NGL Energy Partners LP — Fiscal 2020 Third-Quarter 10-Q
Reporting period: Three and nine months ended December 31, 2019, compared with the same periods in 2018. The filing was signed February 6, 2020. NGL operates in Crude Oil Logistics, Water Solutions, Liquids, and Refined Products and Renewables. Unless noted, figures below are for continuing operations and in U.S. dollars.
Key financial metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | $2.227 billion | $2.295 billion | $5.903 billion | $6.566 billion |
| Operating income | $96.4 million | $144.4 million | $174.0 million | $31.0 million |
| Income (loss) from continuing operations | $49.1 million | $97.2 million | $42.5 million | $(137.3) million |
| Net income (loss), including discontinued operations | $43.0 million | $110.5 million | $(150.3) million | $296.2 million |
| Adjusted EBITDA from continuing operations | $200.5 million | $131.3 million | $427.7 million | $304.4 million |
Gross margin, calculated as revenue less cost of sales, was approximately 13.1% in the quarter versus 10.8% a year earlier, and 11.7% for the nine-month period versus 7.9%. Operating margin was approximately 4.3% and 2.9%, respectively. The filing does not present these margins as reported measures.
- Cash flow: Nine-month operating cash flow was $333.5 million, including $273.6 million from continuing operations and $59.9 million from discontinued operations. Continuing-operations investing cash outflow was $1.688 billion; financing provided $1.066 billion. Cash declined $6.6 million to $12.0 million.
- Capital spending and acquisitions: Nine-month capital expenditures were $427.3 million and acquisition spending was $1.263 billion. Reported additions to property, plant and equipment and intangible assets, including acquired assets, were $1.881 billion.
- Debt and liquidity: Long-term debt, including current maturities and net of issuance costs, was $3.073 billion at December 31, 2019, versus $2.161 billion at March 31, 2019. Cash was $12.0 million. Current assets of $1.342 billion were below current liabilities of $1.362 billion. Revolver borrowings totaled $1.392 billion; the partnership reported compliance with its debt covenants.
- Distributions: Common-unit distributions remained $0.39 per unit per quarter. The filing also reports cumulative preferred distributions, including a 9% current rate on Class B and Class D units and 9.625% on Class C units.
Material changes versus the prior comparable period
- Quarterly revenue decreased about 3%; nine-month revenue decreased about 10%. Lower crude oil and NGL prices contributed to lower reported sales. Quarterly operating income fell, while nine-month operating income increased from a low prior-year base that included a $105.0 million crude-pipeline commitment transaction loss.
- Water Solutions revenue increased to $121.6 million for the quarter from $75.5 million, and produced-water volumes rose substantially, reflecting acquisitions and growth in the Northern Delaware Basin. Segment operating results swung to a $0.6 million loss from $86.7 million income, affected by derivative movements, higher operating and depreciation expenses, a $10.0 million liability revaluation, and differing asset-disposal gains.
- Liquids segment operating income increased to $64.1 million from $21.5 million for the quarter, with higher product margins. Refined Products and Renewables segment operating income increased to $25.0 million from $20.6 million, helped by a $13.8 million biodiesel tax credit recorded in continuing operations.
- Adjusted EBITDA from continuing operations rose to $200.5 million for the quarter and $427.7 million for nine months. These non-GAAP measures include adjustments for items such as derivatives, asset disposals, equity compensation, acquisition costs, and liability revaluations.
- Net loss for the nine-month period included a $192.8 million loss from discontinued operations, including a $181.2 million loss on the TPSL sale. The prior-year period included a $408.9 million gain on the Retail Propane sale, materially affecting year-over-year comparisons.
Outlook, management commentary, risks and unusual items
- Management said expected operating cash flow and revolver capacity were sufficient for anticipated liquidity needs, while noting additional capital or asset sales might be required if plans change or acquisitions are pursued. It identified organic growth in Water Solutions and Crude Oil Logistics, especially in the Delaware and DJ Basins, alongside acquisitions and expansion projects. No quantified earnings or cash-flow guidance was provided.
- NGL acquired Mesquite for preliminary consideration of about $885 million and Hillstone for about $642.5 million, and made other water-related acquisitions. Mesquite’s $200 million contingent payment was triggered after volume thresholds were met; payment was amended to six installments, with the first $55 million paid January 10, 2020. Hillstone contributed $13.2 million of revenue and a $4.4 million operating loss from its acquisition date through December 31.
- NGL sold TPSL on September 30, 2019 for approximately $233.8 million of total consideration. It designated Gas Blending and Mid-Con for sale as non-core businesses; Mid-Con was sold January 3, 2020. The filing says these disposals represent a strategic shift expected to significantly affect future operations and results.
- Debt increased following acquisition funding, including $450 million of 7.5% notes due 2026 and a $250 million term loan due 2024. The revolver and term loan are variable-rate; a 0.125 percentage-point rate change was estimated to affect annual interest expense by about $1.7 million and $0.3 million, respectively.
- Key exposures include commodity-price and counterparty credit risk, seasonal working-capital demands, dependence on production and disposal volumes, competition, environmental and regulatory requirements, and access to capital. The partnership reported $6.679 billion of contractual obligations, including debt, interest, leases, pipeline commitments, and commodity purchases; many commodity commitments have corresponding sales, inventory, or derivative positions.
- Contingencies include an LCT Capital lawsuit under appeal, for which $2.5 million was accrued, and environmental liabilities of $2.1 million. The EPA renewable-fuel matter was settled for $25 million and 36 million RINs; the final $12.5 million cash payment was made December 18, 2019, and all RINs had been retired.
- Management reported effective disclosure controls at December 31, 2019. Integration of acquired businesses and their internal controls remained in progress.
Important facts for investors to verify
- How much of reported and adjusted EBITDA is recurring, particularly given derivative volatility, acquisition-related expenses, asset-sale gains or losses, and the biodiesel tax credit.
- Near-term liquidity, revolver availability under the borrowing base, covenant headroom, debt maturities, and ability to service substantial interest and preferred distributions.
- Mesquite and Hillstone operating performance, integration costs, volume commitments, and the timing and funding of the triggered $200 million Mesquite payment.
- Final sale proceeds, working-capital adjustments, and remaining obligations associated with TPSL, Mid-Con, and Gas Blending.
- Cash conversion and investment returns on the elevated acquisition and expansion spending, and sensitivity to production volumes, commodity prices, interest rates, and environmental or legal outcomes.