Generation Essentials Group

Thank you, Latavia. Good afternoon, everyone.

We appreciate you joining us as we discuss, among other things, the Tallgrass Energy Partners and Tallgrass Energy GP results from the second quarter of 2015, which were released through our joint press release and respective 10-Qs today. Joining me on the call this afternoon are David Dehaemers, Tallgrass' President and Chief Executive Officer; Bill Moler, Tallgrass’ Executive Vice President and Chief Operating Officer; and Gary Brauchle, Tallgrass’ Executive Vice President and Chief Financial Officer.

Before turning the call over to David, let me remind you that this 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 July 30, 2015. Please refer to our filings with the SEC which are available on our website, including TEP’s 10-K/A and TEP’s registration statement on Form S-1/A, which provide discussion of factors that may cause actual results to differ from management’s projection, forecast, estimates and expectations.

Please note that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statements. With that, let me now turn the call over to David for his opening remarks.

Thanks, Nate. Good afternoon everyone and thank you to everyone for joining Tallgrass Energy second quarter earnings call.

We’re pleased to have executed a very successful IPO of TEGP, which closed on May 12 and also to host our first combined earnings call for TEP and TEGP. I’ll briefly touch on the second quarter prorated distributions for TEP later in the call, but the primary focus today will be on the financial and operating results of TEP as its performance drivers the results of TEGP.

Second quarter was another very successful quarter both commercially and financially for TEP. I get the number of emails like I’m sure most of you do and a lot of them are in the MLP space, I saw a piece yesterday, where over 100 MLPs have reported their distributions for Q2 and it was pretty neat to see that TEP once again is at the top of the list in terms of increase in distribution sequentially.

As you know we’ve completed the acquisition of an additional 33.3% of interest in Pony Express, which was effective March 1. So, the second quarter includes the results of our full two-thirds ownership interest in Pony for the first time for the second full quarter.

We also placed the lateral, which is the Northeast Colorado lateral, we call it NECL on Pony Express into commercial service in April and activated all of our contracts in May -- on May 1, which means again that the second quarter included firm transportation revenue from NECL for the first time for basically two of the three months. Finally, the second of the two upstream pipelines that deliver barrels to Pony Express activated their contracts in May, allowing PXP to begin to collect its joint tariff fees from those shippers.

For these reasons and others, the second quarter produced record adjusted EBITDA and DCF at TEP. These results were the driver behind our eighth consecutive quarterly distribution increase.

This recent increase of $0.06 per quarter to $0.58 or $2.32 annualized represents an 11.5% increase from the first quarter of 2015 and 52.6% year-over-year growth rate. And it’s interesting to note that through two quarters of this year or in other words from fourth quarter of 2014, we’ve already increased our distribution 19.6%, call it 20%, which in fact meets our distribution growth guidance that we gave everybody for the full-year 2015 and we’re still have half a year to go.

So, we’re feeling pretty good about that. As you recall, the first Pony Express drop transaction provides TEP a quarter -- a minimum quarterly preference payment of $16.65 million, the second drop transaction included an additional minimum quarterly preference payment of $20 million or a total of $36.65 million between the two and that will continue through the quarter-ending December 31, 2015.

For the second quarter, Pony Express generated distributable cash flow to TEP of $40.3 million or at 66 -- or basically 66.7% or two-thirds interest. This DCF to TEP is obviously an excess for the minimum quarterly preference payment of $36.7 million.

Our second quarter adjusted EBITDA for TEP was $69 million, DCF was $56.9 million and coverage was 1.23 times, representing strong asset performance and accretive acquisition of Pony Express and solid distribution coverage. Gary will go through the numbers here in greater detail in just a moment, but as I previously mentioned, again, we increased our quarterly distribution for TEP to $0.58, which will be paid Friday, August 14, two weeks from tomorrow to unit holders of record as of tomorrow, July 31.

As a result of the $0.58 distribution to TEP, TEGP will receive prorated distributions from Tallgrass equity from the closing of the IPO on May 12 through the end of the second quarter of approximately $3.5 million. And so, what that $3.5 million represents really is TEGP’s share of its interest in the IDRs, it’s interest in our 1.36% GP interest and its share of the 20 million TEP units that we will put into TEGP at the IPO.

That will be paid on August 14 or 17. Based on the $3.5 million distribution it will receive, TEGP declared a prorated distribution to its Class A shareholders of $0.073, which would equate to $0.133 full quarter distribution on a non-prorated basis.

Just as a reminder, the second quarter of 2015 for TEGP was not included in the prospective financial information presented in TEGPs registration statement on form S-1A. The forecast period cover the 12 months ended June 30, 2016, so in another words from July 1 this year through June 30, 2016 and presented a projected distribution of $0.624 for that period.

I think it's safe to say that based on our TEP's history of quarterly distribution increases and the guidance that we have provided overall to everybody in the past, it would be reasonable to assume that the quarterly distributions for the forecast period will not be linear and obviously won't be a linear $0.156 to get you to that $0.62, but rather we still feel good about our projections that we are in the S-1A and fully expect to meet or beat those. At this point, I will turn the call over to Gary to provide additional details on the financial segments and then I will be back to talk about our assets like we have done in calls previous.

Thanks, David and good afternoon, everyone. Today I will first spend a minute on our balance sheet and then I will go into some details on our segment performance for the quarter.

As of quarter end, we have $706 million drawn on our $850 million revolving credit facility, which is slightly higher than $698 million balance at the end of the first quarter. We remain comfortable with our current liquidity but we continue to target a bond offering in the future to term out a portion of that revolver debt, but most of all to provide substantial liquidity to facilitate further growth at TEP.

Our leverage is currently below our guidance and what we’ve talked to you about in the past of three to four times debt to EBITDA and more specifically it's a 2.6 times of leverage based on Q2 annualized EBITDA. And now on to the segments.

First, the natural gas transportation and logistics segment which includes pipe and trailblazer produced adjust EBITDA of $16.6 million, up $1.5 million from Q2 of 2014 due to lower operating costs, but down $2.6 million from Q1 of 2015. The decrease as compared to the sequential quarter was due to higher transportation revenues driven by cold weather we all experienced in Q1, lower OEM expenses in Q1 and lower cost of sales.

Firm contracted capacity of 1,520 MMcf a day was slightly higher than the 1,494 MMcf a day for Q2 of 2014. Overall, I would simply summarize the segment's performance by saying that it was in line with our expectations for the second quarter.

Turning now to the crude oil transportation and logistics segment, our Pony Express, adjusted EBITDA was $46.3 million for Q2 which is substantially higher than the $25.5 million reported in Q1 of 2015. This was due to a number of factors that David touched on earlier in the call, but let me go into them in just a bit more detail for you.

Those drivers include the full quarter of TEP earning two-thirds of Pony Express, the activation of the NECL contracts on May 1, the activation of the contracts for the final upstream joint tariff pipeline and the notable reduction of our estimated property taxes for 2015. As it relates to the property taxes, we do expect the property tax expense to increase in 2016, since the 2015 assessments are reflective of the early operational period on the pipeline.

So, having said that, the lower property tax expense in 2015 at Pony may well result in slightly higher coverage at TEP for 2015 than we would have otherwise expected. One other item of note before I move into the operational metrics.

As you may have seen in the financial statements, shipper deficiencies on Pony Express increased by $4.2 million in the quarter. This is due to a number of factors at play in and around the region, including slower than anticipated regional production growth, weather and other delays and shipper deliveries to the pipeline and record vehicle miles driven in the region that translates in to increased local refining demand, all of which results in fewer pipeline shipments.

As we’ve said in the past, efficiencies may move around from quarter-to-quarter and because we have five year take or pay contracts on Pony, we’re not overly concerned by reasonable deficiency bills and burns in the short term, just as we saw this quarter. I only mention this to you because we know that many of you are interested in recent developments and trends in the energy markets that Tallgrass and our assets serve.

Back to Pony Express again, the average daily throughout on the pipeline during Q2 was 237,000 barrels a day, up substantially from Q1’s average of 165,000 barrels a day, but below the approximate contracted capacity of 290,000 barrels a day, all reflecting NECL’s contract activation in May. David will update you more on recent throughput numbers as well as developments around the pipeline’s capabilities, well in excess of the nameplate capacity when he returns to talk to you in just a moment.

Finally, I’ll leave you with one thought as it relates to the financial contributions of Pony Express to TEP. You may recall that we did the first PXP drop at a nine multiple based on 100% pipeline cash flows of approximately 200 million annually.

Next, we did the second drop at a nine multiple based on 100% pipeline cash flows of approximately 240 million annually. If you take PXP’s cash flow performance in Q2, gross it up to 100% and then annualize it, you will find the number to be well north of $240 million with very little walk up volumes on the pipeline and very little expansion barrel contributions.

Therefore, I would summarize by saying the pipeline’s performance is exceeding our financial expectations and our accretion expectations at TEP and we remain very optimistic and are working hard to deliver even greater contribution from Pony Express. Finally, at the processing and logistics segment, adjusted EBITDA was 7.1 million, which is an increase of approximately 1.6 million compared to Q2 of 2014.

The increase is primarily due to increased revenues at the water services business. Average volumes at the processing facilities for Q2 of 2015 of 130 MMcf a day were down slightly from the 136 MMcf a day for Q2 and we’re also down from the 145 MMcf a day for Q1 of 2015, all as we expected.

I will mention again this quarter as we did last quarter that it’s possible we may see additional decreases in the inlet volumes through the last two quarters of this year 2015 based on the current commodity environment, reduced drilling activity and other factors at play in the region. But like at Pony Express, we continue to work and have a number of opportunities that we are pursuing to increase the contributions of this segment as well.

So with all those comments complete, I will turn it back over to David.

Good. So I’d like to briefly talk a little bit or make some comments here broadly on the volatility in the energy markets recently, but more specifically why TEP is well positioned even in these times.

Well, low energy commodity prices are generally not good for the energy industry broadly, especially for E&P companies, let me remind you that approximately 98% of TEP’s next 12 months minimum projected EBITDA as presented in TEP’s S-1/A forecast is fee based and that number actually should grow as we put more of our fee based assets in to TEP as an example, the remaining third of Pony Express as well as reps in our terminals businesses. Majority of our revenues are generated from customers that have investment grade credit ratings and are part of corporate families with investment grade credit ratings.

For those customers that don’t have investment grade ratings, we closely monitor their financial metrics and have secured a substantial amount of financial collateral, which includes the line fill on Pony Express, prepayments, letters of credit maturity bonds. I’d also like to point out the weighted average life of our contracts on Pony Express as an example are nearly five years, which provide ample time for crude oil supplies and demand to reach equilibrium and return to a more profitable drilling economic scenario for many E&P companies.

And finally, our dropdown inventory and list of growth projects translates in to our continued confidence and our ability to continue to deliver exceptional results. These are just a few of the reasons we remain big believers in Tallgrass even in these challenging commodity markets.

So, now let’s move on to the end of the July assets here briefly. First up, as always, is Pony Express.

Gary gave you the average throughput for the second quarter of 237,000 barrels per day. Over the past month, we’ve averaged approximately 260,000 barrels per day with the peak throughput [indiscernible] in excess of 330,000 barrels a day.

So, that’s one day, 330,000 a day. The throughput in excess of our nameplate capacity of 320,000 barrels a day is possible to a number -- among a number of things.

The viscosity of the crude we are transporting versus the viscosity of the crude that the pipeline was designed for. We stepped the pipeline for a heavier grade of crudes and in fact it’s lighter so that would ship more through.

And actually again, we have other things too. Another important operational development is that we’re making good progress on the installation of our drag reducing agent or DRA injections kits.

We have 15 pump stations and we are putting that DRA injections kit in each and every one of them. They’re almost all in and complete.

In fact, we’re using DRA as we speak. That DRA is going to give us the ability to pump at least 100,000 barrels a day more than what that capacity was.

So, just to wind that out for you, nameplate capacity was 320. We’ve already -- on any given day have shipped over 330,000 barrels in a given day and frankly with the DRA as well as the slate of crude that we’re moving through the pipeline should easily be able to move 425,000 to 450,000 barrels a day through the pipeline.

Of the 100,000 that I’m talking about incrementally, we have approximately 30,000 barrels of that already committed through either increased original contracts, in other words, people that contracted for with us, their volumes are going to increase or alternatively, when we went out last fall for an open season, we did get a new contract, five-year term for an incremental 10,000 barrels a day. So, we’re excited about all this.

I mean, the bottom line for Pony Express is that it’s scalable and it’s scalable in a big way. And so, we’re out there beating the bushes and we’re very, very bullish on its ability to take crude away from all the places that we touch and frankly, we’re going to touch as many place as we can in terms of getting crude in that pipeline.

Some of you may have noticed in TEP’s 10-Q that we made a filing with the FERC to increase Pony’s maximum walk-up rate and increase the committed rates on Pony Express, Belle Fourche Pipeline Company and Bridger Pipeline by the annual index adjustment allowed by FERC and while we increased the maximum walk-up rate, we actually lowered our posted walk-up rate a little bit with a goal of attracting additional walk-up volumes. This index adjustment is expected to also provide incremental revenues to PXP going forward.

Now, on to REX. I’d remind everybody again that REX is owned by Tallgrass Development Company, which owns our 50% interest in REX and operates the pipeline.

Tallgrass Development is a private company that we own, but everybody always is very interested in. So, we’ve made a practice of talking about it.

As many of you seen in recent industry publications, we’re two days away from a transformative shift in the natural gas markets. The in-service of REX is 1.2 Bcf a day East-to-West project, an ability for Marcellus and Utica natural gas producers and shippers to move Appalachian production to markets in the Midwest and Gulf Coast regions.

It’s going to start on Saturday, August 1. REX expects to move incremental East-to-West volumes within Zone 3 on a firm basis, starting Saturday.

In fact, we’ve already been doing that just on a free flow basis for the last month or more. This is yet another important milestone and our strategy to transform REX into a bidirectional header system.

We’ve talked to all of you guys about that for a long time now and that bidirectional header system will be between the Rocky Mountains and Appalachian such as a lot of markets, East-to-West and West-to-East in between there. As it relates to volume effort closed in REX, we don’t obsess daily over these numbers, because of long-term take-or-pay contracts on REX as well as the market need for firm capacity.

There are days when the market just doesn’t need that much capacity but when it’s cold in Chicago, they do. It’s very interesting to note that notwithstanding all that, we have seen recent – we have seen peak flows at 1.5 Bcf a day from East-to-West in Zone 3 and 1.3 Bcf a day in Westbound flows on the pipeline.

The third piece of transformation at REX is the capacity enhancement project, which will add 0.8 Bcf a day of incremental capacity within Zone 3, we call that the power up in the past. We are closed to signing a turnkey construction contract for this project and will commence spending capital on the larger long lead items such as compressors.

We continue to plan for an in-service date in the second half of 2016, and when that occurs REX will be capable of moving 2.6 Bcf a day Eastbound in Zone 3. As you all might remember, that’s adding three compressors out there in the Ohio area to REX to allow us to do that, network application and are moving forward post stage on that.

Before we move to terminals, I would like to address one of the most frequent questions we get about REX and the so called contract cliff in 2019, what are the rates and volumes on the East end going to be in 2019. Well, I don’t know what the rates and volumes will be in 2019, I can tell you that given REX’s footprint, we believe there is a lot of additional optionality and flexibility within zones 1 and zones 2.

Post 2019, that could allow for bi-directional flows or multiple short haul pass at varying rates depending on the path. REX has already mitigated in excess of 50% of the three contracting risk from when we originally bought the assets back in 2012 and that is four years in advance of that contract maturities.

So again, I wish I could always have a crystal ball, but one thing I can assure you is just like we have worked our behind off here relative to making REX even more viable over the next four years, we are going to be doing the same thing relative to the Rockies gas coming out of on REX. And again, I will remind everybody that the new contracts that we have on the East end there have almost a weighted average life of about 18 years.

Finally, Tallgrass Terminals, have been a number of positive developments in our terminals business over the past quarter, the Sterling facility with 1.3 million barrels of capacity is now complete and generating revenue and we have been very pleased with its operational performance. A number of us went out there a month or two ago and I actually have the pleasure of climbing one of the tanks and walking on the roof and it was plumb full, which is a good thing.

I think a couple of days later it was plumb empty, so it’s all good thing and shows you that the crude is moving. We have plans underway to build a truck unloading terminal at Buckingham to give our customers an additional injection point into NECL.

We currently expect that to be in service in Q2 2016. We are also pursuing two other promising projects, which are really too early in our development cycle to provide specific details, I already mentioned this to demonstrate to you that the Terminals is at this point comparatively small, but very important asset for Tallgrass and we’re excited about the opportunities we have there.

Terminals today relates a lot to Pony Express and I guess I could tell everybody on the call that we are going to be playing offense on when it comes in Pony Express. In closing, what the current commodity price environment has created, well, it has created volatility in the market.

We see this as an opportunity to grow TEP and TEGP values with solid long-term returns. Our team remains focused on executing our strategic plan and creating value for unitholders and shareholders.

This continued focus led to the accomplishment of a number of important milestones in the second quarter, including in-service of NECL, the closing of TEP’s – TEGP’s IPO. However, as I have said in the past, the work is not complete and we’ve only just begun.

As always we thank all of you for being interested enough to call in, participate in the call, listen to what we have to say, we appreciate your confidence investing in us. And with that operator, we will turn it back to you to open up for questions.

Quick question. First, can you guys give some sort of color around the recent TPU growth and how we should be using this maybe as a read-through for the rest of the year, given that you guys talked about how you’ve already hit guidance just in the first half alone and how I should be thinking about that?

I think your question was we increased by $0.06 here which is $0.24 and between first and second quarter we are almost at 20% for the year now. You kind of like to know what the crystal ball looks like for the next six months?

Pretty much and then’16, if you’re willing to give it to me?

Well, I don’t think any of our guidance from what we had said earlier in the year which was 20% a year for the next three years has changed. We said also at the time that it might be different at times, one year it might be 15, the next year might 25, et cetera.

I would say, the only thing we are probably willing to give you more than what – our guidance is still good. It clearly looks like we are doing better than our guidance we gave earlier in the year.

We are not going to change it based on that, but I guess what I would tell you is just look at our track record since we took TEP public and I would say that that’s a good indication of kind of where we will be both by the end of the year as well as the words that we’ve said relative to 2016 and ‘17.

That’s helpful. And then a quick follow-up.

So could you guys do an update on potential organic growth opportunities? I know you gave some impressive potential expansion numbers of Pony, but just maybe framing up some other opportunities around Pony more like NECL projects or other bolt-on opportunities there?

I wish, again I – we have always thought all along that we could not withstanding what we talked about, which is just the pure scalability of NECL which is -- there is no more capital to put in it and if 50,000 barrels shows up tomorrow, we can move 375,000 barrels through it. I mean those economics are just playing outstanding for us.

We have always talked about in terms of the base assets be it TIGT, TMID and the terminals business for the matter that we’ve spent the $100 million a year on that type of stuff. I think that is the type of stuff that we have in the [indiscernible].

So if you look at our terminal at Buckingham, the other two projects we alluded to that are terminals related, but attached to Pony, I would say that’s probably a pretty good number to think about.

Perfect. Thanks, guys.

Appreciate it. Nice job.

Thank you very much,

Hey, James.

Hey, guys. I appreciate the color on Pony Express.

Just a couple of clarifying questions on that. You talked about property taxes coming in lower than expected.

Is that the big driver that you are talking about as to why maybe the Pony Express is exceeding maybe the 235 EBITDA that you’ve talked about or is it some other factors that maybe you could elaborate on?

Yeah, James, I think in the short term that is marginally helpful to the financial contribution of Pony Express. I would tell you that we are finding other operational efficiencies on the pipelines, inclusive of lower operating costs.

We’ve seen some gains on the pipeline in terms of PLAs et cetera. We have 10,000 barrel contribution, our 10,000 barrel expansion that we did contract towards the back half of 2014, that is now online.

There are a number of factors and I did mention that the property tax benefit in 2015 we expect to be primarily temporary. So I think all of those things, but in the short term with the property tax benefit we are seeing much better financial contribution of the pipeline than we had previously expected.

And as Dave said, the expansion capacity of the pipeline could be even more valuable going forward. So it’s a number of factors, not just one thing.

Yeah. And that was something I wanted to follow-up.

You mentioned the 30,000 barrel a day number of either new contracts or I didn’t quite catch exactly what that was in reference to.

Yeah, so today we’ve got contract and we are getting paid for somewhere around 290,000 barrels a day and we have another 10,000 barrels a day that we picked up that is just starting, that we picked up last fall and then the existing contracts that we had are going to be growing into that. So there is another 20,000 barrels over the next year and two their volumes increase.

So regardless of Walk-Up volumes, you ought to see us going to above 310,000 or 320,000 barrels even without Walk-Up volumes because of people’s increasing contract commitments.

And what are those Walk-Up volumes looking like currently?

They’re not great. I mean, we are required, as you know, on the crude oil pipeline to keep 10% for Walk-Up people in this environment of $48 to $52 oil, we’re just not seeing a lot of people just showing up the shipment.

And James, I would just add that the pipeline is performing extremely well relative to our expectations again without much Walk-Up volumes going through the system at all.

Appreciate it. That’s all I had.

Thank you.

Thanks, James.

Hi, Selman.

Thank you. Hello.

Congratulations on a very nice quarter. Just a couple of quick questions from me.

First of all, I know you guys talked about in terms of Pony Express ultimately, capacity on that could be 425,000 to 450,000 but I just – again going back to your comments, how long do you think it takes to get really above that 330 in terms of a sustained rate?

Selman, this is Bill Moler. If you could tell me what crude is going to be in the next six months to five years, I can probably answer that question better than what I’m going to, but as David said, we’re reaching in and pursuing opportunities, not just with our joint tariff partners ,upstream in to the Bakken, we are looking in the powder, we obviously with NECL are in the DJ Basin, we’re looking for a wide variety of supply to come in to the pipeline and are pursuing those opportunities.

We are building terminals off of our NECL line and turn down building terminals off of our NECL line to support trucks coming in. We’re out there very aggressively trying to get contract commitments and committing to capital to try to take advantage of the scalability of the pipeline as Dave described.

Thank you. I appreciate that.

And then in terms of the last third of that being dropped down, still could that be sort of a first quarter 2016 event?

Yeah. We are thinking somewhere the end of the year, beginning in the next.

We are going to kind of see how things go for the rest of the year here, but I don’t think anything has changed with that. That’s right.

Okay. And then just in terms of -- just one quick question on the DCF statement there, the distribution to non-controlling interest rate of 0.9 million, can you remind me what that is?

Yeah, Selman. That’s primarily related to Tallgrass’ development, third ownership interest in Pony Express and the way the payment works in this particular quarter, the pipeline exceeded the target cash flow and so Tallgrass’ development did receive a distribution and we call it a non-controlling interest because Tallgrass development owns a third, TEP owns two-thirds and TEP consolidated.

So think about that as the cash flow that went to for the quarter for its ownership in TXT.

All right. Thanks very much.

Hi. Good afternoon.

Just wanted to ask about the Prairie State Pipeline, is that a project you’re still working on or is that kind of put on hold at this point?

Elvira, it is a project that we are still working on, as you know, we partnered with AGL to pursue that project. As originally designed, the project is likely to be redesigned, but we still feel like there is going to be a project we built there, we’re still working closely with our partner to develop it and we think, by the end of the year, we will have something in hand to announce.

Okay, great. And then can you just maybe talk a little bit about the M&A environment, what you’re seeing out there, ad spreads come in, any sort of commentary on that?

Yeah. On the M&A environment, I don’t think that ad spreads have come in enough, I mean I think obviously as you guys know, the MLP space has gotten, people have gotten their equity pricing significantly and so I think on assets that are available out there, it doesn’t seem like things are getting any more reasonable.

Notwithstanding that, I do think there is, what, over a 120 MLPs now and there are some where their valuation on a relative basis to someone like us as an example is getting a little more attractive and so, we’ve had a number of people talking to us about things like that. We’re continually thinking about that.

I mean, you guys have heard it from other people that are probably held less smarter than us in this space that there probably will be some merger activity, et cetera at some point and we might be in a good position to be there at some point, but nothing is eminent.

Great, thank you.

Welcome.

Good work, operator, thank you. Everybody that called in, thank you for your time, appreciate your support with Tallgrass.

I know that it’s been a little bit of a challenging environment but only thing we’re going to do is control what we can control and it’s obvious that we’re working hard to control and produce results like we have here. Those of you that have supported us, we really appreciate it, the buyers in particular.

The sellers, if you keep selling and hopefully we’re going to be buying. So, thanks for your interest in Tallgrass and everybody have a great evening.

Good bye.