NGL Energy Partners LP — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2019. Although the request metadata says “2018 Q4,” this filing is an annual report for FY2019; its final-quarter results are separately identified below. Amounts are in U.S. dollars.
Business context and reporting period
NGL operates four continuing segments: Crude Oil Logistics, Water Solutions, Liquids, and Refined Products and Renewables. During FY2019 it completed the sale of virtually all its Retail Propane business, a strategic shift; that business is reported as discontinued operations for all periods presented. It also sold its Bakken and South Pecos water-disposal businesses while retaining the rest of Water Solutions.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $24.017 billion | $16.907 billion |
| Operating income (loss) | $142.0 million | $(17.2) million |
| Continuing-operations income (loss) | $(63.7) million | $(226.4) million |
| Net income (loss) | $339.4 million | $(69.6) million |
| Net cash from operating activities | $337.3 million | $138.0 million |
| Adjusted EBITDA (non-GAAP) | $440.4 million | $408.3 million |
FY2019 net income included $403.1 million of after-tax income from discontinued operations, largely reflecting the Retail Propane sale gain. Continuing operations remained loss-making. Revenue rose substantially, but largely reflects higher commodity prices and sales volumes in high-throughput marketing businesses; cost of sales was $23.285 billion. Gross profit was approximately $732.0 million, or 3.0% of revenue, versus $494.7 million, or 2.9%, in FY2018.
Continuing-operations operating cash flow was $307.5 million. Continuing investing activities used $392.3 million, including $455.6 million of capital expenditures; continuing financing activities used $793.9 million. Cash at year-end was $18.6 million. The partnership paid $1.56 per common unit in distributions during FY2019, unchanged from FY2018.
At March 31, 2019, long-term debt had a face amount of $2.173 billion (book value, net of issuance costs and current maturities, was $2.160 billion). Revolver borrowings were $1.171 billion, at a weighted-average rate of 4.39%; letters of credit were $143.4 million. The $1.765 billion credit agreement matures October 2021. Management reported covenant compliance and leverage ratios of 2.63x and total leverage indebtedness of 4.48x. The filing says indebtedness was reduced by $528.2 million during FY2019, including current maturities.
Final quarter: For the quarter ended March 31, 2019, revenue was $5.141 billion, continuing-operations income was $44.6 million, and net income was $43.2 million.
Material changes versus the prior comparable period
- Continuing-operations loss narrowed to $63.7 million from $226.4 million, while reported net income turned positive primarily because of the Retail Propane disposal gain.
- Operating cash flow increased to $337.3 million from $138.0 million. Continuing operating cash flow increased to $307.5 million from $53.6 million, with working-capital movements affecting results.
- Water Solutions operating income improved to $210.5 million from a $24.2 million loss, including $141.3 million of gains on the Bakken and South Pecos sales. Wastewater processing averaged 947,000 barrels per day versus 707,000.
- Crude Oil Logistics moved to a $7.4 million operating loss from $122.9 million of income; FY2018 included a $108.6 million gain on the Glass Mountain sale, while FY2019 included a $105.0 million loss on a minimum-volume-commitment transaction.
- Liquids’ operating loss narrowed to $2.9 million from $93.1 million, but included a $66.2 million Sawtooth goodwill impairment; FY2018 had a $116.9 million impairment.
- Refined Products and Renewables operating income declined to $27.5 million from $56.7 million, with lower margins and weaker renewables results.
Outlook, management commentary, risks and unusual items
- Management said expected operating cash flows and revolving-credit borrowing capacity should meet liquidity needs, while noting that changed assumptions or acquisitions could require additional capital or asset sales.
- Management expected approximately $1.2–$1.3 billion of acquisitions and growth capital spending in FY2020, including approximately $970 million for the Mesquite water-disposal acquisition and other Water Solutions transactions already closed. The Mesquite agreement was announced after year-end and was expected to close in July 2019, subject to conditions.
- After year-end, NGL issued $450 million of 7.50% notes due 2026 and issued 1.8 million Class C preferred units for $43.1 million net proceeds. It also redeemed the remaining Class A preferred units in April and May 2019. These subsequent events affect the post-year-end capital structure.
- Other notable items include a $34.8 million accrual for the Gavilon EPA settlement; the settlement required $25 million cash and retirement of 36 million renewable identification numbers, all retired by March 31, 2019, with $12.5 million cash paid and $12.5 million accrued at year-end.
- Principal risks include commodity-price and basis volatility, producer activity and wastewater volumes, customer concentration, counterparty credit, seasonal working-capital demands, leverage and refinancing needs, interest rates, pipeline minimum-volume commitments, environmental and injection-well regulation (including seismicity concerns), and potential future impairment of goodwill or other assets. The Sawtooth impairment followed lower storage demand; management’s valuation depended on projected volumes, fees and cash flows.
- The partnership adopted ASC 606 in FY2019; the filing reports a $139.3 million cumulative beginning-equity adjustment for a previously deferred gain. Adoption reduced FY2019 reported operating income and net income by $30.1 million relative to the filing’s presentation without adoption.
Important facts for investors to verify
- How much of FY2019 earnings and cash flow is sustainable after excluding disposal gains, impairments, the minimum-volume transaction loss, and other unusual items.
- Whether Water Solutions volumes, margins and acquired assets support returns sufficient to justify planned growth spending and the Mesquite acquisition.
- Current revolver availability after borrowing-base limits, letters of credit, seasonal working-capital needs and the credit agreement’s tightening leverage covenants.
- Debt and preferred-unit obligations after the April–May 2019 financing and Class A redemption, including the 2022 revolver maturity and preferred distribution priority over common units.
- Progress and final terms of the Mesquite acquisition, and the impact of its funding on leverage, liquidity and distributions.
- Developments in the Gavilon settlement, other legal or environmental contingencies, and further impairment risk at Sawtooth or other reporting units.