NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2014 (fiscal third quarter and year to date). Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise. Results are not directly comparable in several areas because of acquisitions, particularly TransMontaigne in July 2014.
Business context and key financial metrics
NGL operates crude oil logistics, water solutions, wholesale natural gas liquids, retail propane, and refined products and renewables businesses. Total assets were $6,905.9 million at December 31, 2014, versus $4,167.2 million at March 31, 2014.
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $4,552.1 | $2,743.4 | $13,581.3 | $5,723.3 |
| Operating income | $18.1 | $41.2 | $5.3 | $43.8 |
| Net income (loss) | $(5.3) | $24.1 | $(61.1) | $5.6 |
| Net income (loss) allocated to limited partners | $(22.7) | $19.6 | $(102.3) | $(3.1) |
| Basic and diluted loss per common unit | $(0.26) | $0.27 | $(1.17) | $(0.03) |
| Adjusted EBITDA | $136.6 | $79.9 | $238.0 | $148.0 |
Adjusted EBITDA is a non-GAAP measure and excludes specified items; it should not be treated as a substitute for GAAP earnings or operating cash flow. The filing reports consolidated operating margins of approximately 0.4% for the quarter and less than 0.1% year to date, based on operating income divided by revenue.
- Cash flow: Operating cash flow was $81.8 million for the nine months, compared with $64.8 million a year earlier. Before changes in operating assets and liabilities, cash flow was negative $92.6 million, versus positive $137.3 million; working-capital changes contributed $174.4 million in the current period.
- Investing and financing: Investing activities used $1,114.5 million, including $1,114.0 million for acquisitions. Financing activities provided $1,052.8 million. Cash increased by $20.1 million to $30.6 million.
- Debt and liquidity: Long-term debt, including current maturities, was $2,757.8 million; cash less total debt was approximately negative $2,727.2 million. Current assets were $2,457.7 million and current liabilities $1,901.2 million, a current ratio of approximately 1.29. The revolving facilities had $2,296 million of total capacity, with $1,396 million borrowed and $176.1 million of letters of credit; remaining availability is subject to the borrowing base. The partnership reported compliance with debt covenants and a leverage ratio of approximately 3.3x against a 4.25x maximum.
- Distributions: The partnership paid $0.6088 per common unit for the quarter and subsequently declared $0.6175 per unit, payable in February 2015.
Material changes and segment performance
- Revenue rose substantially year over year, driven largely by acquired operations and higher sales volumes; the TransMontaigne acquisition contributed $3.0 billion of revenue and $16.7 million of operating income in the nine-month period. Higher revenue did not translate into higher consolidated operating income.
- Crude oil logistics: Quarterly operating loss widened to $26.8 million from $6.4 million. Management cited the sharp oil-price decline, timing differences between purchases and sales, and a $20.0 million inventory lower-of-cost-or-market adjustment. Nine-month segment loss was $25.3 million.
- Water solutions: Quarterly operating income increased to $34.5 million from $1.0 million; nine-month income was $48.4 million. Increased wastewater volumes and facility acquisitions contributed, as did derivative gains that reduced quarterly cost of sales by $29.1 million and nine-month cost of sales by $34.2 million.
- Liquids: Quarterly operating loss was $14.0 million versus income of $40.6 million; the nine-month loss was $4.0 million versus income of $53.1 million. A $29.9 million loss on sale of a natural gas liquids terminal and weaker margins amid falling prices weighed on results.
- Retail propane: Quarterly operating income was broadly flat at $21.5 million. Warmer weather reduced volumes, while higher per-gallon margins partly offset the decline.
- Refined products and renewables: Quarterly operating income was $29.0 million versus a $1.0 million loss in the prior-year quarter; nine-month income was $36.5 million. The comparison reflects acquisitions. Current-period results included an $8.7 million biodiesel tax-credit benefit and TransMontaigne employee termination-benefit expense.
- Corporate and other operating loss increased to $26.0 million for the quarter and $67.1 million year to date, including higher corporate compensation costs. Interest expense rose to $30.1 million for the quarter and $79.2 million year to date, primarily because of acquisition-related borrowing.
Outlook, risks, contingencies, and unusual items
- Management stated that expected operating cash flows and revolving-facility capacity should meet liquidity needs, while cautioning that acquisitions or changed assumptions could require additional capital. No specific earnings or distribution guidance was provided.
- Crude oil prices fell sharply, with WTI at Cushing ending the quarter at $53.27 per barrel. Management warned that sustained low prices could reduce drilling, crude logistics volumes, water-processing volumes, and recovered-hydrocarbon revenue. Lower prices and warmer weather also affected wholesale liquids demand and inventory margins.
- Management planned a fourth-quarter goodwill impairment assessment, noting that lower oil prices may adversely affect water-solutions forecasts. Any impairment was not quantified in this filing.
- The Grand Mesa pipeline project has an estimated construction cost of approximately $655 million, with service anticipated in late 2016. The contractual-obligations table lists a remaining construction commitment of $647.9 million.
- After quarter-end, NGL signed an agreement to acquire a Utah natural-gas-liquids storage facility for approximately $280 million, comprising $80 million cash and approximately $200 million in common units. It also completed a $25 million cash and 132,100-unit retail propane acquisition and purchased a water facility for $12 million.
- Unusual items included the $29.9 million terminal-disposal loss, inventory valuation adjustments, derivative gains, acquisition and termination-related compensation, and a $2.5 million contractual-dispute settlement recorded in other income. Acquisition fair values remained subject to revision.
- The filing describes ordinary-course legal claims as not expected by management to have a material adverse effect, while noting outcomes are uncertain. Environmental regulation and operating risks remain relevant. Disclosure controls were reported effective; integration of acquired businesses and their internal controls remained ongoing.
Important facts for investors to verify
- Whether the sharp commodity-price decline, inventory adjustments, and related derivatives continue to affect realized segment margins and reported earnings.
- Whether operating cash flow remains dependent on favorable working-capital movements, and how much revolving-credit availability is actually accessible under borrowing-base terms.
- Debt-service capacity, covenant headroom, the TLP facility’s March 2016 maturity, and the extent of variable-rate exposure.
- Whether acquired businesses achieve expected cash generation and integration benefits, and whether final acquisition accounting or goodwill testing results in material adjustments or impairment.
- Funding, construction progress, ship-or-pay commitments, and expected economics of Grand Mesa, along with financing and dilution implications of the Utah storage acquisition.
- The sustainability of distributions relative to operating cash flow, required capital spending, debt obligations, and acquisition funding needs.