Tallgrass Energy's (TEGP) CEO David Dehaemers on Q2 2016 Results - Earnings Call Transcript

| About: Tallgrass Energy (TEGP)

Tallgrass Energy GP LP (NYSE:TEGP)

Q2 2016 Earnings Conference Call

August 3, 2016 4:30 p.m. ET

Executives

Nate Lien - Head, IR and Financial Inquiries

David Dehaemers - President and CEO

Bill Moler - EVP and COO

Gary Brauchle - EVP and CFO

Analysts

Kristina Kazarian - Deutsche Bank

Brandon Blossman - Tudor, Pickering & Holt

Christine Cho - Barclays

John Edwards - Credit Suisse

Ethan Bellamy - R.W. Baird

Charles Marshall - Capital One

Ted Durbin - Goldman Sachs

Operator

Good day everyone, and welcome to the Tallgrass Energy Quarterly Investor Conference Call. At this time, I would like to turn the conference over to Nate Lien. Please go ahead, sir.

Nate Lien

Thank you, Laurie [ph]. 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 second quarter of 2016, which were released through our joint press release and 10-Qs this afternoon. Joining me on the call this afternoon 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 call 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 April 28, 2016. Please refer to our filings with the SEC which are available on our Web site, including our 10-Ks, which provide discussions of factors that may cause actual results to differ from Management's projections, forecasts, estimates, and expectations. Note, that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statement.

Please also refer to our earnings release for reconciliations between the non-GAAP financial measures referenced in this presentation, and the most comparable financial measure or measures calculated and presented in accordance with GAAP.

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

David Dehaemers

Good afternoon everybody, and thank you for joining the Tallgrass Energy's second quarter earnings call. I have to tell you, I always look forward to these call because it's kind of the one time each quarter where we get to talk to everybody at once and kind of have the table. And today we've got a number of things to go through, not only our performance, but some other matters to talk to; some a little lighter, some a little bit more meaningful and serious.

And I guess before I kind of dive into what we did this quarter, I would like to just step back and talk about a few things that seems to me sometimes in the energy -- midstream energy business as well as the MLP where people forget about these things. And that is simply this: MLPs are not simply this unique animal that's out there. Frankly, MLPs are just like any other company, and a company that's publically traded like ours or any MLP would actually be a corporation were it not for the fact that the internal revenue code gives it the ability to be taxed as a partnership.

And so that's the only difference. Probably one of the things that make MLPs unique that I think people forget about, is these partnerships are structured so that these MLPs with long-lived assets are able to generate cash flow that then is returned to their unit holders, and that's cash flow from operations.

And so I think people sometimes forget that, and think that MLPs are just kind of these unique animals out there, and it's a whole asset class that needs to be looked at extremely different from any other business, et cetera. And I think it's important to step back and take a look at that, and remember that at times.

One thing that we've had happen in this last two weeks is we did take REX out of service. We thought it might be out for eight days. I think we were down somewhere between four-and-a-half, and five days, which we feel really good about. I think I would instruct everybody that if you get a chance to take a look at our Web site there are four or five pictures that are going to be up on there for a couple of weeks. They're really good pictures of the construction work that we did where we're tying in the compressor stations, the three new compressor stations on REX, and there are four or five great pictures of very hard working pipe liners working through the night and tying those pipelines in, and I would encourage you to take a look at those and see the type of work that we do, and the service that we provide.

Finally again, before jumping in on the lighter side of things, we have a social media consultant around here now and that is my 14-year-old niece and my 12-year-old nephew, and they told me, they said, Uncle David, you really need to think about what's going on in social media, and I said, "Oh yeah, why is that?" And they said, "Well, for instance, do you know that there are people that are on your earnings call that play drinking games?" And I said, "What are you talking about?" They said they count the number of words that you say certain phrases at times and they take a drink and they claim that by the time your earnings calls are done that they're drunk. Well, we want to be socially responsible and so therefore we're going to try and change up some of those words.

So no longer will we -- we will at least try not to use the words Chicken Little or Mad Money or things -- or working our butts off, as an example. So whoever is doing it may have just had three drinks, I don't know, but I guess I would encourage you to look for the replacement words for those because we can't totally let them off the hook.

With all that said, as you can see in our earnings release we had another very strong quarter with a number of positive, commercial, and financial developments including financial results that reflect two months of distributions from REX for the first time as a result of our 25% acquisition, in May. The settlement of REX'S claim against a former unit at the Department of the Interior, that's the Mineral and Mining Service, MMS additional contracted capacity at REX. In the settlement in principle of TIGT's rate case, an open season on Pony Express for a new condensate stream and the in-service of TDev's Buckingham terminal among other things.

Let's first review the outstanding financial results for the second quarter which led to TEP's 12th consecutive quarterly distribution increase, since its IPO in May 2013, and TEP's fourth consecutive quarterly distribution increase since its IPO in May 2015. The second quarter adjusted EBITDA for TEP was $114 million, not including any of our fully collected net deficiency payments under our take-or-pay contracts on Pony Express, but inclusive of two months of distributions from REX. If you include the quarter's net deficiency payments in adjusted EBITDA, the amount would have been $122.6 million.

We have again included the table in our press release to show the impact of deficiency payments if we were to have included them in adjusted EBITDA. In addition to that supplemental disclosure this quarter, we have included another disclosure to illustrate the impact that incremental barrel shipments on Pony Express had on our current results, as well as a description of how they could impact our future results.

I guess I would remind you that incremental shiploads are similar to walk-up barrels in that we ship them, and that when we ship them they are earned revenue in current period cash flow. But unlike walk-up barrels they are with our contracted customers, and incrementals can be used as a credit against future take-or-pay barrels. Gary also explained this to you in detail I think on our last Q4 call, and so if you have any additional questions you can reach out he or -- me or Gary, but we felt like it was an important disclosure for you to know. We don't necessarily know that anybody that is our existing customer that ships incrementally on us will ever reduce their MVC [ph] commitments in a future period, that we wanted you to know what that looked like.

TEP's DCF for the second quarter, which does include deficiency payments, was $112 million, and once again beat our own internal expectations. Coverage for the quarter was a very strong 1.41 times with approximately $32.5 million dollars of cash generated in excess of distributions. Since TEP's IPO in May 2013 our cumulative coverage is $91.3 million, and our cumulative coverage ratio is 1.2 times.

Why do I tell you this? Because like anything, we don't, I've said this many times over and over again, we don't run our business for 90-day periods. We run it for the long haul. There is no doubt that at some 90-day period we may experience a hiccup, and that's partially the reason that you run coverages like this, and you generate earlier cash flow that you don't distribute.

As mentioned in the opening, our strong performance in the REX acquisition supported TEP, increasing its quarterly distribution by $0.05 per unit to 75.5 cents or $3.02 annualized. This represents an increase of 7.1% for the first quarter of 2016, 30.2 cents year-over-year growth, and approximately 163% growth from the annualized minimum quarterly distribution of $1.15 at our May 2013 IPO. The increase is consistent with TEP's plan to recommend to the Board of Directors of its general partner increases in its second and third quarter, so one more to come here, 2016 distributions that will aggregate to approximately $0.09 over the first quarter of 2016 distribution of 70.5 cents.

As a result of the 75.5 cent distribution at TEP, Tallgrass equity will receive distributions of $40.3 million on its 20 million TEP common units, GP interest, and IDRs. And in turn, TEGP will receive the $11.7 million from Tallgrass Equity or an increase of $1.7 million from the first quarter of 2016. Based on that amount, TEGP declared a distribution to Class A shareholders of 24.5 cents or $0.98 on an annualized basis, which represents increases of 16.7% from the first quarter, and 84.2% since TEGP IPO-ed [ph] in May of 2015, so a little over a year.

Before I turn the call over to Gary, just let me say one other thing that even today I got a piece from somebody that talked about other coverage universe. There's 82 MLPs out there, and 70 had reported. The average increase for those 70 was 2% year-over-year, compare that to our numbers. In addition, the median distribution yield for the whole MLP universe, which is over 100, today is about 7.1%. We are at 6.5%, again median is not necessarily the average, but I guess I would tell you by any measure that I can think of, 6.5% compared with a median of 71 does not place us by any way in shape or form overvalued in my opinion. In fact, we are undervalued.

With that, I'll turn the call over to Gary.

Gary Brauchle

Thanks Dave. Good afternoon everybody. Let's jump right into the segment performance, and then I'll talk about balance sheet, leverage, and liquidity. In our crude oil segment which is Pony Express, it generated distributable cash flow to TEGP of $74.3 million for its 98% interest during the second quarter of '16. The increase of $2.8 million as compared to the sequential quarter mainly is attributable to reduce the expenses. And I would tell you that Q2 represents yet another very strong performance from Pony Express.

With respect to volumes on Pony Express, average daily throughput during Q2 was approximately 286,000 barrels a day, comparable to Q1's average of approximately 291,000 barrels a day. Preliminary July figures show throughput of approximately 280,000 barrels a day, and preliminary August shipper nominations would predict that we will move approximately 295,000 barrels per day this month. So, Pony continues to move volumes consistently at or near its contracted capacity.

Turning to the natural gas segment, which includes TIGT, Trailblazer, and now, a 25% interest in REX, the segment produced adjusted EBITDA of $45.8 million, up approximately $29 million as compared to both the sequential and prior year quarters. The increases are related to the inclusion of two months of distributions from REX for its -- TEP's 25% interest that is acquired in May. I would caution you against annualizing the segment's performance, because it only includes two months of REX distributions, and it does include TEP's 25% interest in the REX litigation settlement.

TEP accounts for REX as an equity method investment and expects to continue that accounting treatment even when TEP owned 75% of the pipeline. I will admit that's not a perfectly intuitive answer, but it is what GAAP requires in this particular case. So TEP will not consolidate REX's debt, and only include the equity and earnings in TEP's net income. And as for TEP's adjusted EBITDA, that amount will include only distributions received from REX and not 25% of REX'S EBITDA.

Firm contracted volumes for TIGT and Trailblazer averaged 1.48 million cubic feet a day during the second quarter, which was in line with the first quarter volumes. Bill will give more details later, but importantly, TIGT has settled its rate case and is awaiting final approval, and it's safe to say that the financial benefit to TIGT going forward will be meaningful.

The processing and logistics segment generated adjusted EBITDA of $3.5 million for this last quarter, second quarter of '16, representing a slight increase as compared to the sequential quarter, and a $3.5 million decrease as compared to the prior year quarter. The decreases are due to lower average inlet volumes at the processing facilities. And as we look ahead in this segment, the volumes are expected to remain low in this year. But I will tell you that we continue to expect additional contributions late this year, and for full-year '17 from the recently acquired water assets as the minimum volumes under those contracts ramp up.

Moving on, as you may recall, when TEP purchased the additional 31% interest in Pony, in January this year, TDev granted TEP a call option on the 6.518 million units it was issued as part of the consideration in the drop-down transaction. The strike price of the option is $42.50 per unit. During Q2, TEP issued 3.563 million common units under its ATM program for net proceeds in excess of that strike price. In fact, the net average issuance price was $47.23. As those units were issued, we paid down the balance on our revolving credit facility, and then on July 21, we drew on the revolver to repurchase and retire the same 3.563 million common units from TDev. This is the reason the revolver balance increased subsequent to quarter end.

Based on the net proceeds of $168.3 million that TEP received from the issuance of those units, it made a payment of $151.4 million to TDev, and that was the 3.563 million units funds $42.50 for the repurchase of those units. The difference of almost $17 million was used to reduce borrowings under TEP's revolving credit facility, and the reduction of the debt in that amount reduces the purchase price and therefore the transaction multiple for Pony dropped 3 from approximately 9 times to 8.8 times.

The multiple could be further reduced to the extent TEP is able to issue additional common units at net prices above the strike price of $42.50 and redeem any of the remaining 2.95 million units that are subject to the call option. As we've said many times before, this transaction and its structure is one of many examples of the supportive relationship that TEP continues to enjoy with TDev.

Now leverage and liquidity. TEP's leverage as of quarter end was approximately 2.7 turns based on the trailing 12 months adjusted EBITDA including the actual distributions associated with the 25% interest in REX. If you were to use the debt balance of just over $1.4 billion, as of July 29, that I just described, our leverage ratio would be approximately 3.1 times, which is on the low end of our investment-grade target of 3 to 4 turns. And I would suggest to you that either of those numbers is among the best in the MLP space today. As to liquidity, as of July 29, TEP had well over $300 million of liquidity available to on it on our $1.75 billion revolver.

Before I turn the call over to Bill, I want to briefly touch on the potential bond issuance at TEP that's been contemplated now for some time. I know many of you are aware of the substantial improvement in the energy high-yield markets that occurred heading into the Q2 earnings season, and we are too. We've been monitoring market conditions very closely, and remain ready. So I'll tell you that the pricing of our inaugural issuance is important for a number of reasons, not the least of which is its impact on TEP's cost to capital. So we remain very focused on picking our spot very carefully.

Now Bill will update you on our assets. Bill?

Bill Moler

Thank you, Gary. First up is Pony Express. As Gary highlighted earlier in the call, Pony Express continues to exceed our expectations with volumes that have been consistently at or near our near contracted volume. Last quarter, I mentioned the work that our commercial team has done to expand the diversity of this system, using as an example the connection to Genesis' Powder River. Another example is our recent announcement of an open season for our fourth common stream on Pony Express. This new stream will be a light crude or condensate, and allow us to compete for those volumes in the region as well. In addition to the new common stream, our commercial team continues to work at adding additional demand connections into Pony Express from a local refiner near our pipeline.

As a reminder, P66's Ponca City Refinery is an existing demand connection on the system. No agreement has been executed, but we are working it hard, and hopeful that it will be commercialized in the near future. With such supply diversity as crude oil coming from the Bakken, the Powder River basin, the DJ basin, the Niobrara, wellhead connectivity through our two joint upstream pipelines: Belle Fourche and Highland, a multiple common back stream system, refinery connectivity, and an additional Tallgrass Terminals injection site at Buckingham, which just went into service yesterday, and our expansion capacity of at least 100,000 barrels a day, Pony Express is well-positioned to compete for barrels both now and in the future.

Let's talk about TIGT rate case. We filed the TIGT rate case with the FERC in late-October of last year. It was the 90s since TIGT had had a rate case, and was well overdue. The filing proposed changes to TIGT's rate structure, updates to its tariff, implementation of a rate increase for our firm and interruptible transportation and storage services. The FERC accepted our filing, and those rates in the filing went into effect on May 01, 2016 subject to refund. Even though those rates went into effect on May 01, our top priority was always to settle the case with our shippers on fair, mutually agreeable terms. I am happy to report that we have reached an agreement with those customers, representing a majority of firm fee revenue on the TIGT system as of December 31, 2015 to settle all rate related issues.

On June 08, we filed the offer of settlement with the commission, and on July 14, the presiding administrative law judge certified it to the FERC. In conjunction with that settlement, TIGT executed contract extensions with certain firm capacity shippers for an average additional term of 3.25 years. TEP expects TIGT's annualized revenue to increase by proximally $13 million a year as a direct result of this rate case settlement. We and our shippers are very happy with that outcome.

Let's talk about REX. As a reminder, Tallgrass Development has a 50% ownership interest in REX, and operates the pipeline, and TEP now owns a 25% interest in REX as a result of the acquisition completed earlier this year. As mentioned on prior calls, REX's capacity enhancement project is in full swing with well in excess of 60% of the projected capital spent through June 30. We are still on schedule for an in-service date on or prior to year-end. This milestone will represent another positive cash flow step change that this team has created around this asset and footprint. I would also point out that we took the east end of REX down on Tuesday, July 19, for five days in order to perform some of the necessary work on the three new compressor stations that are being installed. The outage was expected to last until Monday, July 25.

The teams worked very hard. Dave mentioned the pictures on the Web site, you can see it. Everything fit, was welded up tight, done in a very safe manner, and we are able to complete the work two days ahead of schedule, and bring the pipeline back into service on Saturday 23. For those of you who watch the market, when REX goes down there is impact, and we wanted to get that line back in service as quickly as possible. And our team did an outstanding job of communicating with our customers well in advance of that outage in order to minimize their financial impacts, our operational impacts, as well as those to REX. We do not anticipate any additional outages related to this new construction.

Another recent positive development at REX that some of you may have read about is Spire Incorporated recently announced Spire St. Louis Pipeline project, which is a new lateral capable of moving 400 million cubic feet a day that will interconnect with REX in Scott County, Illinois. As a result of that project, REX has signed a precedent agreement with a subsidiary of Spire for 20 million cubic feet a day of capacity. With the signing of this agreement, the total contracted capacity on the capacity enhancement project is up 2.73 billion cubic feet a day. We feel very confident in the demand for the remaining capacity, and will continue to work to contract it prior to in-service.

I would also like to briefly touch on the Ultra Petroleum bankruptcy proceedings, and the status of our $303 million claim. REX's President has been named Co-Chair of the creditor committee with Ultra and has been heavily involved in the negotiation process from day-one. While the process is still ongoing and we have no current view to share into our potential recovery, we are confident in our ability to recover a substantial amount of that claim.

Finally, Tallgrass Terminals, as a reminder, Tallgrass Terminals is owned by Tallgrass Development, our private company. The past three quarters we have reported on the progress of the Buckingham truck unloading terminal. And I'm happy to report that the terminal is now in service and accepting deliveries which will provide more optimality for our shippers, and will better position Pony Express competitively. With this terminal up and running, and with the contributions from the Sterling terminal, and our interest in the Deeprock Terminal at Cushing, we currently expect Tallgrass Terminals to produce annual adjusted EBITDA in the range of $10 million to $12 million.

We also anticipate this number will grow over time as we execute on acquisitions and continued organic growth, such as our storage terminal in South Cushing on the 500-plus acres that we purchased in 2015. We expect to begin civil work on that project in mid-August, and we continue to be very positive about terminals and the opportunities that project and terminals will present throughout our footprint for future growth.

I will now turn it back over to David for his closing remarks.

David Dehaemers

So this is usually the time where it's one of my more enjoyable times as long as -- as well as Q&A on these calls. And I do have a few closing comments that I will make that are probably along the norms of what we've done in the past. But before that, I do have one serious matter and I think this is the appropriate forum to do it.

I want to talk about this serious matter, TEP and TEGP as public companies have to live with all sorts of SEC regulations around our disclosure, things we say, things we have to provide in our filings, not the least of which is fair disclosure. It appears that some of the public and especially certain analysts do not have to live within those rules or frankly it appears any rules.

And you're probably wondering now what am I talking about? Well, I'm going to tell you specifically what I'm talking about. On Monday, July -- or August 01, at 8.40 p.m., a analyst from Hedgeye Energy sent an unsolicited email to, I don't know how many people, but it clearly made its way to us. It went to many of our investors. It went to many of the regulated analysts or the people that act like analysts that cover our company. The headline of that piece says, TEP/TEGP: Pony shipper BCEI warns of potential contract restructuring. BCEI is also known as Bonanza Creek Energy. I'm going to read you two paragraphs out of this note, and then I'll point out to you why this is a serious problem.

I quote, BCEI is a committed shipper on TEP's Pony Express oil pipeline contracted to ship 12.6 MBD through April 2020. BCEI is also committed to ship 15 MBD on NGL Energy Partners' Grand Mesa oil pipeline that goes in service in 4Q, 2016. "In BCEI's 10-Q it warns that it will soon be deficient on both contracts, and then attempts to aggressively pursue restructuring these contracts … " "We estimate that BCEI's commitment to Pony Express amounts to $17 million per year, 12.6 MBD at $3.75 per barrel. BCEI's latest disclosure suggests that it's going to be highly deficient on that commitment starting in September 2016." So those are the quotes. You all know what's funny about this? Frankly, it is not funny. What it is, is libel. And the reason it is libel is because Bonanza Creek is not a shipper on Pony, they have never shipped one barrel on Pony Express. They certainly aren't a committed shipper.

I would suggest to people that write things about our company, be that in social media or as purported analysts, get their facts straight before they go libeling our company because they are liable for that. I'll end with my message being this. We work really hard around here for a lot of people that have a lot of money invested in our future. People are obviously welcome to believe our story, not believe it, buy our stock, sell it short, whatever. What you aren't able and have the right to do is make up your own set of facts, and then slander us. If this continues we will have other means for which we will address this in the future.

Now getting back to kind of the more enjoyable part of our jobs here, I think this quarter, in now finally having REX partially in TEP, brings to the forefront all the hard work that we have done around here. I'll remind everybody that the reason that 25% of REX is in TEP today is a third-party acquisition that we made from Sempra. I know there are certain people out there who might think that because Phillips 00:29:50] didn't agree to ROFR into the asset, that it wasn't a great buy. The fact of the matter is we all had ROFRs. We had discussions with Phillips. There were good reasons that they didn't, not the least of which is REX is the only non-oil -- non-liquids, in other words, natural gas asset that they own. You can obviously talk to them about other reasons that they may or may not have, but it didn't have anything to do with REX being a valuable asset or not.

I think those people that know us and actually follow us closely, and that look at our body of work over the last, in my case 20 years, in Bill's case 30 years, and the whole management teams', they look at our entire body of work, not the least of which is the last three or four years, should give us the benefit of the doubt, relative to we know what we're doing, and that we're working very hard to create value for our shareholders. This should not entitle people to a drink, but we in fact work our fingers to the bone. And so we have 600-plus employees here. We've got 40 engineers, we got 300 people in the field. We've signed commercial contracts over the last two years totaling over $5 billion worth of value. And I think that is deserving of some respect.

Having said that, you know again, I was taught early on that actions speak louder than words. While I do enjoy these conference calls and getting to the opportunity to tell you all about TEP and what we have done in the last year or the last quarter, as well as the last year, and what we intend on doing from this point forward, I will tell you that I enjoy more letting our actions speak for what we've done.

With that, we'll open it up for questions. And again, as always, we appreciate your support and interest in our story.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Kristina Kazarian with Deutsche Bank.

Kristina Kazarian

Good afternoon, guys.

David Dehaemers

Hey, Kristina.

Kristina Kazarian

So you guys mentioned this in a press release and also chatted about in your opening comments, but can you guys talk about the opportunities to -- on the condensate batching open season, you guys alluded to refinery in connect as well, but what sort of EBITDA uplift we could be seeing here, and, yes, how we generally need to be thinking about this?

David Dehaemers

So, Kristina, I'll let Bill answer the bulk of that, but one thing I'll point out to you is, when we first started Pony two years ago or 18 months ago depending on which section it was, we had the refinery that Bill referred to, which is Ponca City, at that time accepting zero barrels of oil at that time when we first started up. Today, they are accepting tens of thousands of barrels a day. I'm not going to tell you specifically how much, but they are. And that's just one refinery along that system. So with that, I'll let Bill talk to you about the batching, and then the other refinery, et cetera.

Bill Moler

We filed the open season. The open season runs for 30 days. We've had several parties already contact us for the necessary confidentiality agreements, and subsequently they get the full package of what the services look like. We have the capability. We have the terminaling at Cushing to deal with condensate. We have the pumps, the horsepower to move condensate. And as you know, we have 100,000 barrels a day of excess capacity that for all intents and purposes is free and available today on Pony. So anything we get from the condensate or light crude open season will be gravy and mostly additive at very little incremental cost to the system. Can I predict how much that is going to be at this point? I can't. But we've had some good interest thus far, and hope that interest continues to grow.

On the refinery front, we've said it a number of times, that Pony is not a one-trick Pony. When we originally built this line it was -- its intent was to be Bakken crude going straight to Cushing and nothing more. We commercialized, developed, and built the Nickel line [ph] to add the DJ barrels and the Niobrara barrels. We added Genesis bringing powder barrels over. We have deliveries to refining in Oklahoma, soon to be other refining, and then what's left goes to Cushing. So it's that diversity that we think differentiates us from all others. And that diversity is going to bring fruitful results over time.

Kristina Kazarian

Okay. And then a follow on to that, we got an announcement from someone else last night, Regional [ph] say about the Sandpiper cancelation, can you maybe just talk about the longer term read through on that?

David Dehaemers

Yes, Kristina, it's Dave. Sandpiper was, at least in my opinion, a pipeline that really -- it's fine to think of these things. It probably shouldn't have gone as far as it went. I think that the consolidation that's taking place with the Bakken pipeline, Bakken Express, where Enbridge and maybe it's Marathon joined in on that, it makes the most logical sense relative to infrastructure, et cetera.

I think that, again, like one of the big picture things, that I think sometimes people are failing to understand is that the Bakken is a fairly big play. Not all -- we get as much as 200,000 barrels a day from the Bakken today. But the Bakken Express pipeline isn't going to sap all the capacity out of that particular production area. And in fact, not every barrel in the Bakken wants to go to Patoka or wants to go to Nederland.

And I think people forget to realize that the Bakken tariffs are not all that much -- in fact, they're not any better than tariffs that are combined tariffs that would get people both to Cushing into the Houston ship channel. And ours are all gathering systems at the header, where as barrels are going to be brought into the Bakken pipeline system have a cost to get the barrels to the head point of its system, and then they also have cost, particularly at Nederland, to get the barrels out of Nederland either to a out-borne ship or to another refinery.

And I'm certain -- it's certainly got big players involved in it, and certainly -- and we know they have contracts, all of which is good for the country's infrastructure, but it's not going to sap everything dry. And the fact of the matter is we have every reason to believe that the shippers that are on us today, nobody likes $30 and $40 oil. It's not really good for frankly anybody in my view. But if you see $55, $60, $70 oil again, all of our shippers are going to want to go to the same place that they're going today, which is either those endpoint refineries which we're going to have all connected by then, or Cushing whereby they can go just about anywhere they want.

Kristina Kazarian

Perfect. And then last quick follow-up one for me, is how do you guys want me to be thinking about the other half of the option, and just time frame on executing that portion?

David Dehaemers

The simple answer would be it's anything above $42-$50 is to TEP's benefit. And just a little history on that, at the time you never know exactly where things are going to trade now or things are going to look. I think we felt at TEP, for this last quarter and what we did, we had inquiry and we felt like we needed to take some of the chips off the table. It benefited TEP, you saw, to the tune of $17 million lowering its purchase price. It benefited TDev, which obviously back in January, when we wanted to drop down the asset, was very supportive and took back units when it really would've preferred to have cash.

So, we kind of viewed it as a win-win. I know that's really not responsive to your question, which is kind of looking forward.

I guess I would just tell you that we'll play it as it comes. We've got about a year more to run on the option, so it's not like we're in any particular hurry. And like I said in my opening remarks, I think our view is that we're undervalued now as it is. So, our goal is to optimize our cost of capital for TEP, and for our unit holders, and there's no set plan. I hope we are fortunate enough to have a good price to where we can deal with it here in a very logical manner over the next year.

Kristina Kazarian

Perfect. Thanks, guys.

David Dehaemers

You bet.

Operator

And next we'll move on to Brandon Blossman with Tudor, Pickering, & Holt.

Brandon Blossman

Good afternoon, gentlemen.

David Dehaemers

Hello, Bandon. How are you?

Brandon Blossman

I am good. So I guess I'll switch over to the gas side. The 400 million-a-day demand lateral off of REX seems like a very positive development. Can you comment on just how you see that kind of moving forward, you've got to make [ph] now 20 million-a-day of contracted capacity, how do you think that that demand sink evolves in terms of contracted capacity on REX over the next five years?

Bill Moler

We obviously look at it as a very positive addition. We told you guys early on that we were going to work very hard on the supply side in the Marcellus and the Utica, and knowing we have 2.6 BCF by the end of the year capable of flowing west to east at 1.8 BCF a day, currently available west to east, that we are a pipeline that is probably oversupplied and we need to add demand laterals.

Matt and his team have done a great job of going out and securing direct connected demand sources. That 400 million a day, we did get a contract from Spire as a result of that negotiation and interconnect. They are currently out in an open season. That open season may result in LDC taking all the space. It may result in some of our current shippers paying a fee to get to a market at St. Louis. But more importantly than anything, is it's 400 million a day of direct connected burner tip capacity, that gas coming from the Rockies or from that Marcellus and Utica can go to. So the more takeaway we have, the more demand -- direct connected demand where you don't have to pancake pipe on pipe on pipe is a good thing for us. So it gives all of our shippers a new liquid point of sale and that's encouraging and very positive.

Brandon Blossman

I agree, anything that you would like to tease on a go-forward basis, what's the outlook for something incremental that looks like this, over the next year or two?

David Dehaemers

This is Dave. I would just -- I would add to Bill's comments. I don't know that it's so much a tease as, like it or not, the energy industry, whether it's upstream producers, even midstream to some degree and/or LDCs, there is a certain amount of history and there's a certain amount of inertia that exists. People are used to doing business between companies for a long, long time. It takes a long time for things to change. Clearly, you -- we all recognize that delivery of natural gas fundamentally has changed in this country in the last five years and I think because of that, LDCs, in particular, are looking to source gas from other places than they were in the past.

I think they have new routes that they can take that presumably will net them a lower cost to their customers. I guess all I would tease, is like Bill says, there's a lot of capacity on that line. And as you go through time, if it's proven out that Rockies gas or Marcellus or Utica gas or Mancos Shale gas is cheaper, that's a good thing for everybody.

Bill Moler

The teaser is what we basically said in the prepared comments, which is, we do still have a little bit of capacity left of the power-up, and the team is out working very hard to get additional direct connected demand load tied to the system, and I think we will be successful in having that sold out before it's placed in service. The other thing I'll add to Dave's comments is, the cost recovery mechanism policy that FERC came out with to help improve energy infrastructure in the country, really gives a huge advantage to REX.

We -- in our rate base, filed a cost recovery mechanism within our initial filing. People don't quite know how to get their hands -- or heads around that just yet, regulatorily. We put it in our rate case. I'll say we settled around it, but there is going to be a day where the south to north infrastructure that is many, many, many more years old than REX, are going to start needing to recover their maintenance capital to keep those pipelines viable. When that happens, these LDCs are trying to get ahead of it and they're coming to REX to enjoy new infrastructure that is only six years old and not infrastructure that's 10 times that age. So we think that's a big advantage to us as well.

Brandon Blossman

Definitely appreciate all the color, guys. Second question, same topic, going the other way, west to east, REX, any more Encana-like extensions or blended extends on the horizon as you guys look forward?

Bill Moler

We aren't currently chasing any or trying to get any done currently. One or more of our shippers may come to us out of the blue and request it. Matt and I talked a little bit about the Ultra settlement. That may result in contracts; that maybe result in, who knows what that ends up looking like, but at this particular point, there's none of that going on.

Brandon Blossman

That's it for me. Thank you very much.

David Dehaemers

Thank you.

Operator

Next is Christine Cho with Barclays.

David Dehaemers

Hi, Christine.

Christine Cho

Hi, everyone. I wanted to start on REX, just some clarifications if I could. How do -- so you guys talked about how you guys are going to be dealing with REX in your financials. How do the rating agencies view, at least, let's start with your 25% interest in REX, when they look at your leverage? So are they going to do the same thing where they're just not going to include the debt and just look at the distributions you received? Or are they going to look at the 25% portion of the debt and your proportion of EBITDA?

Gary Brauchle

Christine, it's Gary. I have to confess that I don't think we have perfect knowledge exactly of the way that they model those things. I think they might look at it, in fact, perhaps in both ways, at least one agency may, but I think we're cognizant of the leverage for filing a CEP on those basis, and we'll manage it relative to that. But again, I have to tell you that I think one of them probably looks at it, in that fashion, not exactly sure on the other.

David Dehaemers

Yes, I'd supplement a little bit, Gary, is I think that the one agency that always proportionally consolidates everything is going to continue to do that. I think whether it's 25%, 50%, 75% that it owns, it is totally counterintuitive, even to me, who is just a dumb old accountant that it's not consolidated after 50%, but my suspicion is either way they do it as well -- so let's say, we're at -- fast forward, we're up to 75% ownership. Either way they do it, whether it's consolidating the debt and consolidating all the way down through net income and adjusted EBITDA, we're going to end up with a good answer regardless.

Christine Cho

Okay. And then also, when you guys talk about your long-term 3 to 4 times leverage ratio that you want to keep, I should be calculating that the way you guys described it on the call, right? Like just distribution, no debt from REX?

Gary Brauchle

Yes. You should. But again, we're cognizant of both answers.

Christine Cho

Okay.

David Dehaemers

Like Gary said, we're well aware of what is -- what it is running it both ways and when REX is in at 75% and giving what we've stated long-term that we think that REX's leverage ratios need to be, our goal is to be in that same thing. We've said all along, 3 to 4 times, any way, shape or form you look at it.

Christine Cho

Okay. And then just another question on REX, so you guys provided the financials here, which I thought were pretty helpful; year-to-date, it looks like the maintenance CapEx for REX is $4 million. I know that there's seasonality to this number so I was curious if you could provide like a more normalized full-year number.

Gary Brauchle

Yes, Christine, we don't really provide that level of detail in terms of maintenance CapEx. I will say that I think there may be a view that REX is 100% maintenance CapEx, $25 million or more a year and that is not the case currently, and hasn't been over history. I think you could probably use $10 million to $17 million, somewhere in that neighborhood on an annual basis. But again, these integrity programs change from quarter to quarter, year to year, so just be cognizant of that as well.

Christine Cho

Okay.

David Dehaemers

So I mean, again, Christine, keep in mind, REX is, six- year-old pipe. It's not 70-year-old pipe like Plantation Pipeline is, as an example. And I'm not trying to cram on Plantation. It's just a fact. Yes, but, so it's only six years old, number one. Number two is, I just yesterday approved an AFE for $3 million of right away remediation where you had ground swells that have sunk in because of water drift, et cetera, and that's stuff that you just deal with all the time. So I mean, right there, there's another $3 million and -- but like Gary said, it's not anywhere near what some of the pundits seem to think it might be.

Christine Cho

Okay, helpful. Then last question from me, I just wanted to go back to this, this third-party pipeline that's being built out of Bakken. Taking the supply to the Gulf, and I understand that you have your contracts that run through, I think it's 2020 or 2021. But I guess What are you are thoughts on offering something competitive with that by teaming up with other pipes that go to the Gulf from Cushing through another joint tariff?

David Dehaemers

Well, it's interesting you bring that up because we have been thinking about that, and again, Bill will probably wax more eloquently on this than I, but our customers, we've been talking to them about this. Our customers like the refinery complexes that we're in a directly feed today.

They like Cushing. They don't particularly have a need or feel the sense that they need to go to the Houston Ship Channel, but as you rightfully ask and point out, it has not been lost on us that we might not have an additional joint tariff partner that allows us, at some point in the future, should our customers desire it to get to the Houston Ship Channel.

Christine Cho

Great. Thank you for the color.

David Dehaemers

You bet.

Operator

Next we'll move to John Edwards with Credit Suisse.

John Edwards

Yes, hi, everybody and congrats on another nice quarter.

David Dehaemers

Thank you, John.

John Edwards

Just following the last question here, so with the Bakken Crude Pipeline coming on, I guess you were saying that you don't really view that as, competition, per se. Well, I guess that would be the wrong word. But maybe just how does that -- how do you think about the renewals going in four or five years and how -- do you really think that impacts or you just think there's still enough volumes to go around for everybody?

David Dehaemers

Well, John, I mean, it's a couple things. One is four or five years is really hard to predict, period. I mean, Oil markets only go out what, two, three years. Gas markets may be that long and, frankly, I'm -- I'll be really, really happy if I'm alive in three or four years.

Having said all that, RBN Energy wrote a really great piece on the Bakken and the DJ and all that, places where we pick up oil from, and before the Bakken really got going, the thing that really got the oil out of the place was crude by rail. The thing that pipelines are displacing, be that ours or others, in the DJ, the Powder, or the Bakken, for that matter, the thing that's really being displaced is that. And with Sandpiper going away, our view is that the market for pipeline capacity, it hasn't really -- it really isn't going to outstrip Bakken. Will it outstrip it at $20? Yes, because no one is going to be producing and that's going to affect everybody. Is it going to outstrip it at $50? Probably not in my view. So I mean, it's a multi-variable thing and it's just not easy to answer. I guess I would tell you if you -- following up on Kristina's question, if you take our stacked rates and our joint tariff partners and put another one in there to get to the Houston Ship Channel, we could be more than competitive with barrels to get to the Houston Ship Channel versus Nederland.

It's extremely hard to tell you. We are talk -- just like we did on REX. We're talking to our existing customers about extending our contracts now. You've got across the board, you've got people who say, you know what? Crude has been $20 -- $25 this last year and today, it's $40 and yes, it was $50 last month but we don't even want to talk about it until it stabilizes more. We've got other customers that say, you know what? Yes, we'll talk to you about. I don't know what to tell you beyond that. Bill, do you want to add anything?

Bill Moler

The only thing that I will remind you is that two years ago, we had four pipelines who were cordial enough to flatter us by coming in and offering to build pipes in areas in which we serve. That was two years ago. Two years ago, we were in the ground. Two years forward, two of those are gone. We're down to two. And we're still the only pipe in the ground. I've been to Patoka, Illinois and I have been to Cushing, Oklahoma, and only one of those locations that has a big sign up front that says, Pipeline Hub of the World, and it's not Patoka. Patoka is an interesting spot. You could get to some interesting markets. But Patoka is not going to outrun Cushing. There's no way. Cushing is where people go. Cushing is the point of liquidity. Do they want to get to Houston? Maybe. Do they want to get to the Ship Channel? Maybe. Or are they just happy enough to sell their crude to somebody else at Cushing? It could be any one of those three answers, but, again, I feel very confident in what we're doing moving forward with the diversity we have of supply, with the diversity we have of a market. We're taking natural gas principles, which we all know here very well and we're applying them to the crude oil market. And that is, you match supply with demand. As long as you can do that, you're going to have a volume on your system for as long as you can expect.

John Edwards

All right, thank you for that. That's really helpful. That's all I had. Thank you so much.

David Dehaemers

Thanks, John.

Operator

Next we'll move to Ethan Bellamy with R.W. Baird.

Ethan Bellamy

Hey, guys. So I do think it's fair to ask about the shippers on Pony. You told us one company that's not a shipper. Are there any other shippers that you can disclose and I presume the answer to that is no, but could you tell us about the credit quality of those customers? And are you -- do you have any concerns about any of the shippers on that line right now?

David Dehaemers

Well, you're right, well, no, we can't disclose our shippers other than what we're required to in the SEC, across the whole Company. I think, B, we could talk to you about the -- I don't think we see anybody right now that is of particular concern. Obviously, we have one shipper who's not shipping. They're paying us, but they're not shipping their full volumes, and that is what it is. I don't know that it's particularly concerning. I think as far as credit, we've got a fair amount of credit. We own -- we have rights to the oil in the pipeline. We also have other collateral that we took in terms of lines of credit and guarantees, et cetera. I don't know, Nate, Gary, anything that pops out to you?

Gary Brauchle

No. Ethan, we gave some pretty detailed disclosures at year end around TEP's customers and their credit profiles, both at the investment grade level cut-off, as well as if you were just to look at double-digit growth at that point. We did update that in this Q we filed here just a short while ago and at the investment grade cut-off level, it's give or take 50%. If you were to look at the BB-plus, and this is across all of the TEP customers, it's well north of that. And that is just the financial health, notwithstanding those that are not rated investment grade. That said, we do have a substantial amount of collateral secured and we'll continue to do that.

Ethan Bellamy

Got it. And then there was a 2% decrease of the Pony volumes. Is -- should we expect volumes to be flat for the rest of the year or continue to trend marginally down like that?

David Dehaemers

Again, I think that's not meaning to be totally cute but tell us what oil prices are going to be and we'll tell you what volumes are like. 2% is not that big a deal, and…

Bill Moler

We've already told you what nominations are, at least for the month of August, which are above the two prior months, so no, there's not a trend, and people decide what to do with their barrels on a monthly basis. We hear from them on the 20th of each month where they want to take their barrels and that's what the nomination has become. And so far, we've been running close to contracted capacity. Plus or minus 2% isn't in our margins.

Ethan Bellamy

Okay. And then I'm just trying to triangulate from as many directions as I can here. I presume that when you guys did the dropdown in valuation, that you had some a bear case on crude and potential volumes and, I'm wondering how the current environment and outlook stacks up to the discussions when you did the dropdown valuation?

Bill Moler

Obviously, we had a fairness in opinion, and you're right. You know what those things look like. Yes, I think that was all taken into account. Whether in January, it prognosticated that we're going to be at $39.88 or whatever it closed at today, in the forward curve, was going to look at X, I can't say that at all. I think that, with the exception of maybe Moody's Crude Deck, the forward curve that's out there for most people that have some sanity is probably what we're thinking about. And I think just like the environment we've been in, I think anywhere from $40-ish to $60 is going to look about the same and I think stability above $60, which I think would be good for everybody, is probably going to have people shipping on us full and maybe even having us start having some walk-up business, so. I just -- I'm trying to help you, Ethan, I just don't know how to do it.

Ethan Bellamy

Well, I appreciate the intent, anyway. And then the last question, obviously, we've some simplification in the sector, particularly the LP/GP compression trades and it looks like your peer group, particularly the bigger and more mature partnerships are going to a cleaner structure. I recognize your -- you don't have a big GP burden but if all things go well, then you will at some point. Is that -- is structural change, any time in the future, is that something you've considered?

David Dehaemers

Well, and we've talked about this before. I think there's a significant difference between where we're at in our life and where we're at in terms of the way we have set ourselves up, versus the guys. The guys who have done it recently all found themselves in a pickle. Whether it was debt or their business model or whatever, and they were -- they somewhat had their, at least in my belief, had their hands forced relative to kind of collapsing those. Each one of them netted a little differently and we don't necessarily debate whether the appropriate value was given or not, but I think we're just in a different spot. We've got a good business model. It's long-term. We've got good assets. We are fairly over-levered. I think we've met all of our marks along the way and, our -- and frankly, again, like you said yourself, our GP IRR debt or GP IRR take is not huge. It's going to grow. Will there be a point in the future? Yes, I think every MLP hits an inflection point. The place that I used to be at took them 15 years for them to hit that inflection point. We've been doing this what, 3 or 3.5 years?

Whether that inflection point is a natural result of so successful a model that everybody has done really well, both the LPs and the GPs or it's as a result of economic circumstances where you've got a poor business model or you've gotten yourself over-levered. Time will tell with that. So, yes, I think there will come a point in time. I can't prognosticate right now when that will be or at what point.

Ethan Bellamy

Thank you, and congratulations on posting solid numbers for the quarter.

David Dehaemers

Thanks, Ethan. Operator, we have any more questions?

Operator

We do.

David Dehaemers

We'll take two more.

Operator

The next one is from Charles Marshall with Capital One.

Charles Marshall

Good afternoon, everyone. I think it's in your presentation, it looked like there was a new pipeline project from Douglas to ONEOK Stock and Express pipeline, can you just provide any color there and just lay out the scope of the project, timing, cost, et cetera? Just any color would be helpful.

Bill Moler

The color is this, I suppose in the drinking game, people are going to start using diversity as one of the words. But today, Douglas is similarly connected to one NGL line that takes the crude to border Texas. We have a contract with those folks through the end of this year. And we are going to diversify our NGL takeaway and have enter into an agreement with ONEOK where we build the line over to them. They transport on it and lease it and give us a fee for doing it and we enjoy a lower T&F rate on them than we did on the prior folks. So it's operational synergies as well as cost savings on getting those NGL barrels to market.

Charles Marshall

Great. I appreciate that. And then I guess with respect to Tallgrass Terminals recognizing sensitivity around talking about future dropdowns, but outside of just proper valuation and timing, is there anything stopping you guys from evaluating a dropdown of the terminal assets or are you looking for more EBITDA scale from those assets, if you can just talk about that?

David Dehaemers

I think it is a little bit of EBITDA scale, and it isn't so much of trying to grow the EBITDA and dropping in at X multiple, et cetera, as much as we have some things we're working on where we feel the appropriate maturity risk level is appropriate at TDEV at this point and not necessarily TEP. So I would say it's more a function of that. Clearly, we can deal with it at any point and that -- at some point, that in and of itself doesn't make any significant of a -- or material difference any more. But for example, Bill talked about in his comments that we bought 550 acres of land down in South Cushing, and that's something that just this week, we are starting civil work on to develop a terminal down there that will be at least partially used by Pony, so…

Charles Marshall

Got it. That's helpful. I guess just one last one from me, the follow-up to a previous question just asked slightly differently. But with regard to REX and just looking at the counterparty exposure, both on the west to east and east to west lines, is there any update that we should be aware of, any type of material party risk? I know you guys had talked about that in the past. We've talked about Ultra here. But is there anything incremental to provide on the call with any of the counterparties?

David Dehaemers

Well, I think the good news is that, natural gas, my last trade, was like $2.88 an M and with a healthy gas market kind of around in that $2.50, $3, it takes a lot of the problems away for people. Probably, frankly, takes away some of the problems for even the people you just named that have filed already. So Gary, any comments on that or…

Gary Brauchle

Nothing else that is material in any fashion; on REX, although we do continue to watch those payments on a monthly basis and, frankly, sometimes more frequent than that, so…

Bill Moler

And then I would add that, over the second quarter, Matt, we hit a record of 3.57 BCF moved on the pipeline in one day and just for those of you who don't get that math, that's approximately 1.8 BCF a day moving west to east, and 1.8 BCF a day moving east to west. We're moving 1.8 BCF a day east to west every day. And people can't wait for the expansion to come on, for -- I know what the question was about credit risk, but you can see what the markets did when we were down for four days. This is hugely meaningful and impactful infrastructure to this country and necessary, and, we're not worried about if we lose one that there won't be 10 to replace.

Charles Marshall

That's all really helpful. Thanks, guys, and congrats on a great quarter.

David Dehaemers

Thank you.

Operator

We'll take our final question from Ted Durbin with Goldman Sachs.

Ted Durbin

Thanks. Just on REX again, on the power-up, I think you said you're on track for the timing. Are you still on track for the CapEx as well I think it was $530 million is what you were thinking?

David Dehaemers

Yes, on time, on budget.

Ted Durbin

All right. Still thinking we will pay down debt on REX with some -- once the CapEx rolls off, plan to continue to pay down the maturities that are coming due?

David Dehaemers

Nothing's changed there, Chuck. I think it's 2018s and 2019s, and do you have another question just out of curiosity?

Ted Durbin

No, just use of free cash flow, really, distributions, especially with TDEV as they get the distributions, what they'll use that for to pay down the…

David Dehaemers

I think you'll -- and let me make -- before I answer that, so just before we hear the thousands of beeps on the phone, just let me make an unabashed attempt to get in my final things that, now Tallgrass is the little pipeline that could, and that I think we're going to wrap up in time for everybody to still make their Lou Dobbs, feature of the night, so no, but Ted, seriously, nothing has changed. I think you will see -- I think we believe TEP coverage will tick up next year. And obviously, that's -- we're going to have good cash flow because power-up is going to come online on REX and we still anticipate that, long term, we want to bring the REX debt down to kind of that 4X, give or take, multiple. And so that -- you're going to see us building up, at least cash on a coverage basis so that long term, we can put that money back into REX and pay the debt down when it comes mature.

Ted Durbin

Got it. And then I guess just, if your view is that the stock's undervalued, as you think about the next dropdown, are you not happy to do equity to do the next drop? You had TDEV come in with some support and not taking cash. I guess, just how you're thinking about the mechanics of the next drop?

David Dehaemers

Yes, we would -- again, we're just trying to max -- and I'm not sure what would led you to ask if we would not be happy to do X equity on the next drop? I think we've talked about the next drop being mid-year, next year. It's our goal to keep a good capital structure. I think we're very low-levered today. I don't know, what, we're 65% equity, 35% debt, or something like that, and I don't see any reason to change our -- it's working for us, other than, again, I just think that we deserve a better equity price and I would be delighted to, at some appropriate portion, fund the next dropdown with the -- an appropriate amount of equity at a good price.

Ted Durbin

Okay. That makes sense. I'll leave it at that. Thank you.

David Dehaemers

Thanks, Ted. Operator, thank you for everything and everybody that was on the call. I appreciate your time and interest in our Company. We're just getting started, so thanks a lot. Bye.

Operator

You're quite welcome. That does conclude our conference call today, everyone. We do thank you all for your participation.

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