NGL Energy Partners LP: Form 10-Q for the period ended Dec 31, 2021

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 nine months ended December 31, 2021. 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, 2021 (“Annual Report”) filed with the Securities and Exchange Commission on June 3, 2021.

Overview

We are a Delaware limited partnership. NGL Energy Holdings LLC serves as our general partner. At December 31, 2021, 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.

Consolidated Results of Operations

The following table summarizes our unaudited condensed consolidated statements of operations for the periods indicated:

(in thousands)

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 acquisitions, disposals and other transactions. Our results of operations for the three months and nine months ended December 31, 2021 are not necessarily indicative of the results of operations to be expected for future periods or for the full fiscal year ending March 31, 2022.

Recent Developments

Global Pandemic

The global spread of COVID-19 caused a global pandemic and worldwide containment and mitigation measures contributed to a massive economic slowdown and decreased demand for crude oil and refined products. This period of unprecedented restrictions on travel and economic activity significantly reduced demand for refined products and all three of our segments were negatively impacted by the lower commodity price environment and reduced demand.

While many global and regional economies have reopened, the potential future limitations and impact of the ongoing COVID-19 pandemic, including emerging variants of the virus and renewed mitigation measures, on our business are still unknown at this time. Given the uncertain timing of a return of refined product demand to historical levels, the extent these events will have an impact on our results of operations is unclear. Crude oil prices have increased but future drilling and production plans are continually being assessed.

Seismic Activity

Induced seismic activity, associated with subsurface injection of produced water for disposal, has become a concern for certain state government agencies in several areas of the Permian Basin in which our Water Solutions business operates. To mitigate in these areas, we have been leading collaborative industry efforts with the relevant state regulatory agencies and other disposal operators. We have implemented voluntary strategic reductions in injected volumes at certain facilities, have temporarily shut in facilities, where appropriate, and are working with state regulatory agencies to collect and review data that will help derive appropriate and sustainable solutions. To date, due to the capacity within our integrated system in those areas, the diverse locations of our disposal facilities and the connectivity of our system, we have not been negatively impacted by these actions.

Acquisitions and Dispositions

We completed several acquisitions and dispositions during the nine months ended December 31, 2021 and fiscal year ended March 31, 2021. These transactions impact the comparability of our results of operations between our current and prior fiscal years.

On June 18, 2021, we sold our approximately 71.5% interest in Sawtooth Caverns, LLC (“Sawtooth”) to a group of buyers (see Note 15 to our unaudited condensed consolidated financial statements included in this Quarterly Report).

In March 2021, we acquired the Ambassador pipeline, an approximately 225-mile natural gas liquids pipeline, which runs from the Kalkaska gas plant in Kalkaska County, Michigan to a termination point near Marysville in St. Clair County, Michigan. In December 2020, we sold certain permits, land and a saltwater disposal facility to a third-party.

Repurchases of Senior Unsecured Notes

During the three months ended December 31, 2021, we repurchased $20.0 million of the 7.5% senior unsecured notes due 2023 (“2023 Notes”).

Segment Operating Results for the Three Months Ended December 31, 2021 and 2020

Water Solutions

The following table summarizes the operating results of our Water Solutions segment for the periods indicated:

(in thousands, except per barrel and per day amounts)

(1) Total produced water barrels processed during the three months ended December 31, 2021 and 2020 were 169,238,413 and 129,900,413, respectively.

Water Disposal Service Fee Revenues. The increase was due to an increase in produced water volumes processed as a result of increased crude oil production driven by higher crude oil prices and completion activity, primarily in the Delaware Basin. This was partially offset by lower service fees received per barrel due to higher volumes received in basins with lower fees, such as the Eagle Ford Basin, as well as increased volumes from customers with lower contracted fees.

Recovered Crude Oil Revenues. The increase was due primarily to higher volumes of skim oil sold due to increased produced water processed as well as higher crude oil prices realized.

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 the timing of our customers completions.

Other Revenues. Other revenues primarily include brackish non-potable water revenues, water pipeline revenues, land surface use revenues and solids disposal revenues. The increase was due primarily to higher sales of brackish non-potable water and pipeline revenues, driven by an increase in drilling and completion activity primarily in the Delaware Basin as well as our increased capacity to meet demand for these services, partially offset by lower solids disposal revenues.

Cost of Sales-Excluding Impact of Derivatives. The increase was due primarily to costs related to the transfer of brackish non-potable water and recycled water to the purchaser as well as increased purchases of brackish non-potable water from third-parties to meet customer needs.

Derivative Loss. 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 the produced water and selling the recovered skim oil. During the three months ended December 31, 2021, we had $1.8 million of net unrealized losses on derivatives and $1.7 million of net realized gains on derivatives. During the three months ended December 31, 2020, we had $4.6 million of net realized gains on derivatives and $5.8 million of net unrealized losses on derivatives.

Operating and General and Administrative Expenses. The increase was due primarily to higher utility, royalty and chemical expenses as a result of the increase in produced water volumes processed. Utility and royalty expenses, which are two of our biggest variable expenses, were not impacted by the rise in inflation due to negotiating long-term utility contracts with fixed rates and royalty contracts with no escalation clauses. Severance taxes also increased due to the increase in revenue from recovered crude oil. The Partnership continues to see a decrease in its operating expenses per barrel of produced water processed due to continued focus on cost reduction and an increase in overall disposal volumes.

Depreciation and Amortization Expense. The decrease was due primarily to an impairment charge recorded during the three months ended March 31, 2021 to write down the value of an intangible asset which resulted in lower amortization expense during the three months ended December 31, 2021 as well as certain other long-term assets being fully amortized or impaired during the fiscal year ended March 31, 2021 and nine months ended December 31, 2021. These decreases were partially offset by the depreciation of newly developed facilities and infrastructure.

Loss (Gain) on Disposal or Impairment of Assets, Net. During the three months ended December 31, 2021, we recorded a net loss of $14.3 million primarily related to the write-down of an inactive saltwater disposal facility and damaged equipment and wells at other facilities, abandonment of certain capital projects and the sale of certain other miscellaneous assets and a gain of $4.3 million on the sale of certain land and a landfill permit. During the three months ended December 31, 2020, we recorded a gain of $12.1 million related to the sale of certain permits, land and a saltwater disposal facility, and a net loss of $2.0 million primarily related to the abandonment of certain capital projects.

Crude Oil Logistics

The following table summarizes the operating results of our Crude Oil Logistics segment for the periods indicated:

(in thousands, except per barrel amounts)

(1) Revenues include $2.5 million and $1.8 million of intersegment sales during the three months ended December 31, 2021 and 2020, respectively, that are eliminated in our unaudited condensed consolidated statements of operations.

(2) Information is presented as of December 31, 2021 and December 31, 2020, respectively.

(3) Cost and product margin per barrel excludes the impact of derivatives.

Crude Oil Sales Revenues. The increase was due primarily to an increase in crude oil prices during the three months ended December 31, 2021, compared to the three months ended December 31, 2020. This was offset by the reduction in sale volumes, primarily due to lower production in the DJ Basin. We also had an increase in buy/sell transactions during the quarter ended December 31, 2021. These are transactions in which we transact to 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.

Crude Oil Transportation and Other Revenues. The decrease was primarily due to our Grand Mesa Pipeline, as revenues from third-parties decreased by $10.6 million during the three months ended December 31, 2021, compared to the three months ended December 31, 2020 due to the court approved rejection of the Extraction Oil & Gas, Inc. (“Extraction”) transportation agreement (as part of their bankruptcy) during the prior year quarter. In addition, revenue from the rental of storage also declined due to less capacity being leased to third parties. These declines were partially offset by increased barge transportation revenue as the number of charter days for our fleet increased over the same period as demand increased to pre-pandemic levels.

During the three months ended December 31, 2021, financial volumes on the Grand Mesa Pipeline averaged approximately 83,000 barrels per day, compared to approximately 69,000 barrels per day for the three months ended December 31, 2020 (volume amounts are from both internal and external parties). The increase was due primarily to the new supply agreement signed with Extraction after they exited bankruptcy.

Cost of Sales-Excluding Impact of Derivatives. The increase was due primarily to an increase in crude oil prices during the three months ended December 31, 2021, compared to the three months ended December 31, 2020.

Derivative Loss. Our cost of sales during the three months ended December 31, 2021 included $34.7 million of net realized losses on derivatives, driven by increasing crude oil prices, partially offset by $32.2 million of net unrealized gains on derivatives. Our cost of sales during the three months ended December 31, 2020 included $1.5 million of net realized gains on derivatives and $7.9 million of net unrealized losses on derivatives.

Crude Oil Product Margin. The increase was primarily due to higher crude oil prices as certain contracted rates with producers increased due to higher crude oil prices.

Operating and General and Administrative Expenses. The decrease was primarily related to the write off of a receivable from Extraction of $5.7 million related to deficiency volumes (see below) in the three months ended December 31, 2020. During the bankruptcy, Extraction continued to utilize the shipping services under the transportation contracts but only paid us for the actual volumes shipped and not for the difference between the minimum volume commitment specified under the contracts and the actual volumes shipped (“deficiency volumes”). This decrease was partially offset by an increase in utility expense of $1.4 million in the three months ended December 31, 2021 due to increased volumes on Grand Mesa and increased utility rates.

Depreciation and Amortization Expense. The decrease was due primarily to the reduction of amortization expense due to the impairment of certain intangible assets at the end of the prior year. This was offset by an increase in depreciation expense due to reducing the estimated useful lives of our railcars.

Loss on Disposal or Impairment of Assets, Net. During the three months ended December 31, 2021, we recorded a net loss of $2.2 million for an impairment due to damage caused by Hurricane Ida to one of our Gulf Coast terminals. During the three months ended December 31, 2020, we recorded a net loss of $145.8 million for the impairment of an intangible asset related to a rejected transportation agreement with Extraction and a net loss of $237.8 million for the impairment of goodwill.

Liquids Logistics

The following table summarizes the operating results of our Liquids Logistics segment for the periods indicated:

(in thousands, except per gallon amounts)

38

(in thousands, except per gallon amounts)

(1) Revenue includes $1.9 million of intersegment sales during the three months ended December 31, 2020 that is eliminated in our unaudited condensed consolidated statement of operations.

(2) Information is presented as of December 31, 2021 and December 31, 2020, respectively.

(3) Decrease from March 31, 2021 relates to the sale of Sawtooth on June 18, 2021 (see Note 15 to our unaudited condensed consolidated financial statements included in this Quarterly Report).

(4) Cost and product margin per gallon excludes the impact of derivatives.

Refined Products Revenues and Cost of Sales-Excluding Impact of Derivatives. Revenues and cost of sales, excluding the impact of derivatives, increased due to higher commodity prices, offset partially by a decrease in volumes due to the continued weakness in demand in certain geographical areas due to COVID-19 and tighter supply.

Refined Products Derivative Loss. Our refined products margin during the three months ended December 31, 2021 included a realized loss of $0.2 million and the three months ended December 31, 2020 included a realized loss of $0.2 million.

Refined Products product margins increased during the three months ended December 31, 2021 due to supply being short as a result of extended refinery downtime in certain of the markets in which we compete. These refineries were back online towards the end of December. This increase was partially offset by lower product demand in other areas due to the lingering effects of COVID-19 lockdowns.

Propane Sales and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales were due to higher commodity prices. The increase in propane prices was the result of lower inventories and a strong export market due to the increase in international prices. This was partially offset by lower propane volumes sold driven by reduced demand due to unusually warm weather at the beginning of winter and the loss of two producer services agreements in the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

Propane Derivative (Gain) Loss. Our wholesale propane cost of sales included $29.7 million of net unrealized losses on derivatives and $31.1 million of net realized gains on derivatives during the three months ended December 31, 2021. During the three months ended December 31, 2020, our cost of wholesale propane sales included $1.8 million of net unrealized losses on derivatives and $2.7 million of net realized losses on derivatives.

Propane product margins, excluding the impact of derivatives, decreased as a result of lower demand due to the warmer than normal start to winter and rapidly declining prices. We built our inventory for the winter heating season, particularly in September and October, but due to the warm start of the season the average price for November declined approximately $0.20 per gallon compared to October’s monthly average price and prices continued to decrease another $0.20 per gallon through the end of December.

Butane Sales and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales were primarily due to an increase in commodity prices, which was the result of the strength in crude oil prices and increased global demand, which has led to a tightened supply market. The increase was partially offset by lower volume due to the tight supply market.

Butane Derivative (Gain) Loss. Our cost of butane sales during the three months ended December 31, 2021 included $12.9 million of net unrealized gains on derivatives and $6.9 million of net realized losses on derivatives. Our cost of butane sales included $5.6 million of net unrealized losses on derivatives and $6.6 million of net realized losses on derivatives during the three months ended December 31, 2020.

Butane product margins, excluding the impact of derivatives, increased due to a tight supply market, driven by an increase in demand for exports, which is driving favorable sales differentials.

Other Products Sales and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales, excluding the impact of derivatives, were due to higher commodity prices and increased demand for biodiesel. This was partially offset by reduced natural gasoline volumes during the three months ended December 31, 2021 due to less product being available for shipment by railcars as more of the product is now shipped via third-party pipelines.

Other Products Derivative Loss (Gain). Our derivatives of other products included $0.1 million of net unrealized losses and $6.7 million of net realized losses on derivatives during the three months ended December 31, 2021. Our derivatives of other products during the three months ended December 31, 2020 included less than $0.1 million of net unrealized gains on derivatives and less than $0.1 million of net realized losses on derivatives.

Other product sales product margins during the three months ended December 31, 2021 decreased due to lower natural gasoline margins as a result of the tight supply. This decrease was partially offset by increased biodiesel margins due to securing favorable supply contracts in the Midwest and transporting the product for sale in more favorable markets.

Service Revenues. This revenue includes storage, terminaling and transportation services income. The decrease for the current quarter was due primarily to the disposition of Sawtooth in June 2021.

Operating and General and Administrative Expenses. The increase was primarily due to higher compensation partially offset by the disposition of Sawtooth in June 2021.

Depreciation and Amortization Expense. The decrease was primarily due to the disposition of Sawtooth and lower amortization expense due to certain intangible assets being fully amortized as of September 30, 2021.

Corporate and Other

The operating loss within “Corporate and Other” includes the following components for the periods indicated:

(in thousands)

General and Administrative Expenses. The increase during the three months ended December 31, 2021 was due to increased incentive compensation and outside consulting fees, offset by lower legal expenses due to certain claims being settled.

Equity in Earnings of Unconsolidated Entities

The decrease in equity in earnings of $0.2 million during the three months ended December 31, 2021 was due primarily to lower earnings from certain membership interests related to specific land and water services operations.

Interest Expense

Interest expense includes interest charged on the asset-based revolving credit facility (“ABL Facility”), senior secured notes and senior unsecured notes, as well as amortization of debt issuance costs, letter of credit fees, interest on equipment financing notes, and accretion of interest on non-interest bearing debt obligations. The increase of $21.1 million during the three months ended December 31, 2021 was primarily due to the issuance of the 2026 Senior Secured Notes (as defined herein) which resulted in us paying a higher interest rate. See Note 6 to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Gain on Early Extinguishment of Liabilities, Net

During the three months ended December 31, 2021 and 2020, 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. See Note 6 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.

Other Income, Net

Other income, net for the current quarter was consistent with the prior quarter.

Income Tax Benefit

Income tax benefit was $0.1 million during the three months ended December 31, 2021, compared to an income tax benefit of $1.2 million during the three months ended December 31, 2020. 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. The increase in the noncontrolling interest loss of less than $0.1 million during the three months ended December 31, 2021 was due primarily to higher income from certain recycling operations and water solutions operations, partially offset by a loss from operations of the Sawtooth joint venture during the three months ended December 31, 2020.

Segment Operating Results for the Nine Months Ended December 31, 2021 and 2020

Water Solutions

The following table summarizes the operating results of our Water Solutions segment for the periods indicated:

(in thousands, except per barrel and per day amounts)

(1) Total produced water barrels processed during the nine months ended December 31, 2021 and 2020 were 482,885,902 and 372,197,325, respectively.

Water Disposal Service Fee Revenues. The increase was due to an increase in produced water volumes processed as a result of increased crude oil production driven by higher crude oil prices and completion activity, primarily in the Delaware Basin. This was partially offset by lower service fees received per barrel due to higher volumes received in basins with lower fees, such as the Eagle Ford Basin, as well as increased volumes from customers with lower contracted fees.

Recovered Crude Oil Revenues. The increase was due primarily to higher volumes of skim oil sold due to increased produced water processed as well as higher crude oil prices realized. Additionally, an increase in the number of wells completed in our area of operations during the period with increased flowback activity resulted in higher skim oil volumes per barrel of produced water processed.

Recycled Water Revenues. The increase was due primarily to the increasing demand for water to be used in completions, driven by an increase in drilling and completion activity primarily in the Delaware Basin, and our customers transition from brackish non-potable water to recycled water.

Other Revenues. The increase was due primarily to higher sales of brackish non-potable water and pipeline revenues, driven by an increase in drilling and completion activity primarily in the Delaware Basin as well as our increased capacity to meet demand for these services, and higher land surface use fees and sales of caliche due to increased producer activity.

Cost of Sales-Excluding Impact of Derivatives. The increase was due primarily to costs related to the transfer of brackish non-potable water and recycled water to the purchaser as well as increased purchases of brackish non-potable water from third-parties to meet customer needs.

Derivative Loss. During the nine months ended December 31, 2021, we had $6.8 million of net unrealized losses on derivatives and $5.9 million of net realized gains on derivatives. During the nine months ended December 31, 2020, we had $17.4 million of net realized gains on derivatives and $23.5 million of net unrealized losses on derivatives.

Operating and General and Administrative Expenses. The increase was due primarily to higher utility, royalty and chemical expenses as a result of the increase in produced water volumes processed. Utility and royalty expenses, which are two of our biggest variable expenses, were not impacted by the rise in inflation due to negotiating long-term utility contracts with fixed rates and royalty contracts with no escalation clauses. Severance taxes also increased due to the increase in revenue from recovered crude oil. The Partnership continues to see a decrease in its operating expenses per barrel of produced water processed due to continued focus on cost reduction and an increase in overall disposal volumes.

Depreciation and Amortization Expense. The decrease was due primarily to an impairment charge recorded during the three months ended March 31, 2021 to write down the value of an intangible asset which resulted in lower amortization expense during the nine months ended December 31, 2021 as well as certain other long-term assets being fully amortized or impaired during the fiscal year ended March 31, 2021 and nine months ended December 31, 2021. These decreases were partially offset by the depreciation of newly developed facilities and infrastructure.

Loss (Gain) on Disposal or Impairment of Assets, Net. During the nine months ended December 31, 2021, we recorded a net loss of $23.7 million primarily related to the write-down of an inactive saltwater disposal facility and damaged equipment and wells at other facilities, abandonment of certain capital projects and the sale of certain other miscellaneous assets and a gain of $4.3 million on the sale of certain land and a landfill permit. During the nine months ended December 31, 2020, we recorded a gain of $12.1 million related to the sale of certain permits, land and a saltwater disposal facility, and a net loss of $8.7 million primarily related to the write-down of retired equipment and the abandonment of certain capital projects.

Crude Oil Logistics

The following table summarizes the operating results of our Crude Oil Logistics segment for the periods indicated:

(in thousands, except per barrel amounts)

(1) Revenues include $7.2 million and $4.3 million of intersegment sales during the nine months ended December 31, 2021 and 2020, respectively, that are eliminated in our unaudited condensed consolidated statements of operations.

(2) Information is presented as of December 31, 2021 and December 31, 2020, respectively.

(3) Cost and product margin per barrel excludes the impact of derivatives.

Crude Oil Sales Revenues. The increase was due primarily to an increase in crude oil prices during the nine months ended December 31, 2021, compared to the nine months ended December 31, 2020. This was offset by a reduction in sales volumes, primarily due to lower production in the DJ Basin. We also had an increase in buy/sell transactions during the nine months ended December 31, 2021, compared to the nine months ended December 31, 2020.

Crude Oil Transportation and Other Revenues. The decrease was primarily due to our Grand Mesa Pipeline, as revenues from third-parties decreased by $65.7 million during the nine months ended December 31, 2021, compared to the nine months ended December 31, 2020. During the nine months ended December 31, 2021, financial volumes on the Grand Mesa Pipeline averaged approximately 80,000 barrels per day, compared to 103,000 barrels per day for the nine months ended December 31, 2020 (volume amounts are from both internal and external parties). The decline was primarily due to the court approved rejection of the Extraction transportation agreement (as part of their bankruptcy) as well as decreased production in the DJ Basin.

Cost of Sales-Excluding Impact of Derivatives. The increase was due primarily to an increase in crude oil prices during the nine months ended December 31, 2021, compared to the nine months ended December 31, 2020.

Derivative Loss. Our cost of sales during the nine months ended December 31, 2021 included $95.7 million of net realized losses on derivatives, driven by increasing crude oil prices, partially offset by $53.8 million of net unrealized gains on derivatives. Our cost of sales during the nine months ended December 31, 2020 included $12.9 million of net realized losses on derivatives and $19.2 million of net unrealized losses on derivatives.

Crude Oil Product Margin. The increase was primarily due to higher crude oil prices as certain contracted rates with producers increased due to higher crude oil prices.

Operating and General and Administrative Expenses. The decrease was primarily related to the write off a receivable related to deficiency volumes from Extraction of $5.7 million during the nine months ended December 31, 2020. The decrease was offset by an increase in utility expenses due to increased volumes on Grand Mesa and increased utility rates, as well as increased business insurance due to policy rate increases for the nine months ended December 31, 2021

Depreciation and Amortization Expense. The decrease was due primarily to the reduction of amortization expense due to the impairment of certain intangible assets at the end of the prior year. This was offset by an increase in depreciation expense due to reducing the estimated useful lives of our railcars.

Loss on Disposal or Impairment of Assets, Net. During the nine months ended December 31, 2021, we recorded a net loss of $2.2 million for an impairment due to damage caused by Hurricane Ida to one of our Gulf Coast terminals. During the nine months ended December 31, 2020, we recorded a net loss of $145.8 million for the impairment of an intangible asset related to a rejected transportation agreement with Extraction and a net loss of $237.8 million for the impairment of goodwill.

Liquids Logistics

The following table summarizes the operating results of our Liquids Logistics segment for the periods indicated:

(in thousands, except per gallon amounts)

46

(in thousands, except per gallon amounts)

(1) Revenues include $1.3 million and $3.4 million of intersegment sales during the nine months ended December 31, 2021 and 2020, respectively, that are eliminated in our unaudited condensed consolidated statements of operations.

(2) Information is presented as of December 31, 2021 and December 31, 2020, respectively.

(3) Decrease from March 31, 2021 relates to the sale of Sawtooth on June 18, 2021 (see Note 15 to our unaudited condensed consolidated financial statements included in this Quarterly Report).

(4) Cost and product margin per gallon excludes the impact of derivatives.

Refined Products Revenues and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales, excluding the impact of derivatives, were due to an increase in refined products price. This was offset by a reduction in volumes sold due to the continued weakness in demand in certain geographical areas due to COVID-19 and tighter supply.

Refined Products Derivative Loss. Our refined products margin during the nine months ended December 31, 2021 included a realized loss of $1.3 million and the nine months ended December 31, 2020 included a realized loss of $0.6 million.

Refined Products product margins per gallon of refined products sold for the nine months ended December 31, 2021 increased from the prior year nine months ended December 31, 2020 primarily due to supply being short as a result of extended refinery downtime in certain of the markets in which we compete during the three months ended December 31, 2021, offset by increased competition from refineries.

Propane Sales and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales were due to higher commodity prices. The increase in propane prices was the result of lower inventories and a strong export market due to the increase in international prices. This was partially offset by lower propane volumes sold driven by reduced demand due to unusually warm weather at the beginning of winter, warmer than normal autumn temperatures which resulted in lower product demand for crop drying, reduced volumes due to the loss of two producer services agreements, as well as backwardation in the propane market and deferred customer purchases in the nine months ended December 31, 2021 compared to the nine months ended December 31, 2020.

Propane Derivative Gain. Our wholesale propane cost of sales included $4.0 million of net unrealized gains on derivatives and $22.3 million of net realized gains on derivatives during the nine months ended December 31, 2021. During the nine months ended December 31, 2020, our cost of wholesale propane sales included $1.8 million of net unrealized losses on derivatives and $3.2 million of net realized gains on derivatives.

Propane product margins, excluding the impact of derivatives, decreased as a result of lower demand due to the warmer than normal start to winter and rapidly declining prices. We built our inventory for the winter heating season, particularly in September and October, but due to the warm start of the season the average price for November declined approximately $0.20 per gallon compared to October’s monthly average price and prices continued to decrease through the end of December.

Butane Sales and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales were due primarily to higher commodity prices. This was partially offset by a volume decrease due to a tight supply market as a result of decreased refinery runs and an increase in demand for exports.

Butane Derivative Loss. Our cost of butane sales during the nine months ended December 31, 2021 included $2.6 million of net unrealized losses on derivatives and $12.9 million of net realized losses on derivatives. Our cost of butane sales included $3.7 million of net unrealized losses on derivatives and $15.1 million of net realized losses on derivatives during the nine months ended December 31, 2020.

Butane product margins per gallon of butane sold were higher during the nine months ended December 31, 2021 than during the nine months ended December 31, 2020 due primarily due to a tight supply market, driven by an increase in demand for exports and increase in blending demand, which are driving favorable sales differentials.

Other Products Sales and Cost of Sales-Excluding Impact of Derivatives. The increases in revenues and cost of sales, excluding the impact of derivatives, were due to higher commodity prices. This was partially offset by reduced natural gasoline volumes during the nine months ended December 31, 2021 due to less natural gas production resulting in a tight supply market.

Other Products Derivatives Loss (Gain). Our derivatives of other products included less than $0.1 million of net unrealized losses on derivatives and $9.5 million of net realized losses on derivatives during the nine months ended December 31, 2021. Our derivatives of other products during the nine months ended December 31, 2020 included $0.5 million of net unrealized gains on derivatives and $0.4 million of net realized gains on derivatives.

Other product sales product margins during the nine months ended December 31, 2021 increased due to an increase in biodiesel and biodiesel renewable identification number market prices, as well as securing favorable biodiesel supply contracts in the Midwest and transporting the product for sale in more favorable markets. The increase was partially offset by lower natural gasoline volumes due to less product being available for shipment by railcars as more of the product is now shipped via third-party pipelines.

Service Revenues. This revenue includes storage, terminaling and transportation services income. The decrease during the nine months ended December 31, 2021 was due to the disposition of Sawtooth in June 2021 as well as less throughput in certain of our propane and butane terminals.

Operating and General and Administrative Expenses. The increase was primarily due to higher compensation, travel and entertainment and bad debt expense, partially offset by the disposition of Sawtooth in June 2021.

Depreciation and Amortization Expense. The decrease was primarily due to the disposition of Sawtooth and lower amortization expense due to certain intangible assets being fully amortized as of September 30, 2021.

Loss on Disposal or Impairment of Assets, Net. During the nine months ended December 31, 2021, we recorded a net loss of $60.1 million related to the sale of Sawtooth (see Note 15 to our unaudited condensed consolidated financial statements included in this Quarterly Report for further discussion) and a net loss of $11.8 million related to the sale of another terminal during the three months ended September 30, 2021. During the nine months ended December 31, 2020, we recorded a net loss of less than $0.1 million related to the retirement of certain assets.

Corporate and Other

The operating loss within “Corporate and Other” includes the following components for the periods indicated:

(in thousands)

General and Administrative Expenses. The decrease during the nine months ended December 31, 2021 was due primarily to lower compensation and legal expenses, offset by increased consulting fees. Compensation expense decreased due to lower equity-based compensation and due to the reversal of an incentive compensation accrual, offset by increased incentive compensation during the current year. Legal expense decreased due to certain claims being settled, in particular our claims related to the bankruptcy of Extraction.

Loss on Disposal or Impairment of Assets, Net. During the nine months ended December 31, 2020, we recorded a net loss of $10.8 million, which was due to the write-off of a loan receivable made to a third party for the construction of a natural gas liquids loading/unloading facility.

Equity in Earnings of Unconsolidated Entities

The decrease in equity in earnings of $0.4 million during the nine months ended December 31, 2021 was due primarily to lower earnings from certain membership interests related to specific land and water services operations.

Interest Expense

Interest expense includes interest charged on the ABL Facility, senior secured notes and senior unsecured notes, as well as amortization of debt issuance costs, letter of credit fees, interest on equipment financing notes, and accretion of interest on non-interest bearing debt obligations. The increase of $65.9 million during the nine months ended December 31, 2021 was primarily due to the issuance of the 2026 Senior Secured Notes which resulted in us paying a higher interest rate. See Note 6 to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Gain on Early Extinguishment of Liabilities, Net

During the nine months ended December 31, 2021 and 2020, 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, partially offset by a loss on the early extinguishment of the Sawtooth credit agreement. See Note 6 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.

Other Income, Net

The decrease in other income, net of $1.1 million during the nine months ended December 31, 2021 was due primarily to proceeds received from a litigation settlement during the nine months ended December 31, 2020.

Income Tax Benefit

Income tax benefit was $0.8 million during the nine months ended December 31, 2021, compared to an income tax benefit of $2.2 million during the nine months ended December 31, 2020. See Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a further discussion.

Noncontrolling Interests

The increase in noncontrolling interest income of $0.5 million during the nine months ended December 31, 2021 was due primarily to higher income from certain recycling operations and water solutions operations, partially offset by a lower loss from operations of the Sawtooth joint venture primarily due to the sale of Sawtooth in June 2021.

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 TransMontaigne Product Services, LLC (“TPSL”), our refined products business in the mid-continent region of the United States (“Mid-Con”), and our gas blending business in the southeastern and eastern regions of the United States (“Gas Blending”), which are included in discontinued operations, and certain refined products businesses within our Liquids Logistics segment, as discussed below. EBITDA and Adjusted EBITDA should not be considered as alternatives to net loss, loss from continuing operations 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 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, adjusted for the impact of seasonal market movements related to our base inventory and the related hedge. 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 loss to EBITDA and Adjusted EBITDA for the periods indicated:

(in thousands)

(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) Amount reflects the difference between the market value of the inventory at the balance sheet date and its cost, adjusted for the impact of seasonal market movements related to our base inventory and the related hedge. See “Non-GAAP Financial Measures” section above for a further discussion.

(3) Equity-based compensation expense in the table above may differ from equity-based compensation expense reported in Note 8 to our unaudited condensed consolidated financial statements included in this Quarterly Report. Amounts reported in the table above include expense accruals for bonuses expected to be paid in common units, whereas the amounts reported in Note 8 to our unaudited condensed consolidated financial statements only include expenses associated with equity-based awards that have been formally granted.

(4) Amounts represent expenses we incurred related to legal and advisory costs associated with acquisitions.

(5) Amounts for the three months and nine months ended December 31, 2021 and 2020 represent non-cash operating expenses related to our Grand Mesa Pipeline, unrealized losses on marketable securities and accretion expense for asset retirement obligations.

(6) Amounts include the operations of TPSL, Gas Blending and Mid-Con.

The following tables reconcile depreciation and amortization amounts per the EBITDA table above to depreciation and amortization amounts reported in our unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows for the periods indicated:

(in thousands)

Reconciliation to unaudited condensed consolidated statements of operations:

(in thousands)

Reconciliation to unaudited condensed consolidated statements of cash flows:

The following table reconciles interest expense per the EBITDA table above to interest expense reported in our unaudited condensed consolidated statements of operations for the periods indicated:

(in thousands)

The following table summarizes additional amounts attributable to discontinued operations in the EBITDA table above for the periods indicated:

(in thousands)

52

The following tables reconcile operating income (loss) to Adjusted EBITDA by segment for the periods indicated.

(in thousands)

(in thousands)

53

(in thousands)

(in thousands)

(1) Amount reflects the transactions with TPSL, Mid-Con and Gas Blending that are eliminated in consolidation.

Liquidity, Sources of Capital and Capital Resource Activities

General

Our principal sources of liquidity and capital resource requirements are the cash flows from our operations, borrowings under our ABL Facility, debt issuances and the issuance of common and preferred units. We expect our primary cash outflows to be related to capital expenditures, interest and repayment of debt maturities.

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. 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.

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 by other entities 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 generated from operating activities and borrowings under our $500.0 million ABL Facility, which we believe will provide liquidity to operate our business and manage our working capital requirements. We currently anticipate to have minimal needs for acquisitions or expansion projects and expect to fund these items through cash flows from operations, acquisition specific financing transactions or borrowings under the ABL Facility.

As of December 31, 2021, our current assets exceeded our current liabilities by approximately $321.4 million.

For additional information related to our ABL Facility, see Note 6 to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Cash Flows

The following table summarizes the sources (uses) of our cash flows from continuing operations for the periods indicated:

(in thousands)

Operating Activities-Continuing Operations. The seasonality of our Liquids Logistics business has a significant effect on our cash flows from operating activities. Increases in natural gas liquids prices typically reduce our operating cash flows due to higher cash requirements to fund increases in inventories, and decreases in natural gas liquids prices typically increase our operating cash flows due to lower cash requirements to fund increases in inventories. In our Liquids Logistics business, we typically experience operating losses or lower operating income during our first and second quarters, or the six months ending September 30, as a result of lower volumes of natural gas liquids sales and when we are building our inventory levels for the upcoming butane blending and heating seasons, which generally begin in late fall, under normal demand conditions, and run through February or March. We borrow under the revolving credit facility to supplement our operating cash flows during the periods in which we are building inventory. Our operations, and as a result our cash flows, are also impacted by positive and negative movements in commodity prices, which cause fluctuations in the value of inventory, accounts receivable and payables, due to increases and decreases in revenues and cost of sales. The decrease in net cash provided by operating activities during the nine months ended December 31, 2021 was due primarily to fluctuations in the value of accounts receivable and accounts payable and increased inventory valuations during the nine months ended December 31, 2021.

Investing Activities-Continuing Operations. Net cash used in investing activities was $96.5 million during the nine months ended December 31, 2021, compared to net cash used in investing activities of $151.0 million during the nine months ended December 31, 2020. The decrease in net cash used in investing activities was due primarily to:

• net proceeds (gross cash proceeds less the amount of cash sold, excluding accrued expenses) of $63.5 million from the sale of our interest in Sawtooth in June 2021 (see Note 15 to our unaudited condensed consolidated financial statements included in this Quarterly Report); and
• a decrease in capital expenditures from $151.6 million (includes payment of amounts accrued as of March 31, 2020) during the nine months ended December 31, 2020 to $107.5 million (includes payment of amounts accrued as of March 31, 2021) during the nine months ended December 31, 2021 due primarily to fewer expansion projects in our Water Solutions segment.

These decreases in net cash used in investing activities were partially offset by:

• total proceeds of $43.2 million from the sale of certain permits, land and a saltwater disposal facility to a third-party during the nine months ended December 31, 2020; and
• a $20.2 million increase in payments to settle derivatives.

Financing Activities-Continuing Operations. Net cash provided by financing activities was $70.2 million during the nine months ended December 31, 2021, compared to net cash used in financing activities of $48.1 million during the nine months ended December 31, 2020. The increase in net cash provided by financing activities was due primarily to:

• a decrease of $120.7 million in distributions paid to our general partners and common unitholders, preferred unitholders and noncontrolling interest owners during the nine months ended December 31, 2021 due primarily to the reduction and subsequent suspension of the quarterly common unit and preferred unit distributions;
• $93.4 million in contingent consideration payments during the nine months ended December 31, 2020 due to installment payments related to the Mesquite Disposals Unlimited, LLC acquisition; and
• a decrease of $14.9 million paid in cash to repurchase a portion of our senior unsecured notes during the nine months ended December 31, 2021.

These increases in net cash provided by financing activities were partially offset by:

• a decrease of $59.0 million in borrowings on the revolving credit facilities (net of repayments) during the nine months ended December 31, 2021; and
• proceeds of $45.0 million for an equipment loan that is secured by certain of our barges and towboats during the nine months ended December 31, 2020.

Long-Term Financing

In addition to our principal sources of short-term liquidity discussed above, we expect to fund our longer-term financing requirements by issuing long-term notes, common units and/or preferred units, loans from financial institutions, asset securitizations or the sale of assets.

Senior Secured Notes

On February 4, 2021, we issued $2.05 billion of 7.5% 2026 Senior Secured Notes (“2026 Senior Secured Notes”) in a private placement. The 2026 Senior Secured Notes bear interest, which is payable on February 1 and August 1 of each year, which began on August 1, 2021. The 2026 Senior Secured Notes mature on February 1, 2026.

Senior Unsecured Notes

The senior unsecured notes include the 2023 Notes, 6.125% senior unsecured notes due 2025 and 7.5% senior unsecured notes due 2026 (collectively, the “Senior Unsecured Notes”).

Repurchases

During the three months ended December 31, 2021, we repurchased $20.0 million of the 2023 Notes.

Other Long-term Debt

The Sawtooth credit agreement was paid off and terminated prior to us selling our ownership interest in Sawtooth on June 18, 2021 (see Note 15 to our unaudited condensed consolidated financial statements included in this Quarterly Report).

On October 29, 2020, we entered into an equipment loan for $45.0 million which bears interest at a rate of 8.6% and is secured by certain of our barges and towboats. Under this agreement, we are required to make monthly payments of $0.5 million (principal and interest) and a balloon payment of $24.2 million when this loan matures on November 1, 2027.

For additional information related to our long-term debt, see Note 6 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.

(in thousands)

(1) There were no acquisitions during the three months or nine months ended December 31, 2021 or 2020.

(2) Amounts for the three months and nine months ended December 31, 2021 and 2020 relate to contributions made to unconsolidated entities.

Capital expenditures for the fiscal year ending March 31, 2022 are expected to be approximately $125 million to $130 million, net of anticipated insurance reimbursements.

Distributions Declared

The board of directors of our general partner 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, beginning with the quarter ended December 31, 2020, and all preferred unit distributions, beginning with the quarter ended March 31, 2021. The board of directors of our general partner 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.

Guarantor Summarized Financial Information

NGL Energy Partners LP (parent) and NGL Energy Finance Corp. are co-issuers of the Senior Unsecured Notes (see Note 6 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 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.

The following is the summarized financial information for NGL Energy Partners LP (parent) and the Guarantor Subsidiaries on a combined basis after elimination of intercompany transactions, which includes related receivable and payable balances, and the investment in and equity earnings from the non-guarantor subsidiaries. This summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under Securities and Exchange Commission Regulation S-X.

Balance sheet information:

(in thousands)

(1) Excludes $0.2 million and $50.9 million of net intercompany receivables due to NGL Energy Partners LP (parent) and the Guarantor Subsidiaries from the non-guarantor subsidiaries at December 31, 2021 and March 31, 2021, respectively.

(2) Includes $1.9 billion and $1.9 billion of goodwill and intangible assets at December 31, 2021 and March 31, 2021, respectively.

(3) There are no noncontrolling interests held at the co-issuers or Guarantor Subsidiaries for either period presented.

Statements of operations information:

(in thousands)

(1) There are no noncontrolling interests held at the co-issuers or Guarantor Subsidiaries for either period presented.

Contractual Obligations

For a discussion of contractual obligations, see Note 6, Note 7 and Note 13 to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements other than the letters of credit discussed in Note 6 to our unaudited condensed consolidated financial statements included in this Quarterly Report and the short-term leases discussed in Note 13 to our unaudited condensed consolidated financial statements included in this Quarterly Report.

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 Policies

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 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 policies previously disclosed in our Annual Report.

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 Wall Street Journal prime rate or LIBOR interest rate (or successor rate). At December 31, 2021, we had $156.0 million of outstanding borrowings under the ABL Facility at a weighted average interest rate of 4.24%. 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 December 31, 2021.

In addition, on and after certain dates, distributions for our Class B and Class C Preferred Units will be calculated using the applicable three-month LIBOR interest rate (or successor rate) plus a spread. For our Class B Preferred Units, distributions, on and after July 1, 2022, will accumulate at a percentage of the $25.00 liquidation preference equal to the applicable three-month LIBOR interest rate (or successor rate) plus a spread of 7.213%. For our Class C Preferred Units, distributions, on and after April 15, 2024, will accumulate at a percentage of the $25.00 liquidation preference equal to the applicable three-month LIBOR interest rate (or successor rate) plus a spread of 7.384%.

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 gross profits depend on the differential of sales prices over 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 December 31, 2021 fair value of our commodity derivatives of an increase of 10% in the value of the underlying commodity (in thousands):

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.

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 December 31, 2021, our primary counterparties were retailers, resellers, energy marketers, producers, refiners, and dealers.

Fair Value

We use observable market values for determining the fair value of our derivative instruments. In cases where actively quoted prices are not available, other external sources are used which incorporate information about commodity prices in actively quoted markets, quoted prices in less active markets and other market fundamental analysis.

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 provide reasonable assurance that 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 general partner, 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 general partner, of the effectiveness of the design and operation of our disclosure controls and procedures at December 31, 2021. Based on this evaluation, the principal executive officer and principal financial officer of our general partner have concluded that as of December 31, 2021, such disclosure controls and procedures were effective to provide the reasonable assurance described above.

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 December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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, 2021.