NGL Energy Partners LP — Form 10-K Summary
Business context and reporting period
The filing is the annual report for the fiscal year ended March 31, 2017, not a standalone “2016 Q4” filing. It also reports unaudited results for the quarter ended March 31, 2017. NGL operates five segments: Crude Oil Logistics, Water Solutions, Liquids, Retail Propane, and Refined Products and Renewables. The business combines commodity marketing and transportation with fee-based services, and results remain exposed to energy prices, producer activity, weather, and seasonal working-capital swings.
Financial performance and position
| Metric | FY ended Mar. 31, 2017 | FY ended Mar. 31, 2016 |
|---|---|---|
| Revenue | $13.02 billion | $11.74 billion |
| Cost of sales | $12.32 billion | $10.84 billion |
| Gross profit / margin | $700.3 million / 5.4% | $903.1 million / 7.7% |
| Operating income (loss) | $255.1 million | $(104.6) million |
| Net income (loss) | $143.9 million | $(187.1) million |
| Net income (loss) attributable to NGL | $137.0 million | $(198.9) million |
| Basic / diluted income (loss) per common unit | $0.99 / $0.95 | $(2.35) / $(2.35) |
| Adjusted EBITDA, non-GAAP | $380.8 million | $424.1 million |
| Net cash from (used in) operating activities | $(26.8) million | $351.5 million |
| Capital expenditures | $363.9 million | $661.9 million |
| Cash distributions per common unit | $1.56 | $2.54 |
Revenue increased 10.9%, largely reflecting higher Refined Products and Renewables sales, while the gross margin rate declined as sales and costs vary substantially with commodity prices and product mix. Adjusted EBITDA fell about 10.2%; reported GAAP income included significant asset-sale, impairment-reversal, and other nonrecurring effects. Operating cash flow was negative mainly because receivables and inventory rose, including expanded refined-products inventory.
For the March 2017 quarter, revenue was $3.85 billion, net income was $26.5 million, income attributable to NGL was $25.7 million, and diluted income per common unit was $0.14.
- Segment operating income (loss): Crude Oil Logistics $(17.5) million; Water Solutions $44.6 million; Liquids $43.3 million; Retail Propane $49.3 million; Refined Products and Renewables $222.5 million. The last segment’s result included TLP-related gains; Water Solutions included a goodwill impairment adjustment.
- Segment Adjusted EBITDA: Crude Oil Logistics $59.3 million; Water Solutions $63.1 million; Liquids $63.6 million; Retail Propane $90.8 million; Refined Products and Renewables $125.0 million; Corporate and Other $(21.0) million. These are non-GAAP measures.
- Liquidity: Cash was $12.3 million; current assets were $1.48 billion and current liabilities $938.6 million. The $1.765 billion revolving facility had $814.5 million drawn and $89.2 million in letters of credit at year-end. Its expansion-capital component had no borrowings and $765 million capacity. Availability under the working-capital facility is subject to a borrowing base.
- Debt: Face amount of long-term debt was approximately $3.03 billion ($2.99 billion carrying value, net of issuance costs). Revolver borrowings had a 3.72% weighted-average rate. The revolver matures in October 2021; notes include maturities in 2019, 2021, 2023, and 2025.
- Covenants: NGL reported compliance at March 31, 2017. Its leverage ratio was approximately 4.65:1 against a 4.75:1 maximum; interest coverage was 3.20:1 against a 2.75:1 minimum. The senior secured leverage ratio was 0.54:1 against a 3.25:1 maximum.
Material changes versus prior year
- Revenue rose from $11.74 billion to $13.02 billion, while Adjusted EBITDA declined from $424.1 million to $380.8 million.
- Crude Oil Logistics revenue fell sharply as crude sales volumes declined amid increased competition, although Grand Mesa Pipeline began operating in November 2016 and generated $29.2 million of transportation revenue for the year.
- Water Solutions returned to reported operating income after the prior year’s $380.2 million estimated goodwill impairment. In FY2017, NGL reversed $124.7 million of that estimate following final valuation work. Water processed averaged about 502,000 barrels per day, down from about 570,000.
- Liquids operating income declined to $43.3 million from $76.2 million, with lower margins in propane, butane, and other products. Retail Propane operating income increased to $49.3 million from $44.1 million, partly reflecting acquisitions.
- Refined Products and Renewables sales increased, but product margins were lower. NGL sold its remaining TLP common units for approximately $112.4 million and recorded a $104.1 million gain; it had sold its TLP general partner interest in February 2016 and deconsolidated TLP.
- Common distributions were reduced in April 2016 from $0.64 to $0.39 per quarter ($1.56 annualized). Management deferred a potential increase for up to an additional three quarters, citing market conditions and commodity-price uncertainty.
Outlook, commentary, risks, and unusual items
- Management said it was less likely to pursue acquisitions under prevailing market conditions, while continuing selected expansion projects. Fiscal 2018 growth capital spending was estimated at $150 million to $200 million.
- The February 2017 credit amendment reduced initial facility capacity from $2.484 billion to $1.765 billion and extended maturity to October 2021. NGL also issued $700 million of 7.50% notes due 2023 and $500 million of 6.125% notes due 2025, and raised $222.5 million net from a common-unit offering. The equity and debt proceeds were used primarily to reduce revolver borrowings.
- In June 2016, NGL issued $240 million of 10.75% convertible preferred units to Oaktree and co-investors, along with warrants for up to 4.38 million common units. Preferred distributions rank ahead of common distributions; conversion may begin after the third anniversary and could dilute common unitholders. Preferred distributions for prior quarters must be paid before common distributions may be declared.
- Reported earnings included a $104.1 million gain on the TLP unit sale, $30.1 million amortization of deferred TLP-sale gain, reversal of $124.7 million of the prior goodwill impairment estimate, a $16.2 million gain from terminating a storage sublease, and gains on debt extinguishment and liability releases. Offsetting or additional charges included a $22.7 million loss related to terminating the Water Solutions development agreement, a $14.9 million loss on revaluing the previously held Grassland interest, and a $2.3 million loss on Grassland’s sale.
- Key risks include dependence on crude-oil and gas production and wastewater volumes; commodity, basis, and counterparty risk; seasonal weather and working-capital needs; customer concentration; high leverage and covenant headroom; and environmental, pipeline, rail, and disposal-well regulation, including seismicity concerns and possible operating restrictions.
- A federal civil action concerning 2011 biodiesel renewable identification numbers alleges that defendants should retire equivalent valid RINs and pay civil penalties. NGL denies the allegations and intends to defend the case; it stated that the outcome and significance could not be determined. A motion to dismiss the amended complaint was denied on May 24, 2017, after fiscal year-end.
- The balance sheet included a $2.5 million environmental liability and $8.2 million asset-retirement obligation. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain. One Wyoming facility lacked one required permit because the state had not established a permitting process; timing was unclear.
Important facts for investors to verify
- Reconcile the $137.0 million attributable income and $0.95 diluted per-unit result with nonrecurring gains, the $30.1 million preferred distribution allocation, and the non-GAAP Adjusted EBITDA decline.
- Check subsequent liquidity, borrowing-base availability, covenant calculations, and refinancing plans, particularly given 4.65:1 leverage against a 4.75:1 limit and the debt maturity schedule.
- Assess whether operating cash flow can recover from the $26.8 million use of cash and support capital spending, preferred distributions, debt service, and common-unit distributions.
- Review preferred-unit redemption and conversion terms, warrant exercise timing, and potential dilution, as well as the sustainability of the $0.39 quarterly common distribution.
- Track the RIN litigation, disposal-well seismicity and permit developments, and the effect of customer concentration and producer activity on Water Solutions and Crude Oil Logistics volumes.