Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 NGL Energy Partners LP Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call is being recorded today, November 7, 2017. I would now like to introduce your host for today's conference, Trey Karlovich, CFO.

Thank you and welcome. This conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may and similar expressions and statements are intended to identify forward-looking statements. While NGL Energy Partners 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 prices and market demand for natural gas, natural gas liquids, refined products and crude oil, level of production of crude oil, natural gas liquids and natural gas; the effect of weather conditions on demand for oil, natural gas and natural gas liquids; and the ability to successfully identify and consummate growth opportunities, including strategic acquisitions at costs that are accretive to financial results and to successfully integrate and operate assets and businesses that are built or acquired. Other factors that could impact these forward-looking statements are described in risk factors in the partnerships annual report on Form 10-K, quarterly reports on Form 10-Q and other public filings and press releases. NGL Energy Partners undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA and distributable cash flow, which management believes are useful in evaluating our financial results. Please see the partnership's earnings releases, investor presentations and annual and quarterly reports on Form 10-K and Form 10-Q on our website at www.nglenergypartners.com under the Investor Relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures. At this time, I will turn the call over to our CEO, Mike Krimbill, for his opening remarks.

Thanks, Trey. We obviously are very pleased with the quarterly results that were finally beating our numbers, and of course, importantly, they were driven by increasing volumes in all segments and margin improvements. I think two areas in particular to focus on; one, Grand Mesa. The volume continues to grow. We have, as you may recall, our MVCs increasing by about 13,000 barrels a day on November 1. We also have Bonanza Creek, which placed a drilling rig in their acreage in July. We will begin seeing that increased production. As well as you may recall, when we went through the bankruptcy settlement, we have an increasing margin on those volumes, which equals 10% of the WTI price over $50. So we will see some increasing margins there as well. On water, all basins are experiencing volume growth in not only the water, but skim oil and company-wide, we're seeing an increase in the solids processed. We recently exceeded 800,000 barrels a day of water disposal with more being contracted and connected by water pipelines. Really for the company as a whole, we have significant available capacity in all our segments that can accommodate increased volumes. And we have already spent the capital, so our future growth CapEx will be minimal, while we continue to strengthen the balance sheet. With respect to retail propane, we announced the sale of a portion of our retail propane business this morning. We are not exiting the business but rather focusing on higher-degree day states. To get our numbers right, last year, this business produced about $20 million of EBITDA and maintenance capital was 4. In our forecast, normal winter, we have approximately $25 million for this segment. And again, maintenance capital is about 4. So, obviously, the price we look at it as $220 millions, we're keeping the winter and then closing on March 31. So on a $220 million, it's really 11 times the trailing, it's about 9 times the forecast on an EBITDA basis, and then you can compute what it is on EBITDA minus maintenance CapEx. I want to thank Shawn Coady and his team, as well the DCC, the execs were fantastic to work with. So we will wish them the best. We're not going to be terminating our relationship. We will be providing supply for those operations in the future through our NGL wholesale propane business. I think in summary, we will continue working on deleveraging and improving the coverage. So with that, we'll turn it back to Trey.

All right. Thanks, Mike. As Mike said, this has been a good quarter, and I'm also pleased with our results. Overall, we generated approximately $90 million of adjusted EBITDA this quarter and $130 million year-to-date. Total fiscal 2018 adjusted EBITDA remains forecasted to be between $475 million to $500 million. We have delivered on what we communicated last quarter with the improvement in refined products and liquids and continued growth on Grand Mesa and in our water business. We've executed on one asset sale, and we continue to look at other opportunities. The monetization of the assets and subsequent deleveraging is significant and will allow us to reduce our debt balances and our cost of capital going forward. Briefly on the tax impact of the retail propane transaction. We will recognize a tax gain on this transaction of about $130 million or about $1.10 per unit, but the expected close in next March, this will not be reflected in this year's, the 2017, K-1s. With some of the proposed tax changes, 2018 is still relatively unknown, but at this point, we expect to generate a tax loss from depreciation and amortization that will offset this gain next tax year. Onto the quarterly results. I will start with a summary of each segment and then talk a little more on the balance sheet and our expectations for the remainder of the year. I'll start with crude oil. The crude segment generated approximately $30 million of adjusted EBITDA this quarter with Grand Mesa contributing $38 million. As a reminder, our crude marketing group supports Grand Mesa through the purchase, transportation and sale of product in the DJ Basin. That segment recognized a loss through those efforts supporting Grand Mesa during the quarter. The remainder of the crude logistics segment operated approximately a…

[Operator Instructions]. And our first question comes from the line of T.J. Schultz from RBC Capital Markets.

First on growth CapEx, as far as that trending lower, just given the growth in the water volumes, what do you need or expect to need to spend there as it seems that that's captured the bulk of the spending here recently? I guess as we think about your comment on available capacity in your segments to capture more volumes, how much room is there in the water segment versus needing more growth capital?

By basin, like the Eagle Ford, we have plenty of capacity there, same as the Pinedale. We drilled one extra well up in the Bakken, and we have significant capacity available in the DJ. So the place where we see dollars being spent are really the Delaware side of the Permian. We probably have a dozen or more permits. The newer model is with these water pipelines coming in, we don't need, for instance, the truck unloading base at every location that we used to build. So we just need some tankage, which reduces our CapEx. So bottom line, I think we have about $30 million slated for the next six to eight months on the water side.

Okay. On Sawtooth, is that still a strategic fit for you all, kind of what's the competitive dynamic there going forward, any color on cash flow expectations for that asset or that has troughed?

Well, certainly, we believe it's troughed. We like the asset. If you look out west, there's a little storage at Adamana and Bumstead in the Southwest, but that's it. And so we have a pretty significant amount of capacity there. What originally we anticipated when prices were $90, we'd see a lot more liquids coming out of the Powder River in the Bakken and some fuel-grade butane, which didn't happen. Well, we think we troughed. We see a path to increase EBITDA significantly, so we are doing everything we can. As you know, the stored seasons only start April 1 through March 31. So we will know more in the next three to four months for next year.

Okay. I guess still in liquid segment, the railcar leases rolling off, kind of what percentage roll-off this year and then next year?

So we have about 700 cars that roll off between now and the end of this year, which we will get the benefit for next year an average of about $1,000 per car per month. So it's a pretty significant savings expected for next year. We may have to use some incremental cars, but if we were to do that, we would expect that to be at a much lower rate. So we're expecting $6 million to $8 million of cost savings next year from the roll-off of railcars.

Okay. Great. And I guess just last, if you could maybe clarify your thoughts on the distribution. We've seen others with yields in this range recently cut distributions to accelerate, delevering, is that a consideration or is the plan to execute kind of into your guidance and coverage range and just give it more time?

We've been pretty consistent here and firm, but we're not cutting our distribution. We did that once in the past, we're not doing it again. We indicated we're going to maintain the $0.39 for this year and then look to recommend a book to the board that we would increase the distribution with really the caveat being that we hit our forecasted numbers of $475 million to $500 million. So definitely no cut, and there's been no discussion of a cut. All the discussions are about increasing as we [indiscernible] beat our numbers.

And our next question comes from the line of Darren Horowitz from Raymond James.

Mike, my first question for you. Within refined products, as it relates to addressing your contracts on Colonial, it look like the space on Colonial was negative $0.01 during the quarter on average and I know your guidance was to take that 20,000 barrels of discretionary line space to 0 for the duration of the fiscal year. So as you guys sit today looking at what -- including for New York Harbor basis over the next three to six months, where do you think the variability around that forecast could be?

So we don't believe that there will be much variability on that forecast from line space as it trades. Again, we've recontracted to the point that line space is relatively indifferent. Our current expectation is that line space will be positive $0.01 or $0.02 through the next, call it, six months to eight months. Should it be positive, that would be a benefit, call it, $5 million to $6 million roughly to our expectations. But at this point, we're not expecting any significant change and again if it remains minus one or even worse based on how our contracts are now structured and how we manage the pipe, we would not have any negative impact.

Adding to that, I think line two is about a 25% positive, the distilled line. We're waiting for on line one is to see the Gulf Coast refineries come back on stream. I think next week, I read there is another 500,000 barrels a day of refining capacity that will be starting up. So to Trey's point, we expect to see the prices in the Gulf Coast fall, which would give us the opportunity to get line one positive.

Darren, you ruined my goal. My goal is to go through the entire conference call without saying the word line space.

I apologize for that. Maybe I will switch to a different segment. It looks a little more positive on the crude oil side of the business outside of what's happening with the step function higher in Grand Mesa committed [volumes and what should come from that. Looking at the base business, in addition to Glass Mountain becoming operational and just hopefully some sequential volume pick up, what else can be done in that business to where you're comfortable with stable sequential EBITDA, the gross, and then the incremental that comes from Grand Mesa is purely that just incremental?

So a couple of things. One, we are seeing improved basin differentials, which is helpful to the marketing business. We've driven our costs down pretty much as well as they can go from what we can control. However, we do have some contractual commitments that roll off over the next, call it, 18 months to 24 months that will also reduce our costs and provide for incremental EBITDA in that business. Those are probably the primary factors. Additionally, with Point Comfort in Oklohoma coming online, we are working to contract those assets out as we continue to add volumes on those assets and that will also contribute to incremental EBITDA rather than a breakeven profile for the rest of that business.

Okay. And then last question for me, a s it relates to additional asset sales and making further progress on the deleveraging initiatives that you talked about, has anything changed with regard to what you consider? I know last time, you had mentioned that you could sell a package of water assets, but it probably wouldn't be either in the DJ or South Texas Eagle Ford, possibly something in the Bakken area. How does that look and is there any update with regard to timing and/or potential magnitude and what that could mean to the debt profile?

So as we've said publicly, we are looking at some other assets. What we said historically was that we were looking in four of our five segments, retail propane, liquids, crude and water. We're continuing to evaluate opportunities. I'd say we are highly focused on deleveraging the balance sheet. Retail propane is a huge step. As we said on the last call, we were targeting something in the $200 million range, and we achieved that. Obviously, something in the water business wouldn't be of that size, but it would contribute and would help. But we are also very pleased with the results we're seeing from water and our expectations over the next 12 months plus. So at this point, what I would say is that we'll continue to look at opportunities, but we're not announcing anything else at this time.

Our next question comes from [indiscernible] NTB Financial.

Just a quick question. I would like to have a general comment -- it's a general question actually. What's happening on possible tuck-in, short-haul pipeline acquisitions, which Trey and I discussed before? What's the possibility of those coming into the -- you getting those under your belt?

Obviously with Grand Mesa, Glass Mountain with our other assets, we are looking at opportunities to add any -- gathering our transportation infrastructure. Those are the types of assets that we would like to own. They need to be strategic and accretive, it's a competitive landscape. We don't have anything to announce at this point in time, but if we were to look at something, I think you would be in the key basins in the U.S. We made it pretty clear that we wanted to be in the Permian, the DJ, the Eagle Ford, the STACK, Merge [, Mid Continent area, those are really the basins that we focus on, maybe a little bit in the Bakken, but those are the key areas.

Also to add, we're not looking at M&A or purchasing someone else's system. We'll be looking at a couple opportunities to build our own. So if we're fortunate enough to do it, it'll be at an attractive return, not something single digit.

Next question comes from Michael Prouting with 10K Capitol.

I had a question somewhat related to a question that's already been asked in terms of deal reaching the balance sheet and also securing a distribution. As you look across your portfolio of businesses, it seems like an obvious opportunity to disposal of asset that aren't returning a good return on capital and obviously you guys say it's a pretty high hurdle there given the leverage and also the rescue [pipe, Oaktree would be basic crude business. So I am just wondering how do you see the opportunities there for divestitures?

Again, as we have said, I mean, we're looking across our asset portfolio. We have a pretty vast asset portfolio and any opportunities that would, as you hit on effectively delever or reduce our cost of capital. Our current public debt is trading at about 7% and as you pointed out, we do have some prefers, that trade around 9% publicly as well as the Oaktree preferers, which is a 10 in 3 quarters coupon. So we do need to clear those hurdles. Obviously, we have some assets which can do that, but we also have some of those assets we are very bullish on their future and would plan to keep those in the portfolio. So it's really looking at what value you can realize today versus the value that you expect to realize in the future and how that translates into reducing your capital costs. I think that's the key. We're not other than -- there are some assets that we would not consider transacting on Grand Mesas, is probably the key one. We're not actually in any of our entire business lines. We like the diversity of the portfolio, but what we did with retail propane is a good example of ability to monetize an asset as a nice multiple, help to delever the balance sheet, but continue to focus in the retail propane space and grow in, as Mike mentioned, states with more heating-degree days.

Okay. I just want to like the way you're talking about that. And just to push a little bit harder on the divestiture side, and congratulations by the way on the valuation of [indiscernible] retail propane assets that you saw. I'm relatively new to the company. It's not clear to me why you are in the retail propane business at all, and especially given the multiple you got on the disposal of those assets, why not look at exiting that business altogether?

When we started up the MLP a few years ago, we wanted to be in businesses that will be commodity based and others that were not commodity based, and retail propane is one that we view as not being affected by rig counts or low crude prices. In fact, low energy prices help increased demand on the retail propane. So we see this as a hedge of our commodity based businesses. It's also an annuity that the key then is to buy the right return, you're not going to necessarily grow it organically. But if you can buy it at a 15% or 16% return, it's a good steady asset. We look at it much like a utility within the business. So we are very much like retail propane. But we do see the southern half of the U.S. in a warm winter, you have a disproportionate decline in your volumes because of the effect of windows and where your house heats up during the day and then your heat does not come out at night. So we will definitely stay in the retail propane business.

Okay. I understand what you're saying there although, given the high cost of capital and also the extraordinary seasonality of that business is still not obvious to me that's a business you should be in, but I appreciate your comments.

Well, we don't disagree with the extraordinary temperature changes we've had recently because it is tough the last two years having been so two of the probably warmest 10 in history.

Yes. I was referring more to the seasonality of the business in terms of -- the cash flow is obviously coming in or at least the revenues being generated in colder months. And it just seems given the high cost of capital and the high indebtedness of business with that kind of seasonality and variability of cash flow, it is just not a business that you should be in.

Well, we sold a piece of it, so we're keeping the rest though.

Your next question comes from the line of Lin Shen from HITE Hedge Asset Management.

This is Matt actually. We're both listening. So on the Grand Mesa, if you clarify the sort of over-earning is the right word, but the earnings above-expectation here this quarter, was that based on excess margin solely from higher volume or was it based on getting a higher margin on all of the volume?

Higher volume. So under our shippers contracts, those shippers have their set rate, their set volume, they were generally in line with those volumes. The incremental volume is generated through our own marketing business where they were able to purchase volumes in the basin, move those volumes along the pipeline. They're paying the pipeline their full tariff. So as we've explained before, NGL benefits as a whole, our crude marketing business loses EBITDA, Grand Mesa makes EBITDA.

Got it. And then do you see any impact on Grand Mesa from some of the new pipelines that Tallgrass is -- where extensions related to Tallgrass is working on?

Not as much. Our understanding is that their extension to Platteville is focused on -- is for condensate. We're not transporting condensate, unless it's blended into a portion of our product that meets our quality specs. We're also not competing at Platteville. So that's a differentiation as well. Obviously, it's a competitive market, we'll continue to compete, but we like the geography that we're focused on, we like the customers and producers that we're servicing, and we continue to think that our volumes will continue to grow on that pipeline.

And then last question, just a follow-up on the divestiture processes. So I guess just clarify, are there actual processes going on right now for assets in other segments or are we serving early exploratory phases in those other segments?

We've been working on multiple processes for the past five to six months. We're continuing to evaluate opportunities and I think that's probably what we'll say on that point.

And I'm not showing any further questions at this time. I would now like to turn the call over to Mike Krimbill for any closing remarks.

Well, these calls are of always easier. We have good news, so this has been fun. And we will be back to you hopefully with more good news. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a nice day.