NGL Energy Partners LP — Form 10-Q Summary
Business context and reporting period. This filing covers the three and six months ended September 30, 2014 (fiscal 2015 second quarter and first half), with comparisons to the same periods in 2013. NGL operates crude oil logistics, water solutions, wholesale liquids, retail propane, and refined products and renewables businesses. Results are substantially affected by acquisitions and by seasonal demand for propane and other natural gas liquids.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue, 2014 | $5,380.5 million | $9,029.1 million |
| Revenue, 2013 | $1,593.9 million | $2,979.9 million |
| Operating income (loss), 2014 | $7.8 million | $(12.8) million |
| Operating income, 2013 | $9.9 million | $2.6 million |
| Consolidated net loss, 2014 | $(15.9) million | $(55.8) million |
| Loss per common unit, 2014 | $(0.34) | $(0.93) |
| Adjusted EBITDA, 2014 (non-GAAP) | $62.2 million | $101.5 million |
| Adjusted EBITDA, 2013 (non-GAAP) | $41.3 million | $68.1 million |
- Revenue growth primarily reflects acquired operations, including Gavilon Energy (acquired December 2013) and TransMontaigne (acquired July 1, 2014); reported periods are not directly comparable. TransMontaigne contributed $1.1 billion of revenue and a $0.3 million operating loss since acquisition.
- Second-quarter operating income fell despite higher revenue. Crude oil logistics operating income declined to less than $0.1 million from $5.9 million, with narrow market spreads and falling crude prices weighing on margins. Water solutions income rose to $14.8 million from $2.9 million, principally on higher processed volumes and acquired facilities. Liquids income declined to $10.9 million from $14.6 million; retail propane remained loss-making, at $(3.1) million versus $(4.5) million. Refined products and renewables contributed $8.8 million of operating income.
- For the first half, corporate and other operating losses increased to $41.1 million from $22.3 million, including higher equity compensation, acquisition costs, and corporate expenses. Interest expense increased to $49.1 million from $21.7 million, primarily reflecting acquisition-related borrowing.
- At September 30, total assets were $6,551.7 million, including $2,585.1 million of current assets and $941.6 million of inventory. Current liabilities were $1,760.0 million, giving working capital of $825.1 million. Cash was $11.8 million. These balances compare with total assets of $4,167.2 million and working capital of $313.5 million at March 31, 2014.
- Total debt was $2,442.4 million, versus $1,636.9 million at March 31. The balance included $1,079.5 million drawn on NGL’s revolving facilities, $400 million of 5.125% notes due 2019, $450 million of 6.875% notes due 2021, $250 million of 6.65% notes due 2022, and $252 million of TLP facility debt. NGL reported leverage of approximately 3.4x against a 4.25x maximum and interest coverage of 4.8x against a 2.75x minimum; it reported covenant compliance.
- First-half operating cash flow was $(61.6) million, investing cash flow $(750.3) million, and financing cash flow $813.3 million. Investing included $658.8 million for acquisitions and $82.9 million of long-lived asset purchases. Financing included $400 million of note proceeds, $370.4 million net proceeds from common-unit sales, and net revolving-facility borrowing of $175.5 million. Ending cash was $11.8 million.
Material changes, outlook, and risks
- On July 1, NGL acquired TransMontaigne for $174.2 million cash net of cash acquired and purchased $380.4 million of inventory. The acquisition included interests in TLP, including its general partner interest and incentive distribution rights. NGL estimated a further $27.5 million working-capital payment; acquisition fair values remained preliminary and subject to potentially material adjustment.
- NGL issued $400 million of 5.125% notes in July and used net proceeds to reduce revolving borrowings. It also completed a common-unit offering and overallotment, receiving $370.4 million net. All subordinated units converted to common units in August.
- Management said anticipated operating cash flow and revolving capacity should meet liquidity needs for the next 12 months, but noted that acquisitions or changed assumptions could require additional capital and that access to capital is not assured. Working-capital needs typically peak June through December as NGL builds seasonal inventory. No specific full-year earnings or distribution guidance was provided.
- In October, NGL declared a quarterly distribution of $0.6088 per unit, expected to total approximately $65.0 million. The filing also describes future distribution obligations and the possibility of additional borrowing if operating cash flow is insufficient.
- Subsequent to quarter-end, NGL purchased five water-disposal facilities for $52.2 million. It also agreed to sell a natural gas liquids terminal, expecting to close in December 2014 and record an estimated $29 million disposal loss.
- Key risks include commodity-price volatility and falling prices, narrow crude market spreads, seasonal demand and working-capital needs, customer and counterparty credit, changing production volumes, acquisition integration and valuation, environmental and regulatory exposure, and variable-rate debt. A 0.125 percentage-point rate change would change annual interest expense by about $1.3 million on NGL’s revolving borrowings.
- Commodity derivatives are not accounted for as hedges, so fair-value changes affect cost of sales. First-half adjusted EBITDA is a non-GAAP measure and excludes specified items; the filing notes that unrealized derivative amounts for acquired Gavilon and TransMontaigne operations were excluded from its calculation.
- Acquisition-related unusual items included $2.7 million of TransMontaigne termination-benefit expense in the quarter, with further expense possible, and Gavilon employee bonuses with additional expense expected in the quarter ending December 2014. The water transportation business sale generated a $4.0 million loss. A customer dispute was settled in September without a recorded gain or loss.
Important facts for investors to verify
- Whether acquired businesses produce durable margins and cash flow, given the large revenue increase but weak consolidated operating results and acquisition-driven comparability.
- Revolver borrowing-base availability, seasonal inventory funding, debt maturities and covenant headroom, particularly the TLP facility due in 2016.
- Whether cash generation can support the declared distributions, acquisition plans, and contractual commitments, including $507.4 million of future operating lease payments and $441.2 million of minimum pipeline throughput payments.
- Final TransMontaigne purchase accounting and working-capital settlement, and the expected timing and $29 million estimated loss on the terminal sale.
- Exposure to commodity-price movements, derivative valuation and settlement effects, inventory write-downs, and the assumptions underlying non-GAAP Adjusted EBITDA.