NGL Energy Partners LP — FY2022 Form 10-K
Reporting period: Fiscal year ended March 31, 2022 (not calendar Q4 2021). Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
NGL is a diversified midstream energy partnership operating Water Solutions, Crude Oil Logistics and Liquids Logistics businesses. Its services include produced-water transport, treatment and disposal; crude-oil transport and storage; and supply, transport and storage of natural gas liquids, refined products and biodiesel. The filing reports a full fiscal year and compares results primarily with the year ended March 31, 2021.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $7.948 billion | $5.227 billion |
| Operating income (loss) | $83.0 million | $(390.8) million |
| Net loss | $(184.1) million | $(639.2) million |
| Net loss attributable to NGL | $(184.8) million | $(639.8) million |
| Loss per common unit | $(2.22) | $(5.68) |
| Adjusted EBITDA, continuing operations | $542.5 million | $448.3 million |
| Cash from operating activities | $205.8 million | $305.8 million |
| Capital expenditures (cash-flow basis) | $142.4 million | $186.8 million |
- Revenue rose about 52%, reflecting higher commodity prices and increased Water Solutions activity. Much of the Crude and Liquids segments’ revenue consists of product sales, so revenue growth should not be read as equivalent margin growth.
- Operating results improved substantially, but NGL remained loss-making. FY2022 included $94.3 million of net asset disposal and impairment losses, including a $60.1 million loss on the Sawtooth sale. FY2021 included $475.4 million of such losses, notably impairment charges tied to Extraction’s bankruptcy and other assets.
- Segment operating income was $94.9 million for Water Solutions and $45.0 million for Crude Oil Logistics; Liquids Logistics recorded an $8.4 million operating loss. Water Solutions processed 656.2 million barrels during the year, versus 498.1 million in FY2021.
- Interest expense increased to $271.6 million from $198.8 million, primarily following the issuance of 7.5% secured notes due 2026. Adjusted EBITDA is a non-GAAP measure; management reported it as supplemental information, not a substitute for GAAP results or cash flow.
- Operating cash flow declined amid working-capital uses, including increases in receivables and inventory, and higher interest expense. Cash was $3.8 million at year-end. Current assets of $1.546 billion exceeded current liabilities of $1.277 billion by about $269 million.
- Face-value long-term debt was approximately $3.4 billion at March 31, 2022. The balance sheet reports $3.350 billion of long-term debt net of issuance costs, plus $2.4 million of current maturities. The $500 million ABL facility had $116 million drawn and approximately $155 million of letters of credit outstanding at year-end.
Material changes versus the prior comparable period
- Revenue increased from $5.227 billion to $7.948 billion, while net loss narrowed from $639.2 million to $184.1 million. The improvement partly reflects much lower impairment and disposal losses, as well as stronger segment activity and commodity prices.
- Water Solutions moved from a $92.7 million operating loss to $94.9 million of operating income, with higher processed-water volumes and recovered crude oil revenue.
- Crude Oil Logistics moved from a $304.3 million operating loss to $45.0 million of operating income. The prior year included large Extraction-related impairment charges; FY2022 results also faced lower Grand Mesa volumes and significant derivative losses associated with rising crude prices.
- Liquids Logistics moved from $70.4 million of operating income to an $8.4 million operating loss, including the $60.1 million Sawtooth disposition loss. Warmer-than-normal weather and reduced propane volumes pressured margins; higher butane and refined-products margins provided offsets.
- Operating cash flow fell by $99.9 million year over year. The partnership sold its approximately 71.5% interest in Sawtooth in June 2021 for $70 million before expenses, recording the loss noted above.
Outlook, risks and unusual items
- Capital and leverage: Management estimated FY2023 capital expenditures of approximately $100 million. Its stated priority is reducing debt and leverage, with a goal of bringing leverage below 4.75:1 and restoring distributions when permitted. No specific earnings or revenue guidance is provided.
- Distributions: Common-unit distributions have been suspended since the quarter ended December 31, 2020; preferred distributions have been suspended since the quarter ended March 31, 2021. Debt covenants restrict distributions until the defined leverage test is met, and preferred arrears must be addressed before common distributions. At March 31, 2022, disclosed cumulative unpaid amounts were $36.9 million for Class B, $5.7 million for Class C and $85.4 million for Class D preferred units.
- Financing update after year-end: On April 13, 2022, the ABL commitment was increased to $600 million, with a requirement to reduce it to $500 million on or before March 31, 2023. The letter-of-credit sublimit rose to $250 million, and the benchmark was changed from LIBOR to SOFR-based rates.
- Market and operating risks: Management cited continued commodity-price volatility associated with the COVID-19 recovery, inflation, supply constraints and Russia’s invasion of Ukraine. Results also depend on producer activity, weather, customer creditworthiness and the availability and cost of transport and storage.
- Water-disposal and regulatory risks: Seismic activity has led operators and regulators to limit or suspend some injection activity. Texas regulators suspended deep produced-water injection in an area that affected one of NGL’s idled wells; NGL said it was plugging and abandoning that well. Environmental, climate, hydraulic-fracturing and other regulatory changes could raise costs or reduce customer production.
- Concentration and contingencies: CITGO accounted for 12.8% of consolidated revenue in FY2022. A Delaware lawsuit over investment-banking services had a new damages-only trial scheduled for November 2022; NGL had accrued $2.5 million at year-end. The filing also reports a $1.8 million environmental liability and a joint-and-several guarantee related to an aircraft-company loan with a $2.5 million outstanding balance; no guarantee accrual was recorded.
- Grant Thornton issued unqualified opinions on the FY2022 financial statements and internal control over financial reporting. Goodwill was $744.4 million; no goodwill impairment was recorded in FY2022, although the Crude Oil Logistics reporting unit’s estimated fair value exceeded carrying value by only about 12% in the January 2022 test.
Important facts for investors to verify
- How the covenant-defined leverage ratio compares with the 4.75:1 distribution threshold, and the timing and terms for any distribution reinstatement.
- Debt repayment and refinancing capacity, particularly maturities, interest costs, ABL borrowing-base availability and the commitment step-down in 2023.
- The amount and continued accrual of preferred-unit distribution arrears, including how arrears affect common unitholders.
- Whether Grand Mesa throughput and customer contracts recover, and the ongoing impact of Extraction-related changes and CITGO revenue concentration.
- Injection-volume restrictions, seismic developments and the financial effects of any additional facility shutdowns or environmental requirements.
- The assumptions supporting goodwill and asset valuations, and any subsequent changes to litigation, environmental or other contingent liabilities.