NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2013; comparative periods ended December 31, 2012. Amounts are U.S. dollars. Financial statement figures are in millions unless otherwise noted.
Business context
NGL operates crude oil logistics, water solutions, natural gas liquids (NGL) logistics, and retail propane businesses. Results reflect substantial acquisition-driven expansion, including the December 2, 2013 acquisition of Gavilon Energy. The quarter also coincided with unusually cold weather, which boosted NGL and retail propane demand. NGL cautions that the businesses are seasonal and interim results may not indicate full-year performance.
Key financial metrics
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $2,743.4 | $1,338.2 | $5,723.3 | $2,800.2 |
| Operating income | $41.2 | $50.2 | $43.8 | $53.7 |
| Net income | $24.1 | $40.5 | $5.6 | $25.8 |
| Net income (loss) allocated to limited partners | $19.6 | $39.2 | $(3.1) | $23.9 |
| Basic and diluted income (loss) per common unit | $0.27 | $0.75 | $(0.03) | $0.53 |
| Interest expense | $16.7 | $9.8 | $38.4 | $22.3 |
| Adjusted EBITDA | $79.9 | $73.2 | $148.0 | $93.1 |
Operating margin was approximately 1.5% for the quarter versus 3.8% a year earlier, and 0.8% for the nine-month period versus 1.9%. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results or cash flow.
- Cash flow: Nine-month operating cash flow was $65.2 million, compared with cash used of $1.9 million in 2012. Investing used $1,372.4 million, primarily reflecting $1,240.6 million of cash acquisitions and $107.9 million of long-lived asset purchases. Financing provided $1,304.6 million, including equity proceeds and debt financing. Cash declined by $2.7 million to $8.9 million.
- Liquidity: At December 31, current assets were $1,655.0 million and current liabilities $1,382.4 million; working capital was approximately $272.6 million. Revolver availability was $199.6 million on the working-capital facility and $325.5 million on the expansion facility, subject to facility terms.
- Debt: Total debt was $1,525.3 million, up from $749.1 million at March 31, 2013. This included $808.5 million outstanding under revolving facilities, $250.0 million of 6.65% senior notes, and $450.0 million of 6.875% unsecured notes due 2021. The partnership reported covenant compliance; leverage was approximately 3.0x against a 4.25x maximum, and interest coverage approximately 9x against a 2.75x minimum.
- Distributions and units: NGL declared a $0.53125-per-unit distribution on January 23, 2014, payable February 14. It reported 73.4 million common units and 5.9 million subordinated units outstanding at December 31.
Material changes and segment performance
- Quarterly revenue more than doubled year over year, principally reflecting acquired businesses and higher commodity prices and volumes. Despite the revenue increase, operating income fell 18% and net income fell 41%; higher depreciation and amortization, interest, corporate costs, and weaker crude logistics results contributed.
- Crude oil logistics: Quarterly operating loss was $6.4 million versus income of $11.4 million. Management cited narrowing crude-market price spreads and increased competition from new South Texas pipelines, which reduced transportation opportunities and sometimes required lower fleet utilization while producer terms were renegotiated.
- Water solutions: Quarterly operating income was $1.0 million versus $5.5 million. Acquired operations added revenue but generated losses, including significant acquired-intangible amortization. For the nine months, management said water-segment revenue was about $3 million below expectations and operating expenses about $2 million above expectations, mainly while integrating Eagle Ford operations.
- NGL logistics: Quarterly operating income rose to $40.6 million from $25.1 million. Cold weather, higher demand and volumes, customer growth, and inventory bought at lower prices supported results.
- Retail propane: Quarterly operating income increased to $21.7 million from $16.4 million, mainly on increased demand associated with unusually cold weather.
- Acquisition and financing activity: The Gavilon acquisition involved $832.4 million of cash, net of cash acquired; its preliminary purchase accounting remains subject to potentially material revisions. NGL also completed multiple water, crude logistics, retail propane, and terminal acquisitions. It issued $450 million of unsecured notes and completed equity offerings/private placements that generated $650.2 million net proceeds during the nine months.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects to continue pursuing acquisition-led growth and believes operating cash flows and available credit capacity can meet anticipated liquidity needs, while noting additional capital could be required and cannot be assured.
- Cold winter weather and strong demand supported current-period propane/NGL volumes and margins, but supply infrastructure was strained. Management warned that sharp price increases may raise customer receivable collection risk and could reduce future demand through conservation or fuel substitution.
- Crude oil results are exposed to volatile commodity prices, production levels, geographic price spreads, and competition. Water solutions depend on oil and gas activity near facilities and customer volumes; most Texas customers lack volume commitments.
- Commodity derivatives are not designated as accounting hedges; changes in fair value are recorded in cost of sales. Nine-month derivative results included a $26.7 million loss, versus a $12.0 million gain in 2012, and affected comparability.
- Acquisition accounting for several 2013 transactions remained preliminary. OWL consideration could increase by up to $60 million if specified performance targets are met; management estimated its fair value at approximately zero at December 31, 2013.
- A crude oil customer dispute concerns $1.7 million of unrecorded disputed fees and a $5.5 million counterclaim; the customer also withheld $3.3 million for later services. NGL said the outcome could not be reliably predicted but did not expect a material adverse effect. Management assessed ordinary-course legal matters as not expected to be materially adverse.
- Other exposures include environmental and regulatory requirements, weather, customer and counterparty credit risk, variable-rate debt, seasonal working-capital needs, and possible changes to the Renewable Fuels Standard or regulation of the Glass Mountain joint-venture pipeline.
Important facts for investors to verify
- Whether acquired businesses, especially Gavilon and Texas water operations, deliver expected operating performance after integration and final purchase-price accounting.
- Whether crude-market spreads and South Texas pipeline competition continue to pressure crude logistics margins and fleet utilization.
- Whether cold-weather-driven demand, elevated commodity prices, supply constraints, and receivable collection risks persist or reverse.
- Debt levels, revolver availability, covenant headroom, interest costs, and the funding required for acquisitions, capital spending, and distributions.
- Resolution of the crude oil customer dispute and any OWL contingent purchase-price payment.
- Comparability of reported revenue and Adjusted EBITDA, including the impact of acquisitions, derivatives, and non-GAAP adjustments.