NGL Energy Partners LP (NGL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2012 NGL Energy Partners LP earnings conference call. My name is Stacey, and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, to Mr. Mike Krimbill, CEO. Please proceed.

Thank you. Welcome to the NGL Energy warm winter earnings call. I will read a paragraph we typically do.

This conference call will include forward-looking statements and information. While NGL Energy Partners LP believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct. A number of factors could cause actual results to differ materially from the projections, anticipated results or other expectations included in the forward-looking statements.

These factors include the prices and market demand for propane, the effect of weather conditions on demand for oil, natural gas, and propane, and the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to financial results, and to successfully integrate acquired assets and businesses.

Other factors that could impact any forward-looking statements are described in Risk Factors in the Partnership's annual report on Form 10-K, quarterly reports on Form 10-Q, and other public filings and press releases. NGL Energy Partners LP undertakes no obligations to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

Please see our website at www.nglenergypartners.com, and under Investor Relations, for reconciliations of the differences between any non-GAAP measures discussed on this call, and most directly comparable GAAP financial measures.

So with that, why don't we get into the quarter, and then we'll talk about the acquisitions, and then the fiscal 2013 expectations. Craig?

Yes. I'm Craig Jones, CFO of NGL, and again, as Mike said, I think the real theme here is the warm winter. I'm sure everyone is aware of it.

For the quarter ended 12/31/11, we are showing adjusted EBITDA of approximately $14 million. We internally had budgeted $21 million for the period, constituting a $7 million unfavorable variance. That variance, the majority of which -- $4 million of which, is applicable to our retail operations. It's not surprising that that makes up the majority, because as most people know, most of you analysts know, generally speaking, retail propane business is much more sensitive to the weather, and warm weather, than our wholesale and midstream business.

The weather was the driver for the depressed earnings -- accounted for all of the unfavorable variance. And generally speaking, we have -- now we have strove for a geographic diversification in our weather, and we pretty much got there, coast to coast. But generally speaking, with that diversity, generally, our weather at all of our service areas, on average, is about 20% warmer than normal.

This has been, in my life, certainly one of the more odd winters, because it's been, throughout the lower 48, very little snow in the upper Midwest, very little snow anywhere in the United States, and there's just not been any pockets where there's been anywhere to speak of. There's been some in the Pacific Northwest, and some snow earlier in the winter, but overall, it's been a pretty remarkable winter.

The good news is that our volumes, the decreased volumes, are not a function of net customer losses, but rather, again, pure weather driven. Checking all of our retail locations, operations, we have not experienced any change, overall change in our customer mix, and no net outflows of customers.

The wholesale, as I've stated earlier, they're a little less sensitive to the weather. Our wholesale segment is only slightly unfavorable for the quarter, about $400,000. And again, to remind folks, about 35% to 40% of our wholesale volumes are pre-sold. That means they are sold at a fixed price, and the contract is for a heating season, so they will pull that contract before the end of our fiscal year, at 3/31/12.

A bright spot for us in the fourth quarter is the strength of our retail sales margins, gross margins per gallon. They are above plan, they're at relatively high levels, based on historical experience. And we haven't seen any denigration in those margins, and they've carried through, thus far, through January, and we're expecting those margins to remain at the current levels through the rest of this fiscal year. So, if we can finally get some weather, it will help mitigate some of the unfavorable volume experiences.

In the operating expenses, we've had some acquisition expenses that were unbudgeted that contributed to a slight unfavorable variance, but generally speaking, our operation expenses at all of our locations and at headquarters are pretty much tracking plan, no surprises there.

So in summary, it was warm weather causing lower volumes, particularly in the retail side. We had good margins, and continue to have good margins, but the result was a $7 million shortfall versus our plan in EBITDA.

You know, we've done a lot of deals. We've done four -- what, four acquisitions thus far since we went public back in mid-May, and we've essentially tripled the size of our company, so we're really well positioned. You look at our pro forma run rate and EBITDA, we're well positioned going forward. It's just for this quarter, the weather just wasn't cooperating with us to be able to harvest a lot of that incremental earnings off of those (inaudible) acquisitions.

Looking forward to the current quarter, to our fourth quarter, ending -- our fiscal ending 3/31/12, we expect better earnings, particularly on the retail side. Our total retail EBITDA for the fourth quarter calendar was, at 12/31/11, was $9 million. We expect that to ramp up to $19 million by the end of March, for that quarter ending 3/31/12. We're expecting to make right at $30 million of EBITDA for the quarter.

It's still below plan. Our plan calls for $35 million, so we have a $5 million unfavorable variance. But overall, our shortfalls, volume-wise, remain pretty consistent, because we don't anticipate the weather changing for our retail subsidiaries. But overall, our shortfalls are less, and our percentage shortfalls are less, so there is an improvement quarter to quarter.

We expect the margins, as I said earlier, to continue throughout this quarter. And that will help us.

Wholesale -- the wholesale margins, again, since we have a lot of pre-sale volumes yet have to be pulled, that will be pulled in February and March, we're expecting the wholesale EBITDA earnings to be slightly favorable to plan. So that doesn't come as a surprise, because of our pre-sale volumes.

That's pretty much it in a nutshell, the overall view of the current fourth quarter calendar, and our last fourth quarter fiscal, looking forward.

Thanks, Craig. A little more flavor on the two acquisitions in January and February. I don't believe we gave any guidance on Pacer, so in the press release, you can see what the purchase price was, and the EBITDA that we expect is $7.5 million.

And then, the NAP transaction, with a purchase price of $66.8 million, we expect, in normal weather, again, to have EBITDA of $10.5 million. And obviously, that's closed, we were integrating that, and we're in good shape versus the model. We're seeing the savings that we anticipated, day one.

So that's the latest on the acquisitions. And let's look forward to fiscal 2013.

When we add up the projected EBITDAs off of the acquisitions we've made to date, and mergers, we are expecting, for the 12 months ended March 31, 2013, with some normal weather, $80 million. So as you've. I guess, participated on these calls, and you add up these different EBITDAs we've given you, that $80 million should be a number that you were expecting.

In terms of common unit coverage, it would be, the interest, getting down to a DCF that we were expecting based on our current long-term debt, having that for a full 12, and an average working capital for the 12 months, we're expecting interest expense to be around $9 million.

Maintenance capital has been below our projections, mainly as a result of having vehicles in excess of our personnel subsequent to the blend in economics in certain of the transactions. So, we're anticipating our maintenance capital (inaudible) around $3 million for next year, and with our current equity outstanding, at $1.40 per unit, I believe that leaves us around a 1.6 to a 1.7 common unit coverage.

So with that, let's open it up to questions.

(Operator instructions) Your first question comes from the line of Ron Londe with Wells Fargo. Please proceed.

Thanks. Mike, I was a little confused about fourth fiscal quarter of 2012 guidance. You first said $19 million in EBITDA, I believe, and then you said something about $30 million.

Oh. Oh, yes.

Can you go over those once again?

Yes, Ron, this is Craig. Sorry. The $19 million, I was just -- I was giving the ramp up and the run rate for our retail only. Retail only goes from $9 million at 12/31/11 to $19 million for the quarter ended 3/31. But the $30 million is all-in, of the total EBITDA for the 3/31/12 quarter end.

Okay, so that includes the SemStream, and --

Yes.

-- everything else. Okay.

Everything. All in.

Yes. Can you give us an update on what's happening with SemStream, what some of your strategies are right now, and how you're looking at improving utilization going forward?

Sure. The initial focus was to market through those terminals in the same way that we marketed through our own terminals. So we -- you know, our sales staff are approaching the retailers in those areas that would utilize those terminals to sell direct, also to get as much of the pre-buy volume as we can, similar to what we do with our own terminals. So obviously, our goal would be to get those up to 35%, 40% of the total volume, as pre-buy. So we are out there moving to grow the volume that goes through those terminals.

In addition, we've evaluated the terminals, and there are opportunities that require us to add some storage, or to do some -- perhaps market butane in addition to the propane, and we are -- we'll be implementing those all summer, so we're ready for the next heating season, to add, really, incremental EBITDA over what we would typically get from just the propane.

There's some exciting opportunities if we can, I guess, close the deal with our partners.

So, we had previously said $16 million to $20 million in fiscal '13, and then $20 million to $25 million after that. So in the $80 million number, I just used $16 million for Sem, which is the low end of our range. But we'll be ready, because really, starting April 1 is the first time that we will have been able to establish our business model with those terminals. Obviously, when we merged in with Sem, and they contributed those assets, the die had already been cast, the marketing had already been done, and there was nothing we could really do unless we found some incremental gallons, and of course, in a warm winter, there weren't anything incremental to find.

How are you dealing with some of the agreements that you have with your customers on the propane side, that aren't able to take as much propane this winter as you were expecting?

You know, early on in January, with as warm as the fourth quarter, and really, in January, is when we all subscribed to the same kind of weather services, and it looked like January wasn't going to be colder than normal, our sales staff, and our wholesale folks, contacted every single pre-buy customer, I think that's who you're referring to, to make sure that they pulled their contracts by March 31 and reduced our working capital.

So, at this point, we expect the contracts to be pulled, and we don't really -- we don't see any problem with us being left with anyone walking contracts.

Okay. You mentioned your margin per gallon, but you didn't actually mention what the number was. You have a number (multiple speakers)?

Yes. It's $0.74 a gallon, gross margin.

Gross margin, correct.

Okay. Yes, that's about what I expected, okay. All right. That's all I have for now.

Thanks, Ron.

Your next question comes from the line of TJ Schultz with RBC Capital Markets. Please proceed.

Hey, guys. Good afternoon. Following Osterman and SemStream, I guess you had indicated an intention to recommend to the Board kind of the 12% to 15% distribution increases for the next couple of years, and then given -- you know, that post this, you've completed two additional acquisitions here, and obviously, just kind of putting the weather this winter in a box, just kind of wondering what your current thoughts are on distribution growth over the next couple of years.

Unchanged. I think with the warm winter, we're very comfortable still doing the 12% to 15% a year. But at this point, you know, we'd like to get in next winter, and I -- I really don't anticipate us, I'll say, recommending anything more than that to the Board. What the Board does is, is up to them. But we're certainly not going to reduce the recommendations from 12% to 15%.

Okay, but that's already been -- that's something that you've already recommended, just -- I mean, kind of coming out of this winter, is that something that gets pushed out a year, maybe?

No, we would continue going to the Board and recommending increases that would be in that 12% to 15% range. You know, that's why we went over -- really, what our view of where our accounting coverage is, so that there's lots of excess coverage.

Okay. No, I get it. I appreciate it. That's all I've got. Thanks, guys.

Your next question comes from the line of Kate Morris with Robert W. Baird. Please proceed.

Hey, guys, it's Ethan. As you look forward to potential other acquisitions, Mike, I mean, you've been incredibly successful. Does this warm winter shake loose some of the smaller retail propane guys, maybe hurt their balance sheet a little bit, and make them easier prey, as it were, or partners, I should say? Or are you looking to maybe get into some other lines of business, diversify, like gathering and processing, or something like that?

The first part of that question is the -- you know, we really don't focus on the mom and pops, and we have focused more on the larger regionals. And we believe that the transaction with NAP was indicative of where multiples are.

The tough part, I think, with mom and pops is, most of them don't really have any significant debt, so they never really -- they never get to a point where they have to sell, or they have to take less than whatever they think it's worth, the business worth.

So I don't know -- we don't know yet. We don't have any mom and pop deals where we've gone in, or a -- I say, a 5 multiple, just see what happens, you know, under the theory there just aren't any -- there are very few buyers. But I really don't expect that to happen. Of course, that doesn't hurt us, because that's not really our strategy.

On the second part of your question, we are constantly working on things in the midstream sector. So we are -- well, we're working on deals that -- you know, where we could market liquids, we could use our railcars. We've ordered additional railcars to try and move liquids, and even crude oil, around the United States and Canada. So we are looking at those other opportunities.

Okay. And Mike, you seem to have margins that are more sustainable than your larger peers, and I would imagine prices that get transmitted accordingly to the customers. Are you seeing the sections from some of the larger, publicly traded MLPs, that people falling in your lap, or is that not a factor, given the fact that nobody's really buying propane right now?

It's really a regional, because in the upper Midwest, we're not (inaudible) in the (inaudible) area, we're not competing against the larger, public MLPs. So we -- there's not -- you're in a rural area there, and there's not a lot of growth, no significant home building going on.

In the New England, East Coast markets, there is some growth. We're -- I wouldn't say anything significant is falling in our lap from the MLPs that are, we think, at higher pricing than we are, but we'll see what happens here in the next -- you know, this summer will probably be interesting.

Okay. And Craig, with respect to the $30 million guidance for the current quarter, what could detract from or enhance that number? Is it just retail weather?

I think retail weather, definitely, yes.

Okay. Thanks very much for doing the call. Appreciate it.

You bet. Thanks, Ethan.

(Operator instructions) Your next question comes from the line of James Champel with HITE. Please proceed.

Hi. I was wondering if you could elaborate a little bit more, for those of us that might not be as familiar, as to why you guys seem to be so successful at consummating meaningful acquisitions in the retail propane space, and others that we follow appear not to be. If you could toot your own horn a little bit there, sort of a good (multiple speakers).

Well, hopefully all the other MLP participants on the call, they've fallen off.

No, part of it is -- it's really our equity, that we think that our partners -- you know, that understand this space and sector, are taking opportunity to sell their businesses for more than they could if it was just cash. And so they're -- certainly, three of our transactions, our larger ones, equity was a significant component. The fourth one, the most recent one, was an owner that was in a situation where they really wanted out, and we may have been the best answer for them in terms of speed. And then, we probably -- may not have been the highest price, but we were certainly the group that could do it quickly, have the capacity to close, and we think we treat people fairly, so they want to deal with us. And we keep their name on the business, and all those things that we've done in the past.

I see. From an amateur perspective, it would just seem like the others are not in position, or don't have the appetite, for doing this right now. Is that a fair characterization, from your point of view?

I think they all have the appetite, but they certainly -- it really comes down to, what's their financing capabilities. And I'd say, some of them, with this warm weather, if you didn't have a pretty strong balance sheet to begin with, you'd be -- it would be tough to borrow the kind of money you'd need, $50 million to $100 million, to do these regional sized deals.

So I'm trying not to bash the competition, and just the facts are, I think that we're -- you know, our sellers know we're going to treat the customers correctly. We're not going to go in and increase the price significantly. We're going to try to keep the same policies in place, the same kind of receivable collection philosophies, and we're not going in, firing a bunch of people. We don't -- we try not to do that.

So, we end up being successful in these larger deals.

Now, are you continuing, or are you taking a breather?

You know, on the midstream side, we are definitely not taking a breather. We're pushing ahead, full speed ahead. On the internal growth projects, we're pushing full speed ahead. On the retail -- and with both propane and now heating oil, this NAP had, I think, about 10 million gallons of heating oil, so we really call it more retail than just retail propane.

I just think at this point, we'll be selective, but we're -- we are still looking at good transactions. We've got to take advantage of the current situation in the industry.

I see, and last one from me. You mentioned coverage of 1.6 in fiscal year 2013, but I assume that's without any distribution increases?

That's as -- I think you're somewhat correct, in that that's based upon our distribution today of $1.40. That's correct. Now, as we stated previously, we'll still go to the Board for our 12% to 15% increase in distribution going forward.

So the expected observed coverage ratio would be lower?

You know, if the Board approves an increase each quarter, yes, then that coverage would decrease a little bit each quarter. Yes.

All right. I'll go back in the queue.

Okay, thanks.

Your next question is a follow up question from the line of Ron Londe with Wells Fargo. Please proceed.

Thanks. Hey, Mike.

Yes?

Just curious. In the last 17 years since I've known you, have you ever taken a breather?

(laughter) I tried, Ron, for two years, and it didn't work out.

Yes, it wasn't much (inaudible) market. I was wondering, you kind of alluded to something that sounded interesting before, concerning propane pricing and competition next time. You said it could be interesting. Could you kind of define interesting? And kind of, give us some perspective on where you think propane prices might be going this summer, given what the inventories are like right now? You know, exiting the winter?

Sure, I'd be -- I think two parts to the question, if I got it right, is the first part is, that I think the -- you know, our competitors are certainly laying off employees, and so there will be -- there may be opportunities to hire some employees to -- I guess, grow gallons, if the customers aren't as happy with customer service, and there's -- a large part of the industry is consolidating districts and operations. There's just natural customer fallout. And I think we'll see more of it this summer than we typically do.

On your pricing question, you know, certainly, when you come out of a winter with record high inventories, which is just amazing in itself, because we went into the winter with fairly record low inventories, and here we come with record high ones coming out. You always are going to have questions about, is there enough storage? The additional export capacity at our [Bellevue] won't be completed, I guess, until the end of the summer.

And so you have probably different issues at Conway than Bellevue, where you have more storage, but lesser ability to get propane down there.

So, we could see lower prices, and there could be some opportunities to pick up distressed product and enhanced margins come the fall. But it also may help our supply and wholesale folks, our storage could become more valuable if there's a perception that there's not enough, and the value storage picks up. So we like what we see for NGL Energy Partners.

Okay, very interesting. Thanks.

Your next question is a follow up question from the line of TJ Schultz with RBC Capital Markets. Please proceed.

Hey, just one follow up. The propane storage lease with Conoco, I guess, expiration is coming up. Just curious if there's any update on that lease agreement.

Yes. The supply agreement where we had the option, we did exercise that option for an additional five years. And the maintenance agreement went along with that, so the storage agreement, we are still negotiating to see what we can come up with.

Okay, thanks.

Your next question comes from the line of James Champel with HITE. Please proceed.

Yes, the trading liquidity is minimal. Any plans for that?

What do you mean by trading liquidity?

These guys that have traded 6,100 shares today.

Oh, oh, oh. Our float. (laughter) We get a little nervous. Trading means speculation. We don't do that, so I was -- I was just a little nervous, what you were asking about. Any plans for that? Obviously, we'd love the liquidity and the float to increase. What I can say is, we have not put any lockups on any of our investors, so any time the investors want to -- would like to sell, they can sell into the marketplace, and we would not at all -- we wouldn't be unhappy with that at all. We'd love to see our trading up to 30,000, 50,000 a day.

You know, we'd naturally -- it will get there over time. We -- you know, we really don't have anything else we can do at this point to increase the float. I just don't have an answer that's going to get you more float.

Okay. Thank you.

And at this time, I'd like to turn the presentation back over to Mr. Craig Jones for closing remarks.

I guess the -- just, we'll keep moving forward, and we're expecting a better quarter coming up. And I go home every night and turn on the Weather Channel and pray, and hope that the cold weather comes.

Thanks, everybody for coming --

Thanks a lot.

-- for calling in.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.