NEW YORK--(BUSINESS WIRE)--Fitch Ratings does not expect to change NGL Energy Partners LP's (NGL) 'BB' Issuer Default Rating (IDR) or 'BB-' senior unsecured rating following the company's announcement that it has offered to acquire the remaining limited partnership units of TransMontaigne Partners L.P. (TransMontaigne Partners) in a unit-for-unit exchange. The offer is non-binding and subject to a definitive agreement. In addition, approval is needed from the conflicts committee of the board of TransMontaigne Partners GP L.L.C., followed by board and unitholder approval.
Fitch views the potential increase in size and scale as favorable from a credit perspective provided NGL manages the balance sheet. Consolidation of TransMontaigne Partners would simplify NGL's structure and provide for additional growth opportunities.
The potential acquisition involves NGL acquiring approximately 80.3% of TransMontaigne Partners since it already owns 19.7% of the LP units. In total, NGL would acquire approximately 12.9 million units currently valued at $562 million. On July 2, NGL acquired TransMontaigne Inc. (which held the GP for TransMontaigne Partners), 19.7% of the outstanding LP units of TransMontaigne Partners, and certain associated entities for approximately $200 million in cash.
The 'BB' rating is supported by NGL's strategy to operate with strong distribution coverage and diverse operations which are located throughout the U.S. Since NGL has significant senior secured debt ahead of the senior unsecured debt, the unsecured debt is notched down to 'BB-'.
Concerns include NGL's short operating history and growth through numerous acquisitions since it was formed in 2010 and IPO'd in 2011. Fitch believes that acquisitions will continue to be significant for NGL as it seeks to expand its operations and increase distributions paid to unitholders. Other concerns include NGL's modest size, and the weather-linked volatility associated with the company's retail propane business which accounted for 34% of fiscal year 2014 (FY2014) EBITDA.
Following significant acquisition activity in FY2014, leverage as defined by Fitch as total debt to adjusted EBITDA was 6.4x as of FY2014 (fiscal year ends March 31), up from 4.2x at the end of FY2013. With the pending acquisition, Fitch forecasts leverage to be approximately 4.5x-5.0x at the end of FY2015 as recent past acquisitions contribute to EBITDA growth which should drive the leverage reduction. Furthermore, Fitch expects EBITDA growth to be more significant in the latter half of FY2015.
Leverage expectations are viewed as appropriate by Fitch for NGL's 'BB' rating. Given NGL's aggressive acquisition strategy, maintenance of its rating will in large part depend on its willingness and ability to issue equity to help fund growth.
NGL is focused on significant growth via organic projects and acquisitions. Fitch expects acquisitions to be NGL's larger focus as it enables the partnership to quickly ramp up in size and scale. The offset to this is that multiples paid for acquisitions are higher than organic growth projects.
Prior to the completed acquisition on July 2, management indicated that adjusted EBITDA should be in the range of $425 million-$430 million in FY2015, up from $255 million in FY2014. In FY2015, it expects to see growth capex of approximately $500 million, up from $133 million in FY2014. In the current fiscal year, approximately 50% of spending is to be directed toward crude logistics, 40% water services and the remainder is for other NGL logistic projects.
In FY2014, $1.3 billion of cash was spent on acquired assets. The most significant acquisition during the fiscal year was the December 2013 acquisition of the Gavilon assets which included crude oil terminals and a 50% stake in a crude oil pipeline which went into service in February 2014. NGL paid $832 million net in cash for the assets.
Following the June bond offering of $350 million and equity offering of $338 million, liquidity appears to be adequate. Proceeds from both offerings were used to reduce revolver borrowings. As of year-end FY2014, cash on the balance sheet was approximately $10 million, the working capital facility had approximately $275 million undrawn and the expansion facility had $253 million undrawn.
In late 2013, NGL increased the size of its secured revolving credit facility to $1.721 billion from $1.67 billion. The bank agreement is comprised of two facilities: a $935.5 million working capital facility which is restricted by a borrowing base and a $785.5 million expansion capital facility. The facility extends until 2018.
Financial covenants in the bank agreement do not allow leverage (as defined by the bank agreement) to exceed 4.25x. With permitted acquisitions, this temporarily increases to 4.5x. As of FY2014, the bank-defined leverage ratio was approximately 3.0x. Interest coverage must exceed 2.75x and it was approximately 7.0x at the end of FY2014. The bank agreement allows working capital borrowings and letters of credit to be excluded from the leverage calculation. NGL gets pro forma EBITDA credit for acquisitions, which is typical for master limited partnership (MLP) bank agreements.
The borrowing base is the sum of: all cash collateral, 85% of accounts receivable, 80% of inventory (less 50% of prepaid inventory), 90% of eligible futures accounts, and 80% of letters of credit for commodities not yet received, less all first purchaser liability, less 100% of secured bank obligations attributable to overdrafts, less 120% of secured hedging obligations, and less 100% of excise tax liabilities. The borrowing base calculation is done at the end of each month.
The company maintains a solid distribution coverage ratio (DCR) which it targets to be approximately 1.5x. With increased distributions, the coverage ratio was 1.1x at the end of FY2014 which is below coverage of 1.5x at the end of FY2013 and management's target. Fitch forecasts EBITDA and DCF growth in FY2015 and expects the DCR to be closer to 1.5x at the end of the current fiscal year.
NGL has indicated that in FY2014, approximately 40%-45% of EBITDA was generated from fee-based assets. It targets 60% of EBITDA from fee-based assets in the next 12-18 months.
NGL's assets are diverse and are comprised of retail propane (34% of FY2014 segment EBITDA), water services (24%), liquids (31%), crude logistics (8%) and other (3%). Furthermore, its assets are located throughout the U.S. Recent acquisitions include crude oil midstream assets (Gavilon) and water services. These are higher margin segments which should improve NGL's overall EBITDA margins going forward.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);
--'Pipelines, Midstream, and MLP Stats Quarterly - Fourth-Quarter 2013' (May 2014);
--'Credit Considerations for the GP/LP Relationship' (November 2014);
--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors' (August 2013);
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs' (April 2013);
--'Master Limited Partnerships 101' (November 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Pipelines, Midstream, and MLP Stats Quarterly - Fourth-Quarter 2013
Credit Considerations for the GP/LP Relationship
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
Master Limited Partnerships 101