NGL Energy Partners LP (NYSE:NGL) (“NGL,” “our,” “we,” or the “Partnership”) today reported its second quarter Fiscal 2023 financial results. Highlights include:

• Net income for the second quarter of Fiscal 2023 of $3.6 million, compared to a net loss of $1.2 million for the second quarter of Fiscal 2022; Net income for the first six months of Fiscal 2023 of $26.7 million, compared to a net loss of $135.7 million for the comparable period of Fiscal 2022

• Adjusted EBITDA⁽¹⁾ for the second quarter of Fiscal 2023 of $142.2 million, compared to $146.3 million for the second quarter of Fiscal 2022; Adjusted EBITDA for the first six months of Fiscal 2023 of $266.1 million, compared to $237.4 million for the comparable period of 2022

• Operating income for the Water Solutions segment of $47.1 million for the second quarter of Fiscal 2023, compared to $32.8 million for the second quarter of Fiscal 2022

• Water Solutions’ quarterly Adjusted EBITDA⁽¹⁾ of $104.8 million for the second quarter of Fiscal 2023, a 19.8% increase compared to the second quarter of Fiscal 2022

• Record produced water volumes processed of approximately 2.27 million barrels per day during the second quarter of Fiscal 2023, growing 28.7% from the same period in the prior year and 5.2% over the immediately preceding fiscal quarter

• Reduced $55.2 million in principal on unsecured notes and equipment financing note in the quarter

“Our Water Solutions segment continues to see strong disposal volume growth, achieving record water volumes processed in the quarter. Our refined products and biodiesel businesses in our Liquids Logistics segment have outperformed as well, benefiting from higher margins due to tighter supplies, and our Crude Oil Logistics segment is reporting strong physical margins, offsetting headwinds of lower volumes out of the DJ Basin. Our seasonal butane and propane segments are positioned to benefit from the refinery blending season and winter weather with both of these businesses generating the majority of their Adjusted EBITDA⁽²⁾ and free cash flow⁽²⁾ in the second half of the fiscal year. We are reaffirming guidance for Adjusted EBITDA⁽²⁾ in excess of $600 million for the Partnership and over $410 million for our Water Solutions segment for Fiscal 2023, and are adjusting our capital expenditure guidance to a range of $105 million - $115 million,” stated Mike Krimbill, NGL’s CEO. “Our primary focus remains repaying the 2023 unsecured notes and driving leverage to below 4.75 times,” Krimbill concluded.

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⁽¹⁾ See the “Non-GAAP Financial Measures” section of this release for the definition of Adjusted EBITDA (as used herein) and a discussion of this non-GAAP financial measure.

⁽²⁾ Certain of the forward-looking financial measures are provided on a non-GAAP basis. A reconciliation of forward-looking financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP is potentially misleading and not practical given the difficulty of projecting event driven transactional and other non-core operating items in any future period. The magnitude of these items, however, may be significant.

Quarterly Results of Operations

The following table summarizes operating income (loss) and Adjusted EBITDA⁽¹⁾ from continuing operations by reportable segment for the periods indicated:

Water Solutions

Operating income for the Water Solutions segment increased $14.4 million for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021. The Partnership processed approximately 2.27 million barrels of produced water per day during the quarter ended September 30, 2022, a 28.7% increase when compared to approximately 1.76 million barrels of water per day processed during the quarter ended September 30, 2021. This increase was due to higher production volumes (and associated produced water) primarily in the Delaware Basin driven by higher crude oil prices and completion activity. Service fees for produced water processed ($/barrel) benefited from payments made by certain producers for committed volumes not delivered. The Partnership also sold approximately 94,000 barrels per day of produced and recycled water for use in our customers’ completion activities.

Revenues from recovered crude oil, including the impact from realized skim oil hedges, totaled $24.2 million for the quarter ended September 30, 2022, an increase of $4.9 million from the prior year period. This increase was due to increased skim oil barrels sold as a result of higher produced water volumes processed and higher realized crude oil prices received from the sale of skim oil barrels. This was offset by lower skim oil volumes per barrel of produced water processed.

Operating expenses in the Water Solutions segment increased to $0.27 per produced barrel processed compared to $0.26 per produced barrel processed in the comparative quarter last year primarily due to higher repairs and maintenance expense due to the timing of repairs and the operation of temporary booster stations. Three of the Water Solutions segment’s largest variable expenses, utility, royalty and chemical expenses, were not (and are not expected to be) impacted by the rise in inflation due to negotiated long-term utility contracts with fixed rates, royalty contracts with no escalation clauses and a fixed chemical expense per barrel with our chemical provider.

Crude Oil Logistics

Operating income for the quarter ended September 30, 2022 increased $4.7 million compared to the quarter ended September 30, 2021, primarily due to higher commodity prices compared to the prior year and an increase in net derivative gains of $28.9 million, partially offset by higher costs of sales (excluding the impact of derivatives), which was also due to higher commodity prices. Product margin decreased primarily due to the sale of higher priced inventory into a market in which prices are declining and as crude oil product margin calculations do not include gains and losses from derivatives that may offset the movement in the physical margin. This decrease was offset by higher contracted rates with certain producers as well as increased differentials on certain other sales contracts. During the three months ended September 30, 2022, physical volumes on the Grand Mesa Pipeline averaged approximately 72,000 barrels per day, compared to approximately 80,000 barrels per day for the three months ended September 30, 2021. Both contracted and non-contracted volumes decreased as overall production in the DJ Basin declined in part due to producer permitting issues.

Liquids Logistics

Operating income for the Liquids Logistics segment decreased $9.8 million for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021. Product margins (excluding the impact of derivatives) for both propane and butane declined during the current quarter as a result of decreasing market prices as the cost of sales applied to lower priced spot volumes sold were based on inventory purchased in a higher price environment. We expect margin to increase as we replace our current inventory with inventory purchased in a lower price environment and realize margin associated with our forward fixed-priced sales contracts. Additionally, we recorded net derivative losses of $0.9 million during the quarter ended September 30, 2022, compared to net derivative gains of $16.5 million during the quarter ended September 30, 2021.

These decreases in operating income were offset by increased margins for refined products, biodiesel and asphalt due to tighter supply in certain markets.

Corporate and Other

Corporate and Other expenses increased primarily due to increased incentive compensation payments and the timing of those payments compared to the prior year as well as increased equity-based compensation due to a reversal of an incentive compensation accrual during the three months ended September 30, 2021.

Capitalization and Liquidity

Total liquidity (cash plus available capacity on our asset-based revolving credit facility (“ABL Facility”)) was approximately $174.7 million as of September 30, 2022. Borrowings on the Partnership’s ABL Facility totaled approximately $287.0 million. The increase from March 31, 2022 was primarily due to increases in working capital balances driven by increased inventory volumes and higher net account receivable balances.

The Partnership is in compliance with all of its debt covenants and has no significant debt maturities before November 2023. The Partnership expects to be able to pay off our outstanding 2023 Notes prior to their maturity date on November 1, 2023 using free cash flow⁽²⁾, and if needed, borrowings under our ABL Facility. Proceeds generated from other cash flow positive initiatives currently being pursued may also be used to repay the outstanding balance of the 2023 Notes prior to their maturity.

Second Quarter Conference Call Information

A conference call to discuss NGL’s results of operations is scheduled for 4:00 pm Central Time on Wednesday, November 9, 2022. Analysts, investors, and other interested parties may join the webcast via the event link: https://www.webcaster4.com/Webcast/Page/2808/46952 or by dialing (877) 545-0523 and providing access code: 866911. An archived audio replay of the call will be available for 14 days, which can be accessed by dialing (877) 481-4010 and providing replay passcode 46952.

Non-GAAP Financial Measures

NGL defines EBITDA as net income (loss) attributable to NGL Energy Partners LP, plus interest expense, income tax expense (benefit), and depreciation and amortization expense. NGL defines Adjusted EBITDA as EBITDA excluding net unrealized gains and losses on derivatives, lower of cost or net realizable value adjustments, gains and losses on disposal or impairment of assets, gains and losses on early extinguishment of liabilities, equity-based compensation expense, acquisition expense, revaluation of liabilities, certain legal settlements and other. NGL also includes in Adjusted EBITDA certain inventory valuation adjustments related to certain refined products businesses within NGL’s Liquids Logistics segment as discussed below. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), income (loss) before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with GAAP, as those items are used to measure operating performance, liquidity or the ability to service debt obligations. NGL believes that EBITDA provides additional information to investors for evaluating NGL’s ability to make quarterly distributions to NGL’s unitholders and is presented solely as a supplemental measure. NGL believes that Adjusted EBITDA provides additional information to investors for evaluating NGL’s financial performance without regard to NGL’s financing methods, capital structure and historical cost basis. Further, EBITDA and Adjusted EBITDA, as NGL defines them, may not be comparable to EBITDA, Adjusted EBITDA, or similarly titled measures used by other entities.

Other than for certain businesses within NGL’s Liquids Logistics segment, for purposes of the Adjusted EBITDA calculation, NGL makes a distinction between realized and unrealized gains and losses on derivatives. During the period when a derivative contract is open, NGL records changes in the fair value of the derivative as an unrealized gain or loss. When a derivative contract matures or is settled, NGL reverses the previously recorded unrealized gain or loss and records a realized gain or loss. NGL does not draw such a distinction between realized and unrealized gains and losses on derivatives of certain businesses within NGL’s Liquids Logistics segment. The primary hedging strategy of these businesses is to hedge against the risk of declines in the value of inventory over the course of the contract cycle, and many of the hedges cover extended periods of time. The “inventory valuation adjustment” row in the reconciliation table reflects the difference between the market value of the inventory of these businesses at the balance sheet date and its cost. NGL includes this in Adjusted EBITDA because the unrealized gains and losses associated with derivative contracts associated with the inventory of this segment, which are intended primarily to hedge inventory holding risk and are included in net income, also affect Adjusted EBITDA. In NGL’s Crude Oil Logistics segment, they purchase certain crude oil barrels using the West Texas Intermediate (“WTI”) calendar month average (“CMA”) price and sell the crude oil barrels using the WTI CMA price plus the Argus CMA Differential Roll Component (“CMA Differential Roll”) per NGL’s contracts. To eliminate the volatility of the CMA Differential Roll, NGL entered into derivative instrument positions in January 2021 to secure a margin of approximately $0.20 per barrel on 1.5 million barrels per month from May 2021 through December 2023. Due to the nature of these positions, the cash flow and earnings recognized on a GAAP basis will differ from period to period depending on the current crude oil price and future estimated crude oil price which are valued utilizing third-party market quoted prices. NGL is recognizing in Adjusted EBITDA the gains and losses from the derivative instrument positions entered into in January 2021 to properly align with the physical margin NGL is hedging each month through the term of this transaction. This representation aligns with management’s evaluation of the transaction.

Distributable Cash Flow is defined as Adjusted EBITDA minus maintenance capital expenditures, income tax expense, cash interest expense, preferred unit distributions and other. Maintenance capital expenditures represent capital expenditures necessary to maintain the Partnership’s operating capacity. For the CMA Differential Roll transaction, as discussed above, we have included an adjustment to Distributable Cash Flow to reflect, in the period for which they relate, the actual cash flows for the positions that settled that are not being recognized in Adjusted EBITDA. Distributable Cash Flow is a performance metric used by senior management to compare cash flows generated by the Partnership (excluding growth capital expenditures and prior to the establishment of any retained cash reserves by the Board of Directors) to the cash distributions expected to be paid to unitholders. Using this metric, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions. This financial measure also is important to investors as an indicator of whether the Partnership is generating cash flow at a level that can sustain, or support an increase in, quarterly distribution rates. Actual distribution amounts are set by the Board of Directors.

We do not provide a reconciliation for non-GAAP estimates on a forward-looking basis where we are unable to provide a meaningful calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various items that would impact the most directly comparable forward-looking U.S. GAAP financial measure that have not yet occurred, are out of the Partnership’s control and/or cannot be reasonably predicted. Forward-looking non-GAAP financial measures provided without the most directly comparable U.S. GAAP financial measures may vary materially from the corresponding U.S. GAAP financial measures.

Forward-Looking Statements

This press release includes “forward-looking statements.” All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Actual results could vary significantly from those expressed or implied in such statements and are subject to a number of risks and uncertainties. While NGL believes such forward-looking statements are reasonable, NGL cannot assure they will prove to be correct. The forward-looking statements involve risks and uncertainties that affect operations, financial performance, and other factors as discussed in filings with the Securities and Exchange Commission. Other factors that could impact any forward-looking statements are those risks described in NGL’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other public filings. You are urged to carefully review and consider the cautionary statements and other disclosures made in those filings, specifically those under the heading “Risk Factors.” NGL undertakes no obligation to publicly update or revise any forward-looking statements except as required by law.

NGL provides Adjusted EBITDA guidance that does not include certain charges and costs, which in future periods are generally expected to be similar to the kinds of charges and costs excluded from Adjusted EBITDA in prior periods, such as income taxes, interest and other non-operating items, depreciation and amortization, net unrealized gains and losses on derivatives, lower of cost or net realizable value adjustments, gains and losses on disposal or impairment of assets, gains and losses on early extinguishment of liabilities, equity-based compensation expense, acquisition expense, revaluation of liabilities and items that are unusual in nature or infrequently occurring. The exclusion of these charges and costs in future periods will have a significant impact on the Partnership’s Adjusted EBITDA, and the Partnership is not able to provide a reconciliation of its Adjusted EBITDA guidance to net income (loss) without unreasonable efforts due to the uncertainty and variability of the nature and amount of these future charges and costs and the Partnership believes that such reconciliation, if possible, would imply a degree of precision that would be potentially confusing or misleading to investors.

About NGL Energy Partners LP

NGL Energy Partners LP, a Delaware limited partnership, is a diversified midstream energy company that transports, stores, markets and provides other logistics services for crude oil, natural gas liquids and other products and transports, treats and disposes of produced water generated as part of the oil and natural gas production process.

For further information, visit the Partnership’s website at www.nglenergypartners.com.

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