NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017; comparative periods ended December 31, 2016. The filing was signed February 9, 2018. NGL operates in crude oil logistics, water solutions, natural gas liquids, retail propane, and refined products and renewables.
Key financial results
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $4,463.3 million | $3,406.6 million | $12,168.2 million | $9,174.1 million |
| Gross profit (revenue less cost of sales) | $190.5 million | $178.6 million | $482.5 million | $451.0 million |
| Operating income (loss) | $124.5 million | $22.6 million | $(19.2) million | $180.6 million |
| Net income (loss) | $56.8 million | $1.3 million | $(180.5) million | $117.4 million |
| Net income (loss) allocated to common unitholders | $40.0 million | $(8.0) million | $(222.7) million | $90.2 million |
| Basic earnings (loss) per common unit | $0.33 | $(0.07) | $(1.84) | $0.85 |
| Adjusted EBITDA (non-GAAP) | $122.6 million | $120.7 million | $252.3 million | $260.2 million |
- Quarterly revenue increased about 31%, while gross margin was approximately 4.3% of revenue. Nine-month revenue rose about 33%, with gross margin approximately 4.0%.
- Cash from operating activities was $4.1 million for the nine months, versus cash used of $115.6 million in the prior-year period. Cash at December 31 was $28.5 million. Investing activities provided $105.1 million, principally reflecting the Glass Mountain sale; financing activities used $92.9 million.
- At December 31, total assets were $6.316 billion and total equity was $1.981 billion. Long-term debt, including current maturities, had a book value of approximately $2.925 billion. Cash interest paid for the nine months was $153.8 million.
- Cash and current assets were $28.5 million and $1.970 billion, respectively; current liabilities were $1.165 billion. Working-capital needs are seasonal and influenced by inventory and commodity prices.
Material changes and significant items
- Quarterly operating income included a $108.6 million gain from selling NGL’s 50% interest in Glass Mountain Pipeline for net proceeds of $292.1 million. This was a major contributor to the quarter’s reported earnings.
- The nine-month operating loss included a $116.9 million goodwill impairment in the Liquids segment’s Sawtooth natural-gas-liquids storage reporting unit. Management cited lower storage demand and earnings; further impairment was described as reasonably possible if expected storage demand does not materialize.
- Nine-month results also compare with the prior year’s substantial gains on asset disposals, including TLP-related gains. NGL’s nine-month loss further reflected higher interest expense ($151.2 million versus $105.3 million) and $22.5 million of net losses on early extinguishment of liabilities. Quarterly debt-extinguishment loss was $21.1 million.
- Adjusted EBITDA was nearly flat year over year in the quarter but declined about 3% for the nine-month period. This non-GAAP measure excludes, among other items, asset gains and impairments, derivative adjustments, and equity compensation; it is not a substitute for GAAP results or operating cash flow.
- Segment trends were mixed: quarterly Crude Oil Logistics operating income was $106.3 million, including the Glass Mountain gain; Water Solutions narrowed its operating loss to $1.4 million; Liquids operating income declined to $22.3 million; Retail Propane operating income rose to $24.0 million; and Refined Products and Renewables recorded a $4.8 million operating loss, including weak refined-products margins and risk-management losses.
Debt, liquidity, distributions, and outlook
- The revolving credit agreement had total capacity of $1.765 billion. At December 31, working-capital borrowings were $1.0145 billion, expansion-capital borrowings were $125 million, and letters of credit on the working-capital facility were $182.1 million. The working-capital facility was therefore close to fully utilized; the filing does not state a single unrestricted available-liquidity figure.
- Reported covenant ratios at December 31 were approximately 5.13-to-1 leverage, 0.35-to-1 senior secured leverage, and 2.32-to-1 interest coverage. NGL reported compliance with its credit agreement and senior-note indentures. Covenant limits for that period were 5.50-to-1 leverage and a minimum 2.25-to-1 interest-coverage ratio.
- NGL repurchased all remaining senior secured notes in December and repurchased portions of its 2023 and 2025 unsecured notes. The credit agreement restricts increasing the common distribution above the preceding quarter’s amount if leverage exceeds 4.25-to-1. On February 5, 2018, after quarter-end, NGL amended the agreement to allow accrued blenders tax credits into the defined EBITDA measure solely for the quarters ending December 31, 2017 and March 31, 2018.
- NGL issued 8.4 million Class B preferred units for net proceeds of $202.7 million. Common distributions remained $0.39 per unit quarterly; the Class A preferred units carry a 10.75% annual distribution rate and Class B preferred units a 9.00% initial annual rate through June 2022.
- NGL agreed to sell the Mid-Continent and Western portions of its Retail Propane business to DCC LPG for $200 million, subject to working-capital adjustment, with closing expected March 31, 2018. The businesses were classified as held for sale; the transaction was not reported as discontinued operations.
- Management said expected operating cash flows and revolving-credit borrowing capacity were sufficient for anticipated liquidity needs, while noting that changed assumptions, acquisitions, or market conditions could require additional capital or asset sales. It said acquisitions were less likely under then-current market conditions and that expansion projects would be financed through the revolver, asset sales, or other financing.
Risks, contingencies, and other notable matters
- Commodity price and counterparty-credit exposure, seasonal inventory funding, competition and thin marketing margins, pipeline minimum-volume commitments, and variable-rate debt are key risks. A 0.125 percentage-point interest-rate change was estimated to alter annual interest expense by $1.4 million at period-end borrowings.
- An EPA/Department of Justice civil action alleges Clean Air Act renewable-fuel-standard violations involving 2011 biodiesel RIN transactions before NGL acquired the relevant business. NGL denies the allegations and intends to defend the case; it said the outcome and significance could not be determined.
- Environmental laws and operating hazards may result in additional costs. The balance sheet included a $2.3 million environmental liability. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting that outcomes remain uncertain.
- The Tax Cuts and Jobs Act limits business-interest deductibility beginning in 2018; the filing noted that this could delay deductions for partners. NGL generally is treated as a partnership for federal income-tax purposes.
- The filing states disclosure controls were effective at December 31, 2017, and reports no material change in internal controls over financial reporting during the quarter.
Most important facts for investors to verify
- How much of quarterly earnings and reported operating income depended on the $108.6 million Glass Mountain gain, and what recurring earnings remain after its sale?
- Whether the Sawtooth storage business stabilizes and whether further goodwill impairment or weaker Liquids performance occurs.
- Available revolver capacity, covenant headroom, and the effect of the February 5, 2018 EBITDA amendment on covenant calculations and compliance.
- Completion and final proceeds from the planned $200 million Retail Propane divestiture, including working-capital adjustments and the business’s contribution before closing.
- Cash conversion and working-capital requirements, including the effect of commodity prices, seasonal inventories, derivative settlements, and pipeline commitments.
- Potential financial and regulatory consequences of the EPA RIN litigation, and the sustainability of distributions given debt levels, preferred distributions, and covenant restrictions.