NGL Energy Partners LP (NGL) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the NGL Energy Partners LP second-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the call over to Mike Krimbill, CEO of NGL.

You may begin.

Thank you.

Welcome, everyone. Before I get started here, there is a slidedeck on the website, our website that Atanas is going to take us through. So while I am reading this, you may want to look for it and pull that up if you don't already have it.

This conference call includes forward-looking statements and information. 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, gas, liquids, crude oil, the level of production of crude oil, 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 strategic acquisitions at purchase prices that are accretive to financial results and to successfully integrate acquired assets and businesses.

Other factors that could impact these forward-looking statements are described in Risk Factors in the Partnership's annual report, on Form 10-K, quarterly reports on Form 10-Q, and other public filings and press releases. NGL Energy Partners undertake no obligation to publicly update or revise any forward-looking statements as a result of the information, future events or otherwise.

Please also see the partnership's website at www.nglenergypartners.com under Investor Relations for reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures.

With that, why don't we kick off with Atanas. And then we will come back here for questions.

Atanas?

Thank you, Mike.

Good morning, everyone. Thank you for joining our second fiscal quarter earnings call. As Mike indicated, we posted a presentation to our website for this call. And I would like to walk you through the slidedeck for our discussion today.

Beginning on slide 3, NGL is reporting adjusted EBITDA for the quarter of $67.6 million, excluding one-time acquisition cost of approximately $600,000. This compares to an EBITDA of $70.4 million for the same period last fiscal year, exclusive of $8.3 million of acquisition costs, which represents a decrease of 4% for the second quarter year over year.

Year to date, NGL is reporting adjusted EBITDA of $156.6 million versus $113.5 million last year, both excluding acquisition costs. This represents an increase of approximately 40% year over year.

NGL reaffirms its adjusted EBITDA guidance at of $500 million for FY16. We also reiterate our distribution growth guidance of 6% for calendar 2015 and 2016 and 8% thereafter. On the graphs below we want to point out NGL's growth from FY14 through FY16, where our year-to-date EBITDA shows a 50% compounded annual growth rate and highlights our push to a less seasonal business model.

Moving on to slide 4, we would like to highlight the driver of our EBITDA variance versus analyst consensus year to date. WACOG in our Wholesale Propane business was a significant portion of our year-to-date variance. However, we want to explain why we are comfortable with our guidance of $500 million for FY16.

As of 9/30/15, NGL had approximately $200 million of presold propane gallons at an average fixed price of $0.66, versus WACOG as of 9/30/15 of $0.38, which equates to an unrealized margin of approximately $55 million before storage costs. These pre-sold volumes are contracted to be lifted by the end of our fiscal year, which is March 31, 2016.

In the lower half of the slide, we also would like to highlight that in FY15 we made approximately $330 million in the last two fiscal quarters. To hit our target of $500 million for FY16, we need to generate $343 million of EBITDA for the quarters ended 12/31/15 and 3/31/16. This equates to just about 4% over the same period last year.

Moving on to slide 5, we want to discuss the macroeconomic energy pricing environment and how each of our businesses counteracts against one another. Starting with Crude logistics and Water, the price of crude is down from around $90 in FY15 to around $45 in FY16. This impacts our Crude marketing margins and our Water margins; specifically, the crude oil recovery revenue stream. However, NGL has been able to fully utilize our storage assets at Cushing that were underutilized last year by entering into long-term leases and utilizing the remaining portion to earn contango.

Next we want to highlight the increased demand in Refined Products and specifically, Motor Gasoline. The Energy Information Administration's most recent report forecasted that motor gasoline demand would increase 2.1%, or 190,000 barrels, for calendar year 2015 versus increased demand of 80,000 barrels per day, or approximately 1%, in calendar 2014. This increased demand has driven up volumes for our Refined Marketing business by 14% year over year. The increased demand, coupled with the allocated line space, has led to high margins year to date for our Refined Products business.

In our Liquids business, as we discussed, we have a large amount of presales, as customers look to lock in a margin at a lower price prior to the start of the heating season. We've also seen an uptick in demand for butane blending. You will note this in our other NGL's margins, which are up by around 50% from $0.08 last year to $0.12 in the quarter ended 9/30/2015.

Our Retail Propane business continues to outperform expectations, posting margins of $1.05 versus $0.90 during the same period last year, for approximately 17% increase year over year.

Next we will move on to slide 6. In our effort to increase our segment EBITDA visibility, we have included EBITDA by segment detail and provided a walk from our operating income to adjusted EBITDA by segment, on a quarter-to-date and year-to-date basis in our 10-Q and in the appendix to this presentation.

Starting with Crude Logistics, the segment is relatively flat for the quarter, but up 30% year to date over last year, as the greater utilization of our storage assets at Cushing and volume growth offset the decrease in marketing margins. Water Solutions is down both for the quarter and year to date over the same period last year, due to the impact of the Crude Oil revenue, which has been offset by increased volumes. Liquids is up, driven by very strong butane volumes and margins, as well as the incremental contribution of project Sawtooth, our large salt dome NGL storage facility in Utah, offset by the wholesale propane WACOG impact.

Retail Propane continues to outperform on a year-over-year basis, driven by increased margins as outlined previously. And with Refined Fuels at a high level, its down for the second quarter of the same period last year. And this is largely a function of the backwardation in the gasoline price curve, which introduces some volatility on the quarter-t-quarter basis.

The year-to-date results are up over 250% versus last year, due to the increased volume and margins previously discussed, coupled with having two quarters of TransMontaigne activity versus only one quarter in the previous period last year. Although, we are very pleased with the results of this business year to date.

On slide 7, we wanted to address the impact of volume, margins and commodity prices on NGL's total EBITDA to help address how these businesses offset each other given the current macroeconomic backdrop. Starting with Crude Logistics, Crude marketing targets a margin of 1.5% crude oil price. So $1 change in crude price impacts margins by around $0.15. Said another way, every $10 change in Crude impacts margins by $12.5 million.

On the other hand, a $0.10 change in Contango impacts EBITDA by $6 million annualized, based on our current crude storage capacity. In Water, a $1 change in Crude price impacts our revenue by $1.2 million annualized at current crude oil volumes. And in Refined Fuels, a $0.01 change in margin impacts EBITDA by $38 million annualized, based on a run rate of 250,000 barrels a day.

In Wholesale Propane, a $0.01 change in margin impacts EBITDA by $12.5 million annualized. And with respect to other NGLs, primarily Butane, a $0.01 change in margin per gallon impacts EBITDA by approximately $7 million. In Retail, a $0.10 a change in margin is equal to $20 million in gross margin.

Moving on to the margins page, which is slide 8, Crude and Water margins are down for the second quarter and year to date over the same period last year, driven by the drop in crude prices. Wholesale margins are down over 50% for 2Q, and 34% year to date, due to the significant decline in propane prices and our increased WACOG.

We expect this to reverse as we head into the second half of our fiscal year and customers start pulling the contracted volumes into winter quarters. Allowing us to realize the locked in margin plus the give0up in the first two quarters through the now decreased WACOG. Other NGL margins are up almost 50%, driven primarily by the strong margins in Butane.

The Refined Product margins are down in the second quarter due to the backwardation in the gasoline pricing curve, but up 11% year to date over the same period last year. And the retail margins are up 17% over the same period last year, due to the fall in wholesale propane prices, allowing us to capture additional margin.

Moving on to slide 9, which is our volumes, Crude volumes are flat for the quarter and up 10% year to date versus last year. Water volumes are significantly up, 40% in Q2 and 65% year to date versus last year. Other NGL volumes, mostly butane, are up 18% for the quarter and 10% year to date over the same period last year. Due to the strong demand for butane blending; our long-term marketing agreement with the refinery on the East Coast; as well as fully leveraging of the our network of NGL product terminals and a fleet of high pressure railcars.

And finally, refined volumes are up 14% for the quarter and 55% year to date over the same period last year, due to owning TransMontaigne for two full quarters versus one quarter last year. Our allocated line space on the Colonial and Plantation pipelines with access to the TransMontaigne refined products terminals and overall increase in demand for refined fuels.

Turning to slide 10, which is our financial metrics. Starting with EBITDA, as previously discussed, Q2 EBITDA came in at $67 million net of $600,00 of acquisition costs. Total year to date EBITDA of $156 million, net of $600,000 of acquisition expenses, which leaves us with a target of $343 million for the last two quarters of FY16 to achieve our target of $500 million for the year.

Cash interest expense for the second quarter came in at approximately $27 million, excluding TLP interest of $2.4 million and non-cash interest expense of $2.4 million. We expect cash interest expense to be in the range of $115 million to $120 million for FY16.

During the second fiscal quarter, we spent $11.3 million on maintenance Capex. This excludes $4.2 million of TLP Maintenance Capex. And we still expect Maintenance Capex to be in the range of $30 million to $35 million for the year.

On slide 11, we wanted to highlight our liquidity position as of September 30, 2015. And in October, we also added $150 million to our acquisition revolver by exercising the accordian feature in our credit facility. This, coupled with our cash balance of approximately $28 million, equates to about $350 million of liquidity.

And on slide 12, taking a look at our Capex guidance year to date, we spent approximately $352.3 million on growth Capex and acquisitions, of which acquisitions accounted for $160.8 million and organic Capex approximately $192 million. This excludes $9 million attributable to TLP growth Capex. Overall, we expect to spend at least $700 million for FY16, which is relatively close to our previous guidance of $750 million. This leaves us with identified Capex spend of around $345 million for the second half of FY16.

And finally, we also recently completed our annual reviews with all three rating agencies. All three reaffirmed our corporate family ratings: Fitch double-B, S&P double-B-minus and Moody's Ba3. While Moody's changed our outlook to negative, S&P upgraded our business risk profile to fair and also upgraded our financial risk profile. With this in mind, we are confident in our ability to tap into the capital markets as needed.

And with this, I will turn it back over to Mike.

Thanks, Atanas.

I would like to just make a few comments without trying to be preaching, I guess. But you know, we are in an environment where negativity seems to be real popular. And no one ever looks to positives in anything, apparently.

And a good example of that was our rating agency, the rating agency situation. We had all three reaffirm our ratings. We had two improvements, and we had a negative watch. All I ever heard about was this whole negative watch deal. And I suspect most people don't even know how it's calculated.

Atanas, if you could give them the math on how that is calculated and how silly it is.

As you know, all three rating agencies use different approaches in calculating our rating.

But Moody's takes an approach where we are not given any pro forma EBITDA credit for our growth projects and for our contracted EBITDA -- particularly Grand Mesa and Sawtooth -- and that impacts our leverage calculation. We understand that this is their methodology, and it is what it is. But to a large degree, that impacted our leverage calculation according to their methodology and translated into a negative outlook.

With S&P, we do get credit, as it's a three-year-forward look. And it's a recoverability model, which resulted in the upgrade both in business risk and financial risk profile.

But with all of this in mind, again, we are very happy that in this environment. where ratings are being challenged, that people are being downgraded, we have gotten a reaffirmation of our ratings by all three rating agencies. And I think that shows that our business model from a risk perspective is working where we see that natural hedge between the various segments.

As we went through the various components of our margins, you could see in three of our businesses, margins are doing extremely well. You have some challenges in the other two segments. But overall that hedge really proves our strategy and our business model.

Exactly. And another item I'm seeing out there lately is some people are calculating a coverage ratio for only the second quarter. Which is obviously, in a seasonal business, it's our low quarter.

And I just am dumbfounded that -- how that has any significance or meaning, when in a seasonal business you should be looking at the coverage either trailing 12 and, you know, pro forma going forward. Obviously, we go to our Board of Directors. And if we said, hey guess what, our coverage is 0.4 times, do you think they're going to raise the distribution? Of course not, so I don't understand this nonsense that we see out here that is totally meaningless and has no relation to our Company.

And I can go on and on about how negative the market obviously seems to be. And no one seems to be -- I heard this years ago, hey, we invest in management. Well, clearly a lot of people don't. And they seem to get rewarded if they come up with some negative nobody else has figured out. So before I open it up, for questions, we are on target; our model works; the rating agencies have reaffirmed us; the Board of Directors looks at our coverage ratios, where they raise the distribution or authorize it.

And we basically this quarter had just two things hit us. You know, we are little tough on the analysts because we don't give quarterly guidance. Last year we did that; and of course when we give guidance, we have to assume some kind of pricing trends. So we really assume a flat price trend.

Well, when you have your liquids prices falling with all the pre-sold gallons we have -- the same thing happened to us last year -- you show losses. We have negative EBITDA in our Wholesale Propane division. It's all going to be recouped in the third and fourth quarter as we deliver those gallons.

The other thing that happened to us was we just had a backwardated gasoline curve in the second quarter. And if you look out over the next six months, the gasoline curve is very nicely contango. So we recoup what we didn't get.

I would like to, I think, compliment the analysts because without our guidance, they came up with some pretty decent consensus estimates. And the only reason we are off of those estimates is because of the WACOG impact and the backwardation on gasoline, both of which will be reversed in the next two quarters.

So with that, let's open it up for questions.

(Operator Instructions)

Brian Zarahn, Barclays. Good morning.

Good morning. EBITDA guidance for the year I understand you expect better propane results in the second half, but can you elaborate a bit more on your outlook for crude logistics, water and refined products?

And why you are confident that results will improve?

Sure, refined products we actually were able to purchase late last year the, an additional 25,000 barrels per day per cycle, and we have signed up with very significant new customer. Margins are healthier there. Margins only have to go up $0.01, as you saw, how it leverages our EBITDA. And if you look at the gasoline market, the curve through March 31 is very contango. So, we are very confident we are going to do well in the refined fuels business.

The crude, we are expecting what we saw the first quarter to repeat in the second. We have Don Robinson, who runs our crude division, segment on the call with us, so we will let him talk to crude in more detail, if you'd like. We're not necessarily expecting any great improvement in the crude, and the one place it could improve, and it has recently, is the contango at Cushing, our storage.

And water, we are very, very bullish on water. There has been -- I've had a number of calls, and oh my gosh, your water volumes must be way down. Well, they are not way down. We saw our first water competitor file for bankruptcy in the Permian. And we are seeing some of our other competitors being put up for sale.

So, from a competitive point of view, we are going to be really in a great position within another, who knows, six months or less. We are adding more water, I guess you would say, getting additional market share, as we focus on these water pipelines which really helps the producers decrease their LOE cost and getting those water trucks off the road. So, we have a backlog of water pipelines that we are building. Somewhere between another 50,000 and 100,000 barrels a day of water will be coming in on those water pipelines.

We are getting more solids in, putting in more solid treatment plants. We have -- in the DJ in fact, we have a solids facility that will be up at the end of this fiscal year that will treat solids in a little different way. We are able to grind up the solids in the Eagle Ford and Permian and inject them down the well. In the DJ, you can't do that because the porosity is not as good. So, there you go through a different process to separate oil, water, and press what's left to get more oil, water, and put the remainder in a dump, landfill. And we have another facility that we are actually injecting some solids in, in the northern part of Colorado where we have a little better porosity in that well. So, we have a lot of really good things going on in water.

The only negative, of course, is the crude price. And that's, we've already taken that hit, unless prices go to $20, I think in the lower $40s we're already at the bottom. So, we're very bullish on the rest of the year, and in fact, as Atanas said, it doesn't have to be much different from last year.

I appreciate the color. If we could get a little more commentary on the crude logistics outlook?

Hey, Don, do you want to --?

I would just say that we -- the margins have been under pressure for some time, and we continue to see that today. But as Mike said, with contango, obviously you can see that out now through the first quarter of 2016, the contango is improving, which we will be able to take advantage of. And with our storage across not only Cushing, but in other areas.

So we think that the contango will offset any margin that we have seen erode over the last few months. Our volumes have held up, but it has been -- we have seen the margins go down, but like I said, we believe that with the contango in the market the way it is through the first quarter of next year we will see, we will make those dollars back in contango.

Understand on crude, any update on Grand Mesa in terms of timing or commitments that you have?

Yes, I will jump in on Grand Mesa. Nothing has changed in terms of, right of way, and shippers and all that. Other than that, we probably can't say anything. So, we're not going to be able to give you much more information at the present time.

Okay. Do you expect to have an update at some point early next year when can we expect more color on the project?

We may get some more color in the next few weeks.

Yes, next few weeks, I think we will be able to give more color to that. Absolutely.

We will stay tuned. Last one for me, and the cost of capital has risen for, across the space, and you do have some financing needs for Grand Mesa and other projects, how does your current cost capital impact your financing plans. And I assume you have reaffirmed redistribution growth rate, could that change if the cost to capital remains roughly where it is?

Well, you want to start Atanas?

Yes, sure. So, if you look at our cost of capital, obviously where equity is trading today, issuing common equity doesn't make any sense of this yield. What is that mean as far as access to capital markets?

If you look at where our bonds trade, which is anywhere between 7.5% to 7.75%, as well as our rating, I think we feel very comfortable with our ability to access the high yield market. If you look at what we've laid out as far as CapEx to the end of the year, we said $345 million, and frankly, we have probably some cushion within that number, meaning it would be somewhat conservative. That number is probably on the higher end. And then if you look at the availability currently, which is at the end of the quarter was $350 million, technically, we had enough liquidity with what we have, but if we were to access the market, we do have that ability.

So, we would probably be relying primarily on the debt markets in high yield. Which also helps us with the rating agencies, with Moody's as well as S&P, because we are flipping more of that secured debt into the unsecured bucket. I am not sure if that adequately addresses your question.

Yes, let me add. This is such a ridiculous equity price. We're certainly not issuers of equity, and as you know, our Board is authorized us to buy up to $45 million worth of NGL units. We did a little bit last quarter.

So, we're clearly buyers of our equity. We are not issuers. And from a liquidity point of view, as Atanas says, we have access to the high yield market. So, we have no concerns on liquidity.

When you look at other things from an equity side like everybody else does, so we look at the perpetual preferreds, the convertible preferreds, to see if those make sense, and they typically are going to trade at some spread over your debt. We are not very excited about, again, issuing equity where the price [where we're at].

Does that mean you're going to, your growth grinds to a halt, and certainly not. We have the revolver, we have ability to put $300 million or $400 million on high yield. We've got these growth projects. We don't need to do acquisitions.

Clearly, I think if you are going to go out and do acquisitions at a 10 multiple, and you have to issue common equity that just doesn't work. We will just keep our heads down and continue with our internal growth, which will over time, the next, as we've said before, get us to $700 million or $800 million EBITDA in the next couple of years.

And if I can add, we're 100% focused on spending our dollars on projects that are fee-based, contracted EBITDA. Sawtooth is a good example, Grand Mesa, and even within our water business transitioning that business even in Texas to a fee-based cash flow stream with pipelines connected to the producers.

We're being very wise and very focused on increasing the traditional midstream [ramp like] cash flow partnership and we are currently just over 50%. And just with the projects that we currently have, what we have laid out to you, by the beginning of FY18, which is less than one calendar year away, we will be at two-thirds fee-based.

Thank you.

Gabe Moreen, Bank of America Merrill Lynch.

Hi, good morning, guys. A couple of questions for me. One is in terms of thinking about liquidity, is it right to think that over at least the next couple of months you will get a working capital benefit from both the liquids business, as well as the retail propane business? And if that's so, can you quantify that in terms of what the magnitude might be?

Okay, yes, the benefit is going to be primarily from the wholesale propane business. Because retail, I mean retail propane, yes, it will benefit us because, really start playing, obviously as you sell more volumes in the winter, that means more cash flow. Similarly, on the wholesale propane business, as produced as the customers, retailers pull those presold volumes, in the third and fourth quarters, that will translate into more liquidity for us. That's anywhere between $75 million to $100 million.

Remind me on this, in other words, that's not [set up] on your working capital revolver that's on your regular revolver, or is there a separate revolver?

That's on a regular -- that's in our working capital revolver. So our credit facilities are bifurcated by, into a working capital facility and an acquisition facility. This is our working capital revolver. Now, we have the ability to move money from one into the other as needed. We have that flexibility.

Okay. That's good to hear. And then in terms of the TransMontaigne stake in the 8k from a couple of weeks ago, is that both the GP and the LP, or just the LP? That sale definitely a go at this point? Can you just give us a little bit of color about how you're thinking about the LP and GP stakes there?

Yes, we -- it is not the GP, we obviously own 100% of that. We were looking at selling the LP units, $3.2 million-ish, at a more attractive price. In particular, it made a lot of sense to us if we had, say, 8% units we were holding and we could sell those and buy back our units yielding 15%. That made a ton of sense to us.

And so we have made a few calls, but we don't have anything close to any kind of agreement. We are not excited about $30. If we're going to sell those, it is going to be at a higher price.

Got it. Thanks, Mike. And then in terms of look at FY17 CapEx, can you just talk about how much Grand Mesa in its current form may be required? If you just look over at FY17, is there other CapEx, whether Sawtooth or elsewhere. If you would think about preliminary 2017 CapEx look and maybe how much of that might be dependent on capital markets at a reasonable price, reasonable terms or not?

Well, Atanas, excluding Grand Mesa, what do you have for, like a Sawtooth?

I don't think we have anything material for Sawtooth in FY17. We just have some of our existing schedule of wells that will go into FY17 that's identified. But Sawtooth will be largely completed.

Yes, Gabe, the Sawtooth is -- we've drilled our fifth cavern, so there's only three remaining and washing out the fifth one. Those are $20 million, $25 million per cavern. That leaves $75 million plus remaining, some of which will -- obviously the fifth cavern will be done this year. When we say it's not that significant, it could be $25 million to $50 million for 2017 at the most. And on Grand Mesa, we should probably not comment at this time on what would be in 2017.

Understood. And last one for me, just in terms of the pro forma EBITDA on slide 11, just in terms of the assumptions, obviously Grand Mesa in its current form run rate, is in the number. But are you baking in anything differently relative to the strip? Can you talk about the volume outlook that's embedded in that number? Is there anything major in that number that we should be aware of that maybe assume something different than the current backdrop?

On Grand Mesa, was that what you're saying?

Grand Mesa and just other business segments in general, in terms of what's embedded in that EBITDA number versus the current backdrop and strip?

Mike, do you want me to take this?

Yes, sure.

Sure, so if you look at that number, which is for government compliance purposes, that's basically our 12 month training EBITDA adjusted for the dollars that we have spent where we have contracted EBITDA or historical EBITDA, so we're getting credit for the months we didn't own those projects. When you look at the total number, Grand Mesa accounts for probably about half of that.

If your12 month trailing is excluding acquisition costs of approximately $490 million, you're left with about $125 million to $130 million of pro forma adjustments. About half of that is Grand Mesa, and that is simply based on the amount of CapEx that we have spent relative to the total project costs. And that's how our credit agreement works and our banks have given us credit for those -- for that spend.

Sawtooth accounts for about $15 billion. You're looking at $75 million to $80 million just related to these projects, then we have about $5 million for marine, and then water accounts for the rest of that variance. All these water wells that we have been putting in over the year. That's what accounts for that $120 million, $125 million of pro forma EBITDA adjustments to get to the $616 million of EBITDA for covenant purposes.

Understood. Thanks for that [walk through that], appreciate it.

Sure.

Darren Horowitz, Raymond James.

Hi, Mike. I want to go back to your comments around return on invested capital. And I'm curious, given the optionality that you have, especially in light of financing the remaining $345 million of growth CapEx this year, you've got a pretty good arbitrage in terms of that cost to debt versus cost of equity. How do you think about, as you briefly mentioned, maybe deferring some of the capital spend with regard to the organic growth program relative to maybe coming back in, possibly issuing a little bit more debt, since you're only running 3.5 turns and purchasing some of the common equity? Because you've got a most 1,000 basis points of yield arb, and I think it might give you a bit more financial flexibility for the long term. I would love your thoughts there.

I'd love to buy back more and more of our common units. It's crazy to -- at the yield it's at, why do an M&A deal at 8 or even 7 times, when you're going to make, whatever, 12% to 14% when you can buy your units in at 15% or 16%. You don't have any [recrop] contracting risk. We think it makes a lot of sense. Our limitation is more, making sure we finance [these] internal growth projects. And certainly the banks aren't really excited about us borrowing a lot of money to go buy our units back. Does that answer the --?

Yes, it does. If I could take it a step further, and I know you mentioned the perpetual preferred and the convertible preferred trading at a spread over the debt, a direct investment obviously would still be less from a cost to capital perspective than where the nominal common equity is trading today.

You've got a little bit of retained cash, and yet you are out there, effectively supporting distribution growth that the market is not giving you credit for. I'm just wondering, with some of that financial flexibility, if you could come in and buy back those units, because the market clearly isn't representing a long-term intrinsic value that you guys can yield over time. How do you think about doing that?

You get a better compounded return, it's better for the unit holders long-term, and I think it makes financial sense. I'm just curious, there are a lot of options I think at your disposal, and I'd love to know how you think about prioritizing them?

You are right. We have looked at -- the perpetual preferreds are really interesting, if that's usually, say, 180 to 200 over your debt. If our high yield was in the, say, 7.5 we are looking at 9.5.

And you get credit on I think 100% from one agency and 50% from the other for -- as equity. If that's the cost, and right now if we are at, I don't know where we are, but say we are at 15% or 16% to the common holder, and then we're about 20% into the splits, that's really like 18% or 19%. I agree, it makes sense all day long to issue in this case, say, the perpetual preferred, and buy back your common. The only real limitation to the perpetual market is it's not really a deep market, it's all retail.

So I think Target did a great transaction. I think they raised $120 million. I think that's a big number for that market. And if we could do something, not even similar, but half of that or more, and use that to buy back our common, that makes a ton of sense.

Okay. And then Atanas, just one housekeeping question for me. As it relates to the variance between your EBITDA and your adjusted EBITDA for the remainder of the fiscal year, is there anything, either from an equity based compensation expense or inventory valuation adjustment that we should be watching out for?

Not outside of what we have disclosed in our notes to the financials, which is in -- most of the impact has been reflected year to date already. There will be some for the remainder of the year, but that's a non-cash expense which is our -- any bonus paid in units as well as any performance based bonus.

Okay. Thank you.

Sure.

Jeff Birnbaum, Wunderlich.

Morning, guys. Thanks for all the color, and the slides and the discussion this morning. So just a couple questions for me. On the crude logistics volumes, I hear what you are saying about margin pressure. On volumes, I think you were at about 233,000 barrels a day for the quarter. I think you said a few months ago, maybe in August, that at that point you more in line with the June exit rate. Is there anything you can give us on either what the September exit rate was on volumes, or where those are today and where you see that headed for the rest of the fiscal year?

Don, can you take that?

Yes, I think we are right around that volume today, and we don't see really any changes going forward. We -- obviously we hope to grow the volume, but it's very tough with the margins the way they are today. But we don't see any, as far as any drop down in the volume going forward.

We've seen a lot of pressure obviously in the Eagle Ford with all the splitters coming up, but we have been able to maintain volumes there. And then in the Permian, we basically, in all the other basins we've sort of maintained our volume. Probably the one part that we have slipped a little in volume is in the midcontinent area. But we see going forward we should be able to maintain the volumes we are doing today.

Okay, great, thanks, Don. And then I apologize if I missed this earlier, but did you mention what the financial impact was in the quarter of those New York harbor hedges?

No, we didn't. It was really just the backwardation of the gasoline curve. We did not quantify that, no.

Okay. But I guess it, per your comments, you see that reversing for the rest of the fiscal year?

Yes, and you can verify that looking at the gasoline curve going out through March. It's very strong contango.

Jeff, this is Atanas, if you look at our refined fuels business, what we have from TransMontaigne, one thing to keep in mind is the vast majority, probably 80%, of that is contracted. Those are one year contracts. So, over that time horizon, you know how much money you will make. There is some volatility because of that backwardation and then you go back to contango. But over the 12-month period, we have -- we feel pretty confident with the expectations that we have.

Now one thing, an upside that could come into our favor, is if you look in this quarter, we are up -- our margins are up 3/10 of a cent. One cent is $38 million, so this is over $12 million impact just from a third of a penny. And what we have there is, which is key, is our line space as well as access to these terminals. So we provide ratable supply, but on the other hand, because of the fact that we have contracts, we have ratable demand.

And what we also do, is we end up selling to the retailer. There is no middleman between us. It's a very good business model, and overall that business has performed very, very well on a year to date basis, even if you look at last year. But you can't look at it on a quarter to quarter and say, yes, it's doing well or it's not doing well.

Understood. Thanks. And just on Grand Mesa, one last one. I think you've said in the past that most of those contracts are take or pay, can you just update us on that? And then to what extent if at all have you -- there's obviously pressure on production as you've discussed. There is also obviously competing projects coming online. To what extent have you considered any sort of collaborative effort there with perhaps some of your peers?

Well, we always consider everything, so that's a good no answer. But we really can't comment on that at this time. But our -- we -- Don, do you want to talk some about the -- we haven't disclosed our --?

No, but I think from our producers that are backing Grand Mesa as far as take or pay, we see all those as in no issues at all as far as meeting their volume requirements. They are all still growing volumes in the basin, or at least maintaining what they were doing before, which is all -- suits well for us being in a good position with the producers as far as their take or pays to us and the Grand Mesa pipeline.

There's really no reason for the producers to be producing, or drilling a ton and producing when they are going to be -- they're going to be back of WTI, once the pipelines are built, they are going to be $5 less back of Cushing. It's interesting how some of these analysts will say, here's the current production with the implication it's never going to go up. It's going to go up when the pipeline takeaway capacity is built, and they get an extra $5 a barrel for their crude. Don?

I agree. That's the -- it's going to benefit all of them as far as when the pipeline gets up, as to getting their barrel to a market at Cushing, which is a very good market today for them.

Thanks for all the color, guys.

Matt Niblack, HITE Hedge.

Hi, thanks for taking my question. Just wanted to make sure I understand how to think about the refined products segment over time. I believe in Q1 you posted about $78 million in segment gross profit in that segment. Is that a good normalized figure to think about going forward?

No, that's not the case, because as we said, you may have -- a good way to think about it is to look at our margin and our volumes, and then look at our operating cost and look at it over a 12-month period. And our margins have been anywhere between $0.035 and $0.05, our run rate from volumes of about 250,000 barrels a day. And our operating costs are what they are. Our Q1 was probably not representative. You can't just take the business and divide it by four quarters. There are some seasonal elements, and, like Mike said earlier, because of the backwardation in the gasoline price curve, it's very difficult to forecast on a month-to-month basis. But overall, because of the fact that we are contracted, we feel confident in our ability to meet that -- our internal goals.

Over the course of a 12-month period, I could think of this as $0.035 to $0.05 times 250,000 barrels a day, minus your OpEx, which is presumably reasonably constant?

That's right.

Yes.

Okay. Great. And then, a lot of --

Another thing is if you look back, what we said earlier, when we acquired TransMontaigne, we were saying year one was $30 million, year two $50 million, year three when it's -- we've run the business for 12 months, its a $70 million business. So you have a guidepost there to go back to.

Right. But I think you have since commented that you think you can continue to do better than what your expectation was? Is that still the case?

Yes.

Okay. Great. And then, different topic. Other MLPs have talked a decent bit in this environment about being able to cut costs. How much is cost reduction a part of your reduced CapEx outlook versus perhaps canceling some projects?

Mike, I don't think we have canceled any projects. When we talk about costs, from an SG&A perspective, we've always been very proactive in keeping our SG&A relatively low. We -- generally whenever we've done an acquisition, given TransMontaigne and Gavilon, we don't really focus on synergies. Not because they are not there, but we don't what the deal to be predicated on synergies. But we've been very proactive in reducing costs around SG&A, having no duplication in tax. In some of the back office functions we have been consolidating as part of the integration systems, and we have not come up with any specific guidance, but that's upwards of anywhere between $5 million and $10 million a year. But no cuts as far as CapEx spending, no projects that I'm aware of.

Got it. Go ahead.

I was going to say, we have always -- we've done this so long, you don't really want to be cutting costs in a downturn, as everybody gets concerned about their job and what's going to happen. We -- in the good times, so last year we were already arranging for consolidation of our offices in Houston. Don's got all -- I think at one point we had four offices from four different acquisitions. He's consolidated that into one office. We're consolidating offices in Denver. That will save us about $1 million a year. We've also pruned on the employee side. I don't -- we don't have any really significant cost reductions left. We have [generally] been doing that over the last six to nine months.

Got it.

We said $5 million to $10 million, this is historically, Mike is correct. This is something that we've realized.

Okay. Understood. And then, lastly, so others have been talking a lot about the impact of really high levels of propane storage. How does that impact you? And I know you presold a lot, so maybe that doesn't matter, but does that create any kind of headwind or tailwind for your business at any stage of your propane value chain?

I will start out on that one. The high volume storage volume, it's over, what, 102 million barrels, a couple of things happen. One is it makes it more of a contango market in liquid storage, which helps us with our presold gallons, the 200 million barrels, or gallons, I mean. So, that's a positive. It also allows us to increase margins as we may get $1 reduction, and let's say there's a $0.90 reduction to the customer. So, we are able to raise the margin.

You only have to ask yourself, it's really a weather factor. If you have a cold winter you're going to make more than obviously a warm winter. And this one is starting out on the warmer side. But if you remember the last two winters, really it didn't getting cold until generally, February, March, April. There's really not a negative to the high storage volumes.

Great. Thank you.

Selman Akyol, Stifel.

Thank you, good morning. Very much appreciate all the color and most of my questions have been answered, I just want to follow the little bit on the buyback. I know you said you've done a little bit of it, but do you expect to complete it within a year? And then given the very attractive returns that you're seeing from that, why wouldn't you not be more aggressive?

Sure, there is two things. I think in our announcement we said we would have it -- we'd anticipate it by March 31, if I recall, but I could be wrong. Timing-wise, you had to put something -- attach some timelines to your announcement. Let's see, I'm trying to think what the second part of the question was. Timing and -- ?

Well, where do you stand, I know you had been small but can you add more color to that?

Yes, if you are doing a private transaction, the company can buy, I believe, pretty much any time. If you are buying on the stock exchange, then the company gets blacked out the same as management. And so both management board officers and the buyback program will be allowed to purchase two days after this call.

All right, thanks very much.

[David Vetch], Morgan Stanley.

Good morning, guys. Thank you very much for all the information you have given us. For those of us that have followed your Company going back to November 2011, we've always noticed that SemGroup has been the largest shareholder of the equity. To the best recollection you have, what is their current position of ownership in the common units?

We actually wait to see their 10-Q each quarter and I believe they haven't sold any in the last two quarters, so I think there's still at 4.6 million units. They originally were a little over 9 million. Is that correct, Atanas?

Yes.

You don't think they've been selling in the last six months or three months?

Yes, we know they haven't sold through September 30, and we don't know, of course, what's happened since. When they file their K, we will find out.

And when will that be, please?

They would have a 12/31 year end, so I don't know how much time they have. They have 90 days to file. So it could be some time next year.

Okay. Thank you very much.

Thank you.

(Operator Instructions)

Mike Murray, Private Investor.

Appreciate it. Thanks, Mike. All my questions have been answered.

Hi, Mike how are you doing?

I'm doing fine, Mike, appreciate the call. Like I said, the Raymond James analyst covered most of my questions. All of them.

I am showing no further questions at this time.

Okay. Well thank you very much, everyone. We appreciate all your time. We will terminate.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day everyone.