NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2012; unaudited. This is the third quarter of the Partnership’s fiscal year. Financial amounts below are in U.S. dollars, generally shown in millions.
Business context
NGL operates retail propane and distillate, natural gas liquids (NGL) logistics, crude oil logistics, and water services businesses. Results changed substantially following acquisitions, particularly High Sierra in June 2012, Pecos in November 2012, and Third Coast on December 31, 2012. Accordingly, year-over-year comparisons are not like-for-like.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $1,338.2 | $470.6 | $2,800.2 | $871.5 |
| Gross profit (revenue less cost of sales) | $133.7 | $30.9 | $242.9 | $44.3 |
| Operating income (loss) | $50.2 | $8.6 | $53.7 | $(1.6) |
| Net income (loss) | $40.5 | $6.1 | $25.8 | $(6.1) |
| Net income (loss) attributable to limited partners | $39.2 | $6.1 | $23.9 | $(6.1) |
| Basic and diluted earnings (loss) per common unit | $0.75 | $0.24 | $0.53 | $(0.41) |
| Adjusted EBITDA (non-GAAP) | $73.2 | $13.6 | $93.1 | $8.0 |
Gross margin was approximately 10.0% for the quarter and 8.7% for the nine months, versus 6.6% and 5.1%, respectively, in the prior-year periods. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or operating cash flow.
- Quarterly segment operating income: retail propane $16.4 million; NGL logistics $25.1 million; crude oil logistics $11.4 million; water services $5.5 million; corporate and other loss $8.2 million.
- Nine-month segment operating income: retail propane $9.8 million; NGL logistics $36.5 million; crude oil logistics $17.2 million; water services $10.0 million; corporate and other loss $19.8 million.
- Interest expense was $9.8 million for the quarter and $22.3 million for the nine months. The nine-month period also included a $5.8 million loss on early extinguishment of debt related to retiring the prior credit facility.
Cash flow, debt and liquidity
- Operating cash flow was negative $1.9 million for the nine months, compared with negative $13.7 million in the prior-year period. Cash generated before changes in operating assets and liabilities was $67.4 million; changes in those balances used $69.3 million, principally reflecting working-capital demands.
- Investing cash outflow was $514.8 million, including $493.3 million of cash paid for acquisitions and $37.4 million of purchases of long-lived assets. Financing cash inflow was $532.8 million, including net revolving-credit borrowings and $250.0 million of senior notes.
- Cash at December 31, 2012 was $23.9 million. Total current assets were $912.5 million and current liabilities $727.8 million, implying working capital of $184.7 million and a current ratio of approximately 1.25.
- Total debt was $836.2 million: $563.0 million outstanding under revolving facilities, $250.0 million of senior notes, and $23.2 million of other notes. Debt was $218.7 million at March 31, 2012. The senior notes bear fixed interest of 6.65%; revolving borrowings were predominantly variable-rate.
- At year-end, the working-capital facility had $24.2 million of remaining capacity after borrowings and letters of credit; the expansion facility had $41.5 million remaining. A January 2013 amendment increased their respective capacities by $25 million and $50 million and removed an annual working-capital balance-reduction requirement.
- Management reported compliance with debt covenants at December 31, 2012: leverage ratio approximately 3.0x against a 4.25x maximum; interest coverage greater than 8.0x against a 2.75x minimum.
Material changes and management outlook
Revenue and earnings increased sharply, largely because acquired businesses expanded the scale and mix of operations. The Partnership completed 13 acquisitions during the nine months, paying $493.3 million in cash and issuing 23.9 million common units in total. The crude oil and water services segments were new in 2012 following High Sierra. The increased acquisition activity also contributed to higher debt, depreciation and amortization, interest expense, corporate costs, and unit count.
Management attributed stronger retail propane results to acquired operations and improved margins: wholesale propane costs fell more than selling prices, while legacy volumes were broadly similar. NGL prices were lower amid mild weather, high production, and constrained export infrastructure. Management noted that roughly 70% of retail volume is sold during the October–March heating season; interim results therefore may not indicate full-year performance.
No quantified earnings guidance is provided. Management stated that anticipated operating cash flows and revolving-credit capacity should meet liquidity needs for the next 12 months, while cautioning that acquisitions, changed assumptions, or other developments could require additional capital. The Partnership intends to continue pursuing acquisitions and expects distributions to increase; the distribution declared in January 2013 was $0.4625 per unit, payable in February.
Risks, contingencies and unusual items
- Commodity price, weather, supply, demand, and margin volatility could affect results. Most commodity derivatives are economic hedges, not accounting hedges, and fair-value changes flow through cost of sales.
- A Pecos business customer accounts for a substantial amount of crude oil sales. Former Pecos owners placed units in escrow as limited, time-bound protection against customer default; NGL was seeking other credit-risk mitigants. The customer also disputed a transportation-rate charge, with the outcome uncertain.
- A Canadian provincial audit assessed approximately $13.4 million of historical fuel and sales taxes relating to High Sierra transactions. NGL disputed the assessment and believed exemptions could reduce or eliminate it; the ultimate outcome was uncertain.
- Legal matters include Pemex litigation concerning allegedly illegally sourced condensate and producer lien claims related to SemCrude, with plaintiffs claiming more than $72 million overall and an asserted NGL share above $2.1 million. Management described outcomes as uncertain; the filing reports an accrual for the Pemex matter.
- Acquisition purchase-price allocations, including for High Sierra, Pecos, and Third Coast, remained preliminary and could change materially. Goodwill was $510.1 million at December 31, 2012.
- Acquisition integration and internal-control work remained ongoing. Management reported disclosure controls effective at December 31, 2012; integration of controls for acquired operations was expected to continue in future quarters.
- The Partnership reported no material changes to previously disclosed risk factors. Environmental regulation, operating hazards, customer performance, financing access, and acquisition integration remain relevant risks.
Important facts for investors to verify
- How much of reported growth and operating income is attributable to acquired businesses versus legacy operations, and whether acquisition-related margins persist.
- Whether working-capital needs, especially seasonal inventory and receivables, convert reported earnings into positive operating cash flow.
- Available borrowing capacity after the January 2013 facility amendment, debt-covenant headroom, variable-rate exposure, and funding needs for future acquisitions and distributions.
- Collection and credit protection for the significant Pecos customer, resolution of its rate dispute, and status of the Canadian tax assessment and material litigation.
- Final acquisition accounting and valuation assumptions, including goodwill, intangible assets, and any subsequent adjustments or impairment indicators.
- Whether distributions are supported by recurring available cash rather than incremental borrowing or capital raises.