NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013 (fiscal 2014 second quarter and first half). Financial statements are unaudited. NGL operates crude oil logistics, water services, natural gas liquids (NGL) logistics, and retail propane businesses. Results are affected by seasonality and substantial acquisitions, which limit comparability with the prior year.
Financial performance
- Revenue: Second-quarter revenue was $1.594 billion, up 40% from $1.136 billion. First-half revenue was $2.980 billion, up 104% from $1.462 billion. Growth primarily reflects acquisitions and higher volumes; reported revenue also reflects commodity prices and high-volume, low-margin product sales.
- Profitability: Second-quarter operating income fell to $9.9 million from $18.6 million; net loss was $0.9 million versus net income of $10.1 million. First-half operating income was $2.6 million versus $3.5 million, and net loss widened to $18.4 million from $14.6 million. Operating margin was approximately 0.6% for the quarter and 0.1% for the first half, versus 1.6% and 0.2%, respectively, in the comparable periods.
- Adjusted EBITDA: $41.3 million for the quarter versus $26.3 million; $68.1 million for the first half versus $19.9 million. This is a company-defined non-GAAP measure and excludes specified items; it is not a substitute for GAAP earnings or cash flow.
- Segment trends: Second-quarter operating income increased in NGL logistics to $14.6 million from $10.2 million, but declined in crude oil logistics to $5.9 million from $10.1 million and water services to $2.9 million from $4.4 million. Retail propane recorded an operating loss of $4.5 million versus $0.5 million. Corporate and other operating loss increased to $8.9 million.
- Cash flow: First-half operating cash flow was negative $48.3 million, compared with negative $52.8 million. Working-capital changes used $109.3 million, principally reflecting a $226.7 million inventory build for the heating season. Investing cash outflow was $477.3 million, including $393.0 million for acquisitions and $67.4 million for capital expenditures. Financing provided $519.6 million, including $415.1 million of net public offering proceeds. Cash ended at $5.5 million.
- Margins and unusual items: Management attributed the crude segment’s quarterly decline partly to narrower geographic price spreads and a $9.8 million year-over-year adverse comparison from unrealized derivative gains/losses. Water services incurred $2.0 million of losses from lightning damage at two facilities. Higher depreciation and amortization, interest, and equity compensation also weighed on results.
Financial position and liquidity
- At September 30, total assets were $3.026 billion, including goodwill of $840.3 million and inventories of $355.3 million. Current assets were $1.014 billion and current liabilities $800.7 million.
- Total debt was $914.3 million: $646.0 million under revolving facilities, $250.0 million of 6.65% secured notes, and $18.3 million of other debt. Revolver availability was $318.1 million in total, but only $9.6 million remained under the working-capital facility; the balance was under the expansion facility. The facilities are secured by substantially all assets.
- The partnership reported compliance with debt covenants at quarter-end; leverage was below 2.5x against a 4.25x maximum, and interest coverage exceeded 7.5x against a 2.75x minimum.
- Distributions paid during the quarter were $0.49375 per unit. A $0.51125 per-unit distribution was declared for payment in November 2013.
Material changes, outlook, and risks
- Acquisitions expanded water and crude oil operations during the period, including OWL, Texas water-service businesses, and crude oil logistics assets. Acquisition accounting remained preliminary for several transactions; goodwill and other fair values could change. OWL’s contingent purchase-price provision could add up to $60 million if specified performance targets are met; its estimated fair value was zero at September 30.
- Management said it expected operating cash flows and credit capacity to meet liquidity needs, while noting that acquisitions or changed assumptions could require additional capital. The partnership continued to pursue acquisition-led growth. No specific earnings or operating guidance was provided.
- Seasonality is significant: NGL and retail propane volumes and cash flows are generally strongest during the October–March heating season, while the first half typically requires inventory funding. Weather, commodity prices, customer demand, supply and transport availability, and crude-oil market spreads may affect performance. Management noted that crude oil price differentials had narrowed and that water-service expansion was increasingly concentrated in Texas, where disposal rates are typically lower than in Wyoming and Colorado.
- Subsequent financing and transaction: In October 2013, NGL issued $450 million of 6.875% senior unsecured notes, using net proceeds to reduce revolver borrowings. In November, it amended its credit agreement, increasing facility capacity, extending maturity to November 2018, and lowering LIBOR margins; lender fees were approximately $8.8 million. Also in November, NGL agreed to acquire Gavilon, LLC for $890 million cash, subject to working-capital adjustment, and arranged a concurrent $240 million private placement of common units. The acquisition and unit sale were expected to close in December, subject to conditions.
- Contingencies: A crude-oil customer dispute involves $1.7 million of unrecorded billed fees, a $5.5 million customer counterclaim, and approximately $3.3 million withheld for later services; NGL ceased service and filed suit. A Canadian tax audit identified $14.9 million of potential fuel and sales taxes; NGL recorded a $14.9 million liability and a $14.1 million expected customer-recovery receivable. Management did not expect either matter to materially harm results, but outcomes remain uncertain. Environmental compliance and operating risks are also inherent in the business.
Key facts for investors to verify
- Whether acquisition-driven revenue growth translates into durable segment margins and operating cash flow after seasonal inventory investment.
- Available working-capital liquidity and debt levels after the October notes, November facility amendment, and proposed Gavilon acquisition and unit issuance.
- Final acquisition fair values, goodwill and amortization, and whether OWL’s performance-based purchase-price provision becomes payable.
- Resolution and financial impact of the customer dispute and Canadian tax audit, including recoverability of the recorded tax receivable.
- Effects of commodity-price volatility, derivative mark-to-market results, weather, and crude-oil price differentials on earnings and distributions.