Tallgrass Energy, LP. (NYSE:TGE) Q1 2019 Results Earnings Conference Call May 7, 2019 4:30 PM ET
Nate Lien - Investor Relations
David Dehaemers - CEO
Bill Moler - President and COO
Gary Brauchle - EVP and CFO
Conference Call Participants
Spiro Dounis - Credit Suisse
Colton Bean - Tudor, Pickering, Holt and Company
Derek Walker - Bank of America Merrill Lynch
Michael Lapides - Goldman Sachs
Good day, everyone and welcome to the Tallgrass Energy First Quarter 2019 Earnings Call. Today’s call is being recorded.
At this time, I would like to turn the conference over to Mr. Nate Lien. Please go ahead, sir.
Thank you, Kim. Good afternoon, and thank you for joining the Tallgrass Energy quarterly earnings call as we discuss TGE results from the first quarter of 2019, which were released through our press release this morning and 10-Q this afternoon.
Joining me on the call this afternoon are David Dehaemers, Chief Executive Officer; Bill Moler, President and Chief Operating Officer; and Gary Brauchle, Executive Vice President and Chief Financial Officer.
Before turning the call over to David, let me remind you that this event is being recorded and a replay will be available for a limited time on our website.
Additionally, our comments today will include forward-looking statements and estimates. These forward-looking comments are subject to various risks and uncertainties and reflect management’s views as of May 07, 2019. Please refer to our filings with the SEC, which are available on our website, which provide discussions of factors that may cause actual results to differ from management’s projections, forecasts, estimates and expectations.
Note that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statement. Please also refer to our earnings release and website for reconciliations between the non-GAAP financial measures referenced in this presentation and the most comparable financial measure or measures calculated and presented in accordance with GAAP.
With that, let me now turn the call over to David for his opening remarks.
Good afternoon, everybody, and thanks for joining our Tallgrass Energy first quarter 2019 earnings call. As you might imagine, it's been another busy quarter with the closing of the Blackstone transaction. Our continued re-contracting efforts on Pony and the west end of REX as well as our ongoing efforts to commercialize the Seahorse Plaquemines liquids terminal and the Pony Express expansion projects. All that has kept us busy. We're making great progress on all fronts.
Bill will talk about more of those items in his prepared remarks. But the key message is that we've made incremental progress in each of these fronts during the quarter. In addition, it was another outstanding quarter of financial performance for Tallgrass Energy with adjusted EBITDA of $246 million cash available for dividends of $201 million, producing healthy dividend, coverage ratio of 1.35 times for the first quarter.
The performance drove TGE's 15th consecutive quarterly dividend increase to $0.53 per share or $2.12 annualized which interestingly enough is over four times in less than four years what we IPO at, and which is also a sequential increase of 1.9% from the fourth quarter of 2018 and an increase of 8.7% over the first quarter 2018 dividend.
With that, I'll turn the call over to Gary for additional comments.
Thanks David and afternoon everybody. Moving to the segment performance for the quarter, the natural gas transportation segment produces adjusted EBITDA of $139 million in the first quarter of 2019, which is an increase of $15 million from the fourth quarter of 2018.
The primary driver was again higher distributions from our 75% interest in REX, which were primarily the result of lower interest expense at REX and the increased rate on the Encana contract which began in March.
In addition, TGE performed above our expectations benefiting from higher margins and lower expenses during the quarter. For the crude oil transportation segment, adjusted EBITDA was $81 million for the first quarter, which was approximately $8 million lower than the fourth quarter of 2018 primarily as a result of lower average transportation volumes but still well above contracted volumes for the quarter.
The quarter averaged approximately 336,000 barrels a day, approximate throughput for April was just under 370,000 barrels per day and we expect throughput in May to again approximate 370,000 barrels per day.
The Gathering, Processing & Terminalling segment generated adjusted EBITDA of $28 million for the first quarter, which was roughly in line with the performance from the fourth quarter.
Now moving on to our capital structure; at the end of the first quarter, our leverage was approximately 3.7 times based on the trailing 12-month adjusted EBITDA as calculated according to our credit agreements.
When including our 75% share of REX's 2.41 billion in debt, our consolidated leverage for the quarter would have been approximately 4.8 times. While these metrics held steady from the fourth quarter, we expect our leverage ratio to decrease throughout the remainder of 2019 as we deliver another year of adjusted EBITDA growth at Tall Grass.
As for liquidity, today we have undrawn revolver capacity of over $850 million representing ample liquidity to continue funding organic growth projects and additional bolt on acquisitions.
One other item of note with respect to REX's capital structure, many of you may have seen that REX issued $550 million of 2029 senior notes in a coupon of 4.95% in early April and that was in order to repay the $525 million term loan that we arranged the beginning of this year.
The short term, term loan provided exactly the flexibility that we sought in order to issue new senior notes in a more stable debt market at an attractive rate for REX, one that is commensurate with its investment grade credit profile.
And with that, I'll turn it over to Bill for the commercial updates for the quarter.
Thank you, Gary. It was a positive operational and commercial quarter for Tallgrass as we advanced recontracting discussions on REX and Pony agreed in principle on a pre-filing settlement of the TGE [ph] rate case advanced our discussions with Kinder Morgan on a potential J.B. to expand Pony Express and on May 1st we closed another strategic water services acquisition.
In the gas transportation segment, we saw some atypical fluctuation in REX west end volumes as seasonal weather in a West Coast pipeline outage occurred in quarter one, but west end volumes have returned to normal levels and our commercial team did a nice job capitalizing on backhaul opportunities in the quarter.
We continue to make incremental positive steps with new and existing customers in our re-contracting efforts and expect to announce a more fulsome update later this year. As we have mentioned a number of times, we believe that the Cheyenne Connector and Cheyenne Hub projects will play a key role in providing incremental volumes into the west end of REX.
We continue to expect in service in the fourth quarter of 2019 for both of these exciting projects. At Tallgrass Interstate Gas Transmission, we have reached an agreement in principle on a pre-filing rate case settlement which is a positive outcome both for Tallgrass and our shippers with negligible expected impact to the pipeline's cash flows.
In the crude oil transportation segment we recently announced Pony Express’s Hartford Lateral project, a new 12-inch 30 mile long pipeline which will extend Pony Express’s reach deep into the D.J. basin and Weld County, Colorado.
The project is backstopped by firm commitments to underwrite the project and we are currently in an open season to solicit equipmental commitments. In addition, we are taking line fill on the iron horse pipeline in the Powder River Basin and nearing completion of the associated terminal assets with an expected in-service date for both by the end of May.
We are also nearing completion on the Grasslands Terminal at the head end of our Platteville line which will allow us to nearly double the capacity of the Platteville extension in order to better serve new and existing customers in that region of the DJ Basin.
Finally, we expect Pony Express it expresses expansion to approximately $420,000 barrels per day to be in service by late summer. Turning to BNN Water Solutions, as we mentioned in a prior earnings release, we’ve recently closed the acquisition of an approximately 92% interest in central environmental services a water services.
A water service provider in the Marcellus and Utica, the acquisition continues to geographically expand our position as an industry leading water services provider as we enter an additional Basin.
Water Services continues to see strong organic growth opportunities across all the basins in which we operate. Finally, for a quick update on seahorse and the Plaquemines Liquids Terminal projects, we continue to have strong engagement and productive conversations with potential sea horse shippers. And as previously mentioned we have one potential anchor shipper signed.
The standalone open season for seahorse and the joint open season with Pony Express have both been extended to May 30. With regard to Plaquemines Liquids Terminal, we’ve recently received a consistency determination from the Louisiana Coastal Protection and Restoration Authority that the proposed PLT terminal is consistent with the coastal master plan.
This determination validates our intent to minimize and mitigate any impact the party terminal might have on Louisiana coastal restoration efforts and there’s another positive step in commercialization of our project. We are in ongoing discussions with a number of potential counter parties that could anchor the project.
And now, David will conclude our remarks ahead of Q&A.
Thanks Bill. The first quarter was yet another outstanding quarter for Tallgrass and we expect the remainder of the year to produce outstanding results as well. In addition, as we move forward with Blackstone we're excited about the important projects we are pushing toward FID and look forward to writing the next successful chapter in the Tallgrass story.
As always thank you to our employees for what they do every day to keep themselves and our community safe and our assets operating reliably. Thank you to our shareholders for their confidence in investing in us and to everyone on this call for your interest in our company.
With that operator, we will turn it over to you to start the Q&A portion of our call.
Thank you; [Operator Instructions] And we'll go first to Spiro Dounis with Credit Suisse.
Hey good afternoon gentlemen. Just I want to start-up with the water assets that you just purchased the Northeast, small amount overall but just wondered if you could walk us through the decision to step out of your core basin and also just how you think about the multiple phase for the business?
This is Dave. I think going into the new basin we have -- our team has looked in the Utica and the Marcellus for a number of years really since we acquired BNN. Some time ago It is a difficult place geographically et cetera, but we've always sort of it’s been of interest to us. We have just had to find the right asset and they felt like at this time they felt that they found the right asset to get us into that area and built it out from there. Do you want to add to that Bill?
The only thing I would add is that, the Marcellus nor the Utica are really new basins to us. We have shippers on racks that move upwards of 2.8 BCF a day from east to west to markets in the Midwest. We know the producer community. We know the shipper community. We're leveraging those relationships in this acquisition to further extend our service offerings to those shippers and producers. So it really is a pretty easy bolt-on, and the facilities are one of the largest, is not the largest in the basin and we're excited to own it and continue to grow it.
Hey, Spiro, it’s Dave. If I call you, Colton by accident, my apologies, I suspect for the…
Don't worry. I’ve been called much worse. Just maybe following up on that in the Northeast; is that primarily truck or is that pipes. And then as you think about developing anything by putting more pipe in the ground or continuing on the current footprint?
You know, today it is primarily trucks. It is a disposal facility that is closest to a significant river crossing. We're about six miles away from a river crossing across the Ohio. So we can get into West Virginia and Pennsylvania trucked volumes and then we are on a major thoroughfare next to a rest stop right off of a major highway. However, our goal as it has been in all of our water business is to get the trucks off the road and get the water into pipe and we are well underway with negotiations with several of the existing disposal shippers to get their volumes on pipe. That's the intent.
Spiro, it’s Gary. I think you asked about the multiple on that and without getting too specific it's in the range of our previous water acquisition multiples kind of in that low to mid single digit number.
Got it. Okay. That's helpful. Second one just following up on Seahorse. I appreciate the prepared comments around that. I guess just curious if you give us a sense of really how far along you are? I think in the last year you talked about being close to signing that anchor shipper and it sounds like that's done now, but I guess there's been sort of a lot of time in between. I certainly appreciate that it's a bit of a moving target. The joint tariff discussions et cetera, but there’s any sort of timeline or maybe you talk about some of the gating issues to get you over the finish line on a potential FID there?
Appreciate the question. You know when we announce Seahorse I think we were the only pipeline project that was being pursued from Cushing to the Gulf Coast certainly from Cushing to Louisiana. At my last count there are now seven different projects that are being proposed by others. So that's complicated the matter to some degree but I will tell you our path from Cushing to St. James and subsequently down to the Plaquemines Liquid Terminal has a lot of interesting nuggets along the way including interconnected pipes, other direct connected refineries.
We're seeing great interest in potential short haul volumes as well as long haul volume all the way down to the Louisiana coastline. And we are in negotiations with aggregators as well as end users and other pipes to potentially fill this project and get it to FID in a hopefully rapid fashion.
Yes. I mean, Spiro I know you're looking for something more definitive and it would be wonderful if we could tell you, look, by the end of May or June we'd be FID on it. I would say that that's not without possibility of happening. It's just we're working with, like Bill said, it's a complicated situation. We're working with a lot of parties. There's a lot of good stuff that we can do, but we've just got to bring a few things together at the same time and we need another anchor shipper who we are talking to go as firm as the first one did.
Understood. Now, I can appreciate the complexities of it. Thanks for taking my question guys.
You bet. Thank you, sir.
We'll go next to Colton Bean with Tudor, Pickering, Holt and Company.
Good afternoon. So just wanted to touch on, Bill, I think you highlighted in the prepared remarks the discussion around Cheyenne Connector and that being able to backfill some of the REX contracts. Just any updates there? I think previously you guys have talked about there are number of shippers that are committed on Cheyenne that haven't yet decided kind of where they want to go from there. So any thoughts on how that plays through direct would be helpful?
Yes. Bill can answer that. Actually I was going to make fun of that and I did it very naturally, I called you Spiro. So you and Spiro or even now Colton. My apologies. Everybody here is laughing and smiling at me, so, my bet. I forget who I'm talking to. Where are we on Cheyenne Connector? As you guys know we are currently fully subscribed at $600 million a day with two committed shippers. We have received our EA from the FERC. We have received all of the concurrent permit filings to the commission. We expect to get the certificate any time now and go into construction.
Still planning on it being in service and Q4 which happens to be coincidental with some of our contract roll offs on racks. So I think we're in a timing game here where we've renewed a fair amount of contracts to-date on REX. I think the others are waiting to make sure that there is sufficient supply sitting at Cheyenne to get into racks at the time that those contracts expire before they renew.
But we have -- the contracts that we have executed have been in the range of value that we had hoped for and we continue to have conversations both small and large with producers, processors, aggregators and end users in the area for space availability when those contracts roll up in November and a few in 2019 and 2020. So, I think as soon as we get pipe in the ground and get going, people will take the risk of the certificate and permit thing off the issue and construction risk and be more apt to go ahead and sign the dotted line.
Got it. And I think last quarter you all had noted that you’d already re contracted 30% percent of the REX roll offs. Any updates to that?
We did note that that's accurate and I think probably at this point all, we'll tell you as we've made more progress in that. Again as you can appreciate, it's a little bit of a competitive thing, it's a little bit of people waiting for validation of long term forward rates. When REX did go down here for four or five days in the last month for some service, I'm not validating this because I've always told everybody that REX is not a spread pipeline, but spreads did blow out to over two bucks and I think that validates a lot of it. So the answer is, yes, we did say 30%. We've made more progress than that but really probably not appropriate to give you a higher percentage specifically right now.
That's helpful. And just the last one, Bill, I think you've talked about with a kind of JV potentially sourcing barrels from third party pipelines from coming out of Alberta and then also out of the Bakken. So, any update there as to how you're thinking about some of those commercial construction and how you would actually get those barrels to Pony?
As a reminder today, Colton, we have joint tariffs with both Kinder’s HH pipeline and Belle Fourche owned by the true families. That's how we access Bakken barrels today. I'm not saying that there aren't other ways to access Bakken barrels down to currency that people are looking at, but those who are our two primary routes today to get Bakken barrels, other heavy barrels that could come into the line could come over from Casper either through a line we might lay or someone else might put in the ground.
There are heavies at Casper. There's heavies on the flat line that goes right by Guernsey. All of those are being pursued including the potential methods to get Canadian volume down to the Guernsey area and into the pipe. So a lot of a lot of moving parts and pieces as you can imagine but all of them are being chased.
Got it. I really appreciate the time this afternoon.
We'll go next to Dennis Coleman with Bank of America Merrill Lynch.
Hi this is Derek Walker on for Dennis. Just a couple for me. You mentioned the recent water acquisition and just kind of a broader sort of bolt-on sort of M&A strategy. I guess maybe is should we think of the bolt-on sort of strategy just mostly focused on water? Is there certain other assets that you're looking at and are these sort of the similar sort of a size sort of opportunities that you're looking at?
The water bolt-ons that have just been there for the taking, I wouldn't say that it's strategic forefront for us. We would love to participate in acquisitions of bolt-ons to racks to Pony, to our midstream assets in the Rockies. It just so happens that our guys in the water business have found ways to create value where others have not and have been very successful in getting those that good multiples and then building off of that and bringing those multiples even down further. But I wouldn't say it's necessarily a forefront strategy.
Got it. And then maybe just a quick one on leverage; David you mentioned 2.7 for this quarter and 4.8 with the proposition of accelerated REX, with an expectation for that to continue to decrease poor for 2019. Is there a general target on the leverage ratio front? And how can we think about that longer term as you kind of execute through some of these projects? Thanks.
Yes Derek, it's Gary and it was it was I that made those comments in the prepared remarks. I think we continue to think about leverage metrics that are investment grade style metrics and we've consistently said at TGE on an consolidated basis for REX in that neighborhood for a long term period of three to four times. And so we've had a good history of living with them that and we'll plan to continue to do that.
Thanks, Gary. That's it from me.
Thanks sir. Thank you.
We’ll take our next question from Michael Lapides with Goldman Sachs.
Hey guys, thanks for taking my question. Real quick on Pony; can you talk about the volume -- the throughput you saw in the first quarter kind of closer to the 330. And then the uptick that just happened in May and how quickly just kind of that seems like a pretty big, pretty quick up tick up to the three 17s? And then how quickly you think you'll feel all the way into the four 20s?
Yes. Michael, if you back really months into probably midway through last year almost, I guess that would be nine months. We've been prorated on the pipe probably five of the nine months I'm guessing and by peroration that means we've had to cut people back some of those months we were kind of capped. I think if I recall correctly about 335 or 340 and then late last year we were able to start moving around 370, 371. Some of it I think has been on price. Bill can color over this a little more than me on the months where we haven't topped out and nor pro-rated.
I don't think any of that is disconcerting. Every month we have moved more volumes than we're contracted for. And so if we're contracted at a 315 level and we move 375, I think that's a very very good indicator. We've got 60 of either walkup or people shipping volumes that maybe they were deficient for in the past. In terms of the 425, I guess again before Bill takes the helm here and tells you what his thoughts are, we have not been able to run the pipe day in, day out and be comfortable with that at 425. But there have been days where we've done 400 a day. And I think it's just a matter of getting the right contracting party for the right place where they need to pick up the volumes et cetera. You want to add to that.
Sure. I think to you know you've seen the Hereford Lateral announcement that is a fully underwritten project with volumes that's consuming some of that available capacity as it comes online. We are doing pump work on the north end between Guernsey and Sterling that is adding some capacity to get to that 420 number. We're doing a pipe, a short pipe loop that's adding to the capacity at number. We’re doing some work in Cushing for overpressure protection on some of the tankage at Deep Rock. All of those things are going to lead to us being able to securely and safely and repeatedly provide volumes at 420 or in excess of 420.
So we haven't sold it because we're not confident that we can do it day in and day out. But with the facilities we're adding we'll be able to. And I'll just remind you that Hereford Lateral contract, we've done contracts with another shipper in the DJ Basin, some of that capacity is pre spoken for, meaning we might have sold a stepped up contract that starts at a volume one year and ramps up the following years. So it's being used on a short term basis in the interim. The winter volume Q1 volume decrease to the extent there was any could have been related to weather related issues and why Wyoming and North Dakota freeze offs et cetera. Generally we see a volume dip simply because it's harder to move oil in subzero temperatures than it is and 70 degrees like it is here in May.
So you know I don't know how much I can ascribe to weather but in January even despite the weather we had a fairly significant basis blow out in the Guernsey market. And we had almost twice our pipe capacity and nominations and allocations thereby acquired. So it's a very dynamic environment and its weather impacted, basis impacted, producer impacted et cetera, but if you ask me one thing I would say it's primarily weather related to winter months.
Got it. And then one quick follow-up, can you just remind me what your expectation for growth in for maintenance CapEx this year? And how should we think about? And let's leave Seahorse in the Plaquemines Terminal aside for now. How that would kind of defer in 2020 not including those two large items?
Gary will give you some more specifics than I will right now. But I will kind of remind you that. So, we did the CES deal that was 50 -- little over 50 million, get another water project that we're probably going to green light here in the 30 million. So that makes up 80. I think we told you last quarter that we had about 700 plus million dollars of growth AFEs on the books. We were -- I think my recollection is we'd spent about 275 million of that. So far I think we're closer now to 375 or 400 having been spent. So we're still executing on another 300 that is in the FP system to go on. And can you supplement that.
Yes, sure. Michael it's Gary. In terms of maintenance CapEx for the year in the neighborhood of $40 million excluding REX give or take 5 million on either side of that. It's probably a good way to think of it. And then in terms of expansion CapEx I would say between $300 million and $400 million and that depends a little bit on that delta on expansion CapEx depends a little bit on the Cheyenne Connector projects and partners opt in on that and make their capital contribution for that. So, hopefully that's helpful.
You mean that number would come down or there'd be an offset if they come in and take their percentage?
If they don't it'll be closer to 400 million, if they do it will be less than that.
Got it. Thanks guys. Much appreciate it.
You bet. Have a good evening.
[Operator Instructions] And we'll go next to Burt Blasko [ph] with MUFG Securities.
Hey guys. On the new water acquisition could you give us a little bit of a breakdown as to what percentage of the volumes are coming from produced water versus frac water? And any guidance you give us on what the different differential in those rates would be?
Differential in the rates display…
Produced versus frac.
Yes. Little confused by your question but flow back water coming from hydraulic stimulation activities is by nature produced water. So that the answer your question is all of it is produced water and we don't I don't know that we have a distinguishment between what is coming in as water that was recently used for hydraulic stimulation or whether it was produced I don't know that we delineate that.
And again we only have owned it for a week. So I might be able to answer your question next quarter. But that's not something we've dug into yet.
Okay. Fair enough.
But what else has gone on Bert.
That was my main question. I think a lot of the rest of it have been answered. So thank you.
Great. You bet.
As we have no further questions, I'd like to turn it back over to our speakers for any additional or closing remarks.
Yes. Operator would you mind giving the audience one more chance to ask a question or two and then we'll close up with remarks.
Absolutely. [Operator Instructions]. And we have no further questions.
Good. Well, I'll go a little off script here and give a couple final remarks before we close out and really do again thank everybody for participating in the call. You know a couple of things that we've had since the last call we had for the end of the year at the end of January and when we announced the Blackstone thing a couple of topics have come up, they're out there and Twitter verse and sometimes they're the plot in the Game of Thrones and things like that, but there is no intention of Blackstone doing anything here untoward.
They simply have felt like they could buy an interest in our business. They gave liquidity Kelso and EMG. They bought it to make money. They did not buy it to screw anybody. Just to be real blunt about it. And for anybody to postulate as anything else out there is patently false ridiculous and fraudulent.
The second is you know the things around us leaving et cetera, you know everybody on this call that spoke today has a significant amount of their net worth still invest in this money, speaking only for myself, I've still got $50 million and invested in that. And that is from money that I put in this thing. It's not restricted stock in fact I've never gotten a share of restricted stock in the last seven years at this thing.
And so I didn't leave $50 million in this thing to lose money and that just simply aren't going to happen. And the people that believe in us that have given us credit over the last seven years who have seen that we do a good job of trying to explain what we're doing and then trying to execute on it. We're not perfect. We don't always may achieve every goal that we have. But I know that we try like hell to do it as much as anybody. Nothing has changed in that regard. So those of you that support us and see that, thank you very much and that’s what we’ll continue to do. We’re going to continue to produce the best results we can for the – all of our constituencies. So with that, again thank you everybody for your attendance and really appreciate your interest in Tallgrass and hope everybody has a wonderful evening. Good bye.
Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect.