NGL Energy Partners LP — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018; comparisons are primarily with the year ended March 31, 2017. This is not a report for calendar 2017 Q4. NGL is a diversified energy midstream and marketing partnership with Crude Oil Logistics, Water Solutions, Liquids, Retail Propane, and Refined Products and Renewables segments.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $17.283 billion | $13.022 billion |
| Cost of sales | $16.536 billion | $12.322 billion |
| Gross profit, calculated as revenue less cost of sales | $746.7 million (4.3% of revenue) | $700.3 million (5.4% of revenue) |
| Operating income | $138.3 million | $255.1 million |
| Net income (loss) | $(69.6) million | $143.9 million |
| Net income (loss) attributable to NGL | $(70.9) million | $137.0 million |
| Net income (loss) per common unit, diluted | $(1.08) | $0.95 |
| Operating cash flow | $137.6 million | $(24.2) million |
| Adjusted EBITDA, non-GAAP | $408.3 million | $381.3 million |
| Interest expense | $199.6 million | $150.5 million |
| Cash distributions per common unit | $1.56 | $1.56 |
Revenue increased about 33%, while cost of sales rose about 34%; gross profit dollars grew but the calculated gross margin narrowed. The filing attributes revenue growth chiefly to higher commodity prices and volumes. Operating income and net income were affected by sizable asset-sale gains, impairment charges, derivative losses, and higher interest costs. Adjusted EBITDA increased, but is a non-GAAP measure and excludes multiple items.
- Cash flow and investment: Investing activities provided $270.6 million, chiefly reflecting asset-sale proceeds; financing activities used $394.3 million. Capital expenditures were $156.2 million on a cash-flow basis. Operating cash flow less that capital spending was approximately $(18.6) million, before other investing activity.
- Liquidity: Cash was $26.2 million at year-end. Current assets were $1.800 billion and current liabilities $1.116 billion. The $1.765 billion revolving credit agreement had $969.5 million of working-capital borrowings and $175.7 million of letters of credit outstanding; actual availability was subject to borrowing-base and facility limits.
- Debt: Face amount of long-term debt was approximately $2.706 billion ($2.683 billion book value excluding current maturities). The partnership repurchased all remaining senior secured notes and portions of its 2019, 2023, and 2025 notes. Year-end revolving borrowings carried a weighted-average rate of 4.99%; a 0.125 percentage-point rate change was estimated to affect annual interest expense by $1.2 million.
- Leverage and covenants: At March 31, leverage was about 4.41x, against a 4.75x maximum; senior-secured leverage was 0.02x, and interest coverage was 2.51x against a 2.50x minimum. NGL reported compliance at year-end. A May 24, 2018 amendment changed covenant terms and provides for a permanent $100 million reduction in Expansion Capital Facility commitments if leverage exceeds 4.00x for the September 2018 quarter.
Segments and changes from the prior year
- Crude Oil Logistics: Operating income was $122.9 million versus a $17.5 million loss. It included a $108.6 million gain on the sale of NGL’s 50% Glass Mountain Pipeline interest. Grand Mesa Pipeline throughput averaged approximately 92,000 barrels per day. Management cited competition, low basin margins, and costs on certain minimum-volume commitments.
- Water Solutions: Operating loss was $24.2 million versus income of $44.6 million. Average wastewater processed rose to 707,000 barrels per day from 502,000, but results included $17.2 million of derivative losses and higher operating costs and liability revaluation expense. The prior-year comparison included a $124.7 million adjustment reversing part of an earlier goodwill impairment estimate.
- Liquids: Operating loss was $93.1 million versus income of $43.3 million, including a $116.9 million goodwill impairment for the Utah salt-cavern storage business. Management cited weaker storage demand, competitive butane margins, and unrecovered railcar costs.
- Retail Propane: Operating income was $155.6 million versus $49.3 million, including an $89.3 million gain on the sale of part of the business. Higher demand from colder winter weather, acquisitions, and commodity prices contributed to higher sales.
- Refined Products and Renewables: Operating income fell to $56.7 million from $222.5 million. Refined-product margins declined, with $77.1 million of derivative losses versus $43.4 million in the prior year. FY2017 included a $104.1 million gain on the sale of TLP common units and $30.1 million of deferred TLP-sale gain.
Outlook, risks, contingencies, and unusual items
- Management expected FY2019 growth capital expenditures of approximately $250 million to $275 million, including anticipated Water Solutions acquisitions, and said it was less likely to pursue acquisitions than in prior years. No earnings or cash-flow guidance was provided.
- The common-unit distribution remained $0.39 quarterly ($1.56 annualized) through the April 2018 declaration. Preferred distributions have priority over common distributions; the partnership cautions that cash available for distribution depends on operating cash flow, debt service, reserves, and financing access.
- On March 30, 2018, NGL sold a portion of Retail Propane for $212.4 million cash and contributed a 28.5% Sawtooth interest to a joint venture for approximately $37.6 million cash plus contributed rights. The partner may acquire NGL’s remaining Sawtooth interest for an additional $182.4 million under options exercisable within three years.
- After year-end, NGL agreed to sell its Retail Propane business to Superior Plus for $900 million cash; the transaction was subject to customary conditions and was expected to close within 60 days of the May 30, 2018 agreement. NGL also completed additional asset transactions after year-end. These are subsequent events, not FY2018 operating results.
- Major risks include commodity-price and basis exposure despite hedging, producer activity and throughput levels, seasonal weather, customer and counterparty credit, competition, rail and pipeline access, and substantial debt and covenant headroom. Environmental, spill, injection-well seismicity, hydraulic-fracturing regulation, and other permitting risks may increase costs or constrain operations.
- A federal civil action over alleged 2011 renewable-fuel-standard/RIN violations remained unresolved. NGL denied the allegations; summary-judgment motions were pending and trial was set for August 27, 2018. The filing said the outcome and significance could not be determined. Management said ordinary-course legal claims were not expected to have a material adverse effect, subject to uncertainty.
- Goodwill and other long-lived assets totaled about $4.1 billion at year-end. The Sawtooth impairment test showed estimated fair value only about 2% above carrying value after the impairment; management warned that storage-demand assumptions could fail and lead to further impairment.
Key facts for investors to verify
- Whether the reported $408.3 million Adjusted EBITDA and segment trends translate into recurring operating cash flow after working-capital needs and capital spending.
- Actual revolver availability, borrowing-base capacity, leverage and interest-coverage covenant compliance under the May 2018 amendment, and the September 2018 leverage test.
- Use of proceeds and realized net debt reduction from the asset disposals, and the status and economics of the proposed $900 million Retail Propane sale.
- Whether Sawtooth storage demand supports its valuation, whether the partner exercises its purchase options, and whether further goodwill impairment is required.
- Progress and potential exposure in the RIN litigation, environmental matters, and commitments to pay for pipeline capacity and minimum throughput.
- Distribution coverage after preferred-unit obligations, debt costs, and the changing asset mix; common-unit distributions are not assured.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of March 31, 2018.