NGL Energy Partners LP(NGL) - 2023 Q4 - Annual Report

PART I Business NGL Energy Partners LP is a diversified midstream energy partnership focused on water solutions, crude oil, and liquids logistics - NGL Energy Partners LP is a diversified midstream energy partnership with three main business segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics[18] - The company has undertaken strategic actions to simplify its business mix, focusing on core areas with stable cash flows and improving its credit profile[19] - In February 2021, NGL closed a major debt refinancing, including $2.05 billion in 7.5% senior secured notes due 2026 and a new $500.0 million ABL facility, leading to the suspension of common and preferred unit distributions to strengthen the balance sheet[21][22] Business Segments Overview The partnership operates through three core segments: Water Solutions, Crude Oil Logistics, and Liquids Logistics Business Segments Description | Segment | Description | | :--- | :--- | | Water Solutions | Transports, treats, recycles, and disposes of produced and flowback water from crude oil and natural gas production. Also sells recovered skim oil | | Crude Oil Logistics | Purchases crude oil from producers, transports it to refineries or for resale, and provides storage and terminaling services | | Liquids Logistics | Conducts supply operations for NGLs, refined petroleum products, and biodiesel to commercial, retail, and industrial customers across the U.S. and Canada | Business Strategies and Competitive Strengths The company's strategy prioritizes debt reduction, long-term fee-based contracts, and leveraging its strategically located assets - Principal business objectives include maximizing profitability, prudent growth, and maintaining a strong balance sheet[29] - Key strategies involve reducing debt and leverage, focusing on long-term fixed-fee contracts to minimize commodity price risk, and growing organically by utilizing its existing asset footprint[30] - Competitive strengths are derived from strategically located water processing facilities and crude oil assets in major basins like the Delaware and DJ Basins, a diversified business model that provides stable cash flows, and a seasoned management team[30][36] Water Solutions The Water Solutions segment is a leading U.S. produced water management business with an integrated pipeline network - The segment handled approximately 849.5 million barrels of produced water during the year ended March 31, 2023, positioning it as the largest independent produced water transportation and disposal company in the U.S[33] Water Solutions Facilities Overview (as of March 31, 2023) | Location | Facilities | Wells | Permitted Processing Capacity (bpd) | | :--- | :--- | :--- | :--- | | Delaware Basin (TX & NM) | 57 | 125 | 4,951,300 | | Eagle Ford Basin (TX) | 19 | 33 | 836,000 | | DJ Basin (CO) | 13 | 31 | 535,500 | | Other Basins | 4 | 11 | 170,240 | | Total | 93 | 197 | 6,493,040 | - The core asset is the Northern Delaware Basin system, with ~730 miles of large-diameter pipelines, 57 active disposal facilities, and ~670,000 dedicated acres under long-term agreements[34] - In the Delaware Basin, approximately 98% of produced and flowback water was received via pipelines during FY2023[40] Crude Oil Logistics The Crude Oil Logistics segment manages crude oil purchasing, transport, and storage, centered around the Grand Mesa Pipeline - The segment's foundational asset is the Grand Mesa Pipeline, a 550-mile pipeline from Weld County, CO, to Cushing, OK, with 150,000 barrels per day of capacity owned by NGL[49] - The Grand Mesa Pipeline transported approximately 27.7 million barrels of crude oil during the year ended March 31, 2023[49] - The segment owns and operates a major crude oil terminal in Cushing, Oklahoma, with 3,626,000 barrels of storage capacity and significant pipeline connectivity[51] - Profitability is impacted by crude oil market structures; the segment benefits from contango markets (forward prices > spot prices) and is challenged by backwardation (forward prices < spot prices)[62] Liquids Logistics The Liquids Logistics segment supplies NGLs and refined products across North America via a network of terminals and railcars - The segment sold approximately 2.7 billion gallons of NGLs, refined products, and renewables in FY2023, averaging 7.45 million gallons per day[65] - Operations are conducted through 25 owned terminals, third-party facilities, nine common carrier pipelines, and a fleet of approximately 4,400 leased railcars[64][80] - The Ambassador Pipeline, a ~225-mile propane pipeline in Michigan, became fully operational in August 2022[79] - The business is seasonal, with propane demand highest in the winter heating season and gasoline demand peaking during the summer driving season[83][84] Human Capital and Government Regulation The company's operations are subject to extensive environmental, health, and safety regulations across federal, state, and local levels - As of March 31, 2023, the company had 638 employees in 29 states and Canada[92] - The company's operations are subject to extensive regulation by agencies such as FERC (for interstate pipelines), EPA, and DOT, covering environmental protection, safety, and transportation[99][104][124] - Environmental regulations such as RCRA, CERCLA, the Clean Air Act, and the Clean Water Act impose significant compliance obligations and potential liabilities for handling hazardous substances and waste[104] - The company faces risks related to potential future regulations on greenhouse gas (GHG) emissions and hydraulic fracturing, which could increase costs and affect customer demand[115][116] Risk Factors The partnership faces material risks related to its substantial debt, commodity prices, regulations, and MLP structure - The company's substantial indebtedness ($2.9 billion at March 31, 2023) and restrictive covenants in debt agreements limit financial flexibility, including the ability to pay distributions, which have been suspended[144][148] - Business operations are highly dependent on crude oil and natural gas production levels, which are influenced by commodity prices, producer spending, and market conditions beyond the company's control[157][158] - The company is subject to extensive and evolving federal, state, and local regulations regarding environmental matters (including climate change and hydraulic fracturing), safety, and transportation, which could increase compliance costs and liabilities[205][212] - The Partnership Agreement limits the fiduciary duties of the General Partner to unitholders and restricts remedies, creating potential conflicts of interest where the GP may favor its own interests[230][234] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the SEC - None[301] Properties The company holds satisfactory rights to its properties, which are substantially used as collateral for its debt facilities - The company believes it has satisfactory title or valid rights to use all of its material properties[303] - 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[303] - The corporate headquarters are leased and located in Tulsa, Oklahoma[305] Legal Proceedings The company is involved in various legal proceedings arising from the ordinary course of business - The company is involved in various legal proceedings and claims in the ordinary course of business, with further details provided in Note 8 to the consolidated financial statements[306] Mine Safety Disclosures This item is not applicable to the company - Not applicable[308] 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 distributions are suspended due to debt covenants tied to a leverage ratio target - Common units are listed on the New York Stock Exchange under the symbol "NGL"[311] - The Partnership Agreement requires quarterly distribution of all available cash; however, distributions are restricted by the 2026 Senior Secured Notes indenture until the total leverage ratio is not greater than 4.75 to 1.00[311][317] - Quarterly common unit distributions were suspended starting with the quarter ended December 31, 2020, and all preferred unit distributions were suspended starting with the quarter ended March 31, 2021[318] - In February 2023, 23,874 common units were surrendered by employees for tax withholding, which are deemed as repurchases[319] Management's Discussion and Analysis of Financial Condition and Results of Operations Operating income improved significantly in FY2023, driven by strong performance in the Water Solutions segment and a focus on deleveraging Consolidated Results of Operations (in thousands) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Revenues | $8,694,904 | $7,947,915 | $5,227,023 | | Operating Income (Loss) | $289,163 | $83,043 | $(390,753) | | Net Income (Loss) Attributable to NGL | $51,386 | $(184,756) | $(639,819) | - The Water Solutions segment's operating income increased to $198.9 million in FY2023 from $94.9 million in FY2022, driven by higher produced water volumes and recovered crude oil sales[326] - The company's total leverage ratio was 4.56 to 1.00 as of March 31, 2023, below the 4.75 to 1.00 threshold required to resume distributions[475] - Capital expenditures for fiscal year 2024 are expected to be $125 million[496] Segment Operating Results for the Years Ended March 31, 2023 and 2022 All segments reported improved operating income in fiscal 2023, led by substantial growth in the Water Solutions segment Segment Operating Income (Loss) (in thousands) | Segment | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Water Solutions | $198,924 | $94,851 | $104,073 | | Crude Oil Logistics | $81,524 | $45,033 | $36,491 | | Liquids Logistics | $66,624 | $(8,441) | $75,065 | - Water Solutions processed an average of 2,327,337 barrels of produced water per day in FY2023, up from 1,797,918 in FY2022, primarily due to increased activity in the Delaware Basin[350] - Crude Oil Logistics experienced a significant swing in derivative impact, recording a $14.6 million gain in FY2023 compared to a $92.0 million loss in FY2022[364] - Liquids Logistics' operating results in FY2022 included a $60.1 million loss on the sale of Sawtooth Caverns, which did not recur in FY2023[335][393] Segment Operating Results for the Years Ended March 31, 2022 and 2021 In fiscal 2022, Water Solutions and Crude Oil Logistics recovered from prior-year losses, while Liquids Logistics declined Segment Operating Income (Loss) (in thousands) | Segment | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Water Solutions | $94,851 | $(92,720) | $187,571 | | Crude Oil Logistics | $45,033 | $(304,330) | $349,363 | | Liquids Logistics | $(8,441) | $70,441 | $(78,882) | - Water Solutions' processed produced water volumes increased to an average of 1,797,918 barrels per day in FY2022 from 1,364,591 in FY2021[407] - The Crude Oil Logistics segment's FY2021 results included a $384.1 million loss on disposal or impairment of assets, primarily related to an intangible asset impairment and goodwill impairment, which did not recur in FY2022[420][430] - Liquids Logistics' propane product margin per gallon (excluding derivatives) fell from $0.057 in FY2021 to $0.011 in FY2022 due to lower demand and increased competition[433][441] Liquidity, Sources of Capital and Capital Resource Activities Liquidity is sourced from operations and an ABL facility, with a primary focus on deleveraging to meet debt covenants - As of March 31, 2023, total long-term debt face amount was $2.9 billion[502] - The ABL Facility has commitments of $600.0 million, with $138.0 million borrowed and $152.0 million in letters of credit outstanding as of March 31, 2023[481] - Net cash provided by operating activities was $445.2 million in FY2023, a significant increase from $205.8 million in FY2022[507] - During FY2023, the company repurchased or redeemed all $301.9 million of its 2023 Notes and repurchased $12.5 million of its 2026 Notes[342][487] Critical Accounting Estimates Critical accounting estimates involve significant judgment regarding goodwill impairment, asset valuation, and derivative instruments - Goodwill impairment testing is performed annually or when a triggering event occurs, relying on assumptions about future cash flows, growth rates, and discount rates[520] - Long-lived assets are evaluated for impairment when events indicate their carrying value may not be recoverable, based on anticipated undiscounted future cash flows[521] - The fair value of derivative financial instruments is determined using publicly available prices for exchange-traded derivatives and pricing models for non-exchange-traded instruments[525] - Revenue recognition for certain long-term Water Solutions contracts requires estimating variable consideration, such as minimum volume commitments, based on forecasted production information[526] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, commodity prices, and counterparty credit - The company is exposed to interest rate risk through its variable-rate ABL Facility and its Class B and C Preferred Units, which have floating-rate distribution features[534][535][536] - A 0.125% change in interest rates would change annual interest expense on the ABL Facility by $0.2 million, based on the balance at March 31, 2023[534] - Commodity price risk is managed through a combination of forward contracts and financial derivatives to reduce price volatility, but the company does not use hedge accounting[539][540] - Credit risk is managed by evaluating counterparty financial condition, requiring collateral or prepayments, and using master netting agreements[543] Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[548] - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2023, based on the COSO framework[550] - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the Partnership's internal control over financial reporting as of March 31, 2023[554] - There were no changes in internal controls over financial reporting during the fourth quarter of fiscal 2023 that materially affected, or are reasonably likely to materially affect, these controls[551] PART III Directors, Executive Officers and Corporate Governance The partnership is managed by its general partner, whose board consists of eight appointed, non-elected directors - The board of directors of the general partner has eight members, with four determined to be independent according to NYSE and SEC standards[565] - Directors are appointed by the NGL Energy GP Investor Group; unitholders do not elect directors[564] - The board has an audit committee and a compensation committee, both comprised of independent directors[598][600] - The company has adopted a Code of Ethics, Corporate Governance Guidelines, and a Code of Business Conduct and Ethics[601] Executive Compensation Executive compensation is based on a pay-for-performance philosophy, with no new equity awards granted in FY2023 - The compensation philosophy emphasizes pay-for-performance, aiming to attract, retain, and motivate executives while aligning their interests with unitholders[609][610] FY2023 Named Executive Officer Compensation | Name | Position | Total Compensation ($) | | :--- | :--- | :--- | | H. Michael Krimbill | Chief Executive Officer | 666,960 | | Bradley P. Cooper | EVP and Chief Financial Officer | 806,515 | | Lawrence J. Thuillier | Chief Accounting Officer | 565,325 | | Kurston P. McMurray | EVP and General Counsel | 1,026,802 | | Linda J. Bridges | Former EVP and CFO | 1,182,624 | | John A. Ciolek | Former EVP, Strategic Initiatives | 315,722 | - The company's Long-Term Incentive Plan (LTIP) expired in May 2021, and no new equity awards were granted to named executive officers in fiscal year 2023[620][642] - The ratio of the CEO's annual total compensation ($666,960) to the median employee's compensation ($69,503) was approximately 10 to 1 for fiscal year 2023[653][656] Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters Invesco Ltd. and EIG are the largest beneficial owners, with directors and executive officers collectively owning 6.68% Beneficial Ownership (as of May 26, 2023) | Beneficial Owner | Percentage of Common Units | | :--- | :--- | | Invesco Ltd. | 14.95% | | EIG Neptune Equity Aggregator, L.P. | 11.26% | | All directors and executive officers as a group | 6.68% | - The company's Long-Term Incentive Plan (LTIP) expired on May 10, 2021, and as of March 31, 2023, there were no securities available for future grants under the plan[669] Certain Relationships and Related Transactions, and Director Independence The company engages in related-party transactions, which are reviewed by the board, and has four independent directors - The General Partner and its affiliates are reimbursed for all expenses incurred on the Partnership's behalf but do not receive a management fee[671] - During fiscal year 2023, the company purchased $1.435 million in aircraft services from KAIR2014 LLC, an entity 50% owned by CEO H. Michael Krimbill[675] - The board of directors has adopted a Code of Business Conduct and Ethics for reviewing and approving or ratifying transactions with related persons[679] - Four of the eight members of the general partner's board of directors are considered independent[683][565] Principal Accountant Fees and Services Grant Thornton LLP's fees for audit services totaled approximately $1.8 million in fiscal year 2023 Accountant Fees (in thousands) | Fee Type | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Audit fees | $1,769 | $1,882 | | Audit-related fees | $0 | $0 | | Tax fees | $0 | $0 | | All other fees | $0 | $0 | | Total | $1,769 | $1,882 | - All services provided by Grant Thornton LLP in fiscal years 2023 and 2022 were pre-approved by the Audit Committee[684] PART IV Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This item lists all financial statements and exhibits filed with the Form 10-K[686] - Financial statement schedules were omitted because they were not applicable or the information was included in the financial statements or notes[688] Financial Statements Consolidated Financial Statements The company reported net income of $51.4 million in FY2023, a significant turnaround from the prior year's loss Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,292,445 | $1,546,339 | | Total Assets | $5,456,144 | $6,070,345 | | Total Current Liabilities | $1,110,137 | $1,277,202 | | Long-Term Debt (Book Value) | $2,857,805 | $3,350,463 | | Total Equity | $767,429 | $714,453 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Total Revenues | $8,694,904 | $7,947,915 | | Operating Income | $289,163 | $83,043 | | Net Income (Loss) Attributable to NGL | $51,386 | $(184,756) | | Net Loss per Common Unit | $(0.56) | $(2.22) | Consolidated Cash Flow Highlights (in thousands) | Account | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $445,186 | $205,846 | | Net Cash from (used in) Investing Activities | $64,188 | $(212,408) | | Net Cash (used in) from Financing Activities | $(507,765) | $5,555 | Notes to Consolidated Financial Statements The notes detail accounting policies, segment data, debt covenants, and confirm no goodwill impairment was recorded in FY2023 - Goodwill impairment was tested quantitatively for the Crude Oil Logistics and Wholesale/Terminal reporting units as of Jan 1, 2023, with fair values exceeding carrying values by ~18% and ~5%, respectively, resulting in no impairment[800][801] - As of March 31, 2023, total long-term debt had a face amount of $2.89 billion, primarily consisting of $2.05 billion in 7.5% Senior Secured Notes due 2026 and $138 million outstanding on the ABL Facility[817] - Cumulative unpaid distributions on preferred units as of March 31, 2023, totaled $74.3 million for Class B, $10.7 million for Class C, and $167.7 million for Class D[879][881][888] - In March 2023, the company sold its marine assets for $111.7 million in cash and certain saltwater disposal assets for $13.6 million in cash and a note receivable[983][987]