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Edited Transcript of TGE earnings conference call or presentation 25-Jul-19 8:30pm GMT

Q2 2019 Tallgrass Energy LP Earnings Call

Leawood Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Tallgrass Energy LP earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David G. Dehaemers

Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC

* Gary J. Brauchle

Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC

* Nathan Lien

Tallgrass Energy, LP - IR Contact

* William R. Moler

Tallgrass Development, LP - Former COO, Executive VP & Director

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Conference Call Participants

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* Colton Westbrooke Bean

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research

* Elvira Scotto

RBC Capital Markets, LLC, Research Division - Director

* Ethan Heyward Bellamy

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Tallgrass Energy Q2 2019 Earnings Call. Today's call is being recorded.

And now it's my pleasure to turn the conference over to Nate Lien. Please go ahead, sir.

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Nathan Lien, Tallgrass Energy, LP - IR Contact [2]

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Thank you, Lori. Good afternoon, and thank you for joining the Tallgrass Energy quarterly earnings call as we discuss TGE results for the second quarter of 2019, which were released through our press release this morning. Joining me on the call are David Dehaemers, Chief Executive Officer; Bill Moler, President and Chief Operating Officer; and Gary Brauchle, Executive Vice President and Chief Financial Officer.

Before turning the call over to David, let me remind you that this event is being recorded and a replay will be available for a limited time on our website. Additionally, our comments today will include forward-looking statements and estimates. These forward-looking comments are subject to various risks and uncertainties and reflect management's views as of July 25, 2019. Please refer to our filings with the SEC, which are available on our website, which provide discussions of factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. Note that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statement. Please also refer to our earnings release and website for reconciliations between the non-GAAP financial measures referenced in this presentation and the most comparable financial measures or measures calculated and presented in accordance with GAAP.

With that, let me now turn the call over to David for his opening remarks.

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [3]

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Good afternoon, everybody, and thanks to everyone for joining our Tallgrass second energy -- second quarter earnings call. Second quarter again produced outstanding financial results, and our commercial teams continue to make progress on REX and Pony recontracting on the ongoing efforts to commercialize the Pony Express expansion, our Seahorse Pipeline as well as our Plaquemines Liquids Terminal project.

While we are not yet at a point to share specific details about recontracting or to announce FID on our growth and expansion projects, we continue to make solid progress on all fronts. Now with the financial metrics for the quarter. Adjusted EBITDA was $254 million and cash available for dividends was $205 million, producing a dividend coverage ratio of 1.35x for the second quarter.

The performance drove TGE's 16th consecutive quarterly dividend increase. Again, that's $2.16 annualized, which is quadruple where we IPO-ed at over 4 years ago, and that is $0.50 -- $0.54 a quarter. That all is a sequential increase of 1.9% for the first quarter of 2019 and an increase of 8.5% over the second quarter for our 2018 dividend.

With that, I'll turn the call over to Gary for his financial comments.

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [4]

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Thanks, Dave, and good afternoon, everyone. Analyzing the segment performance for the quarter, the Natural Gas Transportation segment produced adjusted EBITDA of $144 million in the second quarter of '19, which is an increase of $5 million from the first quarter of '19.

The primary driver of the strong performance in the segment was higher distributions from our 75% ownership interest in REX, which were largely the result of a lower interest expense at the REX level, and the increased rate on the Encana contract, and that rate contributed for a full quarter in Q2.

For the Crude Oil Transportation segment, adjusted EBITDA was $90 million for the second quarter, which was approximately $9 million higher than the first quarter of '19, primarily as a result of higher average transportation volumes in the segment. The quarter on Pony Express averaged approximately 348,000 barrels per day compared to 336,000 barrels per day in the first quarter.

As many of you know, Pony Express was shut down for 8 days during the month of May as a result of major flooding in Central Oklahoma. The shutdown adversely affected throughput on the pipeline during May, approximately 285,000 barrels per day that month. But we made up much of those shipments in June, approximately 338,000 barrels per day in June, and expect to make up the remainder in July with estimated throughput of approximately 374,000 barrels per day for the month, and that was July again.

In addition, preliminary nominations for August came in at approximately 370,000 barrels per day. The Gathering, Processing and Terminalling segment generated adjusted EBITDA of $24 million for the second quarter, which was $4 million lower than the first quarter, and that's primarily as a result of the annual planned Casper and Douglas plant turnarounds.

Now moving on to the capital structure overview. At the end of the second quarter, our leverage was approximately 3.6x based on the trailing 12-month adjusted EBITDA as calculated according to our credit agreements. When including our 75% share of REX's just over $2 billion in debt, our consolidated leverage for the quarter would have been approximately 4.7x, again, on a debt-to-EBITDA basis. As expected, both figures are down from the first quarter due to continued EBITDA growth. And as for liquidity, today, we have undrawn revolver capacity of over $800 million, representing continued ample liquidity for funding our organic growth projects and additional bolt-on acquisitions.

With that, I'll turn it over to Bill now for commercial updates.

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [5]

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Thank you, Gary. As Dave mentioned at the outset, our commercial teams continue to work tirelessly to recontract existing assets and commercialize our new projects. Our operational teams have also done an outstanding job recently and through the quarter of integrating acquisitions and commissioning organic growth projects.

In the gas transportation segment, REX west-end volumes returned to near-normal levels with quarter 2 average throughput of approximately 1.4 billion cubic feet per day. We believe these increased volumes are a result of West Coast markets beginning to return to more normal conditions.

Since our first quarter earnings call in early May, many of you have asked about the status of the Cheyenne Connector and REX Cheyenne Hub expansion projects. We are still waiting on the 7(c) certificate from FERC and, frankly, thought that we would have received it long before now. But as other companies have recently experienced, the FERC approval process has become much slower than what we or others in the industry would like or have experienced in the past.

In the Crude Oil Transportation segment, we recently placed the Iron Horse Pipeline and associated terminals into service in Wyoming. We completed the mechanical construction of the Grasslands Terminal in the DJ Basin, which will nearly double transportation capacity on our Platteville lateral to 80,000 barrels a day, once it is in service in early August. And finally, we are currently taking line field -- line fill on the Hereford lateral in the DJ Basin, where we're accessing new supplies.

These projects all enhance and diversify our crude oil service offerings for customers, which in turn secures additional barrels for Pony Express' expanded capacity of approximately 420,000 barrels per day. That expansion project is on track to be complete late this summer.

Turning to BNN Water Solutions. As we mentioned on the first quarter call, we closed the acquisition of Central Environmental Services and are already working on an expansion of that system with producers in the Marcellus and Utica. In addition, we continue to pursue a number of attractive acquisition and organic growth opportunities across multiple basins in the water business.

Finally, for a quick update on the Pony Express expansion, Seahorse and PLT projects. As many of you saw on our website, we have extended the Pony Express expansion open season, the standalone open season for Seahorse and the joint Seahorse-Pony Express open season to July 31, all in order to accommodate the meaningful progress we are making with shippers on both assets.

While we are not yet ready to announce FID, our commercial teams are relentlessly working to produce that outcome for both projects. With regard to Plaquemines Liquids Terminal, we are in discussions with an international exporter that could potentially take enough capacity to move that project forward into FID.

And now David will conclude our remarks ahead of Q&A.

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [6]

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Thanks, Bill. Tallgrass has continued to perform exceptionally from an operational and financial perspective, and the second quarter was yet another example of this performance. I know many of you desired a more concrete update on recontracting and commercialization of our announced growth projects.

Our team has a long track record of creating opportunities and being able to navigate challenging environments and situations while maximizing stakeholder value. Sometimes that value creation may take more patience than is comfortable from the outside looking in. But from the inside, we remain focused and confident in our ability to deliver once again.

In addition, we run a competitive business, and sharing more details at times would not be helpful from that standpoint. As always, thank you to our employees for what they do every day to keep themselves and our communities safe and our assets operating reliably. Thank you as well to our shareholders for their confidence in investing in TGE, and to everyone on this call for your interest in our company.

And with that, operator, we will turn it over to you to start the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a couple of questions, we will go first to Ethan Bellamy at Robert W. Baird.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Dave, could you talk about the commercial landscape, at least for the number of competing projects in terms of barrels out of North Dakota? Any color you have there will be helpful.

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [3]

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Yes. I mean -- and I -- you're talking competing projects being what, the Liberty announcement as well as maybe an expansion on DAPL?

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Yes, sir.

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [5]

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Yes. No. I think the question everybody has to ask themselves -- and I'm not in a position to talk about either of those pipelines or expansions, other than just the whole market up there. The Bakken has kind of recovered, it's kind of made some new highs. But I think the question in my mind that everybody needs to be asking themselves long term is, at $50 to $60 oil, is the Bakken going to become that 2 million barrel-a-day-plus market that probably it needs to be to support everything that's being talked about that is not yet built.

I don't know the answer to that. I think we've seen that while crude prices are definitely more healthy than they were, say, 3 years ago, I'm not convinced, myself, that it's going to stay at that $50 to $60 level, which I hope it does. But I'm not sure that, that will support that kind of growth that is going to come out of there. You want to add anything, Bill?

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [6]

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No, I think that's accurate. I feel like we continue to be advantaged as the incumbent pipe in the ground and our expansions that are underway now getting us to 420,000 barrels a day or north of that after we speed test. I feel like we're sitting in the catbird seat.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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Okay. That's helpful. And Gary, any material changes we should expect to see on the balance sheet or the other financial items that were disclosed today?

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [8]

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No. Ethan, I mean just so you understand, we had a couple of calendar conflicts and needed to advance our Board meeting and Audit Committee meeting to yesterday and today, which is typically -- or is ahead of our typical schedule. And so that's the only reason we are not releasing the 10-Q today. You'll get all the data as you always do, only next week. And so I think that the major indicators -- operational indicators of the financial performance, I kind of went through them in my prepared remarks, but if there is anything else you need in the short term, just let us know.

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Operator [9]

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(Operator Instructions) And moving next to Colton Bean at Tudor, Pickering, Holt.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [10]

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Just a follow-up on that question around incremental expansion out of the Rockies. So you all mentioned your incumbent position there. How do you evaluate the [gain theory]. I mean effectively, you do have an increment position over the next 18 months, but then as we get to late 2020, early '21, presumably there's a step change in capacity. So if you maximize spot margin in the interim, do you look to maybe recontract ahead of time, even if it means giving up little rate? Or just give me your general strategy there.

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [11]

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Colton, I think it's all 3 of those. We currently have entered into term contracts with a number of shippers, tying them down to good rates for term. We have space that is yet to be uncontracted, but all the shippers have existing history. And some may choose to continue to flow under the history that's been granted to them. We're looking at VIP contracts that allow shippers to do the things like acreage dedications and small volumes and growing, ramping volumes. So we have a quiver of arrows that is diverse relative to how we intend on contracting Pony going forward. And I think you can imagine that we'll use every one of those arrows in doing so.

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [12]

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Yes. I'd just add on to that. If you just look at June, July and August, we will have moved -- June and July actually moved somewhere in the neighborhood of 375,000 to 380,000 barrels a day. I think August nominations are 370,000. I think you guys all know that we've kind of been contracted in the low 300s. We have a healthy market. We are touching a lot of places. And I think that not all pipelines are going to same places. They're not all created equal. Ours, like Bill said, is in the ground, others -- building a de novo pipeline in the areas that we're in isn't just a simple matter of saying I wish it, therefore it is. It's a hard environment in Colorado, in particular. So I think when you postulate your question with, 18 months from now, there'll be a step change in capacity, we can stipulated to that, but I don't know if actually that will occur.

So with all that, we talked about our Hereford extension here that is being put in place. Things that we have on the drawing board, without getting into particular specifics, are we probably will extend it another 25 miles up and touch the southern border of Wyoming. And we're not going to do that -- that'll be an 8-figure spend -- low 8-figure spend, but we're not going to do that without contracts.

So obviously, I guess I'm signaling to you that we've got tens of thousands of barrels of people looking to get onto our system vis-a-vis that even additional expansion. We are looking at things very seriously about extending our mainline Pony system out of Guernsey, west over towards Casper, where we have other assets, et cetera. And there's a lot of ways for us to remain competitive and profitable, notwithstanding what others are doing.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [13]

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Understood, that's very helpful. And then just to stick on Pony, so Express kicked off in open season for additional capacity earlier this month. I know you all discussed potentially moving heavy barrels on the KMI JV. Is that possible to do on the existing Pony system or is it mostly a light system?

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [14]

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It is possible, Colton. We can even move a basket of heavy crude, to some degree, without too much impact on overall capability of the system, which is good news. But yes, with the Kinder JV, the intention would be or hope would be that lights would move over to the larger-diameter pipe and run more efficiently, operationally efficient, less fuel, less DRA. The heavies would move on Pony proper, using less horsepower. And the 2 would meet in separate tanks in a -- at Deeprock in Cushing. So to answer your question, we're well aware of the Enbridge open season. We continue to work to -- work with them and those who want to participate in that open season, and look forward to letting you guys know how that is successful here in short order.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [15]

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Appreciate that. And then just the final one from me. So on the Central Environmental Services acquisition, we're seeing a number of large producers in the Northeast discussed a pivot from trucking to pipe. A lot of those discussions have involved midstream affiliates. So does that change the strategy at all there in terms of produced water in the Northeast? Or how you are all evaluating that?

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [16]

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Your question was a lot of producers are moving -- are wanting to move off trucks to pipe with their disposal water, is that correct?

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [17]

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That's correct. And I think some of those discussions for the producers that have a captive midstream affiliate, a lot of those have involved those affiliates. But that's why I'm curious if that impacted the competitive dynamics or kind of your marketing strategy in that region.

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [18]

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It doesn't at all. In fact, we're talking to every producer that is in, around and near our CES facilities. We are looking at laying pipeline systems together, a number of entities to our disposal wells. We can save them an enormous amount of money, get trucks off the road, it's good for the environment, it's good for the producer and netbacks, and it's good for us. There's plenty of water to go around. And I would remind you that all water operation -- operating teams are not necessarily equivalent. And I have all the faith in our team that we will be successful in putting in a very large water gathering system in the Marcellus-Utica frame in Ohio and fully utilize all the disposal assets we just purchased.

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Operator [19]

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And we'll go next to Elvira Scotto at RBC Capital Markets.

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Elvira Scotto, RBC Capital Markets, LLC, Research Division - Director [20]

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So given the delay in the FERC 7(c), do you still expect the Cheyenne Connector to be up in the fourth quarter this year? And then, just as a follow up, does this delay, has this been affecting any of the recontracting on REX?

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [21]

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The answer to the second one is no, Elvira, it does not really affect any of that. In fact, we're -- like we have said before, we're in a great spot relative to recontracting on that. I'll let Bill answer the first and then segue into your second question.

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William R. Moler, Tallgrass Development, LP - Former COO, Executive VP & Director [22]

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The first question was, do we still expect Q4. I think we answered that earlier, but the answer is, you can't go through -- we were supposed to get the certificate in March with the intent of being done in Q4. It's now August. It will be pushed back a little. We are hoping to stay in Q1. We have 99.9% of the materials on site, we have a contractor and equipment on hold. And the day that we get the certificate, it's hopeful we start excavating and moving forward.

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Operator [23]

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And it looks like we have no additional questions at this time. I will turn the call back over to our speakers for any additional or concluding remarks.

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David G. Dehaemers, Tallgrass Energy, LP - CEO & Director of Tallgrass Energy GP, LLC [24]

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Thank you, operator. Again, thank you everybody for being on our call and being interested in Tallgrass. Appreciate the opportunity to talk with you all and give you both prepared comments as well as answer questions. So thank you very much. Have a good day, everybody.

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Operator [25]

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And ladies and gentlemen, once again, that does conclude today's conference. And again, I'd like to thank everyone for joining us today.