NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three months ended June 30, 2014, the partnership’s fiscal first quarter of 2015. Comparisons are with the three months ended June 30, 2013 unless otherwise stated. Unaudited figures are in U.S. dollars.
Business context and results
NGL operates crude oil logistics, water solutions, natural gas liquids, retail propane, refined products and renewables businesses. Acquisitions—particularly Gavilon Energy in December 2013 and several water and crude logistics businesses—materially changed the business mix and limit year-over-year comparability.
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Revenue | $3.649 billion | $1.386 billion |
| Gross profit (revenue less cost of sales) | $114.6 million | $82.9 million |
| Gross margin (calculated) | 3.1% | 6.0% |
| Operating loss | $20.6 million | $7.3 million |
| Net loss | $39.9 million | $17.5 million |
| Loss per common unit | $0.61 | $0.35 |
| EBITDA / Adjusted EBITDA (non-GAAP) | $25.9 million / $39.3 million | $15.8 million / $26.8 million |
| Cash provided by operations | $9.2 million | $25.5 million |
Despite substantially higher revenue, largely reflecting acquired and newly included businesses, the calculated gross margin rate declined and operating and net losses widened. Operating margin was approximately negative 0.6% versus negative 0.5% in the prior-year quarter. Interest expense rose to $20.5 million from $10.6 million, primarily due to acquisition-related borrowing. Adjusted EBITDA is a company-defined non-GAAP measure and excludes specified items; it should not be treated as a substitute for GAAP earnings or operating cash flow.
Segments and material changes
- Crude oil logistics: Operating income fell to $1.5 million from $6.6 million. Management cited persistently narrow price spreads between markets, which limited transportation arbitrage margins. Acquired Gavilon operations significantly increased reported volumes and sales.
- Water solutions: Operating loss was $0.9 million versus $3.0 million income. The current quarter included $6.2 million of unrealized derivative losses; the prior-year quarter included $0.6 million of unrealized gains. Acquisitions and higher customer demand increased water volumes.
- Liquids: Operating loss improved to $0.9 million from $2.1 million. Higher sales volumes were offset in part by lower propane margins, including the effect of declining prices on higher-cost inventory.
- Retail propane: Operating loss was $1.6 million, broadly similar to the prior-year loss of $1.5 million. The business is seasonal, with most retail volume typically sold October through March.
- Refined products and renewables: Newly reported following the Gavilon acquisition. Refined products generated $0.4 million of operating income; renewables recorded a $1.7 million operating loss. Management cited falling ethanol prices and uncertainty about the EPA’s 2014 biodiesel mandate as pressures on renewables.
- Corporate and other: Operating loss increased to $17.4 million from $13.4 million, including higher equity compensation, acquisition costs and corporate expenses.
Financial position, liquidity and capital
- At June 30, 2014, cash was $39.7 million, total assets $4.266 billion, and total equity $1.781 billion. Current assets of $1.376 billion exceeded current liabilities of $1.034 billion by $341.7 million; the current ratio was approximately 1.33.
- Total debt was $1.448 billion, down from $1.637 billion at March 31; debt less cash was approximately $1.408 billion. The revolving facility had $735.5 million drawn and $220.3 million of letters of credit outstanding. Total facility capacity was increased to $2.193 billion, with working-capital availability subject to a borrowing base.
- The partnership reported covenant compliance at quarter-end: leverage ratio approximately 3.0x against a 4.25x maximum, and interest coverage approximately 6.0x against a 2.75x minimum. Revolver borrowings bore 2.16% interest at June 30.
- Cash from investing was negative $77.8 million, including $48.9 million of long-lived asset purchases and $15.9 million for acquisitions and acquired working capital. Financing provided $97.8 million, including $338.0 million of net proceeds from an 8.0-million-unit offering and net revolver repayments of $186.5 million. Cash increased by $29.2 million during the quarter.
- Management said operating cash flows and credit-facility capacity were expected to meet liquidity needs for the next 12 months, while noting that acquisitions or changed assumptions could require additional capital. The filing provides no numerical earnings guidance.
Outlook, risks and unusual items
- Seasonality is significant: management expects weaker liquids and retail propane cash flows in the first half of the fiscal year as inventories are built, with stronger activity generally in the heating-season quarters. Interim results are not necessarily indicative of full-year results.
- On July 9, 2014, NGL issued $400 million of 5.125% senior notes due 2019, receiving $393.5 million net and using the proceeds to reduce revolving borrowings. This was subsequent to quarter-end.
- On July 1, NGL acquired TransMontaigne for $173.8 million net cash and separately purchased $346.9 million of inventory. It also acquired the general partner and a 19.7% limited partner interest in TransMontaigne Partners; a proposed unit-for-unit acquisition of the remaining partnership units was non-binding and subject to approvals. In July, NGL also paid $82.8 million for five water facilities.
- Outstanding commitments included $424.2 million of minimum operating lease payments and $440.5 million of minimum pipeline throughput payments. Commodity purchase commitments were also substantial; index-priced commitments fluctuate with market prices.
- A crude-oil customer dispute involves $1.7 million of unpaid charges not recognized as revenue and a $5.5 million counterclaim. The customer also withheld $3.3 million for later services, which NGL says were not disputed. Management could not reliably predict the dispute’s outcome but did not expect a material adverse effect.
- Principal risks include commodity-price and spread volatility, weather and seasonal demand, customer and counterparty credit, environmental and regulatory requirements, acquisition integration and access to capital. Management said disclosure controls were effective; integration of acquired businesses and their internal controls remained in progress.
Important facts for investors to verify
- How much of revenue and EBITDA growth reflects acquisitions versus organic performance, and whether acquired businesses can improve margins.
- The drivers of weaker reported gross margin and operating results, including derivative marks, inventory costing and corporate or acquisition-related expenses.
- Cash conversion, seasonal working-capital needs, borrowing-base availability, covenant headroom and the effect of subsequent acquisitions and debt issuance on leverage.
- Integration progress and final acquisition accounting for Gavilon, whose recorded fair values remained subject to change.
- Developments in the customer litigation, environmental obligations, pipeline and lease commitments, and the EPA’s biodiesel mandate.