NGL Energy Partners LP — Form 10-Q Summary
Business context and reporting period
Unaudited fiscal third-quarter report for the three and nine months ended December 31, 2015; comparisons are with the corresponding 2014 periods. NGL operates crude oil logistics, water solutions, wholesale liquids, retail propane, and refined products and renewables businesses. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $2,685m | $4,552m | $9,417m | $13,581m |
| Operating income | $61.2m | $18.1m | $46.7m | $5.3m |
| Net income (loss) | $29.6m | $(5.3)m | $(33.1)m | $(61.1)m |
| Limited-partner net income (loss) | $7.3m | $(22.7)m | $(93.7)m | $(102.3)m |
| Basic earnings (loss) per common unit | $0.07 | $(0.26) | $(0.89) | $(1.17) |
| Adjusted EBITDA (non-GAAP) | $113.2m | $136.6m | $269.2m | $238.0m |
- Quarterly operating margin was approximately 2.3%, versus 0.4% a year earlier; nine-month operating margin was approximately 0.5%, versus 0.04%. Quarterly Adjusted EBITDA declined about 17%, while nine-month Adjusted EBITDA increased about 13%.
- Quarterly segment operating income improved in crude oil logistics ($0.8m versus a $26.8m loss) and liquids ($32.9m versus a $14.0m loss). Water solutions swung to a $5.8m loss from $34.5m income; retail propane income fell to $14.5m from $21.5m. Refined products and renewables rose to $31.7m from $29.0m.
- Revenue fell sharply as commodity prices declined and crude oil logistics volumes contracted; crude oil sales volume in the quarter fell to 10.8m barrels from 22.7m. Management also cited lower propane prices and lower retail volumes amid warmer weather.
- Nine-month cash from operations was $293.1m, compared with $81.8m; working-capital changes contributed $173.6m in 2015. Investing used $595.1m, including $497.1m in long-lived asset purchases and $187.4m for acquisitions, partly offset by derivative cash flows. Financing provided $285.8m. Cash declined by $16.1m to $25.2m.
- At December 31, 2015, total assets were $6.56bn and equity was $2.43bn. Current assets of $1.23bn exceeded current liabilities of $796.9m; cash was $25.2m and inventories were $414.1m.
- Total debt was $3.33bn, up from $2.75bn at March 31, 2015. This included $1.92bn outstanding under NGL’s revolving facilities and $248m under TLP’s facility. NGL’s leverage ratio was approximately 4.0x against a 4.5x maximum; interest coverage was approximately 5.6x against a 2.75x minimum. The partnership reported compliance with debt covenants. Revolving borrowings were variable-rate; the reported NGL rate was 2.68%.
Material changes, outlook, and risks
- In November 2015, NGL acquired a 37.5% interest in a Colorado-to-Cushing crude oil pipeline project, with capacity rights of 150,000 barrels per day. NGL estimated its construction share at $250m, had paid $125m by December 31, and expected the pipeline to enter service in the fourth quarter of calendar 2016. Management expected to pay the remaining construction amount during 2016.
- NGL reclassified $87.4m of pipe from the original Grand Mesa plan to assets held for sale. January 2016 buyer discussions indicated a sale below carrying value was probable; management expected a loss in fiscal Q4 2016.
- On February 1, 2016, after quarter-end, NGL completed the sale of its TLP general partner interest for $350m cash and granted the buyer an option to acquire up to 800,000 of its approximately 3.2m TLP units. NGL said it would retain its marketing business and remain the exclusive long-term tenant in TLP’s Southeast terminal system.
- Management said anticipated operating cash flow and revolving capacity were expected to meet liquidity needs, but noted that access to additional capital depends on market conditions. It described capital costs as elevated, said acquisitions were less likely under current conditions, and intended to continue the quarterly distribution at $0.64 per unit without expecting a near-term increase. A $0.64 distribution was declared in January 2016.
- Key exposures include commodity-price volatility, lower crude oil production and water volumes, weather-sensitive propane demand, imperfect hedging between Gulf Coast and New York Harbor prices, counterparty nonperformance, interest-rate changes, and access to capital. Management warned that low crude prices could further weaken water-solutions results and said a future goodwill impairment remained reasonably possible, although its December impairment test showed estimated fair value above carrying value.
- The EPA alleged past Clean Air Act renewable-fuel-standard violations by a predecessor business. NGL denied the allegations; settlement discussions were ongoing, and the possible outcome and financial effect were not clear. The filing also reported $3.6m of environmental liabilities and $5.0m of asset-retirement obligations.
- After the quarter, the CEO was appointed interim CFO following the CFO’s resignation. Management reported effective disclosure controls; integration of TransMontaigne controls remained ongoing.
Most important facts for investors to verify
- Use the sale proceeds and any related debt repayment to reassess leverage, covenant headroom, interest costs, and liquidity; confirm the treatment and timing of proceeds.
- Track the $125m remaining pipeline construction commitment, project timing, customer commitments, and expected loss on the pipe sale.
- Assess whether water-solutions volumes, recovered-hydrocarbon revenue, and goodwill assumptions withstand continued low crude prices.
- Reconcile Adjusted EBITDA with GAAP results and cash generation, particularly the effects of working-capital movements, derivatives, compensation, acquisitions, and unusual items.
- Monitor distribution coverage and the sustainability of the $0.64 quarterly distribution, alongside variable-rate debt exposure and covenant cushion.
- Follow developments in the EPA matter and the CFO transition; the filing does not provide a clear estimate of the EPA matter’s potential cost.