Fitch Affirms NGL Energy at 'BB'; Outlook Stable
KEY RATING DRIVERS
The 'BB' IDR rating is supported by NGL's strategy to maintain strong distribution coverage and operate diverse assets which are located throughout the U.S. The partnership has significantly expanded in size and scale since its IPO over four years ago. NGL has significant senior secured debt ahead of its senior unsecured debt and therefore, the senior unsecured debt is notched down one from the IDR to 'BB-'. The Recovery Rating is 'RR5'.
Concerns include the fact that NGL has grown quickly through multiple acquisitions over a short period of time and leverage is high. Fitch believes that growth spending, including acquisitions, will continue to be significant for NGL as it seeks to expand its operations and increase distributions paid to unitholders. Importantly, NGL management has a solid history of making acquisitions.
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 on crude logistics, water solutions and refined fuels and renewables. NGL also owns the general partner and 19.7% of the LP units of TransMontaigne Partners LP (TransMontaigne).
Leverage: For the LTM ending June 30, 2015, NGL's adjusted leverage (defined as debt less \\$257 million of TransMontaigne's debt to adjusted EBITDA) was 5.8x. This is above Fitch's prior expectations following significant acquisition activity. At the end of FY15, leverage was 6.0x. As new projects come online, Fitch projects leverage to improve. A significant project for NGL is the Grand Mesa pipeline which is to be in service in September 2016 and expected to generate \\$160 million of EBITDA a year, which should reduce leverage to a range of 5 - 5.5x by the end of FY17. The partnership's leverage could vary significantly depending on the manner in which NGL funds spending.
Fitch's key assumptions within the rating case for NGL include:
--EBITDA growth at a significant pace following acquisitions and substantial growth spending;
--Acquisition activity is expected to continue;
--Distribution growth increases at a measured pace;
--Grand Mesa's EBITDA run rate meets management's expectations of \\$160 million a year once in service (September 2016).
--Fitch assumes primarily debt funding in FY16 for capital needs, and more balanced equity/debt funding in outer years.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Increase of size and scope of operations such that EBITDA exceeds \\$500 million while leverage is below 4.5x on a sustained basis;
--Fee-based arrangements accounting for greater than 60% of cash flows.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Deterioration of EBITDA;
--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 5.5x for a sustained period of time.
NGL has a \\$2.296 billion secured bank facility which is now comprised of a \\$1.038 billion working capital facility (which is restricted by a borrowing base) and a \\$1.258 million expansion facility. NGL enhanced its liquidity position by amending the facility to shift \\$400 million of the commitment from the working capital facility to the acquisition facility. The amendment was effective July 31, 2015. NGL's bank agreement extends through 2018.
On June 30, 2015 and before the shift in the allocation of lenders commitments between the two facilities, the partnership had borrowings of \\$717 million and \\$130 million of letters of credit on the working capital facility which previously had a commitment of \\$1.313 billion. The expansion facility had borrowing of \\$890 million when its capacity was \\$983 million. Cash on the balance sheet was \\$44 million.
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 4.25x. With permitted acquisitions, it temporarily increases to 4.5x. 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.
Fitch expects NGL will continue to generate credit ratios which provide the company sufficient covenant cushion for the bank agreement. NGL does not have any debt maturities until 2018 when the bank agreement expires. With access to capital markets and availability on the revolver, Fitch expects NGL to have adequate liquidity to meet its spending needs.
Fitch affirms the following:
NGL Energy Partners LP
--IDR at 'BB';
--Senior Unsecured at 'BB-'/RR5.
NGL Energy Finance Corp.
--Senior Unsecured at 'BB-'/RR5.
The Rating Outlook is Stable.