Business Context and Reporting Period
This Form 8-K Current Report, dated July 2, 2019, details significant capital raising activities, asset acquisitions, and debt financing executed by NGL Energy Partners LP (the "Partnership"). The filing reports on events occurring on the closing date of July 2, 2019, involving a private placement of preferred units and warrants, the completion of the Mesquite asset acquisition, and the establishment of a new term loan facility.
Key Financial Metrics and Transactions
- Equity Financing: The Partnership completed a private placement of $400 million in aggregate initial liquidation preference of Class D Preferred Units and warrants to purchase 17,000,000 Common Units. Net proceeds were approximately $385 million after deducting an $8 million closing fee and expenses.
- Asset Acquisition: The Partnership completed the acquisition of all assets of Mesquite SWD, Inc. for a total purchase price of $892.5 million. This comprised $592.5 million in cash, $100 million in Class B Preferred Units, and up to $200 million in contingent cash payments based on performance metrics.
- Debt Financing: The Partnership entered into a Term Credit Agreement for a $250 million term loan facility maturing on July 2, 2024. Interest rates are variable, starting with margins of 2.00% (Base Rate) or 3.00% (LIBOR) after the initial three-month period, stepping up over time.
- Financial Covenants: The new term loan imposes financial covenants effective September 30, 2019, including limits on senior, secured, and total leverage, as well as a minimum interest coverage requirement.
Material Changes and Agreements
- Amended Acquisition Terms: The cash portion of the Mesquite acquisition purchase price was amended to $592.5 million, with an additional contingent consideration of up to $200 million.
- Board Representation: Affiliates of the purchasers in the private placement secured the right to designate up to one director to the board of the General Partner, contingent on maintaining specific ownership thresholds. Brian Boland was appointed to the board effective July 2, 2019.
- Registration Rights: A Registration Rights Agreement was executed requiring the Partnership to file a registration statement within 180 days to permit the public resale of the Preferred Units and Common Units issuable upon warrant exercise. Failure to do so by the 360-day deadline triggers liquidated damages payable in cash or Common Units.
- Preferred Unit Terms: The Class D Preferred Units carry a cumulative quarterly distribution rate of 9.00% per annum for the first 11 quarters, increasing to 10.00% per annum thereafter, or a floating rate option (LIBOR + 7.00%) after the 19th quarter.
Outlook, Risks, and Contingencies
- Warrant Vesting: Warrants to purchase 17,000,000 Common Units (split between "Premium" and "Par" warrants) are exercisable starting one year after the closing date, with a 10-year expiration. They vest immediately upon a "Class D Change of Control."
- Liquidity and Redemption: The Partnership has the right to redeem the Class D Preferred Units at any time. Holders may require redemption after 8.5 years. Redemption payments may be made in cash or a combination of cash and Common Units (up to 50% of the price) at the Partnership's election.
- Default Risks: The Term Credit Agreement includes standard events of default, including failure to pay principal/interest, breach of covenants, or bankruptcy. Acceleration of debt obligations may occur upon such events.
- Contingent Liabilities: The Partnership faces potential liquidated damages if the Registration Statement for the private placement securities is not declared effective within 360 days of closing.
Investor Verification Checklist
- Verify the exact terms of the contingent $200 million earn-out in the Mesquite acquisition and the specific performance metrics required.
- Confirm the impact of the new $250 million term loan on the Partnership's leverage ratios and compliance with the new financial covenants effective September 30, 2019.
- Review the full text of the Amended and Restated Partnership Agreement (Exhibit 3.1) to understand the seniority and redemption mechanics of the new Class D Preferred Units relative to existing classes.
- Monitor the timeline for the Registration Statement filing (180-day deadline) to assess the risk of liquidated damages.
- Assess the dilution impact of the 17,000,000 warrants exercisable at $14.54 and $17.45 per unit.