NGL Energy Partners LP — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016. Although the request identifies 2015 Q4, this filing is an annual report covering FY2016; it also restates unaudited quarterly information for the first three quarters of FY2016.
Business context
NGL operates five segments: crude oil logistics, water solutions, wholesale liquids, retail propane, and refined products and renewables. The business combines commodity marketing and margin-based activities with transportation, storage, and processing services. Acquisitions materially affect comparisons between periods.
Financial performance and position
| Metric | FY2016 / March 31, 2016 | Prior comparable period |
|---|---|---|
| Revenue | $11.742 billion | $16.802 billion in FY2015 |
| Operating income (loss) | $(104.6) million | $107.4 million in FY2015 |
| Net income (loss) | $(187.1) million | $50.2 million in FY2015 |
| Limited-partner loss per common unit | $(2.35) | $(0.05) in FY2015 |
| Adjusted EBITDA (non-GAAP) | $424.1 million | $443.3 million in FY2015 |
| Cash from operating activities | $351.5 million | $262.4 million in FY2015 |
| Cash / current assets / current liabilities | $28.2 million / $1.028 billion / $706.0 million | Cash: $41.3 million at March 31, 2015 |
| Long-term debt, carrying value | $2.913 billion; face amount approximately $2.9 billion | $2.727 billion carrying value at March 31, 2015 |
| Total assets / total equity | $5.560 billion / $1.694 billion | $6.656 billion / $2.693 billion at March 31, 2015 |
Revenue fell about 30%, substantially reflecting lower commodity prices and changes in volumes and business mix. Operating results included a $380.2 million water-solutions goodwill impairment and other asset write-downs; these drove the GAAP operating loss. Adjusted EBITDA, a company-defined non-GAAP measure, declined about 4%. The filing reports $655.6 million of FY2016 expansion and maintenance capital expenditures on an accrual basis; net cash used in investing activities was $445.3 million.
By segment, FY2016 operating results were: crude oil logistics loss of $40.7 million; water solutions loss of $313.7 million; liquids income of $76.2 million; retail propane income of $44.1 million; and refined products and renewables income of $227.0 million. The last figure benefited from the TLP general-partner sale, including a reported gain partly deferred because NGL remained a long-term tenant.
At March 31, the revolving credit facilities had $2.484 billion total capacity, with $1.848 billion of borrowings and $45.4 million of letters of credit outstanding. Availability was subject to facility terms and, for working-capital borrowings, a borrowing base. The partnership reported leverage of approximately 3.9x against a 4.75x maximum covenant and interest coverage of approximately 5.3x against a 2.75x minimum; it stated that it was in compliance with debt covenants.
Material changes and unusual items
- Restatement and controls: NGL restated the June, September, and December 2015 quarters after identifying omitted contingent consideration liabilities for royalty payments tied to prior Water Solutions acquisitions. The correction increased goodwill and liabilities and changed quarterly earnings. Previously filed quarterly statements were declared unreliable. Management identified a material weakness in acquisition accounting controls through December 31, 2015; it reported that revised controls were effective by March 31, 2016. The auditor gave unqualified opinions on the financial statements and year-end internal control.
- TLP transaction: On February 1, 2016, NGL sold its TLP general-partner interest for $350 million cash, deconsolidated TLP, and retained a 19.6% limited-partner interest and long-term terminal leases. It recorded a $329.9 million disposal gain, of which $204.6 million was deferred and is to be recognized over approximately seven years. On April 1, 2016, it sold its remaining TLP common units for approximately $112.4 million.
- Asset impairments: Water Solutions recorded a $380.2 million estimated goodwill impairment amid weak crude prices and lower production. NGL also wrote down $47.7 million of pipe associated with the original Grand Mesa plan and recorded other segment asset impairments and write-offs. The water goodwill test relied on forecast recovery in oil prices and volumes; management warned further declines could cause additional impairment.
- Debt transactions: NGL repurchased $73.2 million face value of 2019 and 2021 notes for $43.4 million, recording a $28.5 million extinguishment gain. The filing also describes April 2016 note repurchases and an expected additional gain.
Outlook, liquidity, and risks
In April 2016, after year-end, the board reduced the quarterly distribution from $0.64 to $0.39 per unit. Management expected the lower rate to continue for three additional quarters under then-current conditions and estimated annual cash savings of approximately $170 million for liquidity, debt repayment, and selected growth projects. NGL expected FY2017 growth capital expenditures of $200 million to $300 million and anticipated funding projects through revolver capacity, asset sales, or other financing. It said it was less likely to pursue acquisitions in the prevailing capital-market environment.
NGL expected its Colorado-to-Cushing joint pipeline to begin operations in FY2017’s third quarter. Its estimated share of pipeline construction cost was $250 million, with $39 million remaining at March 31, 2016; connected assets had an estimated $80.6 million of remaining costs. These commitments, seasonal working-capital needs, high leverage, and substantial lease and throughput obligations are important liquidity considerations.
Key operating risks include persistently low oil prices reducing producer activity and water volumes; commodity, basis, and inventory exposure despite hedging; weather-driven propane demand; customer concentration and counterparty credit; reliance on third-party pipelines, railroads, and storage; environmental and disposal-well regulation, including seismicity concerns; and competition. The filing also discloses ongoing EPA allegations concerning alleged 2011 renewable-fuel-standard violations by a predecessor business; settlement discussions were ongoing, and the potential resolution was unclear. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Review the restated quarterly figures and subsequent filings to understand the royalty-liability correction, its earnings effects, and whether the new acquisition-accounting controls remain effective.
- Track water-solutions volumes, recovered-hydrocarbon revenue, crude-price assumptions, and any additional goodwill or asset impairments.
- Confirm distribution payments against operating cash flow, debt covenants, seasonal borrowing needs, and actual revolver availability under the borrowing base.
- Assess progress, remaining cost, committed capacity, and expected in-service timing for the Joint Pipeline and connected assets, as well as FY2017 growth spending.
- Reconcile TLP sale proceeds and deferred-gain recognition, and verify the use of proceeds from the TLP unit sale and Oaktree preferred-unit financing. The filing describes a $200 million preferred issuance at 10.75%, with $100 million received at the first closing and a second closing expected by June 30, 2016.
- Monitor the EPA matter and other environmental, regulatory, and contractual contingencies; the filing does not provide a clear estimate of the potential EPA settlement exposure.