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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended December 31, 2011

or

For the transition period from                      to                     

Commission File Number: 001-35172

NGL Energy Partners LP

(Exact Name of Registrant as Specified in Its Charter)

(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.

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 February 10, 2012, there were 23,296,253 common units and 5,919,346 subordinated units issued and outstanding.

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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 and other natural gas liquids;

·                                          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 and other natural gas liquids supplies;

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

·                                          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;

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·                                          governmental regulation and taxation;

·                                          hazards or operating risks incidental to the transporting and distributing of propane and other natural gas liquids 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;

·                                          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 December 31, 2011 and March 31, 2011

(U.S. Dollars in Thousands)

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 and Nine Months Ended December 31, 2011 and 2010

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

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 Income (Loss)

Three Months and Nine Months Ended December 31, 2011 and 2010

(U.S. Dollars in Thousands)

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

Nine Months Ended December 31, 2011

(U.S. Dollars in Thousands)

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

Nine Months Ended December 31, 2011 and 2010

(U.S. Dollars in Thousands)

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 December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 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 acquired the retail propane businesses of Hicksgas located in Indiana and Illinois.  In October 2011, we acquired the retail propane businesses of the Osterman Associated Companies (see Note 3) located in the northeastern United States.  We have acquired additional retail propane operations subsequent to December 31, 2011 (see Note 14).

Our retail propane segment sells propane and propane-related products and services to residential, commercial and agricultural customers in Massachusetts, Connecticut, Maine, New Hampshire, New York, Rhode Island, Vermont, Indiana, Illinois, Kansas, and Georgia (see Note 14).

We expanded our wholesale supply and marketing and our midstream segments in the November 2011 acquisition of SemStream (see Note 3).  Our wholesale supply and marketing segment provides propane and other natural gas liquids to customers at open-access terminals throughout the common carrier pipeline systems in the Mid-Continent, Midwest, West Coast, 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; owned, 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.

Our midstream segment provides terminal service for propane and other natural gas liquids to customers through our fifteen proprietary terminals located in Illinois; Missouri; Arizona; Arkansas; Indiana; Minnesota; Montana; Washington; Wisconsin; 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 and nine months ended December 31, 2011 and the three months ended December 31, 2010 include our accounts and all of our direct and indirect subsidiaries.  All significant intercompany transactions

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

and account balances have been eliminated in consolidation.  The condensed consolidated financial statements for the six months ended September 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.

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.

Business Combinations

We account for business combinations using the acquisition method and accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date.  Goodwill represents the excess of the purchase price over the fair value of the net assets acquired, including the amount assigned to identifiable intangible assets.  Goodwill primarily represents the value of synergies between the acquired entities and the Partnership and the acquired assembled workforce.  Identifiable intangible assets with finite lives are amortized over their useful lives.  We include the results of operations of acquired businesses from the acquisition date.  We expense all other acquisition-related costs as incurred.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

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, to a lesser extent, 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 in 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 December 31, 2011 or March 31, 2011.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

·                                          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 December 31, 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.

·                                          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 had no assets or liabilities measured using Level 3 measurements as of December 31, 2011 and 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 (in thousands):

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.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

Account Details

Inventories consist of the following (in thousands):

Recent Accounting Developments

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04 “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in GAAP and IFRS.”  The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”).  The new guidance applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, liability or an instrument classified in shareholders’ equity.  Among other things, the new guidance requires quantitative information about unobservable inputs, valuation processes and sensitivity analysis associated with fair value measurements categorized within Level 3 of the fair value hierarchy.  The new guidance is effective during interim and annual periods beginning after December 15, 2011and is required to be applied on a prospective basis.  We do not believe that the adoption of ASU 2011-04 will have a material impact on our results of operations or financial condition.

In September 2011, the FASB issued guidance on testing goodwill for impairment.  The new guidance permits entities to first assess qualitative factors to determine whether it is more likely than not (more than 50 percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required by GAAP.  Previous guidance required an entity to test goodwill for impairment at least annually by comparing the fair value of a reporting unit with its carrying amount, including goodwill.  If the fair value of a reporting unit is less than the carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any.  Under the new guidance, an entity is not required to calculate fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The new guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to evaluate goodwill annually for impairment.  The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  We plan to adopt the new guidance during our quarter ending March 31, 2012.  We do not believe the adoption of the new guidance will have a material impact on our financial condition or results of operations.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

Note 3 — Business Combinations

Fiscal 2012

Osterman

On August 15, 2011, we entered into a business combination agreement with E. Osterman Propane, Inc., its affiliated companies and members of the Osterman family (collectively, “Osterman”) for retail propane operations in the northeastern United States in order to expand our retail propane operations.  We closed the combination on October 3, 2011 and funded the combination with cash of $96 million and the issuance of 4 million common units.  The agreement contemplates a working capital payment post closing for certain specified working capital items, currently estimated as a liability of approximately $3.9 million.  We have valued the 4 million limited partner common units at $81.8 million based on the closing price of our common units on the closing date ($20.47 per unit).  The cash payments were funded with advances under our acquisition facility.  We incurred and charged to general and administrative expense through December 31, 2011 approximately $750,000 of costs related to the Osterman transaction.  We also incurred costs related to the equity issuance of approximately $122,000 which we charged to equity.

We have included the results of Osterman’s operations in our consolidated financial statements beginning October 3, 2011.  During the three months ended December 31, 2011, Osterman’s operations resulted in revenues of approximately $29.3 million and operating income of approximately $2.4 million. 

We have not completed the initial accounting for the business combination.  We are in the process of identifying, and obtaining an independent appraisal of, the fair value of the assets acquired in the combination.  The estimates of fair value reflected as of December 31, 2011 are subject to change and such changes could be material.  Revisions to these estimates will be recorded retrospectively.  We expect to complete this process prior to our year end of March 31, 2012.  We have preliminarily estimated the fair value of the assets acquired and liabilities assumed as follows (in thousands):

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

SemStream

On August 31, 2011, we entered into a business combination agreement with SemStream L.P. (“SemStream”), which we closed on November 1, 2011.  We entered into this business combination in order to expand our midstream and wholesale supply and marketing operations.  SemStream contributed substantially all of its natural gas liquids business and assets to us in exchange for 8,932,031 of our limited partner common units and a cash payment of approximately $93 million, which we funded with $10 million from our acquisition facility and $83 million from our working capital facility.  We have valued the 8.9 million limited partner common units at approximately $184.8 million, based on the closing price of our common units on the closing date ($21.07) reduced by the expected present value of distributions for the units which are not eligible for full distributions until the quarter ending September 30, 2012 (see Note 10).

The agreement also contemplates a working capital payment post closing for certain specified working capital items, currently estimated as a receivable of $2.2 million.  In addition, in exchange for a cash contribution, SemStream acquired a 7.5% interest in our general partner.  We incurred and charged to general and administrative expense through December 31, 2011 approximately $603,000 of costs related to the SemStream transaction.  We also incurred costs of approximately $300,000 related to the equity issuance that we charged to equity.

The assets comprise 12 natural gas liquids terminals in Arizona, Arkansas, Indiana, Minnesota, Missouri, Montana, Washington and Wisconsin, 12 million gallons of above ground propane storage, 3.7 million barrels of underground leased storage for natural gas liquids and a rail fleet of approximately 350 leased and 12 owned cars and approximately $104 million of natural gas liquids inventory.

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NGL ENERGY PARTNERS LP

AND NGL SUPPLY, INC.

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of December 31, 2011 and March 31, 2011 and for the

Three Months and the Nine Months Ended December 31, 2011 and 2010

We have included the results of SemStream’s operations in our consolidated financial statements beginning November 1, 2011.  The operations of SemStream are reflected in our wholesale supply and marketing and midstream segments.  Subsequent to the combination with SemStream, we combined the marketing operations with our pre-existing marketing operations.  As a result, we are unable to determine the specific amount of revenues and operating income of the wholesale supply and marketing segment that resulted from the SemStream combination for the three months ended December 31, 2011.  The midstream operations of SemStream resulted in revenues of approximately $1 million and an operating loss of approximately $0.2 million during the three months ended December 31, 2011. 

We have not completed the initial accounting for the business combination.  We are beginning the process of identifying, and obtaining an independent appraisal of, the fair value of the assets acquired in the business combination.  The estimates of fair value reflected as of December 31, 2011 are subject to change and such changes could be material.  Revisions to these estimates will be recorded retrospectively.  We expect to complete this process prior to our year end of March 31, 2012.  We have preliminarily estimated the fair value of the assets acquired and liabilities assumed as follows (in thousands):