Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Fiscal Year 2020 NGL Energy Partners LP Earnings Conference call. [Operator Instructions] It is now my pleasure to hand the conference over to CFO, Trey Karlovich.

All right. 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 in crude oil, level of production of crude oil, natural gas liquids natural gas, the effects 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 created 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 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 will now turn the call over to our CEO, Mr. Mike Krimbill.

Thanks, Trey. This is a historic quarter with record adjusted EBITDA in excess of $200 million, at least 20% higher than any retail analyst projection. In addition, our 12-month trailing common unit coverage ratio skyrocketed from 1 time to 1.5x. During the quarter, we closed the Hillstone acquisition, which we previously discussed, and exited additional smaller refined products businesses, further reducing volatility and working capital indebtedness. The quarter benefited from the diversity of our business units with Crude Oil and NGL Logistics, achieving record adjusted EBITDA results, while waiting for water volumes to ramp up significantly. Our water volume projections are provided by our producers. We do not make these up. You can read earnings transcripts and presentations from our customers to determine the exciting future rather than looking in the rearview mirror. For instance, the super major customer has only developed 3% of its position in the Delaware. Our water future is bright. First, I'd like to address some of these research reports that have recently been published that provide advice, promote a scorecard approach and ask questions, which are correct in many cases, but misguided in others. First, is NGL focused on ratable, predictable cash flows? Obviously, yes. We have exited the two business units that were most volatile. Our Food segment remains highly contracted with long-term MVCs, and our Liquids business is asset heavy, with 27 terminals and 5,000 railcars. We have substantially grown long-term contracted water revenues with acreage dedications and MVCs, and we have significantly increased these long-term contracts with investment-grade customers. Second, is NGL increasing its financial discipline? Again, yes. We have been decreasing indebtedness through asset sales, preferred equity issuances and working capital reductions. We are dramatically reducing capex in fiscal 2021, beginning this April. We are approaching free cash flow positive status net of internal growth capex during fiscal 2021 as a result of lower capex and increasing distribution coverage. Is NGL management aligned with common unitholders? The answer clearly is yes, more so than most. First, NGL executives and directors own millions of common units. I personally own nearly 3 million common units. We've cut our distribution several years ago by 39%, which effectively eliminated 100% of the entire GP distribution owners, but only 39% of the LP distribution. We have not nor are we currently paying any distribution to the GP owners. We have defended our $1.56 unit distribution and refused to reduce it, even though our yield has increased to as high as 15% at times. We now have a common unit coverage ratio of 1.5x and increasing. So we are comfortably earning our $1.56. Four, should NGL eliminate IDRs? The answer is yes, but how best to accomplish it without impacting the common unitholder. Most eliminations involved a significant dilution to the common unitholder and a unit price decline. We are taking our time in purchasing IDRs for cash in small increments so we limit any future dilution. There is no difference between an MLP with no IDRs and an MLP with the IDRs that is distributing nothing to the GP owners, while it purchases the IDRs. Research makes no sense when analysts place NGL in the penalty box because we have IDRs, but pay nothing, and they have no distribution increases projected. Fifth, should NGL convert to a C-corp? Historically, C-corp conversions or simplifications were disguised common unit distribution cuts. These conversions often resulted in large tax gains to the common unitholder. These C-corps will eventually become taxable and have the added risk of rising future corporate income tax rates. NGL is aligned with a common unitholder. We will not convert. We will not stick our common unit holders with a large tax gain. One reason given to convert is that C-corp should turn 25% in 2019 and MLPs loss 2%. These returns are correct, but we must scratch the surface to determine why. The LP returns were down due to significant decline in the G&P sector. During 2019, NGL actually provided a 35% total return, better than the C-corp average. Looking ahead, we asked ourselves, where the NGL common unit price would have to be in five years in order to provide a 25% annual total return for each of those five years? The answer is approximately $21 or only a $2 per year increase in the common unit price. NGL should not be penalized because it's not a C-corp. It should not be penalized because it has IDRs that pay nothing to the owners. NGL should be embraced for successfully completing its transformation, looking out for the common unitholder and creating the attractive value proposition going forward. So finally, our focus for the future. What is it? One, self-funding; two, continued deleveraging. These two are now possible with a 1.5 common unit coverage and decreasing growth capex requirements. Three, we're increasing acreage dedications, MVCs and extending tenure of existing contracts. And fourth, targeting investment-grade financial metrics and credit rating. So with that, Trey, turn it back to you.

Great. Thanks, Mike. A lot to be excited about with NGL right now and in the future. Let's talk about the quarter. We had a very strong quarter financially, and we have made significant progress in simplifying our business. The highlights of the quarter from a financial perspective includes the sustained strong performance of our Crude Logistics business, driven by volumes on Grand Mesa Pipeline. A record quarter from our Liquids segment, which benefited from lower commodity prices for propane and butane, contributing to very strong demand for products, continued growth of our Water Solutions volumes, along with the full integration of Mesquite and now Hillstone assets into our Delaware Basin system and a further reduction in our refined products segment, where we completed the wind down of our mid-continent business and streamlining of our remaining businesses. All of these items contributed to adjusted EBITDA of over $200 million for the quarter, well above industry analysts' expectations and a raise of our annual guidance. We have met our financial target for distribution coverage, as Mike mentioned, with a current quarter coverage of 2.5x and an LTM coverage ratio about 1.25x. We expect to remain above our target coverage for the foreseeable future. Our LTM pro forma adjusted EBITDA at 12/31/19 is approximately $660 million as calculated for our debt covenant compliance purposes. This includes our historical adjusted EBITDA from continuing operations and pro forma additions for a full year of the acquisitions, primarily, Mesquite and Hillstone, along with credit for organic capital expenditures, subject to certain limitations. We funded the Hillstone acquisition during the quarter through the issuance of an additional $200 million of Class B preferred units and the remaining purchase price borrowed under our revolving credit facility. We also closed a small joint venture for the Limestone Ranch in Lea County, New Mexico, during the quarter and utilized approximately $55 million to complete that transaction. The continued wind down of our refined products business, along with earnings in excess of distributions for the period, contributed to a significant reduction in borrowings under the credit facility. Total debt outstanding at 12/31/19 totaled just under $3.1 billion, resulting in our total leverage at 5x as calculated under our credit facility, which is expected to stay around this level for the next couple of quarters, while we continue to eliminate working capital, integrate Hillstone and grow produced Water volumes. Our targeted leverage metric, including working capital borrowings, is 4x or lower, and we are focused on achieving that goal. We have proven that we will take the steps necessary to meet our financial targets, and we expect nothing different in this case. We have already reduced total leverage by approximately 2x over the past two years, including reducing future working capital needs by at least $400 million. We've improved our distribution coverage by over 40% over the same period and also grown our business by over 40% on an EBITDA basis during that same period. We did all of this while also improving the cash flow profile and predictability of earnings and simplifying our business while focusing on our core strengths. Now, we will cover some of the details driving our operating results for the third quarter and year-to-date fiscal 2020. Adjusted EBITDA, excluding discontinued operations, totaled approximately $200 million for the quarter and almost $428 million year-to-date. Discontinued operations includes the historical results of the TPSL and mid-continent businesses, which have been liquidated, along with the results of our glass blending business, which we are in the process of liquidating as well. We would like to note that the current quarter discontinued operations also includes TPSL's $17 million share of the biofuel tax credits, which NGL retained in the sale of that business and will receive the benefit. The remaining $14 million benefit from these credits is recognized in the continuing operations of the Refined Products segment. As a reminder, while I cover each segment, adjusted EBITDA is a non-GAAP measure that we reconcile to our earnings -- in our earnings release, investor presentations and quarterly reports to operating income, which is a GAAP measure for each segment. Looking at the Crude Oil division. The Crude segment continues to show steady performance and generate approximately $56 million of adjusted EBITDA this quarter and $162 million year-to-date. This is in line with the upper half of our original 2020 adjusted EBITDA guidance range. So we are raising and tightening our range to $215 million to $220 million for this segment for the full year. Grand Mesa volumes averaged 134,000 barrels per day this quarter and has averaged about 130,000 barrels per day this year, remaining in line with our expectations. We expect volumes to remain at these levels through the upcoming quarter as well. Our other Crude Logistics' assets have also performed in line with expectations with our marine fleet operating at full utilization, continued strong demand for our cushing storage and no significant variances in basin differentials driving minimal volatility. This business continues to see very little earnings volatility, despite the changes in crude prices as there remains very little direct commodity exposure in this segment. Jumping to Water. Water adjusted EBITDA was $62 million for the quarter and has totaled $160 million year-to-date. The current quarter includes two months of Hillstone, which closed on October 31. Total disposal barrels were almost 1.6 million barrels per day during the quarter. This is adjusted to account for only 61 days of the Hillstone asset. The increase in volumes over the prior quarter was primarily driven by strong growth behind the Mesquite assets, which averaged almost 475,000 barrels per day during the quarter, and Hillstone, which contributed approximately 270,000 barrels per day for the quarter, again, adjusted for 61 days. The growth in volumes in the Delaware Basin were partially offset by declines, mostly in the Eagle Ford, as rig counts have declined, but also in the DJ Basin, which we believe was mostly weather and timing related during the quarter. Approximately 67% of disposal volumes were delivered via pipeline during the quarter, and we exited the quarter with over 70% of volumes on pipe. We are expecting pipe volumes to continue to increase on our existing systems as our volume growth is focused on the Delaware Basin gathering system. That system continues to show strong growth as the producers behind our system execute on the drilling and development programs. We are expecting water disposal volumes to continue to increase in the basin and expect a significant increase in the middle of next year when Exxon brings the Poker Lake project online as well as other dedicated producers expected volume increases. As a reminder, the Poker Lake dedication includes approximately 70,000 acres in Southern New Mexico under a 20-year, fee-based contract with Exxon. The infrastructure for this dedication is almost complete, requiring minimal incremental capital to support the disposal volumes. Exxon is in the very early innings of their Delaware Basin development plan, and we are not expecting significant contributions from this dedication until mid-2020. We received an average disposal fee of $0.62 per barrel for the quarter, which is consistent with our disposal fee year-to-date. Our skim oil volumes totaled approximately 3,400 barrels per day during the quarter, and realized skim oil revenues, after hedges, totaled approximately $56.90 per barrel, with an average skim oil cut of 21 basis points. We are well hedged for calendar 2020, with approximately 3,700 barrels per day hedged at an average price just over $56 per barrel. We also have hedges in place through calendar 2021 at approximately $55 per barrel. Fresh water sales increased this quarter as well. As a reminder, we have fresh water agreements in place, supporting a significant amount of our New Mexico permitted volumes for calendar 2020. Our Karns City solid facility in the Eagle Ford came back online during the quarter and drove the slight increase in solid volumes. The work performed on this facility as well as certain well workovers, pump replacements and upgrades drove our maintenance capital expenditures so far this year. Operating expenses were $0.42 per barrel for the quarter adjusted for the partial quarter for Hillstone compared to $0.40 per barrel year-to-date. The increase is mostly related to the integration of systems acquired and not yet realizing certain synergies. OpEx remains higher than budget as we work to automate facilities, increase utilization, integrate acquisitions and streamline operations. We're also continuing to move facilities from high-cost diesel generators as we connect them to the electric power grid. We continue to focus on reducing disposal operating expense across the system with a target of $0.30 per barrel. Based on results to date, along with the updated timing from producers on expected volume increases, we currently expect to be below the low end of our previous adjusted EBITDA guidance range for fiscal '20. Per our most recent conversations with our producer customers and the activity we see in the field, the Water volumes are coming. We estimate that Water volumes are approximately three months behind our original expectations. Based on this delay, we are adjusting our FY '20 adjusted EBITDA guidance range to $240 million to $250 million. Moving to Liquids. Adjusted EBITDA for Liquids segment totaled a record $69 million this quarter and has totaled $100 million year-to-date, already exceeding the high end of our annual guidance, which we also raised last quarter. We are raising our adjusted EBITDA guidance again for this segment to $115 million to $120 million for fiscal '20. The quarterly results are not just timing related. We continue to benefit from our recently acquired terminals, including our Chesapeake export facility, which has loaded 29 ships since April as demand has exceeded our initial expectations. The Chesapeake team has done a great job managing this increase in volumes, while also upgrading the facility to support future opportunities. Butane sales remained strong through the quarter, and we benefited from low commodity prices and building our inventory position coming into the period. Butane demand diminishes in our fiscal fourth quarter, but the overall year has been very robust. Wholesale propane started the winter season with strong demand from late season crop drying and a cold November and margins benefited early in the quarter. We've seen the forecast warm up for the remainder of the winter in certain operating areas. We are well positioned from an inventory standpoint to manage a potentially warmer season from a margin perspective. However, volumes could be impacted. Potentially lower propane volume was factored into our updated guidance for this segment. Finally, Refined Products. Our remaining Refined Products business will primarily consist of our rack marketing business, which carries minimal inventory and markets barrels through third-party terminals across the United States and our Renewables business, which is centered around biofuels marketing. Those divisions are reflected in our continuing operations, while the remaining divisions have been removed and are now carried in our discontinued opportunities. The segment adjusted EBITDA for continuing operations was $24 million for the quarter and has been $34 million year-to-date, above the high end of our adjusted EBITDA guidance range as a result of the biofuel tax credits. We realized the benefit for the 2018 and 2019 biofuel tax credits during the quarter with a portion associated with our continuing business, totaling approximately $14 million, which is reflected in this segment. We do not expect the biofuel market to generate the type of volatility we have seen in recent years as the credit is now in place through 2022. Our continuing businesses have been more stable, predictable and carry much less inventory, and therefore, working capital requirements compared to businesses we have exited. Based on our restructuring of this business and the results year-to-date, including the benefit from the tax credits, we are also increasing our adjusted EBITDA guidance range for this segment to $35 million to $40 million. Our growth capital spending is decreasing as we complete our largest infrastructure projects, including the Western Express and Lea County Express pipelines and the interconnections of the Mesquite and Hillstone systems into our legacy system. Maintenance capital expenditures have been relatively consistent the past few quarters and are expected to remain at this level. We expect to be able to fund our growth capital expenditures in fiscal '21 with our excess cash flow from operations. In summary, this was a record quarter for NGL, and we are proud of our accomplishments. We have simplified our business strategy, yet maintained a prudent diversity of cash flows. We have focused on our core areas of expertise and grown our business significantly. We are focused on reducing our leverage, while continuing to execute for our stakeholders. That concludes our prepared remarks. We will now open the line for questions.

Thank you. [Operator Instructions] And our first question comes from the line of TJ Schultz with RBC Capital Markets.

Hey guys, good morning. Just first on the Water volumes. I think you said about three months behind schedule. Does that kind of push that exit rate that you had indicated before, of, I think, 1.8 million to 2 million barrels a day into June? Or does that range that you give -- that you gave from March not include Poker Lake? So maybe if you can just give some expectation on what exit rate would be for the end of this calendar year after Poker Lake.

Let me start. So I'll start, TJ. So we were at about 1.6 million barrels for the quarter. That includes the two months of Hillstone. We are seeing volumes grow this quarter. I think we'll be at the low end of that range heading into the exit for 4Q. But again, what we're seeing is a delay in volumes. Poker Lake is not expected to come on until mid-2020. So we are not factoring Poker Lake into our exit rate for the fourth quarter.

Okay, that makes sense. And then I think SCO has some pretty sizable units to the North of Poker Lake. If I look at maps, it's published that includes like James Ranch and Big Eddy. Have those water rights been dedicated yet?

They have not.

They have not?

No.

All right. That's fine. Is that something that you would expect? They look at dedications this year?

I don't know, Doug? Do you have any thoughts on that, what timing might be other than...

Mike, I would say we cannot speak to that publicly at this time.

Okay, that's fine. I'll see you there. Thanks, guys.

Thanks, T.J.

Thank you.

Our next question comes from the line of Shneur Gershuni with UBS.

Good morning, everyone. Just wondering if we could start off talking about the Water business. I recognize the delay with one of your producers and so forth, but I kind of wanted to focus actually on the margin side of it. You've done a lot of acquisitions, expansions over the last couple of years and so forth. When we think about the margin that you're achieving in the Water business, is this quarter representative of what it's going to be on a go-forward basis? And I was wondering if you can sort of also talk to -- maybe the second question, but if you can talk to the skim impacts. When you first started this, years ago, the skim was a big deal. I thought with all of the investments it was supposed to come down. If you can sort of give us some color with respect to how much of a percentage of the business it is or of the margin impact? And how we should be thinking about it on a normalized basis?

Sure. Thanks, Shneur. So to start on the margin. So I'm going to say, no, this is not what the expected margins would be. We do expect our net margin to be larger on a go-forward basis. If you look year-to-date, our disposal fee has been very consistent at about $0.62 a barrel. That rate may come down slightly as we bring more barrels on pipe, but I think that's a pretty consistent number to use. Our skim oil has generated about $0.14 a barrel. Also I think that's pretty consistent as we are hedged for the next few years. So we're well positioned from a revenue perspective. So that gets you to, call it, $0.75, $0.76 a barrel on the revenue side. Operating expenses is where we have not realized the synergies from the acquisitions. We have not been able to bring all of our disposal facilities on to electrical power. We're still working to tie everything in on pipe. So our OpEx is running higher per barrel. Additionally, I'll point out that our operating expenses right now also include ancillary expenses related to fresh water, solids, the management of the ranches in Southern New Mexico. That's something that we will look to break out to help from a modeling perspective. But overall, we are expecting that operating expenses will come down significantly. For disposal alone, our target is $0.30 a barrel, and we believe that is absolutely achievable. So that's where you get the large benefit from an overall margin perspective is in that -- the reduction of operating costs.

Okay. And just a quick follow-on specifically on the topic. So with Poker Lake, will the -- will it have the same margin as everything that you've got on a go-forward basis? Or is it a higher margin or lower margin relative to what you have right now?

Yes. We can't talk about the specific rates, but what I would indicate is Poker Lake is all delivered at one point. So very little operating expenses expected from the Poker Lake volumes.

Okay, cool. And maybe as a follow -- sorry, yes?

Well, your follow up -- your other question was around skim oil. As we bring more volumes on pipe, the skim oil percentage compared to disposal volume does come down. And we have been guiding that way. For this quarter, we were 21 basis points. Again as we continue to add volumes on pipe, that number will most likely be lower than what we have seen historically when we were primarily trucked volumes. So we will continue to update our expectations as we give our annual guidance on what to expect from a skim oil perspective.

Okay. Definitely helpful. Maybe a question for Mike. In your prepared remarks, you talked about lower capex going forward and being able to -- be able to pay down leverage and so forth. Can you maybe give us a sense of the rate of decline that you're expecting in terms of capex? And then does a pause on acquisitions factor into that as well, too? Do you feel that you've acquired enough, specifically in the Water business, to achieve the scale that you're originally looking for when you embarked on this and it would only be opportunistic and infrequent acquisitions on a go-forward basis?

Yes. We -- I think the two big systems that we wanted to purchase were the Hillstone and Mesquite. So that's done. I think the focus now is on acreage dedications and BCs Right. So we have -- when we have the 4 million barrels of capacity...

Total capacity, permit capacity.

So there's plenty of room there, and we've completed our Lex, Lex and pipe no 24 inch our Poker Lake 30-inch will be complete, I think, around June 30. And then we just have the Orla 24-inch remaining. So capex. We haven't come up with a number yet, but we -- if I can say, we've batted around $100 million for Water, which is going to be mostly just remaining pipe.

All right, I guess that makes sense. Perfect. Thank you very much guys appreciate the color

And our next question comes from the line of Pearce Hammond with Simmons Energy.

Good morning and thank you for taking my questions. First question pertains to the Water business and just following up on the color that you just provided on some questions related to that. But if you were to think about the adjustment in the EBITDA for the Water business in three buckets. Then the buckets being, volumes, and like you said, the volumes are coming in, they're coming, but they're just coming at a slower pace than what you're expecting. Revenues and then operating expenses. Where do you think the majority of that adjustment is coming from within those three buckets?

So Pearce, volumes and OpEx are going to be the two drivers, right? As -- one is, we get more volumes, you are going to naturally bring down your operating expense per barrel as we get higher utilization of the facilities, but this is a volume game. I think the dedications that we've been able to acquire, the long-term dedications, and the MVCs, allow us to capture a significant amount of the volumes in our core focus area, which we think is the best place to be in the country. So I believe this is still a volume game, but operating expenses should not be discounted. From a rate per barrel perspective, again, as I mentioned before, I don't -- that's not -- we're not going to -- I don't think we'll be driving rates higher. I also don't see them coming down significantly either.

Okay, great. And then my follow-up just pertains to the competitive dynamics on the ground. If you are trying to sign up, say, new water deals with producers, what's the environment like right now? How competitive is it? Just some color around that would be great.

Doug, could you cover that one?

Sure. Focus being the Delaware Basin, there really are not a lot of large acreage dedications or MVCs available. Through Hillstone, Mesquite, legacy NGL, we have a very large share of the commitments in the Delaware. And then, obviously, some of our competitors, they have their dedications as well. So from a competitive basis, much of the opportunity for others to come in and greenfield or start competing with us, it's very tough for that environment due to the fact there a lot of the long-term dedications have already been inked. And that's why it's a perfect opportunity for us to now focus on fold ins as far as folding in our contracts into our subregions within the Delaware into our growth pipes and existing online capacity. So to answer your question, the competitiveness, it remains, but a large amount of the contracts and dedications have already been wrapped up in the basin.

Okay, thank you very much.

Thanks.

Great. Thank you.

And our next question comes from the line of Spiro Dounis with Credit Suisse.

Hey, morning, gentlemen, Mike, appreciate your comments around some of the qualitative attributes being cited as an overhang. But I guess, I'd still argue that strong fundamentals should be able to overcome maybe all or most of that. And you mentioned being forward looking here on Water, it sounds like it's got a really strong outlook. And I don't want to dwell in the past. But I guess there's been some iterations here of missed Water results that to some degree have been outside of your control, it sounds like customer related, but I mean, it's driving investors to maybe discount some of the outlook from here. And so can you just maybe walk through some of the specifics on what exactly is driving some of that underperformance? And then what's going to basically abate going forward?

Sure. Doug?

Sure. As Trey went to what we call underperformance here in this quarter, a material amount about 1/3 of our missed to budget was related to generators and diesel unbudgeted. The driver in the Delaware, especially, the New Mexico portion, the local -- the provider there is -- there's plenty of generation in the area, there is a dearth of distribution. So their execution on their end to actually get the power distributed to the certain areas has been a very big struggle for them, which creates, obviously, a hangover for us that was unpredictable. So that -- we come out of the woods. We took about 1/3 of our generators offline in January, which is great news. We finally got on station power. And then by mid- to late summer, our expectation is to have the -- most of the remaining generators offline and online power. So that is coming. That's going to be a material gain for us on the EBITDA side. As far as volumes go, like Mike said, we received a forecast directly from our customers, and that's what we forecast off of. Interestingly enough, those were lower than what they forecasted. But now we've turned the corner into February, and it has gone completely the other direction. And we're scrambling to say, "Oh, my gosh, look at all this water." Good problem to have, right? Makes up -- there's a lot to make up, but we're seeing that turn and the strength of those forecasts coming back. And actually, those forecasts are outpacing where they were previously forecasted. So if you take volumes and OpEx, obviously, the integration side of things with Mesquite and Hillstone, we're very busy reducing OpEx and meeting those synergies that we had modeled. Those are in play. A lot of the Hillstone assets contained rental injection pumps, other rental equipment that NGL purchases on a capital purchase, those are being changed over. And they were -- some of them in January. Certainly, in February to March, this last quarter, we'll be seeing those expenses come off of the books. Mesquite is going very well on the integration side. We're enhancing the -- how that business is being run and working on OpEx on that side. So hopefully, that answers your question, it's a transition, it's a new basin. Like Mike said, our -- one of our largest customers is only 3% developed in their area. There's a lot of midstream development to happen on our end, but there's also a lot of support development around infrastructure, such as power that's happening as well. And frankly, we're going to come out of the woods on a lot of that this fiscal Q4 and then Q1 of '21.

Got it. Very helpful, Doug. Second question, maybe for you, Trey, on Grand Mesa. Performing really well this year, it looks like that should continue based on the outlook, but just curious how you're thinking about maybe some of the credit risk right now? I think some of your major customers are seeing some of their bonds trade a little bit lower here. So how do you think about the credit risk against Grand Mesa being of pretty strategic importance in the basin?

Sure. So we do have diversified customer base on Grand Mesa. Obviously, some of the larger customers do have some credit risk associated with them. We monitor that very closely. We feel very comfortable with what all of our producers are saying publicly as well as to us directly. We do have foresight, they're nominating volumes ahead of when they're reporting publicly. So we do get to see what is coming down the pipeline. So that gives us some foresight into what's happening. And as you can see from the volumes, the volumes have remained strong. So we feel good about where things stand. It's something that we will, obviously, pay a very close attention to. But Grand Mesa was built for these particular producers. We're a strong partner with these producers, and we will continue to partner with these producers on a future basis. Even under the long-term contracts, there is still a lot of work between the producer customers and pipeline to make sure that we're meeting each other's needs.

Thank you, gentlemen.

Thanks.

Our next question comes from the line of Michael Blum with Wells Fargo.

Hey, thanks. Good morning, everyone. Maybe just to stay on Grand Mesa for a second. So I noticed in the quarter you talked about purchase of third-party volumes. I just wanted to understand, is that your marketing company buying those barrels? And if so, how do we think about the margin on that barrel versus a barrel that's just shipped by a third party? And should we just expect that, that is going to be sort of a normal course of operations going forward?

So Michael, yes. That's consistent with how the pipeline has operated from Day 1. NGL Crude Logistics is a shipper on the pipeline. They pay the tariff rate to the pipeline. We report Grand Mesa on a net basis. So we do factor in any loss that Crude Logistics may take into our net -- into what we report. So that has been consistent since the start of the pipeline. That -- the margin that Crude Logistics can generate is generally in line with the differential out of the basin. So I think I've seen some reports recently that -- in the $2 to $3 range. I think that's consistent with what we would expect right now as well.

Great. And then my second question is just you recently hired an Executive VP of Strategic Initiatives. And I just wanted -- maybe if you could just talk a little bit to that. And what the -- what's that role going to entail? And especially, I guess, in light of the fact that sounds like you're -- you've kind of done the heavy lifting on M&A in terms of the acquisitions you want to do. Just want to get a sense of that.

I think that -- this is John Ciolek, Executive Vice President of Strategic Initiatives. I think that the role here is really to make sure that we, number one, don't miss any opportunities from a strategic acquisition or divestiture standpoint. And then I think that there is also a number of other important initiatives that the company is focused on, including ESG, importantly, but also to -- looking forward, we want to make sure that we are presenting our story, presenting the way that we communicate with investors on an ongoing basis. I think that you'll see increased transparency around a number of different things over the course of this fiscal year and in -- on a go-forward basis.

Great, that's all I have. Thank you.

Thank you.

Thank you.

And I'm showing no further questions at this time. I will now turn the call back over to CEO, Mike Krimbill, for closing remarks.

Well, thank you for joining, and we'll talk to you in a few months.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.