NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014; comparisons are with the three months ended June 30, 2012. Financial figures are in U.S. dollars. The filing is unaudited.
Business context
NGL operates crude oil logistics, water services, natural gas liquids (NGL) logistics, and retail propane businesses. Results are substantially affected by acquisitions, commodity prices, and seasonal demand. The June 2012 High Sierra acquisition means the 2013 quarter includes a full quarter of crude oil and water services operations, while the comparable 2012 quarter included only 11 days of those businesses.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $1,386.0 million | $326.4 million |
| Cost of sales | $1,303.1 million | $299.0 million |
| Operating loss | $7.3 million | $15.1 million |
| Net loss | $17.5 million | $24.7 million |
| Net loss allocated to limited partners | $19.3 million; $0.35 per common unit and $0.46 per subordinated unit | $24.7 million; $0.76 per common unit and $0.77 per subordinated unit |
| Operating cash flow | $25.9 million | $(54.9) million |
| Investing cash flow | $(45.5) million | $(281.9) million |
| Financing cash flow | $12.6 million | $350.5 million |
| Adjusted EBITDA, non-GAAP | $26.8 million | $(6.5) million |
Revenue less cost of sales was $82.9 million, approximately 6.0% of revenue. Operating margin was approximately negative 0.5%. Revenue growth largely reflects business combinations and product sales; the filing cautions that the periods are not directly comparable.
By segment, operating income was $6.6 million for crude oil logistics and $3.0 million for water services. NGL logistics recorded a $2.1 million operating loss, versus $1.2 million of income a year earlier; retail propane’s operating loss narrowed to $1.5 million from $6.2 million. Corporate and other operating loss increased to $13.4 million, including $7.1 million of equity-based compensation.
At June 30, cash was $4.6 million, current assets were $812.5 million, and current liabilities were $722.2 million. Total debt was $790.5 million, including $520.5 million drawn on revolving facilities and $250.0 million of 6.65% senior notes. Revolving-facility availability was reported as $175.1 million under the working-capital facility and $280.5 million under the expansion facility. The partnership reported compliance with debt covenants; its leverage ratio was approximately 3:1 against a 4.25:1 maximum, and interest coverage was approximately 7:1 against a 2.75:1 minimum.
Material changes and notable items
- Revenue rose to $1.386 billion from $326.4 million, with crude oil logistics revenue alone at $938.5 million. Acquisition-driven expansion and higher included volumes are central to this change.
- Operating loss improved by $7.7 million and net loss by $7.2 million year over year. The prior-year quarter included a $5.8 million loss on early extinguishment of debt; current-quarter interest expense increased to $10.6 million from $3.8 million, principally reflecting acquisition financing.
- Operating cash flow improved to positive $25.9 million. Inventory investment used $81.1 million of cash, partly offset by working-capital movements and cash generated by the expanded businesses.
- Debt increased to $790.5 million from $749.1 million at March 31, 2013. Cash declined to $4.6 million from $11.6 million.
- The partnership distributed $0.4775 per unit during the quarter. A subsequent distribution of $0.4938 per unit was declared for payment August 14, 2013.
- After quarter-end, NGL completed a $287.5 million net common-unit offering, using most proceeds to repay revolving debt. It also completed acquisitions, including the OWL-affiliated water-services businesses for approximately $168 million cash and 2.46 million units; the purchase price could increase by up to $60 million based on performance targets.
Outlook, risks, and contingencies
Management said anticipated operating cash flows and borrowing capacity were expected to meet liquidity needs for the next 12 months, while noting that changed assumptions or acquisitions could require additional capital and that access to capital is not assured. The filing gives no formal earnings or operating forecast. Management expects continued acquisition activity and identified multiple potential funding sources, including credit facilities and debt or equity issuance.
Seasonality is significant: NGL and retail propane cash flows are generally weakest in the first half of the fiscal year as inventories are built, and strongest in the heating-season half. Management cited narrower crude-price spreads between markets as a factor reducing crude-logistics margins. Commodity prices, weather, production and demand, transportation capacity, customer credit, interest rates, regulation, and acquisition integration are material risks. Derivatives are used as economic risk management instruments but are not designated as accounting hedges; derivative results affected cost of sales.
- A crude-oil customer dispute concerns $1.7 million of unpaid fees and a $5.5 million counterclaim; the disputed post-acquisition fees were not recorded as revenue.
- A Canadian authority assessed approximately $14.9 million of historical fuel and sales taxes. NGL recorded a $14.9 million liability and a $14.1 million receivable for expected customer recovery; the outcome remains uncertain.
- Operating lease commitments totaled $202.2 million. Physical commodity purchase commitments include index-priced obligations whose value changes with market prices.
- Management stated ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging uncertainty. The filing reported no material change to previously disclosed risk factors.
Disclosure controls were concluded effective as of June 30, 2013. Integration of internal controls at acquired businesses was still underway.
Important facts for investors to verify
- How much of reported revenue and operating cash flow reflects durable service margins versus high-volume commodity pass-through and acquisition effects.
- Whether segment margins improve, particularly in NGL logistics, and how crude-market spreads and seasonal demand evolve.
- Post-offering debt, remaining revolver availability, covenant headroom, and liquidity after subsequent acquisitions and distributions.
- Final outcomes and recoverability related to the customer dispute and Canadian tax assessment.
- Acquisition integration, purchase-price adjustments and potential OWL earnout, alongside the dilution from unit issuance.
- Ability to sustain distributions while funding seasonal working capital, capital expenditures, debt service, and growth.