Tallgrass Energy Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: Tallgrass Energy (TEP)

Tallgrass Energy Partners LP (NYSE:TEP)

Q4 2013 Earnings Conference Call

February 26, 2014 5:00 PM ET

Executives

Nate Lien - IR

David Dehaemers - President and CEO

Bill Moler - EVP and COO

Gary Brauchle - EVP, CFO and Treasurer

Analysts

Christine Cho - Barclays Capital

John Edwards - Bank of America Merrill Lynch

Selman Akyol - Stifel Nicolaus

Michael Gaiden - Robert W. Baird

Operator

Welcome to the Tallgrass Energy Quarterly Investor Conference Call. My name is Holly and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. A question-and-answer session will be conducted after the presentation. Please note that this conference is being recorded.

I will now turn the call over to Nate Lien. Sir, you may begin.

Nate Lien

Thank you, Holly. Good afternoon, everyone. We appreciate you joining us as we discuss among other things our results from the fourth quarter of 2013, which released through our press release today.

Joining me on the call this afternoon are David Dehaemers, Tallgrass’s President and Chief Executive Officer; Bill Moler, Tallgrass’s Executive Vice President and Chief Operating Officer; and Gary Brauchle, Tallgrass’s Executive Vice President and Chief Financial Officer and Treasurer.

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 February 26, 2014.

Please refer to our filings with the SEC which are available on our website including our registration statement on Form S-1 which provide a discussion of factors that may cause actual results to differ from management’s projections, forecast, estimates and expectations. And please note that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statement.

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

David Dehaemers

Good afternoon everybody. Thanks for joining us today. We’ve got a number of positive items that we’re going to talk to you about today and so I’m going to jump right into a few comments on the fourth quarter, our best quarter yet as a public company. As we’ve typically have done in the past I’ll talk for a little bit, Gary will take you through some of the numbers and then I’ll come back and finish up with some of the other items that we talked about in our press release as well as some of our TDEV assets which we’re developing.

As you know we’re pleased to have increased our distribution for the second consecutive quarter which was a 5.9% increase over the third quarter and an increase of 9.6% over the MQD for when we IPOed last May. Increase was driven in part by the strong performance in the fourth quarter in which TEP produced net income of $13.8 million and adjusted EBITDA of 22.8 million.

Our gas transportation and storage segment were TIGT as we call it produced adjusted EBITDA of 15.9 million in the fourth quarter which was the strongest quarter of the year for a number of reasons which we’ll talk to you about. TIGT received additional revenues for the buyout of a transportation contract with TMID. This was done in part to eliminate TMID’s status as a market affiliate of TIGT for regulatory purposes. That’s another technical way of saying that we continue to explore and implement ideas to enhance TIGT and TMID working together, their market presence, synergies and service offerings that was limited before when they were market affiliates and when TMID helped transportation capacity on TIGT.

This contract buyout payment amounted to approximately $1.3 million which benefited the TIGT segment, but to the contrary was an expense at TMID. This is kind of a onetime thing, the income would have shown up in either place had we not known this, so it’s not, when I say it’s a onetime thing, it’s a onetime between the two entities.

Going forward, during the fourth quarter TIGT also had average firm contracted capacity of 719 MMcf a day which was up from the prior quarter in Q4 2012. That increase in addition to other factors both of which resulted in additional gas recoveries during the quarter are primary reasons for the Q4 improvement. While we’re pleased with these quarterly results at TIGT you should know that we did not expect this TIGT performance to be at the same level in 2014, and we’ll talk about that a little bit as we go through the call here.

Turning now to the processing segment, TMID generated adjusted EBITDA of $7.5 million which is up approximately 3.9 as compared to Q3 of the same year. You may recall that we talked a fair amount on our last earnings call, about our expectation for TMID’s third and fourth quarters and the timing of the expansion projects that we undertook and completed at Casper and Douglas. Just as our third quarter results in TMID were in line with our expectations considering the extended plant downtime our fourth quarter result was about just as positive as we expected due to our expanded plants being in service and receiving additional processing volumes during the fourth quarter.

Another positive development to report at TMID is that we achieved additional reduction of our commodity exposure going forward. We converted a sizeable contract that was primarily popped to a fee-based contract beginning February 1, 2014. So as we look ahead for TMID with our expansion efficiency upgrades complete, the expansion capacity fully contracted and our commodity exposure significantly reduced from where we were nine months ago, we believe our processing segment is well positioned for a strong year in 2014.

At this point I’ll turn the call to Gary to give you some additional details on Q4 results and then I’ll be back to discuss and update you on the items I talked about previously.

Gary Brauchle

Thanks David and good afternoon. As David mentioned net income for Q4 was 13.8 million while adjusted EBITDA was 22.8 million. DCF was 18.4 million and distributions were 13.1 million, producing coverage in the quarter of 1.41, very strong coverage. Cash interest cost was 1.2 million inclusive of drawn and undrawn fees and average outstanding borrowings on our revolver of approximately 145 million for the quarter. Our significantly lower revolver balance as compared to Q3 reflects the use of the $83 million of proceeds from the sale of the Pony Express gas assets to pay down debt at TEP.

For the year, net income was 14.2 million, adjusted EBITDA was 74.6 million, pro forma DCF for the year was 59.9 million and pro forma distributions were 49.1 million with pro forma resulting coverage of approximately 1.22, again very strong. When comparing those full year and pro forma full year results against the 2013 guidance provided on our first quarterly earnings call shortly after the IPO, we’re pleased to have ended the year having met, or exceeded all of our guidance metrics even after increasing our distribution twice and now for an aggregate of approximate 10% over the MQD.

Moving to the balance, as of year-end we had $135 million drawn on our $500 million revolver, leaving approximately $365 million of liquidity or dry powder. At the balance sheet date, our 12 month debt-to-EBITDA ratio was about 1.8 turns, leaving us with low leverage and ready for our first dropdown.

Following up on some of David’s comments on the segments, we’re very pleased with TIGT’s Q4 performance but here is why we’re cautioning you against using it as a proxy for the future. As David mentioned, TIGT’s Q4 average firm contracted capacity was about 719 Mcf a day and the increase over prior quarters was primarily driven by the west-end expansion project coming online along with the associated firm contracted volumes. However, that increase will be more than offset going forward by the buyout of TMID’s transportation contract on TIGT, and the non-renewable and a few very small contracts.

At TMID, I’ll give you a few more details on our contract portfolio as we look into 2014 from here. After the inclusion of the new fee-based contract conversion that David mentioned and we’re very pleased about, our contract mix was approximately 80% fee-based with the remaining 20% being spread-based and those numbers are based on gross margin. If our new contract portfolio experiences a 5% change in NGL prices, it would cause approximately, or just less than, $0.5 million of margin variability at TMID, which is down substantially from the $1.5 million variability as we reported around the time of the IPO, so again a substantial improvement and reduction of commodity exposure.

On the volumetric side of things at TMID as we look ahead, we’re seeing a slow ramp-up in customer deliveries in Q1 but we expect them to increase thereafter during 2014. And since our fee-based contracts obviously depend a fair amount on the volumes that we actually process, TMID’s margin profile will more closely follow the volumes that we process and obviously now less closely NGL prices, which we’re pleased about.

In summary, we’re pleased with TMID’s growth, the reduction of our commodity exposure and the financial growth that we expect in 2014. And with the financial overview and comments complete now, David, I’ll turn it back to you.

David Dehaemers

Okay. Well, Gary gave you a few qualitative thoughts on our segments for 2014. I’ll now give you a quantification of how we see 2014 shaping up, in other words kind of our view of guidance going forward for 2014. It’s important to note that the numbers I’m about to talk about include having Trailblazer in TEP from April 1st forward through the end of the year, so for three quarters. There is more to come here on Trailblazer so but it is important to understand that. Our 2014 guidance includes adjusted EBITDA between $87 million and $92 million, maintenance CapEx of between $10 million and $13 million and coverage at or about 1.1 times.

It’s reasonable to expect TIGT to be down from 2013 levels, TMID to be up from 2013 levels and we assume that Trailblazer again is part of the MLP for the last three quarters of 2014. Obviously if the Trailblazer closing is delayed beyond April, the numbers I just gave you will be lower. We believe the MLP is well positioned for 2014 and also well positioned to deliver at least 20% distribution growth for 2014 including the Trailblazer acquisition.

So now let’s talk about the assets held at TDEV, because I know everybody is interested in those. That obviously includes, as we said today, the status of the potential Trailblazer acquisition. Just as a reminder, these assets are not currently owned at TEP, and our assets retained by Tallgrass development, but clearly the commercial development at these assets are important for the future growth of TEP. We talked about I think we have a ROFO in our agreement relative to these assets.

As you saw in our press release Trailblazer has been offered to TEP and all the negotiations are ongoing. We are currently assuming a purchase price in the range of $160 million to $165 million. We’ve worked hard in recent months to lead to a settlement agreement on the rate case that we filed late last year with the FERC on Trailblazer and we just filed a settled rate case with the FERC I think it was Monday this week. Where we’re at now is we’re waiting on the presiding judge to certify that settlement which was agreed to with most of our shippers, the ones that actually were interested enough to talk to us in the case about settling it and then final approval from the FERC commissioners which may come anywhere from a month or two months down the road.

We expect both of those things will happen in the next few months. We formed a special committee by TEP’s Board. It was based on two of our independent directors that hired external advisors. We kicked this off about six weeks ago, they hired external advisors to assist them in evaluating the terms of the offer from TDEV, those advisors as you all know would be investment banker for fairness opinion purposes as well as their own independent legal counsel. Well I know you’d all like to know additional details as for the financial terms of the offer, we’ll not be sharing a projected EBITDA or purchase multiples at this time. I will tell you that we expect the deal to be conservatively within the middle of fairway as it relates to purchase price multiples of forward DCF. Said another way you all know what the multiples that people drop assets into their MLPs are at and ours is right in the middle of the fairway.

As we mentioned in the past we expect TEP to fund a substantial majority of the potential purchase price on our revolving line of credit. We expect the acquisition to be immediately accretive to unitholders. We project our annualized distribution could increase by $0.20-$0.25 a unit and when the deals all buttoned up we will recommend to the TEP Board an increase to the quarterly distribution likely for the second quarter. You all know that’s April 1st to June 30th to be paid in the middle of August 2014. We’re excited about continuing to grow our MLP and this is an example of us delivering on one of the many parts of our plan and actually the things that we talked about when we IPOed this Company last May.

Finally on to our other two TDEV assets Pony Express pipeline project and the Rockies Express pipeline, which we own 50% of and operate. First with respect to Pony, the conversion to crude project, that Tallgrass has spent in excess of $560 million through January including $83 million purchase of the 430 mile section of abandoned gas line that came from TIGT in the fourth quarter of 2013. Contractors are progressing nicely on the schedule with the gas to oil conversion as well in the north, and the south spread of the 260 new miles built. To-date we’ve approximately 180 miles of the new 260 miles of pipe has been laid, welded and backfilled. I guess that’s somewhere in the 70% category. So we continue to be pleased with the progress being made and hope to begin Hydro testing the line and then filling it with oil in the coming months.

Another positive development at Pony Express which we first talked about last quarter is the successful binding season, binding open season that we conducted on the Northeast Colorado lateral in the fourth quarter of 2013. The Northeast Colorado lateral we call NECL for short will bring additional crude supply to Pony at Sterling and then it will bring it down to telescoping line of Pony down to Cushing. In that open season we received and firmed up commitments for substantially all of NECL’s pipeline capacity of 90,000 barrels less the 10% that we needed to reserve for walk up capacity and those agreements are five year take-or-pay commitments just like the Pony commitments or contracts are that we have on the mainline from back when we first did the mainline Pony. We began acquiring the necessary rights away, we received initial deliveries of pipe and expect the majority of the approximately $250 million to $350 million project budget to be spent in 2014 with an in-service expected data in the first quarter of 2015 and that’s for the NECL project.

Again the main, the Pony Express project we still are looking at third quarter in-service date for the main Pony Project that comes out at Guernsey, Wyoming. This is a great bolt-on project for Pony and it’s one of the many reasons we’re excited about all the things that we believe Pony will do and present opportunities for Tallgrass going forward.

Turning to REX there’re a number of positive developments since we last reported to you on our conference call, for the end of the third quarter and it’s a good report relative to how we continue to execute on our strategy that we outlined over a year ago. First REX announced on November 26th of last year the FERC issued a decision in REX’s favor on the petition of declaratory order or PDO we had submitted regarding East to West transportation in Zone 3. As part of the process from there the shippers have filed for a rehearing and the FERC recently issued a tolling order as it’s called related to the PDO. In the tolling order it’s important to understand the commission did not grant the rehearing request of the PDO that was requested by the shippers that merely extended the timeframe during which they will determine whether to rehear the PDO or not. We continue to be confident in our position in the FERC’s initial PDO decision and to continue to making progress on our strategy.

We recently completed a binding open season for the Seneca lateral, currently under construction in Noble County. As you recall that Seneca lateral will attach REX to the Seneca gas processing plan that Mark West has in Noble County. We received good interest in the lateral’s full capacity and then now are in the process of advancing discussion with bidders with the intent of fully contract the capacity of the Seneca lateral which we expect to be in-service the second quarter of 2014.

We also just recently completed a non-binding open season for East to West capacity of up to 2.5 Bcf on the main line of REX, while considering that the Seneca lateral volumes will consume some of that main line capacity. This was done with an eye toward better understanding the complete demand picture of East to West capacity on REX and we were pleased to receive bids albeit non-binding bids in excess of 5 Bcf a day for the incremental main line capacity. Going forward we will determine the best path forward to commercialize the remaining East to West capacity on the main line including any capital spending required.

And with that I’ll ask the operator to turn it back to Nate and the operator to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christine Cho with Barclays. Your line is open.

Christine Cho - Barclays Capital

On your recommendation to your Board of Directors for the increase in the annualized distribution of at least $0.20, I just want to clarify, is that going to be phased in, or are you saying once the Trailblazer deal closes, we'll see an increase of $0.05 in the quarterly distribution?

David Dehaemers

Good day Christine. How are you?

Christine Cho - Barclays Capital

Good. How are you?

David Dehaemers

I’m good. To be clear it will be the latter what you said, so we would be asking for an increase of at least $0.05 that’s $0.20 annualized starting in the second quarter and payable in August.

Christine Cho - Barclays Capital

Okay, perfect. And then are there any more regulatory approvals you need for the East to West service?

Bill Moler

Christine, this is Bill Moler. There are possible other regulatory approvals we need to expand the system. If we decide to go to the full power up of 2.5 Bcf that’s likely a section 7Ccertificte application that will require regulatory approval. David addressed the PDO and it stands in his opening remarks so no need to rehash that. But to the extent we’re installing facilities there are certain regulatory protocol that we need to go through in order to do that.

Christine Cho - Barclays Capital

Okay.

David Dehaemers

But I mean -- but having said that to the extent that we just use our existing capacity and move it from Clarington back to points west there should not be any.

Christine Cho - Barclays Capital

Okay. So it’s -- go ahead.

Bill Moler

Go ahead Christine.

Christine Cho - Barclays Capital

So it just sounds like it is all depended on what capacity you’ll eventually go to?

David Dehaemers

Correct.

Bill Moler

That’s accurate.

Christine Cho - Barclays Capital

Okay. Okay. And then can you I know part of this will be dependent on how your negotiations go with potential shippers on Seneca lateral. But is there kind of a capacity number that you are thinking about for that?

David Dehaemers

The Seneca pipe itself is 24 inches in diameter we believe that we can take it up to as much as 600 million a day. We are still finalizing engineering related to the possible expansion of that project but I think probably the 600 number is the top-end.

Christine Cho - Barclays Capital

Okay, perfect. Thank you very much.

David Dehaemers

Thanks.

Operator

Your next question comes from the line of Bavesh Lota. Your line is open.

John Edwards - Bank of America Merrill Lynch

This is actually -- this is actually John Edwards. Can you hear me?

Bill Moler

How you doing?

David Dehaemers

Hey John, how are you?

John Edwards - Bank of America Merrill Lynch

How are you guys doing?

David Dehaemers

Good.

John Edwards - Bank of America Merrill Lynch

Can you just on I guess you are basically trying to get indications of market interest on moving gas East to West on REX. And I am just curious and I realize these are kind of non-binding indications. But as far as term durations, can you give us an idea of what the indications are and maybe some indications of the kind of rates relative to what the existing rates are going, East to West?

David Dehaemers

John, we’re not going to give you anything on rates I will let Bill give you something relative to the -- because we’re in the middle of working that out. But the -- I will let Bill talk to you about tender before I even do that though let me just I mean I don’t want to discourage questions about REX but when we IPOed TEP I think we made a real point of telling everybody that Tallgrass Energy Partners is not a REX story and it maybe someday and while we’re happy to update people on what we’re doing on it and it may be appropriate to be in our MLP someday albeit a couple of years from now. That REX is not a Tallgrass Energy Partners story, so I just don’t want people to lose focus on the other things that we’re doing. So with that Bill do you want to?

Bill Moler

We received a wide variety of tender associated with the non-binding bids that came in on the open season ranging from five years all the way to 20 year term. I think our expectation would be that we would able to contract for the longer end of that spread right. It appears that there will be significant term tied to these contracts.

John Edwards - Bank of America Merrill Lynch

I am sorry what’s that last comment, it would be significant. I am sorry what?

Bill Moler

I just said that it appears that there will be significant term tied these contracts.

John Edwards - Bank of America Merrill Lynch

A significant term, okay.

Bill Moler

If we get there.

John Edwards - Bank of America Merrill Lynch

Okay. So, is it fair to say that on average it sort of skews toward the longer end of that range?

Bill Moler

It’s fair to say, obviously the award of that capacity has to go to precede an agreement execution of binding open season and then shippers will be awarded capacity based on a net present value analysis that will be performed on the final binding bids. But it does appear that a significant term isn’t going to be a factor in there.

David Dehaemers

I think it is fair John to say that our expectation is it skewed toward the longer end of the term.

John Edwards - Bank of America Merrill Lynch

Okay, alright, that’s really helpful. And that’s basically all I have. Thank you very much.

David Dehaemers

Great, thanks John.

Operator

(Operator Instructions) Your next question comes from the line of Selman Akyol with SEL. Your line is open.

Selman Akyol - Stifel Nicolaus

Thank you. Good afternoon.

David Dehaemers

Hey, Selman.

Selman Akyol - Stifel Nicolaus

And my questions do relate to TEP. So, in TMID you guys talked about a slow ramp-up in the first quarter and I am wondering is it, what’s driving that, is it weather?

David Dehaemers

On TMID?

Selman Akyol - Stifel Nicolaus

Yes.

David Dehaemers

It is primarily weather driven, Selman, unheard of subzero temperatures in the Powder River Basin, freeze-offs, a number of things that everybody is fighting up there. Construction slowing, completion of wells in subzero temperature is a complex and difficult thing to do without it being 15 below zero. So, yes, it’s primarily weather driven.

Selman Akyol - Stifel Nicolaus

Okay. Just want to make sure it wasn’t anything else. And then as it relates to the dropdown on Trailblazer you kind of gave an outline, you wanted to get this done by April 1st and then you talked about needing final approvals from the FERC and that could take one or two months you said at the end of February. Would you do the dropdown without final approvals?

David Dehaemers

Yes, let me be a little clear on that. There were two things that are still outstanding. We need the presiding judge to certify the filing we made on Monday which was the settlement filing with the shippers. We expect the presiding judge to do that here in the next couple of weeks and it’s at that point that we would close the transaction. The total commission voting on this, as it sits and it just needs to get on the docket and that’s what could take 60 days, 90 days. We don’t think anything is going to change between the presiding judge certifying it and that point we think it’s just a perfunctory thing. So, that is what I meant relative to that.

Selman Akyol - Stifel Nicolaus

Alright, that’s all I had. Thanks.

David Dehaemers

Great.

Operator

Your next question comes from the line of Michael Gaiden with Robert W. Baird. Your line is open.

Michael Gaiden - Robert W. Baird

Great. Thanks gentlemen for taking my question. Can I please ask as it relates to financing the dropdown, you have quite a bit of availability under your revolver, a low level leverage at present and it indicated a desire to finance the preponderance of the acquisition with that. Could you give us some indication about what might drive your desire to seek some equity financing for the dropdown?

David Dehaemers

Just to be real clear about that, we are capable of doing the entire transaction with our revolving credit facility like I think Gary went through, we have over $330 million of availability on that, so it’s not a question of that and if we do we do a portion of it with equity it won’t be equity that we come to the markets frankly because we can’t, we are not S3 eligible yet. So, it will really be private equity funded by our TDEV. The dropper down of the asset so to speak and the only thing it would really kind of motivate that would be relative to some tax planning relative to minimizing the gain that TDEV may have for tax purposes. We are still evaluating that, I would say, it wouldn’t be -- most of the transaction will be for cash and pulled then off the revolver.

Michael Gaiden - Robert W. Baird

Great, thank you. And then can I lastly ask about potential coordination between TIGT and TMID, you had indicated that something, this is something that you would like to explore further, if you could share some more details about what’s your thinking there that would great?

David Dehaemers

Well I will let Bill add-on to what I just said. We actually have been working and now have concluded on TMID no longer being a market affiliate of TIGT. And so therefore in the past when we have had to ask them to leave the room whenever we talked to the TIGT guys about what was going on, they can now stay in the room. And therefore they can work together as a more cohesive unit relative to things that we will do as a business unit. Bill, you want to expand on that?

Bill Moler

It’s really a matter of convenience when TIGT is the primary source of residue takeaway from TMID’s processing complex and we have producers who are coming to either TMID or TIGT seeking a one-stop solution for gathering, and processing and transport to points of sale. It just makes those conversations more robust to be able to be in the same room and offer a complete package of processing and transport on the system when TMID was a holder of transport on TIGT as a marketing affiliate they would have to toss that ball to TIGT and it just was more complex for our customer community. So we have taken that complexity out so that we can give a more robust package of service offerings to our customers.

Michael Gaiden - Robert W. Baird

Great, thanks a lot gentlemen I appreciate the color.

David Dehaemers

And you’re welcome, thank you.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

David Dehaemers

Why don’t we give it one -- why don’t you ask for one more round and see if anybody joins the queue, operator, and then we’ll conclude?

Operator

Absolutely. (Operator Instructions) There are no questions in queue at this time.

David Dehaemers

Well, let me just conclude with a few remarks. We’re down about in terms of the overall Tallgrass group of companies we’re about a year and four months since the acquisition we’re coming up with more or less 10 months, nine to 10 months, since our IPO and I have to tell you that I’m very proud of everything that the Company has done. I think we have delivered in spades relative to every promise that we kept our promises we’ve delivered on those things. I think we are letting our actions speak latter than our words hopefully and everybody can see that. We’ve thrilled to death with the support that Wall Street and our inventory community has given us. And I hope that people will feel good about their support of us and with that we’re enthused about 2014 the things that we’ve got going on knock on wood things are going really well with regard to building Pony, et cetera. And we think we have a great deal of growth ahead of us. We still have to execute. We still have to come into work every day and get it done but that’s what we’re all focused on here. So with that I appreciate everybody calling in and look forward to talking to you next quarter. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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