NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, the first quarter of fiscal 2020. The filing was signed August 8, 2019. NGL operates crude oil logistics, water solutions, natural gas liquids, and refined products and renewables businesses. Figures below are in U.S. dollars; financial statement amounts are generally unaudited.
Financial performance and position
| Metric | Quarter ended June 30, 2019 | Comparable 2018 quarter |
|---|---|---|
| Revenue | $6,637.9 million | $5,844.4 million |
| Operating income (loss) | $46.6 million | $(84.6) million |
| Net income (loss) | $8.0 million | $(169.3) million |
| Net income (loss) attributable to NGL | $8.3 million | $(168.5) million |
| Net loss allocated to common unitholders; per common unit | $121.1 million; $(0.96) | $188.5 million; $(1.55) |
| Adjusted EBITDA (non-GAAP) | $86.8 million | $80.3 million |
| Cash from operating activities | $69.9 million | $(41.1) million, including discontinued operations |
| Capital expenditures paid | $155.4 million | $72.7 million |
- Revenue rose about 13.6%; operating income improved by $131.1 million. The prior-year quarter included a $101.3 million net asset disposal/impairment loss and $33.7 million of other expense, principally the Gavilon matter accrual. Adjusted EBITDA, a non-GAAP measure, increased about 8.0%.
- Gross profit (revenue less cost of sales) was $184.4 million, or about 2.8% of revenue, versus $148.3 million, or about 2.5%. These are simple calculations from reported totals, not a company-reported segment margin measure.
- Segment operating income was $33.8 million for Crude Oil Logistics, $13.7 million for Water Solutions, $8.5 million for Liquids, and $5.9 million for Refined Products and Renewables; Corporate and Other recorded a $15.3 million loss. Crude Oil Logistics’ turnaround was substantially affected by the prior-year loss on pipeline deficiency credits. Refined Products and Renewables fell from $29.0 million, with lower product margins despite higher sales volume.
- Cash and cash equivalents were $27.5 million at June 30, up from $18.6 million at March 31. Current assets were $1,649.3 million and current liabilities $1,157.4 million. Operating cash flow benefited from working-capital movements, including a $251.7 million cash source from trade and affiliate receivables, partly offset by inventory and payables movements.
- Book long-term debt, including current maturities, was about $2,587.6 million, compared with $2,160.8 million at March 31. Face-value debt was $2,606.6 million, including $1,155.0 million drawn on revolving facilities and $450.0 million of new 2026 notes. Separately, the balance sheet reported $516.1 million of operating lease obligations following adoption of lease accounting.
- The $1.765 billion revolving credit agreement had $141.8 million of letters of credit outstanding. Borrowings carried a 4.27% weighted-average rate. Management reported compliance with debt covenants; leverage was about 3.47x and interest coverage about 3.18x. The filing does not give a single unrestricted cash-availability figure, and working-capital capacity is subject to a borrowing base.
Material changes and notable items
- NGL redeemed all Class A convertible preferred units during the quarter for total payments of $269.4 million, plus a $4.0 million distribution; it issued $450.0 million of 7.50% notes due 2026 and $42.6 million net proceeds from Class C preferred units. Preferred distributions and Class A redemption-related accretion substantially affected the common-unit loss allocation.
- Capital spending increased, primarily for Water Solutions expansion. NGL acquired water disposal assets during the quarter, including a facility purchase for approximately $53 million and a separate $13 million asset acquisition. The company reported $224.997 million of additions to property, plant and equipment and intangible assets on an accrual basis, including acquired assets.
- ASC 842 lease adoption on April 1, 2019 added right-of-use assets and lease obligations; comparative periods were not restated. Quarter lease expense was $31.3 million.
- The former Retail Propane segment had been sold in 2018 and is presented as discontinued operations; prior-period comparisons were adjusted. NGL also sold water-disposal businesses in fiscal 2019, affecting segment comparability.
Outlook, risks and contingencies
- No quantified earnings or cash-flow guidance is provided. Management said anticipated operating cash flows and revolving-credit borrowing capacity should meet liquidity needs, while noting that acquisitions or changed assumptions could require additional capital or asset sales. It cited organic growth opportunities in Water Solutions and Crude Oil Logistics and intends to pursue acquisitions and capital projects.
- Seasonality is important: working-capital borrowing needs generally rise from June through December as NGL builds NGL and gasoline inventories. Results are also exposed to commodity-price changes, margins, production and demand, weather, transportation access, counterparties, and environmental and regulatory developments.
- Subsequent events: On July 2, 2019, NGL completed the $892.5 million Mesquite water-disposal acquisition, funded through $592.5 million cash, $100 million of Class B preferred units, and up to $200 million of contingent deferred cash payments. It also entered a $250 million term loan and agreed to issue $400 million of Class D preferred units and warrants, with $385 million net proceeds. These transactions occurred after quarter-end.
- On August 8, 2019, NGL announced a definitive agreement to sell TransMontaigne Product Services and related assets for estimated proceeds of approximately $300 million, subject to closing adjustments and conditions; proceeds were intended to reduce revolving debt. The company expected closing during its second fiscal quarter.
- Legal and environmental matters include the LCT Capital jury verdict, which NGL is contesting: the filing says the awards are not believed to be cumulative, estimates NGL’s potential allocated liability at less than $4 million, and reports a $2.5 million accrual. A separate EPA consent decree requires $25 million cash and retirement of 36 million RINs; $12.5 million remained accrued at June 30, after the RINs had been retired. NGL also reported $2.4 million of environmental liabilities.
- Commodity derivatives are not designated as accounting hedges, so fair-value movements can create earnings volatility. NGL also disclosed a third-party borrower under a $26.4 million secured NGL-facility loan filed for Chapter 11 after quarter-end.
Key facts investors should verify
- Whether the Mesquite acquisition delivers expected operating performance and how contingent payments, preferred distributions, and warrants affect leverage and common-unit economics.
- Actual completion proceeds and debt reduction from the announced TPSL sale, and the effect of the divested assets on Refined Products and Renewables earnings.
- Working-capital borrowing capacity and covenant headroom under seasonal inventory needs, including the effects of post-quarter financing and acquisition activity.
- Whether reported operating cash flow and Adjusted EBITDA are sustainable after working-capital changes, high capital spending, and the sizable preferred-unit distribution burden.
- Developments in the LCT litigation, EPA settlement payments, and collectibility of the secured facility loan following the borrower’s bankruptcy filing.