NGL Energy Partners LP — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020. Although the request identifies “2019 Q4,” this filing is the FY2020 annual report; it also reports the quarter ended March 31, 2020. Unless stated otherwise, amounts are in U.S. dollars.
Business context and reporting period
NGL is a diversified midstream energy partnership operating in crude oil logistics, produced-water solutions, and liquids and refined products. During FY2020 it sold TPSL, Mid-Con and Gas Blending, and combined its remaining refined-products business with its Liquids segment. The filing presents these divested operations as discontinued operations. It also acquired Mesquite and Hillstone, expanding its Delaware Basin water infrastructure.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue from continuing operations | $7.584 billion | $8.689 billion |
| Operating income (loss) | $(3.3) million | $126.7 million |
| Loss from continuing operations | $(180.5) million | $(79.5) million |
| Net income (loss), including discontinued operations | $(398.8) million | $339.4 million |
| Net income (loss) per common unit | $(4.59) | $2.01 |
| Adjusted EBITDA, continuing operations (non-GAAP) | $589.5 million | $419.2 million |
| Cash from operating activities, continuing operations | $382.4 million | $151.5 million |
| Cash from operating activities, total | $464.1 million | $337.3 million |
| Cash and cash equivalents at year-end | $22.7 million | $18.6 million |
- Margins and segments: Continuing-operations revenue less cost of sales was approximately $979.6 million (12.9% of revenue), versus $706.1 million (8.1%) in FY2019; this is a simple calculated spread, not a company-reported margin. Segment operating results were Crude Oil Logistics $117.8 million, Water Solutions $(173.1) million, and Liquids and Refined Products $142.4 million. Water Solutions included a $250 million goodwill impairment.
- Cash investment and financing: Total investing cash flow was $(1.439) billion, reflecting acquisitions and capital spending; total financing cash flow was $978.8 million. Continuing-operations capital expenditures were $555.7 million.
- Debt and liquidity: Face amount of long-term debt was approximately $3.169 billion at March 31, 2020; the balance sheet reported $3.145 billion of long-term debt net of issuance costs and current maturities. Cash was $22.7 million. Current liabilities exceeded current assets by approximately $71.7 million. The filing reported $1.5 billion outstanding on the revolving facility at a 3.36% weighted-average rate, plus $250 million under the term loan at 4.05%.
- Distributions: Common-unit cash distributions were $1.56 per unit for FY2020. Preferred distributions rank ahead of common-unit distributions.
Material changes versus the prior comparable period
- Revenue fell about 12.7%, while operating results moved from income to a small loss. The Partnership reported a $398.8 million net loss versus $339.4 million net income in FY2019; the comparison is strongly affected by discontinued-operation sale gains in FY2019 and sale losses and impairments in FY2020.
- FY2020 included a $250 million Water Solutions goodwill impairment and $203.99 million of losses on divestitures in discontinued operations. Continuing-operations asset disposal or impairment expense was $261.8 million, compared with $34.3 million in FY2019.
- Continuing-operations operating cash flow improved to $382.4 million from $151.5 million, with working-capital movements contributing. Adjusted EBITDA from continuing operations rose to $589.5 million from $419.2 million; this non-GAAP measure should be considered alongside GAAP results.
- Water Solutions processed 485.1 million barrels of water, up from 345.7 million, including contributions from the Mesquite and Hillstone acquisitions. Crude Oil Logistics operating income improved from a $7.4 million loss to $117.8 million; Liquids and Refined Products operating income rose from $9.3 million to $142.4 million.
Outlook, management commentary, risks and unusual items
- Management described the late-FY2020 oil-market disruption and COVID-19 as causing a simultaneous supply and demand shock, reduced refined-products demand, volatile prices and near-capacity crude storage. The resulting effects on production, customer credit and the Partnership’s future results were uncertain.
- After year-end, on April 27, 2020, the Partnership announced a reduction in the common-unit distribution from $0.39 to $0.20 per quarter, an estimated $100 million annualized cash reduction, and lower expected FY2021 growth and maintenance capital spending. It also amended its credit facility, reallocating capacity between working-capital and expansion facilities.
- At March 31, 2020, the Partnership reported compliance with debt covenants. Its total leverage indebtedness ratio was approximately 4.86x against a 5.75x limit then in effect; the stated limit became 5.50x beginning June 30, 2020. The revolving commitments were due to expire October 5, 2021.
- Important risks include high debt and refinancing needs, dependence on producer activity and key customers, commodity and basis exposure, counterparty defaults, seasonal working-capital demands, environmental and disposal-well regulation, and execution and integration risks from acquisitions. Management’s outlook is not a quantified earnings forecast.
- Unusual items and contingencies include the $250 million noncash goodwill impairment; the $182.1 million loss on the TPSL sale; a $2.5 million accrual for the LCT litigation, with the Partnership estimating its potential allocation at less than $4 million; and a $2.0 million environmental liability. A third-party borrower in Chapter 11 owed $26.7 million on a secured loan; the Partnership had not impaired it at March 31, 2020, and a May 2020 court ruling required full payment or transfer of the facility.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit highlighted acquisition fair-value estimates and the goodwill impairment assessment as critical audit matters.
Most important facts for investors to verify
- Whether post-year-end distribution and capital-spending reductions were implemented as announced, and their effect on liquidity and debt reduction.
- Available borrowing capacity, borrowing-base constraints, covenant headroom and the plan to refinance or repay facilities maturing in 2021–2022.
- Current producer activity, contracted minimum volumes, actual water volumes and the sensitivity of Water Solutions cash flows to lower oil production.
- Realized performance of Mesquite and Hillstone against acquisition forecasts, including remaining contingent payments and integration costs.
- Recoverability of goodwill and other acquired asset values, and developments in the $26.7 million secured loan and disclosed legal matters.
- How continuing-operations cash generation and non-GAAP Adjusted EBITDA reconcile to reported earnings and support preferred and common distributions.