NGL Energy Partners LP — Form 10-Q Summary
Business context and period. This filing covers the three and six months ended September 30, 2016 (fiscal second quarter and first half of fiscal 2017). NGL operates in crude oil logistics, water solutions, wholesale liquids, retail propane, and refined products and renewables. Comparisons are affected by acquisitions and the sale and deconsolidation of TransMontaigne Partners LP (TLP); 2015 comparative results are restated for an error involving acquisition-related contingent royalty liabilities.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $3.046 billion, down from $3.193 billion | $5.768 billion, down from $6.732 billion |
| Operating income (loss) | $(35.8) million, versus $18.3 million | $158.1 million, versus $17.1 million |
| Net income (loss) | $(66.7) million, versus $(6.1) million | $116.1 million, versus $(31.1) million |
| Net income (loss) allocated to common unitholders | $(75.2) million; $(0.71) per unit | $98.1 million; $0.93 per unit |
| Adjusted EBITDA (non-GAAP) | $75.4 million, versus $67.6 million | $139.2 million, versus $156.6 million |
| Cash flow from operations | Not separately stated for the quarter | $(56.4) million, versus $174.1 million |
For the first half, revenue less cost of sales was $272.3 million, compared with $403.3 million in the prior-year period. The six-month operating result includes a $203.5 million net gain in the disposal/impairment line, including the reversal of $124.7 million of a previously recorded goodwill impairment and a $104.1 million gain on sale of TLP units. These items make reported operating income and net income poor indicators of recurring performance. Adjusted EBITDA, a company-defined non-GAAP measure, declined about 11% for the half.
Balance sheet and liquidity at September 30, 2016: Cash was $23.4 million; current assets were $1.250 billion and current liabilities $798.9 million (current ratio about 1.57). Total debt carrying value was approximately $3.071 billion, including $2.023 billion drawn on revolving facilities. Revolver capacity was $2.484 billion, with $75.3 million of letters of credit outstanding; stated availability was subject to the working-capital borrowing base. Leverage was 4.15x against a 4.75x maximum, and interest coverage was 4.60x against a 2.75x minimum. NGL reported covenant compliance.
Six-month investing cash outflow was $235.5 million, including $159.7 million of capital expenditures, $113.3 million for acquisitions and $42.0 million for Colonial Pipeline capacity allocations, partly offset by $112.4 million from the TLP unit sale. Financing cash inflow was $287.2 million. Cash declined by $4.7 million to $23.4 million.
Material changes and management commentary
- Revenue fell year over year, chiefly reflecting lower crude oil logistics activity and prices, lower water volumes and recovered-hydrocarbon revenue, and changes in business scope. Crude Oil Logistics recorded a $19.7 million first-half operating loss, compared with $11.9 million of income. Management cited reduced crude production, competition, lower transport demand and weaker crude-oil contango.
- Water Solutions reported $75.0 million of first-half operating income, but this included the $124.7 million goodwill-impairment reversal. Water volumes processed declined and recovered-hydrocarbon revenue weakened; lower operating costs partly offset those pressures.
- Liquids first-half operating income fell to $8.3 million from $19.9 million, amid lower volumes and weaker margins in other products. Retail Propane’s operating loss widened to $11.2 million from $2.5 million, with acquired-business costs and depreciation contributing.
- Refined Products and Renewables reported $161.2 million of first-half operating income, including TLP-sale-related gains. Refined-product volumes increased, but product margin per barrel declined. TLP’s deconsolidation and subsequent sale reduce comparability with 2015.
- Operating cash flow before changes in operating assets and liabilities was $81.2 million, versus $78.5 million; working-capital changes used $137.6 million, versus providing $95.6 million. Management attributes the seasonal cash demand partly to building liquids inventories ahead of the heating season.
Outlook, capital, risks and unusual items
- No quantified earnings or operating guidance is provided. Management said operating cash flows and revolver capacity were expected to meet liquidity needs, while noting that changed assumptions, acquisitions or market conditions could require additional capital or asset sales. Results are seasonal and interim performance may not indicate full-year results.
- In April 2016, NGL reduced the common-unit distribution from $0.64 to $0.39 per quarter; management expected approximately $170 million in annual cash savings. The $0.39 distribution was declared again for the quarter ended September 30.
- NGL issued $240 million of 10.75% Class A convertible preferred units to Oaktree and co-investors, receiving $235.0 million net of costs, and issued warrants to purchase common units. The preferred units rank senior to common units for distributions and liquidation; their terms include cumulative distributions and conversion/redemption provisions.
- After quarter-end, NGL issued $700 million of 7.50% senior unsecured notes due 2023, receiving about $688 million net and using the proceeds to reduce revolving borrowings. The notes increase fixed-rate interest obligations even as they reduce revolver usage.
- Commodity prices, production and demand, weather, counterparty performance, regulation, environmental requirements, access to capital and refinancing remain significant risks. A 0.125% interest-rate change on quarter-end revolver borrowings would change annual interest expense by about $2.5 million, according to the filing.
- A DOJ civil complaint filed October 4, 2016, at the EPA’s request concerns alleged 2011 biodiesel renewable identification number violations by acquired business Gavilon and a former supplier. NGL denies the allegations and intends to defend itself; it said the outcome and significance could not be determined. The filing also reports $2.2 million of environmental liabilities and $597.9 million of future minimum operating-lease payments.
- The first-half results include a $14.4 million loss on revaluation of an investment and a $30.9 million gain on early extinguishment/release of liabilities. The filing also identifies a material prior-period accounting error and restatement relating to acquired Water Solutions royalty liabilities.
Most important facts for investors to verify
- Whether recurring operating performance and cash generation support the distribution, particularly given negative first-half operating cash flow and lower first-half Adjusted EBITDA.
- Revolver availability under the borrowing base, covenant headroom, debt maturities and the impact of the post-quarter $700 million notes on interest costs and leverage.
- How much reported first-half earnings depended on the goodwill reversal, TLP disposal gains and other unusual adjustments, and how acquisition-related results compare on a consistent basis.
- Whether lower crude production, water volumes and product margins persist, and how seasonality affects inventory funding and liquidity through the heating season.
- The status and potential financial exposure of the biodiesel RIN litigation, as well as the final valuation of recent acquisitions and associated contingent liabilities.