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Operator: Greetings. Welcome to the NGL Energy Partners LP 3Q ’23 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Brad Cooper. You may begin.

Brad Cooper: Thank you. Good afternoon, and thank you to everyone for joining us on the call this afternoon. After the market closed today, we issued an earnings release, investor presentation and filed our Q. Comments today will include plans, forecasts 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 SEC filings and earnings materials. Let’s get into the quarterly results. With three quarters in the books, fiscal ’23 is coming to fruition, and we are extremely happy with what we are seeing.

The plan that Mike outlined to employees in the spring of ’22 and communicated externally on the fourth quarter call of fiscal ’22 is becoming a reality. As we enter the home stretch of this fiscal year, I want to thank all of our employees for their hard work and tenacity to get us to this very exciting spot for the company. We’re increasing our Water Solutions adjusted EBITDA guidance from over $430 million to over $440 million for fiscal ’23. This strong performance out of Water and the return of working capital has us to lean into the repurchasing of our ’23 unsecured notes over the last few quarters. We started this fiscal year with an outstanding balance of $476 million on the ’23 notes. At the end of the third quarter, the balance in the ’23 notes was $302 million, and during the first few weeks of January, we retired an additional $100 million of the ’23 notes, leaving a current balance of $203 million.

This is a significant progress in reducing the balance on these notes, and our plan is to fully retire the remaining balance no later than June 30 while maintaining our strong liquidity position to run all of our businesses. From a balance sheet perspective, we have reported total liquidity at the end of the third fiscal quarter of approximately $280 million and borrowings on the ABL facility of $156 million. As a reminder, we are entering the liquidation phase of the propane season, and we would expect to see the ABL balance decrease over the fourth fiscal quarter. At the beginning of February, we started the process with our bank group to extend the $100 million accordion feature within our ABL that will allow us to have an ABL commitment of $600 million.

This process should be completed by mid-February. With our strong trailing 12-month adjusted EBITDA and the reduction of the ’23 notes, our total leverage should be below 4.75x at the end of this fiscal year. This is a very important milestone, but we will not rest as we continue our laser focus on strengthening the balance sheet over the next fiscal year. As I mentioned earlier, our Water Solutions business continues to see strong growth. Water Solutions is benefiting from owning and operating the largest integrated network of large diameter-produced Water pipelines and disposal wells in the Delaware Basin. Our Water disposal volumes have grown approximately 32% this quarter over the same quarter a year ago and 7% versus last quarter. Our Delaware system experienced three days of sub-2 million barrels of oncoming Water due to cold weather in December.

But with our fully integrated system, we were able to quickly recover and take advantage of unexpected volumes from non-contracted customers to achieve record volumes of over 2.7 million barrels for several days. Our third quarter EBITDA for Water was not impacted by weather, thanks to our excellent field staff efforts. The Water team has continued to focus on reducing operating costs in the face of inflationary pressures while maintaining rapid growth. Operating costs were $0.25 per barrel in the quarter versus $0.27 per barrel in the second quarter. As volumes continue to grow, there is an opportunity to further lower our per barrel operating cost. All of this positions our Water segment for continued EBITDA growth. It’s important to note that Water’s strong financial performance has not been driven by $100-plus crude oil on our skim oil barrels.

We hedged our skim oil in the first half of the year, and our average realized price for fiscal ’23 is approximately $80, which is about where the market is today. The Grand Mesa pipeline continues to be negatively impacted by producer permitting delays in the DJ Basin. Grand Mesa averaged approximately 77,000 barrels per day compared to approximately 83,000 barrels per day in the third quarter last year. We are closely monitoring the basin activity. And as the permitting issues get resolved, we are encouraged that we could see more production out of the basin in the future. And if so, Grand Mesa is well positioned to capture its fair share of those volumes. Our rack marketing and biodiesel businesses have benefited from the tight gasoline and diesel market to capture higher margins and in the case of biodiesel has benefited from cheaper additional supply driving their strong financial performance.

Our butane margins excluding the impact of derivatives, were lower as product purchased earlier in the blending season continues to compete with product purchased in a currently discounted market. Recall that the majority of the EBITDA from our wholesale propane business occurs in the months of December through March. Propane results for the quarter were below expectations, partially due to an overall warmer than normal winter so far. With that, I’d like to turn the call over to Mike.

Mike Krimbill: Thanks, Brad. I would like to summarize the significant growth in our Water disposal volumes a little bit here. If you remember, a year ago, we thought we would have 10% a year growth, and we were way off. This first year, our Water volumes grew 30%. In the first quarter, we saw disposal volumes grow 12% in one quarter versus the fourth quarter last year. In the second quarter versus first, we grew another 5%. And then this quarter, versus second, we saw a 7% growth rate, and we’ll see some additional growth in the fourth quarter. So a 30% growth rate in Water in just one year is really incredible and kudos to our guys for being able to accomplish that. But a lot of it is we’re dependable, and the producers know that they give us the water, we will get rid of it.

This impressive growth is the driver for why we increased adjusted EBITDA guidance from $430 million to $440 million for this year. Recently, a couple of our largest customers indicated publicly they are increasing their activity in the Delaware. This gives us confidence that Water Solutions volumes and EBITDA will continue growing in 2024. And again, our costs at $0.25 a barrel is pretty incredible with the inflation we hear about every day. Maybe a little perspective. We’re at – I think, $331 million EBITDA for the nine months. Third quarter was $121.7 million. So if we were to duplicate that in the fourth quarter, we’d be at $453 million, above the $440 million-plus guidance. We are trying to be a little conservative and make sure that we beat our numbers.

Now I’d like to focus – discuss our strategic focus in short-term and intermediate goal strategy. So first, our key focus has been addressing the ’23 unsecured notes. As Brad mentioned, we’ve made a lot of progress, current balance, $203 million, and we will pay the rest off by June 30. I think this is well before most folks anticipated, and we’ll see if we can do better than that. So we get the immediate debt hurdle out of the way, get us some breathing room. Second, regardless of when we pay off the ’23s, we think by the end of this fiscal year, March 31, our leverage will be at or below 4.75x. Again, I think that’s well in advance of any of the estimates I’ve read on the Street. And contrast that with our leverage in the third quarter, fiscal ’22, 7.2x.

So just within 4 quarters, we have reduced total leverage by approximately 2 full turns and possibly 2.5 turns by March 31. This is remarkable progress. Third, our 26 secured notes mature in February of ’26. So they will become a current liability February of ’25. That is only two years away. We do not want to get into the same situation with these that we did with the ’23s. Therefore, we will continue to drive down leverage in our absolute debt to position the partnership to roll and extend all remaining maturities with the best possible terms. And then fourth, we will also address the preferred dividend arrearages and thereafter the preferred dividend at the appropriate time. They’re certainly on our radar. Now that we’ve talked about increased Water Solutions guidance and debt reductions, I’d like to point out that these debt reductions achieved in these first nine months year-to-date were accomplished without any significant asset sales.

We continue to make progress on several noncore asset sales, which we hope to sign and close in the fourth quarter. If these are completed, the proceeds will go directly to the balance sheet and drive leverage even lower by the end of the year, giving us even more financial flexibility. So with that, let’s open up for Q&A.

Operator: First question comes from Patrick Fitzgerald with Baird. Patrick, please proceed.

Patrick Fitzgerald: Hi, thanks for taking the questions. So could you provide any help on the $29.5 million charge that was, I guess, reversed in the quarter?

Brad Cooper: This is Brad. I think what we can do is point you to the Q on that one. There’s language in the Q with respect to that. That’s about all I can really say. Kurston McMurray, our General Counsel is on the call as well. Kurston, I don’t know if you want to elaborate on that?

Kurston McMurray: Yes. Sure. Sure, Brad. Yes. What we can say is what’s in the Q. And is this a legal matter, so we appreciate your respect to our need to be confidential. Thank you.

Patrick Fitzgerald: Okay. That wasn’t a cash benefit in the quarter, though, was it?

Brad Cooper: Cash benefit? Yes, it was.

Patrick Fitzgerald: Okay. All right. In terms of the Water segment, obviously, very strong results there. One of your competitors actually came out and said that they had to lower their guidance because of the winter storms. Obviously, your volumes look great, but were they actually tamped down a little bit by the winter weather that impacted the region in December?

Brad Cooper: I’m going to let Doug answer but in my prepared comments, we talked about three days or so that were sub $2 million, and then we had a handful of days that were over 2.7%. So I think if you average across those handful of days, it’s probably right in line with where Doug’s average was for the quarter. Doug, anything to add there?

Doug White: No, I would confirm that, Brad.

Patrick Fitzgerald: In terms of your fourth quarter, usually you see a working capital release, and you’ve paid down $100 million. Is that – do you expect a significant working capital release in the fourth quarter? Or did you use the revolver balance to take out the $100 million of additional bonds since the quarter end?

Brad Cooper: Now the bond reduction was done with working capital release, and we would expect further working capital release as we move through the rest of our propane season.

Patrick Fitzgerald: Like could you give us a sense of the magnitude?

Brad Cooper: From where we are at the end of the third quarter, I think it’s fair to say that the ABL balance could be there might be $40 million to $50 million on it at the end of the fiscal year. Assuming no more retirement than this point forward.

Patrick Fitzgerald: So nothing on the – or $40 million, $50 million on the ABL and $100 million less on the ’23s?

Brad Cooper: Correct.

Patrick Fitzgerald: Okay. That’s great. In terms of the NGL segment, any – like I think at the start of the year, you guys said that you would kind of be flat this year in the Liquids Logistics, and you’re trending not so close to flat, implying a big fourth quarter. Is that still your expectation? Or is kind of this year been a little bit worse than you expected because of the warm weather?

Brad Cooper: Yes. I think the weather, the lack of weather, I would say, up in our key areas has been a driver. We do expect a nice fourth quarter from the team, but I think for the year, down relative to expectations across the full Liquids Logistics business. The biodiesel in our rack marketing group and the butane blending have done well, but wholesale propane a little bit lighter than we would have liked to see it at this point in the year. I think we’ll still see a strong fourth quarter from them, but probably under what our expectations were for the full year. Jeff, do you have anything? Jeff Pinter is here who runs the division.

Jeff Pinter: I think your comments captured it well.

Patrick Fitzgerald: All right, great. Thanks a lot guys.

Brad Cooper: Thank you.

Operator: Okay. Next, we have Tarek Hamid with JPMorgan. Please proceed.

Tarek Hamid: Good afternoon, gentlemen. On the Water business, the performance was particularly impressive – and I just want to sort of get a sense of some of the drivers there of how you’re able to continue to reduce costs in that business.

Mike Krimbill: Doug, do you want to take that one.

Doug White: Yes, sir. One of the important factors in our per barrel metric on OpEx certainly is the fixed cost. Every barrel that we add as we grow, and as we grew the volumes so ratably this year, it’s really reduced our fixed cost per barrel. We’re always working to reduce any expense that we can, but on a total basis, our variable costs are higher on a cumulative basis, but we’ve held them very steady on a per barrel basis. But the large amount of volumes that we see today and going forward, it really, really washes out and reduces the fixed cost. We’re doing as much and more water as we did in the past, but our employee headcount has not increased. That’s an example. We look at what the cost to run the business, and we really focus on those fixed costs and keeping those down.

Those are ones that we can certainly control. And then on the variable cost side, like we’ve mentioned many times, we were fortunate to hedge our power costs in Texas at extremely low natural gas prices, and those go through 2028. So that’s a big, big help. So every barrel we bring on, and we’re able to apply these low cost, too, our per barrel metric continues to get better.

Tarek Hamid: Got it. So really a huge fixed cost absorption benefit over time?

Doug White: That’s correct.

Tarek Hamid: And then – and I know you can’t say much about it, but on the $29.5 million onetime gain, is it fair to say that the matter is closed at this point?

Doug White: Yes.

Tarek Hamid: Thank you. And then you touched on potential for further asset sales on a noncore basis. Any sense you can give us kind of the size or nature of kind of the assets we should be thinking about would be helpful.

Doug White: Mike, do you want to take that one?

Mike Krimbill: Not really. I guess we can give a range is $20 million to $100 million.

Tarek Hamid: Fair enough, Mike. I mean I get paid to ask the question, you get paid not to answer it. And I guess just last one for me, and I’ll get back in the queue. As you think about sort of your ’24 and beyond, just love to get your sense of kind of how much additional capital it will take to keep the Water system growing at the – I know you can’t sort of repeat the incredible rate you’re at right now, but sort of at the rates you’re targeting over time?

Mike Krimbill: Doug, you want to…

Doug White: Yes take it Mike. Go ahead.

Mike Krimbill: I think the guidance we’ve given in the past is that we had fully really built out our system after this year where we had a couple of big new pipelines. I would have Doug comment after me, but we were thinking more in the, I’ll say, $40 million to $50 million range going forward. I think that’s going to increase because of the new opportunities. But we haven’t budgeted yet, so we don’t have a number. Do you have anything, Doug?

Doug White: Yes. It’s important to note, we took this quarter as well, this third quarter, and we amended and extended some of our term contracts, acreage dedications, and we picked up a few new contracts there long term that have added to our acreage dedications. And then we’re working on a couple of another couple of 10-year dedications currently. They’re very close to being signed. Those all include additional acreage. So – the other – and then the other important thing to note is the super majors, you can see it in their public comments, they’re really planning to ramp up in the Delaware, and certainly within our footprint. So we’re going to do everything we can to take every barrel of Water and do it from a very smart and contracted basis and not overbuild our system, but be there to capture these great margins.

Tarek Hamid: Got it. I appreciate it. I’ll jump back in the queue. Thank you, guys.

Operator: Up next we have Gregg Brody with Bank of America. Please proceed.

Gregg Brody: Good afternoon, guys. Just – you had very strong volume growth this quarter. I’m just curious, was there any benefit from the seismic activity leading to some of your competitors not being able to inject in their deeper water wells, and is that something that you can quantify and talk about how that – how you may benefit from that going forward?

Mike Krimbill: That’s a question where we knock-on wood to answer that one. We have been very fortunate that our footprint has not been materially affected by the seismic review areas. Certainly, it maintains as a risk to our business, but we feel like both the OCD in New Mexico, the Railroad Commission in Texas have taken really large steps toward remediating that risk or reducing that risk, which is good. That’s very positive. We have certainly benefited from this system that we have that all these years in Hillstone, we’ve spent the money to fully integrate. We have benefited greatly from that due to seismicity, but we certainly aren’t out of the woods yet as an industry, but I believe everyone is working together and along with the regulatory agencies to reduce the future risk.

Gregg Brody: Got it. There was no water moved from other regions over to you that is material?

Mike Krimbill: No, I would say it’s material from a volumetric basis, approximately 150,000 barrels a day to 200,000 barrels a day. That would be an estimate I would give that comes our direction due to reductions or limitations on others.

Gregg Brody: Got it. I think it’s fair to say that that’s going to stay excellent into that volume?

Mike Krimbill: We would expect it to this time.

Gregg Brody: Great. And just one more for you. You highlighted two of your producers in your operating area highlighted increased rig activity. Have they indicated to you timing on when you would potentially see those volumes? Or are you just looking at the rate announcements and interpreting from there that there’s activity coming?

Mike Krimbill: I would say their needs are very immediate.

Gregg Brody: Okay. Thank you for the comments.

Operator: The next question is coming from Ned Baramov with Wells Fargo. Please proceed.

Ned Baramov: Hi, good evening. Thanks for taking the questions. Mike, you touched a little on capital allocation after you get to the 4.75x leverage target maybe next quarter. But could you elaborate a little bit more on how you think about allocating between further debt reductions. As you noted, maybe the 2026s and the payment of preferred distributions in years.

Mike Krimbill: Yes. We really haven’t discussed that with our Board yet. We’re mindful of the arrearage. So it’s really balancing – your balance sheet needs to be in a certain condition to be able to roll out your debt, right? So it’s 4.75x is too high leverage to be able to do that. So we’ll be talking with our bankers, figure out, is it 4.0x, 4.25x, what is it that allows us to launch, and then we push out the debt, so we don’t have to worry about that anymore. And then we’d address the press.

Ned Baramov: Got it. And then on your corporate initiatives, just curious why we haven’t seen an announcement yet. Is it a function of lower demand and the lower bids in the current environment? Is it complexity of the transactions you’re trying to finalize or maybe something else. Whatever color you could provide would be helpful.

Mike Krimbill: Yes, it’s – they’re all a little different. One is requiring consent from I’ll say – I’ll say, third parties and those are – they take longer to receive. Others took – I’d say, we wanted to sell into the strength of the market. So we waited until the market was much stronger. And then we launched and I think we’ll end up with a more attractive price. So it wasn’t a fire sale. We were very thoughtful about timing, and I think one was pushed back some from like the third quarter to the fourth quarter, one we’ve we have signed and now we have to go get consent. Another one, the buyer was having difficulty getting financing, and it appears that they’ve been able to secure financing. So different reasons, but we didn’t want to push because you’re right, if you do that, then you’re going to get a lower price.

Ned Baramov: Got it. Appreciate that. And then maybe can you just remind me what the remaining contract average term on Grand Mesa?

Mike Krimbill: Jeez, I don’t know for sure. I know two of the contracts. Is Don Robinson on? Don, are you there?

Don Robinson: Yes. These contracts are about – have about four years left on them today, three to four years.

Ned Baramov: Got it. Thank you. That’s all I had.

Don Robinson: Thank you.

Operator: The next question comes from Jason Mandel with RBC. Please proceed.

Jason Mandel: Hi guys. Thanks so much. Most of my questions have been answered, but just a quick follow-up on the asset sales. If possible, can you confirm that those asset sales are outside of the Water business or may they include some?

Mike Krimbill: Yes, they’re – well, I can’t confirm that. There is a small one that’s in the Water side that’s a no growth asset and the other two are outside. The other two are larger. But it’s – I call it kind of pruning if there’s a no-growth asset then you basically just have an annuity. And then if it’s – that’s a good one because you’re not really giving up any future growth. The other ones are in areas where we can get multiples over 10x.

Jason Mandel: All right. That’s great. You guys answered all my other questions. Thank you for help.

Operator: Okay. We have reached the end of the question-and-answer session. I would now like to turn the call back to management for any closing remarks.

Mike Krimbill: Yes. Thanks, everyone, for your participation today. As you’ve heard, we’re excited about our progress this fiscal year. We look forward to speaking with you this summer when we discuss our fourth quarter and full year results. Have a good day.

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