Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Fiscal Year 2020 NGL Energy Partners LP Earnings Conference Call. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Trey Karlovich, Chief Financial Officer. Please go ahead, sir.

Thank you, Trey. Doug, please feel free to jump in whenever you see fit. This quarter has been remarkable for NGL, marked by several significant achievements. We successfully completed the acquisition of Mesquite, the largest water solutions company in the Delaware, which has a disposal capacity of 1 million barrels per day, primarily through piping and secured long-term contracts with major producers. Additionally, we finalized the Hillstone TSA, notable for having an outstanding producer contract profile, including minimum volume commitments and acreage dedications ranging from 10 to 20 years with financially stable producers. We also sold our Refined Products business, which reduced our debt by $300 million. For those of you who analyze past performance for investment decisions, in the last 20 to 24 months, we have sold about $2.1 billion in assets while keeping Grand Mesa and made purchases amounting to roughly $1.5 billion. One might expect this would result in a decline in EBITDA; however, it has actually risen by over 50%, from approximately $380 million to nearly $600 million. So, what have we achieved? Our business is now simpler and more focused, having streamlined from five segments to three. The remaining three segments are less volatile following the sale of Refined Products and are also less seasonal due to the divestiture of Retail Propane. Crude and NGL Logistics provide consistent and predictable cash flows, while Water Solutions is currently experiencing significant growth. We have decreased our total leverage by nearly two turns and aim to eliminate a couple of hundred million dollars in working capital debt by the end of the year. We’ve established the largest water system in the U.S., capable of disposing of nearly 3 million barrels a day, with extensive pipeline networks. Moreover, we’ve invested in the Delaware Basin, where producers enjoy the highest returns, thereby minimizing commodity risks. This basin also has the highest water-to-oil ratio, and we've exited basins that posed more risk from commodity prices or seismic activities. We are focused on building a water business profile similar to our G&P operations—characterized by long-term contracts of five to 20 years, significant acreage dedications, and minimum volume commitments, with an emphasis on pipeline transport over trucking. The Mesquite operation is 95% piped, while Hillstone is entirely piped. We've enhanced our producers’ options by constructing extensive 24-inch and 30-inch pipelines connected to our SWDs. Rather than being just a water disposal company, we consider ourselves a water solutions partner, providing various services including disposal and recycling. This recycling service is vital in New Mexico, where conserving freshwater is critical, and we facilitate the use of recycled water for fracking. Our recycling operation is not just a small-scale mobile unit; it consists of a comprehensive produced water pipeline system that supplies recycled water to ponds throughout Lea and Eddy Counties. NGL is capable of delivering frac-quality water, removing undissolved solids and corrosive metals like iron so that producers won’t need to add chemicals. We own approximately 200,000 acres of ranch land in Lea County and are developing recycling ponds and landfills essential for managing undissolved solids from produced water. We are also exploring building solar fields on our land to generate electricity. Looking ahead over the next 18 months, we anticipate a substantial increase in water volumes as our infrastructure can handle greater amounts of flowback water; we expect to continue reducing working capital debt; and we foresee limited acquisition opportunities on a smaller scale while minimizing capital expenditures for growth. We may only require an additional 10 to 20 SWDs each year, along with pipeline development. Before concluding, I want to highlight our meaningful ESG initiatives for the first time. For over ten years, we have operated a large-scale recycling and discharge facility in Wyoming, with a capacity of 60,000 barrels per day. We believe we have the deepest experience in treating produced water to meet recycle standards for reuse and discharge standards that surpass drinking water quality before it enters the New Fork River. To date, we’ve treated and discharged over 60 million barrels in this uppermost tributary of the Green River, which eventually flows into the Colorado. Our treated water meets Wyoming’s top quality specifications, making it both swim-friendly and supportive of aquatic life. Our 14-step patented treatment process is well-suited for New Mexico, where there is a significant shortage of freshwater. In pursuit of this, we have initiated two research partnerships: the first with the Colorado School of Mines, to which we donated a research facility and equipment worth $800,000 to aid in the study of produced water; and the second commitment of $1 million to New Mexico State University for a produced water research consortium aimed at filling scientific data gaps in identifying compounds in produced water and their testing methodologies. We currently have two main goals: one is to collaborate with the state of New Mexico to create a net-zero carbon footprint, and the other is to treat produced water to standards applicable for agricultural purposes, recycled river discharge, and even for municipal drinking water. Alongside our partners, we are examining the soil on our ranches to determine agricultural viability and associated treatment costs. We are assessing the feasibility of growing non-consumable crops like cotton and alfalfa as well as edible crops for human consumption. Additionally, we are investigating the costs required to treat water to standards that allow for river discharge. A large amount of carbon can be sequestered in the soil if we cultivate prairie grasses and other vegetation, and NGL can provide the necessary water quality. The real challenge lies in determining the costs and potential returns on our investments. In summary, our future looks very promising; our infrastructure is established, and our business model is simplified and predictable. Despite challenges from misinformation, analysts stepping back, and short sellers, we have successfully conducted transactions that enhance value for our unitholders. We believe we will one day reflect this in our unit price. Meanwhile, let's appreciate the annual distribution of $1.56.

Okay. Great. Thanks, Mike. After that, there are quite a few things to cover from a financial perspective for the quarter as well as updates on the recent closing of the Hillstone. First, for the transactions included in the quarter. As Mike mentioned, we closed Mesquite on July 2, and we closed the Refined Products TPSL on September 30. So both transactions are reflected in our quarterly results. The sale of TPSL is included in discontinued operations in our September 30 financial statements, and prior periods have been adjusted accordingly. This should allow investors to understand the impact this business has had on our historical results. These results are no longer included in our covenant calculations, which is consistent with the treatment of the Retail Propane segment we sold last year. The proceeds from the TPSL sale were used to repay borrowings on the revolving credit facility and delever the business by approximately half a turn in total. Pro forma for the Mesquite acquisition and the TPSL sale as well as growth CapEx invested year-to-date, our LTM pro forma adjusted EBITDA at 9/30/2019 is approximately $575 million, as calculated for our debt covenant compliance purposes, compared to a total debt balance of approximately $2.8 billion, which resulted in total leverage of approximately 4.8x, which is a reduction of about 0.4 turns from the June 30, 2019 period. With the recent change in our business strategy and the reduction in working capital needs with the TPSL sale and the expected further wind-down of certain remaining Refined Products businesses, we have reallocated our revolving credit facility and adjusted our covenants to be more in line with market. We are now governed by a total leverage covenant which will include working capital borrowings going forward and is currently subject to a 5.75x limit with a step-down to 5.5x beginning June 30, 2020. We expect our leverage to remain at its current level and then reduce once Hillstone volumes ramp with the Poker Lake dedication coming online next year. Our target leverage is below 4x total leverage. The current total leverage metrics are in line with where they have been over the past year and significantly improved from prior periods. However, we believe the cash flow profile and predictability of earnings, as Mike mentioned, is significantly improved with our transition from Retail Propane and Refined Products marketing to Water Solutions infrastructure. Looking at the changes in our debt balances for the quarter. The TPSL sale resulted in an approximately $300 million reduction in working capital at September 30. You should note that our total working capital reduction since June 30 was $252 million, with the offset being primarily a seasonal increase in our Liquids working capital. We funded $250 million of the Mesquite acquisition with a new term loan in July. Our growth CapEx for the quarter was almost $100 million, almost all of which was incurred in our water segment as we built out pipelines and completed our infrastructure. Additionally, we funded $50 million of the Hillstone acquisition with a deposit in September that was funded on our expansion facility and which is also reflected on our balance sheet as an increase in borrowings. Following the end of the quarter, we closed on Hillstone, which was funded with $200 million of incremental preferred equity and the remaining balances funded with proceeds from our credit facility. A portion of this transaction funding will be offset with the remaining wind-down of a portion of our Refined Products business, which is expected to be completed during the current quarter and should reduce working capital needs by approximately $200 million to $250 million. That translates to a net debt increase of approximately $150 million to $200 million for Hillstone, well under our 4x leverage target. Now I will cover the operating results for the quarter as well as our updated guidance for fiscal 2020. Adjusted EBITDA, excluding discontinued operations, totaled approximately $119 million for the quarter and over $212 million year-to-date. We are adjusting our forecast ranges for fiscal 2020 for each of our business units to the following: Crude increases to $200 million to $220 million of adjusted EBITDA for the year. Water will be $270 million to $300 million, which includes Mesquite for 9 months and Hillstone for 5 months. Liquids increases to $85 million to $95 million. And Refined Products, excluding discontinued operations, remains the same at $15 million to $30 million for the year. Our G&A forecast also remains unchanged at $30 million. We are not adjusting our forecasted organic growth capital or maintenance capital expenditures for the fiscal year. And as Mike mentioned, we expect to maintain our $1.56 per unit annualized distribution.

TJ, thank you. Currently, we estimate that around 70% of our acreage or MVCs in the Delaware is committed. This aligns closely with the percentage of our piped water. Our truck water represents the undedicated part of our portfolio in the Delaware. As we add more facilities and expect to see the Poker Lake contract ramp up next year, we anticipate that percentage to increase towards 80% or 85%. Regarding MVCs in the Delaware, of the 70% committed, 30% corresponds to MVC. Sure. The mobile units focus on smaller production runs or on-the-fly operations. Given our extensive experience in recycling and treatment, we didn't view them as a scalable solution, which is why we do not prioritize that approach. With our extensive pipeline system in place, we can strategically establish low-capital expenditure pits and recycling equipment that are centralized, rather than on a large plant basis. Instead, we have a central facility with equipment and pits for water storage. Our interconnection to our produced water system is where we process the produced water. Our average facility has the capacity to treat 50,000 barrels per day, which can be expanded to 100,000 barrels per day with minimal additional capital investment. Our goal is to build on what we've already initiated, with a 10-year acreage commitment at our McCloy Ranch facility. We are supplying that water to the dedicated acreage, which has subsequently opened up further opportunities for additional dedications or contracts within an 8- to 10-mile vicinity of that facility, all connected by pipeline.

We think, number one, we'd probably end up in the midstream space where everyone eliminates their IDRs. So when do you do it? How do you make it, say, fair to a GP owner but very attractive to the partnership? So when we look at our next few years' projections and we look at more of what the DCF per unit, it's clear that we're not going to raise the distribution if we're trading at 12% or 13% where we currently are. We think it's very attractive to buy GP interest back today. And it ultimately would become a multiple below, say, the current market, where we're seeing, whatever, 9x to 15x. I don't know if that answers the question.

Just to add, we're not making decisions in isolation. We are considering the market and our expectations regarding the trading of units to decide whether to repurchase units or increase distributions in the future. Our approach to running the business and generating excess cash flow supports distribution growth. However, that decision will not be made if we are trading at a yield of 13% or 14%. In that case, we would allocate those funds to repurchasing units, which may not lead to a higher general partner valuation due to the lack of increased distributions. This is part of our overall evaluation of the business from a long-term perspective. I hope that clarifies things. That's correct, Justin. There has been no change to our expectations regarding the Hillstone assets. We closed that business a week ago. The largest dedication is the 20-year Poker Lake dedication, which will come online a year from now. In the interim, we expect that the Hillstone EBITDA contribution will essentially offset the financing costs of the business, rather than being accretive or dilutive. This business is financed with $200 million of preferred equity, while the remainder is financed with debt. Doing the simple math, that results in an expected contribution of around $50 million for the first year. There will be a ramp in those volumes over time, but that is the contribution we are factoring into our fiscal guidance. So right now, we are looking at growing capital in total across all of our businesses of probably $200 million to $250 million range. At this point in time, that would include no M&A activity. And I think that's a reasonable number at this point. Now it's primarily the water infrastructure, and then as Mike mentioned, you've got key disposal wells that you would add as needed through the year.

That information is incorrect. We have previously experienced a setback in Colorado, but our opinions on the matter aren't significant. We consulted a law firm in the Southwest that specializes in this field, and they took around ten days to provide their opinion. They concluded that a Democratic president cannot halt fracking on BLM land. We also looked into what occurred in Colorado, where producers rushed to obtain as many drilling permits as they could to have a substantial inventory in case the setback passed. However, there is no similar rush in New Mexico for drilling permits, which suggests how producers are viewing the situation. Therefore, we do not believe that a change in administration could stop fracking on BLM lands. Currently, our production primarily occurs in New Mexico on BLM-managed areas. We’ve tried to assess how much water is sourced from these lands, but it's challenging to determine because all our water is on pipes, and we can't trace the specific mixes. As a result, we cannot quantify how much of our water in New Mexico is from BLM land. We consider the claims to be false, and it's unfortunate that misinformed investors may react negatively. We experienced a similar situation in the DJ field, where ultimately our largest water customer requested a 15-year contract, showing a stark contrast to the misleading news regarding the setback proposal. Again, I have many thoughts, but I think I'll keep them to myself. So thank you, and we'll see you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.