TGE Q4 2017 Earnings Call
Operator: Good day and welcome to the Tallgrass Energy Q4 2017 Earnings Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Treasurer, Mr. Nate Lien. Please go ahead, sir.
Nate Lien: Thank you, Brian. Good afternoon, and thank you for joining the Tallgrass Energy quarterly earnings call as we discuss TEP and TEGP results from the fourth quarter of 2017 which were released through our joint press release this morning and 10-K this afternoon. Joining me on the call are David Dehaemers, President and Chief Executive Officer, Bill Moler, Executive Vice President and Chief Operating Officer; Gary Brauchle, Executive Vice President and Chief Financial Officer; and Matt Sheehy, Senior Vice President & Chief Commercial 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 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 February 13, 2018. Please refer to our filings with the SEC, which are available on our Web site, including our 10-Ks and 10-Qs, 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 statements. Please also refer to our earnings release and Web site 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: Thanks, Nate. Good afternoon everyone and thanks to everyone for joining our Tallgrass Energy fourth quarter earnings call. As many of you saw in our earnings release, this morning, the fourth quarter was yet another outstanding quarter for TEP driven by strong performance in our operating segments and higher than forecasted distributions from REX as a result of incremental capacity sales in Zone 3. All of this contributed to TEP's 18th consecutive quarterly distribution increase. Again, $1.15 annualized at IPO versus $3.86 paid today. Annualized and then TEGP's 10th consecutive quarterly distribution increase, again $0.53 annualized at IPO and $1.47 currently paid today going to $1.95 in the next two quarters. Now let's review the fourth quarter financial results driving our distribution increases. Adjusted EBITDA for TEP was $173.2 million. DCF was $141.6 million, again, producing healthy coverage of 1.28x for the fourth quarter. As we mentioned on the third quarter call and as expected, one of our Pony Express shippers continued to use previously shipped incremental volumes to meet current period from committed volumes to the tune of $8.3 million. Thus, reducing an accumulated incremental volume balance in current period cash flows. With the inclusion of those cash flows, DCF and coverage would have been $149.9 million and 1.35x coverage, respectively. At year end, the remaining the incremental balance for that shipper was only had a balance remaining of $1.5 million, so going forward there will not be a large financial impact from that customer using incremental balances. TEP increased its quarterly distributions in $0.965 per unit or $3.86 annualized, which is an increase of 18.4% over the fourth quarter of 2016. TEGP increased its quarterly distribution to $0.3675 per share or a $1.47 annualized, which is an increase of 32.4% over the fourth quarter of 2016. So now I’m going to turn the call over to Gary for financial comments. I will come back, wrap it up and then we will go into Q&A.
Gary Brauchle: Thanks, Dave, and good afternoon, everyone. The Natural Gas Transportation segment produced adjusted EBITDA of $99.9 million with REX generating approximately $15.8 million of revenue from the sale of incremental Zone 3 capacity during the quarter. These incremental sales averaged approximately 400 million cubic feet per day over the quarter. And as a reminder, that volume of revenue is over and above the fully contracted 800 million cubic feet per day of capacity on the Zone 3 capacity enhancement project placed in service in early '17. We will continue to optimize the additional capacity when its available on Zone 3, and in fact we have recently signed three new firm contracts totaling a 105 million cubic feet a day for terms of 3.5 to 5 years. Our Crude Oil Transportation segment generated distributable cash flow to TEP of $61.3 million, which as David mentioned, was slightly lower than recent quarters and the result of the Q4 use of our previously accumulated incremental shipment balance primarily used in the fourth quarter. Average daily throughput at Pony Express for the fourth quarter was approximately 266,000 barrels a day and approximately 2680,000 barrels a day for the year as compared to our contracted volumes of just over 300,000 barrels per day. And as we always do, we remind you again that we generally get paid on contracted volumes, not throughput. The gathering, processing and terminalling segment generated adjusted EBITDA of $15 million for Q4 and $51 million for the year, which is an increase of approximately $33 million over full-year of '16. We continue to be very pleased with the growth in this segment which is primarily been driven by water infrastructure in our terminals businesses. We expect additional growth in '18 in this segment as a result of increased gathering and processing volumes, acquisitions such as the recently announced Buckhorn transaction and other organic projects. Before we move on and to discuss TEP's balance sheet, I want to briefly touch on the deferred income tax expense and TEGP's income statement in Q4. As a result of the December 17 passage of the legislation originally introduced of the tax cuts and job act, TEGP reassessed the valuation of its deferred tax asset as of year-end. TEGP recorded non-cash deferred income tax expense of $183.5 million in the fourth quarter. And of this amount, $172.9 million is due to the remeasurement of the deferred tax asset, which is as a result of the reduced federal income tax rate from 35% to 21% effective beginning in '18. After the remeasurement and as of year-end, TEGP has a substantial deferred tax asset of $313 million on its balance sheet, which is the expected tax benefit of available future deductions that will be used to offset future taxable income. Therefore it's currently expected that no cash taxes will be paid by TEGP for a period estimated to well exceed 10 years. Now let's turn to TEP's balance sheet. In mid-December, TEP issued another quarter of a billion of its 4.5% notes due 2028 at 101.5, so above par and the proceeds were used to pay down our revolver borrowings. At the end of the fourth quarter, TEP had nearly 1.1 billion of liquidity available on its revolver. TEP's leverage as of quarter end was approximately 3x based on the trailing 12-month adjusted EBITDA as calculated according to our credit agreement provisions. As you know, this continues to be on the low end of our 3x to 4x long-term leverage target indicating ample leverage capacity at TEP to fund third-party acquisitions, organic growth projects, and TEP's share of REX's July 2018 debt maturity of $550 million. Let's talk about that for a minute. As we’ve said, since we acquired our interest in late 2012, we believe a reasonable long-term leverage targeted REX is approximately 4x debt to adjusted EBITDA. And keeping with that goal to continue to reduce leverage REX's board has agreed to repay the July 2018 maturity of $550 million. At TEP and Tallgrass equities current ownership that will amount to approximately $275 million and $137.5 million, respectively. This debt reduction will further strengthen REX's balance sheet for the long-term and should be the next step towards returning REX to an investment grade pipeline. Now moving on to our guidance for '18. The Tallgrass energy family of companies expect adjusted EBITDA in the range of $755 million to $835 million, so about 5% on either side of the midpoint and maintenance capital expenditures of about $20 million to $30 million. This adjusted EBITDA metric includes the assets owned by TEP at year-end, the additional 2% of Pony acquired by TEP on February 1, and the distributions beginning in February attributable to the additional 25% interest in REX acquired by Tallgrass equity in early February. It does not include our estimate of approximately $20 million of shipper deficiency payments that would be included in distributable cash flow calculation, but not in adjusted EBITDA as we currently calculated. We are providing Tallgrass Energy adjusted EBITDA guidance and like the last week's announcement of our evaluation of our organizational structure, and this guidance is essentially agnostic with respect to organizational structure, capital structure or distribution coverage and therefore the reason why we gave it to you in this form. When you analyze this guidance, it should be very clear to you that we're demonstrating our business remains fundamentally sound and in fact it continues to grow year-over-year as a result of the accretive acquisitions and projects that we are announcing and completing. We believe this reinforces what we said last week, which is that we're examining structural reorganization alternatives from a position of strength. Also today notwithstanding last week's announcement of our organizational evaluation, we provided 2018 distribution growth guidance at TEGP of 37% to 40% and at TEP for 7% to 10%. If those entities were to exist in their current structure throughout 2018 and that would be exit rate Q4 declared distribution over Q4. This guidance is intended to provide distribution growth expectations in the event that our evaluation or any resulting transactions are not included during 2018. However, as David shared last week, we certainly hope to conclude our process well before year-end. With that, I will turn it back to David for his concluding remarks.
David Dehaemers: As we set out on a new chapter in the Tallgrass story, over the next few months, I can assure you that we will continue to create value for our shareholders and unitholders on a daily basis. Our recent announcements with Buckhorn, Iron Horse Deeprock North, The Pawnee Terminal, successful plant bill open seasons, the January in-service of the two new refinery connections on Pony and the upcoming in service of the Central Kansas uplift supply at Natoma, all demonstrate that commitment to value creation. To further expand on the value creation point on last quarter's call, I mentioned that we were targeting an additional $50 million to $225 million of acquisitions by year-end. On January 3, we announced an agreement to buy 51% interest in the Pawnee Terminal from Zenith Energy from $31 million and also announced the acquisition of a 38% interest in Deeprock North for $19.5 million. This past week TEP announced the acquisition of water infrastructure assets in the Bakken for $95 million, a prime customer there being XTO with an additional $45 million of capital expenditures expected. We also announced the formation of a joint venture in the Powder River basin with Silver Creek midstream for the development of the Iron Horse crude oil pipeline. Iron Horse will transport crude oil from the PRB to Guernsey and then on into Pony Express. We expect to invest approximately $150 million into the joint venture and its associated Guernsey terminal. By my math that approximates $340 million of acquisitions and growth projects announced over the past month. Why do I highlight these announcements? For a number of reasons. One, it demonstrates our ability to execute on accretive transactions. Two, it furthers our strategy of making Pony Express one of the most diverse oil pipelines in the country, both from a supply and delivery standpoint. On the supply side, we have five common stream source from four different geographic basins and on the delivery side we connected three refineries in Cushing Oklahoma. Three, it shows we're committed to the PRB and believe it presents robust opportunities to expand our midstream service offerings, and four, it demonstrates continued growth in our water infrastructure business through attractive acquisitions and organic projects. Last Thursday on a call, I’d like to set the record straight a little bit on something that I was said that may have been misheard, I was asked I think by somebody about what my guess on Pony volumes would be if I had to venture a guess in 2020? And I said something to the extent of, I had to venture a guess, I would say we would get a 100,000 barrels a day from the Bakken, 150,000 barrels a day from the Powder River and 150,000 barrels from the DJ that adding up to 400,000 barrels. I think perhaps some people may have heard that I said 100,000 from the Bakken and then 150,000 barrels a day from both the DJ and the Powder combined which is not accurate. So that would total 250,000. So I just want to set the record straight on that. I’d like to conclude by getting back to the reorganization announcement from last week. We as a management team believe we owe it to our investors, our employees, and our stakeholders to continually evaluate how we can put Tallgrass in the best position for the future. Right now we believe exploring and potentially consummating our restructuring transaction does just that. Along with the safety of our operations, our goals continue to be long-term stability of distributions as well as best positioning Tallgrass for growth and maximum accretion from that growth. As Gary mentioned, in our 2017 results and our 2018 guidance clearly demonstrate we're exploring a reorganization from a position of strength. We want a simpler structure with a lower cost of capital that attracts investment in Tallgrass to help deliver responsible growth. Over the last five years or so our history demonstrates value creation and we’re approaching our reorganization process that same way. Said more simply, we believe there are reasonable alternatives available to effectuate a reorganization where there are no distribution cuts and there is no dilution. And that is how we are setting off in beginning this process today with the Board meeting we had. So I hope this provides a little more insight to -- into and frankly comfort around last week's announcement. Simply said, we at Tallgrass have been and are winners and we continue to focus on winning. We are absolutely continuing to focus on winning. As always, thank you to our partners and shareholders for their confidence in investing in TEP and TEGP. Thank you to everyone on this call for your interest in our companies. With that, we will turn it over to the operator now to open the lines up for the portion of our Q&A.
Operator: Thank you. [Operator Instructions] And we'll now take our first question from Barrett Blaschke with MUFG Securities.
Barrett Blaschke: Hey guys. Could you walk through a little bit on how we’re going to be thinking about distributions for TEGP? We’ve got $0.12 sort of in the first two quarters and then does it sort of fallback proportionate to the -- somewhat lower growth rate we're now expecting out of TEP?
David Dehaemers: No, I’m not sure I understand your question. Can you …?
Barrett Blaschke: I guess, basically the lion share of the distribution growth for TEGP is going to be in the first two quarters, is that correct?
David Dehaemers: Well, I mean, I think our guidance was 37% to 40%.
Barrett Blaschke: $0.12.
David Dehaemers: … I’m sorry, what?
Barrett Blaschke: Its 37% to 40% for the full-year, correct?
Barrett Blaschke: Yes, and I think the $0.12 equates to something like 32%. So …
Barrett Blaschke: Okay. Okay. Thank you.
David Dehaemers: Yup.
Operator: And we'll now take our next question from Christine Cho with Barclays.
David Dehaemers: Christine.
Christine Cho: Hi, everyone.
Gary Brauchle: Hi, Christine.
Christine Cho: I wanted to start with your '18 guidance. $80 million is a fairly wide range and the outlook for our pipeline business cash flow is relatively stable. So curious as to know what are the things that can move around? I’ve thought of more blends and extends, variability around the water business, timing on the projects, maybe some of that additional capacity that you’ve been optimizing at REX. But curious, if there is anything else worth noting.
Gary Brauchle: Yes, Christine, it's Gary. Over the last couple of years, our guidance from the midpoint up and down has been somewhere in the neighborhood of 4% to 5%, so this is consistent with that. We do try to provide ourselves some flexibility for things that are unforeseen and one example of that would be in 2017 we certainly didn't foresee for example a ship around Pony Express burning off an incremental balance. And so that in and of itself could be somewhere in the neighborhood of $15 million to $20 million, again just by way of example not foreshadowing that will happen in '18. But that is one example on one of the assets. And so I think if you look at the risks and opportunities around each asset in each segment, we don't think that it's unreasonable to give ourselves 5% upside or downside from the midpoint.
Christine Cho: Okay, fair enough. And then, I wasn’t sure what the up see [ph] structure that you have in place for TEGP. But in the event, you do a roll up of the LP unit, would that also extend your noncash taxing status due to a step-up in basis?
David Dehaemers: Yes, Christine, it would to the extent that I think which you’re asking is if the roll up was such that TEP was given -- I think TEGP was given in exchange for TEP with the assets of TEP coming under TEGP, allow for a stepped-up tax basis, and the answer to that is yes. So what that would effectively do is, just as Gary said, it would increase the deferred tax asset and most likely -- because you would have more shareholders outstanding, it wouldn’t necessarily increase the timeframe. So in other words, we set at least 10 years, so let’s just say -- let's just use 10 years an example while your deferred tax asset may go higher, it wouldn’t necessarily be covering now for 12 years because you have more shareholders out there.
Christine Cho: I see. Okay. Helpful. And then, I just wanted to clarify, when you guys say that as you look through various scenarios and say distribution cuts are not on the table with restructuring, I want to clarify that that also doesn't mean a backdoor cut?
David Dehaemers: What you think of debt -- define a backdoor cut for me.
Christine Cho: So, like, if lower yielding paper buys higher yielding paper, usually, unless the pro forma entity increases the distribution, it's a backdoor cut for the higher yielding paper that just got taken out.
David Dehaemers: Yes, so while there are no promises and I think it would be unfair to our Boards of Directors that we met with today and that we’re going to have another meeting with this week to line out in great detail things. I think another way of saying what you said is, if for example the transaction in your question you just detailed a minute ago was such that TEGP was exchange for TEP, and so for example I think TEP right now is on an annual run rate of $3.92 per distribution. The question you're asking is would TEG -- would TEP unitholders receive enough TEGP shares to receive at least that much in terms of we will go into a $1.92 very quickly here, so would they receive enough TEGP shares to cover what they're expecting in terms of distribution today if they did not that would be your definition of a backdoor, because it might -- am I describing all that correctly?
Christine Cho: Yes.
David Dehaemers: Yes, and so that is absolutely our goal and like I think Gary said in his remarks, that is -- I’m actually looking for it.
Gary Brauchle: Christine, while he does that, back on your guidance question, let me just give you another example and I won't name the specific asset, but we from time-to-time do see variability in things like ad valorem taxes and other taxes other than income taxes. And for example we did see in a recent year of swing in property taxes or ad valorem taxes to the tune of $20 million to $22 million. And that's all a function of in-service of particular capital investments in the taxing authorities and on what values they assess taxes on. So those are the type of things that if you look at a couple of risks like those two together, you could understand how to move the needle for percent or so.
Christine Cho: Right.
Gary Brauchle: I did mention two downsides, but there are numerous upsides that I won't go through, but I think you get the point.
Christine Cho: Right. Okay. Thank you.
David Dehaemers: Yes, Christine, getting back to your thing, Gary in his prepared remarks said that we believe there are reasonable alternatives available to effectuate the reorganization where there are no distribution cuts, There is no dilution and that's how we are beginning the process. I think what you describe is a quote backdoor cut and the fact pattern that I said you agreed with would be unequivocally what we're trying to accomplish and where we’re starting now. Having all said that, again, I’m not -- I don’t want to be perceived as Debbie Downer here, but we're not the ones setting the price on the securities and their relative values etcetera. So -- but the answer to your question where we sit today, that is absolutely the goal.
Christine Cho: Perfect. Thank you for the time.
Operator: The next question from Tom Abrams with Morgan Stanley.
Tom Abrams: Hi. Thanks.
David Dehaemers: Hi, Tom.
Tom Abrams: Just a -- hi, I’ve a mechanical question, when REX debt is paid down, their interest of course goes down. So EBITDA goes up, which would flow through directly to TEP or, I guess, I’m trying to get an idea of …?
David Dehaemers: Tom -- yes, Tom, I don’t think their EBITDA would go, but I think their cash flow would go up because interest as you know is after EBITDA. EBITDA [multiple speakers].
Tom Abrams: Well, I guess, I’m trying to get at the flow to TEP, does that pick up? Are they in a situation where they’re going to continue to payout their cash?
David Dehaemers: The less interest at REX is paid at the entity, the more cash there is to distribute.
Tom Abrams: Okay.
David Dehaemers: Yes.
Tom Abrams: Good. And then the other thing was you walk through the numbers on the acquisitions this year, 340, would you care to re-up that list?
David Dehaemers: Yes, I mean, I appreciate the question. We -- I think we said it even last Thursday that we still have a list that has somewhere around $2 billion worth of projects on them. One of them is a $500 million or so acquisition that we’ve our eyes on, but I would say that’s a iffy at best, so that leaves you $1.5 billion that would serve mostly kind of Brownfield projects around our existing footprints and assets. So these are things that we think we can get done in the next couple of years and to the extent that other companies out there talk about their backlog or their shadow backlog or their double secret triple backlogs, that’s our backlog, and I think we feel pretty confident about some of these. It's a bunch of -- it's a few singles and a fair amount of doubles, and they can meaningfully move the needle.
Tom Abrams: And how much of those or maybe some other things in your mind, how big can that water business get? Do you think it's an area that you can really consolidate on a different basis?
David Dehaemers: We do, we have a reason to believe we are the biggest -- the largest water -- freshwater pipeline supplier in the country for purposes of fracking as well as private independently for disposal. Having said that, I know that some people maybe even in the last rig have written out their -- they’re just staying for that, but I will tell you what it's a good business, you can buy it and make good returns on your capital. You get paid back very quickly. You’re the first guy that gets paid in the value stream. So, what I would tell you -- the thing I like about the water business and again I'm not telling you this from -- I'm trying to give you a perspective into how we look at this business. The thing I like about it versus the gathering and process, if you had to simply compare gathering business to the water business, the thing I like and I’m not saying this to be disparaging to gatherers, because we’re -- we gather gas too. But the thing with gathering natural gas is an example as you have to put steel in the ground. And that steel that goes to those wellheads is only as good as those wells are, okay. Relative to the water business, we're putting much less expensive a lot of times plastic pipe in the ground at much lower pressures. And so your investment in this type of businesses significantly lower and also if you have particular wells go to zero value, you don't have that much of a stranded asset that had a very finite life versus the other. And so that's the thing we like. Having said all that, I think we feel like we've invested since we started this about $200 million in the water space. We have talked recently about really trying very hard to start high grading our look at that and growing -- in terms of growing it, I don't want to put a capital on what we would invest in the future, but I would say that we’re going to continue to look at expanding it and buying businesses. But again our underwriting requirements are probably going to get more and more stringent.
Tom Abrams: Good. All right. I appreciate the answers. Thanks a lot.
David Dehaemers: You bet. Thank you.
Operator: And we'll now take our next question from Colton Bean with Tudor, Pickering & Holt.
Colton Bean: Afternoon.
David Dehaemers: Hi, Bean.
Colton Bean: So just wanted to dig into the full-year guide a bit, and so if you guys could break that down some, so I think looking at the incremental revenue …
David Dehaemers: Hey, I’m sorry, we are having a hard time hearing you. You sound like you’re in a cave.
Colton Bean: Sorry, can you guys hear me now?
David Dehaemers: That’s better.
Gary Brauchle: Yes, better, Colton.
Colton Bean: Yes. So just wanted to dig into the full-year guide for 2018 a bit, and see if you could parse out some of that. So I think the big thing I’m focused on here is if you look at the REX contribution just based on the numbers that you guys have put up here over the back half of the year, maybe it's not a quite a full-year contribution in 2018, but you can call it maybe $120 million or somewhere north of that. So if you add that to what you guys were able to do in 2017, would effectively put you at the midpoint of guidance. So, I guess, is the right way to look at the existing guidance range is that, yes, there's a little bit of a step down from the Continental contract, but then that’s effectively being offset by the projects and the acquisitions that guys have been able to execute on?
David Dehaemers: Yes, Colton, let me address that. I mean, I’m not sure exactly where you’re headed with, in fact, the REX piece. But I mean, don't forget to exclude the ultra-settlement payment when you compare '17 to '18 and for comparability purposes there, number one, relative to that. Number two, on Pony Express, I think, the way to think about Pony Express is, yes, you’re right, there is an impact related to the CLR contract amendment. But what I can tell you is that the impact of the growth projects and not having the impact in '18 that we saw in '17 of the incremental bank usage more than offset that. And so you see nice contribution in growth for Pony Express in '18 year-over-year.
Colton Bean: Okay. That’s helpful. I think the UPL is a good point. So just on the processing side of things, you guys just touched on this, but it looks like there was a bit of an uptick there in Q4, so given the activity that you guys are seeing in the Powder, how do you envision that trajectory kind of playing out through 2018 and maybe in the 2019?
Bill Moler: Colton this is Bill Moler. The gathering business -- look, the Powder River Basin for the last 18 months has been primarily on appraisal. Producers are trying to figure out Turner and other zones in the Powder. They -- there are some who are entering development in '18, meaning they’ve figured it out in the intend on adding rigs and drilling more, we have -- I would tell you somewhere around a dozen proposals out the door currently. We believe we will get our fair share of activity and opportunity for both capital investment and accretive projects and revenue enhancement projects in Tallgrass midstream in the Powder River Basin. Again, the big shift is going from appraisal to development, and once they’re in development mode, typically people are looking for more permanent solutions to take away than what they currently have. So, again, we see the Powder really starting to take off in '18 and getting there in totality by '19.
Gary Brauchle: And, Colton, from financially speaking, on the gathering processing and terminalling segment, when you look at the second half of '17 you'll notice it's a pretty nice increase of cash flow contribution from that segment in the back half of '17. We expect it to be even -- to grow even more substantially off of that run rate and that’s from our terminals acquisitions, our water acquisitions and other things like that. So it grew in the back half of '17 and we're expecting nice significant growth on top of that back half '17 growth in '18.
Colton Bean: Perfect. I appreciate the color there.
David Dehaemers: Thanks. Sure.
Operator: And we'll now take our next question from Richard Roberts with Scotia Howard Weil.
David Dehaemers: Hi, Richard.
Richard Roberts: Hi. Good afternoon, folks. Just a quick one for you on guidance and reporting. I guess, this probably won't matter a whole lot with the simplification coming, but just curious, is all the REX, I guess, the 75% at Tallgrass, is all that DCF going to flow through the TEP financials and then have a 25% owned at TEGP backed out below the line? Just kind of curious how this is going to look with the guidance being represented basically on a consolidated basis? Thanks.
Gary Brauchle: Yes, Richard, thanks for the question. It's very mechanical. So some eyes may glaze over here, but let's just take it one at a time. At TEP, there's really no change in the way that TEP is going to report its ownership and REX. So we will see on the income statement, 50% of the equity earnings on the P&L that’s going to be deducted out, and then the 50% distributions are going to be added in to accumulate to or come up to TEP's adjusted EBITDA figure. When you look at TEGP, TEGP, in fact, consolidates TEP. So what you are going to see on TEGP's income statement is you are going to see 75% equity earnings on the P&L. And when we calculate TEGP's adjusted EBITDA, we are going to back out that 75% of equity earnings and we are going to add back the 25% of the distributions that accrued to TEGP or Tallgrass equity for their individual share in REX. Hope that helps.
Richard Roberts: Yes, that clears it up. Thanks.
Operator: And we'll now take our next question from Ethan Bellamy with R.W Baird.
Ethan Bellamy: Hey, guys. Good afternoon.
David Dehaemers: Good afternoon.
Ethan Bellamy: What if any are the impacts of the Seneca lateral fire going to be on Q1 on REX volumes?
Gary Brauchle: Ethan, the incident -- at the time of the incident that pipeline did not have any nominations or flow. It's not to say that it would never flow during the month of January or February during the period of time that we’re repairing it. It's hard to tell, but as far as I know we're moving 2.8 --2.6 Bcf nameplate capacity East to West in Zone 3 to the extent we don't have volume coming from Seneca, it's coming from all of our other interconnects and I just don't see it being material whatsoever.
Ethan Bellamy: Okay. And then, Dave, you might not want to answer this question, but just get -- to get back to what you said about your long-term expectations on Pony, how would -- how should we think about that volumetric trajectory from here for going from, say roughly 300 to 400?
David Dehaemers: Yes, again you asked me one question, I answer it. If you ask me another one, it's a little bit like give a mouse a cookie. Again, Ethan, I can't -- I want to help you as much as I can, but I just can't predict the future. I guess, what I would tell you is what I said last Thursday, our contracts almost all go through all of '19, so we got another -- and then some of them in 2020, so we end up having average life of 21 months and like '19 on some and 22 months on another. I would suspect like Bill said, as the Powder develops out here, as we get the grasslands terminal built in Platteville and we get the Platteville extension hooked in here, third or fourth quarter of this year. We get Iron Horse built out. You and we, we all will have a lot more clarity about what the ramp of that might look like. I wish I could tell you that, okay, today we're contracted at 320 and it will be 350, then it will be 375, and it will be 400 in these timeframes. The only thing I can tell you is that we’re working extremely hard. We are all over this, we are talking to everybody and anybody, I think the investments that we made, that we’ve underwrite -- underwritten have not only -- we’ve not only underwritten them from a perspective of getting the return on net new capital, but also like we said flexing up Pony enough to be in four geographic basins and five, maybe eventually even six common streams. So that’s the best I can give you.
Bill Moler: What I can add, Ethan, not that its additive too much, but we believe we have made all the right moves to be successful in continuing volumes in Pony post any contract roll-off, whatever the date of that roll-off. We are looking at a number of incremental opportunities, Dave mentioned the potential six stream, that potential six stream may include a heavy crude. That is either coming from parts of Wyoming from Legacy production or Canadian crudes. What I will guarantee you is that we are going to have volume in this pipe post any contract roll-off, and what I will guarantee you is -- and I’ve said it since the beginning, this is not a one trick Pony. In fact, it's become several bags of tricks tied to that Pony and we're going to be successful.
Ethan Bellamy: Okay. That's helpful, Bill. How have the conversations with producers and marketers and any other potential shippers changed since crude has improved pricewise this year and it looks like drilling activity is up in all of those areas you’re servicing?
Matt Sheehy: hey, Ethan, it’s Matt. I can jump in here. The conversations are extremely positive. You'll notice we’ve mentioned on Platteville, which has tremendous amount of interest, but if you really recall when we start announcing the direct refinery connections and the incremental connectivity at Cushing, that really set us apart from a lot of other pipelines that provide take away out of, not only the DJ, but Wyoming. So the conversations have been extremely positive, extremely diverse. To put a finer point at what Bill said -- in the local Wyoming area, there's Canadian heavies, there's a whole bunch of opportunities around that segment, there's local Wyoming production and then there's a lot happening up in the Bakken right now. So the conversations have been great. We can give optionality, more importantly we can give that direct refinery access which has a tremendous benefit, not only to our shippers, but the marketers and the customers as well.
Ethan Bellamy: Thank you, Matt. I appreciate it, gentlemen.
Operator: We'll now take our next question from Jerry Xu with Citi.
Jerry Xu: Hey, guys.
David Dehaemers: Hi, Jerry.
Jerry Xu: Just quick -- hey, just quickly switching topics to back to the simplification. Just in regards to sort of corporate governance, this is a two-part question. So, a, do you guys need a unitholder vote at TEP, TEP if, say, TEP buys the IDR in TEGP? And then, secondly, as sort of the opposite, so do you need a go at TEP and TEGP if TEGP buys the LP? Thanks. I can repeat it obviously, if you guys …
David Dehaemers: Yes, would you repeat the first one please?
Jerry Xu: Yes. The first one is just, do you guys need a unitholder vote at TEP, if TEP buys the IDR in TEGP?
David Dehaemers: Yes, the answer to that one would be no. We don’t need a unitholder vote. It would be kind of just like buying out any other asset.
Jerry Xu: Okay.
David Dehaemers: The answer to your second one is, there have been a number of notes written out there, some really well written and well done, some that are frankly horrible. But to note, to the extent that TEGP would offer to exchange its shares for TEP, we would need a unitholder vote at TEP only. We would not need any unitholder vote at TEGP. And just for clarity sake, if the -- if a transaction were to go that route, it would be a simple majority vote, 50.1%. And just to be clear, TEGP controls 38% of the TEP units outstanding. So we'd only need a little over 12% more in terms of a vote to get that approved.
Jerry Xu: Got it. That’s all I had. Thank you.
David Dehaemers: You bet.
Operator: [Operator Instructions] And we'll now take our next question from Tom Abrams with Morgan Stanley.
Tom Abrams: Hey, back on the REX, after the July payment you have another one coming up in January of '19, but you really don’t need to make it, it doesn’t look like based on the 4.0 debt to EBITDA goal, so just wonder how you felt about that payment in January currently?
Gary Brauchle: You’re right, Tom, we don't need to make that payment. I don't know that we have any particular set thing on that. We -- I think we started out probably three and four years ago, when we had the idea that we were going to put the capital into make Zone 3 bidirectional and then we also did Seneca Lateral tied into MarkWest plant. And then we also did the Power Up, which added the compression in Zone 3. I think our thinking all along is still and was then the 4.0x. And that we thought that perhaps at that time not knowing exactly how -- what our results are going to be that it might require that we pay that down to continue to delever. So it's a good question. I don't know that we’ve developed an exact opinion about that yet. We certainly will consult with our partner P66 and figure out what the right metric to do there. Clearly, if the rating agencies who we are going to be contacting soon, both on REX and the Tallgrass companies see things the way we do, and they indeed get REX back to an investment grade pipeline than certainly our cost of refinancing with that would be lower than it has -- it was historically so.
Tom Abrams: All right. Thanks a lot.
Gary Brauchle: Thanks, Tom. Is there any more in the queue.
David Dehaemers: Okay. So, folks just -- it appears we have no more - we will open it up here with the operator in just a second. I do want to tell you we did have one question this week, notwithstanding that we’re blacked out and before even do that, I will tell you some good news and bad news. The good news is that from my standpoint, TEP and TEGP are on sale. So for those of you that like a sale, it might be a good time. The bad news is really for me, personally, I’m blacked out so I can't participate in the sale. But having said that on a more fundamental basis here, we did have a question about the TEGP A shares and the B units. Anything we would do, those basically are fundable in all respects other than one is a Class A shareholder and one is a Class B unitholder, but in terms of their value, these have the option to convert to A's at any time. But they would not ever get treated any differently than anything we would -- in anything we would ever do. So there would be -- there's no monkey games to be done around any of that, so for those out there that kind of go to the dark side of every little nook and cranny and the devious little things that some of the companies have done, that's not a possibility for us. So just wanted to dispel that to the extent that’s kind of creepy crawling around out there. Do we have -- operator, would you request open line for questions one more time please.
Operator: Yes, thank you. [Operator Instructions] And it appears there are no questions in the queue at this time.
David Dehaemers: Okay. With that, I would say thank you everybody for being on the call. I would tell you one final thought too that, it occurs to us that today is Tuesday and a week ago Wednesday there is nothing fundamentally changed about the Tallgrass businesses. So our cash flow hasn't changed. Our amount available for distribution hasn't changed. There's nothing fundamental. In fact, I think fundamentally we've announced some transactions and we are stronger than ever. In fact, my fellow work person here just informed me that today is Fat Tuesday, so tomorrow's Ash Wednesday, but nothing changed between now and then. And it is beyond my realm of comprehension why our securities have gotten beat down like they have. The way -- the reason that we talk to you all about the transaction that we did last week and that we're undertaking now is to actually improve the company, improve our cost of capital, get us to investment grade rating, have a lower cost of debt, be more transparent, get rid of the IDRs directly or indirectly. And why people have such a hard time accepting what we're doing, I don't quite get, but be that as it may. And you know when I say the things fundamentally haven't changed, you don't take 2 plus 2 that equals 3 now. The same 2 plus 2 last week equals 4 and in our case maybe it equals a little bit more than 4 with everything that we've announced here last Wednesday, Thursday, today. So with that, thank you everybody for your interest in our company, for your support in terms of being fellow partners and shareholders of ours. And we hope to be talking to you soon about our process with something more definitive. Notwithstanding that, we’re going to operate the company as best we can and be talking to you next quarter when we report. Everybody have a great day.