NGL Energy Partners LP (NGL) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the NGL Energy Partners Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Trey Karlovich, Chief Financial Officer. Sir, please go ahead.

Thank you and thank you for joining us this morning. This conference call includes forward-looking statements and information. While NGL Energy Partners believes that its expectations are based on reasonable assumptions, there can be no assurance that such expectations will prove to be correct. A number of factors that could cause actual results to differ materially from the projections, anticipated results or other expectations are included in the forward-looking statements. These factors include prices and market demand for natural gas, liquids and crude oil; level of production of crude oil and natural gas; the effect of weather conditions on demand for oil and natural gas and natural gas liquids; and the ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to financial results; and to successfully integrate acquired assets and businesses. Other factors that could impact these forward-looking statements are described in the Risk Factors in the partnership’s annual report on Form 10-K, quarterly reports on Form 10-Q and other public filings and press releases. NGL Energy Partners undertakes no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. Please also see the partnership’s website at www.nglenergypartners.com under the Investor Relations for reconciliations of differences between any non-GAAP measures discussed on this conference call to the most directly comparable GAAP financial measures. At this time, we will now turn the call over to Mike Krimbill, our CEO for his remarks.

Thanks, Trey and thank you everyone for being here. I would like to start out with some of the accomplishments in ‘17. The main one of course, Grand Mesa was online, on schedule in November. If you recall, those are deadlines supported by contracts of approximately 10 years of length, all fee based with upside for additional non-committed volumes as the base this production grows. The rig count has doubled in the DJ. We have talked about what we are seeing on the water side as the indicator. But production is not yet online and we expect to see that definitely in the second half of the year, if not – the fiscal year, if not sooner, beginning in June. As you know, Bonanza Creek was having some difficulty. They emerged from bankruptcy. They are planning on adding a rig this summer. And we have a contract for their volume for the next 7 years. So that turned out as well as I think it could be. We also – as you know, we have been moving to get as much fee-based business as we can in contracted business. We placed the Houma Terminal in service and this is a blending terminal with a major oil company as a partner. We also completed the Port of Comfort, Texas terminal, which is between the ship channel and Corpus, this is an export terminal supported by contracted volumes. And we are fortunate to purchase at a very attractive multiple the Murphy assets at Port Hudson and Kingfisher. Port Hudson is supported by a 5-year contract to supply butane, that’s a natural gasoline for gasoline blending. Kingfisher is in Kingfisher County, which is where the new stack pipeline will originate, that we are also building and that takes a wide grade product and also off-spec condensate we are expanding the splitter that takes that condensate. So that asset we expect to exceed our projections. In addition, we leased some additional assets on the refined products side at Collins from TLP. So for gasoline blending and other things we can do there, that’s the last point on Colonial as you head north, where you can get in and out of Colonial to receive also injections. And then we have leased now, I think we are up to 1 million barrels of storage in the Mid-Con and so we are providing some services in the Mid-Continent for refined that are not part of the original leased assets from TLP. So we think we have set the stage for the future, I would like to go and explore a little bit this line space issue that we had in ‘17. As you know, we purchased about 100,000 barrels of cycle, which is 20,000 barrels a day last July. We did so in order to accommodate our customers’ growth. We want to grow with our customers rather than have them go to competitors and try to add additional volumes. Unfortunately, line space values kind of de-connected from the historical values. We very much like the line space, Colonial sitting there in a great position. You are seeing increasing demand for gasoline in the Southeast. It’s the lowest cost transportation up to the New York Harbor. We still are committed to the line space. We feel like it was perhaps a 1-year issue and not a systemic change in the line space values. When we talk about values, it’s basically the difference between the Gulf Coast pricing and the Harbor pricing, less the tariff to get from the Gulf Coast to New York. What happened last winter was really a January, February, March, I will say, a phenomenon at this point, where we had elevated exports in the Gulf Coast, which we got to kept the Gulf Coast price up. And therefore, the difference between Gulf Coast and New York Harbor did not expand as it normally would. We wanted to give you some idea of the magnitude, especially those of you who are modeling, we initially of course the entire model line space we purchased, which will be allocated to customers as we renew contracts and they see an increase in demand. But at 20,000 barrels a day, you can calculate pretty easily, that would be 840,000 gallons at a $0.01. It’s about $3.1 million for each $0.01. So if you had budgeted in the $0.03 or $0.04 range, I think it ended up at negative 2. That’s a $0.04, $0.05 change in that -- would have been that times 3.1 million. So you are looking at $12 million to $15 million on that what we call discretionary line space that we purchased. We also have a few contracts that have a line space component. So, we also were receiving a lower margin from a few of our customers. So, every $0.01 between the discretionary line space and what we have in our customer contracts is $7 million to $8 million of EBITDA. So if you have negative on your line space, obviously, if we had budgeted $0.02 and it went to negative $0.02, $0.04, that’s about $30 million. Basically, you can get a feel for how that impacts us. We currently are seeing in this first quarter, in line space, the defects, is really line 1 gasoline. It’s probably averaging at minus $0.02 in this first quarter. When you look at the second – our second, third and then fourth, which is the first quarter of ‘18, we are seeing line space values flat to plus $0.01. We believe that these line space values are going to go back to historical norms. We are seeing the exports at this time lower than they were a year ago. We are seeing the Mexican refineries increase their refinery runs, which would mean less demand for the Gulf Coast. So, the indicators we believe are the line space will get back to the historical numbers. Even though we think that we are still looking to change our business model, in case that doesn’t happen. So there are a number of things we can do. One thing we are going to do is talk with some of our customers. It’s not in anyone’s benefit for us to lose money. Obviously, you can’t do that long-term. As an extreme action, you could actually just stop shipping and give up your line space so you don’t lose anything. So we are looking at that and I know we are going to – we will need to get back to historical norms and we will be making some changes or both. I want to talk about the company outlook for ‘18, I think big picture, how do we get from 380 to 500, big picture is that’s really crude oil, which is a full year Grand Mesa, Murphy, as we said, Point Comfort, Houma, plus the dramatic increase in EBITDA on the water side. So I would like to talk about the individual pieces. The retail business and to some extent, liquids are affected predominantly by weather. So in this year’s forecast on the $500 million to $525 million, we have budgeted for a warmer, slightly warmer than normal winter, not as warm as last year, but warmer than normal. So we have pulled back our volumes and we have actually decreased margins by $0.05 in our East Coast business. So we feel good about that, if you got normal weather, we would exceed our number on retail. On the liquids side, we have done the same thing. Clearly, on the wholesale propane, when you have warm weather, we are not selling as much propane to the retail customers, we are – you will see our volumes are up, but that’s because we are having to take the volume that should have gone to retail and then sell it into the hubs at little or no profit. So we are trying to be conservative on that side. Normal weather, we would do very, very well on our liquids business as well. Refined, we have also decreased our budget there for the line space impact. We have some real nice upsides I think in all these businesses, obviously weather on the first two. Refined, we have some blending that we are going to be doing in the Collins storage that we leased from TLP. And we move onto the crude. Crude is going to be I think a real positive area here. We have budgeted our crude on the committed volumes at a – about $1 a barrel, instead of which is where we are currently – what we are currently getting when we are the shipper. Water has indicated to us that the crude demand – the crude production is about to increase dramatically in the DJ for instance, where we will be a beneficiary in our pipeline. But we have down-ticked our expectations in transportation, marketing, because we don’t see recovery in the next quarter or two quarters. But we are seeing the recoveries probably going to happen in the fourth quarter for sure, maybe the third quarter. So why did we say that and I think Plains has also indicated, I think the second half of the year is going to be much stronger. We have the indicator, which is water. So we are seeing dramatic increases in our water business. In particular, our water volumes and let me start by saying, water was in the low 60s, $60 million EBITDA for this – for the year behind us. In our forecast on forward, we have budgeted $100 million. So it’s an increase of almost 50%. That $100 million budget, obviously we have projections of volume, meaning water disposal by quarter. We are already at the projection today of what we are projecting for September. So our volumes – so we have pretty high confidence in water hitting our number or doing better. But the rig counts increased in the Permian and the DJ, in particular. Our water volumes are I think last year, we averaged about 500,000 barrels a day. We are already averaging over 600,000. And with what’s in the pipeline, we can see our way easily to 700,000 next quarter and possibly 800,000 barrels a day by the end of the year. None of – our budget, it is in the $100 million is – are below those numbers. So what’s going to happen with all this water, obviously crude production will come behind, because they are drilling these wells and then they will start completing these pads. So we expect the crude business in the second half of the year to improve and the differentials are going to improve on the crude we shipped. We think transportation, obviously will start improving as there is more – there are more barrels to ship. We have already seen an increase in drivers’ wages that are driving water trucks. In certain areas, it’s gone from like $80 dollars to about $95. We haven’t seen that increase yet on the crude side, but we know that’s coming as there is more crude to transport. So we are being more conservative, I guess on our forecast here. We see really upsides everywhere, but this ‘17 was – every business had a factor that really put it behind the 8 ball, I would say whether it was weather for retail and liquids, the line space values for refined, rig counts at all-time lows, low crude oil prices. Those – all of those things are reversing with the exception of weather and we will know that next winter. But I think we have had two of the warmest winters in history back to back. Our guys have performed very well. There is not a whole lot we knew about the volumes, but margins have increased nicely. You can see that on our numbers. But as you know, we don’t want to lose customers. So we are pulling those margins back for this year when we will see what happens. With respect to growth, we clearly have a lot I think of excess capacity. We spent a lot of money in water for instance. We have a lot of disposal wells that can accept even more water. Our current capacity in those basins we are in is about 1.5 million barrels a day. That will probably over this next 12 months, 18 months become 2 million barrels a day. So as production increases and rigs, which is really rigs being placed in the service, when we are seeing DJ and Permian, we will hopefully, we will see the Eagle Ford pickup more. We don’t have to drill any more wells for the most part. We just have to fill up what we already have. So which is – I mean it’s bad that that’s where we are today, but it’s good that we don’t need to spend much capital going forward to take advantage of the increased business. We have tried to keep our customers and I think you see most of our volumes are the same or up. Now, we just need to get to the profitability up. I would say in the liquids business, we have actually added some pretty significant customers for this fiscal year. That’s a tough business, margins are down there because the excess of railcars and the liquids, anticipated liquids production predominantly out of the Marcellus, that didn’t happen. The retail business, we added some businesses last year. I think we had three real nice regional players in the Eastern U.S. We are finishing the integration of those businesses and we will just be opportunistic on that side. But I think Trey will talk about CapEx. But really the message is low CapEx, focus on the balance sheet and just add volumes and increase margins as the midstream and upstream business recover. So with that, Trey, back to you.

Alright. Thanks, Mike. So I will be going over our financing activities, financial results for the quarter and the full year, which we released this morning as well as providing our full guidance for fiscal 2018. As Mike mentioned, we have made some significant accomplishments during the year. We have also accomplished many of our goals from a financing perspective and we’ll continue to place our focus on building a stronger balance sheet and maintaining adequate liquidity. We have spoken in the past about our financing goals. During the fourth quarter, we were able to amend and extend our credit facility to October 2021, issue $500 million of unsecured notes that mature in 2025 and issued approximately $250 million in common equity through our February offering and prior to that under our ATM. The results were revamped balance sheet with significant liquidity, reduced secured debt, extended debt maturities and a better debt to equity balance. We will continue to work diligently from a finance perspective to decrease our leverage and maintain ample liquidity as we target compliance leverage of 3x to 5x or better, distribution coverage of 1.3x or better, and a low cost of capital to fund our growth opportunities in the future. Looking at the results for the quarter and the full year, we had approximately $121 million of adjusted EBITDA this quarter and have reported approximately $381 million for the full year. Our quarterly results included the following impacts: initial production volumes for demands at Creek on the Grand Mesa Pipeline, which began on January 1, under our new agreement with them. Grand Mesa has performed very well, averaging 53,000 barrels per day for the quarter, with over 75,000 barrels flowing today on the pipeline and growing every month since startup. We continue to be excited about these projects and the opportunities that presents for us to grow our volumes on the pipeline and our presence in the DJ Basin. We have seen a continued ramp in volumes in our water business, as Mike discussed. And we exited the month of March with a run-rate of about $80 million in EBITDA and we have shown continued growth in volumes through April. We have now included our volumes by basin in our earnings release and we will also include this information on a go-forward basis. We started operations at our Houma terminal in Louisiana during the quarter and also closed on the Port Hudson and Kingfisher assets, which we acquired from Murphy in early January. Those assets, along with the new terminal at the Port of Point Comfort will provide incremental earnings for fiscal 2018 and we are excited about the initial results. As Mike mentioned, unfortunately, Mother Nature played a role on our results. With us, recorded what we believe to be the second warmest winter on record for the past 122 years, following closely behind last year’s winter, which was the absolute warmest on record. Our Retail Propane and Liquids businesses were impacted by about $30 million in total based on our estimates due to lower demand for volumes and steep decline of propane prices from January through the end of March, which primarily impacted our wholesale margins. We are basing our future forecast on rolling averages, so you will see that we have lowered our expectations for these businesses for the upcoming year. In addition to managing one of the warmest winters on record, we were also impacted by the unusually depressed line space and basis differentials on the Colonial pipeline, which impacted our contracted and discretionary margins in the Refined Products business. Our margins for the quarter were slightly below $0.02 per gallon on the gasoline basis in this business compared to a forecasted margin of slightly over $0.05 per gallon for the quarter. Our diesel and bio-diesel business also had reduced margins for the quarter, including negative margins in bio, driven by expected changes to governmental regulations and tax incentives since the election in November. Lastly, the Crude Logistics business continues to face margin competition. We do expect to see better performance, as Mike mentioned, from this business going forward and with the new assets coming online, continued stabilization of the crude market and increasing rig counts in our core basins. However, this will take at least a couple of quarters before we start to see that recovery. To go through each business in a little bit more detail. Our Refined Products business generated $12 million of adjusted EBITDA during the quarter and a $125 million for fiscal 2017. We are expecting the segment to generate over $160 million of EBITDA for the fiscal year and we were on track through December. However, the line space impact combined with a falloff in bio-diesel values and margins, which cannot be perfectly hedged, resulted in approximately $40 million shortfall to budget. Mike mentioned some of the reasons. We continue to believe that our position of line space will benefit us over the long-term. However, we do continue to see weakness in this business during the first part of fiscal 2018. Our target EBITDA for this business is $130 million for fiscal 2018 on the expectation that line space values and Gulf to New York Harbor basis differentials steadily recover through this summer and ultimately return to historical levels. We are also expecting increased gasoline demand in the East, higher diesel demand especially in the areas who have increased the drilling activity and stabilization of the renewables business. Our water business has continued to improve throughout the year as we recognized adjusted EBITDA of over $18 million for the quarter, $63 million for the year and we exited the quarter with an $80 million annualized run-rate for the month of March. Overall, volumes have grown 12% since the same quarter last year and about 20% from our low, which was the first quarter of fiscal 2017. We are expecting a higher growth percentage this upcoming year, driven by higher rig counts and additional flow-back volumes. Permian, DJ Basin, Eagle Ford and Bakken volumes are all increasing with the majority of the growth in the DJ and the Delaware. We are targeting $100 million in EBITDA for fiscal 2018, which is based on the crude curve that averages about $52 per barrel for the fiscal year. The Crude Logistics business generated about $30 million of adjusted EBITDA during the quarter and $59 million for fiscal 2017, with Grand Mesa operational for 5 months and contributing over $43 million of EBITDA over the past two quarters. The marketing division continues to support Grand Mesa and our various other assets, which we expect will continue to operate at near breakeven levels if not slight losses for the next couple of years. We recently started operations at the Houma terminal in Louisiana and a terminal of the Port of Point Comfort begins operations in early fiscal 2018. We have forecasted minimal contango margins for the upcoming year. Looking at fiscal 2018, we expect Grand Mesa to contribute $130 million of EBITDA and the rest of the crude segment to breakeven, with upside potential as differentials and margins expand with increased production in the back half of the fiscal year. Retail propane generated about $49 million of adjusted EBITDA for the quarter and $91 million for the year, quite the feat in lieu of the warm winter. Demand was well under budget for the year. However, we were able to maintain margins and reduce operating costs. Our forecasts for the upcoming year have been adjusted based on our volume models, which utilized the most recent 3 to 5-year actual volumes for each district. We are currently budgeting $100 million of EBITDA in fiscal 2018 for this business based on these updated volume projections, which would allow for more upside, should there be a normal winter next year. This does include a full year of operations for the acquisitions that Mike discussed earlier and no anticipated acquisitions are included in this EBITDA projection. Finally, our Liquids segment was also impacted by the weather and resulting decrease in demand for and the price of propane during the quarter. Adjusted EBITDA for this business was $16 million for the quarter and $64 million for the year significantly below expectations coming into the fourth quarter. Our wholesale propane business saw the biggest impact while our butane and storage businesses also came in under forecast due to lower margins, mainly due to high cost rail cars and competitive pricing. We are expecting this business to benefit from the recent Murphy acquisition, which we closed in January and we expect that acquisition to generate about $12 million for this fiscal year. Our fiscal 2018 budget for this entire business is $90 million, would include the full year of the Murphy assets, a partial recovery in the propane and butane businesses and consistent earnings from Sawtooth compared to fiscal 2017. Additionally, we expect our overhead costs to be about $25 million for the upcoming year. And based on each business segment and these overhead costs, our adjusted EBITDA guidance for fiscal 2018 is between $500 million to $525 million. Our growth CapEx expectation for fiscal 2018 is between $150 million to $200 million, with the majority related to our stack extension on Glass Mountain and continued growth in our water business, primarily in the Delaware basin and focused on strategic locations and gathering opportunities. These projects are not expected to contribute earnings of any significance until fiscal year 2019. Our distributable cash flow for the quarter was $84 million and has totaled approximately $235 million for the past 12 months, resulting in a trailing 12-month coverage of about 1.3x, the low end of our targeted coverage level, which includes the distributions on our Class A preferred units. Based on the seasonality of our business, this coverage will decrease over the next two quarters at our current distribution level. However, we do expect it to stay above 1.1x on a TTM basis during that time and to recover to above 1.3x in the latter half of the year. Our compliance leverage at March 31 was about 4.65x, compared to our covenant leverage of 4.75x. This is obviously higher than we anticipated and we will continue to focus on our balance sheet and opportunities to reduce leverage throughout fiscal 2018. Our Board expects our compliance leverage to be approximately 4x before approving an increase in our distributions and management continues to target compliance leverage 3x to 5x or better over the long-term. The pro forma adjustments to compliance EBITDA includes approximately $70 million related to the Grand Mesa project and about $20 million to $25 million related to other projects and acquisitions completed during the past year. These leverage metrics exclude our working capital facility, which is governed by our borrowing base, determined by our receivables and inventories. This facility was approximately $815 million at March 31, 2017 as our propane inventories declined through the winter months. As a reminder, this facility is excluded from our covenant calculations. To wrap up, we did not have the quarter we expected. We are working harder than ever to improving our performance and deliver value to our stakeholders. We are making changes in the way we operate our business, including adding more stable fee based cash flows and optimizing our existing assets and we fully expect to see these changes benefit our bottom line earnings. As we have stated previously, we will continue to focus on our balance sheet and safely operating our assets as we position our business for the future. We appreciate your interest and support and we will now open the line for questions.

[Operator Instructions] Our first question comes from the line of Torrey Schultz with RBC Capital Markets.

Hi guys, good morning. Just I guess first on the retail propane, so you are budgeting a warmer winter for 2018, you added some new business over the past year and I think the budgeted cash flow is up, call it 10% in 2018 versus 2017, so are you essentially budgeting similar weather over the past 1 year or 2 years, I am just trying to understand, you are talking about upside from a normal winter, just kind of what the degree of magnitude of that upside potential is?

So TJ, what we did this year is not go back to normal. Instead, we took the last 3 years, so we had two of the warmest in a normal and averaged those three. And that’s where we got our margins and our volumes. So I know if you had – I don’t know what these three, let’s say we were down just mathematically 10, 10 and normal, one of the years then you would have 20 divided by 3, so you would be down about 7% from normal.

Okay.

So we – historically, we have always kind of gone back to what normal is. But now, I guess our belief in what is normal is shaken, so now we are using the last 3-year actual.

Got it. And then on the line space issue kind of moving over to refined, just kind of help walk through kind of in your guidance, how you are stepping up that line space value through the year and kind of what the ultimate value is and what gives you comfort to kind of move that back up that you are seeing in the market right now?

So TJ, we have started off the year, obviously as Mike mentioned, it’s – line space is still slightly negative today. Our budget has line space essentially zero to the start of the year and averaging $0.02 for the entire year versus historicals, where it’s averaged slightly above $0.04. So we are expecting the line space to recover, particularly in the second half of the year, but we are starting to see slowly, but surely that the line space move back in the right direction. But it is still negative today.

So to add to that TJ, our fourth quarter, so first calendar ‘18, line space values are positive. I think its $0.01, $0.015. Our third quarter, it’s positive, it’s flat second. So those are the actual quotes out there that we are watching. As we said, the import – the exports out of the Gulf are declining. The Mexican refining runs are increasing. We have seen a lot of, a number of ships, I will say a lot, a number of ships diverted from the harbor. I think we just need to see some draws in harbor gasoline. And so everything is pointing to, which we didn’t expect, obviously until the driving season started, which is coming up here pretty quickly. So we don’t see a systemic change yet and we are – the indicators are we will get back to historical numbers.

Okay, understood. And just lastly on Grand Mesa, you have got contracted volumes and my understanding is you have got potential for kind of walk-up volumes, they are just what you are seeing now or what are your expectations and guidance for kind of that walk-up volume piece on Grand Mesa?

So our guidance assumes that walk-up volumes averaged about 10,000 barrels a day for the year. We are seeing somewhere in this 6,000 to 7,000 barrels a day today. Obviously, our rate is slightly lower than what we had originally forecasted based on our full rate, our guidance would be around $135 million. So we have reduced that slightly for this upcoming fiscal year. But we are optimistic as differentials are getting better, as Mike mentioned, the rig counts doubled. We are seeing significantly higher volumes in water, which will lead to higher crude volumes. So we feel pretty confident that the volumes will be there, the question will be, at what rate.

So we just checked last night. Our June walk-up volumes exceeding our budget by about 10%, actually more than the walk-up pieces, but more than that. But the – all of our producers that will have commitments with us have added rigs. And we are also – it’s really a geographic play. So the other producers in the North have – of the basin have also added rigs. So in a clearly – we are seeing that in the waters. So it’s just not our word for it, you might say. So last year, we were probably averaging, what do you think, 60 a day or in water?

In water in the DJ, around that.

Around 60. We are double that today. So we know all these rigs are at work, we know they are drilling. And what we haven’t seen the big pad come on yet. So that is – when that happens, obviously we are going to be able to ship more from all our producers. And we are going to see much less pressure on prices as folks who are not – producers who are not meeting their MVCs are out there competing for barrels and it’s driving the differentials low, so once all that – everyone is producing what their MVC as it takes the pressure off those differentials.

Got it. Alright, that’s it for me. Thank you.

Thanks T.J. [Operator Instructions] Our next question comes from the line of Lin Shen with HITE.

Hi, this is actually Matt. Thanks for taking the question. So just to give us a sense, when you look at your liquids and propane segment, if it were to get something closer to like a 10-year average or a 30-year average winter, how much EBITDA would that add?

So just on the wholesale business – so on retail, it’s probably 10% or so, so call it $10 million upside potential. On the wholesale business, so that business is typically, call it $25 million to $30 million a year business, it’s probably 10% to 15% on that business as well. So, I think a normal winter is an incremental 15 based on forecast. Obviously, this year we were impacted by the much warmer winter and then the propane phenomenon, which impacted our wholesale business negatively during the quarter.

So the total between the two segments will be worth about $15 million?

Yes, I would say about $15 million upside to our – to the guidance.

I am sorry, 15 or 50?

1-5, $15 million to the guidance. But significantly more than that to this current year. So current year, we estimated that the impact for weather alone was about $30 million between wholesale and retail.

Got it. And then the water, so you said in your guidance that the sort of the guided water number was below the level of volumes that you are actually expecting based on activity on the ground right now in your projections. So, do you have a sense like if that trend continues how much upside that could be to your guidance?

I wish I could tell you we spend a lot of time looking at trying to quantify upside but unfortunately, we are trying to limit the downside.

Limit the downside, yes. We appreciate that.

Okay, right. We were looking at couple of quarters ago, I think we mentioned, we’d run some models, say, what do you need to get $125 million and $150 million EBITDA. And as I recall, the $125 million was close to 800,000 barrels a day for the entire year. So we will end the – and we anticipate ending the year at 800,000. So, if you just said the average, 700,000, maybe its $10 million to $15 million on water for this year and it would be a $25 million for a full year.

Got it, okay. And then you said that you are breaking even on the sort of Crude Logistics, I guess, the tracking business. What are the underlying assumptions on pricing there and is there upside or downside to that?

So this one I did look at yesterday. We have assumed no change in trucking revenues, so no increase in pricing, which we are seeing on the water trucking side. So that would be a positive. And then we would expect to see more volumes. We have held our volumes flat. So, the other piece of transportation is the tows and barges. Historically, those rates – the day rates have been $7,500. Today, we dropped our budget to $6,200 a day. We are seeing some lower day rates out there, but we think that’s doable. So in total, the upside is we looked instead if we got a 10% increase in rates and then more fully utilized, I can’t say how much more that was, but in total, that was going to increase EBITDA probably, I don’t know, maybe $5 million. If you recall, we sold off half of our truck fleet last year when things – when the downturn was at its worst.

Right. Okay, thank you.

[Operator Instructions] Our next question comes from the line of Selman Akyol with Stifel.

Thank you. Two quick ones for me. First of all, you discussed little bit on in terms of drivers’ wages increasing. And I am wondering, first of all, are you seeing any other wage pressures throughout? And then is there any ability to pass that along as I guess most people expect trucking demands to increase across the basins?

Yes. We are seeing probably the same thing that the producers are saying. We, our water personnel in the field are probably being recruited by the upstream guys to run rigs, because I think there is an issue with having enough labor on that side. So we have increased our wages in certain basins by $10 – $1 to $2 an hour. So, we are seeing some of that. On the flipside is we are seeing there is some pricing – some increase in pricing. It’s – as I look at it, we have been very I think fair with our customers and producers. As you know, in the DJ, we reduced the MVC volumes in the first 2 years, in return for a longer contract. We did the same thing on the water side. We reduced rates. We got bumped the same pressure everyone else did. And so we all kind of shared the pain. So now that we are seeing some recovery that we are seeing the producers willing to accept some price increase. So I don’t see wage pressures. We do see that but it don’t see it reducing EBITDA.

Very good. And then more of a housekeeping question. On the DCF statement, your interest expense of $45 million and then your cash interest expense of $28 million seemed to be a little bit wider than what we have been thinking. So I was wondering, was there something going on there?

Some of that’s timing and amortization of debt cost. We do expect that, that interest expense number will be higher than that on a run-rate basis for fiscal ‘18. We are modeling between $150 million and $160 million of interest cost for fiscal ‘18 and it’s pretty ratable quarter-over-quarter.

Alright. Thank you.

Our next question comes from [indiscernible].

Hey, thanks. Trey, I was wondering if you could talk a little bit about your comment during the prepared remarks about the compliance leverage being quite close relative to the covenant level, what are the implication to that, for example, you have got growth CapEx, you need to fund, are there things you are going to look to do in order to create some more room since obviously people always gets nervous when MLPs get close to debt covenant levels?

Right. That’s obviously something we are tied to our covenant. We do have – again we are trying to be pretty conservative on our overall guidance. Based on our current debt levels, we need to generate pro forma EBITDA of about $460 million to be compliant. As I walk through, we are over that as of March 31 we expect to be compliant to the rest of the year, but it will be tight and that’s something that we will be managing. Obviously, our growth capital spending is not significant this year. The goal for that will be to – we do get some pro forma credit for growth opportunities. Obviously, we have our ATM, which we could utilize to manage that growth capital spending as well, but that’s something that we will be paying very close attention to throughout the year.

Okay. So bottom line is you don’t think you are going to be in a position where you are not going to be in compliant with the covenant, but it may constrain you a little bit in terms of how you finance things?

Correct.

Okay.

[Operator Instructions] We have a question from the line of Kali Ramachandran with State Street Capital.

Hi. A follow-up on the prior person’s question. Are you in discussions with your bank group to loosen the covenants and if not, why not?

We do have ongoing discussions with our bank group. We obviously have provided them with our forecasts and our expectations and we will continue to work closely with the group, so….

So right now, you are not in any discussions with them about loosening covenants at this stage, because to your own – by your own acknowledgment, you are pretty tight with the covenants today?

It’s one of those things like I guess I should say that we are managing it proactively. And we – like I said, we are in conversations with the bank group.

Okay, thank you.

I am showing no further questions in queue at this time. I’d like to turn the call back to Mr. Krimbill for any closing remarks.

Okay. Well, thank you all for your time and we will have better news in the future, I hope. Okay.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.