NGL Energy Partners LP — Q1 FY2013 Form 10-Q
Reporting period: Three months ended June 30, 2012 (fiscal first quarter); financial statements are unaudited. Amounts below are in U.S. dollars. The comparison is with the three months ended June 30, 2011, but acquisitions—especially High Sierra, acquired June 19, 2012—make the periods materially different.
Business context and key results
NGL operates retail propane and distillate, wholesale natural gas liquids supply and marketing, midstream terminals and rail transportation, and, following the High Sierra acquisition, crude-oil logistics and water treatment and disposal businesses.
- Revenue: $326.4 million, up from $190.8 million. High Sierra contributed $100.4 million of reported revenue during its partial-period consolidation. Revenue growth also reflected prior and current-period acquisitions.
- Profitability: Cost of sales was $299.0 million, leaving gross profit of $27.5 million (8.4% of revenue), versus $4.9 million (2.6%) a year earlier. Operating loss was $15.1 million versus $5.7 million; net loss was $24.7 million versus $6.8 million. Loss per common unit was $0.76, compared with $0.53.
- Segment results: Wholesale supply and marketing reported $6.2 million operating income, versus a $1.7 million loss. Retail propane reported a $6.2 million operating loss, versus $3.2 million; midstream reported a $1.0 million loss, versus $0.03 million income. High Sierra reported an $8.7 million operating loss for June 19–30.
- Cash flow: Operating cash outflow was $54.9 million, versus $22.3 million. Investing cash outflow was $281.9 million, primarily reflecting acquisitions; financing provided $350.5 million. Cash increased by $13.6 million to $21.5 million.
- Debt and liquidity: Total debt was $602.8 million, including $92.4 million current maturities; cash was $21.5 million. The new credit facilities had $645 million of commitments, with $342.5 million borrowed and $60.5 million in letters of credit at quarter-end. The partnership reported leverage of about 3.0x against a 4.25x maximum and interest coverage above 9.0x against a 2.75x minimum, and stated it was covenant-compliant.
- Margins and derivatives: Wholesale results benefited from $14.1 million of realized and unrealized derivative gains. High Sierra’s reported operating loss included $10.1 million of unrealized derivative losses, partly offset by $1.2 million of realized gains. These effects and acquisition accounting complicate period-to-period margin comparisons.
Material changes versus the prior period
- High Sierra expanded the business into crude-oil transportation and marketing and water treatment and disposal. NGL paid cash and assumed debt and other obligations, and issued substantial common units as acquisition consideration. The acquisition drove much of the increase in assets, goodwill, intangible assets, and debt; total assets rose to $1.90 billion from $749.1 million at March 31, 2012.
- On June 19, NGL replaced its prior revolving facility with new working-capital and expansion facilities and issued $250 million of senior notes at 6.65%. Retiring the previous facility resulted in a $5.8 million early-extinguishment loss.
- Common units outstanding rose to 44.75 million from 23.30 million at March 31, primarily due to acquisition issuances. Reported weighted-average common units also increased substantially year over year.
- Wholesale propane prices fell amid mild winter weather and abundant supply. Management said lower prices and weighted-average inventory costing pressured margins, while derivative gains benefited wholesale results. Retail margins per gallon improved, but acquired operating costs contributed to a larger reported retail operating loss.
Outlook, risks and unusual items
- Management said expected operating cash flows and revolving-credit capacity should meet liquidity needs for the next 12 months, while noting that changed assumptions or further acquisitions could require additional capital. No numerical earnings or cash-flow guidance was provided.
- The business is highly seasonal: management said about 70% of retail volume is sold during the October–March heating season, with first- and second-quarter operating losses and negative operating cash flows historically common. Management also noted unusually warm winter weather reduced propane demand.
- The partnership declared a July distribution of $0.4125 per unit, payable in August, totaling approximately $13.7 million. Management estimated that a minimum quarterly distribution of $0.3375 per unit on the June 30 unit count would require about $17.1 million per quarter.
- High Sierra acquisition accounting remained preliminary; management said fair-value estimates could change materially. Integration of High Sierra and Downeast controls was ongoing. High Sierra had previously identified material weaknesses in internal controls, a risk the filing says could affect future reporting.
- Risks include commodity-price and basis exposure, weather, customer concentration and nonpayment, dependence on oil and gas activity, environmental and hydraulic-fracturing regulation, transportation and operating hazards, and potential derivative collateral requirements. The filing also describes legal matters, including a wrongful-death claim, a Pemex condensate lawsuit, and producer lien claims exceeding $72 million in aggregate (NGL’s stated allocated share exceeds $2.1 million). Management could not determine liability for the fatality-related incidents; it believes existing insurance would cover any liability. A High Sierra facility was operating without one required permit; the partnership expected it to be granted but could not predict timing.
Important facts for investors to verify
- Review subsequent acquisition accounting updates, including High Sierra’s purchase-price allocation, goodwill, assumed liabilities, and any material revisions.
- Track post-acquisition operating performance and integration costs, particularly High Sierra’s derivative exposure and the progress of internal-control integration.
- Confirm available borrowing capacity, seasonal working-capital needs, covenant headroom, and the ability to fund distributions alongside debt service and acquisitions.
- Monitor the Wyoming facility permit, litigation developments, and any changes in insurance coverage or environmental obligations.
- Assess whether reported operating performance is recurring after separating acquisition effects, transaction costs, and realized and unrealized derivative gains or losses.