Item 1. Business
Item 1. Business
Overview
We are a diversified midstream energy partnership that transports, treats, recycles and disposes of produced water generated as part of the energy production process as well as transports, stores, markets and provides other logistics services for crude oil and liquid hydrocarbons. Originally formed in September 2010, we are a Delaware master limited partnership and our business is currently organized into the following three segments:
• Our Water Solutions segment transports, treats, recycles and disposes of produced and flowback water generated from oil and natural gas production. We also sell produced water for reuse and brackish non-potable water to our producer customers to be used in their crude oil exploration and production activities. As part of processing water, we aggregate and sell recovered crude oil, also known as skim oil. We also dispose of solids such as tank bottoms, drilling fluids and drilling muds and perform other ancillary services such as truck and frac tank washouts. Our activities in this segment are underpinned by long-term, fixed fee contracts and acreage dedications, some of which contain minimum volume commitments, with leading oil and gas companies including large, investment grade producer customers.
• Our Crude Oil Logistics segment purchases crude oil from producers and marketers and transports it to refineries or for resale at pipeline injection stations, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs, and provides storage, terminaling and transportation services through its owned assets. Our activities in this segment are supported by certain long-term, fixed rate contracts which include minimum volume commitments on our pipelines.
• Our Liquids Logistics segment (formerly named Liquids and Refined Products) conducts supply operations for natural gas liquids, refined petroleum products and biodiesel to a broad range of commercial, retail and industrial customers across the United States and Canada. These operations are conducted through our 28 company-owned terminals, third-party storage and terminal facilities, common carrier pipelines and a fleet of leased railcars. We also provide marine exports of butane through our facility located in Chesapeake, Virginia.
Debt Refinancing
On February 4, 2021, we closed on a private offering of $2.05 billion of 7.5% senior secured notes due 2026 (“2026 Senior Secured Notes”) and a new credit agreement (the “New Credit Agreement”) which consists of a $500.0 million asset-based revolving credit facility (“ABL Facility”). We used the net proceeds from the issuance of the 2026 Senior Secured Notes (along with borrowings under the ABL Facility) to (i) repay all outstanding borrowings under and terminate our existing revolving credit facility, (ii) repay all outstanding borrowings under and terminate our term credit agreement and (iii) pay fees and expenses in connection therewith, as well as fees and expenses in connection with the issuance of the 2026 Senior Secured Notes and entering into the ABL Facility.
As part of this refinancing, we also agreed to certain restricted payment provisions under the 2026 Senior Secured Notes and ABL Facility, one of which is the suspension of the quarterly common unit distributions, beginning with the quarter ended December 31, 2020, and all preferred unit distributions, beginning with the quarter ended March 31, 2021. The cash savings from the suspension of the distributions should accelerate the deleveraging of our balance sheet and increase our liquidity, which should create more financial flexibility going forward.
For additional information related to the ABL Facility and 2026 Senior Secured Notes, see Note 8 to our consolidated financial statements included in this Annual Report.
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Business Repositioning
Over the past several years, we have undertaken a number of important strategic actions in an effort to leverage the Partnership’s core areas of competitive strength and focus on generating stable, growing and predictable cash flows, while improving our credit profile. These steps included the following:
Sale of Retail Propane Segment
• On March 30, 2018, we sold a portion of our Retail Propane segment to DCC LPG (“DCC”);
• On July 10, 2018, we sold virtually all of our remaining Retail Propane segment to Superior Plus Corp. (“Superior”); and
• On August 14, 2018, we sold our 50% interest in Victory Propane, LLC, the only remaining portion of this segment.
Sale of Non-Core Assets in our Water Solutions Segment
• On November 30, 2018, we sold NGL Water Solutions Bakken, LLC to an affiliate of Tallgrass Energy, LP. The divested assets included five saltwater disposal wells located in McKenzie and Dunn Counties, North Dakota.
• On February 28, 2019, we sold our South Pecos water disposal business to a subsidiary of WaterBridge Resources LLC. The divested assets included nine saltwater disposal facilities located near the town of Pecos, Texas in southern Reeves and Ward counties.
Sale of Certain Refined Products Businesses
• On September 30, 2019, we sold TransMontaigne Product Services, LLC (“TPSL”) and associated assets to Trajectory Acquisition Company, LLC (“Trajectory”). The divested assets included the following:
• TPSL Terminaling Services Agreement with TransMontaigne Partners LP, including the exclusive rights to utilize 19 terminals;
• Line space along Colonial and Plantation Pipelines;
• Two wholly-owned refined products terminals in Georgia and multiple third-party throughput agreements; and
• Customer contracts, inventory and other working capital associated with the assets.
• On January 3, 2020, we sold our refined products marketing business in the mid-continent region of the United States (“Mid-Con”) to a third-party.
• On March 30, 2020, we sold our gas blending business in the southeastern and eastern regions of the United States (“Gas Blending”) to another third-party.
• We retained certain refined products and biodiesel businesses, which are included within our Liquids Logistics segment.
Purchase of Natural Gas Liquids Terminals
• In March 2019, we acquired the natural gas liquids terminal business of DCP Midstream, LP. The assets acquired included the following:
• Five propane rail terminals located in the Eastern United States;
• 50% ownership interest in an additional rail terminal located in Maine; and
• An import/export terminal located in Chesapeake, Virginia.
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Purchase of Strategic Water Infrastructure Assets in the Delaware Basin
• On July 2, 2019, we acquired all of the assets of Mesquite Disposals Unlimited, LLC (“Mesquite”). The acquired assets included the following:
• 34 saltwater disposal wells;
• A fully interconnected produced water pipeline transportation and disposal system in Eddy and Lea Counties, New Mexico, and Loving County, Texas spanning approximately 175 miles; and
• Long-term acreage dedications and minimum volume commitment contracts.
• On October 31, 2019, we acquired all of the equity interests of Hillstone Environmental Partners, LLC (“Hillstone”). The acquired assets included the following:
• 19 saltwater disposal wells representing approximately 580,000 barrels per day of permitted disposal capacity;
• approximately 70 miles of a newly-built network of water pipelines, with approximately 680,000 barrels per day of transportation capacity;
• 22 permits to develop another 660,000 barrels per day of disposal capacity; and
• Long-term acreage dedications and minimum volume commitment contracts.
The sale of our Retail Propane segment and a substantial portion of our former Refined Products and Renewables segment has allowed us to reduce working capital indebtedness and decrease earnings volatility. The purchase of the natural gas liquids terminals complements our existing natural gas liquids portfolio, provides strategic access to water for international import and export activity and also creates additional opportunities for new and existing customers to supply their business. The purchase of the two strategic water infrastructure assets assists in furthering our ongoing strategy of cash flow predictability by adding long-term contracts under acreage dedications and minimum volume commitments and provide us with significant scale and capabilities that will facilitate high-quality execution for our customers. We believe these actions have substantially simplified our business mix and has allowed us to focus on what we believe are the core areas of our business and improved our overall financial position. These transactions are expected to better position us for sustained growth in the future.
For more information regarding our results of operations and reportable segments, see Part II, Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 to our consolidated financial statements included in this Annual Report. For more information regarding our dispositions and the impact to our operations, see Note 18 and Note 19 to our consolidated financial statements included in this Annual Report and our Annual Report on Form 10-K for the ye ar ended March 31, 2020 .
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Primary Service Areas
The following map shows the primary service areas of our businesses at March 31, 2021:
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Organizational Chart
The following chart provides a summarized overview of our legal entity structure at March 31, 2021:
(1) Includes (i) NGL Water Solutions, LLC, which includes the operations of our Water Solutions business, (ii) NGL Crude Logistics, LLC, which includes the operations of our Crude Oil Logistics business and certain businesses within our Liquids Logistics segment and (iii) NGL Liquids, LLC, which includes the operations of certain of our businesses within our Liquids Logistics segment.
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Our Business Strategies
Our principal business objectives are to maximize the profitability and stability of our businesses, grow our businesses in an accretive and prudent manner, and maintain a strong balance sheet. We intend to accomplish these objectives by executing the following strategies:
• Focus on building a diversified midstream master limited partnership providing multiple services to customers. We continue to enhance our ability to transport produced water from the wellhead to treatment for disposal, recycle, or discharge, crude oil from the wellhead to refineries, and natural gas liquids from processing plants and supply hubs to end users.
• Operate in a safe and environmentally responsible manner. We seek to operate our business in a safe and environmentally responsible manner by working with our employees, customers, vendors and local communities to minimize our environmental impact and comply with local, state and federal environmental laws and regulations.
• Focus on consistent annual cash flows from operations under multi-year contracts that minimize commodity price risk and generate fee-based revenues . We intend to focus on generating revenues under long-term fixed fee contracts in addition to back-to-back contracts which minimize direct commodity price exposure. We seek to continue to increase cash flows that are supported by certain fixed fee, multi-year contracts, some of which include acreage dedications from producers or minimum volume commitments.
• Prudently manage our balance sheet to provide us with maximum financial flexibility for funding our operations, capital projects and strategic acquisitions. We will seek to maintain sufficient liquidity and credit metrics to manage existing and future capital requirements and to take advantage of market opportunities. We expect to continue to evaluate the capital markets and may opportunistically pursue financing transactions to optimize our capital structure.
• Achieve growth by investing in new assets, customers and ventures that increase volumes, enhance our operations, and generate attractive rates of return . We have invested and expect to continue to invest within our existing businesses to capitalize on accretive, organic growth opportunities. We have available capacity in many of the assets that we own and operate that can be utilized to increase cash flows with minimal incremental capital investment. We also continue to pursue strategic transactions and ventures that complement and enhance our existing footprint.
Our Competitive Strengths
We believe that we are well positioned to successfully execute our business strategies and achieve our principal business objectives because of the following competitive strengths:
• Our water processing facilities, which are strategically located near areas of high crude oil and natural gas production . Our water processing facilities are located among the most prolific crude oil and natural gas producing areas in the United States, including the Delaware Basin, the Midland Basin, the DJ Basin and the Eagle Ford Basin. In addition, we believe that the technological capabilities of our Water Solutions business can be quickly implemented at new facilities and locations. These assets are also underpinned by long-term, fixed fee contracts and acreage dedications, some of which contain minimum volume commitments.
• Our network of crude oil transportation and storage assets, which allows us to serve customers over a wide geographic area and optimize sales. Our strategically deployed terminals, towboats, barges, trucks, and our owned and contracted pipeline capacity, provide access to a wide range of customers and markets. We use this expansive network of transportation assets to deliver crude oil to optimal markets. These operations are supported by certain long-term, fixed rate contracts with producers, refiners and marketers and include minimum volume commitments on our pipelines.
• Our network of natural gas liquids transportation, terminal, and storage assets, which allows us to provide multiple services across the United States and Canada. Our strategically located terminals, large leased railcar fleet, shipper status on common carrier pipelines, and substantial leased and owned underground storage, enable us to be a preferred purchaser and seller of natural gas liquids. We have a diverse base of long-standing customers and believe that our performance metrics allow us to reliably supply, store and transport products throughout the United States and Canada.
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• Our diversified operations allow us to generate more predictable and stable cash flows on a year-to-year basis. Our ability to provide multiple services to customers in numerous geographic areas enhances our competitive position. Our three business units are diversified by geography, customer base and commodity sensitivities, which we believe provides us with more stable cash flows through the typical commodity cycles.
• Our seasoned management team with extensive midstream industry experience and a track record of acquiring, integrating, operating and growing successful businesses. Our management team has significant experience managing companies in the energy industry, including master limited partnerships. In addition, through decades of experience, our management team has developed strong business relationships with key industry participants throughout the United States. We believe that our management’s knowledge of the industry, relationships within the industry, and experience provide us with the opportunities to optimize our existing assets. Our management team also has experience in identifying, evaluating and completing acquisitions and other ventures that provide us with additional opportunities to complement, grow and expand our existing operations.
Our Businesses
Water Solutions
Overview. Our Water Solutions segment transports, treats, recycles and disposes of produced and flowback water generated from oil and natural gas production. We also sell produced water for reuse and brackish non-potable water to our producer customers to be used in their crude oil exploration and production activities. As part of processing water, we aggregate and sell recovered crude oil, also known as skim oil. We also dispose of solids such as tank bottoms, drilling fluids and drilling muds and perform other ancillary services such as truck and frac tank washouts. Our activities in this segment are underpinned by long-term, fixed fee contracts and acreage dedications, some of which contain minimum volume commitments, with leading oil and gas companies including large, investment grade producer customers.
We operate in a number of the most prolific crude oil and natural gas producing areas including the Delaware Basin in New Mexico and Texas, the Midland Basin in Texas, the DJ Basin in Colorado and the Eagle Ford Basin in Texas. With a system that handled approximately 498.1 million barrels of produced water across its areas of operation during the year ended March 31, 2021, we believe that we are the largest independent produced water transportation and disposal company in the United States. We currently have over 325,000 acres dedicated to our system under long-term agreements in the Northern Delaware Basin. In addition, we have several minimum volume commitments and other commercial agreements covering the Delaware, Midland, Eagle Ford, DJ and Pinedale Anticline Basins. Our focus in building our Water Solutions business has been to secure long-term, fixed fee contracts that contain minimum volume commitments, acreage dedications or similarly strong contractual relationships with large, well-capitalized producer customers.
Our core asset in the Water Solutions segment is our system located in the Northern Delaware Basin, where we own and operate the largest integrated network of large diameter produced water pipelines, recycling facilities and disposal wells. This system spans six counties in New Mexico and Texas that represent one of the most prolific crude oil producing regions in the United States with some of the most economic hydrocarbon resource and lowest break-even economics for producers. This system has over 620 miles of newly-built, in-service large diameter produced water pipelines connected to 58 active saltwater disposal facilities and 119 active disposal wells. We have over 325,000 acres dedicated to the Northern Delaware system providing a multi-decade drilling inventory and significant growth opportunity. These assets are substantially supported by long-term, fixed-fee contracts underpinned by major acreage dedications or minimum volume commitments.
Our Water Solutions segment also disposes of solids employing specialized equipment at select facilities in the Eagle Ford Basin, the Delaware Basin, the Midland Basin and the DJ Basin. This capability enables us to accept and dispose of solids such as tank bottoms, drilling fluids and drilling muds generated by crude oil and natural gas exploration and production activities. Our facilities will accept only exploration and production exempt waste allowed under our permits.
We own or have a possessory interest in over 120,000 acres of real estate on two ranches located in Eddy and Lea Counties, New Mexico, which we acquired during the year ended March 31, 2019. We purchased the real estate to secure royalty free locations to grow our produced water business and develop pipeline infrastructure. Our two ranches include 16 commercial water permits and four strategically located brackish non-potable water facilities (including 45 brackish non-potable water wells). Additionally, on both ranches we are organically developing surface mineral mining operations, solid waste facilities, and are exploring other uses for our real estate holdings.
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Operations. We own 114 water treatment and disposal facilities, including 212 injection wells. The location and permitted processing capacities of these facilities are summarized below.
Number of Number of Permitted Processing Capacity (barrels per day)
Location Facilities Wells Own (1) Lease (2) Total
Permian Basin
Delaware Basin (3) - Texas and New Mexico 58 119 1,484,000 3,177,300 4,661,300
Midland Basin (3) - Texas 15 15 400,800 — 400,800
Eagle Ford (3)(4) - Texas 24 38 594,000 362,000 956,000
DJ Basin - Colorado 13 32 393,000 162,500 555,500
Granite Wash (3) - Texas 2 3 60,000 — 60,000
Pinedale Anticline (5) - Wyoming 1 4 — 72,765 72,765
Eaglebine - Texas 1 1 20,000 — 20,000
Total - All Facilities 114 212 2,951,800 3,774,565 6,726,365
(1) These facilities are located on lands we own.
(2) These facilities are located on lands we lease.
(3) Certain facilities can dispose of both produced water and solids such as tank bottoms, drilling fluids and drilling muds.
(4) Includes one facility with a permitted processing capacity of 40,000 barrels per day in which we own a 75% interest.
(5) This facility has a design capacity of 60,000 barrels per day to process water to a recycle standard.
Our customers bring produced and flowback water generated by crude oil and natural gas exploration and production operations to our facilities for treatment through pipeline gathering systems and by truck. We expect that our pipeline delivered volumes will continue to increase as new projects come on line. Once we take delivery of the water, the level of processing is determined by the ultimate disposition of the water.
Our facilities in Colorado, Texas and New Mexico dispose of produced water primarily into deep underground formations via injection wells. At our disposal facilities, we use proprietary well maintenance programs to enhance injection rates and extend the service lives of the wells.
Our facility servicing the Pinedale Anticline in Wyoming has the assets and technology needed to treat the water more extensively than a typical disposal facility. At this facility, we have the option of disposing of the water in underground injection wells or recycling the water. With regard to recycling the water, we either process the water to the point where it can be returned to producers to be reused in future drilling operations (recycle quality water), which minimizes the impact on the aquifer, or we can treat the water to a greater extent, such that it exceeds the standards for drinking water, and can be returned to the ecosystem (discharge quality water).
Customers. The primary customers of our operations consist mainly of large publicly traded, oil and gas companies with diversified acreage positions across multiple leading oil and gas plays. During the year ended March 31, 2021, 75% of the water treatment and disposal revenues of our Water Solutions segment were generated from our ten largest customers of the segment.
Competition. The principal elements of competition are system reliability, project execution capability and reputation, system capacity and flexibility, rates for services and system location relative to the producer’s operations. Our competitors include independent produced water transportation and disposal companies and the water transportation and disposal operations owned by oil and gas production companies themselves. Location can be an important consideration for our customers, who seek to minimize the cost of transporting the produced water to disposal facilities. Many of our facilities are strategically located near areas of high crude oil and natural gas production which provides us with a distinct advantage over a competitor that must build a system that can compete with our assets.
Pricing Policy. We charge customers a fee per barrel of produced water received. Our contractual agreements consist of: (a) minimum volume commitments requiring the customer to deliver a specified minimum volume of produced water over a specified period of time; (b) acreage dedications requiring the customer to deliver all volumes from the dedicated acreage with us; and (c) produced water pipeline and trucked disposal agreements providing interruptible service in exchange for a fee per barrel of produced water received. We also generate revenue from the sale of crude oil we recover in processing the produced water. In addition, we may charge pipeline transportation fees, pipeline interconnection fees, solids disposal fees and fees for the sale of produced water for reuse by our customers.
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Trade Names. Our Water Solutions segment operates primarily under the NGL Water Solutions and Anticline Disposal trade names.
Technology. We hold multiple patents for processing technologies. We believe that the technological capabilities of our Water Solutions business can be quickly implemented at new facilities and locations.
Crude Oil Logistics
Overview. Our Crude Oil Logistics segment purchases crude oil from producers and marketers and transports it to refineries or for resale at pipeline injection stations, storage terminals, barge loading facilities, rail facilities, refineries, and other trade hubs, and provides storage, terminaling and transportation services through its owned assets. Our activities in this segment are supported by certain long-term, fixed rate contracts which include minimum volume commitments on our pipelines. Our operations are concentrated in and around four prolific crude oil producing regions in the United States - the DJ Basin in Colorado, the Permian Basin in Texas and New Mexico, the Eagle Ford Basin in Texas and the United States Gulf Coast.
Our foundational asset in this segment is the Grand Mesa Pipeline (“Grand Mesa”), a 550-mile pipeline that transports crude oil from its origin in Weld County, Colorado to our terminal in Cushing, Oklahoma. Grand Mesa commenced operations on November 1, 2016 and has operated continuously since then. The main line portion of this pipeline is comprised of an undivided interest with Saddlehorn Pipeline Company, LLC (“Saddlehorn”) in which we have the right to use 150,000 barrels per day of capacity of the pipeline. During the year ended March 31, 2021, approximately 32.8 million financial barrels (volume amounts are from both internal and external parties) of crude were transported on the Grand Mesa Pipeline. Operating costs associated with Grand Mesa are allocated to us based on our proportionate ownership interest and throughput. We also own and operate origin terminals at Lucerne and Riverside Colorado where we aggregate crude volumes of different types and grades and store them until they are ready for transfer to our Grand Mesa Pipeline. The Lucerne terminal has 950,000 barrels of operational tankage and a 12 bay truck loading facility. The Riverside terminal has 20,000 barrels of storage and a four bay truck loading facility.
Through our undivided interest in the Grand Mesa Pipeline, we have sufficient capacity to service our customer contracts at the same origin and termination points with the ability to accept additional volume commitments. We retained ownership of our previously-acquired easements for the potential future development of transportation projects involving petroleum commodities other than crude oil and condensate. With the consent and participation of Saddlehorn, we and Saddlehorn may consider future opportunities using these easements for projects involving the transportation of crude oil and condensate.
We own and operate a large scale crude oil terminal located in Cushing, Oklahoma with 3,626,000 barrels of storage capacity, seven off-loading lease automatic custody transfer units (“LACTs”), a full control room, on-site laboratory, and three 24-inch bi-directional pipelines each capable of moving 360,000 barrels per day. The terminal features advantaged connectivity to other terminals and pipelines including important connections to our Grand Mesa Pipeline and TransCanada’s terminal with access to the United States Gulf Coast via Marketlink. Similarly, the terminal connects at Cushing to the Glass Mountain Pipeline which feeds two major mid-continent refineries. The terminal is situated on 200 acres and is designed to be expanded based on customer demand. Cushing is one of the most liquid crude oil trading hubs in the world and is the delivery point for the West Texas Intermediate futures contracts.
We own and operate a crude oil marine terminal in Point Comfort, Texas with 355,000 barrels of storage capacity, six off-loading LACTs and three docks (two for ocean-going barges and ships and one for inland barges).
We own and operate a crude oil pipeline and marine terminal in Houma, Louisiana with 288,000 barrels of storage capacity, two off-loading LACTs, a brown water barge dock and two bi-directional pipelines each capable of moving 120,000 barrels per day with connectivity to Shell’s Zydeco System.
Operations. We purchase crude oil from producers and marketers and transport it to refineries or for resale. Our strategically deployed terminals, towboats, barges, trucks, and our owned and contracted pipeline capacity, provide access to a wide range of customers and markets. We use this expansive network of transportation assets to deliver crude oil to optimal markets.
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We currently transport crude oil using the following assets:
• The Grand Mesa Pipeline, which is described above, and 20 other common carrier pipelines owned by third parties;
• 131 owned trucks and 214 owned trailers operating primarily in the Mid-Continent, Permian Basin, Eagle Ford Basin, and Rocky Mountain regions;
• 397 owned and 210 leased railcars (all of which are leased or subleased to third parties); and
• 13 owned towboats and 23 owned barges operating primarily in the intercoastal waterways of the United States Gulf Coast and along the Mississippi and Arkansas River systems.
All of our 397 owned railcars and 210 leased railcars are compliant with the standards for railcars built subsequent to 2011 for the commodities they are transporting. (See Part I, Item 1–“Government Regulation”).
We also own 28 strategically located pipeline injection stations, the locations of which are summarized below.
State Number of Pipeline Injection Stations
Texas 15
Oklahoma 6
New Mexico 4
Kansas 3
Total 28
Customers. Our customers include crude oil refiners, producers, and marketers. During the year ended March 31, 2021, 78% of the revenues of our Crude Oil Logistics segment were generated from our ten largest customers of the segment. Additionally, certain key customers of the Crude Oil Logistics segment contribute significantly to the cash flows and profitability of the organization. Any loss of those customers or their contracts could have an adverse impact on our financial results.
Competition. Our Crude Oil Logistics business faces significant competition, as many entities are engaged in the crude oil logistics business, some of which are larger and have greater financial resources than we do. The primary factors on which we compete are:
• price;
• availability of supply and refinery demand;
• reliability of service;
• open credit;
• logistics capabilities, including the availability of railcars, proprietary terminals, and owned pipelines, barges, railcars, trucks, and towboats; and
• long-term customer relationships.
Supply. We obtain crude oil from a large base of suppliers, which consists primarily of crude oil producers. We currently purchase crude oil from approximately 270 producers at approximately 5,400 leases.
Pricing Policy. Most of our contracts to purchase or sell crude oil are at floating prices that are indexed to published rates in active markets such as Cushing, Oklahoma, St. James, Louisiana, and Magellan East Houston. We seek to manage price risk by entering into purchase and sale contracts of similar volumes based on similar indexes and by hedging exposure due to fluctuations in actual volumes and scheduled volumes.
Our profitability is impacted by forward crude oil prices. Crude oil markets can either be in contango (a condition in which forward crude oil prices are greater than spot prices) or can be in backwardation (a condition in which forward crude oil prices are lower than spot prices). Our Crude Oil Logistics business benefits when the market is in contango, as increasing prices result in inventory holding gains during the time between when we purchase inventory and when we sell it. In addition, we are able to better utilize our storage assets when contango markets justify storing barrels. When markets are in backwardation, falling prices typically have an unfavorable impact on our storage tank lease rates.
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Trade Names. Our Crude Oil Logistics segment operates primarily under the NGL Crude Logistics, NGL Crude Transportation, NGL Marine, NGL Crude Terminals and NGL Crude Cushing trade names.
Liquids Logistics
Overview . Our Liquids Logistics segment (formerly named Liquids and Refined Products) conducts supply operations for natural gas liquids, refined petroleum products and biodiesel to a broad range of commercial, retail and industrial customers across the United States and Canada. These operations are conducted through our 28 company-owned terminals, third-party storage and terminal facilities, common carrier pipelines and a fleet of leased railcars. We also provide marine exports of butane through our facility located in Chesapeake, Virginia. We employ a number of contractual and hedging strategies to minimize commodity exposure and maximize earnings stability of this segment. During the year ended March 31, 2021, we sold 3.3 billion gallons of natural gas liquids, refined products and renewables products, an average of 9.09 million gallons (approximately 216,000 barrels) per day.
Operations . We procure natural gas liquids from refiners, gas processing plants, producers and other resellers for delivery to leased or owned storage space, common carrier pipelines, railcar terminals, and direct to certain customers. Our customers take delivery by loading natural gas liquids into transport vehicles from common carrier pipeline terminals, private terminals, our terminals, directly from refineries and rail terminals, and by railcar.
A portion of our wholesale propane gallons are presold to third-party retailers and wholesalers at a fixed price under back-to-back contracts. Back-to-back contracts, in which we balance our contractual portfolio by buying physical propane supply or derivatives when we have a matching purchase commitment from our wholesale customers, protect our margins and mitigate commodity price risk. Presales also reduce the impact of warm weather because the customer is required to take delivery of the propane regardless of the weather or any other factors. We generally require cash deposits from these customers. In addition, on a daily basis we have the ability to balance our inventory by buying or selling propane, butanes, and natural gasoline to refiners, resellers, and propane producers through pipeline inventory transfers at major storage hubs.
In order to secure consistent supply during the heating season, we are often required to purchase volumes of propane during the entire fiscal year. In order to mitigate storage costs and price risk, we may sell those volumes at a lesser margin in lower demand months than we earn in our other wholesale operations.
We purchase butane from refiners during the summer months, when refiners have a greater butane supply than they need, and sell butane to refiners during the winter blending season, when demand for butane is higher. We utilize a portion of our railcar fleet and a portion of our leased underground storage to store butane for this purpose. We also transport customer-owned natural gas liquids on our leased railcars and charge the customers a transportation service fee as well as subleasing railcars to certain customers. Our owned and leased terminals and railcar fleet give us the opportunity to access markets throughout the United States, and to move product to locations where demand is highest. We provide transportation, storage, and throughput services to third parties at our facilities at Kingfisher, Oklahoma, Port Hudson, Louisiana and Chesapeake, Virginia, as well as Sawtooth Caverns, LLC (“Sawtooth”), an underground storage facility near Delta, Utah, in which we own approximately a 71.5% interest, as described further below.
We purchase refined petroleum and renewable products primarily in the Gulf Coast, West Coast and Midwest regions of the United States and schedule them for delivery at various locations throughout the country. We conduct just-in-time sales at a nationwide network of terminals owned by third parties via rack spot sales that do not involve continuing contractual obligations to purchase or deliver product. Rack spot sales are priced and delivered on a daily basis through truck loading racks. At the end of each day for each of the terminals that we market from, we establish the next day selling price for each product for each of our delivery locations. We announce or “post” to customers via website, e-mail, and telephone communications the rack spot sale price of various products for the following morning. When customers decide to purchase product from us, we purchase the same volume of product from a supplier at a previously agreed-upon price. For these just-in-time transactions, our purchase from the supplier occurs at the same time as our sale to our customer. Typical rack spot sale purchasers include commercial and industrial end users, independent retailers and small, independent marketers who resell product to retail gasoline stations or other end users. Our selling price of a particular product on a particular day is a function of our supply at that delivery location or terminal, our estimate of the costs to replenish the product at that delivery location, and our desire to reduce product volume at that particular location that day. A significant percentage of our business is priced on a back-to-back basis which minimizes our commodity price exposure.
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The following table summarizes the location of our facilities and respective storage capacity and interconnects to those facilities.
Storage Capacity
Location Number of Facilities Own (1) Lease (2) Total Terminal Interconnects
Utah 1 256,200,000 — 256,200,000 Rail Facility
Virginia 2 20,720,000 — 20,720,000 Rail Facility; Marine Facility
Arkansas 3 3,765,000 90,000 3,855,000 Connected to Enterprise Texas Eastern Products Pipeline; Rail Facility
Minnesota 1 1,829,000 — 1,829,000 Connected to Enterprise Mid-America Pipeline; Rail Facility
Missouri 2 1,770,000 — 1,770,000 Connected to Phillips66 Blue Line Pipeline
Indiana 1 1,530,000 — 1,530,000 Connected to Enterprise Texas Eastern Products Pipeline; Rail Facility
Wisconsin 2 714,000 390,000 1,104,000 Connected to Enterprise Mid-America Pipeline; Rail Facility
Oklahoma 2 898,800 — 898,800 Rail Facility
Massachusetts 2 668,400 120,000 788,400 Rail Facility
Louisiana 1 720,000 — 720,000 Truck Facility
Washington 3 300,000 355,000 655,000 Rail Facility
Illinois 1 480,000 — 480,000 Connected to Phillips66 Blue Line Pipeline
Maine 2 — 240,000 240,000 Rail Facility
New York 2 — 270,000 270,000 Rail Facility
Pennsylvania 1 180,000 — 180,000 Rail Facility
Vermont 1 — 120,000 120,000 Rail Facility
United States Total 27 289,775,200 1,585,000 291,360,200
Ontario, Canada 1 — 120,000 120,000 Truck Facility
Canada Total 1 — 120,000 120,000
Total 28 289,775,200 1,705,000 291,480,200
(1) These facilities are located on lands we own.
(2) These facilities are located on lands we lease.
We have operating agreements with third parties for certain of our terminals. The terminals in East St. Louis, Illinois and Jefferson City, Missouri are operated for us by a third party for a monthly fee under an operating and maintenance agreement that expires in November 2022. The terminal in St. Catherines, Ontario, Canada is operated by a third party under a year-to-year agreement.
We own the land on which 17 of the 28 natural gas liquids terminals are located and we either have easements or lease the land on which the remaining terminals are located.
We are the majority owner of Sawtooth, an underground storage facility near Delta, Utah. This facility currently has capacity to store approximately 6.0 million barrels of natural gas liquids and refined products. We lease storage to 15 customers, with lease terms ranging from one to three years. The facility is located on property for which we have a long-term lease.
We own a natural gas liquids terminal that supports refined products blending in Port Hudson, Louisiana, and a natural gas liquids and condensate facility in Kingfisher, Oklahoma. The Port Hudson terminal is located near Baton Rouge, Louisiana, and is in proximity to other refined products infrastructure along the Colonial pipeline. This truck unloading and storage facility allows for the aggregation and supply of butane and naphtha for motor fuel blending and consists of storage tanks with a total capacity of 720,000 gallons. The Kingfisher facility is a natural gas liquids and condensate facility located in Kingfisher, Oklahoma, which is located in the middle of the STACK production region. The Chesapeake facility is a marine export/import terminal situated upstream of Norfolk, Virginia on the Elizabeth River. The site includes a proprietary dock with the capacity to berth handy-sized vessels (a dry bulk carrier of an oil tanker with a capacity between 15,000 and 35,000 dead weight tonnage) to very large gas carriers (a carrier capable of loading anywhere between 100,000 cubic meters to 200,000 cubic meter of gas),
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truck loading and off-road racks along with 22 railcar spots, with service provided by Norfolk Southern Railroad. The facility has an aggregate storage capacity of 20,378,000 gallons.
We own 23 transloading units, which enable customers to transfer product from railcars to trucks. These transloading units can be moved to locations along a railroad where it is most convenient for customers to transfer their product.
In March 2021, we acquired the Ambassador pipeline, an approximately 225-mile natural gas liquids pipeline, which runs from the Kalkaska gas plant in Kalkaska County, Michigan to a termination point near Marysville in St. Clair County, Michigan. We plan to build a propane terminal, connected to the pipeline, in central Michigan. This pipeline complements our existing assets in the upper Midwest and expands our presence with anchor assets in the state of Michigan, one of the top propane markets in the United States.
We utilize a fleet of approximately 5,100 high-pressure and general purpose leased railcars of which 140 railcars are subleased by third parties.
We lease storage space to accommodate the supply requirements and contractual needs of our retail and wholesale customers.
The following table summarizes our significant leased storage space at natural gas liquids and refined products storage facilities and interconnects to those facilities:
Leased Storage Space
(gallons)
Storage Facility Beginning
April 1,
2021 At
March 31,
2021 Storage Interconnects
Kansas 56,700,000 63,000,000 Connected to Enterprise Mid-America Pipeline, NuStar Pipelines and ONEOK North System Pipeline; Rail Facility; Truck Facility
Michigan 10,500,000 2,100,000 Rail Facility; Truck Facility
Missouri 7,560,000 7,560,000 Truck Facility
Mississippi 7,056,000 7,980,000 Connected to Enterprise Dixie Pipeline; Rail Facility
Texas 3,990,000 3,990,000 Connected to Enterprise Texas Eastern Products Pipeline; Truck Facility
Oregon 554,400 554,400 Connected to Kinder Morgan Pipeline and Olympic Pipeline
Arizona — 4,956,000 Connected to Kinder Morgan Pipeline; Rail Facility; Truck Facility
United States Total 86,360,400 90,140,400
Ontario, Canada 15,750,000 15,750,000 Rail Facility
Alberta, Canada 3,440,800 3,440,800 Connected to Cochin Pipeline; Rail Facility
Canada Total 19,190,800 19,190,800
Total 105,551,200 109,331,200
Customers . Our Liquids Logistics business serves approximately 1,400 customers in 49 states and Canada, including national, regional and independent retail, industrial, wholesale, petrochemical, refiner and natural gas liquids production customers. During the year ended March 31, 2021, 26% of the revenues of our Liquids Logistics segment were generated from our ten largest customers of the segment.
Seasonality . Our wholesale liquids business is largely seasonal as the primary users of propane as heating fuel generally purchase propane during the typical fall and winter heating season. However, we are able to partially mitigate the effects of seasonality by preselling a portion of our wholesale volumes to retailers and wholesalers and requiring the customer to take delivery of the product regardless of the weather.
The demand for gasoline typically peaks during the summer driving season, which extends from April to September, and declines during the fall and winter months. However, the demand for diesel typically peaks during the fall and winter months due to colder temperatures in the Northeast, and peaks in the Midwest during spring planting and fall harvest.
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Competition. Our Liquids Logistics business faces significant competition from other natural gas liquids wholesalers, trading companies and companies involved in the natural gas liquids midstream industry (such as terminal and refinery operations), some of which have greater financial resources than we do. The primary factors on which we compete are:
• price;
• availability of supply;
• reliability of service;
• available space on common carrier pipelines;
• storage availability;
• logistics capabilities, including the availability of railcars, and proprietary terminals; and
• long-term customer relationships.
Market Price Risk . Our philosophy is to maintain minimum commodity price exposure through a combination of purchase contracts, sales contracts and financial derivatives. A significant percentage of our refined products and biodiesel businesses is priced on a back-to-back basis which minimizes our commodity price exposure. For discretionary inventory, and for those instances where physical transactions cannot be appropriately matched, we utilize financial derivatives to mitigate commodity price exposure. Specific exposure limits are mandated in our credit agreement and in our market risk policy.
The value of refined products in any local delivery market is the sum of the commodity price as reflected on the New York Mercantile Exchange (“NYMEX”) and the basis differential for that local delivery market. The basis differential for any local delivery market is the spread between the cash price in the physical market and the quoted price in the futures markets for the prompt month. We typically utilize NYMEX futures contracts to mitigate commodity price exposure. We generally do not manage the financial impact on us from changes in basis differentials affected by local market supply and demand disruptions.
Pricing Policy. In our Liquids Logistics segment, we offer our customers the following categories of contracts:
• customer pre-buys, which typically require deposits based on market pricing conditions;
• market based, which can either be a posted price or an index to spot price at time of delivery; and
• load package, a firm price agreement for customers seeking to purchase specific volumes delivered during a specific time period.
We use back-to-back contracts for many of our liquids business sales to limit exposure to commodity price risk and protect our margins. We are able to match our supply and sales commitments by offering our customers purchase contracts with flexible price, location, storage, and ratable delivery. However, certain common carrier pipelines require us to keep minimum in-line inventory balances year round to conduct our daily business, and these volumes are not matched with a sales commitment.
We generally require deposits from our customers for fixed price future delivery if the delivery date is more than 30 days after the time of contractual agreement.
Legal and Regulatory Considerations. Demand for ethanol and biodiesel is driven in large part by government mandates and incentives. Refiners and producers are required to blend a certain percentage of renewables into their refined products, although the percentage can vary from year to year based on the United States Environmental Protection Agency (“EPA”) mandates. In addition, the federal government has in recent years granted certain tax credits for the use of biodiesel, although on several occasions these tax credits have expired. In December 2019, the federal government passed a law to reinstate the tax credit retroactively to January 1, 2018, with the credit expiring on December 31, 2022. Changes in future mandates and incentives, or decisions by the federal government related to future reinstatement of the biodiesel tax credit, could result in changes in demand for ethanol and biodiesel.
Trade Names. Our Liquids Logistics segment operates primarily under the NGL Supply Wholesale, NGL Supply Terminal Company, Sawtooth Caverns, Centennial Energy, NGL Crude Logistics and Centennial Gas Liquids trade names.
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Human Capital
At March 31, 2021, we had 997 employees in 28 states and Canada. Of those employees, 240 provide work primarily for our Water Solutions segment, 303 provide work primarily for our Crude Oil Logistics segment, 208 provide work primarily for our Liquids Logistics segment, and 246 provide administrative services to the various business segments. NGL is an equal-opportunity employer, and our employee handbook underscores that commitment, with policies prohibiting discrimination, harassment, and retaliation.
We understand the importance of competitive benefits packages for the health and welfare of our employees and for our ability to recruit and retain the best talent. In that regard, at the end of fiscal year 2021, we implemented $20 per hour minimum wage for all regular, full-time employees. We are proud of the fact that 95% of our eligible employees participate in the NGL 401(k) Plan, and we increased our employer match in our 401(k) Plan in fiscal year 2021. In addition, we provide access to health, life, and disability plans, including the following: the choice between a traditional PPO or a high-deductible medical plan; a health savings account with employer contributions for high-deductible plan participants; a flexible spending account for traditional PPO participants; a dental plan; a voluntary vision plan; an Employee Assistance Plan with access to free counseling sessions; company-paid short-term disability coverage; voluntary long-term disability coverage; and life and AD&D plan opportunities.
Our operations are guided by specific health and safety principles. Specifically, we endeavor to conduct our business in a manner that meets or exceeds applicable health and safety regulations and minimizes risk, both to our employees and the communities where we operate. Our environmental, health and safety professionals:
• Advise on safety and industrial hygiene regulatory requirements and best practices;
• Develop safety procedures and guidelines;
• Conduct safety inspections;
• Advise on strategies to improve safety and health performance; and
• Design and conduct safety and industrial hygiene training courses.
As part of this effort, we recently acquired and are implementing an enterprise management information system to help us achieve a better understanding of our performance, identify root causes of incidents of substandard performance, and where appropriate, implement necessary mitigations.
Government Regulation
Regulation of the Oil and Natural Gas Industries
Regulation of Oil and Natural Gas Exploration, Production and Sales. Sales of crude oil and natural gas liquids are not currently regulated and are transacted at market prices. In 1989, the United States Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining price and non-price controls affecting wellhead sales of natural gas. The Federal Energy Regulatory Commission (“FERC”), which has authority under the Natural Gas Act to regulate the prices and other terms and conditions of the sale of natural gas for resale in interstate commerce, has issued blanket authorizations for all natural gas resellers subject to its regulation, except interstate pipelines, to resell natural gas at market prices. Either Congress or the FERC (with respect to the resale of natural gas in interstate commerce), however, could re-impose price controls in the future.
Exploration and production operations and water disposal facilities are subject to various types of federal, state and local regulation, including, but not limited to, permitting, well location, methods of drilling, well operations, and conservation of resources. While these regulations do not directly apply to our business, they may affect the businesses of certain of our customers and suppliers and thereby indirectly affect our business. It is not possible to predict how or when regulations affecting our operations or our customers’ or suppliers’ operations might change.
Regulation of the Transportation and Storage of Natural Gas and Oil and Related Facilities. The FERC regulates oil pipelines under the Interstate Commerce Act and natural gas pipeline and storage companies under the Natural Gas Act, and Natural Gas Policy Act of 1978 (the “NGPA”), as amended by the Energy Policy Act of 2005. The Grand Mesa Pipeline became operational on November 1, 2016 and has several points of origin in Colorado, runs from those origin points through Kansas and terminates in Cushing, Oklahoma. The transportation services on the Grand Mesa Pipeline are subject to FERC regulation. In February 2018, the FERC issued a revised policy to disallow income tax allowance cost recovery in rates charged
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by pipeline companies organized as master limited partnerships. The FERC’s revised policy impacts cost-of-service rates on oil pipelines. Currently, the volumes of crude oil that are transported on the Grand Mesa Pipeline are subject to contractual agreements. Therefore, the FERC’s revised policy is not expected to impact the Grand Mesa Pipeline at the present time. Additionally, contracts we enter into for the interstate transportation or storage of crude oil or natural gas may be subject to FERC regulation including reporting or other requirements. In addition, the intrastate transportation and storage of crude oil and natural gas is subject to regulation by the state in which such facilities are located, and such regulation can affect the availability and price of our supply, and have both a direct and indirect effect on our business.
Anti-Market Manipulation. We are subject to the anti-market manipulation provisions in the Natural Gas Act and the NGPA, which authorizes the FERC to impose fines of up to $1 million per day per violation of the Natural Gas Act, the NGPA, or their implementing regulations. In addition, the Federal Trade Commission (“FTC”) holds statutory authority under the Energy Independence and Security Act of 2007 to prevent market manipulation in petroleum markets, including the authority to request that a court impose fines of up to $1 million per violation. These agencies have promulgated broad rules and regulations prohibiting fraud and manipulation in oil and gas markets. The Commodity Futures Trading Commission (“CFTC”) is directed under the Commodity Exchange Act to prevent price manipulations in the commodity and futures markets, including the energy futures markets. Pursuant to statutory authority, the CFTC has adopted anti-market manipulation regulations that prohibit fraud and price manipulation in the commodity and futures markets. The CFTC also has statutory authority to seek civil penalties of up to the greater of $1 million per day per violation or triple the monetary gain to the violator for violations of the anti-market manipulation sections of the Commodity Exchange Act. We are also subject to various reporting requirements that are designed to facilitate transparency and prevent market manipulation.
Maritime Transportation. The Jones Act is a federal law that restricts maritime transportation between locations in the United States to vessels built and registered in the United States and owned and manned by United States citizens. Because our fleet transports between locations in the United States, we are subject to the provisions of the law. As a result, we are responsible for monitoring the ownership of our subsidiaries that engage in maritime transportation and for taking any remedial action necessary to ensure compliance with the Jones Act. The Jones Act also requires that all United States-flagged vessels be manned by United States citizens. Foreign-flagged seamen generally receive lower wages and benefits than those received by United States citizen seamen. This requirement significantly increases operating costs of United States-flagged vessel operations compared to foreign-flagged vessel operations. Certain foreign governments subsidize their nations’ shipyards. This results in lower shipyard costs both for new vessels and repairs than those paid by United States-flagged vessel owners. The United States Coast Guard and American Bureau of Shipping maintain the most stringent regimen of vessel inspection in the world, which tends to result in higher regulatory compliance costs for United States-flagged operators than for owners of vessels registered under foreign flags of convenience.
Environmental Regulation
General. Our operations are subject to a myriad of federal, state and local laws and regulations relating to the protection of the environment. Existing regulatory structure shapes our decision-making and business activities in many ways, such as:
• shaping decisions regarding what types of pollution-control equipment to deploy and how a facility should be designed;
• informing construction activities, such as where to locate and where not to locate a facility, e.g., locating construction activities away from sensitive environmental, cultural or historic areas, including wetlands, coastal regions or areas inhabited by endangered or threatened species, and limiting or prohibiting construction activities during certain sensitive periods, such as when threatened or endangered species are breeding/nesting;
• informing decision-making regarding the timing of activities, for example, we will delay construction or system modification or upgrades during the issuance or renewal periods of certain permits;
• informing decision-making pertaining to our approach to investigating, mitigating and remediating unplanned releases from our facilities and operations or attributable to former facilities or operations, as necessary and appropriate; and
• shaping our decision-making about whether a facility or operation should be temporarily halted to address potential non-compliance with relevant permit requirements.
Consideration of and compliance with relevant environmental regulatory requirements has led our business activities to be more sustainable while simultaneously mitigating exposure to long and short-term environmental risk. Conversely, failure to comply with these laws and regulations may trigger a variety of administrative, civil, and criminal enforcement measures,
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including the assessment of monetary penalties. Certain environmental statutes impose strict and joint and several liability for costs required to clean up and restore sites where substances such as crude oil or wastes have been disposed or otherwise unlawfully released. The trend in environmental regulation is to place more restrictions and limitations on activities that may adversely affect the environment. Thus, there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate.
The following is a discussion of the material environmental laws and regulations that relate to our businesses.
Hazardous Substances and Waste. We are subject to various federal, state, and local environmental laws and regulations governing the storage, distribution, and transportation of natural gas liquids and the operation of bulk storage liquefied petroleum gas (LPG) terminals, as well as laws and regulations governing environmental protection, including those addressing the discharge of materials into the environment or otherwise relating to protection of the environment. Generally, these laws (i) regulate air and water quality, impose limitations on the discharge of pollutants and establish standards for the handling of solid and hazardous wastes; (ii) subject our operations to certain permitting and registration requirements; (iii) may result in the suspension or revocation of necessary permits, licenses, and authorizations; (iv) impose substantial liabilities on us for pollution resulting from our operations; (v) require remedial measures to mitigate pollution from former or ongoing operations; and (vi) may result in the assessment of administrative, civil, and criminal penalties for failure to comply with such laws. These laws include, among others, the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the federal Clean Air Act “(CAA”), the Homeland Security Act of 2002, the Emergency Planning and Community Right to Know Act, the Clean Water Act (“CWA”) , the Safe Drinking Water Act, the Oil Spills Prevention and Preparedness Regulations, and comparable state statutes.
CERCLA, also known as the “Superfund” law, and similar state laws, impose liability on certain classes of potentially responsible persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the current and past owner or operator of the site where the release occurred and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. While natural gas liquids are not a hazardous substance within the meaning of CERCLA, other chemicals used in or generated by our operations may be classified as a hazardous substance. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to strict and joint and several liability for the costs of investigating and cleaning up the hazardous substances that have been released into the environment and for damages to natural resources and for the costs of certain health studies. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances into the environment.
RCRA, and comparable state statutes and their implementing regulations, regulate the generation, transportation, treatment, storage, disposal and cleanup of solid and hazardous wastes. Under a delegation of authority from the EPA, most states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Federal and state regulatory agencies can seek to impose administrative, civil and criminal penalties for alleged non-compliance with RCRA and analogous state requirements. Certain wastes associated with the production of oil and natural gas, as well as certain types of petroleum-contaminated media and debris, are excluded from regulation as hazardous waste under Subtitle C of RCRA. These wastes, instead, are regulated as solid waste under RCRA’s less stringent Subtitle D, state laws, or other federal laws. It is possible, however, that certain wastes now classified as non-hazardous solid waste could be classified as hazardous wastes in the future and thereby be subject to more rigorous and costly disposal requirements. Legislation has been proposed from time to time in Congress to regulate certain oil and natural gas wastes as “hazardous wastes under RCRA.” Any such change could result in an increase in our costs to manage and dispose of wastes, which could have a material adverse effect on our consolidated results of operations and financial position.
We currently own or lease properties where crude oil is being or has been handled for many years. Although previous operators have utilized operating and disposal practices that were standard in the industry at the time, crude oil or other wastes may have been disposed of or released on or under the properties owned or leased by us or on or under the other locations where the crude oil and wastes have been transported for treatment or disposal. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA, and analogous state laws. Under these laws, we could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater), or to implement remedial measures to prevent or mitigate future contamination. We are not currently aware of any facts, events or conditions relating to such requirements that could materially impact our consolidated results of operations or financial position.
Oil Pollution Prevention. Our operations involve the shipment of crude oil by barge through navigable waters of the United States. The Oil Pollution Act of 1990 amended the CWA to impose liability for releases of crude oil from vessels or
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facilities into navigable waters. If a release of crude oil to navigable waters occurred during shipment or from an oil terminal, we could be subject to liability under the Oil Pollution Act. We are not currently aware of any facts, events, or conditions related to oil spills that could materially impact our consolidated results of operations or financial position. In 1973, the EPA adopted oil pollution prevention regulations under the CWA. These oil pollution prevention regulations, as amended several times since their original adoption, require the preparation of a Spill Prevention Control and Countermeasure (“SPCC”) plan for facilities engaged in drilling, producing, gathering, storing, processing, refining, transferring, distributing, using, or consuming crude oil and oil products, and which due to their location, could reasonably be expected to discharge oil in harmful quantities into or upon the navigable waters of the United States. SPCC requirements under the CWA require appropriate containment berms and similar structures to help prevent the discharge of pollutants into regulated waters in the event of a crude oil or other constituent tank spill, rupture or leak. The owner or operator of an SPCC-regulated facility is required to prepare a written, site-specific spill prevention plan, which details how a facility’s operations comply with the requirements. To be in compliance, the facility’s SPCC plan must satisfy all of the applicable requirements for drainage, bulk storage tanks, tank car and truck loading and unloading, transfer operations (intra-facility piping), inspections and records, security, and training. Most importantly, the facility must fully implement the SPCC plan and train personnel in its execution. Where applicable, we strive to maintain and implement SPCC plans for our facilities.
Air Emissions. Our operations are subject to the CAA and comparable state and local laws and regulations, which regulate emissions of air pollutants from various industrial sources and mandate certain permitting, monitoring, recordkeeping and reporting requirements. The CAA and its implementing regulations may require that we obtain permits prior to the construction, modification or operation of certain projects or facilities expected to produce or increase air emissions above certain threshold levels, that we obtain and strictly comply with air permits containing emissions and operational limitations, or utilize specific emission control technologies to limit emissions, any of which could impose significant costs on our business. Violation of CAA requirements could subject us to monetary penalties, injunctions, conditions or restrictions on operations and, potentially, criminal enforcement actions. Furthermore, we may make certain future capital expenditures for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions.
Water Discharges . The CWA and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants into state waters as well as navigable waters, defined as waters of the United States (“WOTUS”), and impose requirements affecting our ability to conduct construction activities in waters and wetlands. Certain state regulations and the general permits issued under the CWA’s National Pollutant Discharge Elimination System program prohibit the discharge of pollutants and chemicals. The federal SPCC program requires appropriate containment berms and similar structures to help prevent the contamination of regulated waters in the event of a crude oil or other constituent tank spill, rupture or leak. The CWA prohibits the placement of dredge or fill material in wetlands or other WOTUS unless authorized by a permit issued by the U.S. Army Corps of Engineers (“Corps”) or a delegated state agency pursuant to Section 404. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. We maintain a number of discharge permits, some of which may require us to monitor and sample storm water runoff from such facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations.
Underground Injection Control . The underground injection of crude oil and natural gas wastes is regulated by the Underground Injection Control Program, as authorized by the Safe Drinking Water Act, as well as by state programs focused on the conservation of hydrocarbon resources. The primary objective of injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migration of fluid from the injection zone into underground sources of drinking water, as well as to prevent communication between injected fluids and zones capable of producing hydrocarbons. The Safe Drinking Water Act establishes requirements for permitting, testing, monitoring, record keeping, and reporting of injection well activities, as well as a prohibition against the migration of fluid containing any contaminant into underground sources of drinking water. Any leakage from the subsurface portions of the injection wells could cause degradation of fresh groundwater resources, potentially resulting in suspension of our underground injection control (“UIC”) permits, issuance of fines and penalties from governmental agencies, incurrence of expenditures for remediation of the affected resource and imposition of liability by third parties for property damages and personal injuries.
Under the auspices of the federal UIC program as implemented by states with UIC primacy, regulators, particularly at the state level, are becoming increasingly sensitive to possible correlations between underground injection and seismic activity. Consequently, state regulators implementing both the federal UIC program and state corollaries are heavily scrutinizing the location of injection facilities relative to faulting and are limiting both the density or injection facilities as well as the rate and volume of injection.
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Hydraulic Fracturing. Hydraulic fracturing involves the injection of water, sand, and chemicals under pressure into the formation to stimulate oil and gas production. We do not conduct any hydraulic fracturing activities. However, a portion of our customers’ crude oil and natural gas production is developed from unconventional sources that require hydraulic fracturing as part of the completion process, and our Water Solutions business treats and disposes of produced water generated from crude oil and natural gas production, including production employing hydraulic fracturing. Legislation to amend the Safe Drinking Water Act to repeal the exemption for hydraulic fracturing from the definition of underground injection and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions of Congress. Congress will likely continue to consider legislation to amend the Safe Drinking Water Act to subject hydraulic fracturing operations to regulation under the Act’s UIC Program and/or require disclosure of chemicals used in the hydraulic fracturing process. Federal agencies, including the EPA and the United States Department of the Interior, have asserted their regulatory authority to, for example, study the potential impacts of hydraulic fracturing on the environment, and initiate rulemakings to compel disclosure of the chemicals used in hydraulic fracturing operations, and establish pretreatment standards and effluent limitation guidelines for produced water from hydraulic fracturing operations. In addition, some states and local governments have also proposed or adopted legislative or regulatory restrictions on hydraulic fracturing, which include additional permit requirements, public disclosure of fracturing fluid contents, operational restrictions, and/or temporary or permanent bans on hydraulic fracturing. We expect that scrutiny of hydraulic fracturing activities will continue in the future.
Greenhouse Gas Regulation
There is a growing concern, both nationally and internationally, about climate change and the contribution of greenhouse gas (“GHG”) emissions, most notably methane and carbon dioxide, to climate change. This growing concern has resulted in a steady stream of legislation considered by Congress to address climate change through a variety of mechanisms, including carbon taxes and carbon cap-and-trade programs. For example, in February 2021, the Climate Emergency Act of 2021 was introduced in the House of Representative by Rep. Earl Blumenauer (D-OR) as H.R. 795 and in the Senate by Sen. Bernie Sanders (I-VT), which would require the President of the United States to declare a national climate emergency and take various actions to address climate change. The ultimate outcome of any possible future federal legislative initiatives is uncertain. In addition, several states have already adopted legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap-and-trade programs.
On December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings allowed the EPA to adopt and implement regulations to restrict emissions of GHGs under existing provisions of the CAA. During the Obama Administration, the EPA finalized three rules that regulate GHG emissions from certain sources in the oil and natural gas industry, including New Source Performance Standards for the Oil and Natural Gas Sector (“GHG NSPS”), which became effective on August 2, 2016. During the Trump Administration, rulemaking was undertaken resulting in a substantial relaxation in the GHG NSPS’s requirements, including those relating to fugitive emissions, pneumatic pump standards, and closed vent system certification, among other things, which were finalized on August 13, 2020. The Biden Administration has announced that it intends to review the revisions to the GHG NSPS in President Biden’s January 20, 2021 Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisi s. It is foreseeable that the EPA may seek to reinstate the previous, more stringent regulations, though to do so, it will have to undertake notice-and-comment rulemaking consistent with the Administrative Procedure Act, which could take appreciable time to complete. If future GHG regulations are more stringent, it could require us to incur costs to reduce emissions of GHGs associated with our operations and also could adversely affect demand for the products that we transport, store, process, or otherwise handle in connection with our services.
Some scientists have suggested climate change could increase the severity of extreme weather, such as increased hurricanes and floods, which could damage our facilities. Another possible consequence of climate change is increased volatility in seasonal temperatures. The market for our natural gas liquids is generally improved by periods of colder weather and impaired by periods of warmer weather, so any changes in climate could affect the market for our products and services. If there is an overall trend of warmer temperatures, it would be expected to have an adverse effect on our business.
Because propane is considered a clean alternative fuel under the CAA, new climate change regulations may provide us with a competitive advantage over other sources of energy, such as fuel oil and coal.
The trend of more expansive and stringent environmental legislation and regulations, including GHG regulation, could continue, resulting in increased costs of conducting business and consequently affecting our profitability. To the extent laws are enacted or other governmental action is taken that restricts certain aspects of our business or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business and prospects could be adversely affected.
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Safety and Transportation
All states in which we operate have adopted fire safety codes that regulate the storage and distribution of propane and distillates. In some states, state agencies administer these laws, while in other states, municipalities administer these laws. We conduct training programs to help ensure that our operations comply with applicable governmental regulations. With respect to general operations, each state in which we operate adopts National Fire Protection Association, Pamphlet Nos. 54 and 58, or comparable regulations, which establish rules and procedures governing the safe handling of propane, and Pamphlet Nos. 30, 30A, 31, 385, and 395 which establish rules and procedures governing the safe handling of distillates, such as fuel oil. We believe that the policies and procedures currently in effect at all of our facilities for the handling, storage and distribution of propane and distillates and related service and installation operations are consistent with industry standards and are in compliance in all material respects with applicable environmental, health and safety laws.
With respect to the transportation of propane, distillates, crude oil, and water, we are subject to regulations promulgated under federal legislation, including the Federal Motor Carrier Safety Act and the Homeland Security Act of 2002. Regulations under these statutes cover the security and transportation of hazardous materials and are administered by the United States Department of Transportation (“DOT”). Specifically, crude oil pipelines are subject to regulation by the DOT, through the Pipeline and Hazardous Materials Safety Administration (“PHMSA”), under the Hazardous Liquid Pipeline Safety Act of 1979 (“HLPSA”), which requires PHMSA to develop, prescribe, and enforce minimum federal safety standards for the storage and transportation of hazardous liquids and comparable state statutes with respect to design, installation, testing, construction, operation, replacement and management of pipeline facilities. HLPSA covers petroleum and petroleum products and requires any entity that owns or operates pipeline facilities to comply with such regulations, to permit access to and copying of records and to file certain reports and provide information as required by the United States Secretary of Transportation. These regulations include potential fines and penalties for violations.
The Pipeline Safety Act of 1992 added the environment to the list of statutory factors that must be considered in establishing safety standards for hazardous liquid pipelines, established safety standards for certain “regulated gathering lines,” and mandated that regulations be issued to establish criteria for operators to use in identifying and inspecting pipelines located in high consequence areas (“HCAs”), defined as those areas that are unusually sensitive to environmental damage, that cross a navigable waterway, or that have a high population density. In the Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006, Congress required mandatory inspections for certain United States crude oil and natural gas transmission pipelines in HCAs and mandated that regulations be issued for low-stress hazardous liquid pipelines and pipeline control room management. In January 2012, the federal government passed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (the “2011 Pipeline Safety Act”). This act provides for additional regulatory oversight of the nation’s pipelines, increases the penalties for violations of pipeline safety rules, and complements the DOT’s other initiatives. The 2011 Pipeline Safety Act increases the maximum fine for the most serious pipeline safety violations involving deaths, injuries or major environmental harm from $1 million to $2 million. In addition, this law established additional safety requirements for newly constructed pipelines. The law also provides for (i) additional pipeline damage prevention measures; (ii) allowing the Secretary of Transportation to require automatic and remote-controlled shut-off valves on new pipelines; (iii) requiring the Secretary of Transportation to evaluate the effectiveness of expanding pipeline integrity management and leak detection requirements; (iv) improving the way the DOT and pipeline operators provide information to the public and emergency responders; and (v) reforming the process by which pipeline operators notify federal, state and local officials of pipeline accidents. In recent years, Congress has strengthened PHMSA’s safety authority and repeatedly extended it, most recently in the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2020.
Railcar Regulation
We transport a significant portion of our natural gas liquids, crude oil and biodiesel via rail transportation, and we own and/or lease a fleet of crude oil, high-pressure and general purpose railcars for this purpose. Our railcar operations are subject to the regulatory jurisdiction of the Federal Railroad Administration of the DOT, as well as other federal and state regulatory agencies.
The adoption of additional federal, state or local laws or regulations, including any voluntary measures by the rail industry regarding railcar design or transport activities, or efforts by local communities to restrict or limit rail traffic, could similarly affect our business by increasing compliance costs and decreasing demand for our services, which could adversely affect our financial position and cash flows.
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Occupational Health Regulations
The workplaces associated with our manufacturing, processing, terminal, disposal, storage and distribution facilities are subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes. We believe we have conducted our operations in substantial compliance with OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. Our marine vessel operations are also subject to safety and operational standards established and monitored by the United States Coast Guard. In general, we expect to increase our expenditures relating to compliance with likely higher industry and regulatory safety standards such as those described above. However, these expenditures cannot be accurately estimated at this time, but we do not expect compliance with these standards to have a material adverse effect on our business.
Available Information on our Website
Our website address is www.nglenergypartners.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission (“SEC”), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The information contained on, or connected to, our website is not incorporated by reference into this Annual Report and should not be considered part of this or any other report that we file with or furnish to the SEC.
In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information related to issuers that file electronically with the SEC.