NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, the Partnership’s first fiscal quarter of fiscal 2018. Financial statements are unaudited. NGL operates in crude oil logistics, water solutions, natural gas liquids, retail propane, and refined products and renewables.
Financial performance
- Revenue: $3.782 billion, up 39% from $2.722 billion a year earlier, primarily reflecting higher commodity prices and volumes. Refined Products and Renewables was the largest contributor, with $2.885 billion of revenue.
- Gross profit: Revenue less cost of sales was $139.5 million, down from $155.5 million. The corresponding gross margin was approximately 3.7%, versus 5.7%.
- Profitability: Operating loss was $14.7 million, compared with operating income of $193.9 million. Net loss was $63.7 million, versus net income of $182.8 million; loss attributable to common unitholders was $73.4 million, or $0.61 per common unit.
- Adjusted EBITDA: $38.8 million, down from $63.8 million. This is a non-GAAP measure as defined by the Partnership.
- Cash flow: Operating cash flow was $1.0 million, compared with a $70.5 million use of cash in the prior-year quarter. Before changes in operating assets and liabilities, operating cash flow was negative $27.3 million; working-capital changes provided $28.3 million. Investing activities used $9.2 million; financing activities provided $15.5 million. Cash ended the quarter at $19.5 million.
- Liquidity and debt: Current assets were $1.334 billion and current liabilities $816.6 million. Long-term debt, net of issuance costs and current maturities, was $2.834 billion; current maturities were $42.8 million. Revolver borrowings were $769.5 million, with $71.7 million of letters of credit outstanding. The revolving facility’s weighted-average interest rate was 3.99%.
- Distribution and preferred capital: The common-unit distribution remained $0.39 per unit. The Partnership issued 8.4 million Class B preferred units for $203.0 million net proceeds; these units carry an initial 9.00% distribution rate through June 30, 2022. Existing Class A preferred units carry a 10.75% rate.
Changes and notable drivers versus the prior year
- The prior-year quarter included substantial nonrecurring gains, including a $104.1 million gain on the sale of TransMontaigne Partners units and large gains in Water Solutions associated with prior-period impairment accounting. This makes the reported year-over-year earnings decline a poor measure of underlying operating change.
- Refined Products and Renewables operating income fell to $14.5 million from $149.8 million. Refined-product margins declined, including from lower Colonial Pipeline line-space values and less favorable price movements; the prior-year period also included the TLP unit-sale gain.
- Water Solutions reported a $1.2 million operating loss, versus $79.5 million income, principally because of prior-year gains and impairment-related items. Wastewater processed increased to 624,100 barrels per day from 452,437, while service fees per barrel declined to $0.59 from $0.62.
- Crude Oil Logistics improved to $4.4 million operating income from a $0.6 million loss, with Grand Mesa Pipeline contributing transportation revenue after entering service in November 2016. Liquids’ operating loss widened to $8.8 million, chiefly reflecting negative propane margins and unrecovered railcar costs; Retail Propane’s loss widened to $5.9 million.
- Interest expense rose to $49.2 million from $30.4 million, mainly following fixed-rate note issuances in October 2016 and February 2017. The Partnership repurchased $55.0 million of senior secured notes and $17.2 million of 5.125% notes due 2019, recording a $3.3 million net extinguishment loss.
Outlook, risks, and contingencies
- Management stated that expected operating cash flows and revolving-credit availability should meet liquidity needs, while noting that changed assumptions, acquisitions, or market conditions could require additional capital or asset sales. It said acquisitions were less likely under current conditions and cited ongoing expansion projects, including the Glass Mountain pipeline extension.
- Seasonality affects working-capital needs: borrowing generally rises from June through December as NGL and gasoline inventories are built. Management cautioned that interim results are not necessarily indicative of full-year results.
- The June 2017 credit amendment restricts distribution increases when leverage exceeds 4.25 to 1. At June 30, leverage was approximately 5.18 to 1, against a 5.50 maximum covenant; senior secured leverage was 0.49 to 1 and interest coverage was 2.53 to 1. The Partnership reported covenant compliance. An August 2, 2017 amendment to the senior secured note agreement added provisions including higher interest at specified leverage levels and a distribution restriction if interest coverage is below 3.00 to 1.
- Material exposures include commodity-price, counterparty-credit, and variable-rate interest risk. A 0.125% interest-rate change was estimated to change annual interest expense by $1.0 million, based on quarter-end revolver borrowings.
- The Partnership is defending an EPA/Department of Justice civil action concerning alleged 2011 renewable-fuel-standard violations and biodiesel RINs. Its motion to dismiss was denied; it denies the allegations and said the outcome and significance cannot currently be determined.
- Environmental liabilities were $2.3 million. Contractual commitments included $574.5 million of future operating lease payments, $133.7 million of minimum pipeline-throughput payments, and $23.4 million of construction commitments. The filing also reports substantial commodity purchase commitments, including index-priced commitments whose value varies with market prices.
- Preferred units rank senior to common units for distributions and liquidation. The filing warns that preferred-unit rights, potential conversion of Class A units, and distribution obligations may constrain financing and dilute common unitholders. No quantified earnings or distribution guidance was provided.
Key facts investors should verify
- How much of operating performance and Adjusted EBITDA reflects recurring segment economics versus derivative marks, inventory adjustments, asset-sale gains, and other exclusions.
- Whether cash generation can improve through the seasonal inventory cycle and support distributions, interest costs, and committed capital spending.
- Debt and covenant headroom under the amended credit and senior secured note agreements, including the effect of the 3.00-to-1 interest-coverage distribution restriction.
- The future profitability of Refined Products and Renewables and Liquids, given compressed margins, and the performance and utilization of Grand Mesa and other expansion assets.
- The outcome and potential financial exposure from the EPA case, as well as environmental, lease, pipeline-capacity, and commodity-commitment obligations.
- The continuing cost and seniority of Class A and Class B preferred distributions, and the potential dilution or restrictions affecting common unitholders.