NGL Energy Partners LP (NGL) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the NGL Energy Partners LP Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the call over to Mike Krimbill, CEO of NGL. You may begin.

Thank you. Welcome everyone. Before get started here there is a slide deck on the website, our website that Atanas is going to take us through, so while I am reading this you may want to look for it pull that up if you don't have it already. 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. While these factors include the prices and market demand for natural gas liquids and crude oil, the level of production of crude oil and natural gas, the 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 LP 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. All right. With that, why don’t we kick-off with Atanas and then we will come back for questions. Atanas?

Thank you, Mike, and good morning, everyone. Thank you for joining our second fiscal quarter earnings call. As Mike indicated, we posted a presentation to our website for this call and I’d like to walk you through the slide deck for our discussion today. Beginning on slide three, NGL is reporting adjusted EBITDA for the quarter of $67.6 million, excluding one-time acquisition cost of approximately $600,000. This compares to an EBITDA of $70.4 million for the same period last fiscal year, exclusive of $8.3 million of acquisition costs, which represents a decrease of 4% for the second quarter year-over-year. Year-to-date, NGL is reporting adjusted EBITDA of $156.6 million versus $113.5 million last year, both excluding acquisition costs. This represents an increase of approximately 40% year-over-year. NGL reaffirms its adjusted EBITDA guidance of $500 million for fiscal year ’16. We also reiterate our distribution growth guidance of 6% for calendar ‘15 and ’16, and 8% thereafter. On the graph below we want to point out NGLs growth from fiscal year ’14 through ’16 where our year-to-date EBIDTA shows a 50% compounded annual growth rate and highlights our pushed to a less seasonal business model. Moving on to slide four, we’d like to highlight the driver of our EBITDA variance versus analyst consensus year-to-date. WACOG in our Wholesale Propane business was a significant portion of our year-to-date variance. However, we want to explain why we're comfortable with our guidance of $500 million for fiscal year ’16. As of 9/30/15 NGL had approximately 200 million of presold propane gallons at an average fixed price of $0.66 versus WACOG as of 9/30/15 at $0.38, which equates to an unrealized margin of approximately $55 million before storage costs. These presold volumes are contracted to be listed by the end of our fiscal year, which is March 31, ’16. In the lower half of the slide, we also like to highlight that in fiscal year ‘15 we made approximately $330 million in the last two fiscal quarters. To hit our target of $500 million for fiscal year ’16 we need to generate $343 million of EBITDA for the quarters ended 12/31/15 and 3/31/16. This equates to just about 4% over the same period last year. Moving on to slide five, we want to discuss the macroeconomic energy pricing environment and how each of our businesses counteracts against one another. Starting with Crude Logistics and Water, the price of crude is down from around $90 in fiscal year ‘15 to around $45 in fiscal year ‘16. This impacts our crude marketing margins and our water margins specifically the crude oil recovery revenue stream. However, NGL has been able to fully utilize our storage assets of Cushing that were underutilized last year by entering into long-term leases and utilizing the remaining portion to earn contango. Next, we want to highlight the increased demand in Refined Products and specifically motor gasoline. The Energy Information Administration's most recent report forecasted that motor gasoline demand will increase 2.1% or 190,000 barrels for calendar year 2015 versus increased demand of 80,000 barrels per day or approximately 1% in calendar 2014. This increase demand has driven up volumes for our refined marketing business by 14% year-over-year. The increased demand coupled with the allocated line space has led to higher margins year-to-date for our Refined Products business. In our Liquids business as we discussed we have a large amount of presales as customers look for lock in a margin at a lower price prior to the start of the heating season. We have also seen an uptick in demand for butane blending. You will know this in our other NGLs margins, which are up by around 50% from $0.08 last year to $0.12 in the quarter ended 9/30/15. Our Retail Propane business continues to outperform expectations posting margins of a $1.05 versus $0.90 during the same period last year or approximately 17% increase year-over-year. Next, we will move on to slide six, in our effort to increase our segment EBITDA visibility we had -- we have included EBITDA by segment detail and provided a walk from our operating income to adjusted EBITDA by segment on the quarter-to-date and year-to-date basis in our 10-Q and in the appendix to this presentation. Starting with Crude Logistics, the segment is relatively flat for the quarter but up 30% year-to-date over last year, as the greater utilization of our storage assets of Cushing and volume growth offset the decrease in marketing margins. Water Solutions is down both for the quarter and year-to-date over the same period last year, due to the impact of the crude oil revenue which has been offset by increased volumes. Liquids is up driven by a very strong butane volumes and margins, as well as the incremental contribution of projects Sawtooth, our large salt dome NGL storage facility in Utah offset by the wholesale propane WACOG impact. We feel propane continues to outperform on a year-over-year basis driven by increased margins as outlined previously and with refined fuels at the high level it’s down for the second quarter over the same period last year and this is largely a function of the backwardation in the gasoline price curve, which introduces some volatility on the quarter-to-quarter basis. Year-to-date results are up over 250% versus last year, due to the increased volume and margins previously discussed, coupled with having two quarters of TransMontaigne activity versus only one quarter in the previous period last year. Overall, we're very pleased with the results of this business year-to-date. On slide seven, we wanted to address the impact of volume, margins and commodity prices on our -- on NGLs total EBITDA to help adjust how this business is offset each other given the current macroeconomic backdrop. Starting with Crude Logistics, crude marketing targets a margin of 1.5% crude oil price, so $1 change in crude price impacts margins by around $0.015. So in other way every $10 change in crude impacts margins by $12.5 million. On the other hand a $0.10 change in contango impacts EBITDA by $6 million annualized based on our current crude storage capacity. In Water a $1 change in crude price impacts oil revenue by $1.2 million annualized at current crude oil volumes. And in Refined Fuels a $0.01 change in margin impacts EBITDA by $38 million annualized based on a run rate of 250,000 barrels a day. In Wholesale Propane $0.01 change in margin impacts EBITDA by $12.5 million annualized and with respect to other NGLs, primarily butane $0.01 change in margin per gallon impacts EBITDA by approximately $7 million. In Retail $0.10 change in margin is equal to $20 million in gross margin. Moving on to the margins page which is slide eight, Crude and Water margins are down for the second quarter and year-to-date over the same period last year, driven by the drop in crude prices. Wholesale margins are down over 50% to Q2 and 34% year-to-date due to significant decline in propane prices and our increased WACOG. We expect this to reverse as we ahead into the second half of our fiscal year and customers start pulling the contracted volumes in the winter quarters, allowing us to realize the locked in margin, plus the give up in the first two quarters through the now decrease WACOG. Other NGL margins are up almost 50%, driven primarily by the strong margins in butane. The Refined product margins are down in the second quarter due to the backwardation of gasoline pricing curve up 11% year-to-date over the same period last year. And finally, the Retail margins are up 17% over the same period last year, due to the fall in Wholesale Propane prices allowing us to capture additional margin. Moving on to slide nine which is our volumes, crude volumes are flat for the quarter and up 10% year-to-date versus last year. Water volumes are significantly up 40% in 2Q and 65% year-to-date versus last year. Other NGL volumes mostly butane are up 18% for the quarter and 10% year-to-date over the same period last year, due to the strong demand for butane blending, our long-term marketing agreement with the refinery on the East Coast, as well as the fully leveraging our network of NGL product terminals and a fleet of high pressured railcars. And finally refined volumes are up 14% for the quarter and 55% year-to-date over the same period last year due to owning TransMontaigne for two full quarters versus one quarter last year. Our allocated line-space on the colonial plantation pipelines with access to the TransMontaigne refined products terminals and overall increase in demand for refined fuels. Turning to slide 10 which is our financial metrics. Starting with EBITDA, as previously discussed, 2Q EBITDA came in at $67 million, net of $600,000 acquisition costs with total year-to-date EBITDA of $156 million, net of $600,000 of acquisition expenses, which leaves us with the target of $343 million for the last two quarters of fiscal ‘16 to achieve our target of $500 million for the year. Cash interest expense for the second quarter came in at approximately $27 million, excluding TLP interest of $2.4 million and non-cash interest expense of $2.4 million. We expect cash interest expense to be in the range of $115 million to $120 million for fiscal ‘16. During the second fiscal quarter, we spent $11.3 million on maintenance CapEx. This excludes $4.2 million of TLP maintenance. And we still expect maintenance CapEx to be in the range of $30 million to $35 million for the year. On slide 11, we wanted to highlight our liquidity position as of September 30th. And in October, we also added $150 million to our acquisition revolver by exercising the accordion feature in our credit facility. This coupled with our cash balance of approximately $28 million equates to about $350 million of liquidity. And on slide 12, taking a look at our CapEx guidance, year-to-date we spent $352.3 million on growth CapEx and acquisitions; of which, acquisitions accounted for $160.8 million and organic CapEx approximately $192 million. This excludes $9 million attributable to TLP growth CapEx. Overall, we expect to spend at least $700 million for fiscal ‘16, which is relatively close to our previous guidance of $750 million. This leaves us with identified CapEx spend of around $345 million for the second half of fiscal ‘16. And finally, we also recently got -- recently completed our annual reviews with all three rating agencies. All three reaffirmed our corporate family ratings, Fitch BB, S&P BB minus and Moody’s Ba3. While Moody’s changed our outlook to negative, S&P upgraded our business risk profile there and also upgraded our financial risk profile. With this in mind, we are confident in our ability to tap into the capital markets as needed. And with this I'll turn it back over to Mike.

Thanks Atanas. I guess, just make a few comments without trying to be preaching, I guess. We’re in an environment where negativity seems to be real popular. No one ever looks for positives in anything apparently. And a good example of that was our rating agency. Rating agency situation, we had all three reaffirm our ratings. We had two improvements and we had a negative watch. All I ever heard about was this whole negative watch field. And I suspect most people don’t even know how its calculated. So Atanas, if you could give them the math on how that’s calculated. Now show how it is?

As you all know both rating agencies have two different -- all three rating agencies, different use, different approaches there and in calculating our ratings. But Moody’s takes an approach where we have not given any pro forma EBITDA credit for our growth projects and for our contracted EBITDA particularly Grand Mesa, Sawtooth and that impacts our leverage calculation. We understand that this is a methodology and it is what it is. But that’s what’s to a large degree that impacted our leverage calculation according to their methodology translated into a negative outlook. With S&P, we do get credit as it took three-year forward look and it’s a recoverability model, which resulted in the upgrade both in business risk and financial risk. But with all this in mind, again we’re happy that in this environment where ratings are being challenged that people are being downgraded, we have gotten a reaffirmation of our ratings by all three rating agencies. And I think that shows that our business model from a risk perspective is working wherever we see the macro hedge between the various segments as we went through the various components of our models. You could see in three of our businesses where margins are doing extremely well. We have some challenges in the other two segments but overall that hedge really proves our strategy and our business model.

Exactly. Another item I had seen out there lately is some people are calculating a coverage ratio for only the second quarter which is obviously in the seasonal business, it’s a low quarter. I just I’m dumb bounded that what -- how that has any significance or meaning. When you -- in a seasonal business, you should be looking at the coverage either trailing 12 and pro forma going forward. We -- obviously we go to our Board of Directors and if we said hey guess what our coverage is 0.4 times, you think they are going to raise the distribution, of course not. So I don’t understand this nonsense that we see out here that is totally meaningless and has no relation to our company. And I can go on and on about how negative the market obviously seems to be. And no one seems to be -- I heard just years ago, hey we invest in management, what clearly lot of people do. And they seem to get rewarded if they come up with some negative nobody else has figured out. So we -- before I open up for questions, we are on target, our model works. The rating agencies reaffirmed us. The Board of Directors looks at our coverage ratios were they raise the distribution or authorize it. We basically this quarter had just two things hit us. We’re little tough on the analyst because we don’t give quarterly guidance. Last year, we did that and of course when we give guidance, we have to assume some kind of pricing trend. So we really assume a flat price trend. Well, when you have your liquids prices falling with all the presold gallons we have, the same thing happened to us last year. You show losses. We had negative EBITDA in our wholesale propane division. It’s all going to be recouped in the third and fourth quarter as we delivered those gallons. While the other thing that happened to you was, we just had a backwardated gasoline curve in the second quarter. And if you look out over the next six months, the gasoline curve was very nicely contango. So we recoup what we didn’t get. I would like to, I think, complement the analyst because without our guidance they came up with some pretty decent consensus estimates and the only reason we are off of those estimates is because of the WACOG impact and backwardation on gasoline. Both of which will be reversed in the next two quarters. So with that, let’s open it up to question.

[Operator Instructions] Our first question comes from the line of Brian Zarahn of Barclays. Your line is now open.

Good morning.

Good morning.

EBITDA guidance for the year, I understand you expect better propane results in the second half. Can you elaborate a bit more on your outlook for crude logistics, water and refined products? And why are you confident that results will improve?

Sure. Refined products, we actually -- we're able to purchase late last year an additional 25,000 barrels per day per cycle. And we have signed up a very significant new customer. Margins are healthier there and margins only have to go up a penny as you saw how it leverages our EBITDA. And if you look at the gasoline market, the curve through March 31 is very contango. So we’re very confident we’re going to do well in the refined fuels business. On crude, we were expecting what we saw in the first quarter to repeat in the second. We have Don Robinson who runs our crude division segment on call with us. So I’ll let him talk to crude in more detail if you like. We’re not necessarily expecting integrating improvement in the crude. One place it could have improve and it has recently is the Contango at Cushing storage. And water, we’re very, very bullish on water. There has been -- I've got a number of calls, oh my gosh, water volumes must be way down. We saw our first water competitor file for bankruptcy. And we were seeing some of our other competitors being put up for sale. So from a competitor point of view, we’re going to be really in a great position within another who knows six months or less. We are adding more water. I guess, should say getting additional market share as we focused on these water pipelines, which really helps the producers decrease their LOE cost. We haven’t getting those water trucks off the road. So we have our backlog of water pipelines that we are building somewhere between 50,000 and 10,000 barrels of day of water will be coming in on those water pipelines. We are getting more solids then, putting in more solid treatment plants. We have in the DJ, in fact, we have a solid facility that will be up again this fiscal year that will treat solids in a little different way. We’re able to, I guess, grind up these solids in Eagle Ford and Permian and inject them down the well. In the DJ, you can’t do that because the porosity is not as good. So there you go through a different process to separate oil and water and press what’s left and get merely a water and puts remainder in a dark landfill. And we have another facility that we are actually injecting some solids in northern part of Colorado where we have little better porosity in that well. So, we have lot of really good things going on in water. The only negative of course is crude price. And that’s -- we've already taken that yet unless prices go to $20 and I think at any lower 40s where we are already at the bottom. So, we are very bullish on the rest of the year. In fact, as Atanas said, it doesn’t have to be much different than last year.

All right. I appreciate the color. If I could get a little more commentary on the Crude Logistics outlook?

Hey, Don. Do you want to….

I would just say that the margins have been under pressure for some time and we continue to see that today. But as Mike said with contango, obviously you can see that outputs now through the first quarter of 2016. The contango is improving, which we will be able to take advantage on it. And whether storage across the -- not only in cushing but another area, so we think the contango will offset any margin that we’ve seen erode over the last few months. Our volumes have held up but the way it’s been -- we have seen the margins go down. But clearly, we believe that with Contango when the market the way it is through the first quarter of next year, we will see -- we will make those dollars back in Contango.

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

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

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

I think, Brian, we may get some more color in next few weeks.

Yeah. Next few weeks, I think we will be able to give more color to that.

We will stay tune. Last one for me. The cost of capital has risen across the space and you do have some financing needs for Grand Mesa and other projects. How does your current cost of capital impact your financing plans and have seen you reaffirm distribution growth rate and could that change if the cost of capital remains roughly where it is?

Well, do you want to start, Atanas.

Yes, sure. So if you look at our cost of capital, obviously where equity is trading today issuing common equity doesn’t make any sense of this yield. So what does that mean as far as access to capital markets? If you look at where our bonds trade, which is anywhere between 7.5% to 7.75% as well as our rating, I think we feel very comfortable with our ability to access the high yield market. If you look at out what we’ve laid out as far as CapEx, for the end of the year, we said $345 million and frankly, we have probably some cushion within that number, meaning that we are being somewhat conservative. That numbers is probably on the higher end. And then if you look at the availability currently, which is -- as of the end of the quarter, it was $350 million. Technically, we had enough liquidity with what we have. But if we were to access the market, we do have that ability. So, we would probably be relying primarily on the debt markets and high yield, which also helps us with the rating agencies, with Moody’s as well as S&P because we are looking more at that secured debt and towards the unsecured bucket. Not sure if that adequately addresses your question.

I mean, this is such a ridiculous equity price. We're certainly not issuers of equity, and as you know, our Board’s authorized us to buy up to $45 million worth of NGL common units. We did a little bit last quarter. So, we are clearly buyers of our equity, we are issuers. And from a liquidity point of view as Atanas says, we have access to that high yield market. So, we have no concerns on liquidity. So, we look at other things from an equity side like everybody else does. So, we look at the perpetual preferreds, the convertible preferreds to see what those make sense and they typically are going to trade at some spread over your debt. So, we are not very excited about -- I will say again, issuing equity with the price of that. So, I’m still over my gust. Does that mean your growth declines to halt and certainly not? We have the revolver. We have the ability to put $300 million or $400 million on high-yield. We’ve got these build projects that we don't need to do acquisitions. Clearly, I think if you are going to go out and do acquisitions that are 10 multiple, then you have to issue common equity that just doesn’t work. So, we will just keep our heads down and continue with our internal growth, which we will over time and the next as we've said before will get us to $700 million or $800 million EBITDA in the next couple years.

And if I could upgrade that, we are 100% focused on spending our dollars on projects that are fee based contracted EBITDA. Salt dome is a good example. Grand Mesa, anyone putting our water business, transitioning that business even at Texas to a fee based cash flow stream with pipelines connected with the producers. So, we're being very wise and very focused on increasing the traditional midstream Brent like cash flow for the partnership and we are currently just over 50%. And just with the projects that we currently have that we have laid out to you, by the beginning of the fiscal ’18, which is less than a one calendar year way, we will be at two-thirds of fee-based.

Thank you.

Thank you. And our next question comes from the line of Gabe Moreen of Bank of America Merrill Lynch. Your line is now open.

Hey. Good morning, guys. A couple questions for me. One is in terms of thinking about liquidity. Look like you will release in the next call, couple months, you will get a working capital benefit from both, the liquids business as well as the retail propane business? And if that’s so can you quantify that in terms of what the magnitude might be?

Yeah. If you -- go ahead, Mike.

Okay. Yes. The benefit is going to be primarily from the wholesale propane business because retail -- I mean, retail propane -- yes, it will benefit as because we are going to start pulling, obviously as you sell more volumes in the winter that means more cash flow. Similarly on the wholesale propane businesses produced as the customers, retailers pulled those presold volumes in the third and fourth quarter that will translate into more liquidity for us. So that's anywhere between $75 million to $100 million.

And remind me on this. If that’s not on -- except for working capital revolver that’s on your regular revolver or is there….

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

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

Yeah. It is not the GP. We obviously own 100% of that. We were looking at selling the GP -- the LP units, $3.2-ish million at more attractive price. In particular, it made a lot of sense to us if we had say 80% units we were holding and we could sell those and buyback our units yielding 15%. That made a kind of sense to us. And so we have made a few calls but we don't have anything close to any kind of agreement. We are not excited about $30. If we are going to sell those, it’s going to be at a higher price.

Got it. Thanks, Mike. And then in terms of giving further look at FY ’17 CapEx, can you just talk about how much of the lease Grand Mesa based on its current form maybe required to slip over to FY ’17 and is there other CapEx for Sawtooth or elsewhere, if you think about it going there for ’17 CapEx look? And maybe how much of that might be dependent on capital markets at a reasonable price, reasonable terms on that?

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

I don’t think we have anything material for Sawtooth in fiscal ’17. We just -- we have some of our existing schedule of wells that will go into fiscal ’17, that’s identified. But Sawtooth will be largely completed.

Gabe, the Sawtooth is -- we’ve drilled our fifth caverns and there is only three remaining and launching out the fifth one. So those are 25, about $20 million, $25 million per cavern. So that leaves 75 plus remaining, some of which will -- obviously the fifth cavern will be done this year. So it’s definitely when we say it’s not that significant, it could be $25 million to $50 million for ’17 at the most. On Grand Mesa, we should probably not comment at this time on what would be in ’17.

Understood. Then last one for me. Just in terms of pro forma EBITDA on slide 11. Just in terms of the assumptions, obviously Grand Mesa I guess. I guess on its current form current rate, isn’t that number or are you baking in anything differently that are relative to the strip? Can you talk a bit sort of up in volume and outlook that’s embedded in that number? Is there anything I guess may trend that number that we should we aware of it but maybe assume something different in the current backdrop?

On Grand Mesa, it was -- Gabe, is that what you were saying?

Yeah. Grand Mesa and just other business segments in general. In terms of what embedded in that EBITDA number versus kind of the current backdrop?

Mike, do you want me to take this?

Yes, sure.

Sure. So if you look at that number, which is for covenant compliance purposes, that’s basically our 12-month trailing EBITDA adjusted for the dollars that we have spent where we have contracted EBITDA or historical EBITDA. So we’re getting credit for the months we didn’t know of those projects. When you look at the total number, Grand Mesa accounts are probably about half of that. If your 12 months trailing is, excluding acquisition cost, approximately $490 million, you’re left with about $125 million to $130 million of pro forma adjustments. About half of that is Grand Mesa and that’s simply based on the amount of CapEx that we have spent relative to the total project cost, and that’s how our credit agreement works and our banks have given us credit for that spend. Sawtooth accounts for about $16 million, so you are looking at $75 million to $80 million just related to these projects, then we have about $5 million for marine and then water accounts for the rest of that variant. So these all water wells that we have been putting in over the year. So that’s what accounts for that $120 million, $125 million of pro forma EBITDA adjustments to get to the 616 of EBITDA for covenant purposes.

Understood. Thanks for the walk. I appreciate it.

Sure.

Thank you. Our next question comes from Darren Horowitz of Raymond James. Your line is now open.

Hey, Mike, want to go back to your comments around return on invested capital. And I am curious given the optionality that you have especially in light of financing our remaining $345 million of growth CapEx this year. You’ve got a pretty good arbitrage in terms of the cost of debt versus cost of equity. So how do you think about as you briefly mentioned maybe deferring some of the capital spend with regard to the organic growth program relative to maybe coming back in, possibly issuing a little bit more debt since you’re only running 3.5 turns and purchasing some of the common equity because you’ve got almost the 1000 basis points of yield. And I think it might give you a bit more financial flexibility for the long-term. So I'd love your thoughts there.

I love to buy back more and more of our common units. It’s crazy that the yield is at, why do an M&A deal at eight or seven times when you're going to make whatever 12% to 14% when you buy your units in the '15 or '16, you don’t have contracting risk. So we think it makes a lot of sense. Our limitation is more making sure we finance these internal growth projects and certainly the banks are more excited about us, though borrowing a lot of money and go buy our units back. I don’t know if that answers?

Yes, it does. If I could take a step further, and I know you mentioned the perpetual preferred or the convertible preferred trading at a spread over the debt, a direct investment obviously would still be less from a cost of capital perspective than where the nominal common equity is trading today. You’ve got a little of retain cash and yet you are out there effectively supporting distribution growth that the market is not giving you credit for. So I am just wondering with some of that financial flexibility if you can come in and buyback those units because the market clearly isn’t representing a long-term intrinsic value that you guys can yield over time. How do you think about doing that? Do you get a better compounded return? It’s better for the unitholders long term. And I think it makes financial sense. I'm just curious there are a lot of options I think at your disposal and I'd love to know how you think about prioritizing them.

Yeah, you’re right, we look at, the perpetual preferreds are really interesting. If that’s usually, say, 180 to 200 over your debt, we thought high yield was in the, say, 7.5, we are looking at say 9.5, and you get credit on I think a 100% from one agency and 50% from the other as equity. So if that’s the cost, and right now, if we’re at -- I don’t know where we are, but say we are at 15 or 16 to the common unitholder and then we are about 20% into the splits, that’s really like 18% or 19%. So I agree with you it makes sense all day long to issue in this case say perpetual preferred and buy back your common. The only I think real invitation to the perpetual market is it’s not really the market, it’s all retail. So I think Target did a great transaction. I think they raised $120 million, but I think that’s a big number for that market. And if we could do something not even similar but half of that or more and use that to buy back our common, that makes a ton of sense.

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

No, outside of what we have disclosed in our most of the financials, which is in both 11, most of the impact has been reflective year-to-date already. There will be some for the remainder of the year, but that’s a non-cash expense, which is our [indiscernible], our any bonus paid in units as well as any performance-based bonus.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of Jeff Buhrman of Wunderlich. Your line is now open.

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

Don, can you take that?

Yeah, I think this -- I think we’re right around that volume today and we don't see really any changes going forward. Obviously, we hope to grow the volume, but it is very tough and with the margins where they are today, but we don’t see any for us any dropdown in the volume going forward. We’re seeing a lot of pressure obviously in the Eagle Ford with all the splitters coming up, but we’ve been able to maintain volumes there. And then in the Permian, we basically and in all the other basins, we sort of maintained our volumes, probably the one part that we slipped a little volumes in the midcontinent area, but we see going forward we should be able to maintain the volumes we are doing today.

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

No, we didn’t, it was really just the backwardation of gasoline curve and we did not quantify that now.

Okay. But I guess in your prepared comments, you see that sort of reversing for the rest of the fiscal year?

Yes, if you can you verify that looking at the gasoline curve going out through March, it’s very strong contango.

Jeff, this is Mike. If you look at our refined fuels business, what we have from TransMontaigne, one thing to keep in mind is the vast majority, probably 80% of that is contracted. Those are one year contracts. So over the time horizon you know how much money you will take. There is some volatility because of that backwardation, then you go back to contango, but over the 12 month period, we have -- we feel pretty confident with the expectations that we have. Now one thing that an outsider could come into our favor and said is if you’re looking this quarter, we’re up our margins, up three-tenths of a cent. One cent is $38 million, so this is over $12 million impact just a third of a penny. And what we have there is which is keys our line space as well as access to these terminals, so we provide ratable, but on the other hand because of the fact that we have contract, we have ratable demand and what we also do is we end up selling to the retailer. There is no middleman between us. So it’s a very good business model and overall that business has performed very, very well from a year-to-date basis, even if you look at last year, but you can’t look at it on a quarter to quarter and, say, yes, doing well, it’s not doing well.

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

Well, we always consider everything, so that’s a good, no, answer, but we really can’t comment on that at this time. But I don’t know, Don, do you want to talk some about the -- we haven’t discussed. Go ahead.

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

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

I agree. It’s going to benefit all of them as far as when the pipeline gets up as to getting their barrel to a marketed cushing, which is a very good market today for them.

Thanks for all the color, guys.

Thank you. Our next question comes from the line of Matt Niblack of HITE. Your line is now open.

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

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

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

That’s right. Yes.

Okay. Great. And then a lot of…

And other thing is if you look back at what we said earlier, when we acquired TransMontaigne in the same year, year one was at $30 million, year two $50 million, year three [indiscernible], call it a -- we run the business for 12 months. It’s kind of a $70 million business. So you have kind of a guidepost there to go back to.

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

Yes.

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

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

Got it. Go ahead.

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

Got it.

Yes. Matt, I said, $5 million to $10 million, this is historically. Mike is correct.

Yeah.

This is something that we’ve realized.

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

I’ll start on that one. The high volume storage volumes over what 102 million barrels, a couple things happened, one, is it make it more of a contango market in liquids storage, which helps us with our presold gallons, the 200 million barrels per gallon, I mean. So that’s a positive. It also allows us to increase margins as we may get a dollar reduction and let say, there’s a $0.90 reduction to the customers. So we’re able to raise the margin. So you really have to ask yourself, it's really a weather factor. If you have a cold winter, you’re going to make more than obviously warm winner and this one starting out on the warmer side. But if you remember last two winters really didn’t get cold till January, February, March, April. So there is really not a negative to the high storage volumes.

Great. Thank you.

Thank you. Our next question comes from the line of Selman Akyol of Stifel. Your line is now open.

Thank you. Good morning. Very much appreciate all the color and most of my questions have been answered. I just want to follow-up a little bit on the buyback. I know you said you done a little bit of it, but do you expect complete it within a year than given the very attractive returns that you’re seeing from that, I guess, why you are not be more aggressive?

Sure. There is two things. I think in our announcement we said we have a -- we anticipated by March 31, if I recall, but I could be wrong. That’s -- so the timing wise you had to put something -- attach some timelines here announcement. The -- say the -- I am trying to think what the second part of the question was, timing and ….

Well, I guess, what -- where do you stand, I know you said you have been small enough, if you add more color to that but?

Yeah. No. If you’re doing a private transactions, the company can buy, I believe, pretty much any time. If you are buying on the stock exchange then the company gets blacked out the same as management. So the both management, board, officers and buyback program will be allowed to purchase two days after this call.

All right. Thanks very much.

Thank you. Our next question comes from the line of David Bach of Morgan Stanley. Your line is now open.

Good morning, guys. Thank you very much for all the information you given us. For those of us that have followed you company going back to November 2011, we’ve always noticed that same group has been the largest shareholders of the equity. To the best direct collection you have, what is the current position of ownership in the common units?

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

Yes.

So you don’t think they’ve been selling in the last six months or three months?

Yeah. We know we haven’t sold through September 30 and we don’t know, of course what’s happened since. When they filed our K, we’ll find out.

And when will that be please?

They have a 12/31 year end so I don’t know how much time they have been 90 days to file. So it will be sometime next year.

Okay. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from [Mike Murray] [ph], Private Investor. Your line is now open. : I appreciate it. Thanks, Mike. All my questions have been answered.

Hey, Mike. How you’re doing? : I’m doing fine Mike. Appreciate the color, let say the Raymond James analyst covered most of my questions, all of them.

Okay.

Thank you. I’m showing no further questions at this time.

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