NGL Energy Partners LP — Form 10-Q Summary
Business context and reporting period. NGL Energy Partners LP operates Water Solutions, Crude Oil Logistics, and Liquids Logistics businesses. This filing covers the fiscal second quarter and six months ended September 30, 2022, compared with the corresponding 2021 periods. Dollar amounts below are in millions unless otherwise stated.
Financial results and liquidity
| Metric | Three months ended September 30, 2022 | Prior-year quarter | Six months ended September 30, 2022 | Prior-year period |
|---|---|---|---|---|
| Revenue | $2,009.4 | $1,754.1 | $4,506.8 | $3,242.8 |
| Operating income (loss) | $68.8 | $64.8 | $156.0 | $(4.5) |
| Net income (loss) | $3.6 | $(1.2) | $26.7 | $(135.7) |
| Net income (loss) attributable to NGL | $3.5 | $(1.5) | $26.4 | $(136.5) |
| Loss allocated to common unitholders | $(26.9) | $(27.2) | $(31.6) | $(187.1) |
| Adjusted EBITDA (non-GAAP) | $142.2 | $146.3 | $266.1 | $237.4 |
Revenue less cost of sales produced gross margins of approximately 12.2% for the quarter and 10.8% year to date, versus 13.0% and 12.1% in the comparable 2021 periods. Operating margins were approximately 3.4% and 3.5%, respectively, compared with 3.7% and negative 0.1%. Margins are calculated from reported revenue and cost of sales or operating income.
- Segment performance: Quarterly operating income was $47.1 million for Water Solutions, $32.9 million for Crude Oil Logistics, and $1.7 million for Liquids Logistics. Year-to-date segment operating income was $100.7 million, $51.9 million, and $28.3 million, respectively. Water benefited from higher volumes, especially in the Delaware Basin; Crude Oil Logistics benefited from derivative results; Liquids Logistics’ quarterly income fell substantially, including from weaker propane margins.
- Cash flow: Operating activities used $31.7 million in the six-month period, versus $7.8 million used a year earlier. Before working-capital changes, operating cash flow was $203.7 million; working-capital changes used $235.3 million, primarily reflecting inventory, receivables, and payables. Investing activities used $60.5 million, including $94.0 million in capital expenditures. Financing activities provided $92.9 million. Cash ended at $4.5 million.
- Debt and liquidity: Long-term debt had a $3.488 billion face amount at September 30, including $2.050 billion of 7.5% secured notes due 2026, $287 million drawn on the ABL revolver, and $399.3 million of 2023 unsecured notes. Current assets exceeded current liabilities by approximately $435.2 million. The ABL commitment was $600 million, with an agreed reduction to $500 million by March 31, 2023; $142.8 million of letters of credit was outstanding. The Partnership reported covenant compliance and no Cash Dominion Event.
Material changes and notable items
- Revenue increased year over year in both periods, mainly reflecting higher commodity prices and increased Water Solutions volumes. Revenue growth did not translate proportionately into margin growth.
- Six-month operating income improved from a loss to profit. The comparison is affected by the prior-year $60.1 million Sawtooth disposition-related loss in Liquids Logistics and the sale of NGL’s approximately 71.5% Sawtooth interest in June 2021.
- During the six months, NGL repurchased $76.4 million face amount of 2023 notes and $1.5 million of 2026 notes, generating a $4.1 million net gain on early extinguishment of liabilities. It repurchased a further $12.0 million of 2023 notes in November 2022.
- Capital expenditures for fiscal 2023 were expected to be approximately $105–$115 million; $94.0 million of cash capital expenditures were reported for the first six months.
Outlook, risks and contingencies
- Management said operating cash flows and ABL availability were expected to meet liquidity needs, including repayment of the 2023 notes. It expected less than $50 million of 2023 notes to remain by August 1, 2023, with the balance repaid before November 1, 2023, using free cash flow and, if needed, revolver borrowings. These are expectations, not assurances.
- All common and preferred distributions remain suspended. The board said it would evaluate reinstatement in due course, considering leverage, liquidity, cash-flow sustainability, maturities, capital spending, and business performance. The 2026 secured-note indenture restricts distributions unless the specified leverage ratio condition is met. Unpaid preferred distributions continue to accumulate; reported amounts due at September 30 included $53.2 million for Class B, $8.1 million for Class C, and $124.6 million for Class D.
- Commodity-price volatility, inflation, higher interest rates, recession concerns, and supply-chain issues could affect demand, margins, working capital, and financing costs. Seasonal inventory building typically increases Liquids Logistics’ borrowing needs in the first half of the fiscal year.
- Produced-water disposal is subject to induced-seismicity mitigation measures in Texas and New Mexico. NGL reduced injection volumes or temporarily shut in certain facilities; management said system capacity and connectivity had prevented a material disposal impact to date.
- A critical Midwest underground propane storage facility was decommissioned in April 2022, reducing sales volumes; management expects partial replacement through customer redirection and rail-to-truck transloading. Falling propane and butane prices also contributed to inventory valuation charges, including an $11.5 million butane charge in the quarter.
- An $8.0 million impairment was recorded for an inactive saltwater disposal facility and equipment at another facility. A Delaware lawsuit over investment-banking services has a quantum-meruit damages-only retrial scheduled for February 6, 2023; NGL had accrued $2.5 million. Environmental liability was $1.7 million. The filing also describes a potential joint-and-several guarantee exposure on a related-party aircraft loan with an outstanding balance of approximately $2.4 million; no accrual was recorded.
Important facts for investors to verify
- Progress and funding plan for the $399.3 million face amount of 2023 notes, including subsequent repurchases and revolver capacity.
- Whether operating cash flow improves as seasonal inventory builds unwind, and how commodity prices affect working capital and realized margins.
- Leverage and distribution restrictions, including the growing cumulative unpaid preferred distributions and the conditions for any reinstatement.
- Water Solutions volume, seismicity-related operating constraints, impairment risk, and the actual effects of the Midwest propane-storage closure.
- Resolution and potential financial exposure from the LCT litigation, environmental matters, and the aircraft-loan guarantee.
- Adjusted EBITDA is a non-GAAP measure; review the filing’s reconciliation and adjustments when comparing it with GAAP earnings and cash flow.