Tallgrass Energy, LP (NASDAQ:TGE) Q2 2019 Earnings Conference Call - Final Transcript

Tallgrass Energy, LP (NASDAQ:TGE) Q2 2019 Earnings Conference Call - Final Transcript 2019-07-25T19:30:00+0000 Executives Nate Lien - Tallgrass Energy LP, David G. Dehaemers - Tallgrass Energy LP, Gary J. Brauchle - Tallgrass Energy LP, William R. Moler - Tallgrass Energy LP, Analysts Ethan Bellamy - Robert W. Baird, Colton Bean - Tudor, Pickering, Holt, Elvira Scotto - RBC Capital Markets, Operator - Good day everyone and welcome to the Tallgrass Energy Q2 2019 Earnings Call. [Operator Instructions] And now it is now my pleasure to turn the conference over to Nate Lien. Please go ahead sir. Nate Lien - Tallgrass Energy LP Thank you, Laurie. Good afternoon and thank you for joining the Tallgrass Energy quarterly earnings call, as we discuss TGE results from 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 measure or measures calculated and presented in accordance with GAAP. With that, let me now turn the call over to David for his opening remarks. David G. Dehaemers - Tallgrass Energy LP Good afternoon, everybody, and thanks to everyone for joining our Tallgrass Energy second quarter earnings call. Second quarter again produced outstanding financial results and our commercial teams continue to make progress on REX and Pony re-contracting and 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 the point to share specific details about re-contracting 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 from dividends was $205 million producing a dividend coverage ratio of 1.35 times for the second quarter. The performance drove TGE 16th consecutive quarterly dividend increase, again that's $2.16 annualized which is quadruple where we IPO-ed at over four years ago and that is $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. Gary J. Brauchle - Tallgrass Energy LP Thanks Dave and 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 this segment was higher distributions from our 75% ownership interest in REX, which were largely the result of the lower interest expense at the REX level and the increased rate on the Encana contract and that rate contributed for 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 eight 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 of 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 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 is 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 3.6 times based on the trailing 12-month adjust 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 4.7 times, 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 in additional bolt-on acquisitions. With that, I'll turn it over to Bill now for commercial updates. William R. Moler - Tallgrass Energy LP Thank you, Gary. As Dave mentioned at the outset, our commercial teams continue to work tirelessly to re-contract 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 two 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 7C 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 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 per 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 31st, 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 and to FID. And now, David will conclude our remarks ahead of Q&A. David G. Dehaemers - Tallgrass Energy LP 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 desire a more concrete update on re-contracting 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 are in 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 in 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. Q & A Operator - Thank you. [Operator Instructions] We will go first to Ethan Bellamy at Robert W. Baird. Ethan Bellamy - Robert W. Baird Hey, guys. Dave, could you talk about the commercial landscape at least for the number of competing projects in terms of barrels on a North Dakota, any color you have there will be helpful? David G. Dehaemers - Tallgrass Energy LP Yes, I mean, you are talking competing projects being what the Liberty announcement as well as maybe an expansion on DAPL? Ethan Bellamy - Robert W. Baird Yes, sir. David G. Dehaemers - Tallgrass Energy LP Yes. 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 and 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 three 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 of there. Do you want to add anything, Bill? William R. Moler - Tallgrass Energy LP 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. Ethan Bellamy - Robert W. Baird 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? Gary J. Brauchle - Tallgrass Energy LP 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 meetings yesterday and today, which is typically or is the ahead of our typical schedule and so that's the only reason we are not releasing the 10-Q today. You'll get all that data as you always do only next week. And so I think that the major indicators, the operational indicators of the financial performance I kind of went through in my prepared remarks, but if there's anything else you need in the short term just let us know. Ethan Bellamy - Robert W. Baird Okay. Thank you very much. Operator - [Operator Instructions] And moving next to Colton Bean at Tudor, Pickering, Holt. Colton Bean - Tudor, Pickering, Holt Good afternoon. So just to follow-up on my question around incremental expense in the Rockies. So you all mentioned your incumbent position there, how do you evaluate the game there and then secondly you do have an incumbent position over the next 18 months, but then as we get to the late 2020, early '21 presumably there is a step change in capacity. So if you maximize spot margin in the interim, you look to maybe re-contract ahead of time, even if it means giving up little rate or just kind of your general strategy there? William R. Moler - Tallgrass Energy LP Hi Colton. I think it's all three 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 will use every one of those arrows in doing so. David G. Dehaemers - Tallgrass Energy LP Yes, I'll 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 were 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 the same places, they are operated 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, you know I wish and 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 will be a step change in capacity. We can stipulate to that, but I do not know factually that that will occur. So with all that, we talked about our Hereford extension here that has been put in place. Things that we have on the drawing board without giving the particular specifics are, we probably will extend it another 25 miles up and touch the southern border of Wyoming. We're not going to do that. That will be an eight figure spend, low eight figure spend, but we're not going to do that without contract. So obviously, I guess I'm signaling to you that we've got tens of thousands of barrels of people looking to get on to 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 toward Casper where we have other assets, etc. There is a lot of ways for us to remain competitive and profitable, notwithstanding what others are doing. Colton Bean - Tudor, Pickering, Holt Understood. That's very helpful. And then just to, actually to stick on Pony, so Express kicked off in open season for additional capacity earlier this month. I know you all have discussed potential moving heavy barrels on the KMI JV, is that possible to do on the existing Pony system or is it mostly a light system? William R. Moler - Tallgrass Energy LP 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 two 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. Colton Bean - Tudor, Pickering, Holt I 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 discuss 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? William R. Moler - Tallgrass Energy LP Your question was a lot of producers are moving -- are wanting to move off trucks to pipe with their disposal water, is that correct? Colton Bean - Tudor, Pickering, Holt 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? William R. Moler - Tallgrass Energy LP 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. Colton Bean - Tudor, Pickering, Holt Great, I appreciate it, thanks. Good afternoon. David G. Dehaemers - Tallgrass Energy LP Thanks, Colton. Operator - And we'll go next to Elvira Scotto at RBC Capital Markets. Elvira Scotto - RBC Capital Markets Hey, good afternoon. David G. Dehaemers - Tallgrass Energy LP Hello Elvira. Elvira Scotto - RBC Capital Markets Hi, good afternoon everyone. 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? David G. Dehaemers - Tallgrass Energy LP 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. Bill? William R. Moler - Tallgrass Energy LP 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. Elvira Scotto - RBC Capital Markets Great, thanks. That's all I had. David G. Dehaemers - Tallgrass Energy LP Thanks Elvira. Operator - 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. David G. Dehaemers - Tallgrass Energy LP 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. Operator - [Operator Closing Remarks]

Tallgrass Energy, LP (NASDAQ:TGE) Q2 2019 Earnings Conference Call - Final Transcript

Jul 25, 2019 • 03:30 pm ET

Tallgrass Energy, LP (NASDAQ:TGE) Q2 2019 Earnings Conference Call - Final Transcript

David G. Dehaemers