Tallgrass Energy's (TEGP) CEO David Dehaemers on Q1 2016 Results - Earnings Call Transcript

| About: Tallgrass Energy (TEGP)

Tallgrass Energy GP LP (NYSE:TEGP)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 04:30 PM ET

Executives

Nate Lien - IR

David Dehaemers - President & CEO

Gary Brauchle - EVP & CFO

Bill Moler - EVP & COO

Analysts

Brandon Blossman - Tudor, Pickering, Holt & Co.

Kristina Kazarian - Deutsche Bank

Gabe Moreen - Bank of America Merrill Lynch

Ted Durbin - Goldman Sachs

John Edwards - Credit Suisse

Selman Akyol - Stifel Nicolaus

Lane French - Robert W. Baird

Charles Marshall - Capital One Securities, Inc.

James Carreker - US Capital Advisors

Michael Blum - Wells Fargo Securities, LLC

Christine Cho - Barclays

Ryan Levine - Citi

Operator

Good day, and welcome to the Tallgrass Energy First Quarter Earnings call. At this time, I would like to turn the conference over to Nate Lien. Please go ahead.

Nate Lien

Thank you, Melissa, and good afternoon, everyone. We appreciate you joining us as we discuss, among other things, the Tallgrass Energy Partners and Tallgrass Energy GP results from the first quarter of 2016, which were released through our joint press release this afternoon.

Joining me on the call are David Dehaemers, Tallgrass' President and Chief Executive Officer; Bill Moler, Tallgrass' Executive Vice President and Chief Operating Officer; and Gary Brauchle, Tallgrass' 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 April 28, 2016.

Please refer to our filings with the SEC which are available on our website, including our 10-Ks, which provide discussions of factors that may cause actual results to differ from Management's projections, forecasts, 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 turn the call over to David for his opening remarks.

David Dehaemers

Good afternoon, everybody, and thanks to everyone for joining Tallgrass Energy's first-quarter earnings call. We've got a fair amount to discuss today. And given the complaints I heard last time around -- it's taking time away from Mad Money and its MLP analysis on Thursdays -- we're starting it earlier this time.

Items we will discuss today include a record quarter for TEP and TEGP, the potential acquisition of a 25% interest in REX by TEP, and the related financial activities at TEP for the first quarter. I'll address the potential REX transaction and financings later in the call, but first I'd like to review the outstanding financial results at TEP for the first quarter.

With the January 2016 acquisition of an additional 31.3% interest in Pony Express, and strong performance in the crude oil transportation and logistics segment, the first quarter produced record adjusted EBITDA and DCF at TEP, and led to TEP's 11th consecutive quarterly distribution increase since its IPO in May of 2013 and TEGP's third consecutive increase since its IPO in May of 2015.

We continue to focus on growing distributions and dividends to our unit holders and shareholders while maintaining investment-grade leverage metrics below or within our targeted range. This is all results in a solid balance sheet, ample liquidity, and healthy long-term distribution coverage at Tallgrass.

The first quarter adjusted EBITDA for TEP was $83.7 million, and this does not include any of our fully collected net deficiency payments under our take-or-pay contracts on Pony Express. If you include the quarter's net deficiency payments in adjusted EBITDA, that amount would have been $90.8 million. We've again included a table in our press release to show the impact of deficiency payments if we were to have included them in adjusted EBITDA.

Our DCF for the first quarter, which does include deficiency payments, was $81.9 million, and beat even our own internal expectations. Coverage for the quarter was a very strong 1.19 times with approximately $13 million of cash generated in excess of distributions.

Our strong quarterly performance in the Pony Express acquisition supported TEP increasing its quarterly distribution by $0.065 per unit to $0.705, or $2.82 annualized. This represents an increase of 10% from the fourth quarter of 2015, 36% year-over-year growth, and approximately 145% growth from the annualized minimum quarterly distribution of $1.15 at our May 2013 IPO.

As a result of the $0.705 distribution at TEP, TEGP will receive distributions from Tallgrass Equity of approximately $10 million, or an increase of $1.7 million from the fourth quarter of 2015. Based on that amount, TEGP declared a distribution to Class A shareholders of $0.21, or $0.84 on an annualized basis, which represents increases of $0.214 from the fourth quarter and 57.9% since the TEGP IPO in May 2015. That May 2015 IPO is not even a year old, so.

I'll now turn the call back over to Gary to provide additional financial details, and then I'll be back to talk about our other announcements today.

Gary Brauchle

Thanks, David, and good afternoon, everyone. Let's jump right into the segments and then I'll spend a bit of time talking about debt and leverage at TEP.

The crude oil segment, or Pony Express, generated distributable cash flow to TEP of $71.5 million for its 98.0% ownership interest during the first quarter of 2016. This represents an increase of $21.7 million as compared to the fourth quarter of 2015. And that increase at DCF to TEP is primarily due to the acquisition of an additional 31.3% interest in Pony Express. And also, the incremental barrel shipments contributed to that increase that we talked about last quarter and also experienced again during Q1.

With respect to volumes at Pony Express, average daily throughput during Q1 was approximately 291,000 barrels a day, up slightly from Q4's average of approximately 288,000 barrels per day. Preliminary April figures show that throughput was about 300,000 barrels per day. And May shipper nominations would predict that we will again move about 300,000 barrels per day next month or during the month of May.

When you compare those throughput numbers with our current contracted volumes of approximately 291,000 barrels per day, you can see consistent utilization at or above 100% of our take-or-pay volumes over the last two quarters and effectively last month and May.

I'm intentionally avoiding saying to you that the pipeline is running full, because I would remind you that we have significant expansion capacity available via the drag reducing agent enhancements and other enhancements we've put in place at Pony Express. And I know that Bill will talk more about those later.

Turning to the natural gas transportation and logistics segment, which includes TIGT and Trailblazer, it produced adjusted EBITDA of $17.2 million, up about $2 million as compared to Q4 of 2015, but down about $2 million as compared to Q1 of 2015. The increase and decrease as you compare quarters in this segment are really not all that significant to TEP, and typically are due to timing and other fluctuations and operating costs, as well as incremental transportation revenue that we're able to capture from time to time in winter months.

Firm contracted capacity averaged 1.49 billion cubic feet a day during the first quarter. And while this metric typically moves slightly from quarter to quarter as well, our natural gas assets at TEP are a stable set of assets that continue to perform in line with our expectations.

As we look to the future of TIGT, we're seeing very positive recent developments in the ongoing rate case, and that's a subject that, again, I know Bill will also talk more about later.

The processing and logistics segment generated adjusted EBITDA of $3.4 million for the first quarter of 2016, representing a decrease of $0.5 million as compared to the fourth quarter of 2015, and a decrease of $5.4 million as compared to the first quarter of 2015. The decreases are due to lower average inlet volumes at the processing facilities that we fully expected and previously mentioned to you on prior quarterly conference calls.

As we look ahead in this segment, the processing volumes are expected to remain low or potentially decrease a bit more this year. But on the other hand, we do expect to see additional contributions late this year and for full year 2017 from the water assets acquired in December of last year as the minimum volumes under those contracts begin to ramp up.

Turning to the balance sheet. At March 31st, we had $1.2 billion drawn on our $1.5 billion revolver. The $447 million increase from the end of the year was due to our purchase of the additional 31.3% interest in Pony Express, again, an effective January 1st of 2016.

As you recall, the cash consideration of $475 million was funded through a draw on our revolver, which was concurrently increased in availability from $1.1 billion to $1.5 billion, again, in conjunction with the third Pony drop. As of April 27th, or just yesterday, we had approximately $1.14 billion drawn on the facility, giving more than ample liquidity at TEP.

With regard to debt to EBITDA, our leverage at the quarter end was approximately 3.6 turns based on Q1 annualized EBITDA. And that 3.6 turns is squarely within our investment-grade target of 3 to 4 times debt to EBITDA on any long-term basis.

Now with the segments and the leverage review complete, I'll turn it back over to David to talk a little bit about some announcements, the other announcements we made today.

David Dehaemers

It's a good show. As you saw in the earnings release, TEP has received an offer from TDev to assign its rights and obligations under the purchase agreement with Sempra to a subsidiary of TEP. Conflicts Committee of the board of directors of TEP's general partner has been formed as evaluating the offer. No agreement has been executed yet and the proposed transaction remains subject to review, negotiations and approval by the Conflicts Committee and by the board of directors of TEP's general partner.

In addition to the ongoing Conflicts Committee process, another development in this transaction is that our other partner in REX, Phillips 66, has waived their right of first refusal, paving the way for TEP to potentially purchase Sempra's entire 25% interest in REX.

If, as we anticipate, TEP closes the transaction in the coming weeks, we intend to provide additional details on the transactions and its positive impact to TEP shortly thereafter. But I can tell you now that we expect the potential transaction to be immediately accretive to TEP unit holders and TEGP shareholders, and also expect to raise distributions over the remaining quarters of 2016, based on a conservative estimate of long-term sustainable cash flow from TEP's interest in REX. In other words, we're not going to get ahead of ourselves with regard to distribution growth attributable to REX at TEP.

With regard to REX, there really is -- there's really good news and then there's good news. The really good news is that its current power up project currently slated to go into service by January 1, 2017, REX should have tremendous cash flow for the next three and a half years. The good news is that there is a lot more to be done and a lot of elasticity relative to REX's ability to move gas in all directions in 2020 and beyond.

We expect to prudently, one, raise distributions at TEP based on what REX can do long term. I repeat, long term. And two, work our butts off to maximize transport volumes and revenues for the long term, and make sure that we can sustain as high of TEP distributions as possible, while making sure that REX's debt remains in that investment-grade slot of 4.0x debt to EBITDA that is so important to TEP's overall long-term financial health.

Therefore, if TEP acquires an interest in REX, you will probably see very nice growth in our distribution coverage, in addition to our expected distribution increases. While we will have more to share about REX after the transaction closes, suffice it to say that we believe REX is ready for prime time.

Now on to the capital structure matters. We recently sold approximately $47 million of TEP units under our ATM program, and also closed today on a sale of approximately $90 million of TEP units to Tortoise Capital Advisors. These equity issuances have helped us fund a potential acquisition in a cost effective way, and limit our need to access the public equity markets any further in 2016, absent other transactions.

In addition, TEP recently received commitments from our lending syndicate to increase the size of our revolving credit facility by $250 million from $1.5 billion to $1.75 billion, which is contingent upon the closing of the acquisition of an interest in REX.

In addition to the increased commitments, we have also amended certain provisions in the agreement -- that's the lending agreement; the revolving facility agreement -- to facilitate the potential acquisition and future dropdowns at REX.

So with about $140 million of equity raised in 2016 and well over $500 million of available revolver capacity, we are ready to close the approximately $440 million potential acquisition of 25% of REX at TEP without further need to access the capital markets.

With that, I'll turn the call over to Bill and he'll take you through the asset updates.

Bill Moler

Thank you, David. First up is Pony Express. As David and Gary highlighted earlier in the call, Pony Express continues to exceed our expectations with volumes that have consistently been at or near our contracted volumes. With the installation of the DRA skids complete, and the additional capacity of up to 100,000 barrels per day available, our commercial team continues to focus on opportunities to connect incremental supply and demand to the Pony Express system.

While additional receipt and delivery points may not immediately add incremental revenue, they provide optionality for our shippers, and positions the pipeline to capture additional barrels as commodity prices continue to recover and drilling activity increases.

One example of this incremental supply is Pony Express' recent connection to Genesis' Powder River Express Pipeline at Guernsey. For the month of April, the pipeline delivered approximately 470,000 barrels to Pony Express. These barrels came from our existing customers and are not incremental barrels or revenue. However, it provides our shippers another option to get barrels into the Pony Express system.

In addition to this new supply connection, our commercial team is working to commercialize a demand connection into Pony Express for a local refiner near our pipeline. No agreement has been executed, but we are hopeful that this one, or additional opportunities for similar, will be commercialized. As we continue to see commodity price recovery and stability, Pony Express remains well-positioned to capture incremental volumes.

Gary mentioned in the earlier call, or earlier in the call about the TIGT rate case. As we reported on the fourth-quarter call, TIGT filed a rate case with the FERC in late October. The filing proposed changes to TIGT's rate structure, updates to its tariff, and the implementation of a rate increase for its firm and interruptible transportation and storage services. The FERC accepted our filing, and the rates are scheduled to go into effect on May 1st of 2016, subject to refund.

While the new rates will go into effect May 1st, our top priority has been a mutually agreeable settlement with our shippers. To that end, our commercial and regulatory teams recently participated in a productive settlement conference with our shipping community in DC. And as of Tuesday, we have an agreement in principle to settle the significant rate issues in this case. We believe that the potential settlement is fair to our shippers, will provide incremental revenue to TIGT, and will avoid the time consuming, costly litigation for both sides.

Let's turn to REX. As a reminder, Tallgrass Development currently holds our 50% ownership interest in REX and operates the pipeline. As some of you may know, in February REX received its 7C certificate from the FERC for the capacity enhancement project. And shortly thereafter, also received a notice to proceed on the project. Construction is in full swing with approximately half of the projected capital spent to date.

I would remind you that the REX partners have agreed to fund this project with equity capital in excess of $500 million. And once it is complete, the partners will have contributed approximately $1.2 billion to the pipeline since Tallgrass began operating in late 2012.

As mentioned on prior calls, REX's Zone 3 east-to-west project is fully contracted, operational, and flowing at its 1.8 billion cubic feet a day capacity in Zone 3 on most days. It's also interesting to note that the pipeline moved 1.7 billion cubic feet a day from west to east in early April for a total of 3.56 billion cubic feet on that one day. Meaning that contrary to the popular belief of some, the west end of REX is not empty, and in fact, continues to be utilized by its contracted shippers.

Before we move on to Tallgrass Terminals, I'd like to briefly touch on the contract situation with Ultra Resources, as I know many of you are interested in it. As you may have seen from our FERC filings, we recently terminated Ultra's contract for failure to cure a payment default and collateral posting requirement. While we may have administratively terminated the contract in line with our tariff, it does not obviate their remaining contractual obligations to REX, which are in excess of $300 million through 2019. We have in fact filed a breach of contract suit against Ultra, and will continuously pursue all legal remedies available to us. We expect to recover some amount through this legal process.

As for Tallgrass Terminals, and as we mentioned in the past two quarters, we continue to make good progress on the Buckingham truck unloading terminal. Construction is well underway, and we continue to expect in-service during the third quarter of 2016. We also continue to work on the other projects and potential acquisitions we have mentioned on prior calls.

While the current commodity environment presents some unique challenges to getting new projects off the ground, our terminals team continues to work hard to move these projects and potential acquisitions forward. We continue to be very positive about the terminals business and the opportunities it presents for organic and other future growth.

With that, I'll turn it back over to David for his closing remarks.

David Dehaemers

Good job, Bill. As we look back on Q1's exceptional financial performance, and look ahead to the potential acquisition of an interest in REX, I'm excited about what the future holds for Tallgrass Energy and its partners.

In the three years since we went public in May 2013, we have executed our strategic plan exponentially -- although that's probably a very strong word -- but let's just say we've, 145% increase in distributions by any measure is a well-done job, had grown our distributions. We continue to maintain a healthy balance sheet and distribution coverage and grown our asset base in a prudent, disciplined manner. Once again, I tell you that our work is not complete. It's only just begun.

With that, we're about 21 minutes into the call, and if Q&A doesn't go for too long, we probably will be able to get everybody over there to CNBC for what's it called, the lightning round. As always, we thank all of you, our partners and shareholders, for your confidence in investing with us at TEP and TEGP, and thank everyone for this call and participating and being interested in what our companies are up to. With that, we're going to turn the call back over to the operator to have a Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Brandon Blossman from Tudor, Pickering, Holt & Co.

Brandon Blossman

Good afternoon, guys. On REX, any incremental color on what drove the decision to at least consider the drop to TEP at this time relative to TDev and dropping it at some other point in the future?

David Dehaemers

That's a good question. We were under kind of some considerable time straints trying to work with Sempra, the seller, and timeframes that we had to deal with it then. We've always -- we've continually, we've been thinking what's the right timing for a REX piece to go into TEP.

We felt like this presented a good opportunity for us to put it into TEP. We just weren't able to deal with it at the same time that the existing partner, TDev, was contracting with Sempra to buy it. So, after we kind of put that to bed and got it contractually put to bed, we made certain that we could, if we deemed it appropriate and did our analysis, to put it into TEP.

So, kind of subsequent to that, we have all talked about it around here, decided, like I said in my comments, that REX we feel is pretty much ready for prime time. And this presented a good opportunity to go ahead and let -- avail TEP of the opportunity to make a great acquisition.

Brandon Blossman

Fair enough. That's good news. Any thoughts about what permanent financing here will look like if TEP does go ahead with the REX acquisition, or is the revolver drop plus the equity what we should expect going forward?

David Dehaemers

I think -- we've kind of viewed the deal that we did with Tortoise and close today, as well as the ATM that we did, as kind of funding -- it's give or take $150 million. That more or less has funded our equity need here. We went ahead and upsized the revolver. And so with the ability for another $0.5 billion on there, we only need another $290 million, give or take, call it $300 million that we would draw on the revolver to close the Sempra transaction. So that is kind of the capital structure. So we feel like we've put that to bed.

Having said that, we are -- we've told everybody that as the credit markets heal going forward, we hope they heal even more later into the year. We do know that at some point we would like to get a public debt offering off at -- an inaugural debt offering off at TEP. So we continue to monitor that. That would just simply be doing that and putting more of an 8- to 10-year bond in place and paying down the revolver. So, hopefully that answers your question.

Gary Brauchle

Brandon, in line with Dave's comments, what he referred to relative to the financing and the 3.6 times debt to EBITDA at TEP at the end of the quarter, executing on what Dave laid out would result in a modest improvement or a reduction in that 3.6 times debt to EBITDA kind of just under the 3.5 times mark. So, positive in that regard as well.

Brandon Blossman

Okay, good. That makes perfect sense. And I guess the comment is it's nice to have a little bit of balance sheet flexibility. That's all for me. Thanks, guys.

David Dehaemers

Thank you. We appreciate your questions, and we've worked hard for the last three and a half years to put ourselves in a position to do that, so thanks. Who's up next, Operator?

Operator

Next we’ll go to Kristina Kazarian with Deutsche Bank.

Kristina Kazarian

Hey, guys. Nice job today on the quarter and the potential acquisition as well. So a follow-up question on the latter. When I'm thinking about this going forward, assuming that it does close, can you just talk about how this shapes the strategy and plan go forward over the next 12 to 18 months, relating to things like organic growth program and whatnot, and how the story's going to shift from there?

David Dehaemers

Bill and Gary can kind of chip in after I put in my two cents worth. We have always talked about the 50% that TDev owned at REX being dropped in kind of beginning of 2017, beginning of 2018. I think with this, that probably gets pushed out a little bit. I think the spacing of what we've been thinking about all along continues. So, if you say that we get this closed in May of 2016 here, I would say some time in the second quarter of 2017 you would look at another piece of REX going in, absent anything else.

Like Bill said in his comments, we have a $0.5 billion project being spent as we speak at REX right now for the addition of the three compressors. That's probably -- that'll be in place by the end of the year, and the contracts that we signed will start up in those on 1/1/17 in terms of the financial impacts of that. We've probably spent half to maybe 60% of the money already on that, and that's all going really well.

I think, again, I hope some of this color is answering your question. There's still a lot of things to do on REX, and when I say that I mean positive things. We're working on a number of commercial initiatives right now that because of a situation where it's competitive, we're not able to talk about it. But suffice it to say that we're working every day to improve the commercial viability of Rockies Express. And I think that'll, just as it's become apparent over the last three years of what we had in mind and what we've created in some ways from scratch, I think that'll become apparent over the next 18 months as to what we have in mind to showing everybody that REX is indeed a long-term, tremendous asset for us.

Kristina Kazarian

Perfect. And then on the Tortoise part of the transaction, too, nice job getting that done. Do you think there is chance for other transactions like that, or should I be thinking that's going to more come in on the equity side and strategy go forward?

Gary Brauchle

Kristina, I think we'll continue to look at transactions both on the equity and the debt side of the house. And I think your question was really more along potential private transactions in the unit, et cetera. We'll continue to look at those, but as Dave said, and we kind of commented here, our equity funding for this transaction is pretty well taken care, give or take. And so we could definitely be opportunistic on -- remain opportunistic on that going forward.

David Dehaemers

Let me follow up to that just a little bit, too. Everybody's going to see that we're filing an S3 today for another addition -- a shelf registration really for purposes of our ATM and increasing the size of that.

Do I think our stock, our units are undervalued? Absolutely. They're way undervalued. And would I have liked to have issued them at $50 instead of wherever we close today, $38, $39, $40? Absolutely. Having said that, we're presented with a transaction that we have to fund and we do what's necessary. But like Gary said, that's effectively we believe put to bed, if this transaction does get closed here in the next couple weeks.

So we're just putting ourselves in a position. It's our job to raise capital, be that debt or equity, as efficiently as we can for all of our unit holders, and we're very tuned into that. I think the one thing I would like to tout a little bit with our team is that we've been able to avoid kind of the perpetual preferred stuff that's going on out there that everybody seems to have to do and is in vogue, and we've kept our story pretty simple. I think that's because we've done a good job and maintained a good balance sheet and financial flexibility around all this.

Kristina Kazarian

Perfect. So that's it for me. Again, nice job in both quarter and transaction -- potential transaction today.

David Dehaemers

Thanks a bunch. So, Operator, we've got a couple more I'm sure, I hope.

Operator

We certainly do. Our next question will come from Gabe Moreen from Bank of America/Merrill Lynch.

Gabe Moreen

Hey, good afternoon. I certainly too would miss Mad Money for knowing what sustainable EBITDA was on REX. But I guess on that note, is there any reason you're not giving us what your view is on sustainable EBITDA at this point? I know that there's a lot of moving pieces between Ultra on one side versus the good things and the expansions. But it would seem like at least ball parking, there's a decent number of known factors.

David Dehaemers

Well, couple things. One is we do -- while we've made the transaction available to TEP, we do have three independent board members, and we're really not -- they're going through their process and we don't want to put them into a position that would not be appropriate. I think that's number one. Number two is, like we said, when it gets closed, and if that's in a couple weeks, you'll have some color then that we'll give you very specifically.

If you go back and look at 2013 and 2014 REX EBITDA, you look at 2015 EBITDA, you look at this year 2016 EBITDA, and you look at what it's going to be in 2017, all those numbers are very, very different, and they're different in a good trajectory. It's kind of a contango trajectory, and we expect to continue that. But we're not trying to hide anything. We just are trying to do this in an appropriate manner, and I suspect you'll have much better color here in the next couple weeks.

Gabe Moreen

Got it. Thanks, David. And then on thinking about coverage and raising distributions prudently, given the moving parts at REX, which I guess also to some extent fixed into the debate that the MLP sector is having on coverage in general, can you just think about ball parking a context. Does this change your approach to coverage to retain cash flow here, and how maybe the partnership, how much excess coverage you'll be carrying?

David Dehaemers

Again, I think that'll be part of the more exacting color, Gabe. But I think, as you know, REX when we bought it in 2012/2013 had $3 billion worth of debt. We and our partners together paid down a tranche of that debt by close to $500 million. So, in addition to all the capital that we've put in for the growth projects, we've also paid down debt.

So today, REX A-8s has $2.5 billion worth of debt. Our next tranche is come due in 2018 and 2019. Like I said, our goal is at some point, if we have all of REX in, which would be this 25% plus our other 50%, a total of 75%, as you can imagine, we will be consolidating REX into TEP, and so therefore we'll be consolidating the debt there. And so it's important for us to have the appropriate credit metrics there.

Having said that, over the next couple years, as we know what our sizeable cash flow is going to be, it'll be important for us to perhaps retain more cash than we would otherwise like to. We'd always like to pay it all out, but retain more cash with the forethought of eventually paying down some of that debt at REX, or contributing capital back into REX so that that debt can be managed down to an appropriate level.

And so globally, that's kind of how the thinking goes. So therefore you would expect we would have -- we would be running some higher coverage, which helps with a lot of things. But again, we'll be giving a lot more detail about all that once we get the transaction closed.

Gabe Moreen

Understood. And then just last one for me on -- the debt market's clearly moving your way, terming out the leverage at TEP. I'm just curious also in terms of maybe discussions you may have been having with the rating agencies. Clearly you're targeting investment-grade metrics. REX itself is below IG. Can you talk about getting to IG, whether you think this transaction helps or hurts that and where you may end up?

David Dehaemers

I think this transaction will help it. We haven't -- obviously we talked to the rating agencies about REX because it is rated. At TEP we're not. Although people that have listened to us carefully know that we went into the rating agencies last year to get a rating. We didn't get anything off, and so there isn't anything public about it out there.

The thing I guess I would share with you is I think if you spread us out like those guys do now, and everything seems to be kind of statutory in some respect, we kind of are IG with the exception of size. And I think that's the great thing now with all of 98% of Pony in, as well as a first tranche of REX here, we are very quickly moving to that last thing that we don't have on an IG metric, which is account of size. And when I say size, I mean EBITDA size. So, there's kind of this $500 million a year EBITDA size that they have out there for minimum IG ratings, and we're going to be moving toward that very, very quickly.

Gary Brauchle

Gabe, I would just add, you did mention REX's ratings and how that may impact TEP. I think Dave, on the other side of the ledger, mentioned the size. The cash flows coming in to TEP from REX certainly help and are very benefitted by the take-or-pay nature of REX's contracts, the long term, the very long-term nature of those contracts.

And I think that the diversity of the cash flows, that TEP is strengthened by this dropdown at REX, all of those things I think are on the other side of the ledger relative to what you said, and I think are going to be very helpful to TEP's credit story.

Gabe Moreen

Got it. Thanks, guys.

David Dehaemers

Thanks, Gabe.

Operator

Our next question will come from Ted Durbin with Goldman Sachs.

Ted Durbin

Sticking with REX here. On the Ultra, are you able to remarket that capacity then, now that you've sort of walked away from the contract with the FERC? And maybe could you also talk to, I believe Magnum Hunter had 100-a-day on the east-to-west side there. Are they going to pay that, or is that something you're trying to remarket as well?

David Dehaemers

So first on Ultra, just to be real clear about it, Ultra stopped paying us, and so they had a breach. We gave them an opportunity to cure that, which is all of mandated by the tariff. They didn't cure it, and so they were in breach. We terminated the contract. Having said that, we then filed a lawsuit for breach of contract, which I think we filed a week or two ago, and so that's pending. It's got a life of its own now. And as far as we're concerned, they owe us $300 million for the remaining life of the contract.

Having said that, as you know, legally we probably have an obligation to mitigate and cover. And so yes, we are, to the extent that there is demand out there, we will be remarketing and trying to sell that capacity that Ultra is not using and paying for. And obviously that might go into the damage calculation when we eventually get around to all that.

I'll just conclude also that just because Ultra stopped paying us doesn't mean that A) we don't believe that they still -- clearly they still owe us money, and secondly, we still think that there's going to be a fair amount there to recover from.

With regard to Magnum Hunter, I guess what I can tell you is we did have 100-a-day contract with them on the power up that's coming in next year. The bankruptcy court did approve Magnum Hunter retaining 50 of that, and so they're going to return 50 of that back to us. We're happy to have that back, because frankly, we believe that that market is becoming more and more constrained and that 50 will continue to have value.

I will tell you additionally, although the bankruptcy court did approve it, there are other approvals that are necessary there like the creditor committee, et cetera. We do fully expect that that'll take place.

Ted Durbin

Got it. That's helpful, thanks. And then just on Pony and the volumes through the quarter, and sounds like we're right around 300 a day. It feels like you've got a lot more room to run a lot more. Have you given any thought to maybe giving a bit of a discount on the tariff to move some more volume, pick up some more margin there?

David Dehaemers

We do have more room, as the guys talked about, with regard to the DRA effects and just the overall dynamics of how the pipeline can actually run. Yes, we've thought about that. We're out talking to everybody and beating the sticks, et cetera. And we would be open to that for the right amount of term, et cetera.

I think as you know, it's notwithstanding that crude's kind of -- WTI's back up to $45. It's still just a tough market where people are a little bit hesitant to --. With the forward curve on crude, people have got to be willing to contract for a period of time.

So, it's not as if though we're just kind of playing big man on campus and waiting for everybody to come to us. We're out talking to customers and going and seeing them in Houston and Oklahoma, et cetera, and trying to get more business on it, believe me. And we would be willing to do that if it shows up under the right terms.

Ted Durbin

Understood.

David Dehaemers

Ted, one more thing. Matt Sheehy -- he's here with us -- reminded me that the REX transport is actually the only firm transport, interstate firm transport that the bankruptcy court approved for Magnum Hunter. So, just throwing that out there in the for-what-it's-worth category.

Ted Durbin

Great. Thank you.

David Dehaemers

Okay. Operator, we've got some more calls -- or more questions, I hope?

Operator

Yes we do. Our next one will come from John Edwards with Credit Suisse.

John Edwards

Good afternoon, everybody, and congrats on the announcements here. Just I'm wondering, the fact that -- you did speak to the fact that there were some time issues that are pushing you to put the REX piece into TEP. And then based on your comments, would it be fair to conclude that you've got greater confidence now in the -- as far as extending the REX contracts on that so that the effective multiple would be a lot lower, say, compared to if those contracts were not extended beyond 2019?

I'm just trying to think about and sort of size up the risk tradeoffs. It goes back to the earlier question, why put it into TEP now versus putting it into TDev and then dropping it later, which obviously most of us were thinking that that was the model you would follow.

David Dehaemers

Good question. I think this is a good -- what I'm about to tell you is a good way to a similarity and contrasting here. Clearly, when we bought -- frankly, when we bought the asset in 2012, everybody was thinking that REX was ding dong, REX is dead. And it was a weak -- we were calling it the chicken little pipeline; the sky is falling and REX is going to be empty.

Clearly we have I think done -- the team has done an outstanding job of improving the visibility around REX to everything you guys know today. We talk about that all the time.

Having said that, we know what the next three years are going to look like at a minimum in a very conservative manner. And we are, like I said in my remarks, working our butt off every day to improve that. And obviously with the east end being fully contracted, particularly with the power ups starting 2017, the rest of our work now gets to focus on Zones 1 and 2.

But having said that, I think the thing to contrast what we did or are doing with REX now relative is what we did with Pony. If you think about when we did our first drop of Pony, it was just going into service. And we had -- we put Pony in at a value, and we did some things around it that kind of gave TEP certainty around its cash flows, et cetera. And then after a while, we had Nekels coming on, et cetera. We had been running it for a while, we put the second drop of Pony in. You could contrast that and have a parallel there to a second drop of REX.

I think as clearly as we continue on in time here, we're going to have greater and greater visibility about what REX looks like on an A-8s basis, and then particularly our interests combined. And as soon as we know those, it's incumbent upon us to give people some visibility into what that is. And so I think it fits nicely with the way we've done, approach our drops in the past relative to Pony and clearly now with respect to REX.

John Edwards

Okay. So, just -- so I'm trying to sort of read through your comments. Would you say that compared to when you were first looking at this transaction, your confidence is better or about the same? I'm just trying to -- we're just trying to figure out how to think about the --. Because in effect, by putting it into TEP now, it obviously puts the contract perfection risk onto TEP as opposed to putting it into TDev and then dropping. So that's why we're just trying to figure out how to assess that, if you will.

David Dehaemers

Look, I --.

John Edwards

I don't know how else to ask the question.

David Dehaemers

Nothing magical has happened in the last 30 days, other than the magic has been that we found one of our partners willing to sell an interest in the pipeline at what we thought was a good value. I think they think it's a good value to sell it at. We happen to think it's a good value to buy at. We operate and run that pipeline.

We feel really good about all the commercial things we have done on REX and that we continue to do on REX. And on balance, we just feel like -- we've told everybody all along that all of our assets at Tallgrass will eventually be in Tallgrass Energy Partners. So we felt -- we feel like on balance, it was appropriate to offer this asset to TEP to get REX, like I said, into the prime time show here.

John Edwards

Okay. Okay, and then -- that's helpful. And then as far as you were mentioning also you had some real nice volumes on the west-to-east. In fact, I think you said a day or two, the total volumes was pushing the 3.5/3.6 range. I'm just curious the average west-to-east volumes that you're seeing these days, what that is trending at.

David Dehaemers

Would you say the last part about the REX bonds again? I'm sorry, John.

John Edwards

Average volumes. The average volumes. You were saying that you had some spikes where you actually had 3, 3.5 flowing because you had some real good west-to-east volumes. So I'm just curious what that average west-to-east volumes are.

David Dehaemers

I'll let Bill answer it. They're not really spikes. I think he was just -- go ahead, Bill.

Bill Moler

Our average volumes west to east are probably between 800 and a Bcf a day. We had a spike, there was a little bit of basis. It was cold in the northeast. We are seeing some impacts from some storage being taken off the market, that gasses is not wanting necessarily to travel from the Rockies to the West. So, a lot of opportunity that gas needs to find a home.

But the 1.7 was a great day. And I'll just remind everybody that our max rate on REX is around $1.80 a dekatherm per month. And knowing that rate, if we get one month of a blowout with the polar vortices, for contracts on existing capacity that's available, we take advantage of those opportunities. And this was a situation where we did something just like that.

John Edwards

Okay, that's helpful. And then another one of the calls today, one of the companies mentioned -- this is beyond Zone 3 -- that they're actually capacity constrained into as far as being able to ship more volumes out because Zone 3 is essentially full. And so I know you've done this tremendous work in expanding the capabilities there. Are there additional capabilities or plans, perhaps take it higher, or is it pretty much, you're pretty much have taken it as far as you can go, as far as the Zone 3 expands?

David Dehaemers

John, it's a good question. Let me -- and we'll answer that. But in addition, let me just first clarify one thing on Zone 3 in the east end. Apparently there was another call today where someone said that perhaps our power up capacity expansion wasn't going to be in service until mid-2017. That's not accurate. We're going to -- we will be in service by the beginning of 2017, if not by the end of 2016.

So, just for everybody where you're getting conference calls where people are saying different things, we're the one doing the work, we're the ones doing the operating of REX, and it'll be in service by January 1st of 2017.

So with regard to what you say -- you asked, John, yes; if you all recall, we did canvas the market at the time about either looping and expanding the pipeline or alternatively powering it up. We've done the power up now, and we have people standing ready to contract for that and that's fully contracted. If indeed the market is capacity constrained, there are other things that we can do, like looping the pipeline there in Zone 3. Maybe not the entire pipeline. Maybe sections of it, et cetera. Bill, do you have anything you want to add to that?

Bill Moler

What I would add to that is that the power up brings 600 million a day online on January 1st, 2017, as Dave said. I will remind you that we are performing that construction under a turnkey contract, so capital risk is minimal, and so is in-service risk because there are penalties and bonuses associated with that contract.

So, we feel very confident. It's moving well right now. I will also remind you that the capacity constraint is there, and we expect it to be there for perhaps a significant period of time. So, as that constraint starts to have more and more impact on the suppliers, we believe that we'll be able to get to a point where we can do those things that Dave talked about.

Other projects in the area, if you pay attention, aren't having a lot of success permit wise and certificate wise and other things, getting pushed out farther and farther. So, when Dave mentioned that the Magnum Hunter 50 million a day that's coming back to us has value, we believe it has increasing value, and as does any excess power up capacity that we might have at this point.

So, we're going to be in service in January and take care of that, and that'll alleviate a little bit of the pain. But we expect Marcellus and Utica gas production to continue to be voluminous, and we're going to be there to do something about it at the right time.

Gary Brauchle

Bill, you said another 600 a day in service on the capacity enhancement, and I know you meant 800 a day, just to clarify. And in addition to any capacity that Mangum Hunter or Triad Hunter would turn back to us, call it 50 a day, we have almost that same amount of unsold capacity remaining on the capacity enhancement project, too. So it's not a lot in the grand scheme thing of things, but certainly we have some availability there.

John Edwards

Okay. And then just the last thing on the rate case. Just remind me, what was the revenue on that?

Gary Brauchle

We didn't, on the TIGT rate case, we didn't tell people what that is, John. I think what we did tell everybody on our last call was for 2016 we budgeted in, starting May 1st, what we felt was a conservative amount. And like Bill said, with kind of an agreement handshake in principle earlier this week, we're well within that, and frankly expect to do a little bit better than what we had put in our budget.

Bill Moler

And John, documents are being drafted now, so really a little early to talk about it. But handshakes and agreement in principles complete.

John Edwards

Okay. All right. The last thing, and sorry for so many questions here, but just outside of these two customers where there's some counterparty risk here -- Ultra and Magnum -- is there anything else out there that we should be aware of on counterparty?

Bill Moler

None that's material, John. We've got one or two cats and dogs that just don't have significant volume.

John Edwards

Okay, great. Thank you. That's it for me.

David Dehaemers

Operator, we got -- keep going. This is good.

Operator

Certainly. Our next question will come from Selman Akyol from Stifel.

Selman Akyol

Hey, good afternoon. Very nice announcement. Couple quick questions. Most of them not around REX. First of all, going back to last quarter, I guess you talked about TDev having $100 million to invest, help support the stock. Did all that get exercised? Did you guys invest all that?

David Dehaemers

We authorized, TDev authorized up to that much to purchase. We did not buy any. The price continued to improve and we were happy. While we thought it was raging buy, and still think it's a buy, we made a decision to kind of let it ride on its own with parties that --. And again, as you recall, we took back a couple hundred million dollars of units at TDev when we did the Pony drop at the beginning of the first year.

Selman Akyol

Okay. Going back to TIGT and Trailblazer, you guys attributed lower operating costs and G&A costs in the first quarter of 2016. I guess number one, sustainable, and then number two, is there any more to come out?

Gary Brauchle

Selman, TIGT and Trailblazer historically have seen lower operating costs in Qs 1 and Q4 of every year, and that's also true for maintenance CapEx. I think we do expect to see Qs 2 and 3 this year on the O&M side and the sustaining CapEx side to be heavier than Qs 1 and 4. Now having said that, the benefit of the rate case outcome that we're working towards will cover a little bit of that up, but we do see most of that benefit showing up in Q4.

Selman Akyol

Got you. And then just going back to, you got a noncash loss here on derivatives of $9 million. Is there -- it's a little larger than I think I've seen previously. So my question is, is that really just due to volatility in the environment, or was there some change in policy -- you had more contracts, any additional hedging that you've been doing there?

Gary Brauchle

No, Selman, that's related to the call option that was part of the Pony Express transaction where TDev granted TEP a call option on the unit that it issued to TDev. The accounting rules require that TEP put that on their balance sheet and market-to-market every quarter. So that's an unrealized loss on that call option, and that is going to be obviously a noncash transaction that we see as long as that call option's outstanding. And we kind of expect that to kind of work its way down over time.

But that's exactly what that is. That is in no way related to the commodity hedging we do. There was an amount there, I think about $40,000 in the quarter, but nothing material at all.

Selman Akyol

I appreciate that. And then I guess the last question for me, just on REX, the only thing standing between this and closing is really the Conflicts Committee to get through. There'd be nothing else?

Gary Brauchle

Yes.

Selman Akyol

Okay. Thank you very much.

Operator

And next we have a question from Lane French from Baird.

Lane French

Hi, good afternoon. Could you guys provide us with an update on how the Redtail water business has been progressing since it was acquired in December?

David Dehaemers

Well, Bill just went out and looked at it yesterday, so we'll let him answer that.

Bill Moler

Fantastic assets, by the way. The facilities are performing as expected. We just did a 16-well frack with one of the producers in the area. And we should be seeing some nice disposal fees in excess of the minimum volume commitments that we have because of flowback from that very large frack.

So it's, as Dave mentioned earlier or Gary mentioned, on the freshwater side, we don't expect to see huge volumes on that until 2017, but they should be ramping up for Q4 of 2016 and going into 2017. And then the disposal side is operating as expected, but we're going to have volumes increase or decrease as fracks are completed in the area. And getting some good interest from counterparties other than Whiting, and out there pursuing those very aggressively.

Lane French

Thank you. And then additionally, is there any update on the status of the Prairie State Pipeline?

Bill Moler

Prairie State is a project waiting to happen, and that's where it sits right now. No real good update on it, except we hope that as time progresses on here, that we'll have a shot to not only look at Chicago as a direct connected market, but we're chasing volumes in St. Louis, in Kansas City, and any other metropolitan area within reach from REX's main corridor.

Lane French

Great. Thank you.

David Dehaemers

Got some more people in the queue, Operator?

Operator

Yes we do. Next is Charles Marshall with Capital One Securities.

Charles Marshall

Good afternoon, guys. Two quick ones from me. So assuming that the drop of the 25% interest in REX is complete, is it fair to assume that the incremental CapEx that's remaining on the enhancement project, that TEP would fit the bill for their 25% interest, or would TDev pick up that CapEx spend?

David Dehaemers

No, TEP will pick up its share of it, but as you can imagine, we baked all that into the cake when we did our acquisition modeling for purposes of buying it in either entity. And so that will, again, when it gets closed and we kind of give some more granular detail about it, you'll see that we're funding that out of our cash flow from REX, and it works very nice and neat.

Charles Marshall

Got it. And then last one for me. Just with regard to the step up this quarter, the deficiency payments. Can you just walk us through the shippers on Pony Express? And is that all coming from one shipper that are not meeting minimum volumes, or if you could just give us sort of a lay of the land and some of the customer activity there and what you're seeing. If it's more than one customer shipping below or any color would be helpful.

David Dehaemers

We cannot give you this -- for competitive reasons, we can't give you granular stuff on shippers other than we tell you our top two are in the cave. It is basically from one shipper only, and everybody else is pretty much shipping their take-or-pay commitments, and we have one shipper who is falling behind. They can -- they're obviously paying us, and we obviously have elasticity in the pipeline to allow them to ship at any time in the future without creating incremental cost or burden to us, but it is pretty much one shipper.

Having said that, like Bill pointed out, we do have one shipper also that is kind of shipping in an exact amount of incremental barrels that just so happens to be almost the same amount as the deficiencies.

Charles Marshall

Got it. That's it for me.

David Dehaemers

Great. Thank you.

Operator

And next we have a question from James Carreker from US Capital Advisors.

James Carreker

Just one quick one from me. You previously talked about REX as an $800 million EBITDA pipeline in 2017. If Ultra's about $75 million, does that all go to the bottom line, or are there some offsets there that you can mitigate?

David Dehaemers

The answer to your whole question is, yes, you got it pretty correct. The mitigation is obviously filing suit against Ultra, and A) either trying to resell the capacity as we go along. If we resell it today, I think spreads are $0.15, $0.20. And so if we sell it, we're going to get $0.15, $0.20, maybe even less on an IT basis, and that goes to mitigate our stuff against Ultra.

James Carreker

In terms of O&M, would you see any kind of -- if the volumes were lower, would that materially impact I guess the expenses associated with running the line?

David Dehaemers

Not materially. The difference -- we might have a little bit of save going in, but it's not anything near kind of what you talked about in terms of revenue side.

James Carreker

Got you. Okay, well that's helpful.

David Dehaemers

Having said that, let me be clear, though, too, that when we are buying this additional 25% interest in REX, we modeled the financial impacts of this purchase in the most conservative ways possible.

James Carreker

Yes, totally understood. I understand, it's all the price you pay, so the risk is kind of in there. I didn't know if maybe there was some -- since you've talked about that $800 million number, maybe Ultra comes down, but maybe there was some other incremental volumes from the east-to-west side or some incremental rates or some cost reductions that could be associated with making that up, if you will. That's kind of what I was looking for. I totally understand that the risk is priced into the price.

David Dehaemers

I guess I would tell you that with one of the earlier questions about capacity constraints on the east end, if you take the 50 we have left that Magnum Hunter's going to turn back on the east end, then you take the 50 that we've retained, frankly, we think selling that on an IT basis, and having a certain amount available to sell into the market at any given time, frankly, we can make really good money with that. Is that predictable? Is that a known? Absolutely not. But we every day are waking up trying to figure out how we can make the most money possible.

James Carreker

Okay. Thank you very much.

David Dehaemers

Yes, thanks a lot.

Operator

And next up we have Michael Blum from Wells Fargo.

Michael Blum

I'm going to go back to REX with two quick questions, I hope. So one, I don't know if this is just semantics, but is there a reason that you want TEP to acquire the 25% interest in REX directly from Sempra versus hypothetically buying 25% from TDev and then TDev completing the transaction with Sempra? Is there like a tax issue? Is there something else to think about there?

David Dehaemers

There's nothing to think about there. I guess I would tell you by my way of thinking about it, the transaction that was negotiated with Sempra by TDev at the time is obviously an extremely third party negotiation and transaction. That makes it, in our minds, a lot simpler relative to the Conflicts Committee and the hoops that we have to jump through there.

They're still formed and they're still doing their jobs, but no, there's nothing, semantics or anything different about it. We just think that it's pretty elegant and simple to turn over the benefit of the bargain to TEP.

Michael Blum

Okay. No, that makes sense. Second question is just in the press release, you talk about how P66 elected not to exercise its ROFR. But in exchange for that, TDev and Sempra agreed to make certain amendments to the REX Limited Liability Company agreement. Can you elaborate at all on what those amendments are and what that means?

David Dehaemers

We're not going to elaborate in great detail, but I think it's just a simple concept of there are certain -- prior to this transaction being completed, we owned 50%, Sempra owned 25%, P66 owned 25%. As you can imagine, there were certain things in the LLC agreement where 50% ruled the day, 51% or greater ruled the day. 75% or 76% ruled the day and even higher percentages.

Suffice it to say that we -- P66, having Sempra as an additional third party owner, had a certain degree of control on certain things, that if we were able to buy the 25% without a few modifications, they would lose. And so effectively I would say it's as simple as we just chose to change the agreement so that P66 could continue to have the same degree of control that they did under the present situation.

Gary Brauchle

And Michael, the 8-K, in the body of the 8-K there's much more detail on it than the press release. Just obviously given that it wasn't necessarily material to the transaction, was not in the press release, but a bit more detail in the 8-K.

David Dehaemers

Sorry, please.

Michael Blum

No, go ahead.

David Dehaemers

Just let me say, we took over in 2012 and been operating the asset. I think we've had a very good partnership with both of our partners, Sempra and P66. P66 will be our only partner going forward, and I think we've had a good partnership with them. We continue to look forward to having a good, effective business relationship with them going forward.

Michael Blum

Great. That's all I have. Thanks.

David Dehaemers

Thanks, Mike.

Operator

Our next question will come from Christine Cho with Barclays.

Christine Cho

Hi everyone. I really need to step up my star one game. So, I just wanted to first go on you talk about how you expect to recover something from Ultra. Is that assuming, operating under the assumption that Ultra files for bankruptcy? And if they do file for bankruptcy, do you guys still think you would be able to recover anything?

David Dehaemers

I think our ability to recover from them will be whether they file for bankruptcy or not. So if they do file for bankruptcy, I don't think we view it as any different. If you follow them at all, almost all their creditors are, if not all, are unsecured. And so whatever claim we would have would be pari passu with anybody else. You look at their assets, et cetera, and what's available for recovery. We just feel good about our chances of recovering some significant amount from that, whether they file for bankruptcy or not.

Christine Cho

Okay, helpful. And then on the REX side, I hate to beat a dead horse, but just wanted to dig into your comments that you're only going to raise the distribution at TEP based on REX's long-term outlook. And I think you've said that it's too early to see recontracting on the first two zones of REX.

So, how should we think about modeling in increases for this year? Should we currently assume no recontracting, and what that means for post-2019 EBITDA and associated capital calls to get down to that 4 times leverage, and then model in any upside as we get more clarity on contracts going forward?

David Dehaemers

I don't know that -- again, we will in a couple weeks, when we get it closed, have some more detail to you. I'm not sure it'll ever satisfy your need for granularity. But having said that, I don't think I would model in nothing. Again, REX on the east end is not going to be empty. It just isn't. You can't -- you wouldn't be able to get gas to the appropriate places for people to make food and heat their homes and take warm showers if REX was empty on the west end.

So having said that, I guess I would encourage you to model in something on the west end at a volume, at a rate that is probably more commensurate with what the market is out there right now for long-haul transport. So then that leads you to the rest of your model.

And clearly, as we peel back the onion here and get further and further closer to 2018 when people will be willing to talk to us about recontracting, you will get better and better clarity on that.

Having said that, don't think in the meantime that we're sitting on our butts and not working on getting people extended now. We're talking to some people about maybe a little bit of current rate relief with some amended volumes later into the future. When we get all that done, we'll roll it out to you and you'll be able to fill in the blanks a lot better.

Christine Cho

Okay. And then I think you guys had just said that one shipper had volumes in excess of their take-or-pay agreement on PXP, equally offsetting the deficiency payment. Was that just on a barrels basis? And if it was, what was the cash flow contribution of that?

Gary Brauchle

You're focused on the cash flow contributions. And the DCF contribution amount for net deficiency payments is almost exactly that amount for the net incrementals. And those numbers are right in the neighborhood of $7 million to $7.5 million each for the quarter, Christine.

Christine Cho

Okay, thank you for that. And then just lastly, how should we think about the revolver balance at TEGP? At time of IPO, I kind of thought that it would be used as an instrument to maybe smooth out your distributions at TEGP, given it's very frontend loaded with the growth. But just curious as to any updated thoughts there.

David Dehaemers

Good question. Look, I think when we were out on the road or when we were just completing that, I think we gave people the color that we thought at least for a year that we probably wouldn't do anything with it. We would borrow on it. And I think you're right; our color was then and it hasn't changed relative to smoothing of the distributions.

So I think we've been consistent with what we said, and we're just now coming up on a year. Will it be next quarter where perhaps we take a piece of our distributions and pay that revolver down some to smooth them more into that kind of 30% to 35% distribution growth rate? I don't know. We'll deal with that as we come. We don't have any pre-conceived plans to do that.

I will note, though, that a lot of people are asking, they do ask, well why did you grow your distributions at 9 months, or basically a little less than a year, by 54% if the market isn't paying you for it? Well, I don't -- the market does or doesn't pay it. We're generating the same amount of cash flow regardless.

Our goal is to pay it out to people on the one hand, but on the other hand, is our security at TEGP undervalued in our minds? Absolutely. Particularly compared to other people who have promised more and delivered less. So, not sure that was complete --

Christine Cho

No, that was help -- no, that answered my question, yes. Thank you for your time.

David Dehaemers

You bet. You too. I think we've got one or two more, Operator.

Operator

Yes. We do have Ryan Levine from Citi.

Ryan Levine

Hi guys. Just wanted to get some additional clarifications, see if there was any update around the rack contract with Sempra as being remarketed to Ultra. If there's any additional conversations around a potential transaction there or getting additional clarification there.

Bill Moler

All we can really tell you is that what was in Sempra's press release, that they intend on releasing their capacity, that has no impact to us whatsoever. We will administratively support them accomplishing that. But the rate and the volumes and all that and the revenue influence to us remains the same.

David Dehaemers

Ryan, you also mentioned Ultra in that sentence, and perhaps what you're referring to is a bit of capacity that Sempra had released to Ultra. They did and continue to backstop that piece of capacity.

Ryan Levine

Okay. I guess they're trying, or there was mention in their release around the time of the transaction about them incurring a loss for the next few years and to frontend load that. Is there any appetite to transact that remaining capacity and move that cash flow, the timing forward?

Bill Moler

Sorry. The two are completely distinct and separate. Sempra Energy marketing and all the capacity, and Sempra Corporate who held the 25% interest, are -- they're just separate and completely apart. So, what one does with their capacity has no impact on REX, the pipeline owner. We really can't talk about it because of the regulated nature of that contract.

Ryan Levine

Okay, thank you.

David Dehaemers

Anything else, Ryan? Okay, Operator.

Operator

And at this time, we have no further questions in the queue.

David Dehaemers

Well look, thank you everybody for your time, and appreciate the questions, and I hope you felt like this was fruitful. Thanks for your interest in Tallgrass, and we'll see you before next quarter when we get the REX transaction closed. Have a good day. Bye.

Operator

That does conclude our conference for today. Thank you for your participation.

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