Edgar Filing: NGL Energy Partners LP

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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, 2012

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 7, 2012, there were 45,611,439 common units and 5,919,346 subordinated units issued and outstanding.

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	PART I

Item 1.	Financial Statements (Unaudited)	2

	Condensed Consolidated Balance Sheets as of June 30, 2012 and March 31, 2012	2
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2012 and 2011	3
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended June 30, 2012 and 2011	4
	Condensed Consolidated Statement of Changes in Partners’ Equity for the three months ended June 30, 2012	5
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2012 and 2011	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48

	PART II

Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59

Signatures		60

Exhibit Index		61

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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 petroleum products;

· 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;

· the impact of legislative and regulatory actions on hydraulic fracturing;

· hazards or operating risks incidental to the transporting and distributing of petroleum products 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 ability to renew contracts with key customers;

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

· the ability to renew leases for general purpose and high pressure rail cars;

· 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;

· the ability 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, 2012.

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PART I

Item 1. Financial Statements (Unaudited)

NGL ENERGY PARTNERS LP

Unaudited Condensed Consolidated Balance Sheets

As of June 30, 2012 and March 31, 2012

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

	June 30,			March 31,
	2012			2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	21,467		$	7,832
Accounts receivable - trade, net of allowance for doubtful accounts of $1,111 and $818, respectively	347,709			84,004
Receivables from affiliates	4,599			2,282
Inventories	192,066			94,504
Prepaid expenses and other current assets	62,617			10,002
Total current assets	628,458			198,624

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $18,819 and $12,843, respectively	435,369			255,403
GOODWILL	476,894			148,785
INTANGIBLE ASSETS, net of accumulated amortization of $9,805 and $8,174, respectively	355,673			143,559
Other	3,816			2,766
Total assets	$	1,900,210		$	749,137

LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Trade accounts payable	$	360,941		$	81,369
Accrued expenses and other payables	51,068			10,023
Product exchanges	15,372			4,764
Advance payments received from customers	47,042			20,293
Payables to affiliates	14,778			8,486
Current maturities of long-term debt	92,412			19,484
Total current liabilities	581,613			144,419

LONG-TERM DEBT, net of current maturities	510,437			199,177
OTHER NONCURRENT LIABILITIES	2,978			212

COMMITMENTS AND CONTINGENCIES

PARTNERS’ EQUITY, per accompanying statement:
General Partner — 0.1% interest; 50,720 and 29,245 notional units outstanding, respectively	(51,601		)	442
Limited Partners — 99.9% interest —
Common units — 44,749,763 and 23,296,253 units outstanding, respectively	840,744			384,604
Subordinated units — 5,919,346 units outstanding at June 30, 2012 and March 31, 2012	13,133			19,824
Accumulated other comprehensive income —
Foreign currency translation	18			31
Noncontrolling interests	2,888			428
Total partners’ equity	805,182			405,329
Total liabilities and partners’ equity	$	1,900,210		$	749,137

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

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NGL ENERGY PARTNERS LP

Unaudited Condensed Consolidated Statements of Operations

Three Months Ended June 30, 2012 and 2011

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

	Three Months			Three Months
	Ended			Ended
	June 30,			June 30,
	2012			2011
REVENUES:
Retail propane	$	59,184		$	12,852
Wholesale supply and marketing	164,675			177,497
Midstream	2,151			497
High Sierra operations	100,426			—
Total Revenues	326,436			190,846

COST OF SALES:
Retail propane	37,417			8,106
Wholesale supply and marketing	155,176			177,769
Midstream	803			98
High Sierra operations	105,589			—
Total Cost of Sales	298,985			185,973

OPERATING COSTS AND EXPENSES:
Operating	23,338			7,142
General and administrative	9,960			2,036
Depreciation and amortization	9,227			1,377
Operating Loss	(15,074		)	(5,682		)

OTHER INCOME (EXPENSE):
Interest income	366			126
Interest expense	(3,800		)	(1,301		)
Loss on early extinguishment of debt	(5,769		)	—
Other, net	26			85
Loss Before Income Taxes	(24,251		)	(6,772		)

INCOME TAX PROVISION	(459		)	—

Net Loss	(24,710		)	(6,772		)

Net (Income) Loss Allocated to General Partner	(95		)	7

Net Loss Attributable to Noncontrolling Interests	60

Net Loss Attributable to Parent Equity Allocated to Limited Partners	$	(24,745	)	$	(6,765	)

Basic and Diluted Earnings Per Common Unit	$	(0.76	)	$	(0.53	)

Basic and Diluted Earnings per Subordinated Unit	$	(0.77	)	$	(0.53	)

Basic and Diluted Weighted average units outstanding:
Common	26,529,133			9,883,342
Subordinated	5,919,346			2,927,149

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

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NGL ENERGY PARTNERS LP

Unaudited Condensed Consolidated Statements of Comprehensive Loss

Three Months Ended June 30, 2012 and 2011

(U.S. Dollars in Thousands)

	Three Months			Three Months
	Ended			Ended
	June 30,			June 30,
	2012			2011

Net loss	$	(24,710	)	$	(6,772	)
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustment	(13		)	5
Comprehensive loss	$	(24,723	)	$	(6,767	)

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, 2012

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

												Accumulated
				Limited Partners								Other						Total
	General			Common				Subordinated				Comprehensive			Noncontrolling			Partners’
	Partner			Units	Amount			Units	Amount			Income			Interests			Equity
BALANCES, MARCH 31, 2012	$	442		23,296,253	$	384,604		5,919,346	$	19,824		$	31		$	428		$	405,329
Distribution to partners	(10		)	—	(7,019		)	—	(2,146		)	—			—			(9,175		)
Contributions	460			—	—			—	—			—			120			580
Business combinations (Note 3)	(52,588		)	21,453,510	483,359			—	—			—			2,400			433,171
Net income (loss)	95			—	(20,200		)	—	(4,545		)	—			(60		)	(24,710		)
Foreign currency translation adjustment	—			—	—			—	—			(13		)	—			(13		)
BALANCES, June 30, 2012	$	(51,601	)	44,749,763	$	840,744		5,919,346	$	13,133		$	18		$	2,888		$	805,182

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

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NGL ENERGY PARTNERS LP

Unaudited Condensed Consolidated Statements of Cash Flows

Three Months Ended June 30, 2012 and 2011

(U.S. Dollars in Thousands)

	Three Months			Three Months
	Ended			Ended
	June 30,			June 30,
	2012			2011
OPERATING ACTIVITIES:
Net loss	$	(24,710	)	$	(6,772	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization, including debt issuance cost amortization	15,697			1,930
Loss on sale of assets	7			—
Provision for doubtful accounts	293			46
Commodity derivative (gain) loss	(4,228		)	29
Other	62			(7		)
Changes in operating assets and liabilities, exclusive of acquisitions —
Accounts receivable	139,458			(3,783		)
Receivables from affiliates	5,407			—
Inventories	(49,519		)	(40,424		)
Product exchanges, net	10,698			6,389
Prepaid expenses and other current assets	(1,019		)	408
Trade accounts payable	(140,417		)	12,071
Accrued expenses and other payables	(18,804		)	(61		)
Accounts payable to affiliates	(2,724		)	—
Advance payments received from customers	14,890			7,831
Net cash used in operating activities	(54,909		)	(22,343		)

INVESTING ACTIVITIES:
Purchases of long-lived assets	(2,684		)	(840		)
Cash paid for acquisitions of businesses, including acquired working capital	(295,341		)	(70		)
Cash flows from commodity derivatives	15,514			2,217
Proceeds from sales of assets	361			39
Other	212			(204		)
Net cash provided by (used in) investing activities	(281,938		)	1,142

FINANCING ACTIVITIES:
Proceeds from sale of common units, net of offering costs	(673		)	75,289
Repurchase of common units	—			(3,418		)
Proceeds from borrowings under revolving credit facilities	462,175			22,500
Payments on revolving credit facilities	(333,675		)	(76,500		)
Issuance of senior notes	250,000			—
Payments on other long-term debt	(300		)	(189		)
Debt issuance costs	(18,450		)	(251		)
Contributions	580			—
Distributions to partners	(9,175		)	(3,846		)
Net cash provided by financing activities	350,482			13,585
Net increase (decrease) in cash and cash equivalents	13,635			(7,616		)
Cash and cash equivalents, beginning of period	7,832			16,337
Cash and cash equivalents, end of period	$	21,467		$	8,721

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

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

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 operate retail and wholesale propane and other natural gas liquids businesses. NGL Energy Holdings LLC serves as our general partner. We completed an initial public offering in May 2011. Subsequent to our initial public offering, we significantly expanded our businesses through a number of business combinations, including the following:

· On October 3, 2011, we completed a business combination transaction with E. Osterman Propane, Inc., its affiliated companies and members of the Osterman family (collectively, “Osterman”), whereby we acquired retail propane operations in the northeastern United States. We issued 4,000,000 common units and paid $96 million in exchange for the assets and operations of Osterman. The agreement also contemplates a working capital payment post-closing for certain specified working capital items, currently estimated as a liability of $4.0 million.

· On November 1, 2011, we completed a business combination transaction with SemStream, L.P. (“SemStream”), whereby we acquired SemStream’s wholesale natural gas liquids supply and marketing operations and its 12 natural gas liquids terminals. We issued 8,932,031 common units and paid $91 million in exchange for the assets and operations of SemStream, including working capital.

· On January 3, 2012, we completed a business combination transaction with seven companies associated with Pacer Propane Holding, L.P. (collectively, “Pacer”), whereby we acquired retail propane operations, primarily in the western United States. We issued 1,500,000 common units and paid $32.2 million in exchange for the assets and operations of Pacer, including working capital. We also assumed $2.7 million of long-term debt in the form of non-compete agreements.

· On February 3, 2012, we completed a business combination transaction with North American Propane, Inc. (“North American”), whereby we acquired retail propane and distillate operations in the northeastern United States. We paid $69.8 million in exchange for the assets and operations of North American, including working capital.

· During April and May 2012, we completed three separate business combination transactions to acquire retail propane and distillate operations in Georgia, Kansas, Maine, and New Hampshire. The largest of these was with Downeast Energy Corp. (“Downeast”). On a combined basis, we paid $56.1 million of cash and issued 750,000 common units in exchange for these assets and operations, including working capital. In addition, a combined amount of approximately $8.9 million will be payable either as deferred payments on the purchase price or under non-compete agreements.

· On June 19, 2012, we completed a business combination with High Sierra Energy, LP and High Sierra Energy, GP (collectively, “High Sierra”). High Sierra’s assets include water discharge, recycling, and disposal facilities, two crude oil terminals, a fleet of rail cars, and a fleet of trucks. We paid $96.8 million of cash and issued 18,018,468 common units to acquire High Sierra Energy, LP. We also paid $97.4 million of High Sierra Energy, LP’s long-term debt and other obligations. Our general partner acquired High Sierra Energy GP, LLC by paying $50 million of cash and issuing equity. Our general partner then contributed its ownership interests in High Sierra Energy GP, LLC to us, in return for which we paid our general partner $50 million of cash and issued 2,685,042 common units to our general partner.

As of June 30, 2012, our businesses include:

· Retail propane and distillate operations in 24 states;

· Wholesale propane and other natural gas liquids operations throughout the United States and in Canada;

· Propane and natural gas liquids transportation and terminalling operations, conducted through 18 owned terminals and a fleet of 2,868 owned and leased rail cars;

· A crude oil transportation and marketing business, the assets of which include two crude oil terminals, 96 trucks, and 461 leased rail cars; and

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

· A water treatment business, the assets of which include a water discharge and recycling facility, a water recycling facility, eight water disposal facilities, a fleet of 50 water trucks, and 65 fractionation tanks.

Note 2 - Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements as of and for the three months ended June 30, 2012 and 2011 include our accounts and those of our controlled subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements 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 presentation 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 notes 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, 2012, included in our Annual Report on Form 10-K. Due to the seasonal nature of our natural gas liquids 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 amounts 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 our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2012. We have included information below on certain new accounting policies relevant to the businesses acquired in the June 2012 merger with High Sierra, and on certain other accounting policies that are significant to an understanding of the accompanying financial statements.

Revenue Recognition

Revenues from sales of products are recognized on a gross basis at the time title to the product sold transfers to the purchaser and collection of those amounts is reasonably assured. Sales or purchases with the same counterparty that are entered into in contemplation of one another are reported on a net basis as one transaction. Revenue from wastewater disposal trucking services is recognized when the wastewater is picked up from the customer’s location or upon delivery of the wastewater to a specific delivery location, depending upon the terms of the contractual agreements. Revenue from other transportation services is recognized upon completion of the services as defined in the customer agreement. Revenue on equipment leased under operating leases is billed and recognized monthly according to the terms of the related lease agreement with the customer over the term of the lease. Net gains and losses resulting from commodity derivative instruments are recognized within cost of sales.

Revenues for the wastewater disposal business are recognized upon delivery of the wastewater to the disposal facilities. Certain agreements require customers to deliver minimum quantities of wastewater for an agreed upon period. Revenue is recognized when the wastewater is delivered, with an adjustment for the minimum volume delivery in the event that actual delivered wastewater is less than the committed minimum. Revenues from hydrocarbons recovered from wastewater are recognized upon sale.

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

Amounts billed to customers for shipping and handling costs are included in revenues in the consolidated statements of operations. Shipping and handling costs associated with product sales are included in operating expenses in the consolidated statements of operations. Taxes collected from customers and remitted to the appropriate taxing authority are excluded from revenues in the consolidated statements of operations.

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 business combinations. 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.

· 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. The majority of our derivative financial instruments and our product exchange assets and liabilities were categorized as Level 2 at June 30, 2012 and March 31, 2012 (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 did not have any derivative financial instruments or other assets or liabilities categorized as Level 3 at June 30, 2012 or March 31, 2012.

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:

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

	Three Months Ended June 30,
	2012		2011
	(in thousands)

Interest paid, exclusive of debt issuance costs	$	3,237	$	677
Income taxes paid	$	176	$	—

Value of common units issued in Downeast combination (Note 3)	$	16,650	—

Value of common units issued in High Sierra combination (Note 3)	$	414,794	—

Cash flows from commodity derivative instruments are classified as cash flows from investing activities in the consolidated statements of cash flows.

Inventories

Inventories consist of the following:

	June 30, 2012		March 31, 2012
	(in thousands)
Propane and other natural gas liquids	$	161,492	$	89,224
Crude oil	21,320		—
Other	9,254		5,280
	$	192,066	$	94,504

Asset Retirement Obligations

An asset retirement obligation (“ARO”) is a legal obligation associated with the retirement of a tangible long-lived asset that generally results from the acquisition, construction, development or normal operation of the asset. Significant inputs used to estimate an ARO include: (i) the expected retirement date; (ii) the estimated costs of retirement, including adjustments for cost inflation and the time value of money; and (iii) the appropriate method for allocation of estimated asset retirement costs to expense. The cost for asset retirement is capitalized as part of the cost of the related long-lived assets and subsequently allocated to expense over the remaining useful lives of the assets associated with the obligation. The ARO liability is accreted to the estimated total retirement obligation over the period the related assets are used through the expected retirement date.

Note 3 — Acquisitions

High Sierra combination

On June 19, 2012, we completed a business combination with High Sierra, whereby we acquired all of the ownership interests in High Sierra. We paid $96.8 million of cash and issued 18,018,468 common units to acquire High Sierra Energy, LP. These common units were valued at $406.8 million using the closing price of our units on the New York Stock Exchange on the merger date. We also paid $97.4 million of High Sierra Energy, LP’s long-term debt and other obligations. Our general partner acquired High Sierra Energy GP, LLC by paying $50 million of cash and issuing equity. Our general partner then contributed its ownership interests in High Sierra Energy GP, LLC to us, in return for which we paid our general partner $50 million of cash and issued 2,685,042 common units to our general partner. We recorded the value of the 2,685,042 common units issued to our general partner at $7.6 million, which represents an initial estimate, in accordance with GAAP, of the fair value of the equity issued by our general partner to the former owners of High Sierra’s general partner. In accordance with the fair value model specified in the accounting standards, this fair value was estimated based on assumptions of future distributions and a discount rate that a hypothetical buyer might use. Under this model, the potential for distribution growth resulting from the prospect of future acquisitions and capital expansion projects would not be considered in the fair

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

value calculation. We have not yet completed the accounting for the business combination, and this estimate of fair value is subject to change. The difference between the estimated fair value of the general partner interests issued by our general partner of $7.6 million, calculated as described above, and the fair value of the common units issued to our general partner of $60.6 million, as calculated using the closing price of the common units on the stock exchange, is reported as a reduction to equity. We incurred and charged to general and administrative expense during the three months ended June 30, 2012 approximately $3.5 million of costs related to the High Sierra transaction. We also incurred or accrued costs of approximately $653,000 related to the equity issuance that we charged to equity.

We have included the results of High Sierra’s operations in our consolidated financial statements beginning on June 19, 2012. During the three months ended June 30, 2012, our consolidated statement of operations includes an operating loss of approximately $8.7 million generated by the operations of High Sierra. The following table summarizes the revenues and cost of sales generated from High Sierra’s operations that are included in our consolidated statement of operations for the three months ended June 30, 2012 (in thousands):

	Revenues		Cost of Sales
Crude oil transportation and marketing	$	73,914	$	76.883
Natural gas liquids transportation and marketing	24,779		28,090
Water treatment and disposal	1,580		616
Other	153		—
Total	$	100,426	$	105,589

We are in the process of identifying, and obtaining an independent appraisal of, the fair value of the assets and liabilities acquired in the combination with High Sierra. The estimates of fair value reflected as of June 30, 2012 are subject to change and such changes could be material. We currently expect to complete this process prior to filing our Form 10-Q for the quarter ending December 31, 2012. We have preliminarily estimated the fair value of the assets acquired and liabilities assumed as follows (in thousands):

Accounts receivable	$	395,204
Inventory	43,365
Receivables from affiliates	7,724
Derivative assets	10,646
Forward purchase and sale contracts	34,717
Other current assets	11,965
Property, plant and equipment:
Land	5,900
Transportation vehicles and equipment (5 years)	12,160
Facilities and equipment (20 years)	70,500
Buildings and improvements (20 years)	29,800
Software (5 years)	2,700
Construction in progress	9,600
Intangible assets:
Customer relationships (15 years)	174,100
Lease contracts (1-6 years)	10,500
Trade names (indefinite)	3,000
Goodwill	318,652
Other noncurrent assets	120
Assumed liabilities:
Accounts payable	(416,765		)
Accrued expenses and other current liabilities	(26,460		)
Payables to affiliates	(9,016		)
Advance payments received from customers	(1,237		)
Derivative liabilities	(5,726		)
Forward purchase and sale contracts	(22,448		)
Noncurrent liabilities	(2,556		)
Noncontrolling interest in consolidated subsidiary	(2,400		)
Consideration paid, net of cash acquired	$	654,045

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

Goodwill represents the excess of the estimated consideration paid for the acquired business over the fair value of the individual assets acquired, net of liabilities. Goodwill primarily represents the value of synergies between the acquired entities and the Partnership, the opportunity to use the acquired businesses as a platform for growth, and the acquired assembled workforce. We estimate that all of the goodwill will be deductible for federal income tax purposes.

The fair value of accounts receivable is approximately $0.6 million lower than the contract value, to give effect to estimated uncollectable accounts.

Retail combinations during the three months ended June 30, 2012

During April and May 2012, we entered into three separate business combination agreements to acquire retail propane and distillate operations in Georgia, Kansas, Maine, and New Hampshire. On a combined basis, we paid cash of $56.1 million and issued 750,000 common units, valued at $16.7 million, in exchange for the receipt of these assets. In addition, a combined amount of approximately $4.4 million will be payable either as working capital adjustments or as deferred payments on the purchase price, and a combined amount of $4.5 million will be payable under non-compete agreements. We are in the process of identifying the fair value of the assets and liabilities acquired in the combinations. The estimates of fair value reflected as of June 30, 2012 are subject to change and changes could be material. We expect to complete this process prior to filing our Form 10-Q for the quarter ending December 31, 2012. Our preliminary estimates of the fair value of the assets acquired and liabilities assumed in these three combinations are as follows (in thousands):

Accounts receivable	$	8,252
Inventory	4,679
Other current assets	1,193
Property, plant and equipment
Land	4,219
Tanks and other retail propane equipment (5-20 years)	28,917
Vehicles (5 years)	9,122
Buildings (30 years)	9,505
Other equipment	1,116
Intangible assets
Customer relationships (10-15 years)	14,350
Tradenames (indefinite)	500
Non-compete agreements (5 years)	850
Goodwill	9,424
Other non-current assets	784
Working capital settlement payable	(3,818		)
Deferred payments	(614		)
Long-term debt, including current portion	(4,491		)
Other assumed liabilities	(11,248		)
Consideration paid through June 30, 2012	$	72,740

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

Business combinations for which acquisition accounting is not yet complete

During the year ended March 31, 2012, we completed three other business combinations for which we have not yet completed the process of identifying the fair values of the assets and liabilities acquired. These include the Osterman, Pacer, and North American combinations. The estimates of fair value reflected as of March 31, 2012 and June 30, 2012 are subject to change and changes could be material. Our preliminary estimates of the fair values of the assets acquired and liabilities assumed in these three combinations are as follows (in thousands):

	Osterman			Pacer			North American
Accounts receivable	$	5,584		$	4,389		$	10,338
Inventory	4,048			965			3,437
Other current assets	212			43			282
Property, plant and equipment
Land	4,500			1,400			2,600
Tanks and other retail propane equipment	55,000			11,200			27,100
Vehicles	12,000			5,000			9,000
Buildings	6,500			2,300			2,200
Other equipment	1,520			200			500
Intangible assets
Customer relationships	62,479			21,980			9,800
Tradenames	5,000			1,000			1,000
Goodwill	30,405			18,460			14,702
Assumed liabilities	(5,431		)	(4,349		)	(11,129		)
Consideration paid	$	181,817		$	62,588		$	69,830

Pro Forma Results of Operations

The operations of High Sierra have been included in our statement of operations since High Sierra was acquired on June 19, 2012. The following unaudited pro forma consolidated data for the three months ended June 30, 2012 and 2011 are presented as if the High Sierra acquisition had been completed on April 1, 2011. The pro forma earnings per unit are based on the common and subordinated units outstanding as of June 30, 2012.

	Three Months Ended			Three Months Ended
	June 30,			June 30,
	2012			2011
	(in thousands)
Revenues	$	1,042,375		$	955,379
Net loss from continuing operations	(8,976		)	(5,995		)
Limited partners' interest in net loss from continuing operations	(8,967		)	(5,989		)
Basic and diluted earnings from continuing operations per Common Unit	(0.18		)	(0.12		)
Basic and diluted earnings from continuing operations per Subordinated Unit	(0.18		)	(0.12		)

The pro forma consolidated data in the table above was prepared by adding the historical results of operations of High Sierra to our historical results of operations and making certain pro forma adjustments. The pro forma adjustments included: i) replacing High Sierra’s historical depreciation and amortization expense with pro forma depreciation and amortization expense, calculated using the fair values of long-lived assets recorded in the acquisition accounting; ii) replacing High Sierra’s historical interest expense with pro forma interest expense, calculated using the cash consideration paid by us in the merger multiplied by the 6.65% interest rate on the senior notes we issued at the time of the merger; and iii) excluding certain professional fees and other expenses incurred by us and by High Sierra that were directly related to the merger. In order to calculate pro forma earnings per unit in the table above, we assumed that: i) the same number of limited partner units outstanding at June 30, 2012 had been outstanding throughout the periods shown in the table, ii) no incentive distributions (described in Note 10) were paid to the general partner related to the periods shown in the table, and iii) all of the common units were eligible for a distribution related to the periods shown in the table. The pro forma information is not necessarily indicative of the results of operations that would have occurred if the merger had been completed on April 1, 2011, nor is it necessarily indicative of the future results of the combined operations.

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

Note 4 — Earnings per Unit

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

	Three Months Ended June 30,
	2012			2011
	(in thousands, except unit and per unit amounts)
Earnings per common or subordinated Limited Partner Unit
Net loss attributable to parent equity	$	(24,650	)	$	(6,772	)
Loss (income) allocated to general partner(*)	(95		)	7
Net loss allocated to limited partners	$	(24,745	)	$	(6,765	)

Net loss allocated to:
Common unitholders	$	(20,200	)	$	(5,220	)
Subordinated unitholders	$	(4,545	)	$	(1,545	)

Weighted average common units outstanding - Basic and Diluted	26,529,133			9,883,342

Weighted average subordinated units outstanding - Basic and Diluted	5,919,346			2,927,149

Earnings per common unit - Basic and Diluted	$	(0.76	)	$	(0.53	)

Earnings per subordinated unit - Basic and Diluted	$	(0.77	)	$	(0.53	)

(*) The income allocated to the general partner for the three months ended June 30, 2012 includes $134,000 of distributions to which it is entitled as the holder of incentive distribution rights, which are described in Note 10.

Since we experienced a net loss during the three months ended June 30, 2012, the 761,000 restricted units described in Note 10 did not cause any dilution.

Note 5 - Property, Plant and Equipment

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

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

	June 30,			March 31,
Description and Useful Life	2012			2012
	(in thousands)
Terminal assets (30 years)	$	60,923		$	60,980
Retail propane equipment (5-20 years)	158,399			128,529
Vehicles (5 years)	57,491			35,764
Water treatment equipment (20 years)	48,400			—
Crude oil tanks and related equipment (20 years)	13,500			—
Information technology equipment (3 years)	6,754			1,973
Buildings (30 years)	58,362			19,027
Land	25,232			14,767
Other (3-7 years)	14,040			6,527
Construction in progress	11,087			679
	454,188			268,246
Less: Accumulated depreciation	(18,819		)	(12,843		)
Net property, plant and equipment	$	435,369		$	255,403

Depreciation expense was $6.1 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively.

Note 6 — Goodwill and Intangible Assets

The changes in the balance of goodwill during the three months ended June 30, 2012 were as follows (in thousands):

Balance, March 31, 2012	$	148,785
Acquisitions	328,076
Other	33
Balance, June 30, 2012	$	476,894

Goodwill by reportable segment is as follows:

	June 30,		March 31,
	2012		2012
	(in thousands)
Retail propane	$	81,284	$	71,827
Wholesale supply and marketing	58,128		58,128
Midstream	18,830		18,830
High Sierra operations	318,652		—
	$	476,894	$	148,785

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

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

		June 30, 2012				March 31, 2012
		Gross Carrying		Accumulated		Gross Carrying		Accumulated
	Useful Lives	Amount		Amortization		Amount		Amortization
		(in thousands)
Amortizable —
Lease and other agreements	5-8 years	$	13,310	$	2,053	$	2,810	$	1,545
Customer relationships	7-20 years	320,120		6,565		131,670		3,868
Non-compete agreements	2-6 years	2,963		1,080		2,113		919
Debt issuance costs	5-10 years	17,755		107		7,310		1,842
Total amortizable		354,148		9,805		143,903		8,174

Non-Amortizable —
Trade names	Indefinite	11,330		—		7,830		—
Total		$	365,478	$	9,805	$	151,733	$	8,174

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

Year Ending March 31,
2013 (nine months)	$	23,940
2014	28,235
2015	27,017
2016	26,077
2017	25,259
Thereafter	213,815
	$	344,343

Amortization expense was as follows:

	Three Months Ended June 30,
	2012		2011
	(in thousands)
Recorded in
Cost of sales	$	200	$	200
Depreciation and amortization	3,166		182
Interest expense	501		352
Loss on early extinguishment of debt	5,769		—
	$	9,636	$	734

Note 7 - Long-Term Debt

Our long-term debt consists of the following:

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

	June 30,		March 31,
	2012		2012
	(in thousands)
Revolving credit facility —
Expansion capital loans	$	254,000	$	—
Working capital loans	88,500		—

Senior notes	250,000		—

Previous revolving credit facility —
Acquisition loans	—		186,000
Working capital loans	—		28,000

Other notes payable	10,349		4,661
	602,849		218,661
Less - current maturities	92,412		19,484
Long-term debt	$	510,437	$	199,177

On June 19, 2012, we entered into a new revolving credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement includes a revolving credit facility to fund working capital needs (the “Working Capital Facility”) and a revolving credit facility to fund acquisitions and expansion projects (the “Expansion Capital Facility”). Also on June 19, 2012, we entered into a Note Purchase Agreement whereby we issued $250 million of notes payable in a private placement (the “Senior Notes”). We used the proceeds from the issuance of the Senior Notes and borrowings under the Credit Agreement to repay existing debt and to fund the acquisition of High Sierra.

Credit Agreement

The Working Capital Facility has a capacity of $197.5 million for cash borrowings and letters of credit. At June 30, 2012, we had outstanding cash borrowings of $88.5 million and outstanding letters of credit of $60.5 million on the Working Capital Facility. The Expansion Capital Facility has a capacity of $447.5 million for cash borrowings. At June 30, 2012, we had outstanding cash borrowings of $254.0 million on the Expansion Capital Facility. In addition, upon satisfaction of certain conditions, we will have the right to increase the amount available under our revolving credit facilities from the current amount of $645 million up to an aggregate amount of $700 million. The commitments under the Credit Agreement expire on June 19, 2017. We generally have the right to make early principal payments without incurring any penalties, and earlier principal payments may be required if we enter into certain transactions to sell assets or obtain new borrowings. Once during each fiscal year, we are required to prepay loans under the Working Capital Facility and/or cash collateralize outstanding letters of credit in order to reduce the outstanding Working Capital Facility loans and letters of credit to an aggregate amount of $50 million or less for 30 consecutive days.

All borrowings under the Credit Agreement bear interest, at NGL’s option, at (i) an alternate base rate plus a margin of 1.75% to 2.75% per annum or (ii) an adjusted LIBOR rate plus a margin of 2.75% to 3.75% per annum. The applicable margin is determined based on the consolidated leverage ratio of NGL, as defined in the Credit Agreement. At June 30, 2012, the interest rate in effect on outstanding LIBOR borrowings was 3.25%, calculated as the LIBOR rate of 0.25% plus a margin of 3.0%. At June 30, 2012, the interest rate in effect on outstanding base rate borrowings was 5.25%, calculated as the base rate of 3.25% plus a margin of 2.0%. Commitment fees are charged at a rate ranging from 0.38% to 0.50% on any unused credit. The Credit Agreement is secured by substantially all of our assets.

At June 30, 2012, our outstanding borrowings and interest rates under our revolving credit facility were as follows (dollars in thousands):

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

	Amount		Rate
Expansion capital facility —
LIBOR borrowings	$	254,000	3.25	%
Base rate borrowings	—		—
Working capital facility —
LIBOR borrowings	65,000		3.25	%
Base rate borrowings	23,500		5.25	%

The Credit Agreement specifies that our “leverage ratio”, as defined in the Credit Agreement, cannot exceed 4.25 to 1.0 at any quarter end. At June 30, 2012, our leverage ratio was approximately 3 to 1. The Credit Agreement also specifies that our “interest coverage ratio”, as defined in the Credit Agreement, cannot be less than 2.75 to 1 as of the last day of any fiscal quarter. At June 30, 2012, our interest coverage ratio was greater than 9 to 1.

The Credit Agreement contains various customary representations, warranties and additional covenants, including, without limitation, limitations on fundamental changes and limitations on indebtedness and liens. Our obligations under the Credit Agreement may be accelerated following certain events of default (subject to applicable cure periods), including, without limitation, (i) the failure to pay principal or interest when due, (ii) a breach by NGL or its subsidiaries of any material representation or warranty or any covenant made in the Credit Agreement or (iii) certain events of bankruptcy or insolvency.

At June 30, 2012, we were in compliance with all covenants under our credit facility.

Senior Notes

The Senior Notes have an aggregate principal amount of $250 million and bear interest at a fixed rate of 6.65%. Interest is payable quarterly. The notes are required to be repaid in semi-annual installments of $25 million beginning on December 19, 2017 and ending on June 19, 2022. We have the option to make early principal payments, although we will be required to pay a penalty if we make an early principal payment. The Senior Notes are secured by substantially all of our assets, and rank equal in priority with borrowings under the Credit Agreement.

The Note Purchase Agreement specifies that our “leverage ratio”, as defined in the Note Purchase Agreement, cannot exceed 4.25 to 1.0 at any quarter end. At June 30, 2012, our leverage ratio was approximately 3 to 1. The Note Purchase Agreement also specifies that our “interest coverage ratio”, as defined in the Note Purchase Agreement, cannot be less than 2.75 to 1 as of the last day of any fiscal quarter. At June 30, 2012, our interest coverage ratio was greater than 9 to 1.

The Note Purchase Agreement contains various customary representations, warranties, and additional covenants that, among other things, limit our ability to (subject to certain exceptions): (i) incur additional debt, (ii) pay dividends and make other restricted payments, (iii) create or permit certain liens, (iv) create or permit restrictions on the ability of certain of our subsidiaries to pay dividends or make other distributions to us, (v) enter into transactions with affiliates, (vi) enter into sale and leaseback transactions and (vii) consolidate or merge or sell all or substantially all or any portion of our assets.

The Note Purchase Agreement provides for customary events of default that include, among other things (subject in certain cases to customary grace and cure periods): (i) non-payment of principal or interest, (ii) breach of certain covenants contained in the Note Purchase Agreement or the Senior Notes, (iii) failure to pay certain other indebtedness or the acceleration of certain other indebtedness prior to maturity if the total amount of such indebtedness unpaid or accelerated exceeds $10 million, (iv) the rendering of a judgment for the payment of money in excess of $10 million, (v) the failure of the Note Purchase Agreement, the Senior Notes, or the guarantees by the subsidiary guarantors to be in full force and effect in all material respects and (vi) certain events of bankruptcy or insolvency. Generally, if an event of default occurs (subject to certain exceptions), the trustee or the holders of at least 51% in aggregate principal amount of the then outstanding Senior Notes of any series may declare all of the Senior Notes of such series to be due and payable immediately.

At June 30, 2012, we were in compliance with all covenants under the Note Purchase Agreement.

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

Previous credit facilities

On June 19, 2012, we made a principal payment of $306.8 million to retire our previous revolving credit facility. Upon retirement of this facility, we wrote off the portion of the debt issuance cost asset that had not yet been amortized. This expense is reported as “Loss on early extinguishment of debt” in our consolidated statement of operations.

Other Notes Payable

The other notes payable of approximately $10.3 million mature as follows (in thousands):

Year Ending March 31,
2013 (nine months)	$	2,739
2014	2,207
2015	1,665
2016	1,549
2017	1,424
2018	765
	$	10,349

Note 8 - Income Taxes

We qualify as a partnership for income taxes. As a result, we generally do not pay any U.S. Federal income tax. Rather, each owner reports their share of our income or loss on their individual tax returns. 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 up to 10% of our gross income and not be subject to taxation as a corporation. We have two taxable corporate subsidiaries that hold certain assets and operations that represent “non-qualifying income” for a partnership. Our taxable subsidiaries are subject to income taxes related to the taxable income generated by their operations.

We also have two Canadian subsidiaries, one of which we acquired in the June 2012 merger with High Sierra, that are subject to income tax in Canada. Our income tax provision for the three months ended June 30, 2012 related to these subsidiaries was not significant.

We evaluate uncertain tax positions for recognition and measurement in the consolidated financial statements. To recognize a tax position, we determine whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the consolidated financial statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. We had no uncertain tax positions that required recognition in the consolidated financial statements at June 30, 2012 or March 31, 2012. Any interest or penalties would be recognized as a component of income tax expense.

Note 9 - Commitments and Contingencies

Legal contingencies

We are party to various claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions, and complaints, after consideration of amounts accrued, insurance coverage, and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.

In February 2012, High Sierra, several of its subsidiaries and other unaffiliated parties, were notified of a claim for wrongful death and failure to maintain adequate safety precautions. At this time, we are not able to determine what amount, if any, for which we might ultimately be held liable. In March 2012, a vehicle collided with a truck owned and operated by High Sierra, which resulted in a fatality. At this time, we are not able to determine whether we will be held liable for this incident. We believe that the amount of our liability for these incidents, if any, would be covered under existing insurance coverage.

In September 2010, Pemex Exploracion y Produccion (“Pemex”) filed a lawsuit against a number of defendants, including High Sierra. Pemex alleges that High Sierra and the other defendants purchased condensate from a source that had acquired the condensate illegally from Pemex. We do not believe that High Sierra had knowledge at the time of the purchases of the condensate that such condensate would later be alleged to have been sold illegally. The proceedings are in an early stage, and as a result, we cannot reliably predict the outcome of this litigation. We believe that we have good defenses and also believe that, in the event of an adverse outcome, our total exposure is not expected to be material to the Partnership. However, future adverse rulings by the court could result in material increases to our maximum potential exposure. We have recorded an accrued liability in the High Sierra business combination accounting, based on our best estimate of the low end of the range of probable loss.

In May 2010, two lawsuits were filed in Kansas and Oklahoma by numerous oil and gas producers (the “Associated Producers”), asserting that they were entitled to enforce lien rights on crude oil purchased by High Sierra. These cases were subsequently transferred to the United States Bankruptcy Court for the District of Delaware, where they are pending. These claims relate to the bankruptcy of SemCrude, L.P. The Associated Producers are claiming damages against all defendants in excess of $72 million and assert that our allocated share of that is in excess of $2.1 million. The parties are in the discovery phase of the cases and no trial date has been set.

In August 2009, a number of lawsuits were filed entitled “Samson Resource Company vs. Valero Marketing and Supply, et al.” (“Samson”) under which Samson claimed it was entitled to enforce lien rights on crude oil purchased by High Sierra. In December 2011, High Sierra and Samson settled this matter for a payment by High Sierra of $50,000. In early 2011, IC-CO, Inc. (“IC-CO”) and W.E.O.C., Inc. filed an action in the United States District Court for the Eastern District of Oklahoma against J. Aron & Company. The claims asserted in the IC-CO action are identical to those asserted in the Samson and Associated Producers actions. IC-CO and W.E.O.C., Inc. sought recovery of sums they were owed for crude oil they had sold and not been paid for. The amount of their claims is approximately $80,000. However, their complaint also seeks class action certification status on behalf of all other producers located in the State of Oklahoma. In December 2011, IC-CO filed a motion seeking to amend its complaint to add additional defendants, including High Sierra. The court has not yet ruled on the motion to amend the complaint. We believe we have meritorious defenses to the claims, including those raised in the Associated Producers action, and that the IC-CO claims are now barred by applicable statute of limitations.

One of our facilities acquired in the High Sierra merger is operating with all but one of the required permits. High Sierra has applied for the permit, which is necessary for ongoing operations. We have been informed by the State of Wyoming that we have fulfilled all of the obligations necessary to receive the permit; however, we believe that denial of the permit application could adversely affect operations. We have continued to communicate with the State of Wyoming about the status of the permit. We believe that the permit will be granted, but are unable to determine the timing of any action by the State of Wyoming.

Environmental matters

Our operations are subject to extensive federal, state, and local environmental laws and regulations. Although we believe our operations are in substantial compliance with applicable environmental laws and regulations, risks of additional costs and liabilities are inherent in our business, and there can be no assurance that significant costs will not be incurred. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations, could result in substantial costs. Accordingly, we have adopted policies, practices, and procedures in the areas of pollution control, product safety, occupational health, and the handling, storage, use, and disposal of hazardous materials designed to prevent material environmental or other damage, and to limit the financial liability that could result from such events. However, some risk of environmental or other damage is inherent in our business.

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

Asset retirement obligations

We recorded an asset retirement obligation liability of $1.1 million upon completion of our business combination with High Sierra. This asset retirement obligation liability is related to the wastewater disposal assets and crude oil lease automatic custody units, for which have contractual and regulatory obligations to perform remediation and, in some instances, dismantlement and removal activities when the assets are abandoned. As described in Note 3, the valuation of the liabilities acquired in this merger is subject to change, once we complete the process of identifying and valuing the assumed liabilities.

In addition to the obligations described above, we may be obligated by contractual requirements to remove facilities or perform other remediation upon retirement of certain other assets. However, we do not believe the present value of these asset retirement obligations, under current laws and regulations, after taking into consideration the estimated lives of our facilities, is material to our financial position or results of operations.

Operating Leases

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

	2012		2011
Three months ended June 30	$	4,760	$	681

Future minimum lease payments at June 30, 2012 are as follows for the next five years, including expected renewals (in thousands):

Year Ending March 31,
2013 (nine months)	$	42,575
2014	50,658
2015	41,870
2016	37,099
2017	32,683

Sales and Purchase Contracts

We have entered into sales and purchase contracts for natural gas liquids and crude oil to be delivered in future periods. These contracts require that the parties physically settle the transactions with inventory. At June 30, 2012, we had the following such commitments outstanding:

	Gallons	Value
	(in thousands)	(in $ thousands)
Natural gas liquids fixed-price purchase commitments	62,119	$	68,807
Natural gas liquids floating-price purchase commitments	438,425	354,171
Natural gas liquids fixed-price sale commitments	170,857	161,290
Natural gas liquids floating-price sale commitments	322,250	405,681

Crude oil fixed-price purchase commitments	223,509	405,675
Crude oil fixed-price sale commitments	190,294	366,537

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

We account for the contracts shown in the table above as normal purchases and normal sales. Under this accounting policy election, we do not record the contracts at fair value at each balance sheet date; instead, we record the purchase or sale at the contracted value once the delivery occurs.

Certain of the forward purchase and sale contracts shown in the table above were acquired in the June 2012 merger with High Sierra. We recorded these contracts at their estimated fair values at the merger date, and we are amortizing these assets and liabilities to cost of sales over the remaining terms of the contracts. At June 30, 2012, the unamortized balances included $34.7 million recorded within other current assets and $22.4 million recorded within other current liabilities. As described in Note 3, we are still in the process of identifying the fair values of the assets and liabilities acquired in the combination with High Sierra. The estimates of fair value reflected as of June 30, 2012 are subject to change and such changes could be material.

Note 10 — Equity

Partnership Equity

The Partnership’s equity consists of 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 primary 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.

The subordination period will end on the first business day after we have earned and paid the minimum quarterly distribution on each outstanding common unit and subordinated unit and the corresponding distribution on the general partner interest for each of three consecutive, non-overlapping four-quarter periods ending on or after June 30, 2014. Also, if we have earned and paid at least 150% of the minimum quarterly distribution on each outstanding common unit and subordinated unit, the corresponding distribution on the general partner interest and the related distribution on the incentive distribution rights for each calendar quarter in a four-quarter period, the subordination period will terminate automatically. The subordination period will also terminate automatically if the general partner is removed without cause and the units held by the general partner and its affiliates are not voted in favor of removal. When the subordination period lapses or otherwise terminates, all remaining subordinated units will convert into common units on a one-for-one basis and the common units 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.

Common Units Issued in Business Combinations

As described in Note 3, we issued common units as partial consideration for acquisitions during the three months ended June 30, 2012. The following table summarizes the changes in common units outstanding during the quarter ended June 30, 2012, exclusive of unvested units granted pursuant to the Long-Term Incentive Plan (described elsewhere in Note 10):

Common units outstanding at March 31, 2012		23,296,253
Common units issued in High Sierra combination		20,703,510
Common units issued in Downeast combination		750,000
Common units outstanding at June 30, 2012		44,749,763

As a result of provisions in agreements reached at the time of certain common unit issuances in connection with business combinations, 3,932,031 of the common units will not be eligible to receive the distribution declared in July 2012 and 20,703,510 of the common units will only be eligible to receive one-third of the distribution declared in July 2012.

In connection with the completion of these transactions, we amended our Registration Rights Agreement. The Registration Rights Agreement, as amended, provides for certain registration rights for certain holders of our common units.

During July 2012, we issued 100,676 common units as partial consideration for the acquisition of a retail propane business.

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

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.”

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 0.1% general partner interest, assume our general partner has contributed any additional capital necessary to maintain its 0.1% general partner interest and has not transferred its incentive distribution rights and there are no arrearages on common units.

							Marginal Percentage Interest In
	Total Quarterly						Distributions
	Distribution Per Unit						Unitholders		General Partner
Minimum quarterly distribution					$	0.337500	99.9	%	0.1	%
First target distribution	above	$	0.337500	up to	$	0.388125	99.9	%	0.1	%
Second target distribution	above	$	0.388125	up to	$	0.421875	86.9	%	13.1	%
Third target distribution	above	$	0.421875	up to	$	0.506250	76.9	%	23.1	%
Thereafter	above	$	0.506250				51.9	%	48.1	%

During the three months ended June 30, 2012, we distributed a total of $9.2 million ($0.3625 per common and subordinated limited partner units and per general partner notional unit) to our unitholders of record as of April 30, 2012. On July 24, 2012, we declared a distribution of $0.4125 per common unit, to be paid on August 14, 2012 to unitholders of record on August 3, 2012. This distribution amounts to $13.7 million, including amounts paid on common, subordinated, and general partner notional units and the amount paid on incentive distribution rights.

Equity-Based Incentive Compensation

Our general partner has adopted the NGL Energy Partners LP 2011 Long-Term Incentive Plan for the employees, directors and consultants of our general partner and its affiliates who perform services for us. The Long-Term Incentive Plan allows for the issuance of restricted units, phantom units, unit options, unit appreciation rights and other unit-based awards, as discussed below. The number of common units that may be delivered pursuant to awards under the plan is limited to 10% of the issued and outstanding common and subordinated units. The maximum number of units deliverable under the plan automatically increases to 10% of the issued and outstanding common and subordinated units immediately after each issuance of common units, unless the plan administrator determines to increase the maximum number of units deliverable by a lesser amount. Units withheld to satisfy tax withholding obligations will not be considered to be delivered under the Long-Term Incentive Plan. In addition, if an award is forfeited, canceled, exercised, paid or otherwise terminates or expires without the delivery of units, the units subject to such award will again be available for new awards under the Long-Term Incentive Plan. Common units to be delivered pursuant to awards under the Long-Term Incentive Plan may be newly issued common units, common units acquired by us in the open market, common units

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

acquired by us from any other person, or any combination of the foregoing. If we issue new common units with respect to an award under the Long-Term Incentive Plan, the total number of common units outstanding will increase.

On June 15, 2012, the Board of Directors of our general partner granted 761,000 restricted units to employees and directors. The restricted units will vest in tranches subject to the continued service of the recipients. The awards may also vest in the event of a change in control, at the discretion of the Board of Directors. No distributions will accrue to or be paid on the restricted units during the vesting period. The expected vesting of the awards is summarized below:

Vesting Date		Number of Awards
January 1, 2013		215,500
July 1, 2013		197,500
July 1, 2014		175,000
July 1, 2015		86,500
July 1, 2016		86,500

The weighted-average fair value of the awards was $19.10 at June 30, 2012, which was calculated as the closing price of the common units on June 30, 2012, adjusted to reflect the fact that the restricted units are not entitled to distributions during the vesting period. We record the expense for each tranche on a straight-line basis over the period beginning with the vesting of the previous tranche and ending with the vesting of the tranche. We adjust the cumulative expense recorded through the reporting date using the estimated fair value of the awards at the reporting date. We recorded expense of $0.7 million related to these awards during the three months ended June 30, 2012. We estimate that the expense we will record on the awards granted as of June 30, 2012 will be as follows (in thousands), after taking into consideration an estimate of forfeitures:

Year ending March 31,
2013 (nine months)	$	6,252
2014	4,639
2015	2,094
2016	1,557
2017	383
Total	$	14,925

As of June 30, 2012, 4,305,910 units remain available for issuance under the Long-Term Incentive Plan.

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 values due to their short-term nature. The carrying amounts of our debt obligations reasonably approximate their fair values at June 30, 2012, as most of our debt is subject to terms that were recently negotiated.

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:

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

		June 30, 2012				March 31, 2012
Item	Recorded As	Level 1		Level 2		Level 1		Level 2
		(in thousands)
Assets:
Commodity derivatives	Other current assets	$	35	$	8,347	$	—	$	—
Product exchanges	Other current assets	—		41		—		131

Liabilities:
Product exchanges	Product exchanges	—		15,372		—		4,764
Interest rate derivative	Accrued expenses and other payables	—		120		—		157
Commodity derivatives	Accrued expenses and other payables	2,406		8,293		—		36

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

The following table sets forth our open commodity derivative contract positions at June 30, 2012 and March 31, 2012. We do not account for these derivatives as hedges.

Underlying Contracts	Period	Total Notional Units (Barrels)	Fair Value
		(in thousands)
As of June 30, 2012 -
Propane swaps	July 2012 - December 2013	3,976	$	12,994
Heating oil calls and futures	August 2012 - June 2013	204	663
Crude swaps	July 2012 - June 2013	2,585	1,456
Crude - butane spreads	July 2012 - March 2014	581	(16,290		)
Crude forwards	July 2012 - December 2013	27,388	2,961
Butane forwards	September 2012 - December 2012	116	(571		)
Propane forwards	October 2012 - March 2013	71	117
			1,330
Less: Margin Deposits			(3,647		)
Net fair value of commodity derivatives on consolidated balance sheet			$	(2,317	)

As of March 31, 2012 -
Propane swaps	April 2012 - March 2013	3,702	$	(36	)

At June 30, 2012, the propane swaps include 134 instruments that have a combined unfavorable fair value of $21.9 million (liability) and 159 instruments that have a combined favorable fair value of $34.0 million (asset). We have reported these amounts on a net basis on the consolidated balance sheet, as all of these instruments are settled through the Intercontinental Exchange or the New York Mercantile Exchange.

At June 30, 2012, we have reported $16.7 million of derivative liabilities associated with the natural gas liquids operations of High Sierra net of derivative assets, as the master netting agreements with the counterparties give us the right to settle these amounts net. At June 30, 2012, we have reported $4.4 million of derivative assets associated with crude oil operations of High Sierra net of derivative liabilities, as the master netting agreements with the counterparties give us the right to settle these amounts net.

At March 31, 2012, the propane swaps include 77 instruments that have a combined unfavorable fair value of $6.5 million (liability) and 97 instruments that have a combined favorable fair value of $6.4 million (asset). We have reported these amounts on a net basis on the consolidated balance sheet, as all of these instruments are settled through the Intercontinental Exchange or the New York Mercantile Exchange.

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

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

	Three Months Ended June 30,
	2012			2011
	(in thousands)
Commodity contracts -
Unrealized gain (loss)	$	1,929		$	(2,246	)
Realized gain	2,299			2,217
Interest rate swaps	(1		)	(278		)
Total	$	4,227		$	(307	)

The commodity contract gains and losses are included in cost of sales 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.

Note 12 - Segments

Our reportable segments have historically included retail propane, wholesale marketing and supply, and midstream. On June 19, 2012, we completed a merger with High Sierra, the operations of which are reflected as a separate segment in the table below. We evaluate our operating segments’ performance based on operating income and EBITDA. Certain financial data related to our segments is shown below:

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NGL ENERGY PARTNERS LP

Notes to Unaudited Condensed Consolidated Financial Statements - Continued

As of June 30, 2012 and March 31, 2012, and for the

Three Months Ended June 30, 2012 and 2011

	Three Months Ended June 30,
	2012			2011
	(in thousands)
Revenues:
Retail propane -
Propane sales	$	39,852		$	10,194
Distillate sales	11,764			—
Sales of equipment, water softener, and other	3,790			1,440
Service and rental revenues	3,802			1,218
Wholesale supply and marketing -
Propane sales	104,126			146,299
Other natural gas liquids sales	72,557			38,537
Storage revenues	437			317
Midstream	3,718			497
High Sierra operations	100,426			—
Elimination of intersegment sales	(14,036		)	(7,656		)
Total revenues	$	326,436		$	190,846

Depreciation and Amortization:
Retail propane	$	6,741		$	1,067
Wholesale supply and marketing	785			98
Midstream	914			212
High Sierra operations	787			—
Total depreciation and amortization	$	9,227		$	1,377

Operating Income (Loss):
Retail propane	$	(6,171	)	$	(3,194	)
Wholesale supply and marketing	6,168			(1,693		)
Midstream	(1,026		)	28
High Sierra operations	(8,698		)	—
General and administrative expenses not allocated to segments	(5,347		)	(823		)
Total operating loss	$	(15,074	)	$	(5,682	)

Other items not allocated by segment:
Interest income	366			126
Interest expense	(3,800		)	(1,301		)
Loss on early extinguishment of debt	(5,769		)	—
Other income, net	26			85
Income tax expense	(459		)	—
Net loss	$	(24,710	)	$	(6,772	)

Geographic Information:
Revenues:
United States	$	319,808		$	190,803
Canada	6,628			43
Operating income (loss):
United States	(16,540		)	(5,613		)
Canada	1,466			(69		)

Additions to property, plant and equipment, including acquisitions (accrual basis):
Retail propane	$	54,711		$	716
Wholesale supply and marketing	185			194
Midstream	526			—
High Sierra operations