Q3 2019 Earnings Call
Good day and welcome to the Tallgrass Energy Q3, 2019 earnings call. Today's conference call is being recorded at this time I would like to turn the conference over to Nate lien Treasurer for Tallgrass. Please go ahead Sir.
Thanks, Corey and good afternoon, and thank you for joining the Tallgrass energy quarterly earnings call as we discuss TG results for the third quarter 2019, which are at least through our press release. This morning and 10-Q this afternoon.
Joining me on the color, David Hammers, Chief Executive Officer, Bill Moler, President and Chief operating Officer, and Gary Broccoli Executive Vice President and Chief Financial Officer.
Before turning the call over to David Let me remind you that this event is being recorded 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 October Thirtyth 2019.
Please refer to our filings with the FCC, which are available on our website, which provide discussions of factors that may cause actual results to differ from managements projections forecast 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 most comparable financial measure or measures calculated calculated and presented in accordance with gap.
With that let me now turn the call over to David for his opening remarks.
Good afternoon, everyone. Thank you for joining our tallgrass energy third quarter earnings call.
At the outset I'll provide a brief.
Brief update on the non binding take private proposal from Blackstone as I know, it's a is the topic on everyone's mind will not address anything beyond this update on this subject to even in the queue in a portion of the call.
As most of you can appreciate this is a very public in complex transaction and both sides, that's bid that being Blackstone and then the.
Partnerships or tallgrass is.
Conflicts committee are working diligently in pursuit of a potential agreement, giving that the process is ongoing we can't provide any update beyond that and it's not that we.
Don't want to but just as we legally can this process cannot and should not be rushed and as we've said before we are confident in the rigor and integrity of the conflicts committee to.
Committees process.
As many of you know I know many of you want to hear about the recently filed Pony express rates status of our Recontracting efforts to shine connector and hub enhancement Sevenci certificates that we received and then the.
Management side letters, we will get to all of that in a few minutes, but first we're going to talk about the outstanding third quarter financial results produced by our team.
In the company.
Adjusted EBITDA was $264 million cash available for dividends was $211 million producing dividend coverage of 1.36 times for the third quarter.
Performance drove TG, 17th consecutive quarterly dividend increase.
I guess I would also just point out that since Blackstone bought the general partner in March of this year.
And they have been in our board meetings and been part of that process. We have raised the dividend three times within owning the general partner.
And so it was 55 cents for the quarter or 220 annualized which is a sequential increase of 1.9% from the second quarter of 2019, and an increase of 7.8% over the third quarter 2018 dividend.
With that I'll turn the call over to Gary for additional comments.
Thanks, Dave and good afternoon, everyone moving to the segment performance for the quarter. The natural gas transportation segment produced adjusted EBITDA of $142 million in the third quarter of 19, which is roughly in line with the performance from the second quarter of 19.
The primary driver of the performance in the segment was the distributions from our 75% interest in Rockies Express, which have increased in 2019, largely as a result of the lower interest expense at Rockies Express in the increased rate on the Encana contract.
For the crude oil transportation segment, adjusted EBITDA was $88 million for the third quarter, which was also roughly in line with the second quarter of 19, primarily as a result of continued strong average transportation volumes on the pipe.
The quarter averaged approximately 365000 barrels a day compared to 348000 barrels a day in the second quarter.
While deliveries were higher adjusted EBITDA was relatively flat primarily due to the use of prior shipper deficiencies as well as lower deficiency payments during the quarter them. So those two items contributed to the adjusted EBITDA being lower although volumes were higher.
And again that was prior.
Use of prior shipper deficiencies and lower deficiency payments during the quarter.
The gathering processing and Terminalling segment generated adjusted EBITDA of $36 million for the third quarter, which was $12 million higher than the second quarter.
This was primarily a result of the and your annual Casper and Douglas plant turnarounds that occurred during the second quarter as well as strong performance from both our water and terminal businesses in the third quarter.
Now moving on the capital structure at the end of the third quarter. Our leverage was approximately 3.5 times based on the trailing 12 month adjusted EBITDA calculated according to our credit agreement.
When including our 75% share of Rex is just over $2 billion and that they.
Hey, the leverage for the quarter would have been approximately 4.5 times as expected both figures are down from the second quarter due to continued EBITDA growth.
And as for liquidity today, we have an undrawn revolver capacity of about 200, 825 million again, thats $825 million, representing ample liquidity to continue funding organic growth projects and additional bolt on acquisitions that we may identify and execute on.
With that I'll turn it over to bill for the commercial updates.
Thanks, Gary.
The third quarter was again, Mark my very strong operational performance and a number of positive commercial developments that David alluded to in his opening comments, let's jump right into it.
As most of you may have seen through various publications in mid September . We finally received our FERC sevenci certificates for the Cheyenne connector and Rec Cheyenne hub expansion projects. Just recently, we received the associated notices to proceed on each project and DCP has exercised its option to purchase a 50 per.
Interest in Cheyenne connector, which we expect to close in the fourth quarter.
In addition, we received an additional 200 million cubic feet per day contract on the Cheyenne hub project, increasing our total commitments on that project now to 800 million cubic feet per day.
Construction crews have been mobilized and work on both projects has begun in earnest. We're very excited about these projects and what it means for our customers in the broader markets in the DJ basin and at the Cheyenne hop.
While we are solidifying our final construction timeline and associated in service date, we currently anticipate that it will push past the ended the first quarter.
That said, we expect completion in the first half of 2020.
In addition to these positive developments at Rex we resolve the final outstanding issues with the tied with the type rate case pre settlement agreement and have also agreed in principle to a settlement with our trailblazer shippers and trailblazers rate case.
Both providing future clarity and stability for both of those assets.
In the crude oil transportation segment, we continue to experience very high utilization of the pipelines available capacity with average daily throughput for the third quarter of approximately 365000 barrels per day.
As Gary mentioned earlier for October we expect throughput to be near 380000 barrels per day.
Running in excess of 420000 barrels on a number of days during the month.
We also expect similar throughput for November based on our awarded nominations and in December . We currently anticipate moving in excess of 400000 barrels per day.
Based on recent speed tests and work yet to be completed we believe the pipeline will be capable of running in excess of 450000 barrels per day on a consistent basis.
In addition, we've made significant progress on contracting Pony Express since our last conference call late in July .
We currently have signed contracts in excess of 165000 barrels per day for varying has with average rates plus or minus $2.50.
In terms ranging from three to five years.
In addition, we are in active and advance discussions for agreements that could result in an additional approximately 70000 barrels per day with average rates also in that same range of around plus or minus 250.
Finally as is the case with many other liquid pipelines in the country, we believe that certain existing shippers will ship under their valuable history. They are earned over the past five years at the newly posted uncommitted tariff rates as evidenced by our strong October throughput and November nominations I would emphasize.
That the these posted rates are short term incentive rates that are subject to change at anytime.
So in summary.
As we Recontract Pony Express we are achieving our goal of contractual diversity with appropriate value for using our diverse system. What I mean by that is we are executing contracts for various past terms rates with a diverse set of customers.
Therefore, you can expect to see take or pay contracts, but also other types of creative contracts that incentivized customers in different ways to use our pipeline.
And finally on this topic, we're pleased with the level of contracting in the rates. Our team has been able to achieve in a very competitive environment and remain confident that Pony express will generate a significant amount of cash flow for tallgrass going forward.
Turning to BNN water solutions, our team continues to pursue several acquisitions and organic growth opportunities within the basins. We serve inclusive of working to commercialize a large scale pipeline project in the Utica that would serve many of our existing Rockies Express customers.
Finally for a quick update on Pony Express expansion Seahorse NPL team, we continue to make incremental progress on age, but are not yet ready to announce f. I'd on any of the three at this time.
And now David will conclude our remarks ahead of Q in a thanks Bill.
So.
We must conclude with.
Remarks here and then we'll go into the queue in a.
I just wanted to say that given the recent interest in the letter certain members of management sign in conjunction with the March 2019 Blackstone transaction.
I'd like to tie that I would like to take a few minutes on that topic before we move into Q and aim.
In hindsight these should have been called retention in lockup agreements.
Most critics sort of looking at these agreements with the benefit of hind side, but back considering and learning all the facts and circumstances at the time.
Let me remind everyone of some of those facts and circumstances people are fully entitled to their opinions that are not entitled to their set their own set of facts.
And obviously for some of these facts you have to have a little bit of.
Reasonable deduction versus just blathering on.
The sale of the general partner of Tallgrass was a private transaction between the owners of the GP and Blackstone those owners. The time were Kelso Mg myself in a few members of my team.
A key factor in that transaction is that Blackstone desired to own 100% ownership of the general partner of Tallgrass in order to gain control of Tallgrass. There is a value in control and market transactions demonstrate that time and again in this case the price for the private general partner.
Was give or take $480 million.
$480 million have nothing to do with the price per share other than it just happened to work out to about $4 a share.
For those of you that have to deal and pennies that was $3.82 a share.
If you take 20, 625, and you subtract out.
$4 you get a net price for the LP shares that were sold of 20 to 25.
Again for everybody that wants to be spent more specific 20, 625, which was just.
Matt add of $3.82 was which we were paid for the general partner and $22.43 is what we were paid for our LP.
No one other than Kelso Mg and my team to own any of the general partner asset and was never entitled to any of that through $4.
So I want to make that clear.
Blackstone also one in certain protections around their significant investment in tall gas in tallgrass, primarily from specific members of the management team, who also own part of the privately held GP those protections among other things were acquired those individuals including myself to retain a specific ownership and.
Interest in TG to provide an incentive to grow the business.
Non solicitation agreement non competition restrictions and lockup agreements relative to our ability to buy and sell our shares.
So for example, I'll just talk about myself I agree to a three year noncompete agreement, if I ever leave tallgrass, which is significant to me.
I agreed to 15 month lockup on not buying or selling any TGP, which again is significant to me I'm unaware of any other shareholders out there who simply own a shares who would give up their rights to work in this industry for that period of time or agreed to not buy and sell shares for that Barry.
At a time so those were significant adders.
As compensation for conceding valuable control and for agreeing to the other significant restrictions Blackstone was willing for a short and define period of time.
To purchase the retained ownership interest from these former owners of our general partner at the same price that was set with Blackstone in the March sale.
It should be noted that approximately one and a half million of those shares were class BGP voting shares.
Said another way they were GP controlled shares owned by four members of management and approximately 3.2 million of other shares owned by two members of management, who agreed in March to sell Blackstone all their class B GP voting shares again speaking only for myself.
I will tell you that over the last seven years aside from my GP ownership I have accumulated over 2 million shares that I have bought I've never sold a share until last March I had numerous buys you all can see that.
And that is unlike some of our largest holders in 2019, if you guys really want to get at the root of why the stock is performed the way. It has I would encourage you to go look at the form Sthree F. Cindy's, Chris is that right.
13 form.
Foreign Thirteens section 30 products. The section 13 de filings and look at our largest institutional holders the same ones who are complaining about the way. This the these these types of things have.
Come to be and look at what they have bought and sold okay.
Again, I accumulated over 2 million shares I never sold to share until last March.
Furthermore, I was unwilling to complete that transaction unless I was paid the same price for every share around period.
Here is another fact.
It did happen a couple times after the plant in after the Blackstone transaction that we traded well above the 20 to 25 or again for those of you that have to have the exact numbers $22.43. In fact on March 29.
I mean, we traded as high as $25, a 96 cents for an LP unit or I should say in a share on may 22nd this year, we traded up to 20 488.
Stock price is down it was down to around 14 or $15. When Blackstone made their offer and that was due to sellers. Okay that you could identify the SEC filings. It had nothing to do of Blackstone selling Blackstone hasn't sold to share nor as management since then.
Furthermore, if it take private does not occur or is not signed within the specified time period. Those members of management will only be paid the value of the control and and of the other significant restrictions would it which equates to the approximately $4 per share $3.82 for their general partner ownership.
And that would occur this coming March.
They would we would all then own our TG Act equity at the same market value that everybody else does.
It should be mentioned that the retention and lockup agreements do not cover all the equity in TG owned by the members of management, which include a significant number of a shares owned outright and also unvested equity participation shares.
All having the value of what it is today yesterday and tomorrow equal to the traded market price.
I guess again I would note on a personal level I've never gotten a share of restricted stock in this company.
Gary Bill if some of the other members here have and Thats, what that paragraph is telling you.
There are shares are valued at the same way your shares or value.
So in summary.
Any characterization that members of management are getting paid a higher value for giving up the exact same thing is LP owners is patently false as as any other characterization that management engineered something where they had nothing to lose and everything to gain.
The fact is we agreed to lengthy lockups.
Lengthy noncompete agreements and other valuable things that benefited all stockholders not just Blackstone.
Finally regarding the Blackstone take private I will add one other thing.
What did investor and I went and I use investor very specifically, our I recognize there are short sellers in the market, but what investor among all of this does not want to buy at a lower prices sell at a higher price.
Blackstone does not set the market price period in fact of already told you the market sets. It we've had more sellers than we've had buyers and you guys could easily build a picture of who the sellers of men.
Blackstone has made an offer.
For which they would like to buy the rest of the company and take it private that offer may or may not be acceptable.
Hi earlier said that I would give you a little bit more color later in the conversation about the.
Conflicts Committee.
Let me tell you that we have three independent board members that are on the conflicts committee negotiating with Blackstone or trying to come to some resolution on that.
These three members one of them I have known for over 40 years.
Has been on Tallgrass board since.
2015, when we took TGP public.
The other to bid on the Tallgrass board since 2013, one of which I've known for over 20 years.
It is a come it is a very independent conflicts committee and I know the we'll work hard to do the right thing.
As always I want to thank our employees for what they do everyday to keep themselves in our community safe on our assets operating reliably.
Thank you as well to our shareholders for their confidence investing in and TGP and to everyone. In this call for your interest in our company.
With that operator, we'll turn it over to you to handle the Q and a portion of the call with Nate.
Thank you if you would like to ask your question. Please signal by pressing star one on your telephone keypad, if you're using speakerphone. Please make sure the mute function, it's turned off to a value or signal to reach our equipment again. Please press star one to ask your question.
We'll pause momentarily to allow everyone an opportunity to signal for questions.
Well take our first question from Colton Bean with Tudor, Pickering, Holt and company.
Good afternoon appreciate the detail on Pony Express re contracting in just two questions related to that so.
The first.
Are those new contracts, primarily tied to the Bakken given the northeast, Colorado doesn't roll until next year or are they spread out geographically.
They are spread out geographically colton.
We have some had guernsey, which is both powder and Bakken and.
You have DJ that are just new volumes coming on yeah cold.
Thank you good question Manville's right I guess, you know that we had two traunch, giving you hit it exactly the northeast, Colorado stuff that we did contract for five years.
Doesn't come due until later next year, but having said that without disclosing particular shippers and.
Greetings and rates.
It is it is a mix of locations et cetera, we we have more under contract than than what we simply told you about we just telling you about the new style.
Got it in regard to those existing shippers that you mentioned you expect them to continue either on a walk up basis, or maybe theres still potential to convert them to firm can you just characterize the scale of those shippers is that two to three large shippers or a multitude of smaller shippers.
Coke occult and we can answer that question.
And we just can't answer that question, but I, but I will tell you that.
They are shipping or will be shipping under history that they earned and that history that they earned.
Puts them in a regular shipper category I wouldn't categorize it as walk up they can ship on that history as long as they flow that history and.
We suspect they will continue to flow that history for an extended period of time.
And it may get it maybe.
Said differently cold they have first rights on that that volume to ship, whether they have contracted or not.
Yes, and just to clarify that given the scaling of the the volume incentive rates. The expectation is that to 50 that you've highlighted wouldn't change materially for those shippers.
I think our highest walkup.
Rate would be three in a quarter. If you looked at our tariff really hard. So I think we have three or four delineations depending on volume.
And so I don't know that I would agree that you ought to just characterize it as using 250 across the board.
Okay, and so but in regard to the scale nothing to maybe to disclose there in terms of whether it would be higher or lower than that to 50.
Got it okay.
M&A unchanged connector appreciate the detail there.
That's moving to 800 million I think as of Q4 ASU earlier. This year you'd noted that you had re contracted about 30% of the west to east roll off and Rockies Express so with Cheyenne progressing can you update us on where you stand there.
That open season.
Is on our.
He BB and on our postings fairly public documents.
We continue to have some recontracting from production in the powder.
Some and.
In the DJ in the Fianc.
But we're still working hard at it I think when.
I think when connector gets completed and or as it gets closer to completion and especially the hub, which as a reminder, cold in the hub has 800 million today and the connector has 600 million today. So the hub is capable of pulling gas from other pipes other than just the connector.
There's a there's a certain.
Right and term that will contract with and we're looking forward to doing deals with our existing shippers and others I I'd just add a little bit to what bill said and say it may be just a little bit different way, we're coming into a good period I think relative the.
Weather wise et cetera, and we're happy to let the situation play out for a number of months here, we have gotten rates that are very acceptable, albeit on a shorter tuner, but.
When the connector in hub go into service that 800, a day is going to show up right at the door step of direction.
Yes that that we believe in along on a long term basis will fill the gap at something that works for us financially as well as our shippers.
Got it and just the final one for me so on Rockies Express can you just frame how you're evaluating counterparty exposure now given some of the movement, we've seen in both debt yields and ratings among the natural gas producer community.
Yes Goldman.
It's Gary we were continuing to evaluate potential counterparties. The same as we always have and is allowed under our tariff we take the exposure seriously and if.
Sub investment grade.
Shipper on an existing pipe our tariff regulates how much credit we can we can except from them and so we'll continue to deal with that in that regard I think you know on the east end of the pipe because we put a significant amount of capital into the ground, we were able to secure far more than what a normal.
Existing infrastructure asset would would allow in terms of credit and we continue to to hold up.
Again.
According to our for FERC tariff allowances. So we're watching it I can tell you that.
We talked last and disclosed last quarter about one particular very small shipper that the did the bolt on their obligation.
But as we continue to review.
Monthly obligations from our shippers none of them are significantly pass due or represent any.
Problems at this point that we can see so across all of our pipe. So much do we hold cash collateral and equivalents Nate.
Financial.
You don't have a tough period.
I would again I would supplement a little bit of what Gary says, particularly on the east end of Rex you know the rates where that people are paying us for east to west movements Clarington west or.
Actually very competitive and lower than a lot of other new build pipes, where we just simply had to.
But in the compression and the new pump stations that we did so thats a good fact and I think the other factors is that.
Most of our Ft Cup I mean almost.
Let's just say 95% of RFP customers are moving.
And of their ft volumes in terms of actual.
Molecule movements.
Okay. Appreciate the time this afternoon.
You bet. Thank you Sir.
Our next question comes from Michael Appetites with Goldman Sachs.
Hey, guys two questions real quick first of all.
If you had defining how close are you on the incremental 75000 barrels for Pony Express in terms of signing up that customer and having a little bit more certainty around that that's question. One question too can you kind of go around the different pony expansion opportunities and just kind of give us say, hey, where are we.
We on each of these and keep we've been talking about these first six to 12 months that's pretty normal.
In the industry when are you thinking you'll get closer to five D.
So what is your first question on really see horse when you talked about 75000 barrels no you when you talk.
About the re contracting at 2.5 dollars a barrel on existing Pony. You said there was an amount that was already signed and then I thought you said that you had another 75 that you thought you are close with.
Yeah. We're I got you know was it in the prepared comments it was 70000.
Our hasn't were close on agreements within.
Bill take that second let me and Bill will probably supplement what I say on the first here.
If you look at what we've done from macro standpoint, I think in 2019, we not including what I'm going to tell you about now but in 2019.
We will have spent roughly $360 million on small tuck in acquisitions and or expansion projects.
Just.
This week or actually today with the board.
We approve somewhere.
Roughly $75 million more in.
Projects across the assets of two of those projects were pony type.
Projects and so you want to.
Add onto that.
Michael I think that thing is 70000 barrels as you said it.
Submitted at very competitive environment, we have fought hard.
Four barrels and we have folks who.
We're close to close to getting there and.
I wish I could tell you exact timing.
I wish it was tomorrow.
But it's a it's moving too.
But at this point are hard to say exactly.
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