Commitments and Contingencies

9 Months Ended

Dec. 31, 2011

Commitments and Contingencies

Commitments and Contingencies

Note 9 - Commitments and Contingencies

Litigation

We are involved in claims and legal actions arising in the ordinary course of business.  We believe that the ultimate disposition of these matters will not have a material adverse effect on our financial position and results of operations.

Obligations Under Propane Asset Purchase and Sale Agreement

In connection with the purchase of certain propane assets from ConocoPhillips, NGL Supply executed the following agreements in November 2002:

Propane Business Operating & Maintenance Agreement.  The Propane Business Operating & Maintenance Agreement specifies that ConocoPhillips will continue to operate the propane assets for us and provides for the payment for such services as well as the payment for the utilization of certain common facilities, as defined.  The agreement has a primary term of ten years from November 7, 2002, and provides for an extension for a five-year period, to be continued on a year-by-year basis.  We have the ability to terminate the agreement with written notice by August 1 of the calendar year preceding the year we would terminate the agreement.

We are obligated to pay a fixed monthly operating fee plus a utility service fee which varies based on usage and all direct costs incurred by ConocoPhillips related to the propane assets.  The initial monthly operating fee was $25,000, which consisted of a labor charge of $15,000 plus a non-labor charge of $10,000.  During the ten-year primary term, the labor charge component increases at a rate of 2.5% per year, and during the five-year extension, the labor charge component is increased at an amount appropriate in the circumstances based on ConocoPhillips’ actual labor and benefit costs.  The non-labor component was fixed for a term of two years, but thereafter was to be adjusted for every two-year period based on ConocoPhillips’ actual costs of operating our propane assets.  The total operating fee charged to cost of sales on the consolidated statements of operations, including the charge for the utility service fee and propane asset direct charges, was as follows (in thousands):

	2011		2010
Three months ended December 31	$	93	$	89
Nine months ended December 31, 2011	270
Nine months ended December 31, 2010 —
Three months ended December 31, 2010			89
Six months ended September 30, 2010			175

The total minimum monthly fee as of December 31, 2011 is approximately $30,000.  During the remaining term of the primary ten-year period and the five-year extension, the estimated minimum annual commitments for the Propane Business Operating & Maintenance Agreement for the remainder of the year ending March 31, 2012 and the years ending March 31, 2013 through March 31, 2016 are as follows (in thousands):

Year Ending March 31,
2012 (three months)	$	93
2013	364
2014	370
2015	376
2016	382

Propane Supply Agreement. This agreement was executed in order to provide us with a constant supply of propane for our business. The agreement is for a primary term of ten years, and may be extended for an additional five-year period, then continuing on a year-by-year basis.

The agreement specifies that we may purchase a specified volume of propane per week from ConocoPhillips. The price we will pay is an average of the published daily propane spot price at Conway, Kansas plus a location differential equal to published pipeline tariffs and, for the ten-year primary period, less a specified discount which varies depending upon the location of purchase. The charge for such propane purchases is included in cost of sales on our consolidated statements of operations.

Storage Space Lease. NGL Supply executed a propane storage space lease with ConocoPhillips for storage at its Borger, Texas storage facility. The storage agreement provides for a volume of up to 850,000 barrels of propane at any one time, and expires on March 31, 2012.

The storage agreement requires a specified minimum storage payment which varies by year, plus additional charges to the extent we had more than the designated 850,000 barrels in storage at any time. The total lease charge recorded in cost of sales on our consolidated statements of operations was as follows (in thousands):

	2011		2010
Three months ended December 31	$	108	$	108
Nine months ended December 31, 2011	325
Nine months ended December 31, 2010 —
Three months ended December 31, 2010			108
Six months ended September 30, 2010			217

As of December 31, 2011, the monthly storage charge is approximately $36,000.  The estimated future annual storage charge will be approximately $0.1 million during the remainder of the year ending March 31, 2012.  We are presently negotiating an extension to this storage agreement; however, there is no guarantee any such extension will be executed or on the same terms.

Other Operating Leases

We have executed various noncancelable operating lease agreements for office space, underground propane storage, trucks, real estate, equipment, rail cars and bulk propane storage tanks.  Rental expense relating to operating leases (excluding the Borger lease discussed above) was as follows (in thousands):

	2011		2010
Three months ended December 31	$	1,358	$	702
Nine months ended December 31, 2011	2,918
Nine months ended December 31, 2010 —
Three months ended December 31, 2010			702
Six months ended September 30, 2010			1,325

Future minimum lease payments at December 31, 2011, are as follows (in thousands):

Year Ending March 31,
2012 (three months)	$	1,688
2013	14,191
2014	14,122
2015	8,379
2016	8,340
	$	46,720

Sales and Purchase Contracts

We have entered into sales and purchase contracts for propane and other natural gas liquids to be delivered in future periods.  These contracts require that the parties physically settle the transactions with natural gas liquid inventory.  At December 31, 2011, we had fixed-price outstanding sales contracts of approximately $187.2 million (approximately 123.8 million gallons) and fixed-price outstanding purchase contracts of approximately $74.8 million (approximately 54.4 million gallons).  These contracts have terms that expire at various dates through December 2012.

Agreements with Affiliates

In connection with the SemStream combination, we executed a transition services agreement with SemGroup Corporation (SemGroup) under which we pay approximately $150,000 per month.  The agreement is to expire on March 31, 2012 or at such time as agreed by both parties or upon our written request.  During the three months ended December 31, 2011, we paid approximately $299,000 under this agreement.

We lease certain office space from an affiliate for which we pay rent of approximately $12,000 per month.  During the three months ended December 31, 2011, we incurred total expenses of approximately $36,000.  The future commitments of such lease arrangements are included in the lease payment detail above.

Employee Benefits

We maintain a 401(k) defined contribution plan for eligible employees under which eligible employees may contribute amounts up to the statutory limits and we provide matching contributions up to a stipulated percentage of the employee contributions.  Contributions to the plan, if any, are at our discretion.  Contributions to the plan totaled approximately $0.3 million for the nine months ended December 31, 2011.