NGL Energy Partners LP — Form 10-Q Summary
Business context and reporting period. The partnership operates in crude oil logistics, water solutions, natural gas liquids, retail propane, and refined products and renewables. This filing covers the quarter and six months ended September 30, 2017, the second quarter of fiscal 2018. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Three months ended Sept. 30, 2017 | Six months ended Sept. 30, 2017 |
|---|---|---|
| Revenue | $3,923.3; prior year $3,045.5 | $7,704.9; prior year $5,767.5 |
| Operating income (loss) | $(129.1); prior year $(35.8) | $(143.8); prior year $158.1 |
| Net income (loss) | $(173.6); prior year $(66.7) | $(237.3); prior year $116.1 |
| Net income (loss) allocated to common unitholders | $(189.3), or $(1.56) per unit | $(262.7), or $(2.17) per unit |
| Adjusted EBITDA (non-GAAP) | $90.8; prior year $75.5 | $129.7; prior year $139.4 |
Revenue increased substantially, but primarily reflects higher commodity prices and sales volumes in businesses with high cost of sales; it did not translate into improved GAAP profitability. The quarter’s operating loss included a $116.9 goodwill impairment in Liquids. Six-month operating results also compare against prior-year gains, including a $104.1 gain on the sale of TLP common units.
- Cash flow and investment: Six-month operating cash flow was $10.0, versus cash used of $54.9 in the prior-year period. Investing used $108.2, including $56.5 of capital expenditures and $48.4 for acquisitions. Financing provided $104.4. Cash ended at $18.4.
- Margins and segments: Quarterly segment operating income was $1.2 for Crude Oil Logistics, while Water Solutions lost $7.5, Liquids lost $118.1, Retail Propane lost $9.2, and Refined Products and Renewables earned $21.0. Crude Oil Logistics benefited from the Grand Mesa Pipeline and better crude product margins. Liquids’ result was dominated by the goodwill impairment and derivative-related volatility.
- Debt and liquidity: Total debt at book value, including current maturities, was approximately $3.04 billion. Revolver borrowings were $971.5 at a weighted-average rate of 4.50%, with $115.1 of letters of credit. The $1.765 billion credit facilities therefore had approximately $678 million of nominal capacity remaining, before considering other restrictions. Current assets were $1,546.2 and current liabilities $989.9.
- Covenants and interest: The partnership reported compliance with debt covenants. Leverage was approximately 5.42x against a 5.50x maximum then in effect; interest coverage was 2.26x against a 2.25x minimum. Limits tighten over time. Credit terms restrict distribution increases if leverage exceeds 4.25x; secured-note terms also restrict increases if interest coverage is below 3.00x.
- Distributions and capital: The common-unit distribution remained $0.39 per unit for the quarter. NGL issued $202.8 of 9.00% Class B preferred units. It repurchased $11.2 of common units during the quarter and repurchased senior secured and unsecured notes during the six-month period.
Material changes, outlook, and risks
- Liquids recorded a $116.9 goodwill impairment after weaker demand for natural gas liquids storage reduced projected revenues and earnings. Management said further impairment is reasonably possible if projected storage demand does not materialize, particularly given commodity-price volatility and excess railcars.
- Commodity derivative results were volatile: the filing reports a net derivative loss of $71.4 for the quarter and $34.9 for the six-month period. Derivatives are not designated as accounting hedges, so fair-value changes flow through cost of sales.
- Management cited seasonality: the first half generally requires building inventories ahead of the heating and motor-fuel blending seasons, increasing working-capital needs. It said expected operating cash flow and revolver capacity should meet liquidity needs, but additional capital or asset sales could be needed if assumptions change or acquisitions are pursued. Management described acquisitions as less likely under current conditions and continued to identify the Glass Mountain pipeline extension as a capital project.
- On November 7, 2017, after quarter-end, the partnership agreed to sell part of its Retail Propane business for $200 million in cash, subject to working-capital adjustment and customary closing conditions. Closing was scheduled for March 31, 2018; the partnership expected to retain profits through closing.
- An EPA civil action concerning alleged 2011 renewable-fuel-standard violations remains unresolved. The EPA sought partial summary judgment in October 2017; NGL denied the allegations and said it would continue to defend the action. The partnership could not determine the outcome or its significance.
- Other exposures include energy-price and demand changes, counterparty credit risk, environmental regulation, and substantial contractual commitments. Minimum operating-lease payments were $553.6 and pipeline-throughput commitments $120.4. The filing provides no specific earnings or distribution guidance.
Investor verification points
- Review the impairment assumptions and remaining goodwill for the Sawtooth storage reporting unit, including the risk of additional impairment.
- Assess covenant headroom and the scheduled covenant tightening, particularly the reported 5.42x leverage and 2.26x interest coverage ratios.
- Reconcile reported Adjusted EBITDA with GAAP losses and examine the effects of derivative marks, impairment charges, and prior-year asset-sale gains.
- Verify liquidity after seasonal inventory funding, letters of credit, debt service, distributions, and committed capital spending.
- Track the proposed Retail Propane sale’s closing conditions, working-capital adjustment, retained operations, and use of proceeds.
- Monitor the EPA litigation and any changes in environmental liabilities or other contingencies.