NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2016. Dollar amounts below are in millions unless stated otherwise; comparative 2015 results are restated where applicable.
Business context and financial performance
NGL operates crude oil logistics, water solutions, natural gas liquids (“Liquids”), retail propane, and refined products and renewables businesses. The filing notes seasonal effects, including increased heating-season activity and working-capital needs.
| Metric | Three months ended Dec. 31, 2016 | Prior-year quarter | Nine months ended Dec. 31, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $3,406.6 | $2,685.0 | $9,174.1 | $9,416.7 |
| Operating income | $22.6 | $82.6 | $180.6 | $99.6 |
| Net income | $1.3 | $51.0 | $117.4 | $19.9 |
| Net income attributable to NGL | $1.0 | $44.2 | $111.3 | $5.2 |
| Adjusted EBITDA (non-GAAP) | $120.6 | $113.5 | $259.8 | $270.1 |
| Net income (loss) allocated to common unitholders | $(8.0) | $27.9 | $90.2 | $(42.6) |
| Basic earnings (loss) per common unit | $(0.07) | $0.27 | $0.85 | $(0.41) |
Quarterly revenue rose primarily with higher refined-products and Liquids sales, while operating income fell. Nine-month revenue declined modestly, but reported operating income and net income increased substantially, largely because of unusual gains and impairment adjustments rather than a uniform improvement in segment results. Adjusted EBITDA, a company-defined non-GAAP measure, declined for the nine-month period.
Cash flow, debt and liquidity
- Cash from operations: $(117.7) for the first nine months, versus $293.1 a year earlier. Before changes in operating assets and liabilities, operating cash flow was $194.9; working-capital changes used $312.5, including increases in receivables and inventory.
- Investing and financing: Investing activities used $331.1, including $264.6 of capital expenditures and $127.5 of acquisition spending. Financing activities provided $449.5. Ending cash was $28.9.
- Debt: Long-term debt had a $3,250.0 carrying value, including current maturities; face amount was $3,274.6. Revolver borrowings were $1,513.5. The $700.0 of 7.50% notes due 2023 issued in October were used to reduce revolver borrowings.
- Liquidity and covenants: Revolving facilities had $2.484 billion total capacity, subject to borrowing-base limits and letters of credit. The company reported leverage of approximately 4.50x against a 4.75x maximum and interest coverage of 3.94x against a 2.75x minimum; it was in covenant compliance. Revolver commitments expire November 5, 2018.
- Other funding and obligations: NGL issued $240 million of 10.75% convertible preferred units and warrants, and raised $43.9 million net through its ATM common-unit program during the period. Future minimum operating lease payments were $608.8 million; pipeline-throughput commitments were $167.5 million.
Material changes and unusual items
- Segment results were mixed. For the quarter, Crude Oil Logistics recorded a $9.2 million operating loss and Water Solutions an $11.9 million loss; Liquids operating income decreased to $24.8 million, while Retail Propane improved to $21.8 million. Refined Products and Renewables operating income fell to $8.2 million.
- Crude Oil Logistics faced lower volumes amid competition and weaker transportation demand; the Grand Mesa Pipeline began operating in November 2016. Water Solutions processed fewer barrels, with management citing lower customer production and activity. Refined-products margins were affected by derivative losses as prices rose and by storage fees following TLP’s deconsolidation.
- Nine-month operating results included a $124.7 million reversal of a prior Water Solutions goodwill impairment and a $104.1 million gain on sale of TLP common units. Other notable items included a $16.2 million gain for terminating a storage sublease, a $30.9 million gain on early extinguishment/release of liabilities, and a $14.4 million loss on revaluation of investments.
- Prior-period financial statements were restated for omitted contingent consideration liabilities associated with Water Solutions royalty agreements; the filing says the error was material to each of the first three quarters of fiscal 2016.
- Management said it expected to recommend a $1.76 annualized common-unit distribution for the quarter ending March 31, 2017, with a goal of growing it to $2.00 annualized during the year. It also projected approximately 10% annual distribution growth for three years after fiscal 2018, based on current market conditions and commodity prices. Management said acquisitions were less likely than in the past and identified ongoing expansion projects, including the Glass Mountain pipeline extension.
Outlook, risks and contingencies
Management stated that anticipated operating cash flow and revolving-credit availability were expected to meet liquidity needs, but noted that changed assumptions, acquisitions, or market conditions could require additional capital or asset sales and that access to capital was not assured. The distribution outlook is a management expectation, not a guarantee.
Key exposures include commodity-price and counterparty risk, variable-rate debt, seasonal inventory funding, competition and volumes in crude oil and water businesses, and regulatory and environmental requirements. A U.S. government civil action concerning alleged 2011 renewable fuel standard/RIN violations was pending; NGL denied the allegations, was seeking dismissal, and said it could not determine the outcome or significance. Management considered ordinary-course legal matters not expected to have a material adverse effect, subject to uncertainty. The filing reported $2.4 million of environmental liabilities accrued.
Most important facts for investors to verify
- Whether operating cash flow recovers as seasonal inventory and receivable balances convert to cash, and how working-capital needs affect revolver usage.
- Debt covenant headroom, borrowing-base availability, and refinancing needs ahead of the November 2018 revolver maturity.
- Whether segment performance improves without reliance on the TLP sale, goodwill reversal, and other unusual gains; assess the quality and sustainability of Adjusted EBITDA.
- Whether the proposed distribution increases are approved and supported by recurring cash flow after preferred distributions, capital spending, and debt service.
- Developments in the EPA/RIN litigation, the prior-period restatement, and acquisition-related contingent consideration and valuation estimates.