NGL Energy Partners LP 10-Q for FY2024 Q2
NGL Energy Partners LP (NGL)
10-Q
2023-11-09
For: 2023-09-30
View Original
Added on
April 04, 2026
About this 10-Q
NGL Energy Partners LP filed this 10-Q on November 9, 2023, covering the quarter ended September 30, 2023 (FY2024 Q2).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.84B
- down 8.4% from $2.01B a year earlier
- Net income
- $28.03M
- up 698.5% from net income of $3.51M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
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
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
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 ☒ 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 ☒ 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 | o | x | ||||||||||||
| Non-accelerated filer | o | Smaller reporting company | ||||||||||||
| 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At November 7, 2023, there were 131,927,343 common units issued and outstanding.
TABLE OF CONTENTS
i
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, biodiesel and energy prices generally;
•the general level of demand, and the availability of supply, for crude oil, natural gas liquids, gasoline, diesel, and biodiesel;
•the level of crude oil and natural gas drilling and production in areas where we have operations and facilities;
•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;
•the effect of weather conditions on supply and demand for crude oil, natural gas liquids, gasoline, diesel, and biodiesel;
•the effect of natural disasters, earthquakes, hurricanes, tornados, lightning strikes, or other significant weather events;
•the availability of local, intrastate, and interstate transportation infrastructure with respect to our transportation services;
•the availability, price, and marketing of competing fuels;
•the effect of energy conservation efforts on product demand;
•energy efficiencies and technological trends;
•issuance of executive orders, changes in applicable laws, regulations and policies, including tax, environmental, transportation, and employment regulations, or new interpretations by regulatory agencies concerning such laws and regulations and the effect of such laws, regulations and policies (now existing or in the future) on our business operations;
•the effect of executive orders and legislative and regulatory actions on hydraulic fracturing, water disposal and transportation, 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 markets;
•loss of key personnel;
•the ability to renew contracts with key customers;
•the ability to maintain or increase the margins we realize for our services;
•the ability to renew leases for our leased equipment and storage facilities;
•inflation, interest rates, and general economic conditions (including recessions and other future disruptions and volatility in the global credit markets, as well as the impact of these events on customers and suppliers);
•the nonpayment, nonperformance or bankruptcy by our counterparties;
•the availability and cost of capital and our ability to access certain capital sources;
•a deterioration of the credit and capital markets;
1
•the ability to successfully identify and complete accretive acquisitions and organic growth projects, and integrate acquired assets and businesses;
•the costs and effects of legal and administrative proceedings;
•changes in general economic conditions, including market and macroeconomic disruptions resulting from global pandemics and related governmental responses, and international military conflicts (such as the war in Ukraine and the conflict between Israel and Hamas); and
•political pressure and influence of environmental groups upon policies and decisions related to the production, gathering, refining, processing, fractionation, transportation and sale of crude oil, refined products, natural gas, natural gas liquids, gasoline, diesel or biodiesel.
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, 2023.
2
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, 2023 | March 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable-trade, net of allowance for expected credit losses of $ | |||||||||||
| Accounts receivable-affiliates | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $ | |||||||||||
| GOODWILL | |||||||||||
INTANGIBLE ASSETS, net of accumulated amortization of $ | |||||||||||
| INVESTMENTS IN UNCONSOLIDATED ENTITIES | |||||||||||
| OPERATING LEASE RIGHT-OF-USE ASSETS | |||||||||||
| OTHER NONCURRENT ASSETS | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable-trade | $ | $ | |||||||||
| Accounts payable-affiliates | |||||||||||
| Accrued expenses and other payables | |||||||||||
| Advance payments received from customers | |||||||||||
| Operating lease obligations | |||||||||||
| Total current liabilities | |||||||||||
LONG-TERM DEBT, net of debt issuance costs of $ | |||||||||||
| OPERATING LEASE OBLIGATIONS | |||||||||||
| OTHER NONCURRENT LIABILITIES | |||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 8) | |||||||||||
CLASS D | |||||||||||
| EQUITY: | |||||||||||
General partner, representing a | ( | ( | |||||||||
Limited partners, representing a | |||||||||||
Class B preferred limited partners, | |||||||||||
Class C preferred limited partners, | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
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, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||||||
| Water Solutions | $ | $ | $ | $ | ||||||||||||||||||||||
| Crude Oil Logistics | ||||||||||||||||||||||||||
| Liquids Logistics | ||||||||||||||||||||||||||
| Total Revenues | ||||||||||||||||||||||||||
| COST OF SALES: | ||||||||||||||||||||||||||
| Water Solutions | ||||||||||||||||||||||||||
| Crude Oil Logistics | ||||||||||||||||||||||||||
| Liquids Logistics | ||||||||||||||||||||||||||
| Corporate and Other | ( | |||||||||||||||||||||||||
| Total Cost of Sales | ||||||||||||||||||||||||||
| OPERATING COSTS AND EXPENSES: | ||||||||||||||||||||||||||
| Operating | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Loss on disposal or impairment of assets, net | ||||||||||||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Gain on early extinguishment of liabilities, net | ||||||||||||||||||||||||||
| Other income (expense), net | ( | |||||||||||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||||||||||||
| INCOME TAX EXPENSE | ( | ( | ( | ( | ||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||
| LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | ( | ( | ( | ( | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NGL ENERGY PARTNERS LP | $ | $ | $ | $ | ||||||||||||||||||||||
| NET LOSS ALLOCATED TO COMMON UNITHOLDERS (NOTE 3) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| BASIC AND DILUTED LOSS PER COMMON UNIT | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| BASIC WEIGHTED AVERAGE COMMON UNITS OUTSTANDING | ||||||||||||||||||||||||||
| DILUTED WEIGHTED AVERAGE COMMON UNITS OUTSTANDING | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in Thousands)
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Changes in Equity
Six Months Ended September 30, 2023
(in Thousands, except unit amounts)
| Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | |||||||||||||||||||||||||||||||||||||||||||||||||
| General Partner | Units | Amount | Units | Amount | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2023 | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Equity issued pursuant to incentive compensation plan (Note 9) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2023 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Equity issued pursuant to incentive compensation plan (Note 9) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2023 | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
6
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Changes in Equity
Six Months Ended September 30, 2022
(in Thousands, except unit amounts)
| Limited Partners | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | |||||||||||||||||||||||||||||||||||||||||||||||||
| General Partner | Units | Amount | Units | Amount | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2022 | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Equity issued pursuant to incentive compensation plan | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT JUNE 30, 2022 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Equity issued pursuant to incentive compensation plan | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2022 | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in Thousands)
| Six Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||
| Depreciation and amortization, including amortization of debt issuance costs | ||||||||||||||
| Gain on early extinguishment of liabilities, net | ( | ( | ||||||||||||
| Equity-based compensation expense | ||||||||||||||
| Loss on disposal or impairment of assets, net | ||||||||||||||
| Change in provision for expected credit losses | ( | |||||||||||||
| Net adjustments to fair value of commodity derivatives | ||||||||||||||
| Equity in earnings of unconsolidated entities | ( | ( | ||||||||||||
| Distributions of earnings from unconsolidated entities | ||||||||||||||
| Lower of cost or net realizable value adjustments | ||||||||||||||
| Other | ||||||||||||||
| Changes in operating assets and liabilities, exclusive of acquisitions: | ||||||||||||||
| Accounts receivable-trade and affiliates | ( | ( | ||||||||||||
| Inventories | ( | ( | ||||||||||||
| Other current and noncurrent assets | ( | |||||||||||||
| Accounts payable-trade and affiliates | ( | |||||||||||||
| Other current and noncurrent liabilities | ( | |||||||||||||
| Net cash provided by (used in) operating activities | ( | |||||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Net settlements of commodity derivatives | ( | |||||||||||||
| Proceeds from sales of assets | ||||||||||||||
| Proceeds from divestitures of businesses and investments, net | ||||||||||||||
| Investments in unconsolidated entities | ( | ( | ||||||||||||
| Distributions of capital from unconsolidated entities | ||||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| FINANCING ACTIVITIES: | ||||||||||||||
| Proceeds from borrowings under revolving credit facility | ||||||||||||||
| Payments on revolving credit facility | ( | ( | ||||||||||||
| Repayment and repurchase of senior unsecured notes | ( | ( | ||||||||||||
| Payments on other long-term debt | ( | |||||||||||||
| Debt issuance costs | ( | ( | ||||||||||||
| Distributions to noncontrolling interest owners | ( | ( | ||||||||||||
| Payments to settle contingent consideration liabilities | ( | ( | ||||||||||||
| Principal payments of finance lease | ( | ( | ||||||||||||
| Net cash (used in) provided by financing activities | ( | |||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||||||||
| Supplemental cash flow information: | ||||||||||||||
| Cash interest paid | $ | $ | ||||||||||||
| Income taxes paid (net of income tax refunds) | $ | $ | ||||||||||||
| Supplemental non-cash investing and financing activities: | ||||||||||||||
| Accrued capital expenditures | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
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 (“GP”). At September 30, 2023, our operations included three segments:
•Our Water Solutions segment transports, treats, recycles and disposes of produced and flowback water generated from crude oil and natural gas production. We also sell produced water for reuse and recycle and brackish non-potable water to our producer customers to be used in their crude oil exploration and production activities. As part of processing water, we aggregate and sell recovered crude oil, also known as skim oil. We also dispose of solids such as tank bottoms, drilling fluids and drilling muds and perform other ancillary services such as truck and frac tank washouts. Our activities in this segment are underpinned by long-term, fixed fee contracts and acreage dedications, some of which contain minimum volume commitments with leading oil and gas companies including large, investment grade producer customers.
•Our Crude Oil Logistics segment purchases crude oil from producers and marketers 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, and transportation services through its owned assets. Our activities in this segment are supported by certain long-term, fixed rate contracts which include minimum volume commitments on our owned and leased pipelines.
•Our Liquids Logistics segment conducts supply operations for natural gas liquids, refined petroleum products and biodiesel to a broad range of commercial, retail and industrial customers across the United States and Canada. These operations are conducted through our 23 owned terminals, third-party storage and terminal facilities, nine common carrier pipelines and a fleet of leased railcars. We also provide services for marine exports of butane through our facility located in Chesapeake, Virginia and we also own a propane pipeline in Michigan. We attempt to reduce our exposure to price fluctuations by using back-to-back physical contracts and pre-sale agreements that allow us to lock in a margin on a percentage of our winter volumes. We also enter into financially settled derivative contracts as economic hedges of our physical inventory, physical sales and physical purchase contracts.
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 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, 2023 was derived from our audited consolidated financial statements for the fiscal year ended March 31, 2023 included in our Annual Report on Form 10-K (“Annual Report”) filed with the SEC on May 31, 2023.
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, 2024.
9
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
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 accounting estimates we make in the preparation of our unaudited condensed consolidated financial statements include, among others, determining the impairment of goodwill and long-lived assets, useful lives and recoverability of property, plant and equipment and amortizable intangible assets, the fair value of derivative instruments, estimating certain revenues, the fair value of asset retirement obligations, the fair value of assets and liabilities acquired in acquisitions, the recoverability of inventories, the collectability of accounts and notes receivable and accruals for environmental matters. 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.
Income Taxes
We qualify as a partnership for income tax purposes. As such, we generally do not pay 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 a deferred tax liability of $40.5 million and $40.7 million at September 30, 2023 and March 31, 2023, respectively, as a result of acquiring corporations in connection with certain of our acquisitions, which is included within other noncurrent liabilities in our unaudited condensed consolidated balance sheets. 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 benefit recorded during the six months ended September 30, 2023 was $0.1 million with an effective tax rate of 22.1 %. The deferred tax benefit recorded during the six months ended September 30, 2022 was $0.8 million with an effective tax rate of 27.4 %.
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
10
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Inventories consist of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Propane | $ | $ | ||||||||||||
| Butane | ||||||||||||||
| Crude oil | ||||||||||||||
| Biodiesel | ||||||||||||||
| Diesel | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
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.
Our investments in unconsolidated entities consist of the following at the dates indicated:
| Entity | Segment | Ownership Interest | September 30, 2023 | March 31, 2023 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Water services and land company | Water Solutions | $ | $ | |||||||||||||||||||||||
| Water services and land company | Water Solutions | |||||||||||||||||||||||||
| Water services and land company | Water Solutions | |||||||||||||||||||||||||
| Aircraft company (1) | Corporate and Other | |||||||||||||||||||||||||
| Natural gas liquids terminal company | Liquids Logistics | |||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
(1) This is an investment with a related party.
Other Noncurrent Assets
Other noncurrent assets consist of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Linefill (1) | $ | $ | ||||||||||||
| Loan receivable (2) | ||||||||||||||
| Minimum shipping fees - pipeline commitments (3) | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
(1) Represents minimum volumes of product we are required to leave on certain third-party owned pipelines under long-term shipment commitments. At September 30, 2023 and March 31, 2023, linefill consisted of 502,686
(2) Represents the noncurrent portion of loan receivables, net of allowances for expected credit losses, primarily related to the sale of certain saltwater disposal assets. See Note 16 for a discussion of activity during the current fiscal year.
(3) Represents the noncurrent portion of minimum shipping fees paid in excess of volumes shipped, or deficiency credits, for a contract with a crude oil pipeline operator. This amount can be recovered when volumes shipped exceed the minimum monthly volume commitment (see Note 8). At September 30, 2023, the deficiency credit was $6.8 million, of which $4.3 million is recorded within prepaid expenses and other current assets in our unaudited condensed consolidated balance sheet.
11
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Accrued Expenses and Other Payables
Accrued expenses and other payables consist of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Derivative liabilities | $ | $ | ||||||||||||
| Accrued interest | ||||||||||||||
| Accrued compensation and benefits | ||||||||||||||
| Excise and other tax liabilities | ||||||||||||||
| Product exchange liabilities | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
Reclassifications
We have reclassified certain prior period financial statement information to be consistent with the classification methods used in the current fiscal year. These reclassifications did not impact previously reported amounts of assets, liabilities, equity, net income or cash flows.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) interest rate or another reference rate expected to be discontinued because of reference rate reform. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” which deferred the sunset date from December 31, 2022 to December 31, 2024 and left all other provisions of ASU 2020-04 unchanged. On April 13, 2022, the ABL Facility (as defined herein) was amended to replace the LIBOR benchmark with the SOFR (as defined herein) benchmark (as discussed further in Note 7). We are continuing to evaluate the effect that this guidance will have on our financial position, results of operations and cash flows.
Note 3—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, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Weighted average common units outstanding during the period: | ||||||||||||||||||||||||||
| Common units - Basic | ||||||||||||||||||||||||||
| Common units - Diluted | ||||||||||||||||||||||||||
For the three months and six months ended September 30, 2023 and 2022, respectively, all potential common units or convertible securities were considered antidilutive.
12
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Our loss per common unit is as follows for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands, except per unit amounts) | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | ( | ( | ( | ( | ||||||||||||||||||||||
| Net income attributable to NGL Energy Partners LP | ||||||||||||||||||||||||||
| Less: Distributions to preferred unitholders (1) | ( | ( | ( | ( | ||||||||||||||||||||||
| Less: Net loss allocated to GP (2) | ||||||||||||||||||||||||||
| Net loss allocated to common unitholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Basic and diluted loss per common unit | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
(1) Includes cumulative distributions for the three months and six months ended September 30, 2023 and 2022 which were earned but not declared or paid (see Note 9 for a further discussion of the suspension of common unit and preferred unit distributions).
(2) Net loss allocated to the GP includes distributions to which it is entitled as the holder of incentive distribution rights.
Note 4—Property, Plant and Equipment
Our property, plant and equipment consists of the following at the dates indicated:
| Description | Estimated Useful Lives | September 30, 2023 | March 31, 2023 | |||||||||||||||||||||||
| (in years) | (in thousands) | |||||||||||||||||||||||||
| Natural gas liquids terminal and storage assets | - | $ | $ | |||||||||||||||||||||||
| Pipeline and related facilities | - | |||||||||||||||||||||||||
| Vehicles and railcars (1) | - | |||||||||||||||||||||||||
| Water treatment facilities and equipment | - | |||||||||||||||||||||||||
| Crude oil tanks and related equipment | - | |||||||||||||||||||||||||
| Information technology equipment | - | |||||||||||||||||||||||||
| Buildings and leasehold improvements | - | |||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||
| Tank bottoms and linefill (2) | ||||||||||||||||||||||||||
| Other | - | |||||||||||||||||||||||||
| Construction in progress | ||||||||||||||||||||||||||
| Gross property, plant and equipment | ||||||||||||||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||||||||||||||
| Net property, plant and equipment | $ | $ | ||||||||||||||||||||||||
(1) Includes a finance lease right-of-use asset of $0.1 million. The accumulated amortization related to this finance lease is included within accumulated depreciation.
(2) 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. Linefill, 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.
The following table summarizes depreciation expense and capitalized interest expense for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Depreciation expense | $ | $ | $ | $ | ||||||||||||||||||||||
| Capitalized interest expense | $ | $ | $ | $ | ||||||||||||||||||||||
13
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
We record (gains) losses 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 statement of operations. The following table summarizes (gains) losses on the disposal or impairment of property, plant and equipment by segment for the period indicated:
| Three Months Ended September 30, 2023 | Six Months Ended September 30, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Water Solutions (1) | $ | $ | ||||||||||||
| Crude Oil Logistics | ( | |||||||||||||
| Liquids Logistics (2) | ( | |||||||||||||
| Total | $ | $ | ||||||||||||
(1) Amounts do not include the loss recognized on the sale of certain saltwater disposal assets in the Pinedale Anticline Basin discussed in Note 16.
(2) Amounts do not include the gain recognized on the sale of two natural gas liquids terminals discussed in Note 16.
Note 5—Goodwill
The following table summarizes changes in goodwill by segment during the six months ended September 30, 2023:
| Water Solutions | Crude Oil Logistics | Liquids Logistics | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | |||||||||||||||||||
| Disposal (1) | ( | ( | |||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||
(1) Relates to the sale of two natural gas liquids terminals within our Liquids Logistics segment during the six months ended September 30, 2023 (see Note 16).
Note 6—Intangible Assets
Our intangible assets consist of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Description | Weighted- Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||||||
| (in years) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||
| Amortizable: | ||||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Customer commitments | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Pipeline capacity rights | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Rights-of-way and easements | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Water rights | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Executory contracts and other agreements | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Non-compete agreements | — | ( | ||||||||||||||||||||||||||||||||||||||||||
Debt issuance costs (1) | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total amortizable | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Non-amortizable: | ||||||||||||||||||||||||||||||||||||||||||||
| Trade names (2) | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
(1) Includes debt issuance costs related to the ABL Facility. Debt issuance costs related to the fixed-rate notes are reported as a reduction of the carrying amount of long-term debt.
14
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Amortization expense is as follows for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| Recorded In | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following table summarizes expected amortization of our intangible assets at September 30, 2023 (in thousands):
| Fiscal Year Ending March 31, | |||||
| 2024 (six months) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 7—Long-Term Debt
Our long-term debt consists of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||
| Face Amount | Unamortized Debt Issuance Costs (1) | Book Value | Face Amount | Unamortized Debt Issuance Costs (1) | Book Value | |||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||
| Senior secured notes: | ||||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Asset-based revolving credit facility (“ABL Facility”) | ||||||||||||||||||||||||||||||||||||||
| Senior unsecured notes: | ||||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| Long-term debt | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
(1) Debt issuance costs related to the ABL Facility are reported within intangible assets, rather than as a reduction of the carrying amount of long-term debt.
2026 Senior Secured Notes
The 2026 Senior Secured Notes bear interest at 7.5 %, which is payable on February 1 and August 1 of each year. The 2026 Senior Secured Notes mature on February 1, 2026. The 2026 Senior Secured Notes were issued pursuant to an indenture dated February 4, 2021 (the “Indenture”).
The 2026 Senior Secured Notes are secured by first priority liens on substantially all of our assets other than our accounts receivable, inventory, pledged deposit accounts, cash and cash equivalents, renewable energy tax credits and related assets and second priority liens on our accounts receivable, inventory, pledged deposit accounts, cash and cash equivalents, renewable energy tax credits and related assets.
15
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The Indenture contains covenants that, among other things, limit our ability to: pay distributions or make other restricted payments or repurchase stock; incur or guarantee additional indebtedness or issue disqualified stock or certain preferred stock; make certain investments; create or incur liens; sell assets; enter into restrictions affecting the ability of restricted subsidiaries to make distributions, make loans or advances or transfer assets to the guarantors (including the Partnership); enter into certain transactions with our affiliates; designate restricted subsidiaries as unrestricted subsidiaries; and merge, consolidate, transfer or sell all or substantially all of our assets. The Indenture specifically restricts our ability to pay distributions until our total leverage ratio (as defined in the Indenture) for the most recently ended four full fiscal quarters at the time of the distribution is not greater than 4.75 to 1.00. These covenants are subject to a number of important exceptions and qualifications.
Compliance
At September 30, 2023, we were in compliance with the covenants under the Indenture.
ABL Facility
The ABL Facility is subject to a borrowing base, which includes a sub-limit for letters of credit. Total commitments under the ABL Facility are $600.0 million and the sub-limit for letters of credit is $250.0 million. The ABL Facility is secured by a lien on substantially all of our assets, including among other things, a first priority lien on our accounts receivable, inventory, pledged deposit accounts, cash and cash equivalents, renewable energy tax credits and related assets and a second priority lien on all of our other assets. At September 30, 2023, $156.0 million had been borrowed under the ABL Facility and we had letters of credit outstanding of approximately $139.0 million. The ABL Facility is scheduled to mature at the earliest of (a) February 4, 2026 or (b) 91 days prior to the earliest maturity date in respect to any of our indebtedness in an aggregate principal amount of $50.0 million or greater, if such indebtedness is outstanding at such time, subject to certain exceptions.
At September 30, 2023, the borrowings under the ABL Facility had a weighted average interest rate of 8.27 % calculated as the prime rate of 8.50 % plus a margin of 1.50 % on the alternate base borrowings and the weighted average secured overnight financing rate (“SOFR”) of 5.43 % plus a margin of 2.50 % on the SOFR borrowings. On September 30, 2023, the interest rate in effect on letters of credit was 2.50 %.
The ABL Facility contains various affirmative and negative covenants, including financial reporting requirements and limitations on indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of assets, distributions and other restricted payments, investments (including acquisitions) and transactions with affiliates. The ABL Facility contains, as the only financial covenant, a fixed charge coverage ratio that is tested based on the financial statements for the most recently ended fiscal quarter upon the occurrence and during the continuation of a Cash Dominion Event (as defined in the ABL Facility). At September 30, 2023, no Cash Dominion Event had occurred.
Compliance
At September 30, 2023, we were in compliance with the covenants under the ABL Facility.
Senior Unsecured Notes
The senior unsecured notes include the 2025 Notes, which mature on March 1, 2025 and the 2026 Notes, which mature on April 15, 2026 (collectively, the “Senior Unsecured Notes”).
16
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Repurchases
The following table summarizes repurchases of Senior Unsecured Notes for the period indicated:
| Six Months Ended September 30, 2023 | |||||||||||
| (in thousands) | |||||||||||
| 2025 Notes | |||||||||||
| Notes repurchased (1) | $ | ||||||||||
| Cash paid (excluding payments of accrued interest) | $ | ||||||||||
| Gain on early extinguishment of debt (2) | $ | ||||||||||
(1) We did not repurchase any notes during the three months ended September 30, 2023.
(2) Gain on early extinguishment of debt for the 2025 Notes during the six months ended September 30, 2023 is inclusive of the write-off of debt issuance costs of $0.4 million. The gain is reported within gain on early extinguishment of liabilities, net within our unaudited condensed consolidated statement of operations.
Redemption Rights
Compliance
At September 30, 2023, we were in compliance with the covenants under all of the Senior Unsecured Notes indentures.
Debt Maturity Schedule
The scheduled maturities of our long-term debt are as follows at September 30, 2023:
| Fiscal Year Ending March 31, | 2026 Senior Secured Notes | ABL Facility | Senior Unsecured Notes | Total | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| 2024 (six months) | $ | $ | $ | $ | ||||||||||||||||||||||
| 2025 | ||||||||||||||||||||||||||
| 2026 | ||||||||||||||||||||||||||
| 2027 | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Amortization of Debt Issuance Costs
Amortization expense for debt issuance costs related to long-term debt was $2.7 million and $3.0 million during the three months ended September 30, 2023 and 2022, respectively, and $5.3 million and $6.0 million during the six months ended September 30, 2023 and 2022, respectively.
The following table summarizes expected amortization of debt issuance costs at September 30, 2023 (in thousands):
| Fiscal Year Ending March 31, | ||||||||
| 2024 (six months) | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Total | $ | |||||||
17
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Note 8—Commitments and Contingencies
Legal Contingencies
In August 2015, LCT Capital, LLC (“LCT”) filed a lawsuit against the GP and the Partnership seeking payment for investment banking services relating to the purchase of TransMontaigne Inc. and related assets in July 2014. After pre-trial rulings, LCT was limited to pursuing claims of (i) quantum meruit (the value of the services rendered by LCT) and (ii) fraudulent misrepresentation against the defendants. Following a jury trial conducted in Delaware state court from July 23, 2018 through August 1, 2018, the jury returned a verdict consisting of an award of $4.0 million for quantum meruit and $29.0 million for fraudulent misrepresentation, subject to statutory interest. On December 5, 2019, in response to the defendants’ post-trial motion, the Court issued an Order overturning the jury’s damages award and ordering the case to be set for a damages-only trial (the “December 5th Order”). Both parties filed applications with the trial court asking the trial court to certify the December 5th Order for interlocutory, immediate review by the Appellate Court. On January 7, 2020, the Supreme Court of Delaware (“Supreme Court”) entered an Order accepting an interlocutory appeal of various issues relating to both the quantum meruit and fraudulent misrepresentation verdicts. The Supreme Court heard oral arguments of the parties on November 4, 2020, took the matters presented under advisement and on January 28, 2021, issued a ruling that (a) LCT is not entitled to “benefit-of-the-bargain” damages on its fraud claim; (b) LCT is not entitled to receive fraudulent misrepresentation damages separate from its quantum meruit damages; (c) the trial court abused its discretion when it ordered a new trial on damages relating to LCT’s claim of fraudulent misrepresentation; and (d) the trial court properly ordered a new trial on LCT’s claim of quantum meruit damages. The re-trial of the quantum meruit claim was conducted in Delaware state court from February 6, 2023 through February 15, 2023 and resulted in the jury returning a verdict consisting of an award of $36.0 million subject to statutory interest and costs, as applicable, which through September 30, 2023, equals approximately $22.3 million. The GP and the Partnership contend that the jury verdict is not supportable by controlling law or the evidentiary record, and on July 28, 2023, filed their notice of appeal to the Delaware Supreme Court which raises various issues relating to the quantum meruit verdict, including but not limited to, certain written orders and oral evidentiary and other rulings made prior to and during the February 2023 remand trial. On October 12, 2023, LCT filed its answering brief on appeal and cross-appellant’s opening brief on cross-appeal. The GP and the Partnership have until November 13, 2023 to file their reply and answering brief on cross-appeal. Any allocation of the ultimate verdict award, if any, between the GP and the Partnership will be made by the board of directors of our GP once all information is available to it and after any post-trial and/or any appellate process has concluded and the verdict is final as a matter of law. As of September 30, 2023, we have accrued approximately $4.0 million related to this matter, of which approximately $1.5 million represents interest accrued through September 30, 2023.
The Partnership is a party defendant to a purported class action complaint filed in the federal court in the Northern District of Oklahoma styled Gary R. Underwood, Successor Trustee for the James L. Price Revocable Living Trust, on behalf of the Trust and all others similarly situated v. NGL Energy Partners LP, Case No. 4:21-cv-00135-CVE-SH. This case seeks class certification on behalf of owners who allege the Partnership’s Crude Oil Logistics group violated Oklahoma’s Production Revenue Standards Act when it failed to include statutory interest on proceeds payments it made to certain mineral owners and to state unclaimed property divisions for oil purchased from certain Oklahoma wells. A substantial portion of the statutory interest claimed to be owed in the lawsuit related to suspended proceeds we inherited from our predecessors and remitted to various state unclaimed property divisions in 2016. With no admission of liability or wrongdoing, but only to avoid the expense and uncertainty of future litigation, the Partnership entered into a settlement agreement in this case to resolve all claims made against it by the plaintiff and the proposed class and paid approximately $8.4 million to the plaintiff and the proposed class. During the final fairness hearing on June 15, 2023, the settlement agreement was approved by the court and an order granting final approval of the class action settlement was entered into record.
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions, and complaints, after consideration of amounts accrued, insurance coverage, and other arrangements, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our liabilities may change materially as circumstances develop.
Environmental Matters
At September 30, 2023, we have an environmental liability, measured on an undiscounted basis, of $1.4 million, which is recorded within accrued expenses and other payables in our unaudited condensed consolidated balance sheet. Our operations are subject to extensive federal, state, and local environmental laws and regulations. Although we believe our operations are in substantial compliance with applicable environmental laws and regulations, risks of additional costs and liabilities are inherent in our businesses, and there can be no assurance that we will not incur significant costs. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims
18
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
for damages to property or persons resulting from the operations, could result in substantial costs. Accordingly, we have adopted policies, practices, and procedures in the areas of pollution control, product safety, occupational health, and the handling, storage, use, and disposal of hazardous materials designed to prevent material environmental or other damage, and to limit the financial liability that could result from such events. However, some risk of environmental or other damage is inherent in our businesses.
The following table summarizes changes in our asset retirement obligation, which is reported within other noncurrent liabilities in our unaudited condensed consolidated balance sheets (in thousands):
| Balance at March 31, 2023 | $ | ||||
| Liabilities incurred | |||||
| Liabilities associated with disposed assets (1) | ( | ||||
| Liabilities settled | ( | ||||
| Accretion expense | |||||
| Balance at September 30, 2023 | $ | ||||
(1) Relates to the sale of seven saltwater disposal wells and other long-lived assets within our Water Solutions segment (see Note 16).
In addition to the obligations described above, we may be obligated to remove facilities or perform other remediation upon retirement of certain other assets. However, the fair value of the asset retirement obligation cannot currently be reasonably estimated because the settlement dates are indeterminable. We will record an asset retirement obligation for these assets in the periods in which settlement dates are reasonably determinable.
Pipeline Capacity Agreement
We have a noncancellable agreement with a crude oil pipeline operator, which guarantees us minimum monthly shipping capacity on the pipeline. As a result, we are required to pay the minimum shipping fees if actual shipments are less than our allotted capacity. Under this agreement, we have the ability to recover minimum shipping fees previously paid if our shipping volumes exceed the minimum monthly shipping commitment during each month remaining under the agreement, and this agreement allows us to continue shipping up to six months after the maturity date of the contract in order to recapture previously paid minimum shipping delinquency fees. We currently have an asset recorded in prepaid expenses and other current assets and in other noncurrent assets in our unaudited condensed consolidated balance sheet for minimum shipping fees paid in both the current and previous periods that are expected to be recovered in future periods by exceeding the minimum monthly volumes (see Note 2).
The following table summarizes future minimum throughput payments under this agreement at September 30, 2023 (in thousands):
| Fiscal Year Ending March 31, | |||||
| 2024 (six months) | $ | ||||
| 2025 | |||||
| Total | $ | ||||
Sales and Purchase Contracts
We have entered into product sales and purchase contracts for which we expect the parties to physically settle and deliver the inventory in future periods.
19
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
At September 30, 2023, we had the following commodity purchase commitments:
| Crude Oil (1) | Natural Gas Liquids | |||||||||||||||||||||||||
| Value | Volume (in barrels) | Value | Volume (in gallons) | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Fixed-Price Commodity Purchase Commitments: | ||||||||||||||||||||||||||
| 2024 (six months) | $ | $ | ||||||||||||||||||||||||
| 2025 | ||||||||||||||||||||||||||
| 2026 | ||||||||||||||||||||||||||
| 2027 | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| Index-Price Commodity Purchase Commitments: | ||||||||||||||||||||||||||
| 2024 (six months) | $ | $ | ||||||||||||||||||||||||
| 2025 | ||||||||||||||||||||||||||
| 2026 | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
(1) Our crude oil index-price purchase commitments exceed our crude oil index-price sales commitments (presented below) due primarily to our long-term purchase commitments for crude oil that we purchase and ship on the Grand Mesa Pipeline. As these purchase commitments are deliver-or-pay contracts, whereby our counterparty is required to pay us for any volumes not delivered, we have not entered into corresponding long-term sales contracts for volumes we may not receive.
At September 30, 2023, we had the following commodity sale commitments:
| Crude Oil | Natural Gas Liquids | |||||||||||||||||||||||||
| Value | Volume (in barrels) | Value | Volume (in gallons) | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Fixed-Price Commodity Sale Commitments: | ||||||||||||||||||||||||||
| 2024 (six months) | $ | $ | ||||||||||||||||||||||||
| 2025 | ||||||||||||||||||||||||||
| 2026 | ||||||||||||||||||||||||||
| 2027 | ||||||||||||||||||||||||||
| 2028 | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| Index-Price Commodity Sale Commitments: | ||||||||||||||||||||||||||
| 2024 (six months) | $ | $ | ||||||||||||||||||||||||
| 2025 | ||||||||||||||||||||||||||
| 2026 | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
We account for the contracts shown in the tables above using the normal purchase and normal sale election. Under this accounting policy election, we do not record the physical contracts at fair value at each balance sheet date; instead, we record the purchase or sale at the contracted value once the delivery occurs. Contracts in the tables above may have offsetting derivative contracts (described in Note 10) or inventory positions (described in Note 2).
Certain other forward purchase and sale contracts do not qualify for the normal purchase and normal sale election. These contracts are recorded at fair value in our unaudited condensed consolidated balance sheet and are not included in the tables above. These contracts are included in the derivative disclosures in Note 10 and represent $66.3 million of our prepaid expenses and other current assets and $49.3 million of our accrued expenses and other payables at September 30, 2023.
20
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Other Commitments
We have noncancellable agreements for product storage, railcar spurs and real estate. The following table summarizes future minimum payments under these agreements at September 30, 2023 (in thousands):
| Fiscal Year Ending March 31, | |||||
| 2024 (six months) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 9—Equity
Partnership Equity
The Partnership’s equity consists of a 0.1 % GP interest and a 99.9 % limited partner interest, which consists of common units. Our GP has the right, but not the obligation, to contribute a proportionate amount of capital to the Partnership to maintain its 0.1 % GP interest. Our GP is not required to guarantee or pay any of our debts and obligations. At September 30, 2023, we owned 8.69 % of our GP.
Suspension of Common Unit and Preferred Unit Distributions
The board of directors of our GP temporarily suspended all distributions (common unit distributions which began with the quarter ended December 31, 2020 and preferred unit distributions which began with the quarter ended March 31, 2021) in order to deleverage our balance sheet and meet the financial performance ratios set within the Indenture of the 2026 Senior Secured Notes, as discussed further in Note 7.
Class B Preferred Units
As of September 30, 2023, there were 12,585,642 of our Class B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (“Class B Preferred Units”) outstanding.
Class C Preferred Units
As of September 30, 2023, there were 1,800,000 of our Class C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (“Class C Preferred Units”) outstanding.
21
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Class D Preferred Units
As of September 30, 2023, there were 600,000 preferred units (“Class D Preferred Units”) and warrants exercisable to purchase an aggregate of 25,500,000 common units outstanding.
The following table summarizes the outstanding warrants at September 30, 2023:
| Issuance Date and Description | Number of Warrants | Exercise Price | ||||||||||||
| July 2, 2019 | ||||||||||||||
| Premium warrants | $ | |||||||||||||
| Par warrants | $ | |||||||||||||
| October 31, 2019 | ||||||||||||||
| Premium warrants | $ | |||||||||||||
| Par warrants | $ | |||||||||||||
All outstanding warrants are currently exercisable and any unexercised warrants will expire on the tenth anniversary of the date of issuance. The warrants will not participate in cash distributions.
Total Preferred Unit Distributions in Arrears
The total preferred unit distributions in arrears for all classes of preferred units are $321.2 million as of September 30, 2023.
Equity-Based Incentive Compensation
Our GP adopted a long-term incentive plan (“LTIP”), which allowed for the issuance of equity-based compensation. Our GP granted certain restricted units to employees and directors, which vest in tranches, subject to the continued service of the recipients through the vesting date (the “Service Awards”). The Service Awards may also vest upon a change of control, at the discretion of the board of directors of our GP. No distributions accrue to or are paid on the Service Awards during the vesting period. The LTIP expired on May 10, 2021.
The following table summarizes the Service Award activity during the six months ended September 30, 2023:
| Weighted-Average | ||||||||||||||
| Grant Date | ||||||||||||||
| Number of | Fair Value | |||||||||||||
| Units | Per Unit | |||||||||||||
| Unvested Service Award units at March 31, 2023 | $ | |||||||||||||
| Units forfeited | ( | $ | ||||||||||||
| Unvested Service Award units at September 30, 2023 | $ | |||||||||||||
22
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
As the LTIP expired on May 10, 2021, we had no common units available for grant during the six months ended September 30, 2023.
As of September 30, 2023, there are 606,725 unvested Service Awards which are expected to vest on November 15, 2023. Also, any current unvested Service Awards that are forfeited or canceled will not be available for future grants.
During the three months ended September 30, 2023 and 2022, we recorded compensation expense related to Service Awards of $0.4 million and $0.5 million, respectively. During the six months ended September 30, 2023 and 2022, we recorded compensation expense related to Service Award units of $0.9 million and $1.0 million, respectively.
For the unvested Service Awards at September 30, 2023, we had estimated future expense of $0.2 million which we expect to record by November 15, 2023.
Note 10—Fair Value of Financial Instruments
Our cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other current assets and liabilities (excluding derivative instruments) are carried at amounts which reasonably approximate their fair values due to their short-term nature.
Commodity Derivatives
The following table summarizes the estimated fair values of our commodity derivative assets and liabilities reported in our unaudited condensed consolidated balance sheets at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Level 1 measurements | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Level 2 measurements | ( | ( | ||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||
| Netting of counterparty contracts (1) | ( | ( | ||||||||||||||||||||||||
| Net cash collateral held | ( | ( | ( | ( | ||||||||||||||||||||||
| Commodity derivatives | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
(1) Relates to commodity derivative assets and liabilities that are expected to be net settled on an exchange or through a master netting arrangement with the counterparty. Our physical contracts that do not qualify as normal purchase normal sale transactions are not subject to such master netting arrangements.
The following table summarizes the accounts that include our commodity derivative assets and liabilities in our unaudited condensed consolidated balance sheets at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||||||||
| Other noncurrent assets | ||||||||||||||
| Accrued expenses and other payables | ( | ( | ||||||||||||
| Other noncurrent liabilities | ( | ( | ||||||||||||
| Net commodity derivative asset | $ | $ | ||||||||||||
23
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table summarizes our open commodity derivative contract positions at the dates indicated. We do not account for these derivatives as hedges.
| Contracts | Settlement Period | Net Long (Short) Notional Units (in barrels) | Fair Value of Net Assets (Liabilities) | |||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| At September 30, 2023: | ||||||||||||||||||||
| Crude oil fixed-price (1) | October 2023–April 2024 | ( | $ | |||||||||||||||||
| Propane fixed-price (1) | October 2023–March 2025 | ( | ||||||||||||||||||
| Refined products fixed-price (1) | October 2023–December 2024 | ( | ( | |||||||||||||||||
| Butane fixed-price (1) | October 2023–April 2024 | ( | ||||||||||||||||||
| Other | October 2023–September 2024 | |||||||||||||||||||
| Net cash collateral held | ( | |||||||||||||||||||
| Net commodity derivative asset | $ | |||||||||||||||||||
| At March 31, 2023: | ||||||||||||||||||||
| Crude oil fixed-price (1) | April 2023–March 2024 | $ | ||||||||||||||||||
| Propane fixed-price (1) | April 2023–March 2025 | ( | ( | |||||||||||||||||
| Refined products fixed-price (1) | April 2023–July 2024 | ( | ||||||||||||||||||
| Butane fixed-price (1) | April 2023–March 2024 | ( | ||||||||||||||||||
| Other | April 2023–September 2024 | |||||||||||||||||||
| Net cash collateral held | ( | |||||||||||||||||||
| Net commodity derivative asset | $ | |||||||||||||||||||
(1) We may have fixed price physical purchases, including inventory, offset by floating price physical sales or floating price physical purchases offset by fixed price physical sales. These contracts are derivatives we have entered into as an economic hedge against the risk of mismatches between fixed and floating price physical obligations.
During the three months ended September 30, 2023 and 2022, we recorded net losses of $13.9 million and net gains of $28.0 million, respectively, from our commodity derivatives to revenues and cost of sales in our unaudited condensed consolidated statements of operations. During the six months ended September 30, 2023 and 2022, we recorded net losses of $1.0 million and $13.1 million, respectively, from our commodity derivatives to revenues and cost of sales in our unaudited condensed consolidated statements of operations.
Credit Risk
We have credit policies that we believe minimize our overall credit risk, including an evaluation of potential counterparties’ financial condition (including credit ratings), collateral requirements under certain circumstances, and the use of industry standard master netting agreements, which allow for offsetting counterparty receivable and payable balances for certain transactions. At September 30, 2023, our primary counterparties were retailers, resellers, energy marketers, producers, refiners, and dealers. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, as the counterparties may be similarly affected by changes in economic, regulatory or other conditions. If a counterparty does not perform on a contract, we may not realize amounts that have been recorded in our unaudited condensed consolidated balance sheets and recognized in our net income.
Interest Rate Risk
The ABL Facility is variable-rate debt with interest rates that are generally indexed to the prime rate or SOFR, an adjusted forward-looking term rate based on the secured overnight financing rate. At September 30, 2023, we had $156.0 million of outstanding borrowings under the ABL Facility at a weighted average interest rate of 8.27 %.
24
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Fair Value of Fixed-Rate Notes
The following table provides fair value estimates of our fixed-rate notes at September 30, 2023 (in thousands):
| 2026 Senior Secured Notes | $ | ||||
| 2025 Notes | $ | ||||
| 2026 Notes | $ | ||||
For the 2026 Senior Secured Notes, 2025 Notes and 2026 Notes, the fair value estimates were developed based on publicly traded quotes and would be classified as Level 2 in the fair value hierarchy.
Note 11—Segments
Our operations are organized into three reportable segments: (i) Water Solutions, (ii) Crude Oil Logistics and (iii) Liquids Logistics, consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. Our Liquids Logistics reportable segment includes operating segments that have been aggregated based on the nature of the products and services provided. Operating income of these segments is reviewed by the chief operating decision maker to evaluate performance and make business decisions. Intersegment transactions are recorded based on prices negotiated between the segments and are eliminated upon consolidation.
See Note 1 for a discussion of the products and services of our reportable segments. The remainder of our business operations is presented as “Corporate and Other” and consists of certain corporate expenses that are not allocated to the reportable segments. The following table summarizes revenues related to our segments for the periods indicated:
25
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Water Solutions: | ||||||||||||||||||||||||||
| Topic 606 revenues | ||||||||||||||||||||||||||
| Disposal service fees | $ | $ | $ | $ | ||||||||||||||||||||||
| Sale of recovered crude oil | ||||||||||||||||||||||||||
| Sale of water | ||||||||||||||||||||||||||
| Other service revenues | ||||||||||||||||||||||||||
| Non-Topic 606 revenues | ||||||||||||||||||||||||||
| Total Water Solutions revenues | ||||||||||||||||||||||||||
| Crude Oil Logistics: | ||||||||||||||||||||||||||
| Topic 606 revenues | ||||||||||||||||||||||||||
| Crude oil sales | ||||||||||||||||||||||||||
| Crude oil transportation and other | ||||||||||||||||||||||||||
| Non-Topic 606 revenues | ||||||||||||||||||||||||||
| Elimination of intersegment sales | ( | ( | ( | ( | ||||||||||||||||||||||
| Total Crude Oil Logistics revenues | ||||||||||||||||||||||||||
| Liquids Logistics: | ||||||||||||||||||||||||||
| Topic 606 revenues | ||||||||||||||||||||||||||
| Refined products sales | ||||||||||||||||||||||||||
| Propane sales | ||||||||||||||||||||||||||
| Butane sales | ||||||||||||||||||||||||||
| Other product sales | ||||||||||||||||||||||||||
| Service revenues | ||||||||||||||||||||||||||
| Non-Topic 606 revenues | ||||||||||||||||||||||||||
| Total Liquids Logistics revenues | ||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||||||||||||
During the three months ended September 30, 2023 and 2022, our Liquids Logistics revenues included $31.6 million and $60.3 million of non-US revenues, respectively, and during the six months ended September 30, 2023 and 2022, our Liquids Logistics revenues included $51.2 million and $102.0 million of non-US revenues, respectively.
26
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following tables summarize depreciation and amortization expense (including amortization expense recorded within interest expense, cost of sales and operating expenses in Note 6 and Note 7) and operating income (loss) by segment for the periods indicated.
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Depreciation and Amortization: | ||||||||||||||||||||||||||
| Water Solutions | $ | $ | $ | $ | ||||||||||||||||||||||
| Crude Oil Logistics | ||||||||||||||||||||||||||
| Liquids Logistics | ||||||||||||||||||||||||||
| Corporate and Other | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating Income (Loss): | ||||||||||||||||||||||||||
| Water Solutions | $ | $ | $ | $ | ||||||||||||||||||||||
| Crude Oil Logistics | ||||||||||||||||||||||||||
| Liquids Logistics | ||||||||||||||||||||||||||
| Corporate and Other | ( | ( | ( | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following table summarizes additions to property, plant and equipment and intangible assets by segment for the periods indicated. This information has been prepared on the accrual basis, and includes property, plant and equipment and intangible assets acquired in acquisitions.
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Water Solutions | $ | $ | $ | $ | ||||||||||||||||||||||
| Crude Oil Logistics | ||||||||||||||||||||||||||
| Liquids Logistics | ||||||||||||||||||||||||||
| Corporate and Other | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following tables summarize long-lived assets, net (consisting of property, plant and equipment, goodwill, intangible assets and operating lease right-of-use assets) and total assets by segment at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Long-lived assets, net: | ||||||||||||||
| Water Solutions | $ | $ | ||||||||||||
| Crude Oil Logistics | ||||||||||||||
| Liquids Logistics (1) | ||||||||||||||
| Corporate and Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
(1) Includes $9.0 million and $12.5 million of non-US long-lived assets at September 30, 2023 and March 31, 2023, respectively.
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Total assets: | ||||||||||||||
| Water Solutions | $ | $ | ||||||||||||
| Crude Oil Logistics | ||||||||||||||
| Liquids Logistics (1) | ||||||||||||||
| Corporate and Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
27
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Note 12—Transactions with Affiliates
The following table summarizes our related party transactions for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Purchases from equity method investees | $ | $ | $ | $ | ||||||||||||||||||||||
| Purchases from entities affiliated with management | $ | $ | $ | $ | ||||||||||||||||||||||
Accounts receivable from affiliates consist of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| NGL Energy Holdings LLC | $ | $ | ||||||||||||
| Equity method investees | ||||||||||||||
| Entities affiliated with management | ||||||||||||||
| Total | $ | $ | ||||||||||||
Accounts payable to affiliates consist of the following at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Equity method investees | $ | $ | ||||||||||||
| Entities affiliated with management | ||||||||||||||
| Total | $ | $ | ||||||||||||
Other Related Party Transactions
Guarantee of Outstanding Loan for KAIR2014 LLC (“KAIR2014”)
In connection with the purchase of our 50 % interest in an aircraft company, KAIR2014, we executed a joint and several guarantee for the benefit of the lender for KAIR2014’s outstanding loan. The other owner of KAIR2014, our Chief Executive Officer, H. Michael Krimbill, is a party to a similar guarantee. This guarantee obligates us for the payment and performance of KAIR2014 with respect to the repayment of the loan, which was set to mature in September 2023. On September 1, 2023, KAIR2014 entered into an agreement to extend the maturity date of the loan to September 1, 2028. Accordingly, we and H. Michael Krimbill executed new joint and several guarantees for the benefit of the lender for KAIR2014’s outstanding loan. As of September 30, 2023, the outstanding balance of the loan is approximately $2.1 million. Payments are made monthly, reducing the outstanding balance. As our guarantee is joint and several, we could be liable for the entire outstanding balance of the loan. The loan is collateralized by the airplane owned by KAIR2014 and in the event of a default, the lender could seek payment in full from us. As of September 30, 2023, no accrual has been recorded related to our guarantee.
Note 13—Revenue from Contracts with Customers
We recognize revenue for services and products under revenue contracts as our obligations to either perform services or deliver or sell products under the contracts are satisfied. Our revenue contracts in scope under ASC 606 primarily have a single performance obligation and we do not receive material amounts of non-cash consideration. Our costs to obtain or fulfill our revenue contracts were not material as of September 30, 2023.
The majority of our revenue agreements are in the scope under ASC 606 and the remainder of our revenue comes from contracts that are accounted for as derivatives under ASC 815 or that contain nonmonetary exchanges or leases in the scope of ASC 845 and ASC 842, respectively. See Note 11 for a detail of disaggregated revenue. Revenue from contracts accounted for as derivatives under ASC 815 within our Liquids Logistics segment includes $57.1 million and $58.8 million, respectively, of net gains related to changes in the mark-to-market value of these contracts recorded during the three months and six months ended September 30, 2023.
28
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
| Fiscal Year Ending March 31, | |||||
| 2024 (six months) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
| Total | $ | ||||
Contract Assets and Liabilities
The following tables summarize the balances of our contract assets and liabilities at the dates indicated:
| September 30, 2023 | March 31, 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Accounts receivable from contracts with customers | $ | $ | ||||||||||||
| Contract assets (current) | $ | $ | ||||||||||||
| Contract liabilities balance at March 31, 2023 | $ | |||||||
| Payment received and deferred | ||||||||
| Payment recognized in revenue | ( | |||||||
| Contract liabilities balance at September 30, 2023 | $ | |||||||
Note 14—Leases
Lessee Accounting
Our leasing activity primarily consists of product storage, office space, real estate, railcars, and equipment.
The following table summarizes the components of our lease cost for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Operating lease cost (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable lease cost (1) | ||||||||||||||||||||||||||
| Short-term lease cost (1) | ||||||||||||||||||||||||||
| Finance lease cost | ||||||||||||||||||||||||||
| Amortization of right-of-use asset (2) | ||||||||||||||||||||||||||
| Interest on lease obligation (3) | ||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
(1) Included in operating expenses in our unaudited condensed consolidated statements of operations.
(2) Included in depreciation and amortization expense in our unaudited condensed consolidated statements of operations.
(3) Included in interest expense in our unaudited condensed consolidated statements of operations.
29
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table summarizes maturities of our lease obligations at September 30, 2023 (in thousands):
| Operating | Finance | |||||||||||||
| Fiscal Year Ending March 31, | Leases | Lease (1) | ||||||||||||
| 2024 (six months) | $ | $ | ||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| 2027 | ||||||||||||||
| 2028 | ||||||||||||||
| 2029 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | ||||||||||||||
| Less imputed interest | ( | ( | ||||||||||||
| Total lease obligations | $ | $ | ||||||||||||
(1) At September 30, 2023, the short-term finance lease obligation of less than $0.1 million is included in accrued expenses and other payables and the long-term finance lease obligation of $0.1 million is included in other noncurrent liabilities.
The following table summarizes supplemental cash flow information related to our leases for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| (in thousands) | ||||||||||||||
| Supplemental Cash Flow Information | ||||||||||||||
| Cash paid for amounts included in the measurement of lease obligations | ||||||||||||||
| Operating cash outflows from operating leases | $ | $ | ||||||||||||
| Operating cash outflows from finance lease | $ | $ | ||||||||||||
| Financing cash outflows from finance lease | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Finance lease | $ | $ | ||||||||||||
Lessor Accounting and Subleases
Our lessor arrangements include storage and railcar contracts. We also, from time to time, sublease certain of our storage capacity and railcars to third-parties. Fixed rental revenue is recognized on a straight-line basis over the lease term. During the three months ended September 30, 2023 and 2022, fixed rental revenue was $, which includes $1.1 million of sublease revenue, and $, which includes $0.9 million of sublease revenue, respectively. During the six months ended September 30, 2023 and 2022, fixed rental revenue was $, which includes $2.1 million of sublease revenue, and $, which includes $1.1 million of sublease revenue, respectively.
The following table summarizes future minimum lease payments to be received under various noncancellable operating lease agreements at September 30, 2023 (in thousands):
| Fiscal Year Ending March 31, | |||||
| 2024 (six months) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Total | $ | ||||
30
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Note 15—Allowance for Current Expected Credit Loss (CECL)
ASU 2016-13 requires that an allowance for expected credit losses be recognized for certain financial assets that reflects the current expected credit loss over the financial asset’s contractual life. The valuation allowance considers the risk of loss, even if remote, and considers past events, current conditions and reasonable and supportable forecasts.
We are exposed to credit losses primarily through sale of products and services and notes receivable from third-parties. A counterparty’s ability to pay is assessed through a credit process that considers the payment terms, the counterparty’s established credit rating or our assessment of the counterparty’s credit worthiness and other risks. We can require prepayment or collateral to mitigate credit risks.
We group our financial assets into pools of counterparties with similar risk characteristics for the purpose of determining the allowance for expected credit losses. Each reporting period, we assess whether a significant change in the risk of expected credit loss has occurred. Among the quantitative and qualitative factors considered in calculating our allowance for expected credit losses are historical financial data, including write-offs and allowances, current conditions, industry risk and current credit ratings. Financial assets will be written off in whole, or in part, when practical recovery efforts have been exhausted and no reasonable expectation of recovery exists. Subsequent recoveries of amounts previously written off are recorded as an increase to the allowance for expected credit losses. We manage receivable pools using past due balances as a key credit quality indicator.
The following table summarizes changes in our allowance for expected credit losses for the period indicated:
| Accounts Receivable - Trade | Notes Receivable and Other | |||||||||||||
| (in thousands) | ||||||||||||||
| Balance at March 31, 2023 | $ | $ | ||||||||||||
| Change in provision for expected credit losses | ( | |||||||||||||
| Write-offs charged against the provision | ( | |||||||||||||
| Balance at September 30, 2023 | $ | $ | ||||||||||||
Note 16—Other Matters
Sale of Certain Water Disposal Assets
On June 21, 2023, we sold certain saltwater disposal assets in the Eagle Ford Basin to a third-party for total consideration of $3.0 million, of which $0.05 million was in cash and $2.95 million was a loan receivable. Interest on the loan receivable is based on the prime rate and is due monthly beginning on August 1, 2023. The loan receivable matures on December 31, 2025. We recorded a loss of $5.4 million within loss on disposal or impairment of assets, net in our unaudited condensed consolidated statement of operations for the six months ended September 30, 2023.
On July 25, 2023, we entered into an agreement in which we terminated a minimum volume water disposal contract and sold certain saltwater disposal assets and intangible assets in the Pinedale Anticline Basin to a third-party for total consideration of $8.7 million in cash. The buyer also assumed certain asset retirement obligations associated with the saltwater disposal assets. For this transaction, the consideration was allocated between the termination of the water disposal contract and the sale of assets based on their relative fair values. The terminated contract included a minimum volume commitment through December 31, 2025. Approximately $7.8 million of the total consideration was allocated to the termination of the water disposal contract and was recognized as revenue, and the remaining $0.9 million was allocated to the sale of assets. We recorded a loss of $21.1 million on the sale within loss on disposal or impairment of assets, net in our unaudited condensed consolidated statement of operations for the six months ended September 30, 2023.
As these sale transactions do not represent a strategic shift that will have a major effect on our operations or financial results, operations related to these portions of our Water Solutions segment have not been classified as discontinued operations.
Sale of Certain Natural Gas Liquids Terminals
On July 24, 2023, we sold two natural gas liquids terminals in the Pacific Northwest to a third-party for total consideration of $16.0 million in cash. Also, as part of this transaction, we wrote off goodwill allocated to this transaction and
31
NGL ENERGY PARTNERS LP AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
terminated an existing lease. We recorded a gain of $6.9 million within loss on disposal or impairment of assets, net in our unaudited condensed consolidated statement of operations for the six months ended September 30, 2023.
As this sale transaction did not represent a strategic shift that will have a major effect on our operations or financial results, operations related to this portion of our Liquids Logistics segment have not been classified as discontinued operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of NGL Energy Partners LP’s (“we,” “us,” “our,” or the “Partnership”) financial condition and results of operations as of and for the three months and six months ended September 30, 2023. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (“Quarterly Report”), as well as Part II, Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on May 31, 2023.
Overview
We are a Delaware limited partnership. NGL Energy Holdings LLC serves as our general partner (“GP”). At September 30, 2023, our operations included three segments: Water Solutions, Crude Oil Logistics and Liquids Logistics. See Note 1 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion of these businesses.
Global Pandemic, International Conflicts and Market Update
Since March 2020, and throughout the last three years, global markets and commodity prices have been extremely volatile due to the impacts from the COVID-19 pandemic, with further impacts on volatility caused by the war in Ukraine that began in February 2022 and the current conflict between Israel and Hamas that began in October 2023. While we have seen continued recovery in commodity prices since the beginning of the pandemic, there is still volatility that we expect to continue at least for the near-term and possibly longer, due to the uncertainty of the pandemic, the war in Ukraine, the conflict between Israel and Hamas and the result of any economic recession or depression that has occurred or may occur in the future. This volatility could negatively impact future prices for crude oil, natural gas, petroleum products and industrial products.
In addition, if we see a continuation or acceleration of fiscal year 2023’s inflationary conditions, rising interest rates, supply chain disruptions and tight labor markets, then we may also see higher costs of operating our assets and executing on our capital projects in fiscal year 2024. During fiscal year 2023, the war in Ukraine may have amplified inflation and supply chain constraints complicating the rebound of the global economy after the COVID-19 pandemic. In an effort to curb inflation, the U.S. Federal Reserve raised interest rates during fiscal year 2023, in May 2023 and most recently on July 26, 2023. The U.S. Federal Reserve may implement additional increases in fiscal year 2024, which will increase the cost of our ABL Facility (as defined herein). On the other hand, our ability to pass along rate increases reflecting changes in producer and/or consumer price indices to our customers, under our contracts, should help to counterbalance the impact of inflation on our costs.
Seismic Activity
The subsurface injection of produced water for disposal has been associated with recent induced seismic events in Texas and New Mexico. While these events have been of relatively low magnitude, industry and relevant state regulators are, nevertheless, taking proactive measures to attempt to prevent similar induced seismic events. More specifically, we are engaged in various collaborative industry efforts with other disposal operators and relevant state regulatory agencies, working to collect and review data, enhance understanding of regional fault systems, and ultimately develop and implement appropriate longer-term mitigation strategies. As part of this effort, we have implemented reductions in injected volumes at certain facilities, and where appropriate have temporarily shut-in facilities. To date, due to the capacity of our integrated system in the affected areas, the diverse locations of our disposal facilities, and the connectivity of our system, our ability to dispose of produced water has not been materially impacted by these actions, and with our unique positioning outside of the affected areas, we have the ability to grow our asset base.
32
Consolidated Results of Operations
The following table summarizes our unaudited condensed consolidated statements of operations for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenues | $ | 1,841,096 | $ | 2,009,447 | $ | 3,457,200 | $ | 4,506,830 | ||||||||||||||||||
| Cost of sales | 1,578,448 | 1,764,120 | 2,957,777 | 4,019,131 | ||||||||||||||||||||||
| Operating expenses | 77,389 | 84,158 | 154,070 | 156,018 | ||||||||||||||||||||||
| General and administrative expense | 17,496 | 16,628 | 37,787 | 33,385 | ||||||||||||||||||||||
| Depreciation and amortization | 65,526 | 68,118 | 134,505 | 134,778 | ||||||||||||||||||||||
| Loss on disposal or impairment of assets, net | 16,207 | 7,653 | 15,011 | 7,485 | ||||||||||||||||||||||
| Operating income | 86,030 | 68,770 | 158,050 | 156,033 | ||||||||||||||||||||||
| Equity in earnings of unconsolidated entities | 851 | 1,207 | 942 | 1,881 | ||||||||||||||||||||||
| Interest expense | (58,627) | (68,297) | (118,149) | (135,608) | ||||||||||||||||||||||
| Gain on early extinguishment of liabilities, net | 63 | 2,479 | 6,871 | 4,141 | ||||||||||||||||||||||
| Other income (expense), net | 310 | (15) | 616 | 631 | ||||||||||||||||||||||
| Income before income taxes | 28,627 | 4,144 | 48,330 | 27,078 | ||||||||||||||||||||||
| Income tax expense | (342) | (537) | (482) | (365) | ||||||||||||||||||||||
| Net income | 28,285 | 3,607 | 47,848 | 26,713 | ||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (257) | (97) | (519) | (342) | ||||||||||||||||||||||
| Net income attributable to NGL Energy Partners LP | $ | 28,028 | $ | 3,510 | $ | 47,329 | $ | 26,371 | ||||||||||||||||||
Items Impacting the Comparability of Our Financial Results
Our current and future results of operations may not be comparable to our historical results of operations for the periods presented due to commodity price volatility, acquisitions, dispositions and other transactions. Our results of operations for the three months and six months ended September 30, 2023 are not necessarily indicative of the results of operations to be expected for future periods or for the full fiscal year ending March 31, 2024.
Recent Developments
Dispositions
The following transactions impacted the comparability of our results of operations between our current and prior fiscal years.
As previously reported, on June 21, 2023, we sold certain saltwater disposal assets in the Eagle Ford Basin (see Note 16 to our unaudited condensed consolidated financial statements included in this Quarterly Report).
On July 24, 2023, we sold two natural gas liquids terminals in the Pacific Northwest (see Note 16 to our unaudited condensed consolidated financial statements included in this Quarterly Report).
On July 25, 2023, we entered into an agreement in which we terminated a minimum volume water disposal contract and sold certain saltwater disposal assets and intangible assets in the Pinedale Anticline Basin (see Note 16 to our unaudited condensed consolidated financial statements included in this Quarterly Report).
As previously reported, on March 30, 2023, we sold our crude marine assets and on March 31, 2023, we sold certain saltwater disposal assets in the Midland Basin.
33
Segment Operating Results for the Three Months Ended September 30, 2023 and 2022
Water Solutions
The following table summarizes the operating results of our Water Solutions segment for the periods indicated:
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per barrel and per day amounts) | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Water disposal service fees | $ | 154,751 | $ | 126,295 | $ | 28,456 | ||||||||||||||
| Sale of recovered crude oil | 31,101 | 27,472 | 3,629 | |||||||||||||||||
| Recycled water | 947 | 2,962 | (2,015) | |||||||||||||||||
| Other revenues | 10,445 | 8,181 | 2,264 | |||||||||||||||||
| Total revenues | 197,244 | 164,910 | 32,334 | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Cost of sales-excluding impact of derivatives | 2,952 | 1,964 | 988 | |||||||||||||||||
| Derivative loss (gain) | 4,472 | (1,044) | 5,516 | |||||||||||||||||
| Operating expenses | 53,867 | 55,539 | (1,672) | |||||||||||||||||
| General and administrative expenses | 1,183 | 961 | 222 | |||||||||||||||||
| Depreciation and amortization expense | 52,053 | 51,327 | 726 | |||||||||||||||||
| Loss on disposal or impairment of assets, net | 23,599 | 9,035 | 14,564 | |||||||||||||||||
| Total expenses | 138,126 | 117,782 | 20,344 | |||||||||||||||||
| Segment operating income | $ | 59,118 | $ | 47,128 | $ | 11,990 | ||||||||||||||
| Produced water processed (barrels per day) | ||||||||||||||||||||
| Delaware Basin | 2,156,733 | 1,986,585 | 170,148 | |||||||||||||||||
| Eagle Ford Basin | 138,509 | 112,337 | 26,172 | |||||||||||||||||
| DJ Basin | 146,124 | 153,766 | (7,642) | |||||||||||||||||
| Other Basins | — | 13,150 | (13,150) | |||||||||||||||||
| Total | 2,441,366 | 2,265,838 | 175,528 | |||||||||||||||||
| Recycled water (barrels per day) | 35,341 | 93,898 | (58,557) | |||||||||||||||||
| Total (barrels per day) | 2,476,707 | 2,359,736 | 116,971 | |||||||||||||||||
| Skim oil sold (barrels per day) | 4,378 | 3,216 | 1,162 | |||||||||||||||||
| Service fees for produced water processed ($/barrel) (1) | $ | 0.69 | $ | 0.61 | $ | 0.08 | ||||||||||||||
| Recovered crude oil for produced water processed ($/barrel) (1) | $ | 0.14 | $ | 0.13 | $ | 0.01 | ||||||||||||||
| Operating expenses for produced water processed ($/barrel) (1) | $ | 0.24 | $ | 0.27 | $ | (0.03) | ||||||||||||||
(1) Total produced water barrels processed during the three months ended September 30, 2023 and 2022 were 224,605,594 and 208,457,135, respectively. These amounts do not include 20,763,928 barrels and 12,592,473 barrels for the three months ended September 30, 2023 and 2022, respectively, related to payments received from producers for committed volumes not delivered, as discussed further below.
Water Disposal Service Fee Revenues. The increase was due primarily to an increase in produced water volumes processed from contracted customers mainly in the Delaware Basin, increased fees from new contracts entered into during fiscal year 2023 and higher fees charged for interruptible spot volumes. Also, there was an increase in payments made by certain producers for committed volumes not delivered. Service fees for produced water processed ($/barrel) also benefited from these deficiency payments. In addition, during July 2023, we entered into a transaction in which a portion of the total consideration received was allocated to revenue due to the termination of a minimum volume water disposal contract (see Note 16 to our unaudited condensed consolidated financial statements included in this Quarterly Report).
Recovered Crude Oil Revenues. The increase was due primarily to greater skim oil barrels sold as a result of higher skim oil recovered from increased produced water processed, and the sale during the quarter of approximately 53,000 barrels of skim oil that were stored at the end of the prior quarter due to tighter pipeline specifications.
Recycled Water Revenues. Revenue from recycled water includes the sale of produced water and recycled water for use in our customers’ completion activities. The decrease was due primarily to lower recycled water volumes related to timing of water to be used in completions.
34
Other Revenues. Other revenues primarily include brackish non-potable water revenues, water pipeline revenues, land surface use revenues, solids disposal revenues and reimbursements from construction projects. The increase was due primarily to higher reimbursements from construction projects and higher sales of brackish non-potable water due to a new customer contract. These increases were partially offset by lower water pipeline revenues due to the expiration of certain pipeline commitment revenue in December 2022.
Cost of Sales-Excluding Impact of Derivatives. The increase was due primarily to costs incurred that will be reimbursed by producers for generator and fuel costs at various booster stations. In addition, we incurred trucking expenses for skim oil sales during the three months ended September 30, 2023.
Derivative Loss (Gain). We enter into derivatives in our Water Solutions segment to protect against the risk of a decline in the market price of the crude oil we expect to recover when processing produced water and selling recovered skim oil. During the three months ended September 30, 2023, we had $4.5 million of net unrealized losses on derivatives and less than $0.1 million of net realized losses on derivatives. During the three months ended September 30, 2022, we had $4.3 million of net unrealized gains on derivatives and $3.3 million of net realized losses on derivatives.
Operating and General and Administrative Expenses. The decrease was due primarily to lower chemical expense due to purchasing fewer chemicals and using chemicals more efficiently and lower severance taxes as a result of a severance tax refund in September 2023 related to prior periods partially offset by higher severance taxes due to an increase in revenue from recovered crude oil. Also, during the three months ended September 30, 2022, we incurred increased costs for pollution remediation and clean up costs related to fires at two locations. These decreases from the prior year period were partially offset by higher utilities expense and overhead costs.
Depreciation and Amortization Expense. The increase was due primarily to depreciation of newly developed facilities and infrastructure partially offset by certain long-term assets being fully amortized or impaired during the fiscal year ended March 31, 2023 and six months ended September 30, 2023.
Loss on Disposal or Impairment of Assets, Net. During the three months ended September 30, 2023, we recorded a net loss of $21.2 million primarily related to the sale of certain assets and a net loss of $2.4 million related to the abandonment of certain capital projects and the retirement of certain assets. During the three months ended September 30, 2022, we recorded an impairment charge of $8.0 million to write down the value of an inactive saltwater disposal facility and equipment at another saltwater disposal facility. We also recorded a net loss of $1.1 million primarily related to the abandonment of certain capital projects and the sale and retirement of certain other miscellaneous assets.
35
Crude Oil Logistics
The following table summarizes the operating results of our Crude Oil Logistics segment for the periods indicated:
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per barrel amounts) | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Crude oil sales | $ | 475,103 | $ | 551,394 | $ | (76,291) | ||||||||||||||
| Crude oil transportation and other | 14,747 | 24,639 | (9,892) | |||||||||||||||||
| Total revenues (1) | 489,850 | 576,033 | (86,183) | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Cost of sales-excluding impact of derivatives | 439,698 | 543,263 | (103,565) | |||||||||||||||||
| Derivative loss (gain) | 15,366 | (27,814) | 43,180 | |||||||||||||||||
| Operating expenses | 9,946 | 14,934 | (4,988) | |||||||||||||||||
| General and administrative expenses | 956 | 1,244 | (288) | |||||||||||||||||
| Depreciation and amortization expense | 9,573 | 11,775 | (2,202) | |||||||||||||||||
| Gain on disposal or impairment of assets, net | (467) | (296) | (171) | |||||||||||||||||
| Total expenses | 475,072 | 543,106 | (68,034) | |||||||||||||||||
| Segment operating income | $ | 14,778 | $ | 32,927 | $ | (18,149) | ||||||||||||||
| Crude oil sold (barrels) | 5,636 | 5,839 | (203) | |||||||||||||||||
| Crude oil transported on owned pipelines (barrels) | 6,484 | 6,600 | (116) | |||||||||||||||||
| Crude oil storage capacity - owned and leased (barrels) (2) | 5,232 | 5,232 | — | |||||||||||||||||
| Crude oil storage capacity leased to third-parties (barrels) (2) | 2,250 | 1,501 | 749 | |||||||||||||||||
| Crude oil inventory (barrels) (2) | 660 | 660 | — | |||||||||||||||||
| Crude oil sold ($/barrel) | $ | 84.298 | $ | 94.433 | $ | (10.135) | ||||||||||||||
| Cost per crude oil sold ($/barrel) (3) | $ | 78.016 | $ | 93.040 | $ | (15.024) | ||||||||||||||
| Crude oil product margin ($/barrel) (3) | $ | 6.282 | $ | 1.393 | $ | 4.889 | ||||||||||||||
(1) Revenues include $0.1 million and $1.3 million of intersegment sales during the three months ended September 30, 2023 and 2022, respectively, that are eliminated in our unaudited condensed consolidated statements of operations.
(2) Information is presented as of September 30, 2023 and September 30, 2022, respectively.
(3) Cost and product margin per barrel excludes the impact of derivatives.
Crude Oil Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases were due primarily to a decrease in crude oil prices during the three months ended September 30, 2023, compared to the three months ended September 30, 2022 and lower sales volumes due to an increase in buy/sell transactions during the three months ended September 30, 2023. Buy/sell transactions are transactions in which we purchase product from a counterparty and sell the same volumes of product to the same counterparty at a different location or time. The revenues, cost of sales and volumes are netted for these transactions.
During the three months ended September 30, 2023, physical volumes on the Grand Mesa Pipeline averaged approximately 70,000 barrels per day, compared to approximately 72,000 barrels per day during the three months ended September 30, 2022. Lower demand for heavier crude oil grades, and the resulting lower crude oil prices, resulted in decreased production in the DJ Basin and consequently, lower contracted volumes shipped on Grand Mesa.
Margins from the sale of crude oil increased during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 due to the sale of lower priced inventory into a market in which prices were increasing. During the three months ended September 30, 2022 we experienced the opposite, in which we were selling higher priced inventory into a market in which prices were declining.
Derivative Loss (Gain). Our cost of sales during the three months ended September 30, 2023 included $10.8 million of net realized losses on derivatives, driven by decreasing crude oil prices, and $4.6 million of net unrealized losses on derivatives. The previous amounts for the three months ended September 30, 2023 included net realized gains of $9.4 million and net unrealized losses of $4.8 million associated with derivative instruments related to our hedge of the CMA Differential Roll, defined and discussed below under “Non-GAAP Financial Measures.” Our cost of sales during the three months ended
36
September 30, 2022 included $23.2 million of net realized gains on derivatives, driven by decreasing crude oil prices, and $4.6 million of net unrealized gains on derivatives. The amount for the three months ended September 30, 2022 includes net realized gains of $8.8 million and net unrealized gains of $6.5 million associated with derivative instruments related to our hedge of the CMA Differential Roll.
Crude Oil Transportation and Other Revenues. The decrease was primarily due to the sale of our marine assets on March 30, 2023.
Operating and General and Administrative Expenses. The decrease was primarily due to the sale of our marine assets on March 30, 2023.
Depreciation and Amortization Expense. The decrease was due primarily to the sale of our marine assets on March 30, 2023 and the impairment of certain terminal assets, which lowered their depreciable base, during the three months ended March 31, 2023.
Gain on Disposal or Impairment of Assets, Net. During the three months ended September 30, 2023, we recorded a net gain of $0.5 million primarily due to disposals and retirements of certain assets. During the three months ended September 30, 2022, we recorded a net gain of $0.3 million primarily due to disposals and retirements of certain assets.
37
Liquids Logistics
The following table summarizes the operating results of our Liquids Logistics segment for the periods indicated:
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per gallon amounts) | ||||||||||||||||||||
| Refined products sales: | ||||||||||||||||||||
| Revenues-excluding impact of derivatives | $ | 620,323 | $ | 635,758 | $ | (15,435) | ||||||||||||||
| Cost of sales-excluding impact of derivatives | 614,709 | 629,166 | (14,457) | |||||||||||||||||
| Derivative loss (gain) | 76 | (479) | 555 | |||||||||||||||||
| Product margin | 5,538 | 7,071 | (1,533) | |||||||||||||||||
| Propane sales: | ||||||||||||||||||||
| Revenues | 102,795 | 199,536 | (96,741) | |||||||||||||||||
| Cost of sales-excluding impact of derivatives | 95,421 | 198,046 | (102,625) | |||||||||||||||||
| Derivative loss | 2,790 | 12,750 | (9,960) | |||||||||||||||||
| Product margin (loss) | 4,584 | (11,260) | 15,844 | |||||||||||||||||
| Butane sales: | ||||||||||||||||||||
| Revenues | 106,301 | 152,213 | (45,912) | |||||||||||||||||
| Cost of sales-excluding impact of derivatives | 94,880 | 159,484 | (64,604) | |||||||||||||||||
| Derivative loss (gain) | 1,509 | (10,791) | 12,300 | |||||||||||||||||
| Product margin | 9,912 | 3,520 | 6,392 | |||||||||||||||||
| Other product sales: | ||||||||||||||||||||
| Revenues-excluding impact of derivatives | 260,833 | 285,742 | (24,909) | |||||||||||||||||
| Cost of sales-excluding impact of derivatives | 259,519 | 269,529 | (10,010) | |||||||||||||||||
| Derivative gain | (6,938) | (614) | (6,324) | |||||||||||||||||
| Product margin | 8,252 | 16,827 | (8,575) | |||||||||||||||||
| Service revenues: | ||||||||||||||||||||
| Revenues | 6,829 | 4,946 | 1,883 | |||||||||||||||||
| Cost of sales | 454 | 351 | 103 | |||||||||||||||||
| Product margin | 6,375 | 4,595 | 1,780 | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Operating expenses | 13,576 | 13,685 | (109) | |||||||||||||||||
| General and administrative expenses | 2,050 | 1,967 | 83 | |||||||||||||||||
| Depreciation and amortization expense | 2,383 | 3,396 | (1,013) | |||||||||||||||||
| (Gain) loss on disposal or impairment of assets, net | (6,925) | 52 | (6,977) | |||||||||||||||||
| Total expenses | 11,084 | 19,100 | (8,016) | |||||||||||||||||
| Segment operating income | $ | 23,577 | $ | 1,653 | $ | 21,924 | ||||||||||||||
38
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per gallon amounts) | ||||||||||||||||||||
| Natural gas liquids and refined products storage capacity - owned and leased (gallons) (1) | 157,589 | 167,559 | (9,970) | |||||||||||||||||
| Refined products sold (gallons) | 209,919 | 186,031 | 23,888 | |||||||||||||||||
| Refined products sold ($/gallon) | $ | 2.955 | $ | 3.417 | $ | (0.462) | ||||||||||||||
| Cost per refined products sold ($/gallon) (2) | $ | 2.928 | $ | 3.382 | $ | (0.454) | ||||||||||||||
| Refined products product margin ($/gallon) (2) | $ | 0.027 | $ | 0.035 | $ | (0.008) | ||||||||||||||
| Refined products inventory (gallons) (1) | 707 | 1,990 | (1,283) | |||||||||||||||||
| Propane sold (gallons) | 129,988 | 169,775 | (39,787) | |||||||||||||||||
| Propane sold ($/gallon) | $ | 0.791 | $ | 1.175 | $ | (0.384) | ||||||||||||||
| Cost per propane sold ($/gallon) (2) | $ | 0.734 | $ | 1.167 | $ | (0.433) | ||||||||||||||
| Propane product margin ($/gallon) (2) | $ | 0.057 | $ | 0.008 | $ | 0.049 | ||||||||||||||
| Propane inventory (gallons) (1) | 115,491 | 101,880 | 13,611 | |||||||||||||||||
| Butane sold (gallons) | 108,085 | 111,551 | (3,466) | |||||||||||||||||
| Butane sold ($/gallon) | $ | 0.983 | $ | 1.365 | $ | (0.382) | ||||||||||||||
| Cost per butane sold ($/gallon) (2) | $ | 0.878 | $ | 1.430 | $ | (0.552) | ||||||||||||||
| Butane product margin (loss) ($/gallon) (2) | $ | 0.105 | $ | (0.065) | $ | 0.170 | ||||||||||||||
| Butane inventory (gallons) (1) | 92,651 | 84,928 | 7,723 | |||||||||||||||||
| Other products sold (gallons) | 100,389 | 104,979 | (4,590) | |||||||||||||||||
| Other products sold ($/gallon) | $ | 2.598 | $ | 2.722 | $ | (0.124) | ||||||||||||||
| Cost per other products sold ($/gallon) (2) | $ | 2.585 | $ | 2.567 | $ | 0.018 | ||||||||||||||
| Other products product margin ($/gallon) (2) | $ | 0.013 | $ | 0.155 | $ | (0.142) | ||||||||||||||
| Other products inventory (gallons) (1) | 18,012 | 33,653 | (15,641) | |||||||||||||||||
(1) Information is presented as of September 30, 2023 and September 30, 2022, respectively.
(2) Cost and product margin (loss) per gallon excludes the impact of derivatives.
Refined Products Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, during the three months ended September 30, 2023 were due to a decrease in commodity prices which was partially offset by an increase in volumes, as we have added new supply and customer contracts in certain markets.
Refined Products product margins, excluding the impact of derivatives, decreased during the three months ended September 30, 2023. Higher margins in some markets returned to normal as supply issues were resolved and the supply/demand balance was restored. In addition, volumes in some key markets were lost as one of our major suppliers reallocated short supply to their branded business.
Refined Products Derivative Loss (Gain). Our Refined Products product margin during the three months ended September 30, 2023 included realized losses of $0.1 million and the three months ended September 30, 2022 included realized gains of $0.5 million.
Propane Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, were due to lower propane prices during the three months ended September 30, 2023. Propane volumes decreased during the three months ended September 30, 2023 due to lower performing terminals being idled, the sale of two terminals in the Pacific Northwest during the three months ended September 30, 2023, the loss of certain supply contracts and a focus on more profitable markets.
Propane product margins, excluding the impact of derivatives, increased during the three months ended September 30, 2023 as we sold lower priced inventory into a market with rising prices. In the prior year period, higher priced inventory was sold into a market with declining prices.
Propane Derivative Loss. Our wholesale cost of propane sales during the three months ended September 30, 2023 included net unrealized gains of $0.9 million on derivatives and $3.7 million of net realized losses on derivatives. Our wholesale cost of propane sales during the three months ended September 30, 2022 included $11.9 million of net unrealized
39
losses on derivatives and $0.8 million of net realized losses on derivatives.
Butane Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, were due to lower commodity prices.
Butane product margins, excluding the impact of derivatives, increased during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 primarily due to higher demand for butane blending in the current year. In the prior year, we were negatively impacted by lower location differentials as the product we contracted to purchase at the beginning of the season competed against product purchased in a discounted market. In addition, we recorded a lower of cost or realizable value charge to reduce the value of our inventory during the prior year period.
Butane Derivative Loss (Gain). Our cost of butane sales during the three months ended September 30, 2023 included $4.5 million of net unrealized losses on derivatives and $3.1 million of net realized gains on derivatives. Our cost of butane sales during the three months ended September 30, 2022 included $8.7 million of net unrealized gains on derivatives and $2.0 million of net realized gains on derivatives.
Other Products Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, were due primarily to the decrease in market prices during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. We had entered into long-term biodiesel contracted in the prior year, when prices were higher, for delivery in the current period. Market prices for biodiesel decreased due to the Environmental Protection Agency (“EPA”) Renewable Fuel Standards (“RFS”) final mandate which lowered the required amount of biodiesel to be blended, thus increasing the amount of supply in the market. In addition, price and volume also declined for natural gasoline during the current period compared to the prior year period. The decrease in natural gasoline volumes was due to the loss of certain contracts. These decreases were partially offset by an increase in the volume of renewable identification numbers (“RINs”) sold in the current period.
Other product sales product margins, excluding the impact of derivatives, during the three months ended September 30, 2023 decreased from the prior year primarily due to long-term contracts becoming unfavorable, as described above. Margins during the prior year quarter benefited from favorable supply contracts.
Other Products Derivative Gain. Our derivatives of other products during the three months ended September 30, 2023 included $0.5 million of net unrealized gains on derivatives and $6.4 million of net realized gains on derivatives. Our derivatives of other products during the three months ended September 30, 2022 included $0.9 million of net unrealized losses on derivatives and $1.5 million of net realized gains on derivatives.
Service Revenues and Cost of Sales. This revenue includes storage, terminaling and transportation services income. Revenues during the three months ended September 30, 2023 increased from the prior year due to a minimum volume commitment billing of $4.7 million which was partially offset by lower terminal revenues due to terminals being idled and the sale of two terminals in the Pacific Northwest during the three months ended September 30, 2023.
Operating and General and Administrative Expenses. Operating and general and administrative expense during the three months ended September 30, 2023 was consistent with the three months ended September 30, 2022.
Depreciation and Amortization Expense. The decrease during the three months ended September 30, 2023 was due to a customer relationship intangible asset being fully amortized as of June 30, 2023.
(Gain) Loss on Disposal or Impairment of Assets, Net. During the three months ended September 30, 2023, we recorded a net gain of $6.9 million on the sale of two terminals in July 2023. During the three months ended September 30, 2022, we recorded a net loss of $0.1 million primarily due to disposals of certain assets.
40
Corporate and Other
The operating loss within “Corporate and Other” includes the following components for the periods indicated:
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||
| Derivative gain | $ | (3,381) | $ | — | $ | (3,381) | ||||||||||||||
| Expenses: | ||||||||||||||||||||
| General and administrative expenses | 13,307 | 12,456 | 851 | |||||||||||||||||
| Depreciation and amortization expense | 1,517 | 1,620 | (103) | |||||||||||||||||
| Gain on disposal or impairment of assets, net | — | (1,138) | 1,138 | |||||||||||||||||
| Total expenses | 14,824 | 12,938 | 1,886 | |||||||||||||||||
| Operating loss | $ | (11,443) | $ | (12,938) | $ | 1,495 | ||||||||||||||
Cost of Sales - Derivative Gain. Our cost of sales during the three months ended September 30, 2023 included $2.6 million of net realized gains on derivatives and $0.8 million of net unrealized gains on derivatives. We have entered into economic hedges to protect our liquidity positions and leverage from a significant increase in commodity prices that drive our working capital demands, as we experienced in the prior fiscal year, thus impacting our ability to reduce absolute indebtedness until commodity prices weakened. These positions will expire between November 2023 and March 2024.
General and Administrative Expenses. The expenses during the three months ended September 30, 2023 were higher due to increased business insurance expense as we paid the insurance company to be released from any future supplementary calls on our indemnity policy related to our former crude marine business (which we sold on March 30, 2023), as well as increased insurance premiums. We also incurred higher legal expenses. These increases were offset by lower incentive compensation expense due to the timing of the payments. In the prior year, incentive compensation payments were made during the three months ended September 30, 2022, while in the current fiscal year, incentive compensation payments were made during the three months ended June 30, 2023.
Depreciation and Amortization Expense. Depreciation and amortization expense during the three months ended September 30, 2023 was consistent with the three months ended September 30, 2022.
Gain on Disposal or Impairment of Assets, Net. During the three months ended September 30, 2022, we sold an airplane for a gain of $1.3 million, which was partially offset by a loss recorded on the prepayment of a loan receivable due July 31, 2023.
Equity in Earnings of Unconsolidated Entities
Equity in earnings of unconsolidated entities was $0.9 million during the three months ended September 30, 2023, compared to $1.2 million during the three months ended September 30, 2022. The decrease of $0.3 million during the three months ended September 30, 2023 was due primarily to lower earnings from certain membership interests related to specific land and water services operations.
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Interest Expense
The following table summarizes the components of our consolidated interest expense for the periods indicated:
| Three Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Senior secured notes | $ | 38,437 | $ | 38,437 | $ | — | ||||||||||||||
| Senior unsecured notes | 10,297 | 20,284 | (9,987) | |||||||||||||||||
| Revolving credit facility | 5,203 | 4,662 | 541 | |||||||||||||||||
| Other indebtedness | 554 | 720 | (166) | |||||||||||||||||
| Total debt interest expense | 54,491 | 64,103 | (9,612) | |||||||||||||||||
| Amortization of debt issuance costs | 4,136 | 4,194 | (58) | |||||||||||||||||
| Total interest expense | $ | 58,627 | $ | 68,297 | $ | (9,670) | ||||||||||||||
The debt interest expense decreased $9.6 million during the three months ended September 30, 2023 due primarily to the repurchase of the 7.5% senior unsecured notes due 2023 (“2023 Notes”) throughout the prior year, the redemption of the remaining 2023 Notes on March 31, 2023 and the repurchase of a portion of the outstanding 6.125% senior unsecured notes due 2025 (“2025 Notes”) during the three months ended June 30, 2023 as discussed further in Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report . This decrease was partially offset by an increase in the interest rates on our revolving credit facility during the current year.
Gain on Early Extinguishment of Liabilities, Net
Gain on early extinguishment of liabilities, net was $0.1 million during the three months ended September 30, 2023, compared to $2.5 million during the three months ended September 30, 2022. During the three months ended September 30, 2023, $0.1 million of debt issuance costs previously written off was reversed. During the three months ended September 30, 2022, the net gain (inclusive of debt issuance costs written off) relates to the early extinguishment of a portion of the outstanding Senior Unsecured Notes (as defined herein). See Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.
Other Income (Expense), Net
Other income, net of $0.3 million during the three months ended September 30, 2023 consisted primarily of interest income on loan receivables (see Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion). Other expense, net of less than $0.1 million during the three months ended September 30, 2022 consisted primarily of a loss on the settlement of an asset acquired in an acquisition in fiscal year 2020, partially offset by a gain related to a bankruptcy settlement.
Income Tax Expense
Income tax expense was $0.3 million during the three months ended September 30, 2023, compared to income tax expense of $0.5 million during the three months ended September 30, 2022. See Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.
Noncontrolling Interests
Noncontrolling interests represent the portion of certain consolidated subsidiaries that are owned by third-parties. Noncontrolling interest income was $0.3 million during the three months ended September 30, 2023, compared to $0.1 million during the three months ended September 30, 2022. The increase during the three months ended September 30, 2023 was due primarily to higher income from certain water solutions operations during the three months ended September 30, 2023.
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Segment Operating Results for the Six Months Ended September 30, 2023 and 2022
Water Solutions
The following table summarizes the operating results of our Water Solutions segment for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per barrel and per day amounts) | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Water disposal service fees | $ | 297,703 | $ | 240,178 | $ | 57,525 | ||||||||||||||
| Sale of recovered crude oil | 54,118 | 65,921 | (11,803) | |||||||||||||||||
| Recycled water | 5,167 | 7,372 | (2,205) | |||||||||||||||||
| Other revenues | 21,558 | 17,518 | 4,040 | |||||||||||||||||
| Total revenues | 378,546 | 330,989 | 47,557 | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Cost of sales-excluding impact of derivatives | 5,521 | 6,782 | (1,261) | |||||||||||||||||
| Derivative loss | 4,472 | 4,363 | 109 | |||||||||||||||||
| Operating expenses | 108,949 | 103,736 | 5,213 | |||||||||||||||||
| General and administrative expenses | 2,361 | 4,224 | (1,863) | |||||||||||||||||
| Depreciation and amortization expense | 106,476 | 101,175 | 5,301 | |||||||||||||||||
| Loss on disposal or impairment of assets, net | 22,318 | 9,976 | 12,342 | |||||||||||||||||
| Total expenses | 250,097 | 230,256 | 19,841 | |||||||||||||||||
| Segment operating income | $ | 128,449 | $ | 100,733 | $ | 27,716 | ||||||||||||||
| Produced water processed (barrels per day) | ||||||||||||||||||||
| Delaware Basin | 2,154,906 | 1,937,179 | 217,727 | |||||||||||||||||
| Eagle Ford Basin | 135,737 | 105,463 | 30,274 | |||||||||||||||||
| DJ Basin | 157,745 | 152,057 | 5,688 | |||||||||||||||||
| Other Basins | 1,481 | 15,505 | (14,024) | |||||||||||||||||
| Total | 2,449,869 | 2,210,204 | 239,665 | |||||||||||||||||
| Recycled water (barrels per day) | 67,213 | 115,294 | (48,081) | |||||||||||||||||
| Total (barrels per day) | 2,517,082 | 2,325,498 | 191,584 | |||||||||||||||||
| Skim oil sold (barrels per day) | 4,046 | 3,584 | 462 | |||||||||||||||||
| Service fees for produced water processed ($/barrel) (1) | $ | 0.66 | $ | 0.59 | $ | 0.07 | ||||||||||||||
| Recovered crude oil for produced water processed ($/barrel) (1) | $ | 0.12 | $ | 0.16 | $ | (0.04) | ||||||||||||||
| Operating expenses for produced water processed ($/barrel) (1) | $ | 0.24 | $ | 0.26 | $ | (0.02) | ||||||||||||||
(1) Total produced water barrels processed during the six months ended September 30, 2023 and 2022 were 448,325,889 and 404,467,330, respectively. These amounts do not include 23,873,967 barrels and 12,585,351 barrels for the six months ended September 30, 2023 and 2022, respectively, related to payments received from producers for committed volumes not delivered, as discussed further below.
Water Disposal Service Fee Revenues. The increase was due primarily to an increase in produced water volumes processed from contracted customers mainly in the Delaware Basin, increased fees from new contracts entered into during fiscal year 2023 and higher fees charged for interruptible spot volumes. Also, there was an increase in payments made by certain producers for committed volumes not delivered. Service fees for produced water processed ($/barrel) also benefited from these deficiency payments. In addition, during July 2023, we entered into a transaction in which a portion of the total consideration received was allocated to revenue due to the termination of a minimum volume water disposal contract (see Note 16 to our unaudited condensed consolidated financial statements included in this Quarterly Report).
Recovered Crude Oil Revenues. The decrease was due primarily to lower realized crude oil prices received from the sale of skim oil barrels partially offset by greater skim oil barrels sold as a result of higher skim oil recovered from increased produced water processed, and the sale during the current fiscal year of approximately 33,480 barrels of skim oil that were stored as of March 31, 2023 due to tighter pipeline specifications.
Recycled Water Revenues. The decrease was due primarily to lower recycled water volumes related to timing of water to be used in completions.
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Other Revenues. The increase was due primarily to higher reimbursements from construction projects and higher land surface use revenues. These increases were partially offset by lower water pipeline revenues due to the expiration of certain pipeline commitment revenue in December 2022 and lower sales of brackish non-potable water related to the timing of our customers transitioning from brackish non-potable water to recycled water.
Cost of Sales-Excluding Impact of Derivatives. The decrease was due primarily to lower purchases of brackish non-potable water from third-parties to meet customer needs due to the termination of a joint marketing agreement. This decrease was partially offset by costs incurred that will be reimbursed by producers for generator and fuel costs at various booster stations. In addition, we incurred trucking expenses for skim oil sales during the three months ended September 30, 2023.
Derivative Loss. During the six months ended September 30, 2023, we had $4.5 million of net unrealized losses on derivatives and less than $0.1 million of net realized losses on derivatives. During the six months ended September 30, 2022, we had $4.5 million of net unrealized gains on derivatives and $8.8 million of net realized losses on derivatives.
Operating and General and Administrative Expenses. The increase was due primarily to higher operating expenses due to increased produced water volumes processed. This increase was partially offset by lower severance taxes due to a decrease in revenue from recovered crude oil partially offset by a severance tax refund in September 2023 related to prior periods and lower legal and overhead costs.
Depreciation and Amortization Expense. The increase was due primarily to depreciation of newly developed facilities and infrastructure partially offset by certain long-term assets being fully amortized or impaired during the fiscal year ended March 31, 2023 and six months ended September 30, 2023.
Loss on Disposal or Impairment of Assets, Net. During the six months ended September 30, 2023, we recorded a net loss of $16.2 million primarily related to the sale of certain assets and a net loss of $6.1 million related to the abandonment of certain capital projects and the retirement of certain assets. During the six months ended September 30, 2022, we recorded an impairment charge of $8.0 million to write down the value of an inactive saltwater disposal facility and equipment at another saltwater disposal facility. We also recorded a net loss of $1.6 million primarily related to the abandonment of certain capital projects and the sale and retirement of certain other miscellaneous assets and a loss of $0.5 million related to the termination of a joint marketing agreement.
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Crude Oil Logistics
The following table summarizes the operating results of our Crude Oil Logistics segment for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per barrel amounts) | ||||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Crude oil sales | $ | 925,231 | $ | 1,399,170 | $ | (473,939) | ||||||||||||||
| Crude oil transportation and other | 29,171 | 47,093 | (17,922) | |||||||||||||||||
| Total revenues (1) | 954,402 | 1,446,263 | (491,861) | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Cost of sales-excluding impact of derivatives | 872,379 | 1,344,625 | (472,246) | |||||||||||||||||
| Derivative loss (gain) | 8,146 | (1,947) | 10,093 | |||||||||||||||||
| Operating expenses | 20,409 | 27,122 | (6,713) | |||||||||||||||||
| General and administrative expenses | 1,935 | 2,574 | (639) | |||||||||||||||||
| Depreciation and amortization expense | 19,319 | 23,529 | (4,210) | |||||||||||||||||
| Loss (gain) on disposal or impairment of assets, net | 429 | (1,556) | 1,985 | |||||||||||||||||
| Total expenses | 922,617 | 1,394,347 | (471,730) | |||||||||||||||||
| Segment operating income | $ | 31,785 | $ | 51,916 | $ | (20,131) | ||||||||||||||
| Crude oil sold (barrels) | 11,643 | 13,473 | (1,830) | |||||||||||||||||
| Crude oil transported on owned pipelines (barrels) | 13,047 | 13,770 | (723) | |||||||||||||||||
| Crude oil storage capacity - owned and leased (barrels) (2) | 5,232 | 5,232 | — | |||||||||||||||||
| Crude oil storage capacity leased to third-parties (barrels) (2) | 2,250 | 1,501 | 749 | |||||||||||||||||
| Crude oil inventory (barrels) (2) | 660 | 660 | — | |||||||||||||||||
| Crude oil sold ($/barrel) | $ | 79.467 | $ | 103.850 | $ | (24.383) | ||||||||||||||
| Cost per crude oil sold ($/barrel) (3) | $ | 74.927 | $ | 99.801 | $ | (24.874) | ||||||||||||||
| Crude oil product margin ($/barrel) (3) | $ | 4.540 | $ | 4.049 | $ | 0.491 | ||||||||||||||
(1) Revenues include $0.3 million and $6.1 million of intersegment sales during the six months ended September 30, 2023 and 2022, respectively, that are eliminated in our unaudited condensed consolidated statements of operations.
(2) Information is presented as of September 30, 2023 and September 30, 2022, respectively.
(3) Cost and product margin per barrel excludes the impact of derivatives.
Crude Oil Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases were due primarily to a decrease in crude oil prices during the six months ended September 30, 2023, compared to the six months ended September 30, 2022 and lower sales volumes primarily due to lower production in the DJ Basin and an increase in buy/sell transactions during the six months ended September 30, 2023.
During the six months ended September 30, 2023, physical volumes on the Grand Mesa Pipeline averaged approximately 71,000 barrels per day, compared to approximately 75,000 barrels per day during the six months ended September 30, 2022. Lower demand for heavier crude oil grades, and the resulting lower crude oil prices, resulted in decreased production in the DJ Basin and consequently, lower contracted volumes shipped on Grand Mesa.
During the six months ended June 30, 2023, margins declined due to lower volumes sold, as discussed above, offset by higher margins generated per barrel. During the three months ended June 30, 2023, margin per barrel decreased as higher priced inventory was sold into a market with declining prices. During the three months ended September 30, 2023, margin per barrel increased due to the sale of lower priced inventory into a market in which prices were rising. During the prior year periods, we experienced the opposite, as we sold lower priced inventory in a market with rising prices during the three months ended June 30, 2022, but sold higher priced inventory into a market in which prices were declining during the three months ended September 30, 2022. Crude oil product margin calculations do not include gains and losses from derivatives that may offset the movement in the physical margin.
Derivative Loss (Gain). Our cost of sales during the six months ended September 30, 2023 included $1.5 million of net realized gains on derivatives, driven by increasing crude oil prices, and $9.7 million of net unrealized losses on derivatives. The previous amounts for the six months ended September 30, 2023 included net realized gains of $0.7 million and net unrealized
45
gains of $0.4 million associated with derivative instruments related to our hedge of the CMA Differential Roll defined and discussed below under “Non-GAAP Financial Measures.” Our cost of sales during the six months ended September 30, 2022 included $53.6 million of net realized losses on derivatives, driven by the increasing crude oil prices, and $55.6 million of net unrealized gains on derivatives. The amount for the six months ended September 30, 2022 includes net realized losses of $37.5 million and net unrealized gains of $36.0 million associated with derivative instruments related to our hedge of the CMA Differential Roll.
Crude Oil Transportation and Other Revenues. The decrease was primarily due to the sale of our marine assets on March 30, 2023.
Operating and General and Administrative Expenses. The decrease was primarily due to the sale of our marine assets on March 30, 2023. Additionally, the period benefited from lower incentive compensation expense and lower repairs and maintenance expense.
Depreciation and Amortization Expense. The decrease was primarily due to the sale of our marine assets on March 30, 2023.
Loss (Gain) on Disposal or Impairment of Assets, Net. During the six months ended September 30, 2023, we recorded a net loss of $0.4 million primarily due to disposals and retirements of certain assets. During the six months ended September 30, 2022, we recorded a net gain of $1.6 million primarily due to disposals and retirements of certain assets.
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Liquids Logistics
The following table summarizes the operating results of our Liquids Logistics segment for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per gallon amounts) | ||||||||||||||||||||
| Refined products sales: | ||||||||||||||||||||
| Revenues-excluding impact of derivatives | $ | 1,198,362 | $ | 1,384,437 | $ | (186,075) | ||||||||||||||
| Cost of sales-excluding impact of derivatives | 1,179,889 | 1,367,240 | (187,351) | |||||||||||||||||
| Derivative loss | 187 | 573 | (386) | |||||||||||||||||
| Product margin | 18,286 | 16,624 | 1,662 | |||||||||||||||||
| Propane sales: | ||||||||||||||||||||
| Revenues | 215,045 | 422,110 | (207,065) | |||||||||||||||||
| Cost of sales-excluding impact of derivatives | 205,905 | 410,335 | (204,430) | |||||||||||||||||
| Derivative loss | 681 | 10,818 | (10,137) | |||||||||||||||||
| Product margin | 8,459 | 957 | 7,502 | |||||||||||||||||
| Butane sales: | ||||||||||||||||||||
| Revenues | 176,541 | 352,807 | (176,266) | |||||||||||||||||
| Cost of sales-excluding impact of derivatives | 168,940 | 359,703 | (190,763) | |||||||||||||||||
| Derivative gain | (4,978) | (18,923) | 13,945 | |||||||||||||||||
| Product margin | 12,579 | 12,027 | 552 | |||||||||||||||||
| Other product sales: | ||||||||||||||||||||
| Revenues-excluding impact of derivatives | 466,624 | 580,748 | (114,124) | |||||||||||||||||
| Cost of sales-excluding impact of derivatives | 464,970 | 536,281 | (71,311) | |||||||||||||||||
| Derivative (gain) loss | (8,337) | 18,191 | (26,528) | |||||||||||||||||
| Product margin | 9,991 | 26,276 | (16,285) | |||||||||||||||||
| Service revenues: | ||||||||||||||||||||
| Revenues | 9,228 | 9,084 | 144 | |||||||||||||||||
| Cost of sales | 717 | 698 | 19 | |||||||||||||||||
| Product margin | 8,511 | 8,386 | 125 | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Operating expenses | 24,712 | 25,160 | (448) | |||||||||||||||||
| General and administrative expenses | 3,845 | 3,988 | (143) | |||||||||||||||||
| Depreciation and amortization expense | 5,597 | 6,777 | (1,180) | |||||||||||||||||
| (Gain) loss on disposal or impairment of assets, net | (7,736) | 52 | (7,788) | |||||||||||||||||
| Total expenses | 26,418 | 35,977 | (9,559) | |||||||||||||||||
| Segment operating income | $ | 31,408 | $ | 28,293 | $ | 3,115 | ||||||||||||||
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| Six Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands, except per gallon amounts) | ||||||||||||||||||||
| Natural gas liquids and refined products storage capacity - owned and leased (gallons) (1) | 157,589 | 167,559 | (9,970) | |||||||||||||||||
| Refined products sold (gallons) | 430,006 | 374,657 | 55,349 | |||||||||||||||||
| Refined products sold ($/gallon) | $ | 2.787 | $ | 3.695 | $ | (0.908) | ||||||||||||||
| Cost per refined products sold ($/gallon) (2) | $ | 2.744 | $ | 3.649 | $ | (0.905) | ||||||||||||||
| Refined products product margin ($/gallon) (2) | $ | 0.043 | $ | 0.046 | $ | (0.003) | ||||||||||||||
| Refined products inventory (gallons) (1) | 707 | 1,990 | (1,283) | |||||||||||||||||
| Propane sold (gallons) | 269,741 | 334,619 | (64,878) | |||||||||||||||||
| Propane sold ($/gallon) | $ | 0.797 | $ | 1.261 | $ | (0.464) | ||||||||||||||
| Cost per propane sold ($/gallon) (2) | $ | 0.763 | $ | 1.226 | $ | (0.463) | ||||||||||||||
| Propane product margin ($/gallon) (2) | $ | 0.034 | $ | 0.035 | $ | (0.001) | ||||||||||||||
| Propane inventory (gallons) (1) | 115,491 | 101,880 | 13,611 | |||||||||||||||||
| Butane sold (gallons) | 186,574 | 232,076 | (45,502) | |||||||||||||||||
| Butane sold ($/gallon) | $ | 0.946 | $ | 1.520 | $ | (0.574) | ||||||||||||||
| Cost per butane sold ($/gallon) (2) | $ | 0.905 | $ | 1.550 | $ | (0.645) | ||||||||||||||
| Butane product margin (loss) ($/gallon) (2) | $ | 0.041 | $ | (0.030) | $ | 0.071 | ||||||||||||||
| Butane inventory (gallons) (1) | 92,651 | 84,928 | 7,723 | |||||||||||||||||
| Other products sold (gallons) | 191,488 | 198,616 | (7,128) | |||||||||||||||||
| Other products sold ($/gallon) | $ | 2.437 | $ | 2.924 | $ | (0.487) | ||||||||||||||
| Cost per other products sold ($/gallon) (2) | $ | 2.428 | $ | 2.700 | $ | (0.272) | ||||||||||||||
| Other products product margin ($/gallon) (2) | $ | 0.009 | $ | 0.224 | $ | (0.215) | ||||||||||||||
| Other products inventory (gallons) (1) | 18,012 | 33,653 | (15,641) | |||||||||||||||||
(1) Information is presented as of September 30, 2023 and September 30, 2022, respectively.
(2) Cost and product margin (loss) per gallon excludes the impact of derivatives.
Refined Products Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, during the six months ended September 30, 2023 were due to a decrease in commodity prices which was partially offset by an increase in volumes, as we have added new supply and customer contracts in certain markets.
Refined Products product margins, excluding the impact of derivatives, decreased during the six months ended September 30, 2023 as higher margins in some markets returned to normal as supply issues were resolved and the supply/demand balance was restored.
Refined Products Derivative Loss. Our Refined Products product margin during the six months ended September 30, 2023 included realized losses of $0.2 million and the six months ended September 30, 2022 included realized losses of $0.6 million.
Propane Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, were due to lower propane prices during the six months ended September 30, 2023. Propane volumes decreased during the six months ended September 30, 2023 due to lower performing terminals being idled, the sale of two terminals in the Pacific Northwest during the three months ended September 30, 2023, the loss of certain supply contracts and a focus on more profitable markets.
Propane product margins, excluding the impact of derivatives, have remained consistent during the six months ended September 30, 2023 compared to the six months ended September 30, 2022.
Propane Derivative Loss. Our wholesale cost of propane sales included $3.2 million of net unrealized gains on derivatives and $3.9 million of net realized losses on derivatives during the six months ended September 30, 2023. During the six months ended September 30, 2022, our wholesale cost of propane sales included $11.9 million of net unrealized losses on derivatives and $1.1 million of net realized gains on derivatives.
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Butane Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales were due primarily to lower butane prices. The decrease was also due to lower volumes as a result of weak spot demand during the first half of the period, weak export demand and a change in strategy by a significant customer.
Butane product margins, excluding the impact of derivatives, increased during the six months ended September 30, 2023, as compared to the six months ended September 30, 2022, primarily due to higher demand for butane blending. In the prior year, we were negatively impacted by lower location differentials as the product we contracted to purchase at the beginning of the season competed against product purchased in a discounted market. In addition, we recorded a lower of cost or realizable value charge to reduce the value of our inventory during the prior year period.
Butane Derivative Gain. Our cost of butane sales during the six months ended September 30, 2023 included $2.3 million of net unrealized gains on derivatives and $2.7 million of net realized gains on derivatives. Our cost of butane sales included $14.8 million of net unrealized gains on derivatives and $4.1 million of net realized gains on derivatives during the six months ended September 30, 2022.
Other Products Sales Revenues and Cost of Sales-Excluding Impact of Derivatives. The decreases in revenues and cost of sales, excluding the impact of derivatives, were due primarily to the decrease in market prices during the six months ended September 30, 2023 as compared to the prior year period. Market prices for biodiesel decreased due to the EPA’s RFS final mandate which lowered the required amount of biodiesel to be blended, thus increasing the amount of supply in the market. Sales of RIN’s also decreased with lower prices. The decrease was also the result of lower natural gasoline volumes due to the loss of certain contracts.
Other product sales product margins, excluding the impact of derivatives, during the six months ended September 30, 2023 decreased due to the increased supply of biodiesel in the market due to the EPA’s final RFS mandate, which lowered biodiesel and RIN’s prices and delivery of biodiesel contracts entered into in the prior year, when prices were higher, for delivery in the current period when prices were declining.
Other Products Derivatives (Gain) Loss. Our derivatives of other products included no unrealized gains/losses on derivatives and $8.3 million of net realized gains on derivatives during the six months ended September 30, 2023. Our derivatives of other products during the six months ended September 30, 2022 included $1.2 million of net unrealized losses on derivatives and $17.0 million of net realized losses on derivatives.
Service Revenues and Cost of Sales. This revenue includes storage, terminaling and transportation services income. The increase during the six months ended September 30, 2023 was primarily due to a minimum volume commitment billing of $4.7 million which was partially offset by lower terminal revenues due to terminals being idled and the sale of two terminals in the Pacific Northwest during the six months ended September 30, 2023.
Operating and General and Administrative Expenses. Operating and general and administrative expense during the six months ended September 30, 2023 was consistent with the six months ended September 30, 2022.
Depreciation and Amortization Expense. The decrease during the six months ended September 30, 2023 was due to a customer relationship intangible asset being fully amortized as of June 30, 2023.
(Gain) Loss on Disposal or Impairment of Assets, Net. During the six months ended September 30, 2023, we recorded a net gain of $6.9 million due to the sale of two terminals in July 2023 and recorded a net gain of $0.8 million due to the disposal of certain other assets. During the six months ended September 30, 2022, we recorded a net loss of $0.1 million primarily due to disposals of certain assets.
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Corporate and Other
The operating loss within “Corporate and Other” includes the following components for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||
| Derivative loss | $ | 833 | $ | — | $ | 833 | ||||||||||||||
| Expenses: | ||||||||||||||||||||
| General and administrative expenses | 29,646 | 22,599 | 7,047 | |||||||||||||||||
| Depreciation and amortization expense | 3,113 | 3,297 | (184) | |||||||||||||||||
| Gain on disposal or impairment of assets, net | — | (987) | 987 | |||||||||||||||||
| Total expenses | 32,759 | 24,909 | 7,850 | |||||||||||||||||
| Operating loss | $ | (33,592) | $ | (24,909) | $ | (8,683) | ||||||||||||||
Cost of Sales - Derivative Loss. Our cost of sales during the six months ended September 30, 2023 included $0.4 million of net realized losses on derivatives and $0.4 million of net unrealized losses on derivatives. We have entered into economic hedges to protect our liquidity positions and leverage from a significant increase in commodity prices that drive our working capital demands, as we experienced in the prior fiscal year, thus impacting our ability to reduce absolute indebtedness until commodity prices weakened. These positions will expire between November 2023 and March 2024.
General and Administrative Expenses. The expenses during the six months ended September 30, 2023 were higher than the six months ended September 30, 2022 due to increased business insurance expense as we paid the insurance company to be released from any future supplementary calls on our indemnity policy related to our former crude marine business (which we sold on March 30, 2023), as well as increased insurance premiums. We also incurred higher legal expenses.
Depreciation and Amortization Expense. Depreciation and amortization expense during the six months ended September 30, 2023 was consistent with the six months ended September 30, 2022.
Gain on Disposal or Impairment of Assets, Net. During the six months ended September 30, 2022, we sold an airplane for a gain of $1.3 million, which was partially offset by a loss recorded on the prepayment of a loan receivable that was due July 31, 2023.
Equity in Earnings of Unconsolidated Entities
Equity in earnings of unconsolidated entities was $0.9 million during the six months ended September 30, 2023, compared to $1.9 million during the six months ended September 30, 2022. The decrease of $1.0 million during the six months ended September 30, 2023 was due primarily to lower earnings from certain membership interests related to specific land and water services operations.
Interest Expense
The following table summarizes the components of our consolidated interest expense for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Senior secured notes | $ | 76,875 | $ | 76,875 | $ | — | ||||||||||||||
| Senior unsecured notes | 21,260 | 41,103 | (19,843) | |||||||||||||||||
| Revolving credit facility | 9,805 | 7,902 | 1,903 | |||||||||||||||||
| Other indebtedness | 1,969 | 1,356 | 613 | |||||||||||||||||
| Total debt interest expense | 109,909 | 127,236 | (17,327) | |||||||||||||||||
| Amortization of debt issuance costs | 8,240 | 8,372 | (132) | |||||||||||||||||
| Total interest expense | $ | 118,149 | $ | 135,608 | $ | (17,459) | ||||||||||||||
The debt interest expense decreased $17.3 million during the six months ended September 30, 2023 due primarily to the repurchase of the 2023 Notes throughout the prior year, the redemption of the remaining 2023 Notes on March 31, 2023 and
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the repurchase of a portion of the outstanding 2025 Notes during the three months ended June 30, 2023 as discussed further in Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report. This decrease was partially offset by an increase in the interest rates on our revolving credit facility during the current year and an accrual of interest related to a legal claim (see Note 8 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion).
Gain on Early Extinguishment of Liabilities, Net
Gain on early extinguishment of liabilities, net was $6.9 million during the six months ended September 30, 2023, compared to $4.1 million during the six months ended September 30, 2022. During the six months ended September 30, 2023 and 2022, the net gain (inclusive of debt issuance costs written off) primarily relates to the early extinguishment of a portion of the outstanding Senior Unsecured Notes (as defined herein). See Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.
Other Income, Net
Other income, net of $0.6 million during the six months ended September 30, 2023 consisted primarily of interest income on loan receivables (see Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion). Other income, net of $0.6 million during the six months ended September 30, 2022 consisted primarily of gains related to bankruptcy settlements.
Income Tax Expense
Income tax expense was $0.5 million during the six months ended September 30, 2023, compared to income tax expense of $0.4 million during the six months ended September 30, 2022. See Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.
Noncontrolling Interests
Noncontrolling interest income was $0.5 million during the six months ended September 30, 2023, compared to $0.3 million during the six months ended September 30, 2022. The increase during the six months ended September 30, 2023 was due primarily to higher income from certain water solutions operations during the six months ended September 30, 2023.
Non-GAAP Financial Measures
In addition to financial results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided the non-GAAP financial measures of EBITDA and Adjusted EBITDA. These non-GAAP financial measures are not intended to be a substitute for those reported in accordance with GAAP. These measures may be different from non-GAAP financial measures used by other entities, even when similar terms are used to identify such measures.
We define EBITDA as net income (loss) attributable to NGL Energy Partners LP, plus interest expense, income tax expense (benefit), and depreciation and amortization expense. We define Adjusted EBITDA as EBITDA excluding net unrealized gains and losses on derivatives, lower of cost or net realizable value adjustments, gains and losses on disposal or impairment of assets, gains and losses on early extinguishment of liabilities, equity-based compensation expense, acquisition expense, revaluation of liabilities, certain legal settlements and other. We also include in Adjusted EBITDA certain inventory valuation adjustments related to certain refined products businesses within our Liquids Logistics segment as discussed below. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income, income before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with GAAP, as those items are used to measure operating performance, liquidity or the ability to service debt obligations. We believe that EBITDA provides additional information to investors for evaluating our ability to make quarterly distributions to our unitholders and is presented solely as a supplemental measure. We believe that Adjusted EBITDA provides additional information to investors for evaluating our financial performance without regard to our financing methods, capital structure and historical cost basis. Further, EBITDA and Adjusted EBITDA, as we define them, may not be comparable to EBITDA, Adjusted EBITDA, or similarly titled measures used by other entities.
Other than for certain businesses within our Liquids Logistics segment, for purposes of our Adjusted EBITDA calculation, we make a distinction between realized and unrealized gains and losses on derivatives. During the period when a derivative contract is open, we record changes in the fair value of the derivative as an unrealized gain or loss. When a derivative
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contract matures or is settled, we reverse the previously recorded unrealized gain or loss and record a realized gain or loss. We do not draw such a distinction between realized and unrealized gains and losses on derivatives of certain businesses within our Liquids Logistics segment. The primary hedging strategy of these businesses is to hedge against the risk of declines in the value of inventory over the course of the contract cycle, and many of the hedges cover extended periods of time. The “inventory valuation adjustment” row in the reconciliation table reflects the difference between the market value of the inventory of these businesses at the balance sheet date and its cost. We include this in Adjusted EBITDA because the unrealized gains and losses associated with derivative contracts associated with the inventory of this segment, which are intended primarily to hedge inventory holding risk and are included in net income, also affect Adjusted EBITDA. In our Crude Oil Logistics segment, we purchase certain crude oil barrels using the West Texas Intermediate (“WTI”) calendar month average (“CMA”) price and sell the crude oil barrels using the WTI CMA price plus the Argus CMA Differential Roll Component (“CMA Differential Roll”) per our contracts. To eliminate the volatility of the CMA Differential Roll, we entered into derivative instrument positions in January 2021 to secure a margin of approximately $0.20 per barrel on 1.5 million barrels per month from May 2021 through December 2023. Due to the nature of these positions, the cash flow and earnings recognized on a GAAP basis will differ from period to period depending on the current crude oil price and future estimated crude oil price which are valued utilizing third-party market quoted prices. We are recognizing in Adjusted EBITDA the gains and losses from the derivative instrument positions entered into in January 2021 to properly align with the physical margin we are hedging each month through the term of this transaction. This representation aligns with management’s evaluation of the transaction.
The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net income | $ | 28,285 | $ | 3,607 | $ | 47,848 | $ | 26,713 | ||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | (257) | (97) | (519) | (342) | ||||||||||||||||||||||
| Net income attributable to NGL Energy Partners LP | 28,028 | 3,510 | 47,329 | 26,371 | ||||||||||||||||||||||
| Interest expense | 58,642 | 68,313 | 118,178 | 135,639 | ||||||||||||||||||||||
| Income tax expense | 342 | 537 | 482 | 365 | ||||||||||||||||||||||
| Depreciation and amortization | 65,502 | 68,103 | 134,423 | 134,717 | ||||||||||||||||||||||
| EBITDA | 152,514 | 140,463 | 300,412 | 297,092 | ||||||||||||||||||||||
| Net unrealized losses (gains) on derivatives | 9,691 | (4,828) | 9,059 | (61,730) | ||||||||||||||||||||||
| CMA Differential Roll net losses (gains) (1) | 2,233 | (6,518) | (6,904) | 28,102 | ||||||||||||||||||||||
| Inventory valuation adjustment (2) | (6,436) | (3,560) | (6,100) | (4,115) | ||||||||||||||||||||||
| Lower of cost or net realizable value adjustments | 1,080 | 10,143 | 3,844 | 857 | ||||||||||||||||||||||
| Loss on disposal or impairment of assets, net | 16,207 | 7,653 | 15,011 | 7,485 | ||||||||||||||||||||||
| Gain on early extinguishment of liabilities, net | (63) | (2,479) | (6,871) | (4,141) | ||||||||||||||||||||||
| Equity-based compensation expense | 410 | 479 | 884 | 976 | ||||||||||||||||||||||
| Acquisition expense (3) | 42 | — | 47 | — | ||||||||||||||||||||||
| Other (4) | 536 | 889 | 1,487 | 1,592 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 176,214 | $ | 142,242 | $ | 310,869 | $ | 266,118 | ||||||||||||||||||
(1) Adjustment to align, within Adjusted EBITDA, the net gains and losses of the Partnership’s CMA Differential Roll derivative instruments positions with the physical margin being hedged. See “Non-GAAP Financial Measures” section above for a further discussion.
(2) Amounts represent the difference between the market value of the inventory at the balance sheet date and its cost. See “Non-GAAP Financial Measures” section above for a further discussion.
(3) Amounts represent expenses we incurred related to legal and advisory costs associated with acquisitions.
(4) Amounts represent unrealized gains/losses on marketable securities and accretion expense for asset retirement obligations. Also, the amount for the six months ended September 30, 2022 includes non-cash operating expenses related to our Grand Mesa Pipeline.
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The following tables reconcile depreciation and amortization amounts per the EBITDA table above to depreciation and amortization amounts in our unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Depreciation and amortization per EBITDA table | $ | 65,502 | $ | 68,103 | $ | 134,423 | $ | 134,717 | ||||||||||||||||||
| Intangible asset amortization recorded to cost of sales | (65) | (69) | (130) | (137) | ||||||||||||||||||||||
| Depreciation and amortization attributable to unconsolidated entities | (193) | (194) | (352) | (364) | ||||||||||||||||||||||
| Depreciation and amortization attributable to noncontrolling interests | 282 | 278 | 564 | 562 | ||||||||||||||||||||||
| Depreciation and amortization per unaudited condensed consolidated statements of operations | $ | 65,526 | $ | 68,118 | $ | 134,505 | $ | 134,778 | ||||||||||||||||||
| Six Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| (in thousands) | ||||||||||||||
| Depreciation and amortization per EBITDA table | $ | 134,423 | $ | 134,717 | ||||||||||
| Amortization of debt issuance costs recorded to interest expense | 8,240 | 8,372 | ||||||||||||
| Amortization of royalty expense recorded to operating expense | 123 | 123 | ||||||||||||
| Depreciation and amortization attributable to unconsolidated entities | (352) | (364) | ||||||||||||
| Depreciation and amortization attributable to noncontrolling interests | 564 | 562 | ||||||||||||
| Depreciation and amortization per unaudited condensed consolidated statements of cash flows | $ | 142,998 | $ | 143,410 | ||||||||||
The following table reconciles interest expense per the EBITDA table above to interest expense in our unaudited condensed consolidated statements of operations for the periods indicated:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Interest expense per EBITDA table | $ | 58,642 | $ | 68,313 | $ | 118,178 | $ | 135,639 | ||||||||||||||||||
| Interest expense attributable to unconsolidated entities | (15) | (16) | (29) | (31) | ||||||||||||||||||||||
| Interest expense per unaudited condensed consolidated statements of operations | $ | 58,627 | $ | 68,297 | $ | 118,149 | $ | 135,608 | ||||||||||||||||||
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The following tables reconcile operating income (loss) to Adjusted EBITDA by segment for the periods indicated:
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Water Solutions | Crude Oil Logistics | Liquids Logistics | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 59,118 | $ | 14,778 | $ | 23,577 | $ | (11,443) | $ | 86,030 | |||||||||||||||||||
| Depreciation and amortization | 52,053 | 9,573 | 2,383 | 1,517 | 65,526 | ||||||||||||||||||||||||
| Amortization recorded to cost of sales | — | — | 65 | — | 65 | ||||||||||||||||||||||||
| Net unrealized losses (gains) on derivatives | 4,471 | 4,554 | 3,230 | (2,564) | 9,691 | ||||||||||||||||||||||||
| CMA Differential Roll net losses (gains) | — | 2,233 | — | — | 2,233 | ||||||||||||||||||||||||
| Inventory valuation adjustment | — | — | (6,436) | — | (6,436) | ||||||||||||||||||||||||
| Lower of cost or net realizable value adjustments | — | — | 1,080 | — | 1,080 | ||||||||||||||||||||||||
| Loss (gain) on disposal or impairment of assets, net | 23,599 | (467) | (6,925) | — | 16,207 | ||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | 410 | 410 | ||||||||||||||||||||||||
| Acquisition expense | (29) | — | 65 | 6 | 42 | ||||||||||||||||||||||||
| Other income (expense), net | 248 | (1) | 14 | 49 | 310 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to unconsolidated entities | 1,032 | — | (21) | 51 | 1,062 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to noncontrolling interest | (542) | — | — | — | (542) | ||||||||||||||||||||||||
| Other | 439 | 43 | 54 | — | 536 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 140,389 | $ | 30,713 | $ | 17,086 | $ | (11,974) | $ | 176,214 | |||||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Water Solutions | Crude Oil Logistics | Liquids Logistics | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 47,128 | $ | 32,927 | $ | 1,653 | $ | (12,938) | $ | 68,770 | |||||||||||||||||||
| Depreciation and amortization | 51,327 | 11,775 | 3,396 | 1,620 | 68,118 | ||||||||||||||||||||||||
| Amortization recorded to cost of sales | — | — | 69 | — | 69 | ||||||||||||||||||||||||
| Net unrealized (gains) losses on derivatives | (4,340) | (4,575) | 4,087 | — | (4,828) | ||||||||||||||||||||||||
| CMA Differential Roll net losses (gains) | — | (6,518) | — | — | (6,518) | ||||||||||||||||||||||||
| Inventory valuation adjustment | — | — | (3,560) | — | (3,560) | ||||||||||||||||||||||||
| Lower of cost or net realizable value adjustments | — | (493) | 10,636 | — | 10,143 | ||||||||||||||||||||||||
| Loss (gain) on disposal or impairment of assets, net | 9,035 | (296) | 52 | (1,138) | 7,653 | ||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | 479 | 479 | ||||||||||||||||||||||||
| Other (expense) income, net | (251) | 303 | (91) | 24 | (15) | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to unconsolidated entities | 1,387 | — | (17) | 45 | 1,415 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to noncontrolling interest | (373) | — | — | — | (373) | ||||||||||||||||||||||||
| Other | 861 | (260) | 288 | — | 889 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 104,774 | $ | 32,863 | $ | 16,513 | $ | (11,908) | $ | 142,242 | |||||||||||||||||||
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| Six Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Water Solutions | Crude Oil Logistics | Liquids Logistics | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 128,449 | $ | 31,785 | $ | 31,408 | $ | (33,592) | $ | 158,050 | |||||||||||||||||||
| Depreciation and amortization | 106,476 | 19,319 | 5,597 | 3,113 | 134,505 | ||||||||||||||||||||||||
| Amortization recorded to cost of sales | — | — | 130 | — | 130 | ||||||||||||||||||||||||
| Net unrealized losses (gains) on derivatives | 4,471 | 9,689 | (5,489) | 388 | 9,059 | ||||||||||||||||||||||||
| CMA Differential Roll net losses (gains) | — | (6,904) | — | — | (6,904) | ||||||||||||||||||||||||
| Inventory valuation adjustment | — | — | (6,100) | — | (6,100) | ||||||||||||||||||||||||
| Lower of cost or net realizable value adjustments | — | — | 3,844 | — | 3,844 | ||||||||||||||||||||||||
| Loss (gain) on disposal or impairment of assets, net | 22,318 | 429 | (7,736) | — | 15,011 | ||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | 884 | 884 | ||||||||||||||||||||||||
| Acquisition expense | (28) | — | 84 | (9) | 47 | ||||||||||||||||||||||||
| Other income, net | 428 | 105 | 15 | 68 | 616 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to unconsolidated entities | 1,259 | — | (26) | 95 | 1,328 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to noncontrolling interest | (1,088) | — | — | — | (1,088) | ||||||||||||||||||||||||
| Other | 1,298 | 81 | 108 | — | 1,487 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 263,583 | $ | 54,504 | $ | 21,835 | $ | (29,053) | $ | 310,869 | |||||||||||||||||||
| Six Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Water Solutions | Crude Oil Logistics | Liquids Logistics | Corporate and Other | Consolidated | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 100,733 | $ | 51,916 | $ | 28,293 | $ | (24,909) | $ | 156,033 | |||||||||||||||||||
| Depreciation and amortization | 101,175 | 23,529 | 6,777 | 3,297 | 134,778 | ||||||||||||||||||||||||
| Amortization recorded to cost of sales | — | — | 137 | — | 137 | ||||||||||||||||||||||||
| Net unrealized gains on derivatives | (4,464) | (55,580) | (1,686) | — | (61,730) | ||||||||||||||||||||||||
| CMA Differential Roll net losses (gains) | — | 28,102 | — | — | 28,102 | ||||||||||||||||||||||||
| Inventory valuation adjustment | — | — | (4,115) | — | (4,115) | ||||||||||||||||||||||||
| Lower of cost or net realizable value adjustments | — | 1,074 | (217) | — | 857 | ||||||||||||||||||||||||
| Loss (gain) on disposal or impairment of assets, net | 9,976 | (1,556) | 52 | (987) | 7,485 | ||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | 976 | 976 | ||||||||||||||||||||||||
| Other income (expense), net | 8 | 331 | (184) | 476 | 631 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to unconsolidated entities | 2,212 | — | (24) | 89 | 2,277 | ||||||||||||||||||||||||
| Adjusted EBITDA attributable to noncontrolling interest | (905) | — | — | — | (905) | ||||||||||||||||||||||||
| Other | 1,086 | 125 | 381 | — | 1,592 | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 209,821 | $ | 47,941 | $ | 29,414 | $ | (21,058) | $ | 266,118 | |||||||||||||||||||
Liquidity, Sources of Capital and Capital Resource Activities
General
Our principal sources of liquidity and capital resource requirements are cash flows from our operations, borrowings under our asset-based revolving credit facility (“ABL Facility”), issuing long-term notes, common and/or preferred units, loans from financial institutions, asset securitizations or asset sales. We expect our primary cash outflows to be related to capital expenditures, interest, repayment of debt maturities and distributions.
We believe that our anticipated cash flows from operations and the borrowing capacity under our ABL Facility will be sufficient to meet our liquidity needs, including the repayment of the 2025 Notes. Our borrowing needs vary during the year due in part to the seasonal nature of certain businesses within our Liquids Logistics segment. Our greatest working capital borrowing needs generally occur during the period of June through December, when we are building our natural gas liquids inventories in anticipation of the butane blending and heating seasons. Our working capital borrowing needs generally decline during the period of January through March, when the cash inflows from our Liquids Logistics segment are the greatest. In addition, our working capital borrowing needs vary with changes in commodity prices. A significant increase in commodity prices could drive up our working capital demands and limit our ability to continue to delever our balance sheet and restrict our
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financial flexibility. To protect our liquidity and leverage, we entered into economic hedges that mitigate this exposure when we are building inventory. These positions will expire between November 2023 and March 2024.
Cash Management
We manage cash by utilizing a centralized cash management program that concentrates the cash assets of our operating subsidiaries in joint accounts for the purposes of providing financial flexibility and lowering the cost of borrowing, transaction costs and bank fees. Our centralized cash management program provides that funds in excess of the daily needs of our operating subsidiaries are concentrated, consolidated or otherwise made available for use within our consolidated group. All of our wholly-owned operating subsidiaries participate in this program. Under the cash management program, depending on whether a participating subsidiary has short-term cash surpluses or cash requirements, we provide cash to the subsidiary or the subsidiary provides cash to us.
Short-Term Liquidity
Our principal sources of short-term liquidity consist of cash flows from our operations and borrowings under our ABL Facility, which we believe will provide liquidity to operate our business, manage our working capital requirements and repay current maturities.
The ABL Facility commitments are $600.0 million which includes a sub-limit for letters of credit of $250.0 million. At September 30, 2023, $156.0 million had been borrowed under the ABL Facility and we had letters of credit outstanding of approximately $139.0 million. The ABL Facility is scheduled to mature at the earliest of (a) February 4, 2026 or (b) 91 days prior to the earliest maturity date in respect to any of our indebtedness in an aggregate principal amount of $50.0 million or greater, if such indebtedness is outstanding at such time, subject to certain exceptions.
For additional information related to our ABL Facility, see Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
As of September 30, 2023, our current assets exceeded our current liabilities by approximately $256.1 million.
Long-Term Financing
We expect to fund our long-term financing requirements by issuing long-term notes, common units and/or preferred units, loans from financial institutions, asset securitizations or asset sales.
Senior Secured Notes
On February 4, 2021, we issued $2.05 billion of our 7.5% senior secured notes due 2026 (“2026 Senior Secured Notes”) in a private placement. The 2026 Senior Secured Notes bear interest at 7.5%, which is payable on February 1 and August 1 of each year. The 2026 Senior Secured Notes mature on February 1, 2026. The 2026 Senior Secured Notes were issued pursuant to an indenture dated February 4, 2021 (the “Indenture”).
We have the option to redeem all or a portion of the 2026 Senior Secured Notes at any time at fixed redemption prices contained within the Indenture. If we experience certain kinds of change of control triggering events, we will be required to offer to repurchase the 2026 Senior Secured Notes at 101% of the aggregate principal amount of the 2026 Senior Secured Notes repurchased plus accrued and unpaid interest on the 2026 Senior Secured Notes repurchased to, but not including, the date of purchase.
Senior Unsecured Notes
The senior unsecured notes include the 2025 Notes, which mature on March 1, 2025 and the 7.5% senior unsecured notes due 2026 (“2026 Notes”), which mature on April 15, 2026 (collectively, the “Senior Unsecured Notes”).
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Redemption Rights
We currently have the right to redeem all or a portion of the outstanding 2025 Notes at 100% of the principal amount plus accrued and unpaid interest. As of April 15, 2024, we will have the right to redeem all or a portion of the outstanding 2026 Notes at 100% of the principal amount plus accrued and unpaid interest.
For additional information related to our long-term debt, see Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Capital Expenditures, Acquisitions and Other Investments
The following table summarizes expansion and maintenance capital expenditures (which excludes additions for tank bottoms and linefill and has been prepared on the accrual basis), acquisitions and other investments for the periods indicated.
| Capital Expenditures | Other | |||||||||||||||||||||||||
| Expansion | Maintenance | Acquisitions (1) | Investments (2) | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2023 | $ | 29,476 | $ | 16,358 | $ | — | $ | — | ||||||||||||||||||
| 2022 | $ | 31,589 | $ | 14,219 | $ | — | $ | 346 | ||||||||||||||||||
| Six Months Ended September 30, | ||||||||||||||||||||||||||
| 2023 | $ | 57,041 | $ | 32,885 | $ | — | $ | 258 | ||||||||||||||||||
| 2022 | $ | 62,943 | $ | 29,586 | $ | — | $ | 346 | ||||||||||||||||||
(1) There were no acquisitions during the three months or six months ended September 30, 2023 or 2022.
(2) Amounts for the three months and six months ended September 30, 2022 and the six months ended September 30, 2023 relate to contributions made to unconsolidated entities. There were no other investments during the three months ended September 30, 2023.
Capital expenditures for the fiscal year ending March 31, 2024 are expected to be approximately $130 to $150 million.
Distributions Declared
The board of directors of our GP decided to temporarily suspend all distributions in order to deleverage our balance sheet until we meet the 4.75 to 1.00 total leverage ratio set forth within the indenture of the 2026 Senior Secured Notes. This resulted in the suspension of the quarterly common unit distributions, which began with the quarter ended December 31, 2020, and all preferred unit distributions, which began with the quarter ended March 31, 2021. The board of directors of our GP expects to evaluate the reinstatement of the common unit and all preferred unit distributions in due course, taking into account a number of important factors, including our leverage, liquidity, the sustainability of cash flows, upcoming debt maturities, capital expenditures and the overall performance of our businesses.
Contractual Obligations
Our contractual obligations primarily consist of purchase commitments, outstanding debt principal and interest obligations, lease obligations, pipeline commitments, asset retirement obligations and other commitments.
For a discussion of contractual obligations, see Note 7, Note 8 and Note 14 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
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Cash Flows
The following table summarizes the sources (uses) of our cash flows for the periods indicated:
| Six Months Ended September 30, | ||||||||||||||
| Cash Flows Provided by (Used in): | 2023 | 2022 | ||||||||||||
| (in thousands) | ||||||||||||||
| Operating activities, before changes in operating assets and liabilities | $ | 210,878 | $ | 203,661 | ||||||||||
| Changes in operating assets and liabilities | (79,778) | (235,333) | ||||||||||||
| Operating activities | $ | 131,100 | $ | (31,672) | ||||||||||
| Investing activities | $ | (56,768) | $ | (60,470) | ||||||||||
| Financing activities | $ | (77,083) | $ | 92,860 | ||||||||||
Operating Activities. The increase in net cash provided by operating activities during the six months ended September 30, 2023 was due primarily to fluctuations in working capital, particularly accounts receivable and accounts payable, due to higher crude oil volumes and prices during the six months ended September 30, 2023, and increased earnings from operations.
Investing Activities. Net cash used in investing activities was $56.8 million during the six months ended September 30, 2023, compared to net cash used in investing activities of $60.5 million during the six months ended September 30, 2022. The decrease in net cash used in investing activities was due primarily to:
•a $25.9 million increase in proceeds received primarily from the sale of certain saltwater disposal assets and intangible assets in the Pinedale Anticline Basin, the sale of certain saltwater disposal assets in the Eagle Ford Basin and the sale of two natural gas liquids terminals in the Pacific Northwest in July 2023; and
•a decrease in capital expenditures from $94.0 million (includes payment of amounts accrued as of March 31, 2022) during the six months ended September 30, 2022 to $80.4 million (includes payment of amounts accrued as of March 31, 2023) during the six months ended September 30, 2023 due primarily to the timing of the expenditures in our Water Solutions segment.
These decreases in net cash used in investing activities were partially offset by a $36.2 million increase in payments to settle derivatives.
Financing Activities. Net cash used in financing activities was $77.1 million during the six months ended September 30, 2023, compared to net cash provided by financing activities of $92.9 million during the six months ended September 30, 2022. The increase in net cash used in financing activities was due primarily to:
•a decrease of $153.0 million in borrowings on the revolving credit facility (net of repayments) during the six months ended September 30, 2023; and
•an increase of $18.5 million paid in cash to repurchase a portion of our Senior Unsecured Notes during the six months ended September 30, 2023.
Supplemental Guarantor Information
NGL Energy Partners LP (parent) and NGL Energy Finance Corp. are co-issuers of the Senior Unsecured Notes (see Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report). Certain of our wholly owned subsidiaries (“Guarantor Subsidiaries”) have, jointly and severally, fully and unconditionally guaranteed the Senior Unsecured Notes.
The guarantees are senior unsecured obligations of each Guarantor Subsidiary and rank equally in right of payment with other existing and future senior indebtedness of such Guarantor Subsidiary, and senior in right of payment to all existing and future subordinated indebtedness of such Guarantor Subsidiary. The guarantee of our Senior Unsecured Notes by each Guarantor Subsidiary is subject to certain automatic customary releases, including in connection with the sale, disposition or transfer of all of the capital stock, or of all or substantially all of the assets, of such Guarantor Subsidiary to one or more persons that are not us or a restricted subsidiary, the exercise of legal defeasance or covenant defeasance options, the satisfaction and discharge of the indentures governing our Senior Unsecured Notes, the designation of such Guarantor Subsidiary as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the indentures governing our Senior
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Unsecured Notes, the release of such Guarantor Subsidiary from its guarantee under our revolving credit facility, the liquidation or dissolution of such Guarantor Subsidiary or upon the consolidation, merger or transfer of all assets of the Guarantor Subsidiary to us or another Guarantor Subsidiary in which the Guarantor Subsidiary dissolves or ceases to exist (collectively, the “Releases”). The obligations of each Guarantor Subsidiary under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. We are not restricted from making investments in the Guarantor Subsidiaries and there are no significant restrictions on the ability of the Guarantor Subsidiaries to make distributions to NGL Energy Partners LP (parent). None of the assets of the Guarantor Subsidiaries (other than the investments in non-guarantor subsidiaries) are restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act of 1933, as amended.
The rights of holders of our Senior Unsecured Notes against the Guarantor Subsidiaries may be limited under the U.S. Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law.
As permitted under Rule 13-01(a)(4)(vi) of Regulation S-K, we have excluded summarized financial information for the Partnership because the assets, liabilities, and results of operations of NGL Energy Partners LP (parent), NGL Energy Finance Corp. and the Guarantor Subsidiaries are not materially different than the corresponding amounts in our consolidated financial statements, and we believe that such summarized financial information would be repetitive and would not provide incremental value to investors.
Environmental Legislation
See our Annual Report for a discussion of proposed environmental legislation and regulations that, if enacted, could result in increased compliance and operating costs. However, at this time we cannot predict the structure or outcome of any future legislation or regulations or the eventual cost we could incur in compliance.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements that are applicable to us, see Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires the selection and application of appropriate accounting principles to the relevant facts and circumstances of our operations and the use of estimates made by management. We have identified certain more critical judgment areas in the application of our accounting policies that are most important to the portrayal of our consolidated financial position and results of operations. The application of these accounting policies, which requires subjective or complex judgments regarding estimates and projected outcomes of future events, and changes in these accounting policies, could have a material effect on our consolidated financial statements. There have been no material changes in the critical accounting estimates previously disclosed in our Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
A portion of our long-term debt is variable-rate debt. Changes in interest rates impact the interest payments of our variable-rate debt but generally do not impact the fair value of the liability. Conversely, changes in interest rates impact the fair value of our fixed-rate debt but do not impact its cash flows.
The ABL Facility is variable-rate debt with interest rates that are generally indexed to the prime rate or SOFR, an adjusted forward-looking term rate based on the secured overnight financing rate. At September 30, 2023, we had $156.0 million of outstanding borrowings under the ABL Facility at a weighted average interest rate of 8.27%. A change in interest rates of 0.125% would result in an increase or decrease of our annual interest expense of $0.2 million, based on borrowings outstanding at September 30, 2023.
The current distribution rate for the Class B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (“Class B Preferred Units”) is a floating rate of the three-month London Interbank Offered Rate (“LIBOR”) interest rate (5.40% for the quarter ended September 30, 2023) plus a spread of 7.213%. A change in interest rates of 0.125% would result in an increase or decrease of our Class B Preferred Unit distribution of $0.1 million, based on the Class B Preferred Units outstanding
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at September 30, 2023. Effective July 3, 2023, the reference to LIBOR in the formulation for the distribution rate in these securities was replaced with three-month CME Term SOFR, as calculated and published by CME Group Benchmark Administration, Ltd., plus a tenor spread adjustment of 0.26161%, in accordance with the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), and the rules implementing the LIBOR Act.
On and after April 15, 2024, distributions on the Class C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units will accumulate at a percentage of the $25.00 liquidation preference equal to the applicable three-month LIBOR interest rate (or alternative rate as determined in accordance with the amended and restated limited partnership agreement (the “Partnership Agreement”)) plus a spread of 7.384%. On or after July 1, 2024, the holders of our Class D Preferred Units can elect, from time to time, for the distributions to be calculated based on a floating rate equal to the applicable three-month LIBOR interest rate (or alternative rate as determined in accordance with the Partnership Agreement) plus a spread of 7.00% (“Class D Variable Rate,” as defined in the Partnership Agreement). Each Class D Variable Rate election shall be effective for at least four quarters following such election.
Commodity Price Risk
Our operations are subject to certain business risks, including commodity price 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. Procedures and limits for managing commodity price risks are specified in our market risk policy. Open commodity positions and market price changes are monitored daily and are reported to senior management and to marketing operations personnel.
The crude oil, natural gas liquids, and refined and renewables products industries are “margin-based” and “cost-plus” businesses in which our realized margins depend on the differential of sales prices over our supply costs. We have no control over market conditions. As a result, our profitability may be impacted by sudden and significant changes in the price of crude oil, natural gas liquids, and refined and renewables products.
We engage in various types of forward contracts and financial derivative transactions to reduce the effect of price volatility on our product costs, to protect the value of our inventory positions, and to help ensure the availability of product during periods of short supply. We attempt to balance our contractual portfolio by purchasing volumes when we have a matching purchase commitment from our wholesale and retail customers. We may experience net unbalanced positions from time to time. In addition to our ongoing policy to maintain a balanced position, for accounting purposes we are required, on an ongoing basis, to track and report the market value of our derivative portfolio.
Although we use financial derivative instruments to reduce the market price risk associated with forecasted transactions, we do not account for financial derivative transactions as hedges. All changes in the fair value of our physical contracts that do not qualify as normal purchases and normal sales and settlements (whether cash transactions or non-cash mark-to-market adjustments) are reported either within revenue (for sales contracts) or cost of sales (for purchase contracts) in our unaudited condensed consolidated statements of operations, regardless of whether the contract is physically or financially settled.
The following table summarizes the hypothetical impact on the September 30, 2023 fair value of our commodity derivatives of an increase of 10% in the value of the underlying commodity (in thousands):
| Increase (Decrease) To Fair Value | |||||
| Crude oil (Water Solutions segment) | $ | (4,095) | |||
| Crude oil (Crude Oil Logistics segment) | $ | (3,053) | |||
| Propane (Liquids Logistics segment) | $ | (4,716) | |||
| Butane (Liquids Logistics segment) | $ | (1,940) | |||
| Refined Products (Liquids Logistics segment) | $ | (800) | |||
| Other Products (Liquids Logistics segment) | $ | (1,241) | |||
| Canadian dollars (Liquids Logistics segment) | $ | 124 | |||
Changes in commodity prices may also impact the volumes that we are able to transport, dispose, store and market, which also impact our cash flows.
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Credit Risk
Our operations are also subject to credit risk, which is the risk of loss from nonperformance by suppliers, customers or financial counterparties to a contract. Procedures and limits for managing credit risk are specified in our credit policy. Credit risk is monitored daily and we believe we minimize exposure through the following:
•requiring certain customers to prepay or place deposits for our products and services;
•requiring certain customers to post letters of credit or other forms of surety;
•monitoring individual customer receivables relative to previously-approved credit limits;
•requiring certain customers to take delivery of their contracted volume ratably rather than allow them to take delivery at their discretion;
•entering into master netting agreements that allow for offsetting counterparty receivable and payable balances for certain transactions;
•reviewing the receivable aging regularly to identify issues or trends that may develop; and
•requiring marketing personnel to manage their customers’ receivable position and suspend sales to customers that have not timely paid outstanding invoices.
At September 30, 2023, our primary counterparties were retailers, resellers, energy marketers, producers, refiners, and dealers.
Fair Value
We determine the fair value of our exchange traded derivative financial instruments utilizing publicly available prices, and for non-exchange traded derivative financial instruments, we utilize pricing models for similar instruments including publicly available prices and forward curves generated from a compilation of data gathered from third-parties.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure the information required to be disclosed in our filings and submissions under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer of our GP, as appropriate, to allow timely decisions regarding required disclosure.
We completed an evaluation under the supervision and with participation of our management, including the principal executive officer and principal financial officer of our GP, of the effectiveness of the design and operation of our disclosure controls and procedures at September 30, 2023. Based on this evaluation, the principal executive officer and principal financial officer of our GP have concluded that as of September 30, 2023, such disclosure controls and procedures were effective.
There have been no changes in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) of the Exchange Act) during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved from time to time in various legal proceedings and claims arising in the ordinary course of business. For information related to legal proceedings, see the discussion under the caption “Legal Contingencies” in Note 8 to our unaudited condensed consolidated financial statements included in this Quarterly Report, which is incorporated by reference into this Item 1.
Item 1A. Risk Factors
There have been no material changes in the risk factors previously disclosed in Part I, Item 1A–“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Pursuant to certain covenants within the indenture of our 2026 Senior Secured Notes, the board of directors of our general partner temporarily suspended all common unit and preferred unit distributions. For additional information related to the suspension of distributions, see Note 9 to our unaudited condensed consolidated financial statements included in this Quarterly Report.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended September 30, 2023, no director or officer of the Partnership adopted terminated
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Item 6. Exhibits
| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 22.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS** | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH** | Inline XBRL Schema Document | |||||||
| 101.CAL** | Inline XBRL Calculation Linkbase Document | |||||||
| 101.DEF** | Inline XBRL Definition Linkbase Document | |||||||
| 101.LAB** | Inline XBRL Label Linkbase Document | |||||||
| 101.PRE** | Inline XBRL Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Exhibits filed with this report.
** The following documents are formatted in Inline XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets at September 30, 2023 and March 31, 2023, (ii) Unaudited Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2023 and 2022, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended September 30, 2023 and 2022, (iv) Unaudited Condensed Consolidated Statements of Changes in Equity for the three months and six months ended September 30, 2023 and 2022, (v) Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2023 and 2022, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.
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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 thereunto duly authorized.
| NGL Energy Partners LP | |||||||||||
| By: | NGL Energy Holdings LLC, its general partner | ||||||||||
| Date: November 9, 2023 | By: | /s/ H. Michael Krimbill | |||||||||
| H. Michael Krimbill | |||||||||||
| Chief Executive Officer | |||||||||||
| Date: November 9, 2023 | By: | /s/ Bradley P. Cooper | |||||||||
Bradley P. Cooper | |||||||||||
| Chief Financial Officer | |||||||||||
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Exhibit 31.1
CERTIFICATION
I, H. Michael Krimbill, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NGL Energy Partners LP;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 9, 2023 | /s/ H. Michael Krimbill | ||||
| H. Michael Krimbill | |||||
| Chief Executive Officer of NGL Energy Holdings LLC, the general partner of NGL Energy Partners LP | |||||
Exhibit 31.2
CERTIFICATION
I, Bradley P. Cooper, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of NGL Energy Partners LP;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 9, 2023 | /s/ Bradley P. Cooper | ||||
Bradley P. Cooper | |||||
| Chief Financial Officer of NGL Energy Holdings LLC, the general partner of NGL Energy Partners LP | |||||
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of NGL Energy Partners LP (the “Partnership”) on Form 10-Q for the fiscal quarter ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. Michael Krimbill, Chief Executive Officer of NGL Energy Holdings LLC, the general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
| Date: November 9, 2023 | /s/ H. Michael Krimbill | ||||
| H. Michael Krimbill | |||||
| Chief Executive Officer of NGL Energy Holdings LLC, the general partner of NGL Energy Partners LP | |||||
This certification is being furnished solely pursuant to Section 906 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of NGL Energy Partners LP (the “Partnership”) on Form 10-Q for the fiscal quarter ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley P. Cooper, Chief Financial Officer of NGL Energy Holdings LLC, the general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
| Date: November 9, 2023 | /s/ Bradley P. Cooper | ||||
Bradley P. Cooper | |||||
| Chief Financial Officer of NGL Energy Holdings LLC, the general partner of NGL Energy Partners LP | |||||
This certification is being furnished solely pursuant to Section 906 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request.