NGL Energy Partners LP(NGL) - 2021 Q4 - Annual Report

Part I Business NGL Energy Partners LP, a diversified midstream energy MLP, has strategically repositioned its portfolio and completed a major debt refinancing, leading to the suspension of distributions to accelerate deleveraging - The company operates through three primary business segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics[17][21] - In February 2021, NGL completed a major debt refinancing, issuing $2.05 billion in 7.5% senior secured notes due 2026 and securing a new $500 million ABL facility[18] - As part of the refinancing, the company suspended quarterly common unit distributions (from Q4 2020) and all preferred unit distributions (from Q1 2021) to accelerate deleveraging and increase financial flexibility[19] - The company has strategically repositioned its portfolio by selling its Retail Propane segment and certain refined products businesses, while acquiring key water infrastructure assets in the Delaware Basin and NGL terminals to focus on stable, fee-based cash flows[22][23][24] Water Solutions The Water Solutions segment, the largest independent produced water transportation and disposal company in the U.S., handles produced water from oil and gas production - The Water Solutions segment transports, treats, recycles, and disposes of produced water, handling approximately 498.1 million barrels in fiscal year 2021[33][34] - The segment's core asset is an integrated network of pipelines and disposal wells in the Northern Delaware Basin, supported by over 325,000 dedicated acres under long-term, fixed-fee contracts[34][35] Water Solutions Facilities Overview (as of March 31, 2021) | Location | Number of Facilities | Number of Wells | Total Permitted Processing Capacity (barrels per day) | | :--- | :--- | :--- | :--- | | Delaware Basin (TX & NM) | 58 | 119 | 4,661,300 | | Midland Basin (TX) | 15 | 15 | 400,800 | | Eagle Ford (TX) | 24 | 38 | 956,000 | | DJ Basin (CO) | 13 | 32 | 555,500 | | Other Basins | 4 | 8 | 152,765 | | Total | 114 | 212 | 6,726,365 | Crude Oil Logistics This segment purchases and transports crude oil to refineries and trade hubs, with the Grand Mesa Pipeline as its foundational asset - This segment purchases crude oil from producers and transports it to refineries, with the Grand Mesa Pipeline having a capacity of 150,000 barrels per day[50][51] - In fiscal year 2021, approximately 32.8 million financial barrels of crude oil were transported on the Grand Mesa Pipeline[51] - The segment owns and operates significant storage and terminal assets, including a 3.6 million barrel terminal in Cushing, OK[53][54] Liquids Logistics The Liquids Logistics segment supplies NGLs, refined products, and biodiesel across North America, selling 3.3 billion gallons in fiscal year 2021 - The Liquids Logistics segment supplies natural gas liquids, refined products, and biodiesel, selling 3.3 billion gallons in fiscal year 2021, averaging 9.09 million gallons per day[66] - Operations are conducted through 28 company-owned terminals, third-party facilities, and a fleet of approximately 5,100 leased railcars[66][81] - In March 2021, the company acquired the Ambassador pipeline, a 225-mile NGL pipeline in Michigan, to expand its presence in the upper Midwest propane market[80] Government Regulation The company's operations are subject to extensive federal, state, and local regulations from bodies like FERC, PHMSA, EPA, and OSHA, covering environmental, health, safety, and transportation aspects - The company's operations are subject to extensive federal, state, and local regulations covering environmental protection, health and safety, waste management, and transportation from key bodies including FERC, PHMSA, EPA, and OSHA[97][104][127] - The Grand Mesa Pipeline's transportation services are subject to FERC regulation, and the company is also subject to anti-market manipulation rules from FERC, FTC, and CFTC[99][102] - Growing regulatory scrutiny on climate change and GHG emissions, including actions by the Biden Administration, could lead to increased compliance costs and impact future operations[120][121] - State and federal initiatives related to hydraulic fracturing and saltwater disposal wells, including concerns about induced seismicity, could result in increased costs and operating restrictions[119][214] Risk Factors The company faces significant risks from substantial indebtedness, restrictive debt covenants, commodity price volatility, dependence on third-party production, extensive environmental and tax regulations, and its partnership structure - Liquidity and Financing Risks: The company's substantial debt of $3.4 billion as of March 31, 2021, and restrictive covenants limit its ability to incur more debt, make acquisitions, and pay distributions[147][148] - Operational Risks: Business performance is highly dependent on crude oil and natural gas production levels, influenced by commodity prices and producer spending, which could adversely impact segments[156][162] - Regulatory Risks: The business is subject to stringent environmental, safety, and transportation regulations, with increasing scrutiny on hydraulic fracturing, water disposal, and GHG emissions potentially leading to higher costs[198][206][213] - Partnership and Tax Risks: The partnership agreement limits the general partner's fiduciary duties and unitholders' voting rights, with a significant tax risk being the potential loss of partnership status[223][246] Properties The company holds satisfactory title or valid rights to its material properties, with substantially all assets subject to liens securing its ABL Facility and 2026 Senior Secured Notes - NGL believes it has satisfactory title or valid rights to use all material properties necessary for its business operations[296] - Obligations under the ABL Facility and the 2026 Senior Secured Notes are secured by liens and mortgages on substantially all of the company's real and personal property[296] Legal Proceedings The company is involved in various legal proceedings arising in the ordinary course of business, with details referenced in Notes 9 and 18 of the financial statements - The company is involved in various legal proceedings from time to time in the ordinary course of business, with specific details incorporated by reference from Notes 9 and 18 of the financial statements[299] Part II Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities NGL's common units trade on the NYSE, but all distributions are temporarily suspended since Q4 2020 to deleverage the balance sheet in accordance with debt covenants - The company's common units are listed on the New York Stock Exchange (NYSE) under the ticker symbol "NGL"[303] - A temporary suspension of all distributions was implemented to deleverage the balance sheet, affecting common units from the quarter ended December 31, 2020, and preferred units from the quarter ended March 31, 2021[310] - The suspension is tied to a covenant in the 2026 Senior Secured Notes indenture, which restricts distributions until the total leverage ratio is not greater than 4.75 to 1.00[309][310] Management's Discussion and Analysis of Financial Condition and Results of Operations For FY2021, NGL reported a consolidated operating loss of $390.8 million, primarily due to a $383.6 million impairment in Crude Oil Logistics, with liquidity supported by a new $500 million ABL facility and projected FY2022 capital expenditures of $100 million to $125 million Consolidated Results of Operations (in thousands) | | Year Ended March 31, 2021 | Year Ended March 31, 2020 | | :--- | :--- | :--- | | Revenues | $5,227,023 | $7,584,000 | | Operating (loss) income | $(390,753) | $(3,332) | | Loss from continuing operations | $(637,418) | $(180,545) | | Net (loss) income | $(639,187) | $(398,780) | | Net (loss) income attributable to NGL | $(639,819) | $(397,007) | - The COVID-19 pandemic and related collapse in crude oil prices negatively impacted all three business segments through reduced demand and lower commodity prices[322][323][325] - The Crude Oil Logistics segment recorded a $304.3 million operating loss for FY2021, including impairment charges of $383.6 million related to the Extraction Oil & Gas bankruptcy[337][378] - The Water Solutions segment's operating loss narrowed to $92.7 million in FY2021 from $173.1 million in FY2020, despite an $84.3 million impairment charge in FY2021, with the prior year including a $250.0 million goodwill impairment[331] - Adjusted EBITDA from continuing operations was $448.3 million for FY2021, compared to $589.5 million for FY2020[471] - Capital expenditures for fiscal year 2022 are projected to be between $100 million and $125 million, split evenly between maintenance and growth projects[496] Segment Operating Results (FY2021 vs. FY2020) For fiscal year 2021, Water Solutions' operating loss decreased, Crude Oil Logistics incurred a significant impairment-driven loss, and Liquids Logistics' operating income declined Segment Operating (Loss) Income (in thousands) | Segment | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Water Solutions | $(92,720) | $(173,064) | | Crude Oil Logistics | $(304,330) | $117,768 | | Liquids Logistics | $70,441 | $142,411 | - Water Solutions: The reduced operating loss was primarily due to a smaller impairment charge in FY2021 ($76.9 million) compared to FY2020 ($255.3 million, including $250 million goodwill impairment), with processed water volumes decreasing to 1.36 million barrels/day from 1.64 million barrels/day[354][364] - Crude Oil Logistics: The shift to a significant operating loss was driven by a $384.1 million loss on impairment of assets, primarily related to the rejected Extraction transportation agreement and associated goodwill[368][378] - Liquids Logistics: Operating income decreased by half, mainly due to lower product margins in Butane (down $59.4 million) and Refined Products (down $15.4 million) as a result of reduced demand from the COVID-19 pandemic[380] Liquidity, Sources of Capital and Capital Resource Activities The company's liquidity is primarily from operations and a new $500.0 million ABL Facility, with the February 2021 refinancing extending debt maturities but introducing restrictive covenants, including distribution suspension - Principal liquidity sources are cash from operations and borrowings under the new $500.0 million ABL Facility, which replaced the previous credit facility in February 2021[480][481] - The February 2021 refinancing extended debt maturities and improved liquidity but also introduced restrictive covenants, including the suspension of distributions until the total leverage ratio falls below 4.75 to 1.00[481] Capital Expenditures & Acquisitions (in thousands) | Year Ended March 31, | Expansion Capital | Maintenance Capital | Acquisitions | | :--- | :--- | :--- | :--- | | 2021 | $90,920 | $28,787 | $(901) | | 2020 | $571,154 | $61,353 | $1,268,474 | Cash Flow Summary (in thousands) | | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $303,994 | $464,055 | | Net cash used in investing activities | $(221,493) | $(1,438,756) | | Net cash (used in) provided by financing activities | $(100,376) | $978,833 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from its variable-rate ABL Facility, commodity price risk in its logistics businesses, and credit risk from counterparty nonperformance, using derivatives to mitigate commodity price volatility - Interest Rate Risk: The company has exposure through its variable-rate ABL Facility, with a 0.125% change in interest rates having a minimal impact (less than $0.1 million) on annual interest expense[536][537] - Commodity Price Risk: The logistics businesses are margin-based and sensitive to price fluctuations, with the company using forward contracts and financial derivatives to reduce this risk[539][541][542] - Credit Risk: The company faces risk of nonperformance from customers and counterparties, managed through credit analysis, collateral requirements, and master netting agreements[545] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of March 31, 2021, a conclusion affirmed by an unqualified auditor's opinion - Management concluded that the company's disclosure controls and procedures were effective as of the fiscal year-end, March 31, 2021[551] - Management's assessment, based on the 2013 COSO framework, concluded that internal control over financial reporting was effective as of March 31, 2021[553] - The independent registered public accounting firm, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the Partnership's internal control over financial reporting as of March 31, 2021[557][558] Part III Directors, Executive Officers and Corporate Governance The company is managed by its general partner, NGL Energy Holdings LLC, with an eight-member board including four independent directors, and key executives H. Michael Krimbill (CEO) and Robert W. Karlovich III (CFO) - The board of directors of the general partner has eight members, with four determined to be independent according to NYSE and SEC standards[567] - Key executive officers include H. Michael Krimbill as Chief Executive Officer and Robert W. Karlovich III as Executive Vice President and Chief Financial Officer[572] - The board has an Audit Committee and a Compensation Committee, both composed of independent directors, with Mr. Derek S. Reiners designated as the 'audit committee financial expert'[597][598][599] Executive Compensation The company's executive compensation philosophy emphasizes pay-for-performance, with CEO H. Michael Krimbill's total compensation at $642,632 for FY2021, and a CEO-to-median-employee pay ratio of approximately 10 to 1 - The compensation philosophy emphasizes pay-for-performance to align executive and unitholder interests[608] Summary Compensation for Top Executives (FY 2021) | Name and Position | Salary ($) | Bonus ($) | Total Compensation ($) | | :--- | :--- | :--- | :--- | | H. Michael Krimbill, CEO | 625,000 | — | 642,632 | | Robert W. Karlovich III, CFO | 500,000 | 600,000 | 1,112,759 | | Kurston P. McMurray, General Counsel | 375,000 | 600,000 | 984,210 | - Cash bonuses were paid to Messrs. Karlovich, Thuillier, and McMurray in fiscal 2021 primarily for their work related to the successful issuance of the 2026 Senior Secured Notes and the new ABL facility[610][618] - The ratio of the CEO's annual total compensation ($642,632) to the median employee's annual total compensation ($65,415) was approximately 10 to 1 for fiscal year 2021[648] Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters As of May 28, 2021, Invesco Ltd. and EIG Neptune Equity Aggregator, L.P. were the largest beneficial owners of NGL's common units, while the company's Long-Term Incentive Plan expired with no remaining securities for future issuance Beneficial Ownership of Common Units (as of May 28, 2021) | Beneficial Owner | Percentage Owned | | :--- | :--- | | Invesco Ltd. | 15.37% | | EIG Neptune Equity Aggregator, L.P. | 11.44% | | All directors and executive officers as a group | 4.87% | - The company's 2011 Long-Term Incentive Plan (LTIP) expired in May 2021, with 446,975 unvested awards outstanding as of March 31, 2021, but no securities remain available for future grants[665] Certain Relationships and Related Transactions, and Director Independence The company engages in related party transactions, including a $40.0 million fee paid to EIG for debt refinancing consent and transactions with WPX, all reviewed under the Code of Business Conduct and Ethics - A $40.0 million fee was paid to EIG, an affiliate of a board member, to obtain consent for the February 2021 debt refinancing[672] - The company conducted transactions with WPX, including $39.1 million in sales to WPX and $216.5 million in purchases from WPX for the year ended March 31, 2021[671] - The board of directors has adopted a Code of Business Conduct and Ethics for reviewing, approving, or ratifying transactions with related persons[676] Principal Accountant Fees and Services Grant Thornton LLP serves as the independent auditor, with total fees of $2.156 million for FY2021, predominantly for audit services, all subject to audit committee pre-approval Accountant Fees (in thousands) | Fee Type | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Audit fees | $2,149 | $2,735 | | Audit-related fees | $7 | $48 | | Total | $2,156 | $2,783 | - The audit committee has a pre-approval policy for all services performed by the independent registered public accounting firm, Grant Thornton LLP[682] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including various agreements and required certifications - This item provides a comprehensive list of all exhibits filed with the Form 10-K, including material contracts, partnership agreements, debt indentures, and executive certifications[685][686]