Fitch Affirms NGL Energy at 'B+'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has affirmed NGL Energy Partners LP's (NGL) Long-Term Issuer Default Rating (IDR) at 'B+'. Fitch has affirmed NGL's senior unsecured debt at 'B-' and the Recovery Rating (RR) at 'RR6'.

The Rating Outlook has been revised to Stable from Negative.

Fitch has also affirmed NGL Energy Finance Corp.'s senior unsecured debt rating at 'B-'/'RR6'. NGL Energy is the co-issuer for NGL's senior unsecured notes.

A full list of today's actions follows at the end of this release.

KEY RATING DRIVERS

The 'B+' rating is by supported by NGL's diverse assets located throughout the U.S. The partnership has significantly expanded in size and scale since its IPO in 2011. NGL has significant senior secured debt, which totalled $2.2 billion as of Dec. 31, 2015 and is ahead of its $850 million of senior unsecured debt. Therefore, the senior unsecured debt rating is notched down two from the IDR to 'B-' and the Recovery Rating is 'RR6'. The 'RR6' indicates poor recovery prospects in the event of a default at the unsecured level.

The Stable Outlook reflects NGL's initiatives to improve its cash flows and the balance sheet. Over the last few months, the partnership has sold assets for approximately $450 million. Assets sold include its general partnership and limited partnership interest in TransMontaigne Energy Partners, LP (TransMontaigne). NGL's growth spending for FY17 (ends March 31) is expected to be in the range of $200 million to $300 million which is viewed as reasonable given Fitch's expectations for liquidity. Importantly, NGL has also reduced FY17's distributions by 39%, which should improve the distribution coverage ratio significantly. NGL also plans to issue $200 million of convertible preferred units and warrants in the near term. The convertible preferred are expected to receive 50% equity credit based on Fitch's criteria based on the proposed terms.

While NGL's high leverage is a concern, Fitch's expects it to decrease in FY'17 given the partnership's current initiatives. NGL's counterparty risk is also a concern, particularly for Grand Mesa since its exposure to smaller exploration and production customers tends to increase counterparty risk.

Diverse Operations: NGL's assets are diverse and comprised of liquids (approximately 20% of EBITDA excluding G&A for FY15), crude oil logistics (15%), water solutions (27%), retail propane (21%), and refined fuels and renewables (17%). NGL's strategy is to focus growth spending on crude oil logistics, liquids, retail propane and refined fuels and renewables.

Leverage: For the latest-12-months (LTM) ending Dec. 31, 2015, NGL's adjusted leverage (defined as debt less $250 million of TransMontaigne's debt to adjusted EBITDA) was 6.8x. Fitch expects adjusted leverage to be in the range of 6.8-7.0x at the end of FY16. Given Grand Mesa's in service date of Nov. 1, 2016 and expectations for normalized weather for the propane business in FY17, Fitch projects adjusted leverage to be in the range of 5.4x-5.8x by the end of FY17.

Distributable Cash Flow and Distribution Coverage: For the LTM ending Dec. 31, 2015, distributable cash flow was $302 million, up from $272 million generated during fiscal year 2015. NGL's distribution coverage ratio was 0.99x for the LTM ending Dec. 31, 2015, which is a decline from 1.2x for FY15. With the 39% cut in distribution in FY17, Fitch expects the coverage ratio to be in the range of 1.8x to 2.2x by yearend FY17.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for NGL include:

--EBITDA for FY16 is reduced to $425 million (the midpoint of management's recent guidance);

--EBITDA growth occurs in FY17 due to projects coming on line, particularly Grand Mesa;

--Grand Mesa's contribution to EBITDA is reduced from prior expectations and in line with NGL's guidance of $120 million in year one (down from $160 million);

--NGL successfully closes on $200 million of convertible preferreds and, under the current terms, would receive 50% equity credit as per Fitch's criteria.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Leverage at or below 5.5x on a sustained basis;

--Fee-based arrangements accounting for greater than 60% of cash flows;

--A demonstrated sustainable ability to access capital markets for liquidity needs.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Reduced liquidity;

--Significant increases in capital spending beyond Fitch's expectations or further acquisition activity that have negative consequences for the credit profile (e.g., if not funded with a balance of debt and equity);

--Increased adjusted leverage beyond 6.5x for a sustained period of time;

--Distribution coverage below 1x for a sustained period of time.

LIQUIDITY

As of Dec. 31, 2015, NGL had $25 million of cash on the balance sheet. It also had a $2.474 billion secured bank facility (up from $2.296 billion at the end of the prior quarter) comprised of a $1.038 billion working capital facility (which is restricted by a borrowing base) and a $1.436 billion expansion facility. The working capital facility had borrowings of $604 million and letters of credit totalling $117 million. The expansion facility had drawn $1.317 billion leaving capacity of $119 million. NGL's bank agreement extends through 2018.

In addition to the bank agreement having borrowing base restrictions on the working capital revolver, financial covenants do not allow leverage (as defined by the bank agreement) to exceed 4.75x. The bank agreement was amended in late December 2015 to increase the maximum leverage ratio covenant from 4.25x to 4.75x.

In addition to the working capital borrowings and letters of credit being excluded from the leverage calculation, NGL gets pro forma EBITDA credit for acquisitions. Pro forma EBITDA credit for material projects or acquisitions is typical for MLP bank agreements.

NGL does not have any significant debt maturities until 2018 when the bank agreement expires. After that, it has $400 million of notes due in 2019.

Fitch has affirmed the following ratings:

NGL Energy Partners LP

--Long-Term IDR at 'B+';

--Senior unsecured debt at 'B-/RR6'.

The Rating Outlook is revised to Stable from Negative.

NGL Energy Finance Corp.

--Senior unsecured debt at 'B-'/RR6.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are discussed below:

--Adjusted leverage has been used to account for NGL's past ownership of TransMontaigne (the general partner and limited partnership stake). Historical adjusted debt at NGL was reduced by TransMontaigne's debt. Historical adjusted EBITDA accounted for NGL's stake in TransMontaigne.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003725

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003725

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Shalini Majahan
Managing Director
+1-212-908-0531
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Shalini Majahan
Managing Director
+1-212-908-0531
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com