Note 12 - Fair Value of Financial Instruments

Our cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and other current liabilities (excluding derivative instruments) are carried at amounts which reasonably approximate their fair values due to their short-term nature. The carrying amounts of our debt obligations reasonably approximate their fair values at March 31, 2013, as most of our debt is subject to terms that were recently negotiated.

Commodity Derivatives

The following table summarizes the estimated fair values of the commodity derivative assets (liabilities) reported on the consolidated balance sheet at March 31, 2013:

	Derivative			Derivative
	Assets			Liabilities
	(in thousands)
Level 1 measurements	$	947		$	(3,324	)
Level 2 measurements	9,911			(13,280		)
	10,858			(16,604		)

Netting of counterparty contracts	(3,503		)	3,503
Cash collateral provided or held	(1,760		)	400
Commodity contracts reported on consolidated balance sheet	$	5,595		$	(12,701	)

The following table summarizes the estimated fair values of the commodity derivative assets (liabilities) reported on the consolidated balance sheet at March 31, 2012:

	Derivative		Derivative
	Assets		Liabilities
	(in thousands)
Level 1 measurements	$	—	$	—
Level 2 measurements	—		(36		)
	—		(36		)

Netting of counterparty contracts	—		—
Cash collateral provided or held	—		—
Commodity contracts reported on consolidated balance sheet	$	—	$	(36	)

The commodity derivative assets (liabilities) are reported in the following accounts on the consolidated balance sheets:

	March 31,			March 31,
	2013			2012
	(in thousands)
Prepaid expenses and other current assets	$	5,551		$	—
Other noncurrent assets	44			—
Accrued expenses and other payables	(12,701		)	(36		)
Net liability	$	(7,106	)	$	(36	)

The following table sets forth our open commodity derivative contract positions at March 31, 2013 and 2012. We do not account for these derivatives as hedges.

Contracts	Settlement Period	Total Notional Units (Barrels)		Fair Value of Net Assets (Liabilities)
		(in thousands)
As of March 31, 2013 -
Propane swaps (1)	April 2013 - March 2014	(282	)	$	3,197
Heating oil calls and futures (2)	May 2013 - June 2013	8		79
Crude swaps (3)	April 2013 - June 2014	(91	)	153
Crude - butane spreads (4)	April 2013 - March 2014	(1,116	)	(7,651		)
Crude forwards (5)	April 2013 - March 2014	(144	)	1,033
Butane forwards (6)	April 2013 - March 2014	1,546		(2,557		)
				(5,746		)
Net cash collateral held				(1,360		)
Net fair value of commodity derivatives on consolidated balance sheet				$	(7,106	)

As of March 31, 2012 -
Propane swaps	April 2012 - March 2013	(460	)	$	(36	)

(1) Propane swaps — Our natural gas liquids logistics segment routinely purchases inventory during the warmer months and stores the inventory for sale in the colder months. The contracts listed in this table as “propane swaps” represent financial derivatives we have entered into as an economic hedge against the risk that propane prices will decline while we are holding the inventory.

(2) Heating oil calls and futures — Our retail segment offers our customers the opportunity to purchase a specified volume of heating oil at a fixed price. The contracts listed in this table as “heating oil calls and futures” represent financial derivatives we have entered into as an economic hedge against the risk that heating oil prices will rise between the time we entered into the fixed price sale commitment with the customers and the time we will the purchase heating oil to sell to the customers.

(3) Crude swaps — Our crude oil logistics segment routinely enters into crude oil purchase and sale contracts that are priced based on a crude oil index. These indices may vary in the type or location of crude oil, or in the timing of delivery within a given month. The contracts listed in this table as “crude swaps” represent hedges against the risk that changes in the different index prices would reduce the margins between the purchase and the sale transactions.

(4) Crude-butane spreads — Our natural gas liquids logistics segment enters into forward contracts to sell butane at a price that will be calculated as a specified percentage of a crude oil index at the delivery date. The contracts listed in this table as “crude — butane spreads” represent financial derivatives we have entered into as economic hedges against the risk that the spread between butane prices and crude prices will narrow between the time we entered into the butane forward sale contracts and the expected delivery dates.

(5) Crude forwards — Our crude oil logistics segment routinely purchases crude oil inventory to enable us to fulfill future orders expected to be placed by our customers. The contracts listed in this table as “crude forwards” represent financial derivatives we have entered into as an economic hedge against the risk that crude oil prices will decline while we are holding inventory.

(6) Butane forwards — Our natural gas liquids logistics segment routinely purchases butane inventory to enable us to fulfill future orders expected to be placed by our customers. The contracts listed in this table as “butane forwards” represent financial derivatives we have entered into as an economic hedge against the risk that butane prices will decline while we are holding inventory.

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

	NGL Energy Partners LP								NGL Supply
	Year			Year			Six Months		Six Months
	Ended			Ended			Ended		Ended
	March 31,			March 31,			March 31,		September 30,
	2013			2012			2011		2010
	(in thousands)
Commodity contracts -
Unrealized gain (loss)	$	(5,275	)	$	(4,384	)	$	1,357	$	(200	)
Realized gain	899			10,351			111		426
Interest rate swaps	(5		)	(291		)	224		—
Total	$	(4,381	)	$	5,676		$	1,692	$	226

The commodity contract gains and losses are included in cost of sales in the consolidated statements of operations.

Interest Rate Swap Agreement

We have entered into an interest rate swap agreement to hedge the risk of interest rate fluctuations on our long-term debt. This agreement converts a portion of our revolving credit facility floating rate debt into fixed rate debt on a notional amount of $8.5 million and ends on December 31, 2013. The notional amounts of derivative instruments do not represent actual amounts exchanged between the parties, but instead represent amounts on which the contracts are based. The floating interest rate payments under these swaps are based on three-month LIBOR rates. We do not account for this agreement as a hedge. We recorded a liability of less than $0.1 million at March 31, 2013 and a liability of $0.1 million at March 31, 2012 related to this agreement.

Credit Risk

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

Our counterparties consist primarily of financial institutions and energy companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.

We acquired a crude oil logistics business in our June 2012 merger with High Sierra. As is customary in the crude oil industry, we generally receive payment from customers on a monthly basis. As a result, receivables from individual customers in our crude business are generally higher than the receivables from customers in our other segments.

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

Interest Rate Risk

The interest rate on our revolving credit facility floats based on market indices. At March 31, 2013, we have $461.5 million of debt on our revolving credit facility at a rate of 3.21% and $16.0 million of debt on our revolving credit facility at a rate of 5.25%. A change of 0.125% in the interest rate would result in a change to annual interest expense of approximately $0.6 million on the revolving debt balance of $477.5 million. We believe that the interest rates of the revolving credit facility are consistent with current market rates, and that the book value of the debt approximates fair value.