NGL Energy Partners LP quarterly report, Q2 FY2016

NGL Energy Partners LP — Form 10-Q Summary

Business context and reporting period. This filing covers the quarter and six months ended September 30, 2015, the second quarter of NGL’s fiscal 2016 year. The partnership operates crude oil logistics, water solutions, wholesale liquids, retail propane, and refined products and renewables businesses. Results are affected by commodity prices, weather and seasonality, and acquisitions.

Financial results and liquidity

Metric	Three months ended September 30, 2015	Six months ended September 30, 2015
Revenue	$3.193 billion, versus $5.381 billion	$6.732 billion, versus $9.029 billion
Operating income (loss)	$0.2 million, versus $7.8 million	$(14.5) million, versus $(12.8) million
Net loss	$(24.2) million, versus $(15.9) million	$(62.7) million, versus $(55.8) million
Net loss allocated to limited partners; loss per common unit	$(43.2) million; $(0.41), versus $(30.3) million; $(0.34)	$(101.0) million; $(0.97), versus $(79.6) million; $(0.93)
Adjusted EBITDA (non-GAAP)	$67.0 million, versus $62.2 million	$156.0 million, versus $101.5 million

All figures are in U.S. dollars. Revenue fell substantially as crude oil and product prices declined; lower revenue does not by itself indicate lower sales volumes. The partnership reported total cost of sales of $3.006 billion for the quarter and $6.328 billion for the six-month period. Interest expense rose to $31.6 million for the quarter and $62.4 million year to date, mainly reflecting higher borrowings used to fund acquisitions and capital expenditures. Adjusted EBITDA is a company-defined non-GAAP measure and includes specified adjustments, including equity-based compensation and inventory valuation items.

Cash flow: Six-month operating cash flow was $174.1 million, compared with cash used of $61.6 million in the prior-year period. Investing activities used $340.9 million; financing activities provided $155.6 million. Cash declined by $11.3 million to $30.1 million.
Capital spending: Cash purchases of long-lived assets were $222.3 million, versus $82.9 million. Separately, accrual-basis expansion and maintenance capital expenditures were $226.5 million, versus $82.9 million.
Balance sheet and liquidity: At September 30, current assets were $1.277 billion and current liabilities $852.2 million; working capital was approximately $424.7 million. Total assets were $6.450 billion and equity $2.486 billion.
Debt: Long-term debt, including current maturities, totaled $3.098 billion, up from $2.750 billion at March 31. This included $1.739 billion drawn on NGL’s revolving facilities and $249.6 million on TLP’s facility. NGL reported a 3.5x leverage ratio against a 4.25x maximum and 5.9x interest coverage against a 2.75x minimum; it reported compliance with its debt covenants.
Revolving capacity: At quarter end, the revolving facilities had $2.296 billion total capacity. Working-capital borrowings were $656.0 million with $89.6 million of letters of credit outstanding; availability may also be constrained by the borrowing base. In October, lenders agreed to add $150 million of expansion-facility capacity.

Material changes and management commentary

Quarterly revenue declined about 41% year over year and six-month revenue about 25%. Management attributed much of the drop to lower commodity prices, while noting that acquisitions and expanded operations affect period comparability.
Quarterly segment operating results were mixed: liquids income increased to $20.4 million from $10.9 million; water solutions fell to $0.2 million from $14.8 million; refined products and renewables shifted to a $5.2 million loss from $8.8 million income. Crude oil logistics recorded a small loss, while retail propane’s loss narrowed.
For the six months, water solutions reported a $2.9 million operating loss versus $13.9 million income. Management cited lower recovered-hydrocarbon revenue from weaker oil prices and higher expenses, including costs from acquired and developed facilities. Water received increased to 109.2 million barrels from 65.7 million.
Refined products and renewables’ quarterly performance was hurt by Gulf Coast prices falling more than New York Harbor prices, reducing the effectiveness of its inventory hedges. Management noted that spreads and hedge timing can create quarter-to-quarter earnings volatility.
Management said operating cash flows are typically weakest in the first half of the fiscal year as NGL builds seasonal inventories, and strongest in the second half during heating season. It believes anticipated operating cash flows and revolving capacity are sufficient for liquidity needs, but said additional capital may be needed if plans change or acquisitions are pursued.

Outlook, risks, and unusual items

No specific earnings or financial guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results, in part because of seasonality and acquisitions.
Low oil prices may reduce producer drilling and production, potentially affecting crude logistics volumes and water-treatment demand; they also reduce the value of recovered hydrocarbons. Commodity-price volatility, imperfect hedges, counterparty nonperformance, weather, and access to capital are identified risks.
Water solutions goodwill was $467.1 million. Management said low oil prices and their effect on production and recovered-hydrocarbon revenue will be considered in its fiscal fourth-quarter goodwill impairment assessment.
Construction commitments totaled $584.6 million, including $562.8 million for the Grand Mesa Pipeline, expected to begin service in the second half of calendar 2016, and $21.8 million for expansion of the Sawtooth storage facility. Total future minimum operating-lease payments were $503.4 million and minimum pipeline-throughput payments were $478.0 million.
In October 2015, NGL declared a $0.64-per-unit distribution, expected to total $83.6 million. A unit-repurchase authorization permits up to $45 million through March 31, 2016; $3.7 million had been used by September 30.
Acquisition accounting for several recent water-solutions acquisitions remained preliminary. Management reported ordinary-course legal matters were not expected to have a material adverse effect, while noting environmental compliance can entail significant costs. Disclosure controls were reported effective; integration of TransMontaigne’s internal controls remained ongoing.

Important facts for investors to verify

Reconcile debt, borrowing-base availability, covenant headroom, and the October facility-capacity increase; assess liquidity under seasonal working-capital needs.
Review the economics, funding, and completion risks of the Grand Mesa and Sawtooth construction commitments alongside capital spending and distributions.
Monitor water-solutions volumes, customer drilling activity, recovered-hydrocarbon prices, and the goodwill impairment assessment.
Assess how commodity spreads and hedge effectiveness affect refined-products earnings, and distinguish realized cash performance from derivative and inventory valuation adjustments.
Evaluate the sustainability of distributions and growth plans given recurring losses, acquisition funding needs, and increased equity-based compensation expense.