NGL Energy Partners LP — Form 10-Q Summary
Business context and period. This report covers the three months ended June 30, 2016, NGL’s first quarter of fiscal 2017. Its businesses include crude oil logistics, water solutions, natural gas liquids, retail propane, and refined products and renewables. Comparative 2015 results are restated where indicated. Period comparability is affected by acquisitions and by the February deconsolidation and April sale of NGL’s TransMontaigne Partners (TLP) interests.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Prior comparable period |
|---|---|---|
| Revenue | $2,722.0 million | $3,538.5 million |
| Operating income (loss) | $193.9 million | $(1.2) million |
| Net income (loss) | $182.8 million | $(25.0) million |
| Net income attributable to NGL | $176.9 million | $(29.4) million |
| Income (loss) allocated to common unitholders | $173.3 million; $1.66 basic and $1.38 diluted per unit | $(44.7) million; $(0.43) per unit |
| Adjusted EBITDA | $63.8 million | $89.0 million |
| Operating cash flow | $(71.4) million | $81.8 million |
Revenue fell about 23%, while GAAP operating and net income turned positive. The improvement was not representative of underlying earnings: operating results included a $124.7 million reversal of a prior-period goodwill impairment and TLP-related gains; other income included a $30.0 million gain on early extinguishment of liabilities. Adjusted EBITDA, which excludes specified unusual items, declined about 28%. Gross profit (revenue less cost of sales) was $155.5 million, or approximately 5.7% of revenue, versus $215.9 million, or 6.1%, in the prior period.
Segment operating results included $149.8 million income in refined products and renewables, including the $104.1 million gain on sale of TLP units; $79.5 million income in water solutions, including the goodwill impairment reversal; a $0.6 million loss in crude oil logistics; a $0.1 million loss in liquids; and a $2.5 million loss in retail propane.
Cash flow and liquidity. Operating cash flow before changes in operating assets and liabilities was $97.6 million; working-capital changes used $169.0 million, including inventory growth of $154.6 million. Investing activities used $75.5 million and financing activities provided $129.6 million. Cash ended the quarter at $10.9 million. Current assets were $1.269 billion and current liabilities $869.6 million. The filing cites seasonal inventory funding needs as a driver of borrowing.
Debt and capital. Total debt at June 30 was approximately $2.875 billion, including $1.827 billion drawn on revolving facilities; reported long-term debt, net of issuance costs and current maturities, was $2.867 billion. Revolver capacity was $2.484 billion, with $71.6 million of letters of credit outstanding; availability is subject to the working-capital borrowing base. The facilities mature November 5, 2018. NGL reported covenant compliance, leverage of approximately 4.0x against a 4.5x maximum, and interest coverage of 4.7x against a 2.75x minimum. Revolver borrowings bore 2.73% at quarter-end. A 0.125 percentage-point rate change would alter annual interest expense by approximately $2.3 million.
Material changes, outlook, and risks
- Revenue declined primarily in crude oil logistics and water solutions, reflecting lower crude oil prices, reduced production/volumes, and the comparison with TLP’s formerly consolidated operations. Refined products sales volumes increased, while reported segment income benefited from the TLP disposal gain.
- NGL sold its remaining TLP common units for approximately $112.4 million cash and recorded a $104.1 million gain. It also issued $240 million of 10.75% Class A convertible preferred units and warrants, generating $235.2 million net proceeds. Preferred distributions rank ahead of common distributions; conversion and warrant exercise could dilute common unitholders.
- Management reduced the common distribution from $0.64 to $0.39 per unit, expecting the lower rate to continue for two additional quarters under then-current conditions. It estimated approximately $170 million of annual cash savings to support liquidity, debt repayment, or selected growth projects. A $0.39 distribution was declared for the quarter. Management said anticipated operating cash flow and revolver capacity should meet liquidity needs, but noted that additional capital or asset sales might be needed if assumptions change. Acquisitions were less likely under prevailing capital-market conditions; expansion projects continued.
- Near-term results are subject to seasonality, commodity-price and volume changes, and working-capital requirements. Other exposures include counterparty credit risk, variable-rate debt, environmental regulation, and competition. The EPA has alleged 2011 renewable-fuel-standard violations involving a predecessor business; NGL denies the allegations, settlement discussions are ongoing, and any potential resolution amount is unclear.
- The filing reports a material prior-period error involving omitted contingent consideration liabilities related to water-solutions royalty agreements; affected fiscal 2016 quarters were restated. Management concluded disclosure controls were effective at June 30, 2016.
Key investor verification points
- Separate recurring performance from the goodwill reversal, TLP gains, debt-extinguishment and liability-release gains, and the water-supply investment revaluation loss; assess the decline in Adjusted EBITDA.
- Verify revolver availability after borrowing-base limits and monitor covenant headroom, the November 2018 facility maturity, and seasonal working-capital needs.
- Review the preferred units’ 10.75% cumulative distribution, seniority, conversion terms, governance rights, and the 4.35 million warrants exercisable at $0.01 per common unit.
- Track the sustainability of the reduced common distribution, the EPA matter, and commitments for leases, pipeline throughput, commodity purchases, and capital projects.
- Assess the effects of the restatement, acquisitions, and TLP deconsolidation on comparability and the reliability of reported segment trends.