NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2012; unaudited. This is the partnership’s fiscal second quarter. Amounts below are U.S. dollars unless stated otherwise.
Business context and reporting period
NGL operates retail propane and distillate businesses, natural gas liquids logistics, crude oil logistics, and water services. Results changed substantially following acquisitions, particularly the June 19, 2012 High Sierra combination, which added crude oil, water services, and additional NGL operations. Accordingly, comparisons with 2011 are not like-for-like. Propane activity is seasonal: management says sales, operating profit, and operating cash flow are generally higher in the third and fourth fiscal quarters.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2012 | Six months ended Sep. 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $1,135.5 million | $1,461.9 million | $210.0 million / $400.9 million |
| Gross profit (revenue less cost of sales) | $81.8 million; 7.2% margin | $109.3 million; 7.5% margin | $8.6 million; 4.1% / $13.5 million; 3.4% |
| Operating income (loss) | $18.6 million | $3.5 million | $(4.5) million / $(10.2) million |
| Net income (loss) | $10.1 million | $(14.6) million | $(5.4) million / $(12.2) million |
| Basic and diluted earnings (loss) per unit | $0.18 | Common: $(0.37); subordinated: $(0.38) | $(0.36) / $(0.88) |
| Cash from operating activities | Not presented separately | $(52.8) million | $(52.8) million |
Six-month adjusted EBITDA was $19.9 million, versus a loss of $5.6 million in 2011; this is a non-GAAP measure. Six-month results included a $5.8 million loss on early extinguishment of debt. Higher debt and acquisition-related expenses increased interest and amortization costs.
At September 30, cash was $26.0 million, current assets $736.3 million, and current liabilities $653.1 million, implying working capital of approximately $83.2 million. Total debt was $647.9 million, including $78.0 million of current maturities; long-term debt was $569.9 million. The partnership had $250 million of 6.65% senior notes and $386 million drawn under revolving facilities. Remaining stated revolver capacity was $200.8 million, including $15.3 million under the working-capital facility and $185.5 million under the expansion facility. Leverage and interest coverage ratios were approximately 3:1 and 8:1, respectively, and the partnership reported covenant compliance.
Material changes, outlook, and risks
- Revenue growth largely reflects acquired businesses, especially High Sierra; crude oil logistics contributed $714.3 million of quarterly revenue and water services $15.8 million. High Sierra’s results were included only from June 19, 2012.
- Quarterly operating income improved to $18.6 million from a $4.5 million loss. For the six-month period, operating income was $3.5 million, but the partnership reported a $14.6 million net loss after interest and the debt-extinguishment charge. Retail propane remained seasonally loss-making in the quarter, at a $0.5 million segment operating loss.
- Operating cash outflow was $52.8 million, while investing cash outflow was $310.0 million, principally reflecting acquisitions. Financing provided $381.0 million, including borrowing and senior-note proceeds. Inventory and other working-capital movements materially affected operating cash flow.
- Management said anticipated operating cash flows and revolver capacity should meet liquidity needs for the next 12 months, but noted that acquisitions or changed assumptions could require additional capital; access to additional capital is not assured. No specific earnings or revenue guidance was provided.
- Subsequent to quarter-end, NGL acquired additional businesses, including Pecos on November 1 for $134.8 million cash plus assumed obligations of $10.4 million. Pecos’s crude oil sales are concentrated in one customer; former owners’ escrowed units offer only partial, time-limited credit protection.
- Key exposures include energy and commodity-price volatility, weather and seasonality, supply and transportation constraints, customer credit and concentration, acquisition integration and valuation, environmental and operating hazards, and access to capital. High Sierra acquisition accounting remained preliminary and could change materially. Integration of High Sierra and Downeast controls was ongoing, although disclosure controls were reported effective.
- Legal matters include a crude-oil lien case in which producers claim more than $72 million in damages and assert NGL’s allocated share exceeds $2.1 million; a wrongful-death claim and fatal vehicle collision involving High Sierra; and Pemex litigation. Management considers the ultimate effect of ordinary-course claims not expected to be material, but outcomes remain uncertain. A Wyoming facility also lacked one required permit; management expected it to be granted but could not determine timing.
Important facts for investors to verify
- How much of reported growth and operating income is recurring and attributable to acquired versus legacy operations, particularly given High Sierra’s partial-period inclusion and provisional purchase accounting.
- Whether operating cash flow improves through the heating season and whether seasonal working-capital needs, distributions, and acquisitions can be funded within available credit capacity.
- Debt levels, borrowing availability, covenant headroom, interest costs, and the effect of variable rates; management estimated a 0.125 percentage-point rate change would alter annual interest expense by about $0.5 million.
- Customer concentration and collections in crude oil logistics, including the effectiveness and limits of Pecos’s escrowed-unit protection.
- Progress on acquisition integration, the Wyoming permit, and the resolution or potential exposure of disclosed legal and environmental matters.