NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2018. The quarter ended December 31, 2018; figures are unaudited. NGL operates in crude oil logistics, water solutions, natural gas liquids, and refined products and renewables. Retail Propane is reported as discontinued operations following its sale.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Nine months ended Dec. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $6.377 billion | $4.354 billion | $18.876 billion | $11.961 billion |
| Operating income (loss) | $157.6 million | $100.6 million | $59.7 million | $(28.1) million |
| Income (loss) from continuing operations | $110.4 million | $31.8 million | $(108.2) million | $(190.5) million |
| Net income (loss) attributable to NGL | $110.8 million | $56.3 million | $297.8 million | $(180.5) million |
| Basic earnings (loss) per common unit | $0.65 | $0.33 | $1.82 | $(1.84) |
| Adjusted EBITDA | $132.6 million | $122.6 million | $308.3 million | $252.3 million |
- Quarterly revenue rose sharply, led by refined products and renewables and crude oil logistics. Revenue growth reflects substantial commodity sales volumes and prices; it does not by itself indicate comparable growth in unit margins.
- Quarterly operating income improved, with notable contributions from Water Solutions and gains on commodity derivatives. NGL reported $239.7 million of net derivative gains for the quarter; these fair-value and realized gains can make reported results volatile.
- Nine-month net income was largely affected by the $408.9 million gain on the Retail Propane sale, reported in discontinued operations. Continuing operations remained loss-making for the nine-month period.
Cash flow, balance sheet and capital
- For the nine months, operating cash flow was $115.7 million, including $84.6 million from continuing operations. Investing activities provided $558.5 million overall, substantially reflecting $845.8 million of discontinued-operation investing proceeds; continuing operations used $287.3 million. Financing activities used $673.2 million.
- Continuing-operations capital expenditures were approximately $304.0 million and cash acquisitions were $198.0 million. The filing attributes increased investment principally to Water Solutions expansion.
- At December 31, cash was $23.0 million; current assets were $1.950 billion and current liabilities were $1.565 billion. Total debt book value was approximately $2.218 billion, including $339.9 million classified as current. Debt was down from $2.680 billion at March 31, 2018.
- The revolving credit facility had $889 million outstanding and $157.9 million of letters of credit. Its weighted-average borrowing rate was 4.81%. NGL reported compliance with its credit and note covenants; its leverage ratio was approximately 2.96x and interest coverage was 3.18x.
- Common-unit distributions remained $0.39 per unit per quarter. Preferred units also carry distributions, including 10.75% on Class A and 9.0% on Class B units.
Material changes, outlook and risks
- NGL completed the sale of virtually all of Retail Propane to Superior Plus in July 2018 for $889.8 million cash consideration and sold its remaining Victory Propane interest in August. Retail Propane results are presented as discontinued operations. NGL also sold its Bakken water-disposal business for $91.0 million gross proceeds in November.
- In December, NGL agreed to sell its South Pecos water-disposal business for $238.8 million cash proceeds plus potential additional consideration; closing was expected before March 31, 2019. In January 2019, it agreed to buy DCP Midstream’s NGL terminal business for $90 million, subject to customary conditions.
- Management said expected operating cash flows and revolver capacity should meet liquidity needs, while noting that acquisitions or changed assumptions could require additional capital or asset sales. It plans to pursue growth in Water Solutions and Crude Oil Logistics, particularly in the Delaware and DJ basins. The filing provides no numerical earnings or revenue guidance.
- Subsequent to quarter-end, the February 6, 2019 credit amendment permitted qualifying common-unit repurchases subject to leverage and availability tests, while tightening maximum total leverage limits beginning in later periods. It also allowed specified Gavilon EPA settlement expenses to be excluded from covenant EBITDA for two quarters.
- Unusual and contingent items include a $105.0 million loss on the WPX pipeline-capacity/deficiency-credit transaction; a Gavilon EPA settlement requiring $25 million cash and retirement of 36 million RINs, with $12.5 million accrued at quarter-end; and the LCT jury verdict, for which NGL accrued $2.5 million and estimated its potential allocated liability at less than $4 million while pursuing post-trial remedies.
- Key risks include commodity-price and derivative volatility, seasonal working-capital needs, counterparty performance, environmental and regulatory obligations, and execution of acquisitions and capital projects. Operating leases and minimum pipeline-throughput commitments are also significant obligations. NGL noted that interim results may not indicate full-year results.
Important facts for investors to verify
- How much of quarterly earnings and Adjusted EBITDA reflects derivative gains, accounting changes, and asset-sale gains rather than recurring operations.
- Whether continuing-operations cash generation can support capital spending, debt service, and distributions, given low cash balances and seasonal borrowing needs.
- Debt maturity, revolver availability, and covenant headroom after the February 2019 amendment, including the scheduled tightening of leverage limits.
- Completion and realized proceeds of the South Pecos sale and DCP Midstream terminal acquisition, and the expected returns from recent Water Solutions investments.
- Final outcomes and cash costs of the LCT litigation and Gavilon EPA settlement, and any further changes to reserves or obligations.