Greetings and welcome to the NGL Energy Partners 3Q 2024 Earnings Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Brad Cooper, CFO. You may begin.

Good afternoon and thank you to everyone for joining us on the call today. Our comments today will includes plans, forecast and estimates that are forward-looking statements under the U.S. Securities Law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from the forward-looking statements. Please take note of the cautionary language and risk factors provided in our presentation materials and our other public disclosure materials. Before we enter the third quarter financial results, I want to take some time to discuss who accomplished this quarter. I first want to thank all the NGL employs for their dedication and extra efforts over the last few months. What we have accomplished over the last few months is astonishing and we should be proud of what we have achieved. We have been able to execute on our long-term plan faster than we anticipated. Operationally, we recently held an open season on the Grand Mesa Pipeline. On January 5, we closed the open season on the Grand Mesa Pipeline and had a new 5-year MVC with the same counterparty, whose prior contract expired on December 31. Outside of entering into a new 5-year MVC agreement, this counterparty will also be the shipper on the pipeline, freeing up $18 million to $20 million of working capital. This is a permanent release of working capital. As we continue to negotiate new contracts and a free contract on the pipeline, we should continue to see further reductions in working capital. These reductions in working capital require us to hedge fewer barrels thus reducing earnings volatility and turns crude logistics into a more ratable long-term fee based type of business with more MVCs. A few weeks ago, we issued a press release on the expansion of the LEX produced water…

Thanks, Brad. As you have heard in the last year, we have achieved significant milestones as we position NGL for success and at the same time, continue exceeding expectations. First, as Brad described, we have reduced leverage on the balance sheet faster than expected due to the free cash flow and asset sales at attractive multiples. Second, this deleveraging allowed us to complete the refi of all of our indebtedness earlier than expected, reducing our refinancing risk of providing financial flexibility. And third, we announced the payment of 50% of the preferred dividend arrearages sooner than expected. We are trying not to disappoint, but rather establish a reputation for beating expectations. Looking forward, we are focused on following: payment of the remaining preferred distribution of arrearages as soon as possible, then reinstatement of the Class B, C and D distribution as soon as possible. Third, continued deleveraging through debt reduction and increased EBITDA, balanced with addressing the Class D preferred. Debt reduction can be begin 6 months after the recent refi as the new high-yield debt has non-called provisions of 2 to 3 years and the term loan incurs breakage fees if repaid within the next 6 months; four, improve our credit rating with the agencies, debt reduction, payment of the distribution arrearages and increased EBITDA can accelerate this process; five, emphasize internal growth opportunities at attractive rates of return, underwritten and supported by MVCs. Rather than limiting growth capital as we have up until now, we will look for investments to expand our footprint, strengthen our competitive position that will also increase the quality, consistency and amount of our adjusted EBITDA. One example of this is the recently announced expansion of Lea County Express Pipeline system. The growth CapEx and adjusted EBITDA for this project will be included in our fiscal 2025 guidance. Another example is the outcome of the open season Brad spoke about. We are currently working on multiple new growth projects and contracts, which we will announce if successful. Finally, we expect to grow adjusted EBITDA each year for the foreseeable future led by our Delaware Water Solutions business. With respect to our adjusted EBITDA, we are affirming the previous guidance of $500 million plus for water and $645 million for the partnership. Our guidance for adjusted EBITDA and growth CapEx in fiscal year '25 will obviously be higher than the current fiscal year, so we will announce that at our year-end earnings call. In closing over the last few years, we have made tremendous progress in many areas, increased efficiencies, cost reduction, asset sales, reduced leverage and increase in EBITDA. Going forward, we will have fewer opportunities to capitalize on most of these areas. So our renewed focus will be on internal growth with MVCs and hitting our numbers. NGL was one of the best-performing equities in the energy space in calendar '23, we will do our utmost to repeat that performance. Thank you, we'll open it for questions.

[Operator Instructions] The first question comes from Paul Chambers with Barclays.

I'll surprise you here and not ask about the pref. Brad, you brought up a working capital release in crude logistics. And obviously, your March quarter historically had the largest swings towards the positive working capital change. I know there are a lot of factors involved, including seasonal inventories. But any color or range you can kind of point us to for what the fourth quarter could look like or what you're targeting for the full year?

Fourth quarter ABL balance?

No, working cap -- sorry, working capital change?

Working capital change.

I think the last few quarters, it was like $120 million and I think the previous year it was like $60 million. I know it's a big swing for you every year.

Yes, that's probably a decent zip code. It's a little bit challenging to think I'm looking -- thinking through the ABL balance because we've been using free cash flow to pay down the ABL to address the pref. I would think we'd probably be a $40 million to $50 million working capital number at 3/31, Paul.

Yes. So fourth quarter working capital would be somewhere around, you think, in the 50-ish plus or minus range.

Next, we have Patrick Fitzgerald from Baird.

Congrats on the refi. What is if you wouldn't mind, could you provide an update on the ABL balance as of today or recently?

Yes, it's 0 today.

Okay. So you're making the preferred payments I guess, all with free cash flow and asset sales?

Yes. I mean we're using -- we'll be using a little bit of the ABL balance just because we've been using free cash flow in the third quarter to get the ABL down to 0. So back to the kind of the opening question about the ABL balance at 3/31 will represent a little bit of usage for the preferred. Otherwise, it's free cash flow.

Apologies, having technical difficulties here. On to the next question. Your next question comes from Gregg Brody from Bank of America.

Congrats on all the work you did on refi and getting the first slug of preferred addressed. I know it's been a long road. So congrats on all of that. Just my question is more just on the asset sales. Can you maybe give us a sense of what some of those might be? And if that will lead to some -- any revision to your guidance once it's done?

Yes, good question. What's really left and I spoke to the working capital release that's coming our way as a result of the new -- the shipper on the Grand Mesa Pipeline that just occurred through the open season. We've accounted for that $18 million to $20 million of working capital release in our asset sale number because it's a permanent release of working capital. And there's a second transaction that is a land position that generates mid- to high single-digit EBITDA that we're close to wrapping up. It would be a similar-type multiple from what we've been executing this year.

And just as you talk about shifting to organic growth opportunities you've highlighted the one that you announced in the last month. How significant do you think that could be? And is there -- you sounded like you would try to pay off the rest of the preferred near-term. Is it possible that gets delayed as a result of organic growth opportunities? Or you think you can do it all at the same time or do think you can do at all?

Yes. We can -- I mean we're committed to getting caught up on the preferred arrearages. We've been very clear, I think, with the press release that went on Tuesday and the first payment. We wouldn't have committed to making a first payment, if we didn't see line of sight to having the second payment being made. We do want to see the release of working capital come our way in the third quarter, the free cash flow, we typically generate come our way in the fiscal fourth quarter and then be in a position to make that payment. But the growth projects that Mike spoke to does not impede our ability to address those arrearages.

The next question comes from Paul Chambers with Barclays.

A follow-up question on kind of oil skimming. And I think as we look fiscal '25 and the ramp of the new contract commencing in the second half, will the oil skimming daily volumes grow commensurate with that? Or maybe put another way, is it fair to assume that oil skim volumes will be higher in fiscal '25?

Yes. The relationship between skim and disposal volumes that we've had the last couple of years should hold for fiscal '25. .

Okay. And then I guess, Brad, 1 clarity. On the income statement, the Water Solutions cost of sales was a benefit. I know it's a small number, but can you add any clarity on why that is?

The cost of sales that might be -- we've got hedges. We've hedged the skim oil with costless collars that could be rolling through that line item. Let us look at that real quick, and we can circle back with you, Paul, if that's not [inaudible] composition, we had about 80% to 90% of our skim oil hedged with collars through the end of the fiscal year.

The next question comes from Ward Blum from UBS.

Great accomplishment on the refi. Sort of looking forward, perhaps, a quarter or so when you have the free cash flow and the asset sale proceeds to bring your preferreds current. How do you view the sort of the priorities between getting rid of the B preferred with a 12% coupon or starting to pay distributions to the company unitholders.

I think we got a bad connection -- no, the issue on the Ds is there is a maturity of those at June 30 of '27. So it's not perpetual. We just can't let it hang out there. So we do -- we're not fans of the cost of those funds either. So I would say we have to do something in the next 3.5 years.

I was referring to B as in boy.

The B is being perpetual, but not our first. No, it's not the first secured and the preferred that we would go after, getting caught up on the B, C and D arrearages allows us now to make to start making redemption payments on the Class Bs to Mike's comment that those have the obligation or the put right in the summer of '27, and we will go after the Ds before we address the Bs and Cs.

Would that preclude you from making common distributions at that point when you were going after the paydown of the D?

Now once we have paid the arrearages, we have -- as we refer to the financial flexibility, we can reduce debt further. We can pay -- buy out the Ds over time, and we could then do something with the common

The next question comes from Ned Baramov with Wells Fargo.

Can you talk about how big the contract is with the one shipper which signed up for capacity. And then when are the remaining contracts on Grand Mesa rolling off?

Yes. We've got maybe a smaller contract that's rolling off towards the latter part of this calendar year and then the second contract of size equivalent to one that just rolled out has another couple of years on it.

Okay. Got it. And then maybe on the water system expansion project, can you give us a sense for the CapEx dollars associated with the expansion? I know that you mentioned next year's growth CapEx is going to be higher than the current year, but just looking for additional color there.

Yes. At this time, we can. It will be part of our fiscal '25 budget. And I think as Mike spoke to we'll roll that out on the June year-end call.

The next question comes from Ben Neidermeyer from NBW Capital.

Yes. I'm just wondering with the desire to get a higher debt rating, you -- what you're thinking is on debt-to-EBITDA aspirationally, where you want to see it in -- and I know you've got to counterbalance that with the fact that some of the debt, you can't pay down right away, and it's more of an EBITDA growth thing. But nonetheless, where do you see EBITDA 2, 3 years out?

So Ben, I think the agencies consider the arrearages as indebtedness and they also consider the Class Ds as indebtedness. So we're not looking at our just kind of your plain vanilla leverage. It's really all 3 of those. By paying down the arrearages and going after the Ds that will be reducing leverage from the agency's point of view.

And where -- what are you looking at in terms of goal? Are you looking for leverage to be 3.5 debt-to-EBITDA?

Yes, just plain vanilla without the arrearages or the draft. And we'd like to be Brad, what you?

I think while we continue to address the prep, Class D specifically, I think we're in this 3.75 to 4x range. And then once Ds are taken care of something sub that level, I think probably 3.5% is a nice long-term goal for us to have post-class Ds.

Now can I do a follow-on question on another topic. The former question on not being able to disclose the cost of the new pipe, I'm interested in knowing if you can disclose it, the length of those MVCs and I'm assuming the return on invested capital is going to be much higher than the company norm because you've got it on an existing right of way that you're building another pipe right next to another one -- an existing one. How -- can you give us some sense of what type of returns, the length of those MVCs just beyond without disclosing the costs.

Is Doug on? Doug, are you there?

I'm here.

Can we say the length of the MVC?

Yes. As the press release, I believe stated, Mike, the MVC -- the 5-year MVC was public.

And returns, is this thing are you putting this up at a very low multiple of EBITDAR? Can you give us some sense of the returns on the project?

So your comment on right of way is correct. We all -- we previously purchased that right of way. We had 2 and we built the LX I. This is LEX II. So there is not a significant right of way cost. We can't disclose the return. But I think the important thing here, Ben to the whole story is we got an extension of the acreage dedication. There's value in that there's EBITDA from obviously what gets shipped over these 5 years. But what we're very excited about is the total capacity is 500,000 barrels. So we have a couple of hundred thousand barrels of capacity to sell to other producers. So ultimately, the return or the rate of return is going to be very attractive. And we can't give you a number.

I would now like to turn the call back to Brad Cooper for closing remarks.

Well, thanks, everyone, for your interest in the call today. We've accomplished a lot this last quarter and look forward to talking to you all in June with our year-end results and fiscal '25 budget. Thank you.

Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.