
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


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 discussed 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.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments-Credit Losses.” The ASU requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected, which would include accounts receivable. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The ASU is effective for the Partnership beginning April 1, 2020, and requires a modified retrospective method of adoption, although early adoption is permitted. We are currently in the process of assessing the impact of this ASU on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The ASU will replace previous lease accounting guidance in GAAP. The ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The ASU retains a distinction between finance leases and operating leases. The ASU is effective for the Partnership beginning April 1, 2019. We are currently evaluating our current leases and other contracts that may be considered leases under the new standard and the impact on our internal controls, accounting policies and financial statements and disclosures. Our evaluation process includes compiling a database of our leases, implementing accounting software to assist with compliance and developing internal controls to ensure completeness and accuracy of our leases meeting the scope of this ASU. Upon adoption, we expect to recognize right of use assets and lease liabilities not previously recorded on our consolidated balance sheet. Due to the ongoing nature of our process, we cannot yet determine the quantitative impact of the adoption of this standard. We expect to elect the following transitional practical expedients, which will allow us to not evaluate land easements prior to April 1, 2019: use hindsight in determining the lease term; to not reassess whether current or expired contracts contain leases; to not reassess the lease classification for any expired or existing leases; and to not reassess initial costs. We also expect to elect the optional transition method to record the adoption impact through a cumulative effect adjustment to equity.

On April 1, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers,” using a modified retrospective approach of adoption. ASU No. 2014-09 supersedes previous revenue recognition requirements in Topic 605, “Revenue Recognition,” and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve this core principle, more judgment and estimates are required within the revenue recognition process than required under Topic 605. In addition, ASU No. 2014-09 requires significantly expanded disclosures related to the nature, timing, amount and uncertainty of revenue and cash flows arising from contracts with customers. See Note 15 for a further discussion of the impact of adoption of ASU No. 2014-09 on our unaudited condensed consolidated financial statements and our revenue recognition policies.

On April 1, 2018, we adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” One of the provisions of ASU No. 2016-01 was to supersede the guidance to classify equity securities with readily determinable fair value into different categories (that is, trading or available-for-sale) and require equity securities to be measured at fair value with changes in fair value recognized through net income. As a result of the adoption, we recorded a cumulative effect adjustment of $1.6 million, moving the unrealized loss from accumulated other comprehensive income to limited partners’ equity.


14
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Note 3—Income (Loss) Per Common Unit

The following table presents our calculation of basic and diluted weighted average common units outstanding for the periods indicated:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Weighted average common units outstanding during the period:
 
 
 
 
 
 
 
Common units - Basic
122,380,197

 
121,314,636

 
121,964,593

 
120,927,400

Common units - Diluted
122,380,197

 
121,314,636

 
121,964,593

 
120,927,400


For the three months ended September 30, 2018 and 2017, and the six months ended September 30, 2018 and 2017, the Performance Awards (as defined herein), warrants, Service Awards (as defined herein) and the Class A Preferred Units (as defined herein) were considered antidilutive.

Our income (loss) per common unit is as follows for the periods indicated:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except unit and per unit amounts)
Loss from continuing operations
$
(53,508
)
 
$
(164,293
)
 
$
(218,668
)
 
$
(222,281
)
Less: Continuing operations loss (income) attributable to noncontrolling interests
518

 
(80
)
 
863

 
(132
)
Net loss from continuing operations attributable to NGL Energy Partners LP
(52,990
)
 
(164,373
)
 
(217,805
)
 
(222,413
)
Less: Distributions to preferred unitholders (1)
(23,977
)
 
(16,098
)
 
(44,134
)
 
(25,782
)
Less: Continuing operations loss allocated to general partner (2)
42

 
146

 
193

 
181

Less: Repurchase of warrants (3)
—

 
—

 
—

 
(349
)
Net loss from continuing operations allocated to common unitholders
$
(76,925
)
 
$
(180,325
)
 
$
(261,746
)
 
$
(248,363
)
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations attributable to NGL Energy Partners LP, net of tax
$
408,447

 
$
(9,286
)
 
$
404,318

 
$
(15,005
)
Less: Discontinued operations loss attributable to redeemable noncontrolling interests
48

 
288

 
446

 
685

Less: Discontinued operations (income) loss allocated to general partner (2)
(409
)
 
8

 
(405
)
 
13

Net income (loss) from discontinued operations allocated to common unitholders
$
408,086

 
$
(8,990
)
 
$
404,359

 
$
(14,307
)
 
 
 
 
 
 
 
 
Net income (loss) allocated to common unitholders
$
331,161

 
$
(189,315
)
 
$
142,613

 
$
(262,670
)
 
 
 
 
 
 
 
 
Basic income (loss) per common unit
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.63
)
 
$
(1.49
)
 
$
(2.15
)
 
$
(2.05
)
Income (loss) from discontinued operations, net of tax
3.33

 
(0.07
)
 
3.32

 
(0.12
)
Net income (loss)
$
2.70

 
$
(1.56
)
 
$
1.17

 
$
(2.17
)
Diluted income (loss) per common unit
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.63
)
 
$
(1.49
)
 
$
(2.15
)
 
$
(2.05
)
Income (loss) from discontinued operations, net of tax
3.33

 
(0.07
)
 
3.32

 
(0.12
)
Net income (loss)
$
2.70

 
$
(1.56
)
 
$
1.17

 
$
(2.17
)
Basic weighted average common units outstanding
122,380,197

 
121,314,636

 
121,964,593

 
120,927,400

Diluted weighted average common units outstanding
122,380,197

 
121,314,636

 
121,964,593

 
120,927,400

 
(1)
This amount includes the distribution to preferred unitholders as well as the accretion for the beneficial conversion, as discussed further in Note 10.

15
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


(2)
Net (income) loss allocated to the general partner includes distributions to which it is entitled as the holder of incentive distribution rights.
(3)
This amount represents the excess of the repurchase price over the fair value of the warrants, as discussed further in Note 10.

Note 4—Acquisitions

The following summarizes our acquisitions during the six months ended September 30, 2018:

Water Pipeline Company

On April 24, 2018, we acquired the remaining 18.375% interest in NGL Water Pipelines, LLC operating in the Delaware Basin portion of the Permian Basin in West Texas for total consideration of approximately $4.0 million. The acquisition of the remaining interest was accounted for as an equity transaction, no gain or loss was recorded, and the carrying value of the noncontrolling interest was adjusted to reflect the change in ownership interest of the subsidiary. As of the date of the transaction, the 18.375% interest had a carrying value of $3.9 million.

Saltwater Water Solutions Facilities

During the six months ended September 30, 2018, we acquired six saltwater disposal facilities (including 15 wells) for total consideration of approximately $116.0 million.

As part of these acquisitions, we recorded customer relationship and favorable contract intangible assets whereby we estimated the value of these intangible assets 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.

We assumed land leases with a royalty component as part of the acquisition of these facilities. The acquisition method of accounting requires that executory contracts with unfavorable terms relative to market conditions at the acquisition date be recorded as liabilities in the acquisition accounting. We recorded a liability to other noncurrent liabilities of $1.1 million related to these leases due to the royalty terms being deemed unfavorable. We will amortize this liability based on the volumes processed by the facilities.

The agreements for these acquisitions contemplate post-closing payments for certain working capital items. We are accounting for these transactions as business combinations. The following table summarizes the preliminary estimates of the fair values as of September 30, 2018 for the assets acquired and liabilities assumed (in thousands):
Property, plant and equipment
$
33,202

Goodwill
58,751

Intangible assets
25,124

Other noncurrent liabilities
(1,127
)
Fair value of net assets acquired
$
115,950


As of September 30, 2018, the allocation of the purchase price is considered preliminary as we are continuing to gather additional information to (i) finalize the fair values of the property, plant and equipment and intangible assets and (ii) calculate additional asset retirement obligations.

Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill represents a premium paid to expand the number of our disposal sites in an oilfield production basin currently serviced by us, thereby enhancing our competitive position as a provider of disposal services in this oilfield production basin. We expect that all of the goodwill will be deductible for federal income tax purposes.

The operations of these water solutions facilities have been included in our unaudited condensed consolidated statement of operations since their acquisition date. Our unaudited condensed consolidated statement of operations for the six months ended September 30, 2018 includes revenues of $5.8 million and operating income of $2.5 million that were generated

16
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


by the operations of these water solutions facilities. We incurred $0.2 million of transaction costs related to these acquisitions during the six months ended September 30, 2018. These amounts are recorded within general and administrative expenses in our unaudited condensed consolidated statement of operations.

During the six months ended September 30, 2018, we also acquired two disposal wells for total consideration of $9.1 million, which we are accounting for as an acquisition of assets.

Freshwater Water Solutions Facilities

During the six months ended September 30, 2018, we acquired a ranch and four freshwater facilities (including 27 wells) and a right-of-way that can be used for pipelines for total consideration of approximately $78.1 million.

As part of these acquisitions, we recorded customer relationship and favorable contract intangible assets, whereby we estimated the value of these intangible assets 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.

As part of one of these acquisitions, a book/tax difference was created and as a result, we have recorded a preliminary noncurrent deferred tax liability of $22.4 million (see Note 2 for a further discussion).

We recorded a contingent consideration liability within accrued expenses and other payables and other noncurrent liabilities in our unaudited condensed consolidated balance sheet related to future royalty payments due to the seller. We estimated the contingent consideration based on the contracted royalty rate, which is a flat rate per barrel, multiplied by the expected volumes of freshwater sold. This amount was then discounted to present value using our weighted average cost of capital plus a premium representative of the uncertainty associated with the expected volumes. As of the acquisition date, we recorded a contingent liability of $1.8 million.

We assumed land leases with a royalty component as part of the acquisition of certain of these facilities. The acquisition method of accounting requires that executory contracts with unfavorable terms relative to market conditions at the acquisition date be recorded as liabilities in the acquisition accounting. We recorded a liability within other noncurrent liabilities of $0.5 million related to these leases due to the royalty terms being deemed unfavorable. We will amortize this liability based on the volumes processed by the facilities.

The agreements for these acquisitions contemplate post-closing payments for certain working capital items. We are accounting for these transactions as business combinations. The following table summarizes the preliminary estimates of the fair values as of September 30, 2018 for the assets acquired and liabilities assumed (in thousands):
Property, plant and equipment
$
23,787

Goodwill
8,290

Intangible assets
68,624

Investments in unconsolidated entities
2,060

Current liabilities
(173
)
Other noncurrent liabilities
(24,527
)
Fair value of net assets acquired
$
78,061


As of September 30, 2018, the allocation of the purchase price is considered preliminary as we are continuing to gather additional information to (i) finalize the fair values of land, other property, plant and equipment, other intangible assets, including water rights and customer relationships, and the investment in the unconsolidated entity and (ii) calculate additional contingent consideration liabilities. We are also engaging a third party valuation firm to assist us in this effort. The noncurrent deferred tax liability is also considered preliminary and will be finalized once the fair value of the assets acquired has been finalized.

Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill represents a premium paid to expand our service offerings in an oilfield production basin currently serviced by us, thereby enhancing our competitive position as a provider of disposal and other services in this oilfield production basin. We expect that all of the goodwill will be deductible for federal income tax purposes.


17
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


The operations of these water solutions facilities have been included in our unaudited condensed consolidated statement of operations since their acquisition date. Our unaudited condensed consolidated statement of operations for the six months ended September 30, 2018 includes revenues of $1.2 million and operating income of $0.8 million that were generated by the operations of these water solutions facilities. We incurred $0.8 million of transaction costs related to these acquisitions during the six months ended September 30, 2018. These amounts are recorded within general and administrative expenses in our unaudited condensed consolidated statement of operations.

During the six months ended September 30, 2018, we also acquired an additional ranch (including 18 freshwater wells) for total consideration of $28.4 million, which we are accounting for as an acquisition of assets.

Retail Propane Businesses

During the three months ended June 30, 2018, we acquired three retail propane businesses for total consideration of approximately $19.1 million. We accounted for these transactions as business combinations.

On July 9, 2018, and in conjunction with the sale of the Retail Propane segment (see Note 1), we acquired the remaining 40% interest in Atlantic Propane, LLC, which was part of our Retail Propane segment, for total consideration of approximately $12.8 million. The acquisition of the remaining interest was accounted for as an equity transaction, no gain or loss was recorded, and the carrying value of the noncontrolling interest was adjusted to reflect the change in ownership interest of the subsidiary. Atlantic Propane, LLC was included in the sale to Superior (see Note 1).

The assets and liabilities of these retail propane transactions were included in the sale of virtually all of our Retail Propane segment on July 10, 2018 (see Note 14).

Note 5—Property, Plant and Equipment

Our property, plant and equipment consists of the following at the dates indicated:
Description
 
Estimated
Useful Lives
 
September 30, 2018
 
March 31, 2018
 
 
 
 
(in thousands)
Natural gas liquids terminal and storage assets
 
2–30 years
 
$
235,959

 
$
238,487

Pipeline and related facilities
 
30–40 years
 
244,127

 
243,616

Refined products terminal assets and equipment
 
15–25 years
 
6,736

 
6,736

Vehicles and railcars
 
3–25 years
 
123,614

 
121,159

Water treatment facilities and equipment
 
3–30 years
 
686,547

 
601,139

Crude oil tanks and related equipment
 
2–30 years
 
211,191

 
218,588

Barges and towboats
 
5–30 years
 
102,988

 
92,712

Information technology equipment
 
3–7 years
 
31,987

 
30,749

Buildings and leasehold improvements
 
3–40 years
 
149,605

 
147,442

Land
 
 
 
99,876

 
51,816

Tank bottoms and line fill (1)
 
 
 
20,113

 
20,118

Other
 
3–20 years
 
16,042

 
11,794

Construction in progress
 
 
 
166,384

 
77,596

 
 
 
 
2,095,169

 
1,861,952

Accumulated depreciation
 
 
 
(388,557
)
 
(343,345
)
Net property, plant and equipment
 
 
 
$
1,706,612

 
$
1,518,607

 
(1)
Tank bottoms, which are product volumes required for the operation of storage tanks, are recorded at historical cost. We recover tank bottoms when the storage tanks are removed from service. Line fill, which represents our portion of the product volume required for the operation of the proportionate share of a pipeline we own, is recorded at historical cost.

Amounts in the table above do not include property, plant and equipment and accumulated depreciation related to the Retail Propane segment, as these amounts have been classified as assets held for sale within our unaudited condensed consolidated balance sheets (see Note 14).


18
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


The following table summarizes depreciation expense and capitalized interest expense for the periods indicated:
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Depreciation expense
 
$
25,984

 
$
26,142

 
$
50,713

 
$
50,924

Capitalized interest expense
 
$
173

 
$
—

 
$
322

 
$
—


The table above does not include amounts related to the Retail Propane segment, as these amounts have been classified within discontinued operations in our unaudited condensed consolidated statements of operations (see Note 14).

We record losses (gains) from the sales of property, plant and equipment and any write-downs in value due to impairment within loss on disposal or impairment of assets, net in our unaudited condensed consolidated statements of operations. The following table summarizes losses (gains) on the disposal or impairment of property, plant and equipment by segment for the periods indicated:
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Crude Oil Logistics
 
$
3,367

 
$
(397
)
 
$
1,326

 
$
(4,029
)
Water Solutions
 
730

 
915

 
3,205

 
1,439

Liquids
 
1,004

 
852

 
994

 
852

Total
 
$
5,101

 
$
1,370

 
$
5,525

 
$
(1,738
)

Note 6—Goodwill

The following table summarizes changes in goodwill by segment during the six months ended September 30, 2018:
 
 
Crude Oil
Logistics
 
Water
Solutions
 
Liquids
 
Refined
Products and
Renewables
 
Total
 
 
(in thousands)
Balances at March 31, 2018
 
$
579,846

 
$
424,465

 
$
149,169

 
$
51,127

 
$
1,204,607

Acquisitions (Note 4)
 
—

 
67,041

 
—

 
—

 
67,041

Balances at September 30, 2018
 
$
579,846

 
$
491,506

 
$
149,169

 
$
51,127

 
$
1,271,648



19
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Note 7—Intangible Assets

Our intangible assets consist of the following at the dates indicated:
 
 
 
 
September 30, 2018
 
March 31, 2018
Description
 
Amortizable Lives
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
(in thousands)
Amortizable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
3–20 years
 
$
748,605

 
$
(354,021
)
 
$
394,584

 
$
718,763

 
$
(328,666
)
 
$
390,097

Customer commitments
 
10 years
 
310,000

 
(59,417
)
 
250,583

 
310,000

 
(43,917
)
 
266,083

Pipeline capacity rights
 
30 years
 
161,785

 
(19,741
)
 
142,044

 
161,785

 
(17,045
)
 
144,740

Rights-of-way and easements
 
1–40 years
 
66,861

 
(4,341
)
 
62,520

 
63,995

 
(3,214
)
 
60,781

Executory contracts and other agreements
 
3–30 years
 
45,730

 
(15,673
)
 
30,057

 
42,919

 
(15,424
)
 
27,495

Non-compete agreements
 
2–32 years
 
12,715

 
(1,487
)
 
11,228

 
5,465

 
(706
)
 
4,759

Debt issuance costs (1)
 
5 years
 
41,772

 
(27,011
)
 
14,761

 
40,992

 
(24,593
)
 
16,399

Total amortizable
 
 
 
1,387,468

 
(481,691
)
 
905,777

 
1,343,919

 
(433,565
)
 
910,354

Non-amortizable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water rights
 
 
 
58,352

 
—

 
58,352

 
—

 
—

 
—

Trade names
 
 
 
2,800

 
—

 
2,800

 
2,800

 
—

 
2,800

Total non-amortizable
 
 
 
61,152

 
—

 
61,152

 
2,800

 
—

 
2,800

Total
 
 
 
$
1,448,620

 
$
(481,691
)
 
$
966,929

 
$
1,346,719

 
$
(433,565
)
 
$
913,154

 
(1)
Includes debt issuance costs related to the Revolving Credit Facility (as defined herein). Debt issuance costs related to fixed-rate notes are reported as a reduction of the carrying amount of long-term debt.

Amounts in the table above do not include intangible assets and accumulated amortization related to the Retail Propane segment, as these amounts have been classified as assets held for sale within our unaudited condensed consolidated balance sheets (see Note 14).

The weighted-average remaining amortization period for intangible assets is approximately 13.4 years.

Amortization expense is as follows for the periods indicated:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
Recorded In
2018
 
2017
 
2018
 
2017
 
(in thousands)
Depreciation and amortization
$
26,766

 
$
27,453

 
$
54,082

 
$
55,088

Cost of sales
1,384

 
1,506

 
2,849

 
3,091

Interest expense
1,225

 
1,154

 
2,418

 
2,240

Total
$
29,375

 
$
30,113

 
$
59,349

 
$
60,419


Amounts in the table above do not include amortization expense related to the Retail Propane segment, as these amounts have been classified within discontinued operations within our unaudited condensed consolidated statements of operations (see Note 14).


20
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Expected amortization of our intangible assets is as follows (in thousands):
Fiscal Year Ending March 31,
 
2019 (six months)
$
59,490

2020
117,984

2021
105,797

2022
91,105

2023
80,339

Thereafter
451,062

Total
$
905,777


Note 8—Long-Term Debt

Our long-term debt consists of the following at the dates indicated:
 
 
September 30, 2018
 
March 31, 2018
 
 
Face
Amount
 
Unamortized
Debt Issuance
Costs (1)
 
Book
Value
 
Face
Amount
 
Unamortized
Debt Issuance
Costs (1)
 
Book
Value
 
 
(in thousands)
Revolving credit facility:
 
 
 
 
 
 
 
 
 
 
 
 
Expansion capital borrowings
 
$
65,000

 
$
—

 
$
65,000

 
$
—

 
$
—

 
$
—

Working capital borrowings
 
759,000

 
—

 
759,000

 
969,500

 
—

 
969,500

Senior unsecured notes:
 
 
 
 
 
 
 
 
 
 
 
 
5.125% Notes due 2019 (2)
 
353,424

 
(1,012
)
 
352,412

 
353,424

 
(1,653
)
 
351,771

6.875% Notes due 2021 (2)
 
367,048

 
(3,862
)
 
363,186

 
367,048

 
(4,499
)
 
362,549

7.500% Notes due 2023
 
610,947

 
(7,712
)
 
603,235

 
615,947

 
(8,542
)
 
607,405

6.125% Notes due 2025
 
389,135

 
(5,522
)
 
383,613

 
389,135

 
(5,951
)
 
383,184

Other long-term debt
 
5,654

 
—

 
5,654

 
5,977

 
—

 
5,977

 
 
2,550,208

 
(18,108
)
 
2,532,100

 
2,701,031

 
(20,645
)
 
2,680,386

Less: Current maturities
 
721,119

 
(4,874
)
 
716,245

 
646

 
—

 
646

Long-term debt
 
$
1,829,089

 
$
(13,234
)
 
$
1,815,855

 
$
2,700,385

 
$
(20,645
)
 
$
2,679,740

 
(1)
Debt issuance costs related to the Revolving Credit Facility are reported within intangible assets, rather than as a reduction of the carrying amount of long-term debt.
(2)
Amounts are included in current maturities, as discussed further below.

Amounts in the table above do not include long-term debt related to the Retail Propane segment, as these amounts have been classified as liabilities held for sale within our unaudited condensed consolidated balance sheets (see Note 14).

Amortization expense for debt issuance costs related to long-term debt in the table above was $1.2 million and $1.6 million during the three months ended September 30, 2018 and 2017, respectively, and $2.5 million and $3.3 million during the six months ended September 30, 2018 and 2017, respectively.


21
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


Expected amortization of debt issuance costs is as follows (in thousands):
Fiscal Year Ending March 31,
 
 
2019 (six months)
 
$
5,690

2020
 
2,749

2021
 
2,376

2022
 
2,376

2023
 
2,376

Thereafter
 
2,541

Total
 
$
18,108


Credit Agreement

We are party to a $1.765 billion credit agreement (as amended, the “Credit Agreement”) with a syndicate of banks. As of September 30, 2018, the Credit Agreement includes a revolving credit facility to fund working capital needs, which had a capacity of $1.450 billion for cash borrowings and letters of credit (the “Working Capital Facility”), and a revolving credit facility to fund acquisitions and expansion projects, which had a capacity of $315.0 million (the “Expansion Capital Facility,” and together with the Working Capital Facility, the “Revolving Credit Facility”). Our Revolving Credit Facility allows us to reallocate amounts between the Expansion Capital Facility and Working Capital Facility. During the three months ended September 30, 2018, we reallocated $150.0 million from the Expansion Capital Facility to the Working Capital Facility. We had letters of credit of $202.3 million on the Working Capital Facility at September 30, 2018.

At September 30, 2018, the borrowings under the Credit Agreement had a weighted average interest rate of 5.13%, calculated as the weighted average LIBOR rate of 2.17% plus a margin of 2.50% for LIBOR borrowings and the prime rate of 5.25% plus a margin of 1.50% on alternate base rate borrowings. At September 30, 2018, the interest rate in effect on letters of credit was 2.50%. Commitment fees were charged at a rate ranging from 0.375% to 0.50% on any unused capacity.

On July 5, 2018, we amended our Credit Agreement. In the amendment, the lenders consented to, subject to the consummation of the Retail Propane disposition, release NGL Propane, LLC and its wholly-owned subsidiaries from its guaranty and other obligations under the loan documents, among other things. In return, the Partnership agreed to use the net proceeds from the Retail Propane disposition to pay down existing indebtedness no later than five business days after the consummation of the Retail Propane disposition.

The following table summarizes the debt covenant levels specified in the Credit Agreement as of September 30, 2018:
 
 
 
 
Senior Secured
 
Interest
 
Total Leverage
Period Beginning
 
Leverage Ratio (1)
 
Leverage Ratio (1)
 
Coverage Ratio (2)
 
Indebtedness Ratio (1)
September 30, 2018
 
4.75

 
3.25

 
2.50