NGL Energy Partners LP — Form 10-Q Summary
Business context and period. This unaudited report covers the fiscal quarter and six months ended September 30, 2018, compared with the corresponding 2017 periods. NGL operates crude oil logistics, water solutions, natural gas liquids (“Liquids”), and refined products and renewables businesses. It completed the sale of virtually all its Retail Propane business in July 2018; that business is presented as discontinued operations.
Key financial results
| Metric | Three months ended Sept. 30, 2018 | Six months ended Sept. 30, 2018 |
|---|---|---|
| Revenue | $6.655 billion, versus $3.877 billion | $12.499 billion, versus $7.607 billion |
| Operating loss | $13.3 million, versus $119.9 million | $97.9 million, versus $128.7 million |
| Loss from continuing operations | $53.5 million, versus $164.3 million | $218.7 million, versus $222.3 million |
| Net income (loss), including discontinued operations | $354.9 million, versus a loss of $173.6 million | $185.7 million, versus a loss of $237.3 million |
| Adjusted EBITDA (non-GAAP) | $95.4 million, versus $90.8 million | $175.7 million, versus $129.7 million |
| Cash flow from operations | Not presented as a quarterly figure | $(87.9) million total; continuing operations used $118.8 million |
All amounts are U.S. dollars. Net income included a $408.6 million gain on the Retail Propane sale; continuing operations remained loss-making. Basic net income per common unit was $2.70 for the quarter and $1.17 for the six months, while continuing-operations losses were $0.63 and $2.15 per unit, respectively.
Financial position, liquidity and operating performance
- At September 30, cash was $36.4 million, total assets $6.385 billion, and current assets and current liabilities were $2.260 billion and $2.101 billion, respectively. Trade receivables were $1.367 billion and inventory was $679.1 million.
- Debt carrying value was $2.532 billion, including $716.2 million of current maturities. Revolving-credit borrowings were $824 million, at a 5.13% weighted-average rate; the facility also had $202.3 million of letters of credit. NGL reported compliance with its debt covenants; leverage was 3.69x and interest coverage 2.67x.
- Six-month investing cash outflow from continuing operations was $456.6 million, including $193.5 million of capital expenditures and $198.0 million of acquisitions. The company received $845.8 million of investing cash from discontinued operations, primarily related to the propane divestiture. Continuing-operations financing used $286.7 million; total distributions to common and preferred unitholders were $117.5 million.
- Quarterly segment operating results improved in Crude Oil Logistics ($31.0 million versus $1.2 million), Water Solutions ($9.8 million versus a $7.5 million loss), and Liquids ($10.8 million versus a $118.1 million loss, which included a prior-year goodwill impairment). Refined Products and Renewables recorded a $29.5 million operating loss versus $21.0 million income, reflecting weak margins and derivative losses.
Material changes, outlook and risks
- Portfolio and capital allocation: The Retail Propane sale generated $896.5 million in cash consideration and a reported $408.6 million gain. Management said proceeds were used to reduce revolver borrowings and described plans to pursue growth, particularly in Water Solutions and Crude Oil Logistics, through acquisitions and expansion projects. No specific earnings or cash-flow guidance was provided.
- Debt developments: On October 16, 2018, after quarter-end, NGL redeemed all 6.875% notes due 2021 using its revolving facility. The redemption shifts funding toward variable-rate debt. The 5.125% notes due 2019 were also shown as current maturities at quarter-end.
- Unusual costs and accounting: A crude-pipeline capacity agreement transaction resulted in a reported $105.0 million loss, including a $67.7 million write-off of deficiency credits and $35.3 million paid to WPX, plus related costs. Adoption of ASC 606 included a $139.3 million cumulative-effect increase to opening equity; the company reported that adoption reduced six-month net income by $15.1 million compared with the prior accounting treatment.
- Legal and regulatory exposure: NGL accrued $34.2 million for the Gavilon renewable-fuel matter. The settlement, approved by the court on November 8, 2018, requires $25 million cash and retirement of 36 million RINs over 12 months. In the LCT Capital case, a jury awarded $33 million plus statutory interest; NGL disputed the verdict, reported post-trial motions and possible appeal, and accrued $2.5 million, estimating its potential allocated liability at less than $4 million.
- Business risks: Management highlighted commodity-price and counterparty-credit exposure, seasonal working-capital needs, variable-rate borrowing costs, environmental and regulatory requirements, and dependence on pipeline capacity and customer activity. Six-month derivative losses were $89.0 million in the income statement. Management said anticipated operating cash flows and revolver capacity should meet liquidity needs, but noted that changed assumptions or acquisitions could require additional capital or asset sales.
Important facts for investors to verify
- How much of reported earnings and cash proceeds came from the propane disposal, and what recurring earnings remain after the exit?
- Whether continuing-operations cash generation improves as seasonal inventory builds reverse, and how receivables and working capital perform.
- Available revolver capacity and covenant headroom following the October 2021-note redemption, including sensitivity to higher rates.
- Actual cash, RIN retirement and other costs under the Gavilon settlement, and the eventual outcome and allocation of the LCT verdict.
- Whether Water Solutions acquisitions and expansion spending produce durable returns, and whether refined-products margins and derivative results recover.