NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three months ended June 30, 2011 (fiscal first quarter); unaudited. Unless otherwise noted, financial amounts are in U.S. dollars. The comparative 2010 results are for NGL Supply, Inc. alone and exclude Hicksgas, acquired in October 2010, so period-to-period comparisons are not fully like-for-like.
Business context
The Partnership operates retail propane, wholesale supply and marketing, and midstream terminal businesses in the United States and Canada. The business is seasonal: management says most retail propane volume is sold October through March, with operating cash flows generally weakest in the first half of the fiscal year.
Financial highlights
| Metric | Quarter ended June 30, 2011 | Comparable 2010 period |
|---|---|---|
| Revenue | $190.8 million | $160.3 million |
| Gross margin | $4.9 million (2.6% of revenue) | $2.1 million (1.3%) |
| Operating loss | $5.7 million | $2.3 million |
| Net loss | $6.8 million; $0.53 per common and subordinated unit | $1.4 million |
| Adjusted EBITDA | $(1.6) million | $(0.7) million |
| Net cash used in operating activities | $22.3 million | $11.9 million |
Revenue rose about 19%, while gross margin more than doubled, but operating and net losses widened. The retail segment contributed $4.7 million of gross margin but recorded a $3.2 million operating loss. Wholesale supply and marketing reported negative gross margin of $0.3 million and a $1.7 million operating loss. Midstream operating income was $28,000. Management attributes much of the retail growth and expense increase to the Hicksgas acquisition; wholesale volume fell 10.4% amid reduced customer storage purchases, while higher commodity prices lifted reported sales and costs.
Cash and cash equivalents were $8.7 million at June 30, down from $16.3 million at March 31. Current assets were $113.1 million and current liabilities $79.2 million (calculated current ratio: approximately 1.43). Inventories increased to $53.1 million from $12.7 million, principally propane inventory. Total debt was $12.2 million, versus $66.4 million at March 31; this included $11.0 million of working-capital borrowings and $1.2 million of other notes. The $65.0 million acquisition-facility balance was repaid using IPO proceeds. The Partnership reported $39 million available on its working-capital facility and $150 million on its acquisition facility, and compliance with debt covenants.
Material changes and unusual items
- In May 2011, the Partnership completed its IPO, selling 4.025 million common units at $21 per unit. Approximately $72 million of net proceeds from the principal offering were used to repay acquisition-facility borrowings and for general purposes; proceeds from the underwriters’ additional-unit sale funded a $3.4 million unit redemption.
- A 3.7219-for-one common-unit split was effected, and 5.9 million common units were converted to subordinated units.
- Quarterly partner distributions totaled $3.85 million ($0.35 per unit). A subsequent prorated distribution of $0.1669 per unit was declared and paid in August.
- Interest expense increased to $1.3 million from $72,000, reflecting higher average debt, interest rates, debt-issuance-cost amortization and letter-of-credit fees.
- Commodity derivatives produced a $2.2 million unrealized loss and $2.2 million realized gain; the interest-rate swap loss was $278,000. Derivatives were not accounted for as hedges.
Outlook, risks and contingencies
Management expects operating cash flows and revolving-credit capacity to meet liquidity needs for the next 12 months, while noting that acquisitions or changed assumptions could require additional capital. No earnings guidance was provided. A Kansas retail propane acquisition for $2.1 million closed July 12, 2011. On August 12, the Partnership agreed to acquire northeastern U.S. retail propane operations, expected to close in early October subject to customary conditions, including regulatory approvals. Consideration includes $96 million cash, 4 million new limited partner units and a working-capital payment; the cash portion is expected to be funded with revolver borrowings.
Key risks include propane price and demand volatility, ability to pass through higher costs, weather and seasonality, supply and transportation availability, customer and counterparty credit risk, and access to capital. The filing reports fixed-price commodity purchase commitments of approximately $111.4 million and index-priced purchase commitments of approximately $119.9 million. Ordinary-course legal claims are disclosed; management believes their disposition will not materially adversely affect the Partnership. The filing identifies no significant change to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- How the planned northeastern acquisition closes and is financed, including its working-capital needs and impact on leverage and unit count.
- Whether seasonal cash generation and borrowing capacity can support inventory buildup, distributions and acquisition spending; operating cash flow was materially negative this quarter.
- Whether wholesale margins recover after lower storage demand and negative segment gross margin, and how retail acquisition costs affect profitability.
- The extent to which commodity purchase commitments are matched by sales or otherwise managed, and the potential effect of price changes and derivative positions.
- The sustainability of distributions given the Partnership’s current losses, seasonal cash flows and stated minimum-distribution policy.