Edgar Filing: NGL Energy Partners LP

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

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35172

NGL Energy Partners LP
(Exact Name of Registrant as Specified in Its Charter)

Delaware		27-3427920
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

6120 South Yale Avenue Suite 805 Tulsa, Oklahoma		74136
(Address of Principal Executive Offices)		(Zip code)

(918) 481-1119

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o

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

As of August 12, 2011, there were 8,864,222 common units and 5,919,346 subordinated units issued and outstanding.

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	PART I

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2011 and March 31, 2011	3
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended June 30, 2011 and 2010	5
	Condensed Consolidated Statement of Partners’ Equity for the three months ended June 30, 2011	6
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010	7
	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41

PART II

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	43
Item 4.	[Removed and Reserved]	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

Signatures		45

Exhibit Index		46

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Forward-Looking Statements

This quarterly report on Form 10-Q contains various forward-looking statements and information that are based on our beliefs and those of our general partner, as well as assumptions made by and information currently available to us. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. When used in this quarterly report, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “estimate,” “intend,” “could,” “believe,” “may,” “will” and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we and our general partner believe that the expectations on which such forward-looking statements are based are reasonable, neither we nor our general partner can give assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on our results of operations and financial condition are:

· the prices and market demand for propane;

· energy prices generally;

· the price of propane compared to the price of alternative and competing fuels;

· the general level of petroleum product demand and the availability of propane supplies;

· the level of domestic oil, propane and natural gas production;

· the availability of imported oil and natural gas;

· the ability to obtain adequate supplies of propane for retail sale in the event of an interruption in supply or transportation and the availability of capacity to transport propane to market areas;

· actions taken by foreign oil and gas producing nations;

· the political and economic stability of petroleum producing nations;

· the effect of weather conditions on demand for oil, natural gas and propane;

· availability of local, intrastate and interstate transportation infrastructure;

· availability and marketing of competitive fuels;

· the impact of energy conservation efforts;

· energy efficiencies and technological trends;

· governmental regulation and taxation;

· hazards or operating risks incidental to the transporting and distributing of propane that may not be fully covered by insurance;

· the maturity of the propane industry and competition from other propane distributors;

· loss of key personnel;

· the fees we charge and the margins we realize for our terminal services;

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· the nonpayment or nonperformance by our customers;

· the availability and cost of capital and our ability to access certain capital sources;

· a deterioration of the credit and capital markets;

· the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to our financial results and to successfully integrate acquired assets and businesses;

· changes in laws and regulations to which we are subject, including tax, environmental, transportation and employment regulations or new interpretations by regulatory agencies concerning such laws and regulations; and

· the costs and effects of legal and administrative proceedings.

You should not put undue reliance on any forward-looking statements. All forward-looking statements speak only as of the date of this quarterly report. Except as required by state and federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise. When considering forward-looking statements, please review the risks described under “Item 1A — Risk Factors” of this quarterly report and “Item 1A — Risk Factors” in our annual report on Form 10-K for the fiscal year ended March 31, 2011.

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PART I

Item 1. Financial Statements (Unaudited)

NGL ENERGY PARTNERS LP

Unaudited Condensed Consolidated Balance Sheets

As of June 30, 2011 and March 31, 2011

(U.S. Dollars in Thousands)

	June 30,		March 31,
	2011		2011
			(Note 3)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,721	$	16,337
Accounts receivable - trade, net of allowance for doubtful accounts of $190 and $161, respectively	48,083		44,346
Accounts receivable - affiliates	295		—
Inventories	53,121		12,697
Product exchanges	416		427
Prepaid expenses and other current assets	2,487		3,683
Total current assets	113,123		77,490

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $4,056 and $2,871, respectively	65,706		66,020
GOODWILL	8,568		8,568
INTANGIBLE ASSETS, net of accumulated amortization of $2,292 and $1,558, respectively	11,271		11,755
Total assets	$	198,668	$	163,833

LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	49,315	$	37,244
Accrued expenses and other payables	5,117		3,711
Product exchanges	7,423		1,045
Advance payments received from customers	15,545		7,714
Current maturities of long-term debt	1,830		830
Total current liabilities	79,230		50,544

LONG-TERM DEBT, net of current maturities	10,376		65,541
OTHER NON-CURRENT LIABILITIES	370		395

COMMITMENTS AND CONTINGENCIES

PARTNERS’ EQUITY, per accompanying statement:
General Partner — 0.1% interest; 14,799 and 10,945 notional units outstanding, respectively	146		72
Limited Partners — 99.9% interest —
Common units — 8,864,222 and 10,933,568 units outstanding, respectively	86,545		47,225
Subordinated units — 5,919,346 and no units outstanding, respectively	21,940		—
Accumulated other comprehensive income —
Foreign currency translation	61		56
Total partners’ equity	108,692		47,353
Total liabilities and partners’ equity	$	198,668	$	163,833

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

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Unaudited Condensed Consolidated Statements of Operations

Three Months Ended June 30, 2011 and 2010

(U.S. Dollars in Thousands, except per unit and per share amounts)

	NGL Energy Partners LP			NGL Supply, Inc.
	Three Months			Three Months
	Ended			Ended
	June 30,			June 30,
	2011			2010
REVENUES:
Retail propane	$	12,852		$	2,142
Wholesale supply and marketing	177,497			157,734
Midstream	497			416
Total Revenues	190,846			160,292

COST OF SALES:
Retail propane	8,106			1,356
Wholesale supply and marketing	177,769			156,766
Midstream	98			93
Total Cost of Sales	185,973			158,215

Gross Margin	4,873			2,077

OPERATING COSTS AND EXPENSES:
Operating	7,142			2,564
General and administrative	2,036			1,105
Depreciation and amortization	1,377			715
Operating Loss	(5,682		)	(2,307		)

OTHER INCOME (EXPENSE):
Interest income	126			41
Interest expense	(1,301		)	(72		)
Other, net	85			105
Loss Before Income Taxes	(6,772		)	(2,233		)

INCOME TAX BENEFIT	—			790

Net Loss	(6,772		)	(1,443		)

Net Loss Allocated to General Partner	7

Net Loss Attributable to Noncontrolling Interest				29

Net Loss Allocable to Limited Partners or Attributable to Parent Equity	$	(6,765	)	$	(1,414	)

Basic and Diluted Earnings Per Common Unit or Share	$	(0.53	)	$	(72.60	)

Basic and Diluted Earnings per Subordinated Unit	$	(0.53	)

Basic Weighted average units outstanding:
Common	9,883,342
Subordinated	2,927,149

Weighted average common shares outstanding:
Basic				19,711
Diluted				19,711

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

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Unaudited Condensed Consolidated Statements of Comprehensive Loss

Three Months Ended June 30, 2011 and 2010

(U.S. Dollars in Thousands)

	NGL Energy Partners LP			NGL Supply, Inc.
	Three Months			Three Months
	Ended			Ended
	June 30,			June 30,
	2011			2010

Net loss	$	(6,772	)	$	(1,443	)
Other comprehensive income net of tax:
Change in foreign currency translation adjustment	5			17

Comprehensive loss	$	(6,767	)	$	(1,426	)

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

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NGL ENERGY PARTNERS LP

Unaudited Condensed Consolidated Statement of Changes in Partners’ Equity

Three Months Ended June 30, 2011

(U.S. Dollars in Thousands)

				Limited					Limited				Accumulated
				Partners					Partners				Other		Total
	General			Common					Subordinated				Comprehensive		Partners’
	Partner			Units		Amount			Units	Amount			Income		Equity
BALANCES, MARCH 31, 2011	$	72		10,933,568		$	47,225		—	$	—		$	56	$	47,353
Distribution to partners ($0.35 per unit)	(4		)	—		(3,846		)	—	—			—		(3,850		)
Conversion of common units to subordinated units	—			(5,919,346	)	(23,485		)	5,919,346	23,485			—		—
Sale of units in public offering, net	—			4,025,000		75,289			—	—			—		75,289
Repurchase of common units	—			(175,000	)	(3,418		)	—	—			—		(3,418		)
General partner contribution	85			—		—			—	—			—		85
Net loss	(7		)	—		(5,220		)	—	(1,545		)	—		(6,772		)
Foreign currency translation adjustment	—			—		—			—	—			5		5
BALANCES, June 30, 2011	$	146		8,864,222		$	86,545		5,919,346	$	21,940		$	61	$	108,692

The accompanying notes are an integral part of this condensed consolidated financial statement.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

Three Months Ended June 30, 2011 and 2010

(U.S. Dollars in Thousands)

	NGL Energy Partners LP			NGL Supply, Inc.
	Three Months			Three Months
	Ended			Ended
	June 30,			June 30,
	2011			2010
OPERATING ACTIVITIES:
Net loss	$	(6,772	)	$	(1,443	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,930			915
Deferred income tax benefit	—			(790		)
Bad debt provision	46			2
Commodity derivative loss	29			232
Other	(7		)	(48		)
Changes in operating assets and liabilities, net of acquisitions —
Accounts receivable	(3,783		)	13,538
Inventories	(40,424		)	(51,369		)
Product exchanges, net	6,389			25,480
Prepaid expenses and other current assets	408			(1,523		)
Accounts payable	12,071			(5,512		)
Accrued expenses and other payables	(61		)	(3,621		)
Advance payments received from customers	7,831			12,215
Net cash used in operating activities	(22,343		)	(11,924		)

INVESTING ACTIVITIES:
Purchases of long-lived assets	(840		)	(133		)
Cash paid for acquisitions of businesses	(70		)	(26		)
Cash flows from commodity derivatives	2,217			285
Proceeds from sales of assets	39			61
Advances to affiliates	(204		)	—
Net cash provided by investing activities	1,142			187

FINANCING ACTIVITIES:
Proceeds from sale of common units, net of offering costs	75,289			—
Repurchase of common units	(3,418		)	—
Proceeds from borrowings under revolving credit facility	22,500			3,100
Payments on revolving credit facility	(76,500		)	—
Payments on other long-term debt	(189		)	(40		)
Debt issuance costs	(251		)	—
Distributions to partners ($0.35 per unit)	(3,846		)	—
Preferred stock redemption	—			(3,000		)
Common stock dividends ($357 per share)	—			(7,000		)
Preferred stock dividends	—			(17		)
Net cash provided by (used in) financing activities	13,585			(6,957		)
Net decrease in cash and cash equivalents	(7,616		)	(18,694		)
Cash and cash equivalents, beginning of period	16,337			24,238
Cash and cash equivalents, end of period	$	8,721		$	5,544

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

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Note 1 - Organization and Operations

NGL Energy Partners LP (“we” or the “Partnership”) is a Delaware limited partnership formed in September 2010 to own and, through its subsidiaries, operate retail and wholesale propane and other natural gas liquids businesses that historically were owned and operated by NGL Supply, Inc. (“NGL Supply”), Hicks Oils and Hicksgas, Incorporated (“HOH”) and Hicksgas Gifford, Inc. (“Gifford”). We refer to HOH and Gifford collectively as “Hicksgas.” We had no operations prior to September 30, 2010.

NGL Supply was determined to be the acquirer in our formation transactions effected in October 2010. NGL Supply was organized on July 1, 1985 as a successor to a company founded in 1967, and was a diversified, vertically integrated provider of propane services including retail propane distribution; wholesale supply and marketing of propane and other natural gas liquids; and midstream operations consisting of propane terminal operations and services. As discussed in Note 3, in October 2010, we also acquired the retail propane businesses of Hicksgas located in Indiana and Illinois.

Our retail propane operations sell propane and propane-related products and services to residential, commercial and agricultural customers in Indiana, Illinois, Kansas and Georgia.

Our wholesale supply and marketing operations provide propane and other natural gas liquids to customers at open-access terminals throughout the common carrier pipeline systems in the Mid-Continent, Gulf Coast and Northeast regions of the United States. Our wholesale supply and marketing services include shipping and maintaining storage on these pipeline systems and supplying customers through terminals, refineries, third-party and leased tank cars and truck terminals. Our wholesale customers include various refineries, multistate marketers ranging in size from national and regional distribution companies to medium and small independent propane companies located throughout the country.

In our midstream segment, we provide propane terminal services to customers through our three proprietary terminals located in East St. Louis, Illinois; Jefferson City, Missouri; and St. Catharines, Ontario, Canada.

Note 2 - Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements as of and for the three months ended June 30, 2011 include our accounts and all of our direct and indirect subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The condensed consolidated financial statements for the three months ended June 30, 2010 represent the financial statements of NGL Supply.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements include all adjustments that we consider necessary for a fair statement of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete annual consolidated financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended March 31, 2011, included in our Annual Report on Form 10-K. Due to the seasonal nature of our operations, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Significant Accounting Policies

Our significant accounting policies are consistent with those disclosed in Note 2 of the Notes to Consolidated Financial Statements in our audited consolidated financial statements for the year ended March 31, 2011 included in our Annual Report on Form 10-K.

Revenue Recognition

Our revenue is primarily generated by the sale of propane and other natural gas liquids and propane-related parts, fittings and appliances in the United States and by services and rentals provided by our retail propane, wholesale supply and marketing, and terminal operations in the United States and Canada.

We accrue our revenues from propane and other natural gas liquids sales and propane-related sales at the time title to the product transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser or installation of the appliance or rental equipment. We record our terminalling, storage and propane service revenues at the time the service is performed and tank and other rentals over the term of the lease. We record product purchases at the time title to the product transfers to us, which typically occurs upon receipt of the product. We present revenue-related taxes collected from customers and remitted to taxing authorities, principally sales and use taxes, on a net basis.

We consider two or more legally separate exchange transactions with the same counterparty, including buy/sell transactions, as a single arrangement on a combined basis. Our buy/sell transactions are netted against each other on the consolidated statements of operations with no effect on net income.

Fair Value Measurements

We apply fair value measurements to certain assets and liabilities, principally our commodity and interest rate derivative instruments and assets and liabilities acquired in a business combination. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value should be based upon assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and risks inherent in valuation techniques and inputs to valuations. This includes not only the credit standing of counterparties and credit enhancements but also the impact of our own nonperformance risk on our liabilities. GAAP requires fair value measurements to assume that the transaction occurs in the principal market for the asset or liability or in the absence of a principal market, the most advantageous market for the asset or liability (the market for which the reporting entity would be able to maximize the amount received or minimize the amount paid). We evaluate the need for credit adjustments to our derivative instrument fair values in accordance with the requirements noted above.

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

· Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date. We did not have any fair value measurements categorized as Level 1 at June 30, 2011 or March 31, 2011.

· Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 include non-exchange traded derivatives such as over-the-counter commodity price swap and option contracts and interest rate protection agreements. All of our derivative financial instruments and our product exchange assets and liabilities were categorized as Level 2 at June 30, 2011 and March 31, 2011 (see Note 11). We determine the fair value of all our derivative financial instruments utilizing pricing models for significantly similar instruments. Inputs to the pricing models include publicly available prices and forward curves generated from a compilation of data gathered from third parties.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

· Level 3 — Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. We did not have any derivative financial instruments or other assets or liabilities categorized as Level 3 at June 30, 2011 or March 31, 2011.

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

Supplemental Cash Flow Information

Supplemental cash flow information is as follows for the periods indicated:

	Three Months Ended June 30,
	2011		2010
	(in thousands)
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid	$	785	$	99
Income taxes paid	$	—	$	—

Cash flows from commodity derivative instruments that are not accounted for as hedges are classified as cash flows from investing activities in the consolidated statements of cash flows.

Account Details

Inventories consist of the following:

	June 30, 2011		March 31, 2011
	(in thousands)
Propane	$	49,598	$	9,529
Other	3,523		3,168
	$	53,121	$	12,697

Recent Accounting Developments

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS represent accounting standards published by the International Accounting Standards Board (the “IASB”), which is based in London, England. In February 2010, the SEC expressed its continuing support for a single set of high-quality globally accepted accounting standards and established a general work plan that sets forth areas and factors the SEC will consider before requiring domestic public companies to transition to IFRS. Currently, the Financial Accounting Standards Board (the “FASB”) and the IASB are working individually and jointly on a number of accounting standard convergence projects that, if finalized in 2011, would bring about a significant shift in the accounting and financial reporting landscape. These projects include a broad range of topics such as financial statement presentation, accounting for leases, revenue recognition, financial instruments, consolidations and fair value measurements.

The SEC expects to make a determination in 2011 regarding the mandatory adoption of IFRS, with the expectation that any decision to adopt IFRS will allow U.S. issuers a number of years to transition from current GAAP. We continue to monitor developments regarding the potential implementation of IFRS and the ongoing convergence projects of the FASB and IASB. We will evaluate the impact that any definitive accounting guidance

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

may have on our financial statements once this information is finalized by the appropriate standard setting organizations, including the SEC.

Note 3 — Acquisitions

As discussed in Note 1, we purchased the retail propane operations of Hicksgas in October 2010 as part of our formation transactions. The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their fair values, in the acquisition of the retail propane businesses of Hicksgas described above (in thousands):

			Estimated
	Final		Allocation as of
	Allocation		March 31, 2011		Revision
Accounts receivable	$	5,669	$	6,156	$	(487	)
Inventory	6,182		6,229		(47		)
Prepaid expenses and other current assets	2,600		2,604		(4		)
	14,451		14,989		(538		)
Property, plant, and equipment:
Land	2,666		—		2,666
Tanks and other retail propane equipment (15 year life)	23,016		22,213		803
Vehicles (5 year life)	6,599		6,173		426
Buildings (30 year life)	7,053		6,241		812
Office equipment (5 year life)	523		1,264		(741		)
Amortizable intangible assets:
Customer relationships (15 year life)	2,170		3,278		(1,108		)
Non-compete agreements (5 year life)	550		868		(318		)
Tradenames (indefinite-life intangible asset)	830		—		830
Goodwill (Retail propane segment)	3,716		7,756		(4,040		)
Total assets acquired	61,574		62,782		(1,208		)

Accounts payable	1,837		2,777		(940		)
Customer advances and deposits	12,089		12,063		26
Accrued and other current liabilities	2,152		2,203		(51		)
	16,078		17,043		(965		)

Long-term debt	5,768		5,768		—
Other long-term liabilities	274		517		(243		)
Total liabilities assumed	22,120		23,328		(1,208		)

Net assets acquired	$	39,454	$	39,454	$	—

The total Hicksgas acquisition cost was allocated based on the estimated fair value of the assets acquired and liabilities assumed, based primarily on an independent appraisal completed in July 2011. The revisions indicated above were recorded during the three months ended June 30, 2011, on a retrospective basis as an adjustment to the March 31, 2011 carrying amounts. The impact of such revisions on net income for prior periods was not significant.

Goodwill was warranted because these acquisitions enhance our current retail propane operations. We expect all of the goodwill acquired to be deductible for income tax purposes (see Note 8). We do not believe that the acquired intangible assets have any significant residual value at the end of their useful life.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

The total acquisition cost was $39.5 million, consisting of cash of approximately $17.2 million and the issuance of 4,154,757 common units valued at approximately $22.3 million. The units issued to the shareholders of HOH in the formation transaction were valued at $5.37 per unit, the price paid for common units issued in our formation.

Pro Forma Results of Operations

The operations of Hicksgas have been included in our statements of operations since they were acquired in October 2010. The following unaudited pro forma consolidated results of operations for the three months ended June 30, 2010 are presented as if the Hicksgas acquisitions had been made, and our initial public offering, unit split and unit conversion (see Note 10) had been completed, on April 1, 2010. The pro forma earnings per unit are based on the common and subordinated units outstanding as of June 30, 2011.

	Three Months Ended
	June 30,
	2010
	(in thousands)
Revenues	$	167,524
Net loss	(5,385		)
Limited partners’ interest in net loss	(5,379		)
Basic and diluted earnings per Common Unit	(0.36		)
Basic and diluted earnings per Subordinated Unit	(0.36		)

The pro forma consolidated results of operations include adjustments to give effect to depreciation on the step-up of property, plant and equipment, amortization of intangible assets, use of the proceeds from our offering to pay debt issued to finance the acquisition and certain other adjustments. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the transactions been made at the beginning of the period presented or the future results of the combined operations.

Note 4 — Earnings per Common Unit or Common Share

Our earnings per common and subordinated unit or per share of common stock for the periods indicated below were computed as follows:

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

	Three Months Ended June 30,
	2011			2010
	(dollars in thousands,
	except per unit or share amounts)
Earnings per Limited Partner Unit or Common Stock:
Net loss or net loss to the parent equity	$	(6,772	)	$	(1,414	)
Loss allocable to general partner	7
Preferred stock dividends				(17		)

Net loss allocable to limited partners or common shareholders	$	(6,765	)	$	(1,431	)

Weighted average common units or common shares outstanding - Basic and Diluted	9,883,342			19,711

Weighted average subordinated units outstanding - Basic and Diluted	2,927,149

Earnings per common unit or common share - Basic and Diluted	$	(0.53	)	$	(72.60	)

Earnings per subordinated unit - Basic and Diluted	$	(0.53	)

In the computation of earnings per common share of NGL Supply for the three months ended June 30, 2010, the impact of the outstanding stock options prior to exercise (approximately 237 shares) has not been included in the diluted earnings per share computation because the effect would be anti-dilutive.

Note 5 - Property, Plant and Equipment

Our property, plant and equipment, net of depreciation, consists of the following as of the dates indicated:

	June 30,		March 31,
Description and Useful Life	2011		2011
	(in thousands)
Terminal assets (30 years)	$	18,948	$	18,933
Retail propane equipment (5-15 years)	30,784		30,360
Vehicles (5 years)	7,867		7,666
Information technology equipment (3 years)	727		678
Buildings (30 years)	7,080		7,053
Land (nondepreciable) and other (3-7 years)	4,356		4,201
	69,762		68,891
Less: Accumulated depreciation	4,056		2,871
Net property, plant and equipment	$	65,706	$	66,020

Depreciation expense was $1,195,000 and $515,000 for the three months ended June 30, 2011 and 2010, respectively.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Note 6 — Goodwill and Intangible Assets

The changes in the balance of goodwill during the three months ended June 30, 2011 were as follows (in thousands):

Balance, March 31, 2011, as previously reported	$	12,608
Revision to allocation of Hicksgas acquisition	(4,040		)
Balance, March 31, 2011 and June 30, 2011	$	8,568

Goodwill by segment is as follows:

	June 30,		March 31,
	2011		2011
	(in thousands)
Retail propane	$	6,534	$	6,534
Wholesale supply and marketing	2,034		2,034
	$	8,568	$	8,568

Our intangible assets consist of the following as of the dates indicated:

		June 30, 2011				March 31, 2011
		Gross Carrying		Accumulated		Gross Carrying		Accumulated
	Useful Lives	Amount		Amortization		Amount		Amortization
		(in thousands)
Amortizable —
Supply and storage agreements	8 years	$	1,802	$	600	$	1,802	$	400
Customer lists	8-10 years	2,033		229		2,033		154
Customer relationships	15 years	2,170		108		2,170		200
Non-compete agreements	2-6 years	1,550		438		1,550		239
Debt issuance costs	4 years	5,178		917		4,928		565
Total amortizable		12,733		2,292		12,483		1,558

Non-Amortizable —
Trade names	Indefinite	830		—		830		—
Total		$	13,563	$	2,292	$	13,313	$	1,558

Expected amortization of our amortizable intangible assets is as follows (in thousands):

Year Ending March 31,
2012 (nine months)	$	2,237
2013	2,527
2014	1,902
2015	1,308
2016	607
Thereafter	1,860
	$	10,441

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Amortization expense was as follows:

	Three Months Ended June 30,
Recorded in	2011		2010
	(in thousands)
Cost of sales	$	200	$	200
Depreciation and amortization	182		200
Interest expense	352		22
	$	734	$	422

Note 7 - Long-Term Debt

Our long-term debt consists of the following:

	June 30,		March 31,
	2011		2011
	(in thousands)
Revolving credit facility —
Acquisition loans	$	—	$	65,000
Working capital loans	11,000		—
Other notes payable	1,206		1,371
	12,206		66,371
Less - current maturities	1,830		830
Long-term debt	$	10,376	$	65,541

Revolving Credit Facility

We and our subsidiaries have a $200.0 million credit agreement (the “Credit Agreement”) with a group of banks. The Credit Agreement provides for a total credit facility of $200.0 million, consisting of a $50.0 million working capital facility and a $150.0 million acquisition facility. Borrowings under the working capital facility are subject to a defined borrowing base. The working capital facility allows for letter of credit advances of up to $50.0 million and swingline loans of up to $5.0 million. Substantially all of our assets are pledged as collateral under the Credit Agreement.

Borrowings under the Credit Agreement bear interest at designated interest rates depending on the computed “leverage ratio,” which is the ratio of total indebtedness (as defined) at any determination date to consolidated EBITDA for the period of the four fiscal quarters most recently ended. Interest is payable quarterly. Interest rates vary at LIBOR plus 3% to 3.75% for any LIBOR borrowings (LIBOR plus 3.5% at June 30, 2011) or the bank’s prime rate plus 2% to 2.75% for any base rate borrowings (prime plus 2.5% at June 30, 2011), in each case depending upon the leverage ratio. We are also required to pay a 0.5% commitment fee on the average unused commitment.

Our revolving credit facility further indicates that our “leverage ratio” cannot exceed 4.0 to 1.0 at any quarter end. At June 30, 2011, our ratio of total funded debt to consolidated EBITDA was .061 to 1.

During the three months ended June 30, 2011, we had a maximum borrowing under our working capital facility of approximately $11.5 million and an average borrowing of $2.5 million. The weighted average interest rate of our working capital facility during the three months ended June 30, 2011 was 5.08% and the interest rate at June 30, 2011 was 5.75%.

The Credit Agreement has a final maturity on October 14, 2014. Once a year, between March 31 and September 30, we must prepay the outstanding working capital revolving loans and collateralize outstanding letters of credit in order to reduce the total working capital borrowings to less than $10.0 million for 30 consecutive days. In May 2011, we repaid the $65.0 million advances under our acquisition facility using the proceeds from our initial public offering (see Note 10).

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Our revolving credit facility includes customary events of default. At June 30, 2011, we were in compliance with all debt covenants to our revolving credit facility. Our revolving credit facility also contains various covenants limiting our ability to (subject to certain exceptions), among other things:

· incur other indebtedness (other than permitted debt as defined in the credit facility);

· grant or incur liens on our property;

· create or incur any contingent obligations;

· make investments, loans and acquisitions;

· enter into a merger, consolidation or sale of assets;

· change the nature of the business or name or place of business of any of the Credit Parties without approval;

· pay dividends or make distributions if we are in default under the revolving credit facility or in excess of available cash; and

· prepay, redeem, defease or otherwise acquire any permitted subordinated debt or make certain amendments to permitted subordinated debt.

Other Notes Payable

The other notes payable of approximately $1.2 million mature as follows (in thousands):

Year Ending March 31,
2012 (nine months)	$	664
2013	452
2014	90
	$	1,206

Note 8 - Income Taxes

We qualify as a partnership for income taxes. As such, we will not pay any U.S. Federal income tax. Rather, each owner will report their share of our income or loss on their individual tax returns. Accordingly, no income tax provision has been recorded for the three months ended June 30, 2011. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined as we do not have access to information regarding each partner’s basis in the Partnership.

As a publicly-traded partnership, we are allowed to have non-qualifying income only up to a total of 10% of our gross income and not be subject to taxation as a corporation. During the three months ended June 30, 2011, we formed a taxable corporate subsidiary and transferred to such subsidiary certain assets and operations that represent “non-qualifying income” for a partnership. As a result, our taxable subsidiary will be subject to income taxes related to the taxable income generated by its operations.

During the three month period ended June 30, 2011, our corporate subsidiary realized a net operating loss of approximately $44,000. We provided a full valuation allowance of $17,000 against the tax benefit of the operating loss carryforward as of June 30, 2011. Based on the operations to date, we believe it is likely that the subsidiary will not have sufficient future taxable income to utilize the operating loss carryforward. We will continue to evaluate whether the valuation allowance is required as we obtain more operating history for the operations contributed to the taxable subsidiary.

NGL Supply’s tax provision for the three month period ended June 30, 2010 was computed using the expected annual effective tax rate which differs from the statutory rate due to the effect of state income taxes. The

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

components of the income tax provision of NGL Supply are as follows for the three months ended June 30, 2010 (in thousands):

Current expense:
Federal	$	—
State	—
Total	—

Deferred expense (benefit):
Federal	(790		)
State	—
Total	(790		)
Total income tax expense (benefit)	$	(790	)

Effective tax rate	35.4		%

Note 9 - Commitments and Contingencies

Litigation

We are involved in claims and legal actions arising in the ordinary course of business. We believe that the ultimate disposition of these matters will not have a material adverse effect on our financial position and results of operations.

Obligations Under Propane Asset Purchase and Sale Agreement

In connection with the purchase of certain propane assets from ConocoPhillips, NGL Supply executed the following agreements in November 2002:

Propane Business Operating & Maintenance Agreement. The Propane Business Operating & Maintenance Agreement specifies that ConocoPhillips will continue to operate the propane assets for us and provides for the payment for such services as well as the payment for the utilization of certain common facilities, as defined. The agreement has a primary term of ten years from November 7, 2002, and provides for an extension for a five-year period, to be continued on a year-by-year basis. We have the ability to terminate the agreement with written notice by August 1 of the calendar year preceding the year we would terminate the agreement.

We are obligated to pay a fixed monthly operating fee plus a utility service fee which varies based on usage and all direct costs incurred by ConocoPhillips related to the propane assets. The initial monthly operating fee was $25,000, which consisted of a labor charge of $15,000 plus a non-labor charge of $10,000. During the ten-year primary term, the labor charge component increases at a rate of 2.5% per year, and during the five-year extension, the labor charge component is increased at an amount appropriate in the circumstances based on ConocoPhillips’ actual labor and benefit costs. The non-labor component was fixed for a term of two years, but thereafter was to be adjusted for every two-year period based on ConocoPhillips’ actual costs of operating our propane assets. The total operating fee charged to cost of sales on the consolidated statements of operations, including the charge for the utility service fee and propane asset direct charges, was as follows (in thousands):

	2011		2010
Three months ended June 30	$	87	$	86

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

The total minimum monthly fee as of June 30, 2011 is approximately $30,000. During the remaining term of the primary ten-year period and the five-year extension, the estimated minimum annual commitments for the Propane Business Operating & Maintenance Agreement for the remainder of the year ending March 2012 and the years ending March 31, 2012 through March 31, 2016 are as follows (in thousands):

Year Ending March 31,
2012 (nine months)	$	272
2013	364
2014	370
2015	376
2016	382

Propane Supply Agreement. This agreement was executed in order to provide us with a constant supply of propane for our business. The agreement is for a primary term of ten years, and may be extended for an additional five-year period, then continuing on a year-by-year basis.

The agreement specifies that we may purchase a specified volume of propane per week from ConocoPhillips. The price we will pay is an average of the published daily propane spot price at Conway, Kansas plus a location differential equal to published pipeline tariffs and, for the ten-year primary period, less a specified discount which varies depending upon the location of purchase. The charge for such propane purchases is included in cost of sales on our consolidated statements of operations.

Storage Space Lease. NGL Supply executed a propane storage space lease with ConocoPhillips for storage at its Borger, Texas storage facility. The storage agreement provides for a level of up to 850,000 barrels of propane at any one time, and expires on March 31, 2012.

The storage agreement requires a specified minimum storage payment which varies by year, plus additional charges to the extent we had more than the designated 850,000 barrels in storage at any time. The total lease charge recorded in cost of sales on our consolidated statements of operations was as follows (in thousands):

	2011		2010
Three months ended June 30	$	108	$	108

As of June 30, 2011, the monthly storage charge is approximately $36,000. The estimated future annual storage charge will be approximately $0.3 million during the remainder of the year ending March 31, 2012.

Other Operating Leases

We have executed various noncancelable operating lease agreements for office space, underground propane storage, trucks, real estate, equipment and bulk propane storage tanks. Rental expense relating to operating leases was as follows (in thousands):

	2011		2010
Three months ended June 30	$	681	$	151

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Future minimum lease payments at June 30, 2011, are as follows (in thousands):

Year Ending March 31,
2012 (nine months)	$	2,045
2013	2,767
2014	2,766
2015	2,698
2016	2,635
	$	12,911

Sales and Purchase Contracts

We have entered into sales and purchase contracts for propane and other natural gas liquids to be delivered in future periods. These contracts require that the parties physically settle the transactions with natural gas liquid inventory. At June 30, 2011, we had fixed-price outstanding sales contracts of approximately $92.6 million (approximately 61.4 million gallons) and fixed-price outstanding purchase contracts of approximately $111.4 million (approximately 78.2 million gallons). These contracts have terms that expire at various dates through March 31, 2013.

Note 10 — Equity

Partnership Equity

The Partnership’s equity consists of a 0.1% general partner equity and a 99.9% limited partner equity. Limited partner equity consists of common and subordinated units. The limited partner units share equally in the allocation of income or loss. The principal difference between common and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis and all common units thereafter will no longer be entitled to arrearages.

Our general partner is not obligated to make any additional capital contributions or guarantee any of our debts or obligations.

Initial Public Offering

During May 2011, we sold a total of 4,025,000 common units (including the exercise by the underwriters of their option to purchase additional common units from us) in our initial public offering at $21 per unit. Our proceeds from the sale of 3,850,000 common units of approximately $72.0 million, net of total offering costs of approximately $9.0 million, were used to repay advances under our acquisition credit facility and for general partnership purposes. Proceeds from the sale of 175,000 common units ($3.4 million) from the underwriters’ exercise of their option to purchase additional common units from us were used to redeem 175,000 of the common units outstanding prior to our initial public offering.

Unit Split and Conversion of Common Units to Subordinated Units

On May 11, 2011, we:

· Effected a 3.7219 to one split of our common units. All unit and per-unit information herein has been adjusted to reflect after-split information, and

· Converted 5,919,346 of our common units to subordinated units.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Distributions

Our general partner has adopted a cash distribution policy that will require us to pay a quarterly distribution to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to the general partner and its affiliates, referred to as “available cash,” in the following manner:

· First, 99.9% to the holders of common units and 0.1% to the general partner, until each common unit has received the specified minimum quarterly distribution, plus any arrearages from prior quarters.

· Second, 99.9% to the holders of subordinated units and 0.1% to the general partner, until each subordinated unit has received the specified minimum quarterly distribution.

· Third, 99.9% to all unitholders, pro rata, and 0.1% to the general partner.

The general partner will also receive, in addition to distributions on its 0.1% general partner interest, additional distributions based on the level of distributions to the limited partners. These distributions are referred to as “incentive distributions.”

During the three months ended June 30, 2011, we distributed a total of $3.85 million ($0.35 per common and general partner notional unit) to our unitholders of record as of March 31, 2011. Subsequent to June 30, 2011, we declared a distribution of $0.1669 per unit to unitholders of record on August 3, 2011, which was paid on August 12, 2011. This represents a pro rata distribution of our minimum quarterly distribution for the period from the closing date of our initial public offering (May 17, 2011) through June 30, 2011.

Note 11 — Fair Value of Financial Instruments

Our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities (excluding derivative instruments) are carried at amounts which reasonably approximate their fair value due to their short-term nature. The carrying amounts of our variable-rate debt obligations reasonably approximate their fair value due to their variable interest rates on substantially all of the debt and there have been no changes in conditions from the inception of the credit facility indicating that our credit terms were not market terms.

The following table presents the estimated fair value measurements of our assets and liabilities carried at fair value in our condensed consolidated financial statements at the dates indicated:

		June 30, 2011				March 31, 2011
Item	Recorded As	Level 1		Level 2		Level 1		Level 2
				(in thousands)
Assets:
Commodity derivatives	Prepaid Expenses	$	—	$	—	$	—	$	783
Product exchanges	Product Exchanges	—		416		—		427

Liabilities:
Product exchanges	Product Exchanges	—		7,423		—		1,045
Interest rate derivatives	Accrued Liabilities	—		277		—		293
Commodity derivatives	Accrued Liabilities	—		1,422		—		—

We have entered into an interest rate swap agreement to hedge the risk of interest rate fluctuations on our long term debt. This agreement converts a portion of our revolving credit facility floating rate debt into fixed rate debt on a notional amount of $8.5 million and ends on June 30, 2013. The notional amounts of derivative instruments do not represent actual amounts exchanged between the parties, but instead represent amounts on which

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

the contracts are based. The floating interest rate payments under these swaps are based on three-month LIBOR rates. We do not account for these agreements as hedges.

The following table sets forth our open commodity derivative contract positions at June 30, 2011 and March 31, 2011. We do not account for these derivatives as hedges.

Underlying Propane Contracts

Period

Total
Notional
Units

Type

Price Per
Gallon

As of June 30, 2011 -

OPIS Conway

Jan 2011

June 2011

25,000 BBL

Swap (Sale)

1.15000

OPIS Conway

Feb 2011

June 2011

75,000 BBL

Swap (Sale)

1.16000

OPIS Conway

May 2011

Mar 2012

45,000 BBL

Swap (Purchase)

1.50500

OPIS Conway

May 2011

Mar 2012

75,000 BBL

Swap (Purchase)

1.43500

OPIS Conway

May 2011

June 2012

60,000 BBL

Swap (Sale)

1.26000

OPIS Conway

May 2011

Dec 2012

75,000 BBL

Swap (Purchase)

1.30000

OPIS Conway

June 2011

Mar 2012

47,000 BBL

Swap (Purchase)

1.43875

OPIS Conway

June 2011

Sept 2011

90,000 BBL

Swap (Sale)

1.42000

OPIS Conway

June 2011

Apr 2012

100,000 BBL

Swap (Sale)

1.28000

OPIS Conway

June 2011

Dec 2012

100,000 BBL

Swap (Purchase)

1.32250

OPIS Conway

June 2011

Mar 2012

15,000 BBL

Swap (Purchase)

1.36250

OPIS Conway

June 2011

Mar 2012

6,000 BBL

Swap (Sale)

1.47000

OPIS Mt. Belvieu

Mar 2011

Sept 2011

45,000 BBL

Swap (Sale)

1.43000

OPIS Mt. Belvieu

May 2011

Nov 2012

5,000 BBL

Swap (Purchase)

1.35500

OPIS Mt. Belvieu

June 2011

Dec 2011

24,000 BBL

Swap (Sale)

1.50500

OPIS Mt. Belvieu

June 2010

Dec 2011

4,000 BBL

Swap (Purchase)

0.98000

Janesville - MAP

June 2011

Dec 2011

11,905 BBL

Physical Cap (Sale)

1.62780

As of March 31, 2011 -

OPIS Conway

Nov 2010

Apr 2011

25,000 BBL

Swap (Sale)

1.10500

OPIS Conway

Nov 2010

Oct 2011

90,000 BBL

Swap (Purchase)

1.13500

OPIS Conway

Dec 2010

June 2011

30,000 BBL

Swap (Sale)

1.12500

OPIS Conway

Jan 2011

June 2011

75,000 BBL

Swap (Sale)

1.15000

OPIS Conway

Jan 2011

Dec 2011

75,000 BBL

Swap (Purchase)

1.20500

OPIS Conway

Jan 2011

Dec 2011

225,000 BBL

Swap (Purchase)

1.21375

OPIS Conway

Feb 2011

June 2011

225,000 BBL

Swap (Sale)

1.16000

OPIS Mt. Belvieu

Mar 2011

Sept 2011

45,000 BBL

Swap (Sale)

1.43000

OPIS Mt. Belvieu

June 2010

Dec 2011

4,000 BBL

Swap (Purchase)

0.98000

We recorded the following net gains (losses) from our commodity and interest rate derivatives during the periods indicated:

	Three Months Ended June 30,
	2011			2010
	(in thousands)
Commodity contracts -
Unrealized loss	$	(2,246	)	$	(517	)
Realized gain	2,217			285
Interest rate swaps	(278		)	—
Total	$	(307	)	$	(232	)

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

The commodity contract gains and losses are included in cost of sales of our wholesale supply and marketing segment in the consolidated statements of operations. The gain or loss on the interest rate contracts is recorded in interest expense.

Credit Risk

We maintain credit policies with regard to our counterparties on the derivative financial instruments that we believe minimize our overall credit risk, including an evaluation of potential counterparties’ financial condition (including credit ratings), collateral requirements under certain circumstances and the use of standardized agreements, which allow for netting of positive and negative exposure associated with a single counterparty.

Our counterparties consist primarily of financial institutions and major energy companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. Based on our policies, exposures, credit and other reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty performance.

For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our consolidated statements of financial position and recognized in our net income.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Note 12 - Segments

We have three operating segments, two of which conduct their business exclusively in the United States, while our midstream terminal operations are conducted in the United States and Canada. We evaluate our operating segments’ performance based on gross margin and operating income and EBITDA. Our segments and their respective financial information are as follows:

	Three Months Ended June 30,
	2011			2010
	(in thousands)
Revenues:
Retail propane
Propane sales	$	10,194		$	1,754
Sales of parts and fittings and water-softeners	1,440			114
Propane service and water-softener and tank rental revenues	1,218			274
Wholesale supply and marketing
Wholesale supply sales	184,836			159,851
Storage revenues	317			328
Midstream	497			416
Elimination of intersegment wholesale supply sales	(7,656		)	(2,445		)
Total revenues	$	190,846		$	160,292

Gross Margin:
Retail propane
Propane sales	$	3,214		$	511
Sales of parts and fittings and water-softeners	314			1
Propane service and water-softener and tank rental revenues	1,218			273
Wholesale supply and marketing
Wholesale supply sales	(589		)	640
Storage revenues	317			328
Midstream	399			324
Total gross margin	$	4,873		$	2,077

Depreciation and Amortization:
Retail propane	$	1,067		$	434
Wholesale supply and marketing	98			71
Midstream	212			210
Total depreciation and amortization	$	1,377		$	715

Operating Income (Loss):
Retail propane	$	(3,194	)	$	(1,517	)
Wholesale supply and marketing	(1,693		)	(144		)
Midstream	28			25
General and administrative expenses not allocated to segments	(823		)	(671		)
Total operating loss	$	(5,682	)	$	(2,307	)

Other items not allocated by segment:
Interest income	126			41
Interest expense	(1,301		)	(72		)
Other income, net	85			105
Income tax benefit	—			790

Net loss	$	(6,772	)	$	(1,443	)

Geographic Information for our Midstream Segment:
Revenues:
United States	$	454		$	382
Canada	43			34
Gross margin:
United States	356			289
Canada	43			34
Operating income (loss):
United States	97			111
Canada	(69		)	(86		)

Additions to property, plant and equipment including acquisitions (accrual basis):
Retail propane	$	716		$	139
Wholesale supply and marketing	194			—
Total	$	910		$	139

	June 30,		March 31,
	2011		2011
	(in thousands)
Total assets:
Retail propane	$	73,655	$	78,566
Wholesale supply and marketing	99,067		57,507
Midstream	18,478		19,279
Corporate	7,468		8,481
Total	$	198,668	$	163,833

Long-lived assets, net:
Retail propane	$	58,608	$	58,997
Wholesale supply and marketing	4,433		4,537
Midstream	18,242		18,446
Corporate	4,262		4,363
Total	$	85,545	$	86,343

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2011 and March 31, 2011, and for the

Three Months Ended June 30, 2011 and 2010

Note 13 — Subsequent Events

On July 12, 2011, we paid $2.1 million to acquire certain retail propane operations located in Kansas in order to expand our retail propane operations. This transaction will be accounted for as a business combination, and the revenues and expenses will be recognized in our consolidated financial statements beginning on July 12, 2011. The assets acquired and liabilities assumed will be recorded based on their estimated fair values as of the acquisition date. At this time, we have not obtained all the information required to complete the determination of the fair values of the acquired assets and liabilities.

On August 12, 2011, we entered into a business combination agreement for retail propane operations in the northeastern United States for our retail propane segment. The agreement is subject to customary closing conditions, including obtaining regulatory approvals. The combination will be funded with cash of $96 million, the issuance of 4 million new limited partner units, as well as a working capital payment for certain specified working capital items. The combination is expected to close in early October 2011. The cash payment will be funded with advances under our revolving credit facility.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial condition and results of operations as of and for the three months ended June 30, 2011. The discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Overview

We are a Delaware limited partnership formed in September 2010. We had no operations through September 30, 2010. As part of our formation, in October 2010, we acquired and combined the assets and operations of NGL Supply, primarily a wholesale propane and terminaling business founded in 1967, and Hicksgas, primarily a retail propane business founded in 1940. We do not have our own historical financial statements for periods prior to our formation. The financial statements of NGL Supply became our historical financial statements for all periods prior to October 1, 2010.

We own and, through our subsidiaries, operate a vertically integrated propane business with three operating segments: retail propane; wholesale supply and marketing; and midstream. We engage in the following activities through our operating segments:

·	our retail propane business sells propane to end users consisting of residential, agricultural, commercial and industrial customers;

·	our wholesale supply and marketing business supplies propane and other natural gas liquids and provides related storage to retailers, wholesalers and refiners; and

·	our midstream business, which currently consists of our propane terminaling business, takes delivery of propane from pipelines and trucks at our propane terminals and transfers the propane to third-party transport trucks for delivery to retailers, wholesalers and other customers.

Our businesses represent a combination of “margin-based,” “cost-plus” and “fee-based” revenue generating operations. Our retail propane business generates margin-based revenues, meaning our gross margin depends on the difference between our propane sales price and our total propane supply cost.

Our wholesale supply and marketing business generates cost-plus revenues. Cost-plus represents our aggregate total propane supply cost plus a margin to cover our replacement cost consisting of cost of capital, storage, transportation, fuel surcharges and an appropriate competitive margin. The margins we realize in our wholesale business are substantially less as a percentage of revenues or on a per gallon basis than our retail propane business. We attempt to reduce our exposure to the impact of price fluctuations by using “back-to-back” contractual agreements and “pre-sale” agreements which essentially allow us to lock in a margin on a percentage of our winter volumes.

Our midstream business generates fee-based revenues derived from a cents-per-gallon charge for the transfer of propane volumes, or throughput, at our propane terminals. Our midstream business is impacted primarily by throughput volumes at our three propane terminals. Throughput volumes are impacted by weather, agricultural uses of propane and general economic conditions, all of which are beyond our control. We are able to somewhat mitigate the potential decline in throughput volumes by preselling volumes to customers at our terminals in advance of the demand period through our wholesale supply and marketing segment.

Historically, the principal factors affecting each of our businesses have been propane demand and our cost of supply, as well as our ability to maintain or expand our realized margin from our margin-based and cost-plus operations.

Seasonality

Seasonality has a significant impact on propane demand which impacts all of our segments, but the most significant impact is on our retail propane segment. A large portion of our retail propane operation is in the

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residential market where propane is used primarily for heating purposes. Approximately 70 - 75% of our retail propane volume is sold during the peak heating season from October through March. Seasonal volume variations also impact our wholesale supply and marketing and midstream segments. Consequently, our sales, operating profits and positive operating cash flows are generated mostly in the third and fourth quarters of each fiscal year. We have historically realized operating losses and negative operating cash flows during our first and second fiscal quarters. See “—Liquidity, Sources of Capital and Capital Resource Activities — Cash Flows.”

Propane Price Fluctuations

Fluctuations in the price of propane can have a direct impact on our reported revenues and sales volumes and may affect our gross margins depending on our success of passing cost increases on to our retail propane and wholesale supply and marketing customers. At Conway, Kansas, one of our main pricing hubs, the range of low and high-spot propane prices per gallon for the periods indicated and the prices as of period end were as follows:

	Range of Conway, Kansas
	Spot Price				Spot Price
	Per Gallon				Per Gallon
For the Three Months Ended June 30:	Low		High		At Period End

2011	$	1.2760	$	1.4900	$	1.4160
2010	0.8910		1.1260		0.8925

Historically, we have been successful in passing on price increases to our customers. We monitor propane prices daily and adjust our retail prices to maintain expected margins by passing on the wholesale costs to our customers. We believe that volatility in commodity prices will continue, and our ability to adjust to and manage this volatility may impact our financial results.

In periods of significant propane price increases we have experienced, and expect to continue to experience conservation of propane used by our customers that could result in a decline in our sales volumes, revenues and gross margins of each of our operating segments. In periods of decreasing costs, we have experienced an increase in our gross margin.

Recent Developments

The following transactions that occurred during the period since our formation in October 2010 impact the comparability of our results of operations for the three months ended June 30, 2011 and 2010:

Acquisition of Hicksgas

On October 14, 2010, we purchased the propane-related assets and assumed certain related obligations from Hicksgas for a combination of our limited partner interests and payment of approximately $17.2 million, a total consideration, including assumed liabilities, of approximately $61.6 million. Hicksgas was founded in 1940 as a retail propane operation and significantly increased its retail propane volumes through acquisitions.

New Revolving Credit Facility

On October 14, 2010, we entered into a revolving credit facility with a group of lenders. The revolving credit facility, as amended in January, Februar