NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2011. Filed November 14, 2011. Unless noted otherwise, financial amounts below are U.S. dollars in millions.
Business context and comparability
NGL operates retail propane, wholesale supply and marketing, and midstream terminal businesses. Results are highly seasonal: management says sales, operating profits, and positive operating cash flow are generally concentrated in the October–March heating season. The 2011 results include Hicksgas, acquired in October 2010, while the 2010 comparison is NGL Supply alone; therefore, year-over-year comparisons are not like-for-like.
Financial performance and position
| Metric | Three months ended Sept. 30, 2011 | Six months ended Sept. 30, 2011 |
|---|---|---|
| Revenue | $210.0 | $400.9 |
| Gross margin | $8.6 (4.1% of revenue) | $13.5 (3.4% of revenue) |
| Operating loss | $(4.5) | $(10.2) |
| Net loss | $(5.4) | $(12.2) |
| Adjusted EBITDA | $(3.9) | $(5.6) |
| Operating cash flow | Not separately presented | $(52.8) |
For the six-month comparison, revenue increased from $316.9 million, gross margin from $6.0 million, and net loss widened from $2.6 million. NGL attributed much of the higher revenue and retail margin to Hicksgas and higher propane prices; wholesale volume declined, and wholesale gross margin fell. The reported comparison is also affected by the different businesses and tax status.
At September 30, cash was $8.4 million, current assets $174.1 million, and current liabilities $151.4 million. Total debt was $50.7 million, including $40.6 million classified as current maturities; total debt at March 31 was $66.4 million. Inventory rose to $107.3 million from $12.7 million, principally reflecting seasonal inventory accumulation and lower wholesale customer liftings. Six-month operating cash use increased from $30.7 million in the prior comparison, with the inventory build a major cash use.
The credit agreement provides $330 million of revolving capacity, comprising working-capital and acquisition facilities. At September 30, NGL reported $50 million of working-capital borrowings, about $20 million available on that facility, and $200 million available on the acquisition facility. It reported covenant compliance and a funded-debt-to-EBITDA ratio of 0.05:1 at that date. These figures predate significant post-period acquisition borrowing.
Material changes, outlook, risks and unusual items
- NGL completed the Osterman retail propane acquisition on October 3 for $96 million cash and 4 million common units. It completed the SemStream transaction on November 1 for about $93 million cash and approximately 8.9 million common units; SemStream also acquired a 7.5% interest in the general partner. Both transactions were funded partly with credit-facility borrowings. Management expects the deals to expand retail propane, wholesale and midstream operations, while increasing interest expense; integration and purchase accounting were not complete.
- At November 11, after these transactions and related facility actions, available borrowing capacity was $16 million on the working-capital facility and $43 million on the acquisition facility. This is materially tighter than reported September 30 capacity.
- Management said anticipated operating cash flows and facility capacity should meet liquidity needs for the next 12 months, but noted additional capital may be needed if assumptions change or further acquisitions occur. It provided no earnings guidance.
- Propane spot prices at Conway were higher than a year earlier. Management said it generally passes price increases through, but sharp or sustained increases may pressure margins, reduce demand, and require more cash for inventory. Weather, supply and transportation availability, competition, and customer credit are additional risks.
- Fixed-price outstanding sales contracts were approximately $154.4 million and purchase contracts approximately $109.9 million at September 30, with maturities through March 2013. A $30 million portion of the working-capital facility matures in February 2012, and the agreement also requires an annual working-capital paydown period.
- Acquisition-related costs were expensed, including approximately $530,000 for Osterman and $539,000 for SemStream through September 30. The filing reports ordinary-course legal claims but no material proceedings; management did not expect those matters to materially affect financial position or results.
Most important facts for investors to verify
- Post-acquisition debt, borrowing-base availability, and compliance with credit-facility terms, especially given the reduced availability reported at November 11.
- Whether Osterman and SemStream deliver the expected operating contribution, and the effects of acquisition financing, unit issuance, integration costs, and working-capital adjustments.
- Seasonal cash generation and inventory needs, including whether the winter heating season reverses the first-half operating cash outflow.
- Underlying segment margins and volumes, separating acquisition effects, propane price changes, and one-time acquisition costs from ongoing performance.
- Exposure to propane price volatility, weather, pipeline and storage access, counterparty performance, and the February 2012 facility maturity.