NGL Energy Partners LP: Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended June 30, 2018, NGL’s fiscal first quarter. Its continuing businesses were Crude Oil Logistics, Water Solutions, Liquids, and Refined Products and Renewables. Retail Propane was classified as discontinued operations and held for sale; the prior period was retrospectively reclassified. NGL completed the sale of virtually all Retail Propane to Superior Plus on July 10, 2018, for approximately $896.5 million in cash, subject to estimated working-capital adjustments.
Financial performance and liquidity
Amounts below are in millions, except per-unit data and ratios.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $5,844.4 | $3,730.7 |
| Operating loss | $(84.6) | $(8.8) |
| Net loss | $(169.3) | $(63.7) |
| Net loss attributable to NGL | $(168.5) | $(63.4) |
| Loss per common unit | $(1.55) | $(0.61) |
| Adjusted EBITDA (non-GAAP) | $80.3 | $38.9 |
| Cash from continuing operating activities | $(73.2) | $(9.7) |
Revenue rose 57%, but cost of sales absorbed nearly all of it: gross profit was approximately $148.3 million, or 2.5% of revenue, versus $102.0 million, or 2.7%, a year earlier. The larger reported loss primarily reflected unusual charges, including $101.3 million of net disposal or impairment losses and a $35.0 million accrual for the Gavilon EPA matter. Adjusted EBITDA is a company-defined non-GAAP measure and excludes specified items.
Cash and cash equivalents were $13.7 million at June 30, down from $22.1 million at March 31. Total assets were $6.324 billion; current assets were $2.370 billion and current liabilities, including amounts held for sale, were $1.165 billion. Continuing investing activities used $224.5 million, including $72.7 million of capital expenditures and $116.6 million of acquisitions; continuing financing activities provided $289.3 million.
Debt at June 30 was approximately $3.033 billion net of debt issuance costs, including $1.326 billion drawn on the revolving facilities. The weighted-average revolver rate was 4.79%. NGL reported covenant compliance, a leverage ratio of approximately 4.50, senior secured leverage of 0.61, and interest coverage of 2.71. Following the July Retail Propane sale, proceeds were used to repay revolving debt.
Material changes versus the prior comparable period
- Revenue increased substantially, while the operating loss widened. The reported revenue comparison is affected by adoption of ASC 606 on April 1, 2018: prior-year revenue remained under the previous accounting standard.
- Crude Oil Logistics recorded a $99.7 million operating loss, versus $4.4 million income, chiefly reflecting a roughly $105 million loss on a transaction transferring future pipeline minimum-volume obligations and deficiency credits.
- Water Solutions revenue increased to $76.1 million from $47.0 million, and the segment moved to $1.0 million operating income from a $1.2 million loss. Wastewater processed rose to about 920,000 barrels per day from 624,000.
- Refined Products and Renewables operating income increased to $29.0 million from $14.5 million. Liquids also improved to $2.6 million operating income from an $8.8 million loss.
- Operating cash use worsened, driven in part by working-capital movements; investing outflows increased with acquisitions, derivative settlements, and Water Solutions expansion spending.
- Revenue-standard adoption increased opening equity by $139.3 million from recognition of a previously deferred gain. It also increased the quarter’s disposal/impairment loss and net loss by $7.5 million versus the amounts that would have been reported without adoption.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or financial guidance. It described plans to deploy Retail Propane sale proceeds toward debt reduction and near-term strategic growth, particularly Water Solutions, and to pursue acquisitions and expansion in core basins including the Delaware and DJ Basins.
- Management said operating cash flows and revolving capacity were expected to meet liquidity needs, while cautioning that changed assumptions, acquisitions, or market conditions could require additional capital or asset sales. Seasonal inventory builds typically increase borrowing needs from June through December.
- Commodity price changes can affect margins, derivative valuations, inventory, receivables, and funding needs. Derivative gains and losses are recorded in cost of sales, and NGL does not designate these instruments as accounting hedges. The company also cited counterparty credit risk, interest-rate exposure, competition, operating hazards, and environmental and regulatory risks.
- The EPA matter related to 2011 renewable fuel standard transactions had reached an agreement in principle; NGL accrued an estimated cost of up to $35.0 million, subject to court approval of a definitive consent decree.
- After quarter-end, a jury returned a $33.0 million verdict in the LCT litigation, plus statutory interest. NGL disputed the fraudulent-misrepresentation award and planned post-verdict motions and, if necessary, an appeal. The filing estimated the amount ultimately allocable to the Partnership would be less than $4.0 million; the verdict was not final.
- The quarterly common-unit distribution was $0.39 per unit. Class A preferred units carry a 10.75% annual distribution rate and Class B preferred units a 9.00% rate, subject to the stated terms.
Most important facts for investors to verify
- How much of the $896.5 million Retail Propane sale proceeds was ultimately applied to debt, and the resulting debt, interest expense, and covenant headroom.
- Whether the EPA settlement received court approval, its final cost and payment timing, and the outcome and ultimate Partnership exposure in the LCT litigation.
- Whether continuing operating cash flow improves after seasonal inventory investment and the major working-capital outflows.
- Whether Water Solutions acquisition and expansion spending generates sustainable returns, and whether the large crude-pipeline obligation loss signals further exposure.
- How derivative marks, commodity prices, and the ASC 606 change affect future reported results and comparability; review Adjusted EBITDA alongside GAAP cash flow and net income.