Mike Krimbill - Chief Executive Officer Trey Karlovich - EVP and Chief Financial Officer

Lin Shen - HITE

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2016 NGL Energy Partners LP 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, today program is being recorded. I would now like to introduce your host for today's program Mike Krimbill, CEO. Please go ahead.

Thank you. And thank you everyone for joining us, we delayed a couple of minutes so everyone would have a chance to call in, so I think we've got everyone connected. So 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 a 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 the prices and market demand for natural gas, liquids, crude oil, level of production of crude oil and natural gas, effect of weather conditions on demand for oil, natural gas and to 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 undertakes no obligation to publicly update or revise any forward-looking statements as a result of new 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. So, we'll get down to business. I would like to turn it over to Trey to begin and then will open for questions.

Thanks, Mike, and good morning, and thank you all for joining us. Before I dive into our fourth quarter and fiscal 2016 results, I wanted to cover few big picture events and transactions which have occurred over the past several months in relation to NGL. These transactions have strengthened our balance sheet and liquidity position and have improved our platform for growth going forward. Our strategy has been to reduce our committed capital requirements, decrease our debt and leverage, increase liquidity and show to the market that we have access to capital. Our focus has been to reduce the yield on our bonds first, which we believe translates over to our equity price improvement. We execute several transactions over the past several months to accomplish this and we believe we have provided ourselves the ability for the Company to continue to pursue its strategic objectives like the completion of Grand Mesa and other opportunities around our footprint. First I want to cover the TLP ArcLight transactions. I think it is important to remind everyone that the sale of the GP interest to ArcLight for $350 million will have very little, if any, impact to the day-to-day recurring operations of our refined products segment. If anything, we expect to see some additional opportunities through our relationship with ArcLight, TLP and Gulf Oil. ArcLight acquired the general partner of a mature MLP in the high splits with a low yield and excess distribution coverage perfect for their potential drop down strategy. This transaction greatly benefited both companies. We retained all of the customer supply agreements and line space. We will continue to utilize the TransMontaigne LLC name, but we would be completely separated from TLP other than our arrangements to lease terminals and storage from them along the Colonial and Plantation pipelines that extends for several decades. We have recently purchased additional line space on Colonial and Plantation pipelines, enabling us to continue to grow with our customers. Our sale of the TLP LP units for $112 million will result in no further distribution from TLP beyond the May 26th payment. We never intended to hold common units in another MLP and rather than slowly selling those units into the market throughout the year, we were able to negotiate a sale to ArcLight for all of our units at very little discount to the market price at that time. This transaction provided us with liquidity and removed any overhang in the TLP units for TLP and ArcLight, another win for all entities. Overall even factoring in the loss of distributions from the TLP units, we do not expect any reduction to our EBITDA going forward related to these transactions, and we are forecasting the fiscal year '17 refined product segment to exceed the fiscal 2016 results. Second, while we have made tremendous strides in enhancing our balance sheet and liquidity position, the full effect of those transactions will not be reflected in our 3/31/16 balance sheet. The balance sheet in our press release that we issued this morning does not include the proceeds from the TLP common unit sale, the proceeds from our preferred equity issuance to Oaktree or all of the senior notes that we were able to purchase at a discount par. Those transactions provided an additional $320 million reduction in debt and about 300 million of increased liquidity from the 331 balances in the release. These items combined with the TLP GP sale, the combination with Saddlehorn for Grand Mesa, the senior notes repurchased during the quarter and the temporary reduction in our distribution have combined to significantly strengthen our credit profile. I would like to provide some information on the potential tax impact of these various transactions. You should be aware NGL cannot provide tax advice, so I encourage each of you to consult with your respective tax professional for your specific situation. That being said, there will be long-term capital gains from the TLP GP and LP sales that will vary based on the periods of the NLG units were held. We expect the gain to be approximately $3.25 per unit for those that held units in February 2016 for the TLP GP sale and about $0.60 per unit for those that held units in April related to the TLP LP units. These amounts are estimates and are subject to change. Units acquired after April 1st will not be allocated again from the TLP transactions. Unitholders were also recognized ordinary income from the cancellation of debt. We do not expect to generate -- we do expect to generate a tax loss from ordinary operating activity in 2016 to offset this income, and we are exploring tax strategies like bonus depreciation on 2016 assets placed on service to offset any additional ordinary income items. Now going into the fourth quarter and year end results, our adjusted EBITDA for the fiscal year came in at 424 million, right in the middle of the updated guidance we provided about five weeks ago, with our fourth quarter coming in at a 155 million. Our distributable cash flow was 123 million for the quarter, and we paid a total distribution of about 40 million earlier this month which resulted in coverage for the quarter of about 3.1 times and coverage for the last 12 months right at 1.0 times. Before I cover each business segment, I would like to discuss the non-cash charges that impacted our financial statements during the quarter. There are quite a few of them. We recognized a gain from the TLP GP sale of 130 million. Additionally, we have deferred approximately 200 million of additional gain related to this transaction due to our continued relationship with TLP through the extension of our terminal leases. This gain will be recognized ratably at $30 million per year through 2023 and is included in the current and non-current liabilities on our balance sheet. We also recognized a gain on the early extinguishment of debt, totaling 28.5 million during the quarter. We will also have a gain in the first quarter of '17 for the additional debt purchases in April. Our last gain was the result of a revaluation of the royalty payments expected to be paid from our Water segment for the remaining life of those wells. This gain totaled 36 million during the period. As noted in our release, these royalty payments should have be recognized as liabilities in prior periods, we’ve corrected those amounts in the release. We’ve recognized non-cash losses for the impairment of goodwill in our water segment totaling 380 million and 68 million on the write-down of certain assets including pipe and steel coil, we held prior to combining our Grand Mesa project with Saddlehorn. Our overall net loss for the quarter was 207 million and totaled a 187 million for the year; however, excluding all these onetime non-cash items we would have recognized net income of approximately 46 million for the quarter and 66 million for the year. Going into our segments, our Refined Products and Renewables business had a great quarter with about 52 million of adjusted EBITDA driven by motor fuels demand. The full year adjusted EBITDA for this segment totaled a $134.4 million. Our business is primarily servicing high growth population areas running through the Gulf Coast through the Southeast and all the way to the New York City harbor. Our customer base includes high quality names like Costco and Benchmark. We are forecasting robust demand through fiscal year ’17 and have included approximately $140 million of EBITDA in our fiscal year ’17 guidance. As a reminder this business is cyclical and we expect the first and fourth quarters to outpace the second and third quarters of our fiscal year. Our Retail Propane and Liquids Logistics businesses were both impacted by extremely warm winter heating season. Our Retail Propane segment generated about 41 million of EBITDA and our Liquids segments generated about 38 million during the quarter. Both were down a combined 25 million from last year as the volumes declined. The adjusted EBITDA for the full year was 79 million for Retail and a 100 million for Liquids. We are expecting volumes to rebound next year predicting normalized winter and heating degree days returning to normal. We are also adding storage capacity at Sawtooth for this upcoming storage season. Our forecast for fiscal year ’17 includes approximately 95 million of adjusted EBITDA for our Retail business and about 93 million for our Liquids Logistics business. The Crude Logistics business was in line with our updated forecast for the quarter with 17 million of adjusted EBITDA. We had adjusted this segment in our models based on the steep declines in crude prices and volumes and certain assumptions for our storage business to take advantage of the contango market. We have also sold the portion of our trucking assets which had been operating at a loss. Our full year EBITDA for the crude segment was 62 million. Looking at fiscal year ’17, we expect Grand Mesa to come online in November and we are also building a terminal in Louisiana that will come online in early fall. As we have discussed, we expect to generate approximately $50 million of EBITDA in fiscal 2017 from Grand Mesa and expect this entire business unit to generate EBITDA of approximately $127 million in fiscal ’17. Our water solutions segment recognized adjusted EBITDA of $12 million for the quarter and finished the year at 71 million. Lower volumes, rig counts, prices and certain onetime costs including about 1.5 million of bad debt expense affected our fourth quarter results. We are focusing on reducing cost and optimizing our business for fiscal year ’17 and believe we are in the right basins with the right customers to take advantage of any potential recovery. We are currently forecasting 65 million of adjusted EBITDA in fiscal year ’17 for this segment with the anticipation of slowly increasing crude prices and water volumes throughout our fiscal year. Finally with the sale of TLP GP and our focus on reducing cost in this price environment, we are expecting to reduce our general and administrative cost. For example, we are moving employees into one central office in Denver and focusing on reducing controllable costs within our businesses. Our corporate and other G&A EBITDA impact was a cost of 5.5 million for the fourth quarter and 25.3 million for the year. Our forecast is to reduce this cost to approximately 20 million for fiscal year ’17. Looking at our balance sheet, we reduced our overall debt by over 400 million this quarter even after investing 155 million in growth CapEx primarily related to Grand Mesa. Most of this relates to the TLP GP transaction including the net proceeds and the deconsolidation of TLP and removing their debt from our balance sheet. Our total debt outstanding was 2.3 billion excluding 618 million under our working capital facility. We expect our compliance leverage to be approximately 3.9 times compared to our covenant levels of 4.75 times. These calculations include our trailing 12 months EBITDA and certain pro forma additions for capital projects including Grand Mesa and exclude the balance of our working capital facility from the calculation. Mike can help anyone with the math. We're targeting compliance leverage of 3.25 or below and will continue to manage our business with that target in mind. We're projecting to invest between 200 million to 300 million and growth CapEx during fiscal year 17 with approximately a 110 million of that related to Grand Mesa. We believe that we have the liquidity and balance sheet to fund those expenditures without accessing the capital markets including our current liquidity and the excess distribution coverage we expect to realize in 2017 of approximately $175 million. However, we continue to see and focus on opportunities to prudently grow our business including with our new strategic partner Oaktree. We would expect to fund these new opportunities with a mix of excess cash coverage, equity and debt. We are pursuing several organic projects in our Refined Products, Liquid Logistics in Crude Oil businesses as well a strategic growth of our retail propane footprint all with very attractive return profiles even in the current market environment. As such, in order to be prepared for these opportunities, we plan to put an ATM in place in the near future which can be utilized for any new growth opportunities. We do not expect to utilize the ATM at these price levels and the ATM would remain effective for up to three years. In summary, this is a marathon not a sprint. We've made some tremendous strides to better position NGL for success throughout the commodity cycle. We have a stronger balance sheet, more liquidity, a strategic partner, great assets and opportunities and a management team that is highly motivated and incentivize by growth of our unit price. We are all aligned and we will continue to work diligently to provide value to our stakeholders. Mike do you have anything you would like to add?

Yes, I'd just like to provide a little more clarity on growth is obviously we're very focused on reducing leverage and increasing common unit coverage. We've said previously, we don’t anticipate being in the M&A market any big way, but that said, we've given a range 200 to 300 million on growth capital, the 200 clearly funds Grand Mesa. We have the Houma Terminal in Louisiana in the completion of the Sawtooth fifth cavern. So to go from 200 to 300, we are looking at purchasing additional line space on Colonial. We have recently been successful doing that. We are looking at some retail propane businesses that are in our footprint, and we're also looking at Water Pipelines wherever we can find an opportunity makes a lot of sense to build those. That makes up the other 100 million probably in multiple costs of three to six times and obviously they are all in the $1 million to $45 million, $50 million range. So anything bigger than that we're clearly going to our new JV partner, Oaktree we're very fortunate to have Oaktree as a partner, and things have of the larger value whether that’s a 100 to whatever million dollars, we would pursue those with Oaktree as our partner. So I think, with that, we will open it for questions.

[Operator Instructions] Our first question comes from the line of [Mark Berman from Trident] [ph]. Your question please.

Yes, sir. Thank you. I was just wondering what the thoughts are over, I would say the mid-term on any increases to the dividend. I understand that in the short term after the dividend cut moneys are used for debt reduction et cetera?

So, obviously as we -- when we announced the reduction in our distribution back in April, we did describe that as a temporary reduction in our distribution. We are looking at the current distribution level to be in place for the next couple of quarters until Grand Mesa comes online going into next year. We would observe where we are from a financial perspective where the market is and make -- our Board would make that determination at that point in time. Our guidance and the excess cash flow that I have described in our guidance, assumes our distribution at this level for 12 months.

Thank you. Our next question comes from the line of Lin Shen from HITE. Your question, please.

So first of the 500 million in guidance for the next fiscal year, what are some of the key assumptions there around commodities and volumes on the system?

So we put our guidance together in March of this year as we put together our budget, which was approved by our Board in early April and was submitted to our bank group as well as our rating agency. The price curve that we used at that point in time was based on a curve of - started at about $36 and increased to approximately $43 through the 12 month period. That price assumption was used to generate our various volume assumptions for the businesses that are impacted by crude oil, so specifically our crude oil logistics and our water business. Additionally, we looked at pricing and demand for other products namely propane and butane in our retail propane and our NGL Logistics business and motor fuels, diesel fuel, jet fuel and gasoline for our Refined Products business, those businesses are more driven by demand versus just the absolute price.

Right, so you are assuming normal winter then for the propane businesses?

Yes we are.

Lin, this is Mike. Look, I'll put it in another ways. We did the 4.25-ish, we have 50 million there for - included for Grand Mesa, that's 4.75. So there is only a really a 25 increase over this lousy, challenging environment, and that's part of that is just the normal weather for our Liquids and Propane division. But basically it’s, our look at it - kind of assume the crappy environment that we've gone through for the last 12 months continuing. So clearly, we are doing -- I mean crude prices are up. We haven’t seen the rig count go up yet and I think the rig count is the key to seeing increased water and crude volumes.

And then in the water business, are you seeing robust interest in this conversion to pipelines versus trucks that you've been pushing or has that really been kind of pushed out with the commodity environment?

I think it's somewhere in between, I wouldn’t call it robust. We've got half a dozen water pipeline projects that we are building. So I think where it isn’t robust is because in this environment it's difficult to get the producers to sign up for a take-or-pay, and of course we're not just building these pipeline out of [spec] [ph]. We've got to have a commitment from the producer. So that's where I think the rub occurs but we do have some of those commitments and we are building those pipelines.

And the competition in that segment, has it been going bankrupt and going away in this environment, I can't imagine smaller players doing very well?

We have been asking our water management the same question because we just don’t see numerous bankruptcy filings. There was one I think late last year, which I believe was CJ Energy. Everyone, all the other bigger players seem to be hanging on whatever that means but not going bankrupt. But we are seeing a number of the disposal facilities being shut down although they are not declaring bankruptcy.

Make sense. And last question, in terms of Crude Logistics, there has been a real positive -- and actually water -- a real positive in the oil strip being far above where it was when you put your guidance together. But then also contango was not what it was and so the net of those two things, can we assume by your reaffirmation of the guidance of those things at this point are sort of netting each other out or is there some upside to the guidance from the commodity price environment?

I think it's early to say there is upside, again we really focused on the rig count. The crude price helps on our skim oil, but we are looking for the second half of this year to see completion of these ducts that will lead to a lot of flow-back water, which has a higher percentage of crude oil. So net-net you do, you're correct, the contango -- and we're still waiting to see what's really happened because we've seen contango be less, it's reduced here in the last few weeks. But we're not sure is that because producers are locking in $50 plus strip, which is going to impact the out months temporarily. So we're not sure -- we were not confirmed yet the contango was permanently reduced. But we’re not going to see it increasing in crud volumes until we get the rig count increasing and it seems to have bottomed out.

Thank you. This does conclude the question-and-answer session at today's program. I'd like to hand the program back to Mike Krimbill, CEO.

Well, thank you guys very much and we'll probably see you very shortly for the first quarter. All right thanks.

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