Tallgrass Energy Partners' (TEP) CEO David Dehaemers on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Tallgrass Energy (TEP)

Tallgrass Energy Partners, LP (NYSE:TEP)

Q2 2014 Earnings Conference Call

August 6, 2014 5:00 p.m. ET

Executives

Nate Lien - IR

David Dehaemers - President & CEO

Bill Moler - COO

Gary Brauchle - CFO

Analysts

Gabe Moreen - Bank of America Merrill Lynch

Christine Cho - Barclays

Mohit Bhardwaj - Citigroup

Ethan Bellamy - Baird

Operator

Good afternoon. My name is [Michelle Nicole] (ph), and I will be your conference operator today. At this time, I would like to welcome everyone to the Tallgrass Energy Partners Quarterly Investors Conference call. (Operator Instructions)

Thank you. Mr. Nate Lien, you may begin your conference.

Nate Lien

Thank you. Good afternoon, everyone. We appreciate you joining us as we discuss among other things our results from the second quarter of 2014, which are released through our press release and 10-Q today.

Joining me on the call this afternoon are David Dehaemers, Tallgrass' 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 Web site. 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 August 6, 2014.

Please refer to our filings with the SEC which are available on our Web site including our 10-K, which provide a discussion of factors that may cause actual results to differ from management's projections, forecast, estimates and expectations. 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

Very good, thanks, Nate. Good afternoon everyone, and thank you for joining Tallgrass Energy Partners' second quarter earnings call. We have got a lot to talk about this quarter, including results which include Trailblazer, in our financials for the first time, another distribution increase, the upsize of our revolver and equity issuance, and the announcement of the Potential Pony Express acquisition. So with that, let’s get to it.

As a remainder, TEP acquired Trailblazer from Tallgrass Development on April 1, 2014. The consolidated TEP results for the second quarter of 2014 include the results of Trailblazer. The six-month period has been recast and it included the results of Trailblazer as if it had been a part of TEP since January 1, 2014, for those of you that are accountant-type people that's used to be called pooling of interest. For comparative purposes, we have also recast three and six-month periods for 2013 to include the results of Trailblazer.

Now, on to the second quarter results; some folks after seeing the ranges of our preliminary second quarter results that were released through our perspective supplement in 8-K filed in conjunction with the launch of our equity offering on July 21st categorize our result as a mess or weak. Let me tell you directly as best I can that the management team here at Tallgrass does not view our second quarter results as a mess or weak. We expected and communicated to everyone that Q2 would be soft due to planned downtime, increased O&M, expenses, increased maintenance CapEx, and we even said on last quarter's call that we most likely would not cover our second quarter distribution.

I know that everybody needs to use verbs, adverbs and adjectives, particularly those who do this for a living in terms of writing on our company, but we're just here to tell you that we don’t view it that way, and we gave out annual guidance at the beginning of the year and we still are sticking by that.

As I said before, we don’t place too much weight on TEP's 90-day result and don’t run the company for 90-day periods of time. We run it for the long haul. We've emphasized before that we don’t expect coverage to be linear, although that would be nice.

Once again, we give out guidance once a year. We've already done that. We'll talk a little bit about that later, just because we had some things happened since that guidance. But you know, we're going to miss, you guys will know if we're going to beat the heck out of it, you'll know too by virtue of our results.

So, I guess to further drive all this home, I'd ask everybody to remember our first quarter. I'd characterize that as people are going to say we had a mess or weak quarter here that our first quarter was very strong performance, we produced coverage of 1.47 times as compared to our results for the second quarter here was 0.94. 0.94 this quarter excludes the impact of our July equity offering that we just did a couple of weeks ago.

Alternatively looking back at the 2013 quarters, you know that we went public just a little over a year ago. You'd see some variation. So it's just not linear for us. We believe we better measure something longer than 90-day such as accounting year or trailing four quarters, we further illustrate our view when you exclude the impact of our July equity issuance, our last 12 months coverage is equal to 1.18 times and we generated nearly $10 million of Bcf in excess of our distributions over that period of time.

Again, our second quarter net income was $16.9 million, Bcf of 15.5 million and coverage of 0.94, excluding impact of the recent equity offering in line with our expectations and consistent with the preview we shared with you about 90 days ago on our first quarter earnings call characterize as you may that TEP is on plan.

Specifically the drivers, the second quarter numbers which Gary will go through with you in more detail here shortly were planned and unplanned downtime in our processing segment, prospect fees related to the unplanned downtime and higher O&M expenses and maintenance capital expenditures. Again, you guys typically know that we see most of this during the warmer months when we can do this work that gets deferred over the winter when we were running harder. We typically do see planned downtime higher O&M and higher maintenance CapEx in the summer months.

Switching to the growth in future of TEP, we're pleased to have increased our distribution for the fourth quarter consecutive quarter since our IPO, and we'll be paying a cash dividend of $0.38 per unit on August 14. This represents an increase of 5.5 cents or 16.9% over the first quarter distribution and 32.2% over the MQD, which is as everybody recalls when we went public, the MQD was $1.15, I believe.

The total distribution with respect will be $19.7 million, which includes approximately $3 million, a little over $3 million impact of the distribution that will be paid on the newly issued 8 million plus common units that we did here a couple of weeks ago.

Notwithstanding that, we're on effect -- our view is this is that we're in effect paying a fifth distribution on the newly issued units. You guys who have been following MLPs for a long time know that this was done -- it's not crowded as much these days, but early on when there were fewer MLPs this was a nice incentive on tariff for people that were issuing equity. And we really view this fifth distribution on these newly issued units as simply a part of financing cost, the $0.38 that's been paid really just adds another percent to the issuance discount or the re-offer discount.

That's how we view that. We're very pleased with the execution of the offering and we thank those of you who bought units in support of TEP, and as an investment and partner in TEP. Frankly, your confidence in the offering that we did in buying the units is very humbling to us and very appreciated.

Given the recent execution of our first follow-on equity offering, the upsize of our revolving credit facility and a the announcement of the Potential Pony Express acquisition, we're well position now to deliver on TEP's substantial growth prospects, and I can assure you that the team remains focused on delivering that growth, while safely operating our assets.

All of our employees, all 550 to 600 of them show up everyday, work hard, work smart and have long-term best interest of the company in mind.

At this point, I'll turn the call back over to Gary to walk you through the changes in our capital structure and additional quarter two comments by segment, and then I'll come back to you to give you little bit more [detail] (ph) on TEP's future. Gary?

Gary Brauchle

Good afternoon everybody, and thanks for joining us. Since David highlighted the pertinent consolidated figures, and also because he just mentioned our capital markets activities, I'll first take a minute to talk about the balance sheet, and then I'll move on to our segment performance for the second quarter of 2014.

As of quarter end or June 30th, we had approximately $281 million drawn on our newly amended revolver. The increased balance primarily reflects, or the increase over prior quarter primarily reflects the 150 million in cash that was drawn on the revolver and paid to Tallgrass Development as consideration for the Trailblazer acquisition.

In addition to increasing the commitments on the revolver from 500 million to 850 million, of course all of which was done with an eye towards Pony Express dropdown. We were fortunate and able to add growth and dropdown flexibility to our covenants in the revolver. We're also able to add flexibility relative to lower funded and unfunded debt cost in the revolver.

In addition to the revolver upsize on July 25th as David mentioned, we closed on the issuance of 8.05 million common units, and that transaction yielded us net proceeds from the offering of approximately 320 million. We use that 320 million to pay down the revolver balance, which was approximately 285 million at the time. So, therefore as we sit here in early August, TEP has no long-term debt on its balance sheet, and approximately 40 million of cash in the bank.

You know, because we could have issued equity in late July, early August to take two examples, and our total Q2 distribution would have been different in either of those cases. We're showing you in our press release coverage for the second quarter with and without the distribution that we'll pay on the newly issued units. We're also showing coverage without the distribution on the new units to assist you in tracking us against our 2014 guidance that we issued in late February, which was obviously prepared without giving effect to any Pony dropdown or any equity issuance.

So in summary, we're very pleased with the outcome of the debt in equity transaction, and those successes contribute to the very effective cost of capital for the Potential PXP acquisition, and all of that combines for one main reason why we expect it to be nicely accretive to TEP unitholders when consummated.

So, now moving on to our second performance for Q2 of 2014; first, the gas transportation and storage segment which includes TIGT and now Trailblazer, produced adjusted EBITDA of about 15.1 million for the quarter, which is 3.6 million better than the recast figures for Q2 of 2013. And again, the recast figures for the comparative periods do include Trailblazer. The increase for Q2 2014 was primarily related to the reduction in cost to Trailblazer, which were the result of the newly established tariff which allows for the recovery of compression cost through that tariff.

Firm contracted capacity of about 1500 a day was up slightly from 1,441 a day for Q2 of 2013 and the same ones performance was in line with our expectations. Now, I’d note for you that we’d expect similar performance in Q3 while we continue our higher O&M and maintenance CapEx spend again during the warmer months.

Now, let’s turn to the processing segment, which includes TMID and our expanded interest in the water services business. Adjusted EBITDA for the processing segment in Q2 of 2014 was 5.5 million which is up slightly or about 300,000 over the same quarter in the prior year. The increase is primarily due to distributions that we received from our water services business. However, I will tell you that EBITDA for the second quarter of 2014 was negatively impacted by planned downtime for annual maintenance at Douglas, unplanned downtime at Douglas and off-spec fees related to NGL deliveries which contained high levels of methanol. Let me take a minute or two to talk to you about that.

Methanol is a dehydration agent that is sometimes used by producers, gatherers and at times even ourselves at TMID to do water the wet inlet gas for processing. However, if the resulting NGLs contain too much methanol, it could cause refining issues downstream of us and the refiners of the wide grade pipeline may suspend receipt of off-spec NGLs, attempt to assess of off-spec charges to TMID or both. And we did experience these issues in the second quarter. And again, as I mentioned, they negatively impacted the EBITDA for the quarter in the processing segment.

The Douglas plant incurred total off-spec fees of just under $1 million during the quarter. I will tell you that we continue with our gatherer and the refineries, and at this point we believe that the methanol issues will not materially impact Q3. So average inlet volumes for Q2 of 2014 of about 136 a day remain flat as compared to 137 a day during the second quarter of 2013, and this was due the planned downtime we experienced in Q2 2014 that I just described to you. The planned downtime was both planned and unplanned.

However, I will make note for you and give you some more recent data points as we exited the month of June, we were processing just 160 a day, and as we exited the month of July we were processing just over 160 MMcf a day, so volumes are clearly up.

With the financial overview complete, I’ll turn it back over to David now for some additional comments.

David Dehaemers

Thanks, Gary. I know that many of you are anxious to hear about the offer we have received from Tallgrass Development to purchase a 33.3% interest in the Pony Express pipeline for $600 million. Since we are not yet under contract we will not be providing details about EBITDA, potential accretion and multiples. But I would like to clarify and further define the cash flow preference rights we will receive in the acquisitions.

As with any new project, there will be a period defined between in-service and full commercial operation when we are not transporting all contracted volume; if you recall our contracted volume on the Pony Mainline system is 206 million in farm and then we expect somewhere in the neighborhood of 24 or a walk-up for a total of 230,000 barrels a day when we were really going.

In order to mitigate TEP's risk associated with the project’s cash flow ramp up TDEV has offered first dollar cumulative cash flow preference wise through September 30, 2015. That basically is about a year from October 1st of this year. This is not a guaranteed payment, but TEP will receive first dollars of cash distributions from PXP to be agreed upon a month before Tallgrass Development receives in-cash distributions.

Furthermore to that, agreed upon amount is not received in any quarter prior to September 30, 2015 a deficiency catch up will apply, so again a real quick example or two of this. For example, and this is only for illustrative purposes, but if TEP’s agreed upon amount is $15 million per quarter, $60 million a year; in the first quarter PXP generates only $15 million in distributions, TEP will receive the full $15 million. In other words 100% of PXP’s cash flow and TDEV would receive none.

If PXP generated $17 million in the same quarters, an example, TEP would receive the same 15 million and then the $2 million excess would go to TDEP. While we do not expect the volume effort ramp up to as anywhere near a year, in other words, September 30, 2015 Tallgrass Development has offered the cash flow preference lasting roughly a year to be conservative. It’s worth noting that the preference mitigates the downside risk to TEP, but it allows TEP to share in any upside volumes and cash flow due to additional walk-up barrels and operational efficiencies each of which we see as a distinct possibility.

So just to totally wrap that up with what I just said. For example, the first quarter we produced TEP owing a third. We produced in excess of $45 million in my illustration. Then TEP not only get the 15, which is its third share of 45, but it would receive also a third of anything above 45.

In summary, you can be confident that Tallgrass Development has structured this transaction order to protect TEP. With respect to the timing of the drop, the special committee representing TEP has been formed and has engaged their banker and lawyers. While it’s difficult to predict the exact timing with any degree of certainty, we continue to talk to you late Q3 or early Q4 for actually closing the drop.

To the financial impacts of the $600 million transaction, what we will say is that looking to the Trailblazer transaction, which again was just on April 1st. It’s probably a good proxy for how we think about acquisition multiples for this drop. And we are confident, based on that, most people can do their own math as to just how accretive a successful first Pony transaction will be for TEP.

With regard to TEP, Pony Express project itself, just to give you some information on where we are at with that. I am sure there will be additional questions in the Q&A session regarding all this, but I want to give you some information.

As a reminder, Pony Express and the 50% interest in reps that I am going to talk about now are TDEP retained assets and currently owned by Tallgrass Development, so they are not currently TEP assets. There have been a number of rumors in the market that the Pony Express project has been delayed. Listening to our last call, we said that we expected to be in service during the third quarter of this year. We still have a handful of sections in which final construction and hydro testing is being completed. A construction is substantially complete and line-fill has begun and we are continuing to August. I repeat; line-fill has begun, we’ve been putting barrels in the line.

We still expect in service to be in September with activation of one of our two joint tariffs in October. As we previously communicated, one of the upstream pipelines, we are connected to two, which will be delivering 30,000 barrels a day to Pony Express that guarantee has been delayed. We still expect the activation of the joint tariffs with that other pipeline later in the fourth quarter. We anticipate being able to replace some of the delayed upstream pipeline volumes with walk-up shipments, but at this point do not have an estimate on what that amount will be.

Overall the Pony Express project continues to go very, very well. We’ve already capitalized on other opportunities around the Pony Express mainline such as the NECL project, which we talked to you about in the past. I would remind you that its part of the -- and that is part of the potential acquisition by TEP. We will be constricting that during the fall and you would expect that to be in the service at the beginning of 2015.

In addition to all that we are building up some storage assets in Sterling and at Cushing which are not part of the potential acquisition, so those assets being developed by TDEV might have the -- potential to be dropped into TDEV at some point in the future and are not part of the transaction we are talking about here.

We expect the broader Pony Express project will turn out far better than we imagine when we originally purchased it in 2012. And as you recall when we purchased it in 2012, it was just a bunch of signed contracts. So basically over the last 18 to 21 months we have been executing on the plan of converting the existing natural gas pipeline to crude and then adding new line all the way down to Cushing. We are down on the two yard line and we are going to punch the ball in.

With regard to REX, we are excited to announce that the first East end volumes are flowing into REX through the Seneca Lateral at the contracted rate of 200 MMcf a day to continue to work on the upgrades to handle the 350 MMcf a day of incremental capacity and expected to be online later in the fourth quarter of this year. That would be a total of 600 coming in at the East end of REX off of Seneca Lateral.

As a reminder the remaining 1.2 Bcf of Zone three East West capacity that we talked about a little bit before is contracted for 20 years subject to receiving FERC approval of our application to make physical improvements to the pipeline compression required to make it bidirectional; bidirectional meaning going East West and West East.

Note, the emphasis again on REX is a bidirectional pipeline and not a pipeline reversal. In addition to the 1.8 Bcf that is already contracted on the East end going West, you probably have been following now that we recently concluded a non-binding open season to further expand East West capacity. We received excellent interest and are currently in discussions around commencing one or more of those projects in the near future, and so we would ask you to stay tuned for additional updates on REX expansion projects.

As we move forward on one or more of these East West expansion projects, you can anticipate that we will perceive in a commercial and regulatory fashion that is not too different than how we handle the 1.8 Bcf of East West flows executed over the past year.

I’ll just remind everybody that, again, 18 to 21 months ago REX was the Chicken Little pipeline as I always called it, the sky was falling. And so we’ve executed monumentally in my opinion on showing people that REX isn’t going to be an empty pipeline and it’s going to be handling a lot of gas for a lot of years.

With respect to specific updates complete, let me offer you a final thought or two. Again, TEP has been public for over a year now, and you’ve had a good look into how we run our business and deliver significant responsible growth to our unit holders. Now, more than ever I remain confident in our ability to continue to do that and here is why.

We have a significant dropdown inventory at progress. Development that by my calculation could be conservatively valued somewhere between $3.50 billion and $4 billion of real and true mid stream assets that are already in the ground will be constructed today. So they should make their way into TEP over the next one to five years with very attractive accretion to our unit holders’ cash distributions.

In addition our commercial teams continue to identify and deliver low multiple expansion opportunities at TEP and Tallgrass Development around the footprint of our existing assets. So I would suspect that two to five years from now, if we are to look back we would find that the dropdown inventory and organic growth will have ended up well in excess to the aforementioned investment range. And this doesn’t even include our appetite for making disciplined acquisitions.

The characterizing and value, TEP is a high growth, high value, dropdown organic story that’s very appropriate in our opinion; once again, thank you to all of our partners, and for the confidence in investing in TEP, and thank you to everyone participating in this call today for your interest in our company.

With that, we’ll go to the Q&A portion of our call. And I’ll turn it back over to Nate.

Nate Lien

Operator, would you please open the Q&A session.

Question-and-Answer-Session

Operator

(Operator Instructions) And your first question comes from the line of Gabe Moreen.

Gabe Moreen - Bank of America Merrill Lynch

Hi. Good afternoon, everyone.

David Dehaemers

Hi, Gabe.

Gabe Moreen - Bank of America Merrill Lynch

Hi, I'll try to see what I can do no longer get paid by the adverb around here but we'll see what we can do in future notes. So couple of questions, one, clearly on REX to start out there; I think Dave you had mentioned the interest on the non-binding open season that a project or may be segmented and there may be some more interest in some segments than others. Can you just talk about sort of maybe several projects that are embedded potentially in there and then also, how far you might think you would be from going to binding open season?

David Dehaemers

Yes. I’ll just say that it really is two things, I think from a macro standpoint. And then I’ll turn it over to Bill to give you a little bit more color. But these are going to be broad-brush strokes. It’s really adding more compression to the pipeline which would let us move more volumes East West, that kind of one level and then the other level is a looping of the line which should be significantly more expensive, but albeit a lot more volume. So with that, Bill, do you want to add anything?

Bill Moler

All I would say is we are in negotiations with shippers on precedent agreements relative to those expansions and depending upon how those go will dictate the time and capital that we put into it.

Gabe Moreen - Bank of America Merrill Lynch

Okay, got it. So can you clarify how you've got the 1.2, I guess it's already signed up, this open season was obviously for a lot or a non-binding open season is for lot for up to 1.8. Can you talk about how much you could go to with just additional compression as opposed to looping?

Bill Moler

Yes. What we did, Gabe, was go out with a non-binding open season for either the compression or the looping. And that would range up to 1.8 incremental to the existing 1.8. And if we were to loop in its entirety, the compression side is dependent upon location at where people want to receive gas and deliver gas and all of that is still subject to the negotiations ongoing with those shippers who are interested.

Gabe Moreen - Bank of America Merrill Lynch

Okay. But presumably the compression will be something significantly less than 1.8 incremental?

Bill Moler

Gabe, it will be a fraction of that. You might think about on the low side, a fourth to a third and maybe as much a half.

Gabe Moreen - Bank of America Merrill Lynch

Okay, great.

Bill Moler

But we are working on all that. That might help you a little bit.

Gabe Moreen - Bank of America Merrill Lynch

All right, great. Thanks guys. And then one follow-up I had on PXP. Just in terms of understanding kind walk-up volumes and sort of what was meant by that or those kind of volumes that are getting trucked out of the basement or those volumes that you expect ultimately with your commitments to show up, but just aren't going to be shipping right away on the pipe. Just try to understand how that would work and with the magnitude of those volumes might be?

David Dehaemers

Yes. Again, Bill might correct me after I throw my two cents here. But as you know with the crude liquid pipelines we acquired to only contract 90% of the capacity. So with a nominal capacity of 230,000 barrels we could only affirm contract 206, we have to leave 10% for walk-up.

Now, almost all the barrels that show up at Guernsey are getting out of their rail or truck or some other thing today, there is very little pipeline capacity out of Guernsey to other places. So we are going to be the big takeaway in the area. So probably the best way to think about it is that 10% -- there are almost, again, all walk-up in a sense, but we’ve contracted 90%. We have a great deal of confidence that the 24,000 barrel walk-up is going to be there and there is probably going to be a lot more than that.

Gabe Moreen - Bank of America Merrill Lynch

Okay, got it. Thanks, guys.

Operator

And your next question comes from the line of David [Mendel] (ph).

Unidentified Analyst

Yes. Hi, guys. Thanks for taking the question. I am sorry, another question on REX obviously, it pretty looks like a sizable potential cash flow for TEP, so generally important here. Just trying to hear an understanding for the milestones to think about for dropping down portions of REX into TEP, I know that the revolver was increased with an eye towards turning to dropdown REX. So how do we think about what are the milestones, contract announcement, construction, de-leveraging rating increases like that?

David Dehaemers

Yes. I’ll let Gary talk a little bit about the revolver here in just a minute. But when we upsize revolver to 500 to 850 at TEP, it was to basically give us a lot more flexibility specifically with regard to the Pony drops and then also in a add-on stuff we made to either organic build out stuff as well as any acquisition stuff we should do. So as Gary said in his comments are debt today being -- having no debt on the balance every $40 million of cash with this PXP transaction being 60, sorry, 600. You can imagine that we are going to go from having no debt to about 600 to close that transaction. So we will have another $250 million dry powder so to speak.

Again, I am going to let Gary and Bill chime in after I’m done here. But with regard to REX, we are still working hard to just play this whole thing out. With the inventory of real pipeline and real projects that we have at TDEV, obviously we can’t put all those in at once relative to our ability to absorb them. And so we are pretty focused right now on working on REX getting it lined out for the long term and probably more focused on Pony Express getting it up and running and getting it dropped into TEP in an orderly fashion.

So our thinking right now is probably post Pony 100% being in the partnership would be when we would be thinking about REX coming in. Again, we only own 50% of it. And so it would be fractions of our 50% interest.

Gary, Bill, do you want to add anything to that?

Gary Brauchle

Jason, I would just add. This is Gary. Again, David said it well just how it’s going. It indicates no eminent plans for REX drops; however, it does provide us some optionality and flexibility with respect to a revolving credit facility and the ability to drop a portion of at this very moment the 50% interest that TDEV owes.

Unidentified Analyst

Okay, thank you very much.

Operator

(Operator Instructions) And your next question comes from the line of Christine Cho.

Christine Cho – Barclays

Hi, everyone. With your announcement of the dropdown, you kind of gave us what the contracted rate were for Pony Express. Can you give us a sense of what the going rate is for the spot volumes on Pony Express?

David Dehaemers

Yes. Bill, do you want to take that? I think we -- you followed farther in the process of following our TDEV.

Bill Moler

Good question, Christine. What we currently have posted on our Web site is a range of $4 to $4.25. We are working to finalize the tariff filing which should go in fairly soon relative to what the walk-up rate will be at Guernsey. But that’s what’s posted in the market currently.

Christine Cho – Barclays

And then when you -- I know you guys haven’t given an explicit multiple and just kind of imply that it’s similar to Trailblazer. But when we think about that multiple it include your spot volumes as well, right? It wasn’t just a contracted portion that you were including in your multiple.

David Dehaemers

Correct. I mean just to clarify that further, if you think about we are building out NECL and so it does include NECL. So we're going to be building out a 60 mile mainline that bring volumes in from Colorado in the Sterling which allowed another 80,000 plus barrels when it comes online in the, let’s say, the end of the first quarter of 2015. And so what you -- a third for $600 million implies (indiscernible) value of 1.8 billion at this point. So you can take your way the multiple you think you can discern from what we have acted in the past particularly about Trailblazer and kind of come up with what you think our cash flow and EBITDA will be from that through the (indiscernible). So that’s kind of what the preference that TEP has that’s predicated upon for the first year.

Christine Cho – Barclays

Okay. Then just going back to, I know you are kind of addressing on some of the rumors and rumblings about the Pony mainline getting delayed. And I understand that you have deficiency payments to protect you. But can we just talk about, I guess, like let’s envision a worst case scenario where it is delayed. Do those deficiency payments make you completely whole or how does that work?

David Dehaemers

Yes. I'm going to fill that real quick and then Bill can skip in, but -- so the upstream pipeline that is delayed for, let's say, three months, our contract with them delays for three months. In other words, if we were contracted for five years, we are still contracted with them for five years, it just starts when they actually activate the tariff.

Christine Cho - Barclays

Okay.

David Dehaemers

And so, that's part of the answer. Bill, you want to add in anything there?

Bill Moler

You nailed it on the head. It is from the date of activation of the joint tariff. Christine, we do believe as Dave mentioned earlier, that although an upstream pipeline is delayed in getting into asset Guernsey, Guernsey is right near the Powder River Basin and the crude development in that area is just north of the DJ Basin. We don’t necessarily expect Bakken barrels to fill the walk-up, but we do think that there is enough local crude in the area to perhaps a plan, all of 38,000 barrels that is delayed.

Christine Cho - Barclays

Okay. So, it doesn’t sound like the customer actually pays you anything, it's just that the contract gets pushed out, however, long the in-service date got pushed out?

Bill Moler

That's correct until the joint tariff is activated.

Christine Cho - Barclays

Right, okay. And then, I hate to beat a dead horse, but just going to REX, are you finding that customers want rates similar to what you were offering on the initial east to west service? And I'm only asking because there is another project out there that goes to defiance and these find up three large producers and it seems like the rate that they were charging to get to defiance is very similar to what you were charging. And so, I guess are you finding that customers want that, and if that's the case, how different is your pricing going to be for a scenario that where you're doing compression versus looping?

David Dehaemers

Bill?

Bill Moler

Good question, Christine. In my experience, what the customer wants is the lowest rate you're willing to give them, which is not necessarily comparable to the project, to defiance or the project that we already have under contract on the original 1.8 Bcf. We have to put in facilities to effectuate any of the expansion scenarios that we've discussed. The rates that we'd be looking to recover are what the market is willing to bear, and that meets our economic hurdles on the projects. So, is that in the realm of the rates that we charged? On the first bidirectional projects, it's in the area.

Christine Cho - Barclays

Okay.

David Dehaemers

I'd just add a couple of things to that, Christine. We're aware of the other projects that are out there, and obviously you've probably heard some of the comments by the other natural midstream players, Tennessee gas pipeline is an example, relative to -- at some point the last cheap pipe transport out of Appalachia is gone. I don’t know whether that's exactly true or not, but I guess I'd tell you our project versus others, I'd only talk about ours in the sense that the nice thing about REX is it's in the ground, all the compression stations are there, whether it's a power-up adding more compression, which you just add a couple more compressor stations or add more compression at our existing stations or you loop part of the pipeline. The good thing about REX, it's already there, it's not a new deal. So, we feel really good about our chances dealing with our customers and getting our fair share of incremental capacity.

Christine Cho - Barclays

Okay. That was it from me, thank you so much.

David Dehaemers

You're welcome, thank you.

Operator

Your next question comes from the line of Mohit Bhardwaj.

Mohit Bhardwaj - Citigroup

Hi, thanks for taking my questions, this is Mohit Bhardwaj from Citigroup. Just two quick questions on Pony Express; first one, David, if you could just talk about the line-fill, whether the crude that's going into the line-fill is it all coming from Bakken or Wyoming region or is it coming from the Cushing area, if you just clarify that for us?

David Dehaemers

Yes. Bill will probably add a little bit here on the end, but it's coming out of both Guernsey and Cushing. It's all the same oil. It's appropriate for what we need to pack the line with. The good thing about putting it from both ends is that we can do it quicker and then have less stress on the system. So, Bill, you want to add anything about that?

Bill Moler

Not a lot to add; it will increase or decrease the amount of time that it takes to get the line filled. We have figured out a way to go north out of Cushing and south out of Guernsey, and hopefully somewhere in the middle those two lines of crude meet.

Gary Brauchle

Mohit, this is Gary. I'd just add that the line-fill is not an obligation ultimately of Pony, it is shippers line-fill, and they will own those barrels.

Mohit Bhardwaj - Citigroup

Okay, thanks for that. And Bill or Gary, would you mind reminding us what the total line-fill is?

Bill Moler

Total line-fill on the pipeline is right around 2 million barrels. We've been filling for a little while now. We've got about 280,000 barrels in the pipe.

Mohit Bhardwaj - Citigroup

Great. And one final on Pony Express; is there a possibility of getting any Canadian heavy into the pipe at all or is it all just going to be light barrels that are going to flow once it starts to flow later in the year?

Gary Brauchle

We have a broad range on our tariff for viscosities and gravities, but every indication we're getting from the market it's going to be light sweet crude.

Mohit Bhardwaj - Citigroup

Okay, thanks for your comments.

Operator

And your next question comes from the line of Ethan Bellamy.

Ethan Bellamy - Baird

Hey, guys.

David Dehaemers

Ethan Bellamy, how are you?

Ethan Bellamy - Baird

Yes, that was a really good run, I like that. Is there anything going on in that Kelso or EMG that might be useful to developing for TEP directly? And are they just happy to collect check, then a 60% return, or are they actively engaged with you guys on a frequent basis in terms of strategic planning?

David Dehaemers

There isn't anything actively going on with them, and we just had our board meeting, two representatives from each of them sit on our board. I think they're very happy with their investment with us, and they're, as I've said in the past, very good partners.

EMG is very active as you'll know in the energy space somewhat exclusively. And I think that's good for us. It provides some synergies with us. Relative to acquisitions that are out there, if they're of a size that are probably big for where our partnership is at, given our inventory or dropdowns, we're asking them to look at those with us together, particularly in the midstream area. And they're glad to do that. We haven't found anything yet that we're willing to put out there for that, if they are smaller size, we're pretty well running our own show and looking at those assets ourselves.

Is that responsive to what you're asking?

Ethan Bellamy - Baird

Yes, I think so. And then just, I mean, we are not exactly kind of a seller's market for M&A and if I remember correctly, you're kind of value guy. Is it safe for me to assume that you've got so much going on in development with dropdowns that you're more likely to do to just stick to organic projects and what you've got already at development?

David Dehaemers

I wouldn’t say to the exclusion of acquisitions, but it has to be pretty compelling. So, when we're building a tankage at Sterling or looking at a rail project at Sterling and Cushing or -- tankage at Cushing is an example, or some of these other things like compression on REX. Frankly, those are very compelling investments for us. And we're not finding a lot of acquisition opportunities that have those same metrics.

Things change; we look at everything. There are circumstances sometimes where you can do an one-off deal with somebody where it's to their benefit to perhaps take that units in your company or whatnot, and get on board to train.

So I think you're thinking about it the right way.

Ethan Bellamy - Baird

Okay. And then kind of a big picture question. I don't know if this has really anything to do with you directly or indirectly it would, but this whole issue about condensate exports in the possibility of crude oil exports, I'd love to hear your thoughts about how you think that will all shake out?

David Dehaemers

Did you say condensate and then crude oil?

Ethan Bellamy - Baird

Yes. I mean, just the idea of exports and what kind of chatter you're hearing and if any of that has picked your interest in terms of some way for you to make money?

David Dehaemers

Bill, you want to …

Bill Moler

Ethan, I don’t personally know that I'll be around on this side of the ground when and if the country decides to export crude oil. But it may happen. Condensate exports is a booming business right now. We're not in the condensate business currently, except for what comes into the plants up in Casper and Douglas. That's a long haul for us to get to an export terminal from Wyoming.

So we don’t immediately see opportunities in either of those areas at this particular point in time.

Ethan Bellamy - Baird

Okay. Well, I thought I'd ask, because I know you guys don’t ever sleep, so …

David Dehaemers

Yes. We'd be very interested to certain kind of filling our lab, but I think Bill's thinking is right. I mean, there is a lot of talk about crude in particular, but I mean -- I don’t know, I have my own personal feelings about exporting crude out of this country, and I'm hopeful and think it will be awhile.

Ethan Bellamy - Baird

All right. Thanks to you all, I appreciate it.

David Dehaemers

Thanks, Ethan. Operator, we have any more people on the queue?

Operator

No, sir. Would you like me to re-call?

David Dehaemers

Yes, one more time.

Operator

Okay. (Operator Instructions) And I'm showing there is no more question on the phone line.

David Dehaemers

Operator, well, thank you. Everybody were either really good and fast, we weren’t boring, but anyway with that, we appreciate your interest in the company today. I think we've got our call done in 50 minutes, had good questions. And again, thanks very much for your interest, and have a great evening. Bye.

Operator

This does conclude today's conference call. You may now disconnect.

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Tallgrass Energy Partners (NYSE:TEP): Q2 EPS of $0.38 beats by $0.13. Revenue of $77.32M (+11.5% Y/Y) beats by $1.58M.