NGL Energy Partners LP (NGL) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 NGL Energy Partners Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to CFO Mr. Trey Karlovich. Please go ahead, sir.

Thank you, and welcome, everybody. As a reminder, this conference call includes forward-looking statements and information. Words such as anticipate, project, expect, plan, goal, forecast, intend, could, believe, may and similar expressions and statements are intended to identify forward-looking statements.

While NGL Energy Partners believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct.

A number of factors could cause actual results to differ materially from the projections, anticipated results or other expectations included in the forward-looking statements. These factors include prices and market demand for natural gas, natural gas liquids, refined products and crude oil; level of production of crude oil, natural gas liquids and natural gas; the effect of weather conditions on demand for oil, natural gas and natural gas liquids; and the ability to successfully identify and consummate growth opportunities and strategic acquisitions at costs that are accretive to financial results and to successfully integrate and operate assets and businesses that are built or acquired.

Other factors that could impact these forward-looking statements are described in the 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 undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

This conference call also includes certain non-GAAP measures, namely EBITDA, adjusted EBITDA and distributable cash flow, which management believes are useful in evaluating our financial results. Please see the partnership's earnings releases, investor presentations and annual and quarterly reports on Form 10-K and Form 10-Q on our website at www.nglenergypartners.com under the Investor Relations tab for more information on our use of non-GAAP measures as well as reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures.

I'll now turn the call over to Mr. Mike Krimbill, our CEO, for his opening remarks.

Thank you, Trey, and good morning, everyone. I am very, very pleased with the results and what we see for this fiscal year in particular and as well as the future. What a difference a year makes.

In fiscal 2017, we faced the worst possible conditions in most of our businesses: record warm winter temperatures, low crude oil prices and a decimated rig count and negative line space values.

In fiscal 2018, we have experienced significant improvements in our Crude Logistics, Water Solutions, Retail Propane and the Wholesale Propane portion of our NGL Logistics business. Colder-than-normal weather in our markets, higher crude prices and an increased rig count have allowed these businesses to produce strong results in the third fiscal quarter, with a tailwind heading into our fourth quarter and beyond.

So let's get into some specifics. For fiscal 2018 versus '17, we project the following: one, in Crude Logistics, we're probably going to double our EBITDA as a result of Grand Mesa. Volumes currently exceed 100,000 barrels a day and are increasing.

Water Solutions will nearly double its EBITDA, with a fourth quarter run rate of $140 million. Growth in water volumes, pipelines, solids disposal and skim oil are expected to continue in fiscal 2019 and beyond. We currently have 30 permits filed in the Permian Basin alone for future disposal facilities that will have a potential 750,000 barrels a day of new capacity.

Retail Propane volumes are benefiting from the slightly colder-than-normal weather in our footprint. The recent decline in propane prices at the hubs is very positive for margins. Fiscal 2018 is expected to exceed last year by as much as 30%.

NGL Logistics is also benefiting from the cold weather in its Wholesale Propane business, which is anticipated to improve about 60% over the prior year. The Sawtooth storage cavern facility and the butane railcar segments are expected to be down as compared to last year. So in total, this business will approximate the prior year.

The Refined Products business, particularly the Southeast segment, has continued to underperform in a significant fashion. In July, we eliminated the impact of negative line space values on our sales volumes. But the absence of positive line space, previously included in margins pre-2018, reduced our overall margins from about $0.05 a gallon to $0.03 a gallon, an annual reduction of nearly $40 million.

In addition, the hurricanes reduced refinery production significantly for nearly 6 weeks and correspondingly lowered inventories, such that: one, Gulf Coast prices did not weaken when compared to New York Harbor; two, it created a backwardated market as prompt prices increased significantly; and three, it greatly reduced Contango markets for gasoline and diesel.

So what does all of this mean? We believe there has been at least a short-term structural change in the value of line space such that it will trade in a narrow band, around 0, with possibly more time-negative than -positive. We must modify our model to supplement marketing with other activities.

First, we have hired a gasoline and butane blender to better utilize our Collins storage and leased additional storage in New York Harbor. This will reduce our product costs.

Two, we have reorganized our supply group to enhance margins, arbitrage markets and improve the use of our assets.

In addition, we are aggressively optimizing ours and other's line space as well as purchasing upline barrels rather than shipping when it is more profitable.

Fiscal 2018 performance here is unacceptable, and we will actively manage this business to achieve the results we expect.

As a result of the hurricanes and onetime impact on our Refined Products business, net of the improvements in our other businesses, we are only reducing our fiscal 2018 guidance about 6% from the low end of the previous guidance of $475 million. And let me be clear, we would not be reducing our guidance if not for the hurricanes. Our situation is no different than an upstream company that has to shut-in production due to a similar event. I think this year also affirms the wisdom of our model of owning multiple businesses that can offset the impact of one business that is underperforming.

We expect increased results from all of our businesses in fiscal 2019, with 4 of our businesses offsetting the margin decline in Refined Products that is not temporary.

With respect to asset sales to improve the balance sheet, we announced 2 significant deals with expected proceeds exceeding $500 million and a blended multiple of 12x EBITDA. We continue to sell idle assets and look for a strategic partner for our Sawtooth storage facility. Our growth is predominantly focused on Water Solutions and organic Crude Logistics projects, which will not require the issuance of any common equity. We have turned the corner, we've strengthened the balance sheet, our EBITDA has improved and we are earning our distribution.

So with that, back to you, Trey.

All right. Thanks, Mike. So I'm going to start with the improvements we made on the balance sheet, primarily around our reduction in debt balances and leverage, and then go over our quarterly results and expectations for the fourth quarter and full year.

We utilized the $300 million in gross proceeds from the Glass Mountain sale to repurchase the entire $195 million balance of our 2022 senior secured notes, which included a make-whole payment of $17.5 million. Our rationale for focusing our attention on these notes was a combination of the higher coupon rate of those notes at 8.4% based on our current leverage, the maturity date and amortization of the notes and the relative short time frame to reduce indebtedness prior to December 31 as well as the elimination of that secured debt from our balance sheet. Our credit facility is now the only secured debt remaining in our capital structure.

Additionally, we were able to repurchase in the open market approximately $89 million of unsecured debt at an average price of 98.8% of par value with a weighted average coupon of 6.4%. While the notes repurchased had a longer tenor associated with them, the interest savings and the net discount to par made these repurchases compelling.

We will close on the Retail Propane sale at the end of this quarter, and we will continue to evaluate our entire capital structure in order to get the most benefit for the debt reduction, whether that is in interest savings, maturities or a combination of the 2.

We're expected to end our fiscal year with a compliant debt balance between $1.6 billion and $1.7 billion, which excludes our working capital facility. We also expect our working capital facility to decrease as we reduce propane and butane inventories throughout this heating season. All of these transactions vastly improve our leverage and credit profile, which will increase our financial flexibility and simplify our capital structure.

Our fiscal third quarter is highlighted by the continued improvement in our Water business, volume growth on Grand Mesa and a good start to the winter heating season for our propane businesses. These trends appear to continue into our fourth quarter as water volumes continue to grow, crude prices have been $60 or above and it remains cold in the Eastern and Midwest portions of the United States.

Overall, we reported adjusted EBITDA of $123 million for the quarter and $252 million year-to-date. We had strong quarters in Water, Crude and Retail, as Mike mentioned, which have made up for the shortfall in Refined Products. While we debated somewhat adjusting our guidance, we did update to a range of $440 million to $450 million, as Mike mentioned, primarily driven by the hurricane and the impact that's had on Refined Products, but which also includes increases in Water and Retail based on performance year-to-date and expectations for improved results in the fourth quarter.

We have reduced our crude forecast slightly due to the sale of Glass Mountain prior year-end.

I want to give a little more color on the results and expectations for each segment.

In Crude Oil, the Crude segment generated approximately $30 million of adjusted EBITDA this quarter, with Grand Mesa contributing $43 million gross and approximately $33 million on a net basis. The remainder of the Crude Logistics segment continues to operate at approximately breakeven levels, which includes funding our commitments on third-party pipelines, operating our marine, trucking and rail businesses and our storage terminals at Cushing on the Gulf Coast.

Year-to-date, adjusted EBITDA has totaled over $86 million for this segment. These results are in line with our guidance and our expectations.

Financial volumes on Grand Mesa averaged about 106,000 barrels per day for the quarter and physical volumes averaged about 100,000 barrels per day for the quarter, a 12% increase over the prior quarter. We expect to stay around this volume level for the fourth quarter as well.

There are 26 rigs running in the DJ Basin-Niobrara, and at current commodity prices and economics, we expect drilling and production to continue to increase in the basin.

Prior to the sale of Glass Mountain, we funded approximately $7.3 million during the quarter for the extension into the stack, which is included in our total $49 million invested in growth projects company-wide this quarter. We are also working on a few additional crude projects, including the addition of some tankage at Lucerne in the DJ to support our footprint in the basin.

With the sale of Glass Mountain complete, we are making a slight change to our Crude Oil segment forecasted EBITDA for the fiscal year, which we are now targeting at $120 million.

Moving to Water. Water adjusted EBITDA was $35 million for the quarter, which is a run rate, as Mike mentioned of $140 million annualized. Year-to-date, adjusted EBITDA for the Water segment is over $84 million. We are increasing our fiscal 2018 guidance to $120 million.

Water volumes averaged 789,000 barrels per day this quarter, a 20% increase over the prior quarter and a 53% increase over the same quarter last year. This is significant growth, which has continued into the current quarter as well. Every one of our basins has shown volume increases quarter-over-quarter, with the Permian Basin continuing to set the pace.

We have invested approximately $15 million of growth CapEx this quarter in the Water business and $64 million year-to-date as we added disposal capacity and gathering pipelines to support our existing and new disposal customers.

Our skim oil production was over 3,600 barrels per day during the quarter, with an average crude cut of 0.46% of processed water volumes. Our year-to-date skim oil has averaged approximately 2,900 barrels per day with a 0.43% crude cut.

As a reminder, we have hedged approximately 90% of our expected skim oil production at just over $50 per barrel through March 2018 to limit any direct impact from crude oil pricing changes, which would include the benefits. Additionally, we have extended our hedge position now with positions out through December 2019. Our average hedge price is in the mid-50s, and we have about half of our forecasted skim volumes hedged.

Moving to Liquids. Our adjusted EBITDA for the Liquids segment totaled $20 million this quarter and $35 million year-to-date. And Mike mentioned the Wholesale Propane business exceeded budget for the quarter as margins continued to improve. Based on current heating degree days, we're expecting this division to continue to perform well in the fourth quarter with higher volumes than last year.

Similar to last quarter, the butane business benefited from increased butane prices and volumes; however, it continues to be burdened by tight margins due to railcar lease costs and significant butane supply impacting differentials.

This business is lagging our plan year-to-date. However, those impacts should decrease significantly for next fiscal year as we return railcars from lease and lower our fixed operating costs.

There have been no significant changes to our performance at Sawtooth. However, we are entering the contract season for next year and are looking at multiple opportunities to increase utilization at the caverns.

Based on year-to-date results and current expectations for the fourth quarter, we are updating our fiscal year '18 EBITDA guidance for the Liquids business unit to $65 million.

Retail Propane EBITDA was $35 million, which is right in line with our budget through December. December was colder than normal, driven by the below-freezing temperatures across the country during the last week of the month. That benefit will primarily be recognized in January for our Retail Propane business. October and November were warmer than normal, however, very much in line with our budget, which factored in a warmer-than-normal heating season. January has been colder than normal and the February and March forecasts remain favorable in our core areas of operation.

So far, we have seen increased volumes, and we are maintaining strong margins across our footprint from our original budget. We will continue to benefit from our Midwestern and Pacific Northwest districts through the end of March and the closing of the Retail Propane sale to DCC. Our remaining footprint will be focused on the Eastern portion of the United States, where we continue to grow our Propane business and serve our over 350,000 customers. We expect to have over 400,000 customers within the next 3 years.

During the quarter, we invested approximately $11 million in acquisitions and growth capital in Retail Propane, including the purchase of certain assets in Michigan from our joint venture, Victory Propane.

Year-to-date we have invested growth capital of $41 million in the Retail Propane businesses. The majority of our investment over the past 3 years has been focused on the Eastern portion of our business, which we will retain going forward.

We have updated our FY '18 EBITDA forecast for this fiscal year based on year-to-date results and weather expectations for February and March to $115 million, which includes an approximately $27 million contribution from the assets we are selling to DCC.

Refined Products reported adjusted EBITDA of $9 million this quarter and $24 million year-to-date as we continue to face the headwinds of our position on Colonial Pipeline. The gasoline curve has been backwardated, and the basis between the Gulf Coast and the New York Harbor has been high, especially since Hurricane Harvey in early September. A high Gulf Coast gasoline basis lowers the market value of the Colonial line space.

While we had a slight benefit from the storm in our prior quarter, the lingering effects, along with continued strong exports from the Gulf Coast, has been a detriment to our margins and our inventory risk management. The lack of a Contango market for the upcoming seasonal change in RVP limits our ability to capitalize on our approximately 4 million-barrel gasoline inventory position, which we have been able to benefit from historically. We have hedged our carry position for the fourth quarter albeit at a lower-margin than we've had in the past or expected for this year.

While we no longer have a direct cost related to negative Colonial line space, the current line space market does impact our business, allowing competitors access to ship on Colonial Pipeline at low costs and impacting margins at our terminals.

Mike mentioned several of our strategies to improve the results of this business, which we will continue to address.

The remaining portion of our Refined Products and Renewables business is in line with our budget, with strong diesel margins especially in areas like West Texas, which is tied to increased drilling activity and crude oil transportation, and the benefits to Renewables business with the extension of the biodiesel tax credits.

With the impact to the current quarter and our inventory and hedge position going into the fourth quarter, we are updating our FY guidance for Refined Products to $50 million of adjusted EBITDA.

Our corporate costs were $6.8 million, $21 million year-to-date, and we now expect those to come in between $25 million and $27 million for the entire year. Based on our updated EBITDA guidance of $440 million to $450 million and expected $1.6 billion to $1.7 billion debt balance at March 31 after the Retail Propane sale is complete, we currently expect to be approximately 4x levered on a compliance basis by our fiscal year-end. This assumes no equity issuances under our ATM or otherwise, and we are in compliance with our debt ratio as at 12/31/17 and expect to remain in compliance based on our current guidance and expectations going forward.

We declared a $0.39 per unit, $1.56 per unit annualized distribution this quarter, and we expect to continue at this distribution level for the next quarter as we rebuild coverage and continue to delever the balance sheet.

We have invested approximately $156 million in growth capital so far this year, which includes about $64 million in Water, $41 million in Retail and $21 million related to the Glass Mountain extension. We do not anticipate any significant CapEx or acquisitions for the remainder of this year. Our maintenance CapEx has totaled $12 million for the quarter, $27 million year-to-date. We currently expect to come in slightly over our $30 million guidance. The increase in the current quarter is primarily associated with increased costs in our Water business, driven by the significant growth in volumes.

In closing, we have made significant strides on the operational and financial front. We're reducing debt with 2 highly accretive asset sales and expected coverage from our fourth quarter cash flows. We expect to fund our growth capital within our coverage and continue to delever and grow coverage going forward. Our target leverage remains at 3.25x and our target coverage remains at 1.3x or better.

We have growth embedded in our businesses, especially as crude and liquid prices remain at current levels and volumes continue to increase across our divisions.

Our Crude, Water and Retail businesses are performing at a high level. We have significant cost savings in the near future that will improve our Liquids business, and we are managing the headwinds to our Refined Products business. We look forward to a strong fourth quarter.

Thank you for your interest, and we would now like to open the line for questions.

(Operator Instructions) And our first question comes from the line of Shneur Gershuni with UBS.

I guess wanted to start off with the Refined Products segment. And I realize you gave quite a bit of details. But I was wondering if you had any thoughts on what kind of the run rate for this segment would be on a go-forward basis. And I do recognize you've got Hurricane Harvey impact in there. But I mean, if I think about the challenges over the last year, you've had exports continuing to Mexico, keeping the spread kind of challenging on the Colonial Pipeline. What would be the kind of run rate for that business on a go-forward basis assuming that those type of market challenges continue?

So first, Shneur, one point is we keep looking at this [area], and is that really the only factor to line space? And what we've concluded and we referenced to, maybe there's some at least short-term structural changes. We believe we've seen more terminals built, dock space increased, new dock space built. And it appears that the Gulf Coast is now supplying all product to Florida, which in the past had been supplied somewhat by Europe. So I think we have to anticipate that exports in the winter may not decline in the future. So that's one reason. We need to do other things than just sit around waiting for the Harbor price to go up and the Gulf Coast to go down. With respect to the run rate, I think, we really haven't dug in -- we have budgets coming up. But I would say of the decline, at least 1/3 of it is going to come back to us just in a normal non-hurricane environment that knocks out the refining complex for 4 to 6 weeks. So that would add about $25 million back to our numbers, which is why I said we wouldn't be here reducing our guidance if it hadn't been for the hurricane.

And Shneur, just to add to that. You remember, our first quarter this year was significantly impacted by the line space -- negative line space values in our contracts. So if you take that into account to where those contracts are performing in the current market, which in the first quarter, we were -- we actually had some negative margins, there's some improvement associated with those contracts as well as the impact that Mike mentioned on the hurricane. So I think that gives you a basis for what type of improvement we would see over where we're guiding to $50 million for this year.

Okay, so when I think about that, I mean taking out the hurricane impacts and so forth. I can, in theory, add 1/3 back effectively, to kind of the run rate that you're annualizing out right now, effectively. Is that the right way to be thinking about it?

Yes, as a base. And then these changes we're making will increase the performance over that. So the butane blender more aggressively trading around, and I hate to use the word trade. But when line space is negative, we'll buy it and let people pay us to ship. We won't ship on our space. If upline barrels are less expensive or don't reflect the tariff, then we'll buy upline barrels and won't ship at all. So all of that will add to that base number.

Okay, fair enough. On the second part, the timing of weather for this past quarter. I mean, I recognize the Retail Propane business came in, in line. I was thinking more along the lines of the Wholesale Propane side. We've heard from some throughout the earnings season thus far, that weather kind of showed up later in the quarter and some wholesale deliveries weren't made and are being more recognized kind of in the January quarter. Is that something that you're experiencing as well, too? Could we see that business actually potentially exceed expectations if the trend continues for the next 4 to 6 weeks?

Yes. So what happens is, we have -- perhaps a little different. We have a substantial amount of presold gallons. So when the market propane prices increase, which typically happens with cold weather, you'll find our customers will pull their prebuys. And those have the locked-in margin. So once we get through those, then we're really selling spot, which is where we can enhance our margins. So that -- it was happening in January and continued to happen more in February.

So with propane prices falling, does your margin actually expand on the prebuys?

On the prebuys, no. Those were locked in. But it can expand on retail. It's a bit of a unique market having cold weather than having prices in the last couple of weeks kind of fall out of bed. And so that gives you the ability -- if you don't lower your retail price, of course, you can increase your margins. And on wholesale, they're taking advantage of the increased volume even though other price is lower.

And Shneur, just to add to that. If you remember last year, when propane prices fell off the cliff and the way we had contracted that business with the presales, we got stuck holding inventory at that as those product prices were falling. The way that we structured the business this year, we did not -- we would not have had that impact, but it also limits a little bit some of our potential upside on the spot sales, as Mike was talking about.

Shneur, the other thing to check on is if you look at the propane curve, last year, there was a very large backwardation from Feb, March and March, April. Because of the cold weather, that backwardation is probably down to $0.02. So we're short in March. Also, the curve is fairly flat.

Got it. So just to paraphrase. The Retail segment should do okay -- or could actually improve because if you don't lower the price to the customer while the supply is -- or price for propane is falling, your margin expands. Conversely, on the Wholesale business, you got hit negatively last year and it's pretty sizable because you were effectively stuck long propane and then selling it into a market that was falling. But this year, if I understood what you just said correctly, that you're effectively going to be short gallons relative to weather, which would mean that you wouldn't have an inventory management problem this year, similar to last year. Is that a fair way to characterize it?

Correct.

Yes. And I would add that the increased EBITDA is going to be a function more of volumes than margin. For instance, in January, we're seeing our volumes increase approximately -- well, more than 20% above our budgeted volumes. And you would never -- you wouldn't see that from a margin, right? So if you were -- to make the math easy, if you're at $1, you're not going to go to $1.20. So volume is the key.

And our next question comes from the line of TJ Schultz with RBC Capital Markets.

Just first, back to the Refined Products. I understand kind of the run rate go forward. Mike, you outlined a lot of changes on kind of go-forward strategy, just better use of storage to reduce product cost, some personnel changes, that sort of thing. Just how quickly can those be implemented? And when would you expect some of those strategy shifts to be kind of fully in place?

The restructurings already occurred, so that's in place immediately. The blender joined us in mid-January. And the increased storage has been signed up for and I believe we'll be using -- beginning to use that at the end of Feb and certainly all of March going forward. And the aggressive really optimization of line space also started in the last couple of weeks. So everything is in place. Of course, with butane blending, we'll have some of that for a month or so. And then of course, the summer, it's not going to be as impactful but it will be next winter.

Okay. And then on Grand Mesa, what were your volumes from your marketing business in the quarter?

So TJ, I think as I referenced, we don't give volumes by shipper. But what you can look at is that our physical volumes were 100. Our MVCs was -- or our financial volumes are 106. I think it's safe to assume that our marketing business did not make any MVC payments so there's no MVC volume. So any difference between the 2 would be associated with other contracts.

Okay. And then in the Crude business, you've got some drag from some MVCs on third-party pipes. Can you just kind of quantify the benefit to you all as those roll off the next couple of years or kind of when they do roll off?

So they roll off over the next 2 years. In our 10-Q's, we do outline what the gross commitment is. The key is what we're able to net out of the basins and that's going to depend on the basin differentials. At this point in time, we're not speculating on what those differentials are. So that's going to depend on how production ramps and what takeaway looks like out of the different basins.

Okay. And then on Water, that's moving higher. I think crude cut seems to be trending higher. Are you done with hedges for this year? Or do you think you'd put on more than -- I think you said you have 50% through 2019?

Yes. So we will continue to layer further out in '19 and '20, into '20. Our goal is just to not go over 90% for 12 months out and to be approximately 50% for the following 12 months. So as current positions roll off, we'll start to layer on positions further out the curve as we build up that hedge position. We did layer on a pretty significant amount of hedges over the past 3 or 4 months, further out the curve and would expect to continue to do that. As it relates to our crude cut, our crude cut will improve in our fiscal third and fourth quarters. That's weather driven. So as it gets colder, you actually get a little more condensate and you get a little more crude out of the water, so you do get a little bit of a pickup. In the third quarter, we're expecting a little bit more of pickup, also in our fiscal fourth quarter. And then, it probably will step back down a little bit. Right now we think that the average for the year, 0.42%, is still reasonable and still a reasonable assumption to use for next year as well.

(Operator Instructions) And our next question comes from the line of Matt Niblack with HITE Hedge Asset Management.

So the Water business, if I understand the guidance correctly here, it looks like the fourth quarter EBITDA is guided to be pretty flat to Q3, which given the speed of the ramp and kind of where crude prices are, I thought was a little surprising. Is that a conservative number, first of all? And then secondly, what's the oil price assumed in that number?

Yes, so a couple of things. So one, as I mentioned, we're 90% hedged for the quarter. So we did use the current curve on the hedge price. But we give up that -- on the actual price, but we give that up based on the hedges. So we're using our average hedge price, which is just over $50. We have tried to be conservative in that business. We've been that way for the entire year. But that's really -- we think that this quarter, we'll at least do what we generated in the current quarter. Hopefully, volumes continue to trend the right direction. We've had a very significant increase in volumes quarter-over-quarter. It can be a little bit hard to predict that same type of increase every quarter but right now, that's what we're seeing.

Got it. So now that we're 40 days into Q4 here, you're continuing to see growth in volumes over where they were on average in Q3?

Yes.

Great. And then on that 10% open skim oil, you're assuming something close to the $50 that you've hedged that?

No. It would have been closer to $60 for the next 2 months. It was the curve based off of...

The forward curve, right? Got it.

Yes. But that's when we layer our hedge. So it's a very small amount of volume. You're talking about 350, 370 barrels a day, that actually is commodity-sensitive. The rest [addage]

Got it. Got it. And then in the Liquids business, you mentioned the impact of returning railcars. And I know you've got railcars that you're using here as well as in Crude Logistics and some mix. Could you quantify what you think the net EBITDA improvement will be from returning the railcars you're not using or are otherwise optimizing that fleet as you roll off contracts for FY '19 and FY '20?

Yes. I think last year and this coming year, we're going to have, what do we turn back, 700?

About 700 cars.

Each year. So at a $1000, that's 8,400 -- or $8.4 million each year. Some of those, we may re-lease have a smaller, obviously, much smaller rate. I don't know how many of those we're actually -- and downsizing our fleet, so some of them will never come back. But that's the gross number, $8 million each year.

Got it. So the gross number would be $8.4 million and the timing of that is sort of end of year FY '18, end of year FY '19? So then we see those impacts in '19 and '20?

So a portion of that will be realized in this upcoming year and a portion will be realized in the following year as well because once the car rolls off, there are some costs to clean and transport back to the lessor. Or if we re-lease, we would obviously re-lease at a lower price. The prices today, I think 50% or so is a reasonable assumption on re-leasing. And then to add, in the Crude business, we are not leasing cars in the Crude business. We own railcar fleet. Generally, we're not turning back any cars in the Crude business. So this is all associated with Liquids.

Got it. And in terms of the cars you've owned in the Crude business, we've heard that with some of the pipeline capacity constraints coming out of Canada, that there's starting to be a lot more demand for crude railcars. Are you seeing that? And could there be some value in selling some of those assets?

There could be. We've been seeing -- reading the same articles that maybe that some crude by rail comes back here for a period of time. We have not experienced that yet, but it's possible. Put it another way, we haven't assumed we're going to use any of our cars. So if we can use them, it's just upside.

Great. And 2 more questions. So first one, on the Sawtooth strategic partnership, any more color you can give on that? When we might expect an announcement? How optimistic you are, sort of partner, et cetera?

Well, I would say, stay tuned. We'll probably leave it at that.

Fair. Fair enough. And then last one, so Refined Products. Just trying to get comfort in the guide here given some of what's happening. And you have provided a decent bit of detail. But maybe talk through again the $25 million impact from hurricane is incremental to the secular decline of $40 million?

Right.

So what exactly is that? How is the mechanic of how that cost happens? And why we'd be confident that absent those shutdowns, but with continued exports to Mexico, et cetera, that we would get that back?

Yes. Trey, jump in. But I'll say, $15 million of that was due to the structure, which meant that the [prompt] month increased dramatically. The out months did not. And we were backwardated. And then, as we rolled our inventory, we got whacked each month. And it was very similar to what happened to us several years ago in crude before it went to Contango. So there's 15 of it. The other 10 is the Contango on gasoline and diesel. They're basically this year -- because there was so much less production and inventories are low and then we had some decent exports in both distillates and gasoline that there was basically no Contango on distillates and about half as much on -- I think last year, it was $0.20 a gallon and this year it's about $0.11. So those 2, we feel pretty good about them. I mean, distillate is 0, so it can only go up. And gasoline will at least stay the same or do better.

Got it. And then just a follow-on question there. You also mentioned on this that the next year, obviously, structurally, will not have the impact from negative margin on the line space. What is -- what's a decent number in terms of that impact you had in Q1 '18 from the negative line space? $10 million? $20 million?

So we can do the math, but it's approximately 150,000 barrels per day that we transported. That includes gasoline and diesel [on quoted] implementation. And our average margin has gone from $0.05 to $0.03. We would hope to improve that per gallon, so you've got to take that times 42, times the delta. We would hope to improve that margin slightly next year without the negative piece in our contract, but that's to be determined.

And our next question comes from the line of Ned Baramov with Wells Fargo.

A quick question going back to the Water segment. So given the strong growth in volumes, are you seeing any changes in the competitive landscape? Maybe new entrants or just other operators looking to gain share?

I'll say and no. If you look at the Bakken, I think Tallgrass bought Buckhorn, so it's still the old Buckhorn wells but it will be Tallgrass. And really nothing in the Anticline or the DJ. The Eagle Ford is very competitive. But I think we've seen water -- there's 2: WaterBridge and EVX, who are, I think, in the Eagle Ford and Permian. I think WaterBridge bought some Arkoma water assets from NextEra. Otherwise, it's just the competitors we have growing. So a Goodnight Midstream, a [Mesquite, NRBJ]. So just Trey, any other color? I think that's it.

No. I mean, as they're growing, we're also growing. Water continues to be a challenge, particularly in the Delaware, which seems to be where most of the focus is. Although you are seeing some in the Bakken and Eagle Ford as well. I think that we still are the largest in our core areas, being the DJ, the Eagle Ford and the Permian. And we're continuing to grow as well. Producers, there are still a large number producers that are doing water disposal for themselves. But we're starting to see some of them either sell those assets or look to third parties like ourselves to start to take over those operations. So I think there's a lot of market to share and we're continuing to grow our business as well.

Got it. And then could you provide your updated thoughts with respect to IDRs? And then secondly, maybe an update on the timing of a potential resumption in the distribution growth?

IDRs, it -- I think clearly, there's been simplifications going on and there are some -- I think, some of that is just a way to cut distribution without cutting the distribution. And the market appears to not like IDRs. So in our case, we basically are not paying much at all to the GP. So on the one hand, we think it'd be a great time for perhaps to have -- our MLP buys IDRs, so that's something we've been looking at. It's always cheaper to buy them before you're well into the high-end splits. The downside is, when you buy them when there's not much cash flow, it's not accretive. But if you look out 5 years, you may end up having bought them at a 4 or 5 multiple instead of paying 12x to 15x. So we are looking at that for the benefit of the MLP. But at the moment, it doesn't -- it's not impacting the MLP. We're $1.56 and the high split doesn't kick in until $2.025. On the second part of your -- hopefully, I answered the first time. Second one, we have always, I'll say, expected and wanted to start increasing the distribution after this fiscal year, and whether it's $0.01 or something. Adding back the hurricane, we're back to say, 475-ish. At that number, our coverage is, I think, 1.3x and our leverage is going to be under 4x. So it would -- management would be interested in increasing the distribution. The flip side is, if we're going to trade at a 12% or 13% yield, then we're better off to just take that money to pay down debt. So I think we just have to wait and see where the unit price shakes out. I think there's been -- prior to this call, there's been a misconception that we somehow missed our numbers. In my mind, we have not missed our numbers. Our businesses are performing very well. We got hit with Mother Nature. I see other businesses that analysts say, "Okay, that's a onetime event." We seem to have people go berserk before we even have an earnings call.

And our next question comes from the line of Sunil Sibal with Seaport Global.

I just wanted to kind of consolidate your responses to various questions on the Refined Products and Renewables. So it seems like what you're saying is in a normalized year, you would do at least $25 million more because of the negative impact of the hurricanes, and then additional $10 million to $12 million more because of the line space, different contracting strategy that you adopted. So if I take that into account and the fact that you're guiding to about $50 million for this year, full year '18, so is like $80 million, $85 million a kind of a good run rate for that business? Am I understanding that correctly?

Yes.

Okay. And then, I know you've guided to leverage metrics of about 3.25. So it seems like exiting out of '18 fiscal year, you will be around 4x on leverage -- on covenant basis. So how should we think about hitting that 3.25 target in terms of the time line?

Yes. So replacing next year's first quarter will be a significant improvement in leverage as well. As you remember last year -- this current year's fourth quarter -- first quarter. So let me back up. Last year's fourth quarter and this year's first quarter are both the periods that were impacted by the negative line space. As we roll those 2 quarters out of the leverage calculation, that leverage number improves dramatically. We expect to continue to focus on leverage through next fiscal year based on a lot of different factors. And we haven't given guidance for next year, but I would expect us to be close to that target by the end of next year. That's something that remains a focus, as Mike mentioned. If we have excess cash flow, we're assigning that to either fund growth or pay down debt. And that's something that will continue to be a focus of the management team, and I think the board supports that as well.

Okay, got it. And then one last one for me. In terms of the CapEx budget with the kind of base assets that you've got, how should we be kind of thinking about the normalized kind of a rate on CapEx for you guys? Understanding that it seems like the Water business is growing pretty well, and so you'll be spending some capital there.

Yes. So we talked about this I think a little bit in the last earnings call, too. This year's CapEx -- growth CapEx budget is $150 million to $200 million. We're going to be in the middle of that range. We expect something similar, maybe a little bit less going forward, with the sale of Glass Mountain and with the sale of Retail West. When we look at our growth CapEx, about half of it is Water-related and then the other half is split between Retail Propane acquisitions, some Crude opportunities, and I think Mike mentioned a little bit about it in his comments, and maybe a little bit on Liquids. But those would be the primary areas where we would have growth capital spending. And when we look at multiple ranges: Water, 5x or better; Crude and Retail is probably something more like 6.5x to 7x.

And that concludes our Q&A session for today. So with that, I'd like to turn the call back over to Mr. Mike Krimbill, CEO, for closing remarks.

Well, thank you very much. It's been a lengthy call, but I appreciate your attention and listening to all of our comments. So we'll talk to you again at the end of the year.

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