NGL Energy Partners LP — FY2012 Form 10-K
Reporting-period note: The filing is for the fiscal year ended March 31, 2012, not calendar 2011. It also reports the fiscal fourth quarter ended March 31, 2012. Fiscal 2011 comparisons are not consistently like-for-like: the annual comparison shown is 12 months versus six months, and acquisitions materially changed the business.
Business context and reporting period
NGL operates retail propane, wholesale supply and marketing, and midstream terminal and rail businesses. Its revenue model combines retail margins, wholesale cost-plus sales, and midstream fees. At March 31, 2012, it served more than 224,000 retail propane customers and operated 16 terminals.
Financial results and liquidity
| Metric | FY ended March 31, 2012 | FY2012 Q4 |
|---|---|---|
| Revenue | $1,310.5 million | $438.9 million |
| Gross margin | $93.5 million; 7.1% of revenue | $49.1 million |
| Operating income | $15.0 million; 1.1% of revenue | Quarterly value not clearly provided in the filing text |
| Net income | $7.9 million | $13.9 million |
| Common-unit earnings | $0.32 per unit | $0.47 per unit |
| Adjusted EBITDA | $36.3 million | Quarterly value not clearly provided in the filing text |
| Cash from operating activities | $90.3 million | Quarterly value not clearly provided in the filing text |
- FY2012 cash used in investing was $296.9 million, primarily reflecting $297.4 million of acquisition spending; financing provided $198.1 million.
- Cash and cash equivalents were $7.8 million. Current assets were $198.6 million and current liabilities $144.4 million.
- Total debt was $218.7 million, including $186.0 million of acquisition-facility borrowings and $28.0 million of working-capital borrowings. The $350 million revolving facility matures October 2016 and is secured by substantially all assets.
- Management reported compliance with debt covenants at year-end: leverage below 3.0x against a 4.25x maximum, and interest coverage above 8.0x against a 2.75x minimum. The filing says anticipated operating cash flow and borrowing capacity should cover liquidity needs for the next 12 months, subject to assumptions and acquisition requirements.
Material changes versus prior comparable period
- FY2012 Q4 revenue was $438.9 million versus $311.1 million in the year-earlier quarter; gross margin was $49.1 million versus $19.5 million, and net income was $13.9 million versus $6.6 million. These increases reflect both acquisitions and operating conditions, so they should not be read as purely organic growth.
- Four major combinations closed during FY2012: Osterman retail propane, SemStream wholesale and midstream assets, Pacer retail propane, and North American propane and distillate operations. The company issued units and used cash and borrowings to fund these transactions.
- For the full year, revenue increased substantially from the reported prior period, but that comparison is not comparable because the prior-period figure covers only six months. Year-end assets increased to $749.1 million from $163.8 million, and debt rose to $218.7 million from $66.4 million, reflecting acquisitions and their financing.
- The unusually warm winter reduced propane demand. In the six months ended March 31, 2012, historical retail propane volumes fell 12.9% excluding acquired operations; acquisition-driven volume growth offset that decline in consolidated results.
Outlook, risks, contingencies and unusual items
- Management expected acquired businesses to expand revenue, gross margin and operating income, while also increasing interest expense. It gave no quantified forward earnings or distribution guidance.
- Management warned that customers could carry excess supply after the mild winter, reducing FY2013 purchases and potentially pressuring product prices and wholesale margins. Shale-gas production and limited export infrastructure could add downward price pressure.
- On May 18, 2012, the partnership agreed to a proposed High Sierra merger with aggregate consideration of $693 million less High Sierra net debt and unpaid transaction expenses. Consideration included cash and NGL common units; closing was expected in June 2012, subject to financing, regulatory approvals and other conditions.
- Three additional retail acquisitions completed in April and May 2012 for $55.2 million cash and 750,000 common units, with further working-capital adjustments and approximately $1.9 million of deferred or non-compete payments anticipated.
- Commodity and weather exposure, seasonal working-capital needs, supplier concentration, customer credit and acquisition integration are key risks. Five suppliers accounted for approximately 57% of consolidated cost of sales in FY2012; one wholesale customer represented about 21% of year-end receivables.
- Commodity derivatives were not designated as accounting hedges. FY2012 included a $5.7 million net gain from commodity and interest-rate derivatives, including a $4.4 million unrealized commodity-derivative loss offset by realized gains. No goodwill or long-lived-asset impairment was recorded.
- Management concluded internal control over financial reporting was effective, but excluded Osterman, Pacer, North American and certain SemStream operations from its evaluation. Those excluded operations represented 74% of year-end assets and 31% of annual revenue; integration and control implementation were ongoing.
- The filing reports no material pending legal proceedings outside the ordinary course and no material unresolved staff comments. Environmental, safety, insurance and regulatory liabilities remain potential risks; the company said it carries limited environmental insurance.
Important facts for investors to verify
- Confirm the correct period and compare FY2012 Q4 with the corresponding quarter, not the six-month FY2011 annual figure; separate acquisition effects from organic performance.
- Review the audited financial statements and acquisition accounting, including preliminary purchase-price allocations for Osterman, Pacer and North American, which remained subject to valuation changes.
- Assess debt capacity, working-capital borrowing-base terms, covenant headroom and funding needs for the proposed High Sierra transaction and subsequent acquisitions.
- Track post-winter customer inventories, propane pricing, realized margins and customer collections, particularly given supplier and receivables concentration.
- Monitor integration of acquired operations and the control environment, including the acquired businesses excluded from management’s FY2012 internal-control assessment.