NGL Energy Partners LP — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2014. Although the request metadata says “2013 Q4,” this filing reports fiscal 2014, with comparative fiscal 2013 and 2012 results; it is not a standalone fiscal 2013 fourth-quarter filing. Amounts below are U.S. dollars.
Business context
NGL is a diversified energy partnership operating crude oil logistics, water solutions, natural gas liquids (“liquids”), retail propane, refined products and renewables businesses. Growth during the year was strongly acquisition-driven. Most notably, the December 2013 Gavilon Energy acquisition added crude oil terminals, a 50% interest in Glass Mountain Pipeline, and refined products and renewables marketing operations.
Financial performance and position
| Metric | FY ended March 31, 2014 | FY ended March 31, 2013 |
|---|---|---|
| Revenue | $9.699 billion | $4.418 billion |
| Cost of sales | $9.133 billion | $4.039 billion |
| Operating income | $106.6 million | $87.3 million |
| Net income | $48.8 million | $48.2 million |
| Net income attributable to parent equity | $47.7 million | $47.9 million |
| Basic and diluted earnings per common unit | $0.51 | $0.96 |
| Cash provided by operating activities | $85.2 million | $132.6 million |
| Adjusted EBITDA (non-GAAP) | $255.4 million | $177.9 million |
- Revenue rose 120%, principally reflecting acquisitions, including Gavilon. Operating income increased 22%, while net income attributable to parent equity was nearly flat. Common-unit EPS declined as weighted-average common units increased to 62.0 million from 41.4 million.
- Gross profit was $566.6 million, about 5.8% of revenue, versus $378.7 million, about 8.6%, in FY2013. Operating margin was about 1.1% versus 2.0%; net margin was about 0.5% versus 1.1%. These ratios are affected by the partnership’s high-volume commodity marketing businesses and acquisition-related mix.
- Operating cash flow fell $47.4 million, despite higher cash generated before working-capital changes ($243.3 million versus $146.4 million). Working-capital movements used $158.1 million in FY2014, compared with $13.8 million in FY2013.
- Investing cash outflow was $1.455 billion, including $1.269 billion for acquisitions and $165.1 million for long-lived assets. Financing provided $1.369 billion, including revolving borrowings, $450 million of notes and $650.2 million of net equity proceeds.
- At March 31, 2014, cash was $10.4 million; current assets were $1.309 billion and current liabilities $995.8 million (current ratio about 1.31). Trade receivables were $900.9 million and inventory $310.2 million.
- Total debt was $1.637 billion, up from $749.1 million; the balance included $922 million drawn on revolving facilities, $250 million of 6.65% secured notes due 2022, and $450 million of 6.875% unsecured notes due 2021. The partnership reported leverage of approximately 3.0x against a 4.25x covenant maximum, interest coverage of approximately 7.0x against a 2.75x minimum, and compliance with debt covenants.
- Working-capital facility capacity was $935.5 million, with $389.5 million drawn and $270.6 million of letters of credit; expansion-facility capacity was $785.5 million, with $532.5 million drawn. Working-capital availability is subject to a borrowing base.
- Cash distributions increased during the year: the quarterly per-unit distribution rose from $0.4625 in FY2013 Q4 to $0.5313 in FY2014 Q4. A $0.5513 distribution was declared after year-end. The partnership’s minimum quarterly distribution is $0.3375 per unit.
Material changes and segment results
- Gavilon: Acquired for $832.4 million net of cash acquired. From acquisition through year-end, it contributed $2.9 billion of revenue and $11.0 million of operating income. Purchase-price allocations remained preliminary.
- Crude oil logistics: Sales volume rose to 46.1 million barrels from 24.4 million, but segment operating income dropped to $0.7 million from $34.2 million. Management cited narrower crude price differentials between markets and increased South Texas pipeline competition.
- Liquids: Segment operating income increased to $71.9 million from $30.3 million, supported by colder weather, higher demand and margins, and expanded operations.
- Retail propane: Segment operating income rose to $61.3 million from $46.9 million, principally due to colder weather and higher sales volumes.
- Water solutions: Segment operating income was $10.3 million versus $8.6 million. Texas acquisitions expanded the business, but management said Eagle Ford operations had higher-than-expected expenses and lower-than-expected revenue while being brought up to company standards.
- FY2014 quarterly results were seasonal: the June and September quarters reported net losses of $17.5 million and $0.9 million, followed by net income of $24.1 million and $43.1 million in the December and March quarters, respectively.
Outlook, risks and unusual items
- The filing gives no specific numerical earnings or cash-flow guidance. Management’s stated strategy is continued acquisition and organic growth, greater fee- or margin-based activity, and a disciplined capital structure; it targets leverage consistent with investment-grade companies.
- Management expected the subordination period to end in August 2014 after the required distribution tests, converting remaining subordinated units into common units one-for-one. The filing also reported a post-year-end distribution increase; distributions remain subject to available cash, reserves, debt restrictions and operating needs.
- Key exposures include commodity-price and basis risk, weather and propane seasonality, producer activity and water volumes, competition and customer concentration, counterparty credit, and dependence on third-party pipelines, railroads, storage, leases and transportation capacity. Environmental, wastewater-disposal, injection-well, hydraulic-fracturing and crude-by-rail rules could add cost or constrain operations.
- Unusual items included $43.7 million of net commodity-derivative losses recorded in operating cash-flow reconciliation (derivative accounting gains and losses are included in cost of sales); a $5.3 million terminal impairment; $1.5 million of water-facility write-downs after lightning damage; and a $4.4 million gain on sale of the compressor-leasing business.
- NGL paid $44.8 million to transfer unfavorable Gavilon natural-gas marketing contracts and wound down that business. Gavilon-related employee bonuses and severance also affected results; additional bonus expense was expected in FY2015.
- A crude-oil customer dispute involves $1.7 million of unpaid disputed fees and a $5.5 million counterclaim; the company also reported $3.3 million withheld for later services. Management could not reliably predict the outcome, but did not expect a material adverse effect. Other ordinary-course legal matters were not expected by management to be material.
- Goodwill and intangible assets totaled approximately $1.822 billion. No goodwill impairment was recorded, but acquired-asset valuations and integration remained important estimates and execution matters. Gavilon’s controls were excluded from management’s FY2014 internal-control assessment; Gavilon represented 31% of assets, 30% of revenue and 10% of operating income. Management and the auditor reported effective controls for the operations assessed, and the auditor issued unqualified financial-statement and internal-control opinions.
Important facts for investors to verify
- Confirm the filing period: fiscal year ended March 31, 2014, rather than the “2013 Q4” metadata.
- Review the cash-flow and working-capital drivers behind lower operating cash flow, and compare cash generation with distributions and capital spending.
- Assess debt availability under the borrowing-base facility, covenant headroom, interest-rate exposure and the effect of acquisition financing.
- Evaluate whether crude logistics spreads and water-solutions performance recover, and whether Gavilon integration and preliminary purchase accounting produce expected returns.
- Check customer concentration, disputed receivables, derivative exposure, environmental and transportation requirements, and the terms and sustainability of distributions.